Chicago, RI & P. Ry. Co. v. Fleming

• Decision Date: 18 November 1946
• Docket Number: No. 8929-8931,No. 8938.,8929-8931,8938.
• Citation: 157 F.2d 241
• Parties: CHICAGO, R. I. & P. RY. CO. et al. v. FLEMING et al. (two cases). ST. LOUIS UNION TRUST CO. v. FLEMING et al. AXELROD et al. v. SAME.
• Court: U.S. Court of Appeals — Seventh Circuit

157 F.2d 241 (1946)

CHICAGO, R. I. & P. RY. CO. et al. v. FLEMING et al. (two cases). ST. LOUIS UNION TRUST CO. v. FLEMING et al. AXELROD et al. v. SAME.

Nos. 8929-8931, No. 8938.

Circuit Court of Appeals, Seventh Circuit.

May 23, 1946.

As Amended on Denial of Rehearing June 20, 1946.

Writ of Certiorari Denied November 18, 1946.

COPYRIGHT MATERIAL OMITTED

Loy N. McIntosh, of Chicago, Ill. (Gann, Secord, Stead & McIntosh, of Chicago, Ill., of counsel) for appellants Carter H. Harrison et al.

Alfred Berman and Guggenheimer & Untermyer, all of New York City, for William J. McEnery, amicus curiae.

Henry F. Tenney, of Chicago, Ill., and John Gerdes, of New York City, for Chicago, R. I. & P. Ry. Co.

R. H. McRoberts and T. S. McPheeters, Jr., both of St. Louis, Mo., and J. F. Dammann and Benj. H. Weisbrod, both of Chicago, Ill. (Bryan, Cave, McPheeters & McRoberts, of St. Louis, Mo., and Wilson & McIlvaine, of Chicago, Ill., of counsel), for St. Louis Union Trust Co.

Harry Kirshbaum, of New York City, and Michael Gesas, of Chicago, Ill., for Convertible Bond Holders Group.

Edward K. Hanlon, Walter H. Brown, Jr., Edward W. Bourne, and Wilkie Bushby, all of New York City, F. H. Towner, of Chicago, Ill., Sanford H. E. Freund, of New York City, Otis F. Glenn, W. F. Peter, and Irwin T. Gilruth, all of Chicago, Ill., and Alexander M. Lewis, of New York City, Alexander & Green, of New York City (Clyde W. Sorrell, of New York City, of counsel), Winston, Strawn & Shaw, of Chicago, Ill., White & Case, of New York City (Jesse E. Waid, of New York City, of counsel), Winston, Strawn & Shaw, of Chicago, Ill., and Root, Ballantine, Harlan, Bushby & Palmer, of New York City (Joseph Schreiber, of New York City, of counsel), Rathbone, Perry, Kelley & Drye, Shearman & Sterling & Wright, Beekman & Bogue, and Willkie, Owen, Otis, Farr & Gallagher, all of New York City, for Fleming and Colnon, trustees.

Before KERNER and MINTON, Circuit Judges, and LINDLEY, District Judge.

Writ of Certiorari Denied November 18, 1946. See 67 S.Ct. 201.

KERNER, Circuit Judge.

Appeals are taken by four separate groups of appellants from an order approving a plan of reorganization for the Chicago, Rock Island and Pacific Railway Company. On oral argument the cases were heard together and will be treated in one opinion because of the similarity of issues raised.

On June 7, 1933, the debtor railway company filed a petition under § 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. Because of the debtor's low earnings in the years immediately following the petition and the necessary delay created by the Interstate Commerce Commission in the evaluation of plans, a plan of reorganization was not approved by the Commission until July 31, 1941. This plan was certified to the District Court and on June 3, 1943, the court approved the plan except on two points, In re Chicago, R. I. & P. Ry. Co., D.C., 50 F.Supp. 835. The two points were that the claims of the general mortgage bonds had not been fully satisfied because the new common stock allotted to them at $100 a share was not worth that amount, and that the appointment of reorganization managers by representatives of creditors should be subject to the approval of the court. In accordance with subsection (e) of § 77 the plan was referred back to the Commission for correction on the two matters along with a request by the court that the Commission determine in the first instance the cash available for distribution among the creditors as of December 31, 1943. The Commission held a hearing and after the filing of briefs certified its second plan to the court in May, 1944, in which it made various changes in the original plan, including the allocation among creditors of $38,011,922 of cash which was all that was found to be available for distribution on January 1, 1944. This modified plan was approved on June 15, 1945. It is from this order that the appellants appeal.

Under the plan of reorganization, the capitalization of the debtor was reduced from $459,101,932 to $356,117,327. All the creditors, secured and unsecured, are provided for in varying degrees. The preferred and common stockholders do not participate in the plan because it was found that their equity was of no value. The new capitalization is divided into first mortgage bonds, second mortgage income bonds, preferred stock having a par value of $100 per share, and no par value common stock.

The appellants in 8929, the preferred stock committee, represent a group which does not participate in the plan. They contend the Interstate Commerce Commission, on the reference back to it of the proposed plan of reorganization by the court, was required by § 77(d) of the Bankruptcy Act to proceed de novo. In 8930, the debtor urges that the plan is not fair and equitable because it discriminates unfairly in favor of the senior creditors to the detriment of the junior creditors and that the plan violates legal standards in the degree of participation among the various classes of creditors and stockholders. In 8931, the trustee of the Little Rock and Hot Springs Western Railroad Company alleges that the Commission did not follow legal standards in determining the value of the security for its bonds; that the Commission may not provide for the sale piecemeal of the Little Rock line, the entire line of which is the security for these creditors' bonds. In 8938, the convertible bondholders group represent a class of unsecured creditors who are to receive approximately 34% of their total claims. Like the others they dispute the fairness of the plan. They question the distribution among the creditors by the Commission. They also claim that the Chase National Bank, trustee for the issue of unsecured convertible bonds, has violated its trust and exercised dual and conflicting roles of trustee and creditor.

The Supreme Court in two recent cases, Ecker v. Western Pacific Railroad Corp., 318 U.S. 448, 63 S.Ct. 692, 87 L.Ed. 892 and Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 318 U.S. 523, 63 S.Ct. 727, 87 L.Ed. 959, has clarified and defined the role the Circuit Court of Appeals must assume in railroad reorganizations. Definite restrictions are placed on this court and it is the sole responsibility of the Interstate Commerce Commission to develop the capitalization of the reorganized company. The function of the District Court is principally that of moderator or umpire. By authority of subsection (e) of § 77 of the Act it is the duty of the court to examine the plan to see whether it is fair and equitable; whether it affords due recognition to the rights of each class of creditors and stockholders; and whether there is any unfair discrimination in favor of any class of creditors or stockholders. The court must approve or disapprove the plan in its entirety. It alone cannot correct the plan but it may suggest improvements to the Commission. So long as legal standards are followed, the judgment of the Commission on the capitalization is final. Ecker v. Western Pacific R. Corp., supra, 318 U.S. 474, 63 S.Ct. 692. This court may reverse only if the Commission has failed to follow legal standards in arriving at questions of valuation and capitalization, and the District Court has failed to perform its functions under the Act, Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co., supra.

The appellants do not question the applicability of the cases cited, but collectively they urge reversal on the grounds of unfairness and discrimination between class allocations in the plan, and the Commission's failure to follow legal standards in the capitalization of the reorganized company. Other contentions are advanced but, as will be shown, they are either untenable or mere divisions of the two principal allegations.

The preferred stock committee raises a question of procedural error regarding the manner in which the Commission handled the original plan when the plan was referred back to it by the District Court. This appellant contends that under the requirements of subsections (d) and (e) of § 77 of the Act, the Commission mandatorily is required to proceed as though this were an entirely new plan of reorganization. That is, the Commission must set a hearing date on any new plans of reorganization — one of which must be filed by the debtor, while others may be filed by the trustees, creditors and stockholders — but no plan may be considered until six months after the order referring the proceedings back to the Commission.

This appellant concedes that this is an entirely new matter which has never before been passed on in reorganization proceedings. The District Court in approving the modified plan overruled this objection but without explanation. We fail to find any merit in the objection. True, this is a question of interpretation, but the appellant's interpretation is stilted and impractical. The Commission is the protagonist in a reorganization proceeding, because, as previously stated, it is the best qualified. It provides for the new capital structure and the distribution of corporate funds. In short, the Commission is allowed wide discretion in reaching its conclusions, and if its findings are supported by substantial evidence and follow legal standards they must be affirmed by the courts, Palmer v. Commonwealth of Massachusetts, 308 U.S. 79, 60 S.Ct. 34, 84 L.Ed. 93; Brooks v. St. Louis-San Francisco Ry. Co., 8 Cir., 153 F.2d 312. Yet by this appellant's interpretation on the reference back to the Commission, the latter is deprived of its discretion and mandatorily must proceed de novo.

The Supreme Court has emphasized the urgency for interplay and harmony between the Commission and courts in reorganization proceedings, Palmer v. Massachusetts, supra, 308 U.S. 87, 60 S.Ct. 34, 84 L.Ed. 93; Warren v. Palmer, 310 U.S. 132, 138, 60 S.Ct. 865, 84 L.Ed. 1118. Congressional intention as interpreted...