New England Coal & Coke Co. v. Rutland R. Co.
| Decision Date | 20 May 1944 |
| Docket Number | No. 302.,302. |
| Citation | 143 F.2d 179 |
| Court | U.S. Court of Appeals — Second Circuit |
| Parties | NEW ENGLAND COAL & COKE CO. v. RUTLAND R. CO. |
J. Norman Lewis, of New York City, and Feldman, Kittelle, Campbell & Ewing, of Washington, D. C. (J. Norman Lewis and James P. Durante, both of New York City, of counsel), for appellant.
H. C. McCollom, of New York City (Davies, Auerbach, Cornell & Hardy and Herbert A. Heerwagen, all of New York City, of counsel), for Hubert F. Atwater and William Carnegie Ewen, appellees.
Rathbone, Perry, Kelley & Drye, of New York City (Parker Newhall and Frank H. Heiss, both of New York City, of counsel), for Central Hanover Bank & Trust Co., appellee.
Stewart & Shearer, of New York City (M'Cready Sykes, of New York City, of counsel), for United States Trust Co. of New York, appellee.
Herrick, Smith, Donald, Farley & Ketchum, of Boston, Mass. (Eugene T. Connolly, of Boston, Mass., of counsel), for Old Colony Trust Co., appellee.
George M. Jaffin, of New York City, and Vernon Loveland, of Rutland, Vt. (Phillip B. Wershile and Harry Schneider, both of New York City, of counsel), for Group of Rutland Bondholders, appellees.
Before AUGUSTUS N. HAND, CLARK, and FRANK, Circuit Judges.
On May 5, 1938, some five years after the enactment of § 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, authorizing the reorganization in bankruptcy of insolvent railroads, an unsecured creditor of Rutland Railroad Company (for convenience called the debtor), disregarding § 77, filed a bill in equity in the court below, naming the debtor as defendant, alleging its insolvency, and praying the appointment of a receiver for it and all its railroad properties. Upon the immediate consent of the debtor, the court promptly appointed such a receiver.1 Debtor having defaulted in the payment of interest on three issues of its bonds (in the face amount, respectively, of $1,325,000, $3,491,000 and $4,400,000) secured by first mortgages on portions of its property, a few months later the trustees under the mortgages filed foreclosure bills in the court below. In September 1940, those foreclosure proceedings were consolidated with each other and with the receivership proceeding. The receiver originally appointed subsequently resigned, as did his successor. The present receiver, appointed May 19, 1941, was, at the time of his appointment, General Freight Agent of the debtor, having served in that capacity for thirty-eight years.2 On February 17, 1942, pursuant to petitions filed by the mortgage trustees, the court extended the receivership to the mortgaged properties. The unmortgaged assets include 115 miles of the debtor's railroad.3
For three and two-third years after the beginning of the receivership proceedings, the debtor sat under the "chancellor's umbrella," without any effort by anyone to devise and present a reorganization plan. Then, on February 16, 1942, on petition of the receiver, the court appointed Hubert F. Atwater and William C. Ewen to formulate and submit to the court a plan for the debtor's reorganization. Since April 1940, when they had attended a meeting of a group of bondholders called by one of the mortgage trustees, they had been serving as members of an advisory bondholders' committee. Ewen, engaged in the investment security business, had had experience in the reorganization of traction companies and as a voting trustee of an electric utility company. Atwater, as an employee of investment banking houses, had learned something of the financial aspects of railroad reorganizations. These facts are pertinent as bases of comparison of their experiences and competence with that of the Interstate Commerce Commission. The court's order authorized the receiver to pay Atwater and Ewen not to exceed $250 a month and expenses for a period not to exceed 3 months (later extended to 6 months) with the proviso that such payments should not affect their right to receive additional compensation as reorganization managers or otherwise, for their services theretofore or thereafter performed, in case they were instrumental in consummating a successful plan of reorganization.4
After some six months of study, Atwater and Ewen filed with the Court, on August 10, 1942, a report accompanied by a proposed plan of reorganization which made no provision for participation by debtor's present stockholders. Pursuant to notice, the court held hearings on this plan on September 12 to 15, 1942. At the opening of these hearings, the receiver's counsel stated that the receiver was neutral, neither favoring nor opposing the proposed plan. Of the 195 pages of the printed transcript of the hearings, some 33 pages consist of the testimony of the receiver and of three of the operating officials of the railroad, while 162 pages consist of the testimony of Ewen and Atwater and remarks of counsel.
These hearings were adjourned on September 15, and were not resumed until March 12, 1943. Meanwhile, on December 11, 1942, some three months after the adjournment of the September hearings, the debtor filed in the receivership proceeding a petition pursuant to § 77, sub. i, of the Bankruptcy Act, 11 U.S.C.A. § 205, sub. i, praying that the corporation be reorganized under § 77. Subsection (i) of § 77 reads, in part, as follows: "If a receiver or trustee of all or any part of the property of a debtor has been appointed by a Federal or State court, whether before or after August 27, 1935, a petition or answer may be filed under this section at any time thereafter by such debtor, or its creditors as provided in subsection (a) of this section, and if such petition be approved, the trustee or trustees appointed under this section, or the debtor until such trustee or trustees are appointed, shall be * * * vested with title to such property * * *."5
The prime mover in this matter of the § 77 petition was originally John D. Babbage who, for himself and others, had purchased blocks of the debtor's bonds and preferred stock. During the receivership he had become debtor's president. While he was president, the stockholders and executive committee of the board of directors adopted resolutions, on December 1 and 5, 1942, respectively, authorizing the filing of the § 77 petition.
On January 8, 1943, the court held a hearing on this petition. A further hearing was held on March 12, 1943, that hearing being consolidated with a further hearing of the proposed plan of reorganization. At that joint hearing, the attorney who on January 8 had represented the debtor in presenting the petition told the court that he had resigned as debtor's counsel on February 27, and that, since January 8, it had been arranged that he, as representative of "Mr. Babbage's group" (which had a far larger interest in debtor's bonds than in its stock), was to become one of the three reorganization managers under the proposed plan, the other two being Ewen and Atwater. As a consequence, so this attorney advised the court, "We thought his Babbage's interests and those of other bondholders would be protected and therefore we felt we could go on with the plan as proposed, except for one amendment" (i. e., that stockholders be given an opportunity to purchase stock of the new company from any bondholders who desired to sell).5a The court asked this attorney, "What is the position of your clients now on the petition to go into 77?" He replied, "I suppose it could be stated we do not wish to press it."5b
The debtor was thus left without counsel, but did not withdraw and never has withdrawn its petition. When its lawyerless condition was disclosed, appellant, as owner of 2900 shares of debtor's preferred stock and also as representative of others owning 4300 such shares,6 asked leave in open court on March 12 to intervene both in the equity proceeding and in the matter of the 77 petition; subsequently appellant filed a formal petition for intervention in both matters in the capacity just described, and an order allowing such interventions was entered by the court on March 19, 1943. The court adjourned the joint hearings of March 12 until March 27, 1943.
The testimony at the hearings in September and on March 27 disclosed, among other things, the earnings of the debtor over a period of years; the fact that the earnings had recently increased substantially; that perhaps that increase had little reference to war conditions; that depreciation charges and wages were apparently about to be augmented substantially; that the proposed plan provided for the issuance of about $2,500,000 face amount of new 4% income bonds and $8,500,000 face amount of new common stock; that the aggregate face amount of the proposed new securities would be less than the amount of the now existing debts; that all the new securities were to go to holders of present debt claims and nothing whatever to the present stockholders; that some holders of bonds were dissatisfied with the proposed plan; and that Ewen and Atwater had based their plan on a capitalization at 5% of their estimate of anticipated net revenues available for interest and dividends. All parties agreed that stockholders were entitled to participation only if the value of debtor's property exceeded the amount of its debts, and that the proper basis of valuation for that purpose was the capitalization, at a reasonable interest rate, of reasonably anticipated net revenues. Appellant insisted that, on that basis, the evidence showed excess value justifying stockholders' participation, while appellees asserted the contrary.
The district court, on April 12, 1943, entered an order denying the petition for reorganization under § 77. The court rendered no opinion and made no findings of fact or conclusions of law. From the order of April 12, 1943, appellant has brought this appeal.7
1. In 1928, in Harkin v. Brundage, 276 U.S. 36, 52, 48 S.Ct. 268, 274, 72 L.Ed. 457, the court said: ...
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