In re Denver & RGWR Co.

• Decision Date: 08 October 1945
• Docket Number: 2907,3106-3108.,No. 2906,2906
• Citation: 150 F.2d 28
• Parties: In re DENVER & R. G. W. R. CO. DENVER & R. G. W. R. CO. v. INSURANCE GROUP COMMITTEE et al. DENVER & S. L. W. R. CO. v. SAME. CITY BANK FARMERS TRUST CO. v. SAME. DENVER & R. G. W. R. CO. et al. v. SAME. THOMPSON v. SAME.
• Court: U.S. Court of Appeals — Tenth Circuit

150 F.2d 28 (1945)

In re DENVER & R. G. W. R. CO.

DENVER & R. G. W. R. CO. v. INSURANCE GROUP COMMITTEE et al.

DENVER & S. L. W. R. CO. v. SAME.

CITY BANK FARMERS TRUST CO. v. SAME.

DENVER & R. G. W. R. CO. et al. v. SAME.

THOMPSON v. SAME.

Nos. 2906, 2907, 3106-3108.

Circuit Court of Appeals, Tenth Circuit.

May 10, 1945.

Writ of Certiorari Granted October 8, 1945.

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William V. Hodges, of Denver, Colo. (F. C. Nicodemus, Jr., of New York City, Hodges, Vidal & Goree, of Denver, Colo., and Pierce & Greer, of New York City, on the brief), for Denver & Rio Grande Western R. Co. and Denver, Salt Lake Western R. Co.

Edward E. Watts, Jr., of New York City, and Milton J. Keegan, of Denver, Colo. (Peter H. Holme, Mitchell, Capron, Marsh, Angulo & Cooney, of New York City, and Dines, Dines & Holme, of Denver, Colo., on the brief), for appellant City Bank Farmers Trust Co.

H. H. Larimore, of St. Louis, Mo. (J. W. Preston, of Pueblo, Colo., and R. L. Dearmont, of St. Louis, Mo., on the brief), for appellant Guy A. Thompson, Trustee.

George D. Gibson and Henry W. Anderson, both of Richmond, Va. (Grant, Shafroth & Toll, of Denver, Colo., and Hunton, Williams, Anderson, Gay & Moore and Nan Ross McConnell, all of Richmond, Va., on the brief), for appellees Insurance Group Committee.

Norma L. Comstock, of Denver, Colo. (Alexander M. Lewis and Rathbone, Perry, Kelley & Drye, all of New York City, on the brief), for appellee Central Hanover Bank & Trust Co., Trustee.

Edwin S. S. Sunderland, of New York City (Pershing, Bosworth, Dick & Dawson, of Denver, Colo., and Davis, Polk, Wardwell, Sunderland & Kiendl, Thomas O'G. Fitzgibbon, and Judson C. McLester, Jr., all of New York City, on the brief), for appellee Guaranty Trust Co. of New York, Trustee.

James L. Homire, of Washington, D. C. (James A. Marsh, of Denver, Colo., and Emmet McCaffery, of Washington, D. C., on the brief), for appellee Reconstruction Finance Corporation.

Lindsey & Larwill and Daniel K. Wolfe, all of Denver, Colo. (Stewart & Shearer, of New York City, on the brief), for appellee United States Trust Co. of New York, Trustee.

Lewis & Grant, of Denver, Colo. (Milbank, Tweed & Hope and Arthur A. Gammell, all of New York City, on the brief), for appellee Chase Nat. Bank of City of New York, Trustee.

Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.

Writ of Certiorari Granted October 8, 1945. See 66 S.Ct. 51.

HUXMAN, Circuit Judge.

The Denver and Rio Grande Western Railroad Company¹ and the Salt Lake Western Railroad Company, the second debtor,² filed their petitions in the United States District Court for the District of Colorado November 1, 1935, for reorganization under Section 77 of the Bankruptcy Act of July 1, 1898, as amended, 11 U.S. C.A. § 205. The petitions were approved on the same day, trustees were appointed, and the Debtor was authorized and directed to maintain and operate its property under this proceeding. The Debtor has now been in court under this proceeding for nearly ten years. The Debtor had outstanding numerous senior securities³ which were secured by liens on various parts of the property embraced in the railroad system. These were preferred claims, superior in rank to all other claims against the Debtor. There are no issues or contests between the holders of these classes of securities and it is not necessary to treat them separately. They will be referred to collectively as Senior Bondholders. In addition to these bonds, the Debtor had outstanding general mortgage bonds, in the amount of $29,808,000, which were subordinate in rank only to the claims of the Senior Bondholders. They will be referred to as General Bondholders. The Debtor also had outstanding preferred stock and common stock.

The contest in this case arises between the holders of securities of different rank or priority, by virtue of the fact that the total capitalized value found by the Commission for the reorganized company is insufficient to satisfy in full all claims against the Debtor. The plan of reorganization under consideration satisfied in full the claims of the Senior Bondholders, by assigning to them new securities and common stock for the full amount of their claims. There was left common stock of the Debtor sufficient only to pay ten per cent of the claims of the General Bondholders, and nothing for the holders of the preferred stock and of the common stock. Their claims were adjudged worthless and they were barred from participating in the assets of the reorganized company.

Ten different plans of reorganization were proposed and considered by the Commission prior to the plan which was finally adopted and which is in controversy herein. Two plans were submitted to become effective January 1, 1937. One placed a valuation on the property of $149,732,966, and the other a valuation of $158,747,766. Both gave the General Bondholders 100 per cent of the value of their claims in new stock. Thereafter seven other plans were proposed. They gave the General Bondholders from 32.99% to 50% of their claims in new stock. The valuation placed on the Debtor's property in these plans varied from $135,005,436 to $161,631,934. The Interstate Commerce Commission submitted a third plan, effective January 1, 1942, which gave the General Bondholders five per cent of their claims in new stock. It valued the property at $142,846,612. Thereafter the Interstate Commerce Commission submitted a fourth plan, which is the one under consideration here. This plan is in the alternative. One provides for consolidation with the Denver and Salt Lake Railroad Company. The alternative does not provide for such consolidation. In the event of consolidation, the capitalized valuation placed on the property was $155,173,127. If there was no consolidation, then the capitalized valuation was fixed at $143,528,027. As stated, this plan gave the General Bondholders only ten per cent of the value of their claim in common stock, and barred the preferred stockholders and the common stockholders from participation in the reorganized company. For the purpose of the questions presented by this appeal, it is immaterial which valuation is considered.

On May 1, 1943, after the final plan, as outlined above, had been approved by the Commission, the Debtor filed a petition with the Commission requesting that the proceedings be reopened for the introduction of additional evidence pertaining to the then existing economic conditions and the prospective earnings of the new company as they might affect the capitalization of the new company, the value of the property, and other elements of the plan. The Commission found that such additional evidence was not required and denied the petition. Thereafter the proposed plan was submitted to the District Court for its consideration.

On September 16, 1943, while the court had the plan under consideration, it entered an order providing that the Junction Bonds,⁴ for which provision had been made in the capital structure, be paid from surplus cash in the hands of the Debtor's trustees. On October 25, 1943, the court entered an order approving the plan. Thereafter, on March 31, 1944, the trustees of the General Bonds filed an application with the District Court for a redistribution of the securities which had been set apart in the capital structure for the Junction Bonds. On April 26, 1944, the Commission submitted the plan to the creditors for acceptance or rejection. The General Bondholders rejected the plan by a vote of 20.67% for to 79.33% against the plan. The result of this vote was certified to the District Court. On November 29, 1944, the District Court entered a final order overruling the objections to the confirmation of the plan and denying the application for a redistribution of the securities set up for the Junction Bonds, and confirmed the plan. Appeals have been prosecuted both from the order of October 25, 1943, approving the plan, and from the final order of November 29, 1944. Both appeals present the same questions, and they will not be separately treated. The questions urged by the various appellants will be considered without reference to the appellant presenting them.

Numerous assignments of error are urged by the various parties. They may be summarized generally as follows:

1. The Commission employed fundamentally erroneous methods of valuation in valuing the property of the new company.

2. The Commission erred in denying the petition of the Debtor asking that the case be reopened for the consideration of additional evidence pertaining to the then existing economic conditions and the prospective earnings of the new company as they might affect the capitalization of the new company.

3. The plan is not fair and equitable and fails to afford due recognition to the rights of all classes of creditors and discriminates unfairly in favor of the Senior Mortgage Bondholders, within the meaning of Sec. 77, sub. e, of the Act.

4. The rejection of the plan by 77% of the General Mortgage Bondholders, voting at an election for that purpose, deprived the court of the power to approve and confirm the plan.

5. The court erred in refusing to redistribute the securities intended for the Junction Bonds when they were paid from cash, so as to give the benefit thereof to the General Bondholders.

Method of Valuation

The Act provides that in valuing the property, the Commission shall give due consideration to earning power, past, present, and prospective, as well as all other relevant facts.⁵ While the Commission's report recites that it gave consideration to all relevant factors, it must be conceded that the valuation was fixed almost entirely on the basis of earning power of the property.

Reproduction cost new less depreciation, and invested capital were stressed in the oral argument as fundamentally correct methods of valuation which must be considered as factors and taken into account in any proper...