In re Baltimore & OR Co.

• Decision Date: 20 November 1945
• Docket Number: No. 9905.,9905.
• Citation: 63 F. Supp. 542
• Parties: In re BALTIMORE & O. R. CO.
• Court: U.S. District Court — District of Maryland

63 F. Supp. 542

In re BALTIMORE & O. R. CO.

No. 9905.

District Court, D. Maryland.

November 20, 1945.

COPYRIGHT MATERIAL OMITTED

John J. Cornwell, of Baltimore, Md., Arthur H. Dean and DeLano Andrews (of Sullivan & Cromwell), both of New York City, Harry N. Baetjer and Hunter H. Moss (of Venable, Baetjer & Howard), both of Baltimore, Md., Russell Snodgrass, of Washington, D. C., and F. E. Bankhages, of Baltimore, Md., for petitioner.

Randolph Phillips, pro se.

H. C. Ackert and J. W. Giesecke (of Ackert, Giesecke & Waugh), both of St. Louis, Mo., for objectors Crozier et al.

Edwin S. S. Sunderland and James L. Homire, both of New York City, W. Meade Fletcher, Jr., of Washington, D. C., and Davis, Polk, Wardwell, Sunderland & Kiendl, of New York City, for Reconstruction Finance Corporation.

Walter Pond, of New York City, for Bank of Manhattan Co., trustee.

F. W. Doolittle, Jr. (of Rathbone, Perry, Kelley & Drye), of New York City, for Central Hanover Bank & Trust Co., trustee.

Eben E. Rand (of Mitchell, Capron, Marsh, Angulo & Cooney), of New York City, for City Bank Farmers Trust Co., trustee.

E. Sheldon Stewart, of New York City, for U. S. Trust Co. of New York, trustee.

George Ross Veazey, of Baltimore, Md., for Bankers Trust Co., trustee.

Samuel G. Kling, of Baltimore, Md., for George H. Phillips.

Before SOPER and DOBIE, Circuit Judges, and CHESNUT, District Judge.

CHESNUT, District Judge.

This petition for a railroad adjustment under Chapter XV of the Bankruptcy Act, 11 U.S.C.A. § 1200 et seq., is a sequel to In re Baltimore & Ohio Railroad Co., D. C., 29 F.Supp. 608, certiorari denied Getz v. Baltimore & O. R. Co., 309 U.S. 654, 60 S.Ct. 470, 84 L.Ed. 1003; Id., 309 U.S. 697, 60 S.Ct. 709, 84 L.Ed. 1036. In that earlier case this court (a three-judge court) approved the B and O's 1938 plan for an adjustment of its securities under Chapter XV of the Bankruptcy Act then in force. That Act expired by limitation on July 31, 1940, but was re-enacted by the Act of October 16, 1942, c. 610, 56 Stat. 787, 11 U.S.C.A. (ss. 201 to end) §§ 1200-1255; but by its terms is limited in duration to November 1, 1945, except in respect of any proceeding thereunder theretofore filed.

The chief characteristic of the 1938 plan was an eight year moratorium for the payment of interest charges on certain of the Railroad's bond issues. The dominant feature of this second plan is the extension of maturity dates for certain bond issues aggregating in principal amount $495,799,164. The 1938 plan, after approval by the court, has proven successful in that it avoided a receivership and drastic reorganization of the Railroad under section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, and since 1941, all current and accumulated interest has been paid by the Railroad on all its securities; and in accordance with that plan, the Company has retired over $100,000,000 par value of its capital obligations with consequent reduction of over $5,500,000 of annual interest charges. One feature of the financial embarrassment of the Railroad in 1938 was its then existing obligation in the amount of $72,771,578.44 due to the Reconstruction Finance Corporation for loans previously made and maturing in 1939-1942, secured by a large amount of collateral, and a $50,000,000 note issue (of which the R.F.C. held $13,490,000), likewise maturing in 1939. One of the adjustments made by the 1938 plan was a five year extension of maturity of these obligations with the consent of the R.F.C., until November 8 and August 1, 1944 respectively. Although the 1938 plan was to be generally effective for eight years the R.F.C. was unwilling to postpone the maturity of the debts due to it for a longer period than five years. As the law then stood they could not extend beyond January 31, 1945. 49 Stat. 2, now amended, see 15 U.S.C.A. § 605m.

Particular consideration was given in the hearings on the 1938 plan to the possible or probable effect that these large 1944 maturities would have on the successful working out of the plan. It was realized that the obligations would have to be met either from excess earnings (which seemed improbable) or from successful refunding or otherwise; and the court concluded from the evidence submitted that there was a reasonable prospect for the successful refunding of the 1944 maturities through an anticipated increase in earnings with a consequent increase in market values of the securities (including $102,000,000 of B and O Refunding Bonds) constituting the collateral pledged for the loans. Prior to this second plan the B and O paid off all the $50,000,000 secured note issue, except the $13,490,000 held by the R.F.C. The latter was then consolidated with the other debts due the R.F.C., all secured by collateral.

The anticipated enhancement in value of the collateral did in fact occur to a very substantial extent. On June 15, 1938, the market value of the collateral was $52,000,000; on November 15, 1939, shortly after the approval of the 1938 plan, it increased to $85,000,000; on September 17, 1944 (just before the date of announcement of this second plan) it had increased to $128,000,000, and on September 6, 1945, it had increased to $172,000,000. But despite this substantial increase in market value the evidence in this case shows that it was not financially possible in 1944 for the Railroad to refund the indebtedness to the R.F.C., nor would it be possible even now, in the absence of the approval of the present plan, to refund the amount by sale to the public of notes secured by this collateral.

The reason lies in the nature of the collateral. The principal items of value were $102,000,000 of B and O Refunding Bonds and large amounts of the stocks of the Reading and Western Maryland Railroads, through which the B and O had vitally important operating arrangements. The sale of these stocks would have been disastrous to the B and O and very prejudicial to the holders of its securities affected by the present plan. The market value of these Refunding Bonds in 1939 was in the 30's. It was anticipated that with the approval of the plan and the return of normal traffic conditions, the market value of these bonds would be greatly increased. But while there was some substantial appreciation the market value did not increase anything like so much as had been reasonably anticipated despite substantial increased net earnings. This was apparently due to two factors: (1) the uncertainty as to whether the Railroad would be able to successfully refund its heavy maturities of about $300,000,000 to occur in 1944, 1948, 1950 and 1951, and (2) probably because the investing public had become more critical with respect to railroad securities by reason of the large number of railroads then in receivership or in process of reorganization in bankruptcy. This public attitude seems to have been induced largely by the policy of the Interstate Commerce Commission with respect to new capitalizations of railroads, in insisting that the ratio of fixed charges to net income should be much lower than had been customary in railroad financing in earlier years.¹

In this situation, after unsuccessful efforts to refund the 1944 maturities through public marketing, the management of the Railroad early in 1944 conferred with Mr. Jesse Jones, then Secretary of Commerce and Federal Loan Administrator and the former Chairman of the Reconstruction Finance Corporation, who had given special personal attention to railroad loans, and who still had supervisory authority in the R.F.C., to ascertain whether the R. F.C. would further extend the maturity of the 1944 obligations and if so, on what conditions. The Railroad was advised that no extension would be made unless it could successfully secure a substantial extension of maturities of its large bond issues, maturing in 1948, 1950 and 1951. Despite this previously expressed attitude of the R.F.C. it appears that some of the officers of the Railroad were uncertain whether the refusal to extend the 1944 maturities except on the conditions indicated, was final and unalterable. Thereupon arrangements were made for a formal conference with Mr. Jones upon the subject at his office in Washington on May 12, 1944. At that conference attended by Mr. Jones and other members or representatives of the R.F.C., Mr. White, president, Mr. Snodgrass, financial vice president, and Mr. Clay, General Solicitor, and several Directors of the B and O, Mr. Jones definitely and finally refused to further extend the loans except on the stated conditions. In consequence thereof the Railroad then proceeded to formulate the present adjustment plan, after conference with members of the legal staff of the R.F.C., and financial officers of some of the large institutional holders of B and O bonds.

A railroad adjustment under Chapter XV is much preferable to more drastic reorganization under section 77 of the Bankruptcy Act, if the petitioner can meet the requirements of Chapter XV. One important advantage of the procedure under Chapter XV is that it is generally terminated one way or the other within a relatively short time of about a year after the formulation of the plan, as compared with the much longer periods of possibly five or even ten years not infrequently required under section 77. To comply with the conditions of Chapter XV the railroad must, after formulating the plan, first obtain the voluntary assents thereto of 25% in amount of the claims of affected creditors; and thereafter it must obtain the approval of the plan and the necessary authority for the issuance of new or modified securities by the Interstate Commerce Commission, all before the plan is submitted for approval by the three-judge court.²

After these conditions have been met the railroad must secure assents to the plan, or any modification thereof made by the Commission as a condition of its approval, from creditors holding more than two-thirds of the aggregate amount...