In re Denver & RGWR Co.

• Decision Date: 01 November 1944
• Docket Number: No. 8669.,8669.
• Citation: 62 F. Supp. 384
• Parties: In re DENVER & R. G. W. R. CO.
• Court: U.S. District Court — District of Colorado

62 F. Supp. 384

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

No. 8669.

District Court, D. Colorado.

November 1, 1944.

Wilham 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, of Denver, Colo. and Mitchell Capron, Marsh, Angulo & Cooney, of New York City, and Pershing, Bosworth, Dick & Dawson, 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 (Dines, Dines & Holme, 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.

SYMES, District Judge.

By order of March 23, 1944, the Interstate Commerce Commission on April 26, 1944, submitted for acceptance or rejection by creditors of Classes 6, 7, 8, 10a, 10b and 11, 12a and 12b of the Denver & Rio Grande Western Railroad Company, the above debtor, and by creditors of Classes 1 and 2 of the Denver & Salt Lake Western Railroad Company, as therein provided, a plan for the reorganization of the debtor, the Denver & Rio Grande Western Railroad Company and of the Denver & Salt Lake Western Railroad Company — a subsidiary debtor — approved by the Commission in its Third Supplemental Report and Order of June 14, 1943, and approved by this court October 25, 1943.

Under date of July 4, 1944, the Commission has certified to this court the results of the vote on the submission of the plan of reorganization to the creditors of the Denver & Rio Grande Western Railroad Company, debtor, et al., as aforesaid, showing that said plan had been accepted by more than two-thirds in amount of the total of such claims voting, except that creditors of Class 11, holding $1,332,050 principal amount of Denver & Rio Grande Western Railroad Company General Mortgage Bonds, constituting 20.67% of the total amount of allowed claims of said class, voted for the plan, and creditors of said class holding $5,111,100 principal amount, or 79.33% of allowed claims of that class, voted to reject the plan.

Thereafter objections to the confirmation of the plan were filed by the debtor, the Denver & Rio Grande Western Railroad Company, by Guy A. Thompson, Trustee of the Missouri Pacific Railroad Company, and by the City Bank Farmers Trust Company of New York, Trustee of the General Mortgage aforesaid. Said objections were set down for, and came on for hearing on August 30 and 31, 1944, pursuant to notice to all parties. Full argument and hearing were had. Briefs were filed on behalf of said objectors, and in reply thereto by other trustees and interested parties.

The claim of the General Mortgage Bonds on the effective date of the plan aggregated $43,500,000 — about one-fourth of the debtor's entire debt. It is claimed that when the capitalization of the new company was fixed at $155,173,127 on the basis of consolidation with the Denver & Salt Lake, and $143,528,027 for the debtor alone, if consolidation is not carried out, the Commission took care of every bond issue ahead of the General Mortgage (a junior issue), for 100% of their claims in new securities, and what was left over went to the General Mortgage. At that time the so-called Junction Bonds were in the hands of the public and in the plan the Commission provided that the Rio Grande Junction 5s — whose claim amounted to $2,758,333 — should receive 77% thereof in First Mortgage Bonds, $2,123,916 par, and 23% in Income Bonds, or $634,417 par, and that after all the creditors ahead of the General Mortgage bondholders were taken care of, there was only enough common stock left over to give the General mortgagees 10% of their claim in par value common stock.

That thereafter the wartime earnings of the property were so large that the cash jumped from $10,000,000 to $20,000,000, or better, and counsel says the court very appropriately in September, 1943, instructed the Trustees to buy the Junction Bonds at par and accrued interest and reduced the senior debt by that amount. That by reason thereof the trustee of the General Mortgage Bonds now asks, not for any change whatever in the valuation or capitalization of the debtor, but simply an adjustment such as it says the Commission authorized to be made within the framework of the plan by a redistribution of the new securities that the plan allots to the Junction Bonds, and in so doing maintain the same priority as before between the various issues. That it is simply a matter of accounting.

It is argued that in several other railroad reorganizations, that between the time the Commission put down a plan and the time it got to the court for action, the surplus cash of the respective debtors increased very much so the senior debts could be reduced. That in cases that have come down from the Interstate Commerce Commission since last September it has been said if the surplus cash is used to reduce the senior debt and stops there, for practicable purposes the capitalization of the new company is reduced below that authorized and what the Commission has found the debtor should and can reasonably support. That the way to adjust is to take the new securities allotted to the senior bonds or debt thus paid off and redistribute them, keeping everybody's position relatively the same. That this would shove everybody up a little and give the junior issues better treatment.

It is further urged by this mortgage trustee that the reorganization committee or court should make this adjustment on the basis of the distribution the Commission has followed, and distribute the $2,758,333 bonds set aside to exchange for the Junction Bonds in the plan, keeping the same priorities.

In support of this theory attention is directed to the New Haven reorganization, In re New York, N. H. & H. R. Co., D.C., 54 F.Supp. 595, and Id., D.C., 54 F.Supp. 631. In that case there were certain first and refunding mortgage bonds up as collateral to secure six bank loans aggregating $26,000,000.

The court took $18,000,000 of surplus cash resulting from wartime earnings and with the Commission, decided they could apply it to reduce the claims of the banks by paying the accumulated interest thereon. The problem then was to make a redistribution of the $18,250,000 in bonds provided for in the plan for that purpose, and the court held it should be redistributed along the line that counsel are contending should be done here.

Judge Hincks says by paying off the accumulated interest thereon the secured claims were reduced, so that only $84,800,000 in fixed interest bonds was required, this resulting in a capital structure with a bonded indebtedness less than that which the Commission had found the railroad could reasonably support. Thus a block of $6,000,000 in fixed interest bonds and $11,680,000 in income bonds became available to sweeten the treatment previously proposed for all mortgage creditors. And this was done. Judge Hincks, however, adds that all creditors agreed that these excess securities should be distributed to all secured creditors not already awarded the full value of their claims in fixed interest bonds.

Judge Hincks then went further and paid the bank loans in full out of surplus cash and said, I quote (54 F.Supp. at page 608):

"I doubt whether these conclusions require that the plan be returned to the Commission. I incline to believe that the necessary correction can be accomplished within the framework of the plan in complete conformity with all the valid findings of the Commission."

By analogy counsel argue that in the Rio Grande situation the $2,123,916 Fixed Interest Bonds and $634,417 of Income Bonds allocated to the Junctions should be used to sweeten the treatment previously proposed for all mortgage creditors who have not already been awarded the full value of their claims in Fixed Interest Bonds.

What Judge Hincks did was to pay the bank loans off in full out of surplus cash, stating he believed this action could be accomplished by the court within the framework of the plan without returning it to the Commission, and that his action was based upon the findings of the Commission and was consistent with its limitations and within the power of the judge to make. Later the Commission filed a report approving everything Judge Hincks had done in this respect.

Judge Hincks, however, after expressing doubts whether his action required the plan be returned to the Commission, stated, 54 F.Supp. at page 608:

"I incline to believe that the necessary correction can be accomplished within the framework of the plan in complete...