Group of Institutional Investors v. Chicago St Co 8212 19, 32

• Decision Date: 15 March 1943
• Docket Number: Nos. 11,s. 11
• Citation: 87 L.Ed. 959,318 U.S. 523,63 S.Ct. 727
• Parties: GROUP OF INSTITUTIONAL INVESTORS et al. v. CHICAGO, M., ST. P. & P.R. CO., and 9 other cases. —19, 32
• Court: U.S. Supreme Court

318 U.S. 523

63 S.Ct. 727

87 L.Ed. 959

GROUP OF INSTITUTIONAL INVESTORS et al.

v CHICAGO, M., ST. P. & P.R. CO., and 9 other cases.

Nos. 11—19, 32.

Argued Oct. 14, 15, 1942.

Decided March 15, 1943.

Rehearing Denied April 12, 1943.

See Group of Institutional Investors v. Abrams,

318 U.S. 802, 63 S.Ct. 980, 87 L.Ed. —-.

[Syllabus from pages 523-527 intentionally omitted] Mr. Kenneth F. Burgess, of Chicago, Ill., for Group of Institutional Investors.

Mr. A. N. Whitlock, of Chicago, Ill., for Henry A. Scandrett, et al., Trustees for Chicago, M., St. P. and P.R. Co.

Mr. Fred N. Oliver, of New York City, for Mutual Sav. Bank Group.

Mr. Russell L. Snodgrass, of Washington, D.C., for Reconstruction Finance Corporation.

Mr. John L. Hall, of Boston, Mass., for Chicago, M., St. P. and P.R. Co., debtor.

Mr. Albert K. Orschel, of Chicago, Ill., for Protective Committee of Holders of Preferred Stock of Chicago, M., St. P. and P.R. Co.

Mr. McCready Sykes, of New York City, for United States Trust Co. of New York, trustee.

Mr. Frederick J. Moses, of New York City, for University Group of General Mortgage Bondholders.

Mr. Edwin S. S. Sunderland, of New York City, for Fifty Year Mortgage Trustees.

Mr. C. Frank Reavis, of New York City, for Protective Committee of Fifty Year Mortgage Bonds.

Mr. Meyer Abrams, of Chicago, Ill., for Adjustment Mortgage Bondholders.

Mr. Thomas S. McPheeters, of St. Louis, Mo., for Gary First Mortgage Group.

Mr. Reese D. Alsop, of New York City, for Chicago, Terre Haute and Southeastern Ry. Co., First Lien Bondholders Committee.

Mr. Ernest S. Ballard, of Chicago, Ill., for Massachusetts Mut. Life Ins. Co. et al.

[Argument of Counsel from Page 528 intentionally omitted] Mr. Justice DOUGLAS delivered the opinion of the Court.

These cases are companion cases to Ecker v. Western Pacific Railroad Corp., 318 U.S. 448, 63 S.Ct. 692, 87 L.Ed. —-, decided this day, and are here on writs of certiorari to the Circuit Court of Appeals for the Seventh Circuit. They involve numerous questions relating to a plan of reorganization for the Chicago, Milwaukee, St. Paul & Pacific Railroad Co., formulated in proceedings under § 77 of the Bankruptcy Act. 49 Stat. 911, 11 U.S.C. § 205, 11 U.S.C.A. § 205. The plan was approved by the Interstate Commerce Commission (239 I.C.C. 485, 240 I.C.C. 257) and certified to the District Court. After a hearing and the taking of additional evidence the District Court approved the plan with certain minor modifications not material here. In re Chicago, M., St. P. & P.R. Co., 36 F.Supp. 193. The Circuit Court of Appeals reversed the order of the District Court (Chicago, M., St. P. & P.R. Co. v. Group of Institutional Investors, 7 Cir., 124 F.2d 754) on the ground that the Commission did not make the findings required by Consolidated Rock Products Co. v. DuBois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982.

The debtor filed its petition under § 77 in 1935. Hearings on proposed plans were closed in 1938. The plan of reorganization here in issue was approved by the Commission in 1940. It reduced the capitalization and the fixed charges, eliminated the old stock, and substituted system mortgages for so-called divisional mortgages. It effective date was January 1, 1939. The total debt (including interest accrued to December 31, 1938) was approximately $627,000,000. In addition the debtor had $119,307,300 of preferred stock and 1,174,060 shares of no-par value common stock outstanding. The claims against the debtor which were dealt with by the plan¹ are as follows: The Re- construction Finance Corporation has a claim for loans totalling about $12,000,000, secured as hereinafter described. There are General Mortgage bonds outstanding in the hands of the public in the principal amount of $138,788,000 with accrued and unpaid interest of over $17,500,000. These bonds, bearing interest at various rates from 3 1/2 to 4 3/4 per cent, have a first lien generally on the debtor's lines east of the Missouri River. In addition to the amount of these bonds publicly held, $11,212,000 principal amount are held by the Reconstruction Finance Corporation as security for its loans. There are $8,923,000 First and Refunding bonds outstanding, all of which are held by the Reconstruction Finance Corporation as security for its loans and claims. These bonds have a first lien generally on the lines west of the Missouri and a second lien on the lines east. There are $106,395,096 principal amount of 50 year bonds outstanding with accrued and unpaid interest of $20,835,706. These bonds, subject only to the First and Refunding bonds, have a prior lien on the lines west of the Missouri; and they have a lien subordinate to the General Mortgage and the First and Refunding bonds on the lines east. They carry interest at the rate of 5%. There are also 5% Convertible Adjustment bonds outstanding in a principal amount of $182,873,693, with accrued and unpaid interest of $79,550,055. These bonds have the most junior lien on both the lines west and east of the Missouri River. In addition to those four main mortgages, the debtor had assumed liability on the mortgage indebtedness of other companies which it or its predecessor had either purchased or leased. Among these was the Milwaukee & Northern Railroad Co., which had two bond issues: the First Mortgage 4 1/2s in the principal amount outstanding of $2,117,000 and accrued and unpaid interest of $103,204, which were secured by a first lien on 110 miles of line south of Green Bay, Wisconsin; and Consolidated Mortgage 4 1/2s in the principal amount outstanding of $5,072,000 and accrued and unpaid interest of $247,260 which were secured by a first lien on 286 miles of line north of Gree Bay and by a second lien on the line south of that place. There is also in this group a $3,000,000 amount outstanding of First Mortgage 5s of Chicago, Milwaukee & Gary Ry. Co. with accrued and unpaid interest of $562,500. They were secured by a first lien on some 80 miles of portions of track around the Chicago district.

In addition there is $301,000 principal amount of Bellingham Bay & British Columbia Railroad Co. First Mortgage bonds, owned by the debtor and pledged with the Reconstruction Finance Corporation as security for its loans. Furthermore, there are four bond issues of the Chicago, Terre Haute & Southeastern Ry. Co. and its subsidiaries. These are in the principal amount outstanding of $21,929,000, are secured by liens on lines and trackage rights in Indiana and Illinois and carry either 4% or 5% interest. The debtor operates the lines of the Terre Haute under a 999 year lease executed in 1921 under which the lessee agreed to maintain and replace equipment, pay interest on and the principal of the lessor's bonds and to pay specified annual expenses.² The annual rental consists of interest on the Terre Haute bonds, taxes, and the expense of maintaining the corporate existence of the lessor.

The plan approved by the Commission provides for two system mortgages. One is a new First Mortgage³ which will be a first lien on all properties of the debtor, subject only to the lien of equipment obligations, and under which $58,923,171 principal amount of new First Mortgage 4% bonds will be issued in the reorganization. The second is a new General Mortgage which will be a lien on the properties of the debtor subject to the lien of the First Mortgage, and under which two series of bonds bearing 4 1/2% interest contingent on earnings will be issued. Series A bonds will be issued in the principal amount of $57,256,669 and Series B bonds, in the principal amount of $51,422,111. The interest on both Series A and Series B bonds is cumulative to the maximum amount at any one time of 13 1/2% but the interest on Series A bonds has priority to the interest on the Series B.⁴ The plan provides for the issuance of $111,347,846 of 5% preferred stock and 2,131,475 1/4 shares of no-par value common stock.⁵ As respects the Terre Haute properties the plan provides for the execution of a new lease between the Terre Haute and the new company on condition that substantially all of the Terre Haute bondholders agree to a modification of their bonds and mortgages. The modifications include an extension of the maturity of the bonds, a waiver of equipment vacancies under the existing mortgages, a provision for the abandonment of lines, and reduction of the interest on the bonds so that there is fixed interest of 2.75% and contingent interest of 1.5%, the payment of the latter being subject to the same limitations as the interest on the Series A, General Mortgage bonds. In case substantially all of the Terre Haute bondholders agree to the modifications, a new lease will be made under which the new company will assume the payment of the principal of, and the interest on, the modified bonds and the corporate expenses of the Terre Haute. If substantially all of the Terre Haute bondholders do not agree to the modifications, the Terre Haute lease will be rejected as of the date when the court determines that the modifications have not been approved. In case of such disaffirmance of the lease, the plan reserves, as we discuss hereafter, 15,837 shares of new common stock for certain unsecured claims and the claims which would then arise under the lease. The plan also calls for the establishment of an additions and betterments fund to which $2,500,000 annually would be paid. This annual charge is placed ahead of contingent interest. It is further provided that the board of directors may set aside certain additional amounts for that fund after the payment of full interest on the Series A, General Mortgage bonds and the modified Terre Haute bonds. The plan thus authorizes a capitalization of $548,533,321 for the new company,⁶ the percentage of debt to tatal capitalization being 40.8. The annual charges ahead of dividends, including fixed and contingent interest, the mandatory payment to the additions and...