IN RE BOSTON AND MAINE CORPORATION, No. 73-1069.

• Decision Date: 23 August 1973
• Docket Number: No. 73-1069.
• Citation: 484 F.2d 369
• Parties: In the Matter of BOSTON AND MAINE CORPORATION, Debtor. The GROUP OF INSTITUTIONAL BONDHOLDERS, Appellant, Robert W. MESERVE, Trustee of the Property of Boston and Maine Corporation, Debtor, Appellee.
• Court: U.S. Court of Appeals — First Circuit

484 F.2d 369 (1973)

In the Matter of BOSTON AND MAINE CORPORATION, Debtor The GROUP OF INSTITUTIONAL BONDHOLDERS, Appellant Robert W. MESERVE, Trustee of the Property of Boston and Maine Corporation, Debtor, Appellee.

No. 73-1069.

United States Court of Appeals, First Circuit.

Heard June 5, 1973.

Decided August 23, 1973.

Jerome Preston, Jr., Boston, Mass., with whom Lewis H. Weinstein, Philip Burling, and Foley, Hoag & Eliot, Boston, Mass., were on brief, for appellant.

Robert G. Parks, Boston, Mass., with whom Mulcahy & Mulcahy, and Charles W. Mulcahy, Jr., Boston, Mass., were on brief, for Robert W. Meserve, trustee, appellee.

John L. Davidson, Jr., St. Louis, Mo., with whom Greenfield, Davidson & Mandelstamm, St. Louis, Mo., Richard Ely, Alan L. Lefkowitz, Tom L. Peterson, and Ely, Bartlett, Brown & Proctor, Boston, Mass., were on brief, for Passaconaway Co., intervenor appellee.

John T. Collins, Boston, Mass., with whom Sherburne, Powers & Needham, Robert H. Quinn, Atty. Gen., Com. of Mass., and Mark Furcolo, Asst. Atty. Gen., Boston, Mass., were on brief, for the State of N. H., The Com. of Mass., and Vermont Railway, Inc., intervenors appellees.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

LEVIN H. CAMPBELL, Circuit Judge.

Appellant, called the Group of Institutional Bondholders (Group), consists of insurance companies¹ holding first mortgage bonds of the debtor, the Boston and Maine Corporation (B&M). The Group is now appealing from orders of the reorganization court allowing the trustee of the B&M to make certain capital expenditures. We affirm.

B&M is a medium-sized railroad corporation operating in Massachusetts, Maine, New Hampshire, Vermont and for a short distance in New York. From earlier prosperity, the B&M deteriorated after 1958 into financial distress, operating through the 1960's on the verge of bankruptcy. In early 1970 the B&M had accumulated unpaid property taxes exceeding five million dollars, and bond interest was in arrears; it was placed in reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205, upon petition of the four insurance companies that constituted the appellant Group. Trustees were appointed by the district court in the spring of 1970.

The trustees at first attempted to reopen a merger proposal, rejected in the late 1960's by the B&M's stockholders, that would have joined the B&M with the Norfolk & Western system. The Interstate Commerce Commission (ICC) in 1971 turned down this proposal as "prima facie impracticable." At the same time it rejected the Group's application for abandonment of the B&M's entire line. Later in 1971, at the ICC's request and after they were able to improve the B&M's cash position substantially, the trustees submitted a preliminary reorganization plan. In 1972 twenty-one days of hearings were held on this and alternative plans by an Administrative Law Judge who, early in 1973, issued a report² approving, with modifications, the trustees' proposed plan. He rejected the Group's second proposal which, like the first, called for the prompt liquidation of the B&M. He ordered the trustee³ to submit a "definitive plan for reorganization" by June 30, 1974, and set the hearing on that plan for September 9, 1974.

The trustee's plan requires, to bring about a successful reorganization, the realization of operating economies; provision of maintenance sufficient to keep essential services in operation; sale of unprofitable trackage and real estate, including a sale to Massachusetts of all Boston commuter operations; successful attempts to secure tax abatements; and ultimately recapitalizing a much smaller, but self-sustaining, freight railroad. At the hearing before the Administrative Law Judge proposals from other interested parties indicate the possibility of merger with neighboring lines. Stockholders of the Maine Central, who control the Bangor & Aroostook, a Maine freight line, are seeking control of the B&M and, according to the ICC judge, could play a role in the reorganization and refinancing arrangements. Presumably it was to allow factors such as these to jell, as well as to permit further negotiations with Massachusetts and New Hampshire over the possible sale of parts of the B&M line and operations, that the Administrative Law Judge continued the proceedings until mid-1974.

Against this background the Group, or such as is left of it, appeals from the district court's approval of six petitions by the trustee to make certain capital expenditures. All of the expenditures would facilitate continued operation of the railroad. The Group asserts that the capital expenditures, especially those for the repair of the Hoosac Tunnel, are unreasonable, but it relies primarily upon allegations of statutory and constitutional error: it says that under § 77, if creditors oppose expenditures on the ground that there is no reasonable prospect of successful reorganization, and introduce evidence to support that contention, the court must make a finding "as to whether or not the Railroad is probably reorganizable."

We disagree. Section 77 does not contemplate that a court will make, as a matter of course, an unaided judgment on reorganizability before the ICC has considered the matter and certified a plan to the court. It instead provides in detail for a multi-staged effort by the ICC, creditors and court to develop, if feasible, a satisfactory reorganization plan. The ICC is an expert agency invested with "primary responsibility for the development of a suitable plan." Ecker v. Western Pac. R. Corp., 318 U.S. 448, 468, 63 S.Ct. 692, 705, 87 L.Ed. 892 (1942). Section 77 "manifests the intention of Congress to place reorganization under the leadership of the Commission, subject to a degree of participation by the Court." Id.

Doubtless the court, perhaps even without consulting the Commission, could terminate a reorganization proceeding were it manifestly frivolous or brought in bad faith. That is plainly not the case here. The trustees, the ICC Administrative Law Judge after hearings, and Passaconaway have expressed the belief that the B&M is reorganizable. We have examined the trustee's plan, the Administrative Law Judge's Recommended Report and Order, and the testimony of the Group's expert. While the trustee and the ICC judge acknowledge that reorganization of the B&M presents unique problems, they think it can be done and describe a variety of factors bearing on the likelihood of success. We cannot say that the prospects of reorganization are so dim that the process established by Congress for developing, refining and considering a plan should be short-circuited by a court's summary attempt to substitute its own premature and likely ill-informed judgment as to reorganizability. Under § 77 the court's plain duty is to defer at this juncture to the ICC.

We do not say that senior creditors must sit by for years while their security evaporates. Section 77(g)⁴ permits the reorganization court, on motion of any party or on its own motion, "after hearing and after consideration of the recommendation of the Commission", to dismiss the reorganization proceedings if "there is undue delay in a reasonably expeditious reorganization." The Group did not formally make a motion under § 77(g) but instead sought to raise reorganizability collaterally to its objections to capital expenditures. Even were we charitably to treat its objections as, in effect, a § 77(g) motion, we nevertheless would conclude that the court, under the circumstances presented, did not abuse its discretion in failing to rule specifically on reorganizability and in otherwise denying the motions.

The same delay could be justified in one case but "undue" in another. We would therefore not necessarily limit § 77(g) dismissal to circumstances in which a plan had been certified and approved, although not expeditiously carried out. Were the ICC and other parties to the reorganization to be unduly lethargic in evolving an initial plan, an injured party might, upon a proper showing, invoke § 77(g). Indeed, we would even agree with appellants that in unusual circumstances a party might be entitled to a preliminary ruling on reorganizability if the party could demonstrate peculiar and major irreparable injury that would make any additional delay "undue." Each case turns on its own facts; the court must consider and weigh the effect of delay on all parties and on the public interest as well.

The Group has failed to demonstrate, with any precision, the extent to which the passage of time is affecting its security. Obviously the B&M's tax and interest liabilities, and other priority indebtedness such as administrative expenses, continue to mount; but while we know in a general way that the claims against the bondholders' security increase with time, the record here does not inform us as to how badly off they are, and will be, and appellant made no serious effort to marshall and present such information in the reorganization court. This information is important, since the greater the bondholders' cushion and the slower the rate at which their security is eroding, the less dire for them the consequences of delay even if attempts at reorganization should ultimately fail.⁵

Further, the Group has not demonstrated that the alternative plan it proposes—the expeditious liquidation of the B&M's assets—would necessarily be desirable, particularly for the unsecured creditors who are also entitled to protection of their assets. Canada Southern R. Co. v. Gebhard, 109 U.S. 527, 536, 33 S.Ct. 363, 27 L.Ed. 1020 (1883). Cf. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 597, 55 S.Ct. 854, 79 L.Ed. 1593 (1935). The ICC judge is of the opinion that summary liquidation would have adverse consequences for the bankrupt's estate. Even if it were shown that a distress sale would be best for secured creditors as a group, we cannot say that it would protect adequately the...