In re Central of Georgia Ry. Co.

• Decision Date: 12 January 1942
• Docket Number: No. 4829.,4829.
• Citation: 42 F. Supp. 940
• Parties: In re CENTRAL OF GEORGIA RY. CO. (J. S. FARLEE & CO., Intervener).
• Court: U.S. District Court — Southern District of Georgia

42 F. Supp. 940

In re CENTRAL OF GEORGIA RY. CO. (J. S. FARLEE & CO., Intervener).

No. 4829.

District Court, S. D. Georgia, Savannah Division.

January 12, 1942.

Connerat, Hunter & Cubbedge, of Savannah, Ga., for Farlee & Co.

Adams, Douglas & Brennan, Anderson, Cann & Dunn, Henry Brennan and T. M. Cunningham, all of Savannah, Ga., Alexander & Green and Larkin, Rathbone & Perry, all of New York City, and Pitney, Hardin & Skinner, of Newark, N. J., for certain trustees and certain bondholders committees.

LOVETT, District Judge.

The question to be decided is whether the proceeds derived from the abandonment and sale of a part of a "mortgage division" of the debtor shall be distributed now to the bondholders secured by the divisional mortgage, or shall be retained by the trustee under the Mortgage Indenture, in whose custody the fund was placed subject to the control of the court, until the equities of the many parties at interest in this proceeding have been adjusted and a "fair and equitable" plan of reorganization of the railway company has been submitted to the court.

A history of the case, the facts considered and the reasons for my conclusions should be stated.

History.

On December 19, 1932, on a bill in equity filed by an unsecured creditor a receiver was appointed by this court for the assets and property of the railway. In 1933 the mortgage trustee of the Oconee division filed its plenary suit for the appointment of a receiver of the property covered by its mortgage. Other mortgage trustees did likewise. An account of the properties subject to the various mortgage liens was asked to be taken, as well as a segregation of income to be made by the receiver. The original receiver named under the creditor's bill was appointed receiver for each division on which there was a separate mortgage. In effect, if not in words, the original receivership was extended to cover the receiverships for the divisions. Orders impounding income pledged under the several mortgages were entered early in January, 1934, but payment of such income to the mortgage trustees was to be made at such times as provided by the further orders of the court. The causes were then consolidated in equity and continued as one case until 1940 when the debtor filed a petition in this cause for reorganization under Section 77 of the Bankruptcy Act, 11 U. S.C.A. § 205. Trustees were named by the court, their appointment ratified by the Interstate Commerce Commission, they qualified, and the proceedings in equity thereupon for practical purposes were terminated. While the receiver in equity was administering the property in 1938, on his application, and after appropriate authority from the court and the Interstate Commerce Commission, more than one half of the Oconee division line of railroad was abandoned and the tracks were taken up and sold free and clear of liens, valid liens being transferred to the proceeds of the sale. The order of the court provided that the proceeds of the sale should be deposited with the mortgage trustee "pending the further order of the court and the disposition of any claims or liens upon the same." The trust company which was the mortgage trustee in 1938 has now resigned, its successor has been appointed, and the fund is with the successor trustee.

J. S. Farlee & Company, holding one third or more of the total outstanding bonds of the division, in their own behalf and on behalf of other bondholders similarly situated, intervened and became a party in these proceedings about a year ago; and they pray that the proceeds of the sale of the abandoned line now be distributed by the mortgage trustee to the bondholders in whose behalf a first lien on the whole division was created, asserting there are no valid claims or liens against the fund except their own. Mortgage trustees under other mortgages securing other bonds of the debtor and one bondholders' protective committee oppose the distribution of the fund at this time, and say that an accounting is necessary — and can not now be made — to determine the equitable status of the fund, and that a present disbursement of the fund, going, as it would, beyond the court's power to control, would be premature; that the whole fund should be retained until a plan of reorganization of the railway is prepared and submitted to the court. No plan is now before the court, although certain preliminary steps necessary for the preparation of a plan are now being taken, e. g., the formulating and adoption of a method for segregation and allocation of the earnings and expenses among divisions, leased lines, etc., in accordance with Section 77, sub. c(10), of the Act. The formula is now before the Interstate Commerce Commission for recommendations to the court.

A hearing was had on this intervention in March, 1940, before the late Judge BARRETT. He had rendered no decision when he died. The issues are to be determined by me on the pleadings, transcript of evidence, certain stipulations, facts which may be judicially noticed because a part of the proceedings in this court, and briefs of counsel.

Facts.

The Oconee division is a short or branch line in the railway system. In 1932, when a receiver was first named for the properties, it was 77.01 miles in length. (The total owned and leased lines of the system operated by the trustees then and now were about two thousand miles.) The properties comprising the division are subject to a first lien under a divisional mortgage securing bonds issued by the debtor. After the abandonment of the portion of the division already mentioned, 47.40 miles, and only recently, another application has been made to the Interstate Commerce Commission to take up and dispose of 19.49 miles more of the line. If granted, there will remain only 10.12 miles of the original division. It touches the main line at Dover about 57 miles from Savannah, Georgia, a terminus, and now extends through Statesboro to Metter, a town of some two thousand population, without other railroad facilities. It has no connections other than the one with debtor's main line with which it interchanges traffic. The pending application for further abandonment relates to the segment lying between Statesboro and Metter. The original line, and the remnant now left, extend through an agricultural section of Georgia in which there are no large industries producing tonnage for a railroad. The facts stated are not in dispute.

Since 1932 the Oconee division has never paid its way. Not only has the operation of the line failed to earn the interest on its outstanding bonds, but has resulted in large losses, the amount of which, for lack of a judicially approved formula for segregation of earnings and expenses of the several divisions, has never been mathematically ascertained. The only figures before the court come from the accounting department of the bankruptcy trustee, and, while, for the reasons stated, they are estimates only — and are, therefore, objected to by the intervener — they show for the years 1934 to 1939, inclusive, the operating losses for the division exceed the total principal amount of the outstanding bonds by one hundred thousand dollars. If the losses for the entire period of the receivership and bankruptcy were computed in the same way the amount would be more. This court judicially knows that if the entire division should be abandoned, the salvage value, together with the funds in hand and in controversy, would be far less than the amount of bonds which the line secures. There is, therefore, no equity available to other creditors, secured or unsecured, unless it be that the operating losses mentioned are an asset to be recovered and administered for their benefit, which means, of course, displacing the contract lien of the bondholders by reason of Section 77 or on some other equitable theory. It is also clear, I think, that the retention in the system of the reorganized railway, when the time comes, of the small remnant of the Oconee division that may then be in operation is not essential to a sound plan of reorganization.¹ At this time, however, the parties should not be foreclosed from considering under a plan of reorganization the proper place into which this balance of the line should fall.

Conclusions.

This is not a case where the sale or disposition of collateral held by a creditor as security will hinder, obstruct, delay or prevent the preparation and consummation of a plan of reorganization. I would have no hesitancy in holding in a case of that kind that the court has power to require the fund in controversy to be held intact until due consideration could be given under a plan of reorganization as to what should be finally done with it, and should exercise it. Continental Illinois Nat. Bank, etc., v. Chicago, R. I. & P. R. Co., 294 U.S. 648, 649, 675, 678, 55 S.Ct. 595, 79 L.Ed. 1110; In re Chicago R. I. & P. R. Co., 7 Cir., 110 F.2d 395, 400. Whether the fund is now or later disbursed to bondholders of the division, or in a plan of reorganization is exchanged for new securities, in view of the amount involved, is of minor consequence in working out a plan. Nor is it a case where the court at this time would be required to stop and try out involved issues as to the earnings or losses of a particular division, or of the several divisions. If it were a case of that character the application for disbursement might be premature. See In re Chicago R. I. & P. R. Co., 7 Cir., 90 F.2d 795; In re Chicago & N. W. R. Co., 7 Cir., 114 F.2d 963. When a plan of reorganization is presented, should it turn out on a true accounting that the debits properly chargeable to this division represented by income of other divisions diverted in receivership or in bankruptcy are so great and of such a nature as to equitably require the setting up of a lien prior to that of the first mortgage on the division, the balance of the physical property not yet abandoned or sold (or the proceeds...