In re Chicago, RI & P. Ry. Co.

• Decision Date: 20 June 1947
• Docket Number: No. 9395.,9395.
• Citation: 162 F.2d 606
• Parties: In re CHICAGO, R. I. & P. RY. CO.
• Court: U.S. Court of Appeals — Seventh Circuit

162 F.2d 606 (1947)

In re CHICAGO, R. I. & P. RY. CO.

No. 9395.

Circuit Court of Appeals, Seventh Circuit.

June 20, 1947.

Edward W. Bourne, Wilkie Bushby, Edward K. Hanlon, Alexander M. Lewis, Sanford H. E. Freund, and Jesse E. Waid, all of New York City, for petitioners.

Robert W. Purcell, of Cleveland, Ohio, Thomas Dodd Healy, of Chicago, Ill., Harry Kirshbaum, of New York City, and A. Bradley Eben, of Chicago, Ill., for respondents.

EVAN A. EVANS, Senior Circuit Judge.

The petition upon which I am asked to act is presented by numerous trustees named in several bond issues of the Chicago, Rock Island and Pacific Railway Company.¹ It is predicated upon Section 18 of the Judicial Code, 28 U.S.C.A. § 22, and is addressed to me as the senior circuit judge of this Circuit.

Petitioners assert they represent large groups of creditors who have, on various occasions, been thwarted in their efforts to secure the reorganization of the Railroad under Section 77, the Railroad Reorganization Act, 11 U.S.C.A. § 205, by the rulings of the District Judge. They assert that they cannot expect judicial action by the District Judge, which will expeditiously carry out the plan of reorganization, which has been approved by the Interstate Commerce Commission, the United States District Court, and the Circuit Court of Appeals. Its execution has been recently directed by the last-named court.²

The undersigned, as senior circuit judge, is requested by this petition to designate a circuit judge of this Circuit, to sit in the district court and hear the petitioners, who are seeking the completion of the reorganization of this debtor Railroad. The plan of reorganization awaits only its execution, it having been not only approved by the Interstate Commerce Commission and the Courts, but has been ratified by the creditors whose combined claims aggregate approximately four hundred million dollars, held by approximately seventeen thousand creditors.

Reference is made to the numerous decisions of the courts which have passed upon various phases of this case, for its legal history.³ The proceedings were begun in June, 1933. It first reached the United States Supreme Court in 1934.

Analyzed somewhat broadly, the petition presents both legal and factual issues.

Two legal questions arise:

(1) Does Section 18 of the Judicial Code invest the senior circuit judge with authority to designate a circuit judge to sit in a pending district court suit and thereby displace a sitting district judge, upon said senior circuit judge's determination that "public interest" requires such action?

(2) If the authority to act is conveyed by said Section 18, is it discretionary with the senior circuit judge whether he should act?

The two factual issues are:

(1) Does the instant petition allege, and do the supporting facts disclose, such delay as to amount to judicial misconduct on the part of the district court as to require the senior circuit judge, under Section 18, to find that "public interest" requires the entry of the order sought?

(2) Do the allegations and proof show that Mr. Colnon, a trustee appointed by the district court, has been so recalcitrant as to wilfully and actively block the prompt and effective execution of the plan of reorganization?

The statute upon which petitioners rely and about which the present legal controversy rages, reads:

"Circuit judge designated to hold district court; powers. (a) The Chief Justice of the United States (or in the absence of the Chief Justice, the senior associate justice), or the circuit justice of any judicial circuit, or the senior circuit judge thereof, may if the public interest requires, designate and assign any circuit judge, including retired circuit judges * * * designated and assigned to temporary duty in the judicial circuit, to hold a district court within such circuit * * *." (As amended December 29, 1942, 56 Stat. 1095.)

The petition alleges that the reorganization has proceeded to the point where the four reorganization managers have been nominated pursuant to Article XIV, of the approved Plan of Reorganization. The Plan provides for ratification of the nominees by the District Court, and for his appointment of a fifth. These reorganization managers name the first Board of Directors, and carry the burden of seeing that the Plan is fully and expeditiously executed.

The material allegations of the petition are: (1) Deliberate delay on the part of the trial judge and of one trustee, in the effectuation of the plan; (2) usurpation by the trial judge of the power to appoint reorganization managers; (3) Obstructionist tactics, and efforts, on the part of said trustee, and judge, to gain for the Railroad's stockholders and unsecured creditors whose claims have been wiped out by the plan, a foothold in the financial structure of the Railroad; (4) alleged action of the Trustee Colnon in calling a meeting of stockbrokers in New York to persuade them to organize to oppose the nominations which would be made pursuant to Article XIV of the Plan and to suggest reorganization managers themselves, and action by trustee Colnon in his appearance before a Congressional Committee hearing of the so-called Reed bill, and alleged misstatements made by said Trustee before said Congressional Committee, the general object of said efforts being to defeat the execution of the Plan; (5) conflict between the co-trustees; (6) the need for the removal of Trustee Colnon, allegedly disqualified, which motion for removal should be heard by a judge other than the sitting judge, who appointed him.

In a general way, it may be said that a sharp controversy has arisen over the action of the District Court and particularly over trustee Colnon, appointed by the Court, to allegedly frustrate and defeat the Plan of Reorganization, rather than to see to its execution, at the earliest possible date.

Back of this conduct is or has been a conflict long continued, between the old stockholders of the Railroad, who are eliminated by the Plan of Reorganization, and some unsecured creditors who do not receive as much as they believe they are entitled to receive under the Plan of Reorganization, — and the creditors who hold bonds secured by prior lien who have long waited for the return of the Railroad to its owners.

The story of this long stay of the Railroad with the courts is not complimentary to the courts. Fourteen years, is, in the writer's opinion, too long for any receivership or bankruptcy proceedings. When this case was first presented in the Circuit Court of Appeals in 1934, 72 F.2d 443, 452, I had the duty of writing the opinion for the Court. We there said:

"If plans are not forthcoming with reasonable promptness, relief will be granted appellants. This bankruptcy proceeding contemplates a plan of reorganization. This must be undertaken expeditiously and proceeded with diligently. Such proceedings must never be viewed as nursing receiverships. The two sections, 74 and 77 (11 U.S.C.A. §§ 202, 205), are not to be used to delay, but to facilitate reorganizations of properties that are overcapitalized or whose capital structure is unfortunate. There is no basis for appellants to assume the court will not insist on the consummation of these ends."

Upon that decision's being affirmed by the Supreme Court (Continental Illinois Nat. Bank & Trust Co. of Chicago v. Chicago, R. I. & P. Ry. Co., 294 U.S. 648, 685, 55 S. Ct. 595, 610, 79 L.Ed. 1110), Justice Sutherland, speaking for the Court, said:

"It is true that no plan has yet been consummated; and, so far as the record shows, none has been prepared or is in the course of preparation. If this long delay were without adequate excuse, the retention of the injunction for the long period which has intervened since it was granted could not be justified. But the delay is obviously due to the many doubts and uncertainties arising from the present litigation. Until they are finally resolved, the consummation, or even the preparation, of any definite plan is plainly impracticable. With those doubts and uncertainties now removed, the proceeding should go forward to completion without further delay, or be dismissed.

"The delay and expense incident to railroad receiverships and foreclosure sales constituted, probably, the chief reasons which induced the passage of section 77; and to permit the perpetuation of either of these evils under this new legislation would be subversive of the spirit in which it was conceived and adopted. Not only are those who institute the proceeding and those who carry it forward bound to exercise the highest degree of diligence, but it is the duty of the court and of the Interstate Commerce Commission to see that they do. Proceedings of this character, involving public and private interests of such magnitude, should, so far as practicable, be given the right of way both by the court and by the commission, to the end that they may be speedily determined."

These words were spoken over twelve years ago. It is unnecessary for me to do little more than repeat and add that it is hardly possible to find the court's operation of a railroad through a receiver or a trustee to be as effective or as satisfactory as is the operation of the owner's. Moreover, the right of the owners to manage the affairs of the Company should not be abridged save where disputes, inability to meet obligations or other controversies, make the operation by the owners impossible. And courts should not withhold the property longer than necessary, and the shorter that period, generally speaking, bespeaks effective and efficient handling by the courts. And what I here say applies not only to railroads that are being reorganized under Section 77 of the Reorganization Act, but applies to other debtors that are being reorganized — and also to nursing receiverships, the long-continued run of which has reflected on the courts having jurisdiction of them.

This petition has been strenuously...