In re Florida East Coast Ry. Co.

• Decision Date: 22 January 1949
• Docket Number: No. 4827-J.,4827-J.
• Citation: 81 F. Supp. 926
• Parties: In re FLORIDA EAST COAST RY. CO.
• Court: U.S. District Court — Southern District of Florida

81 F. Supp. 926

In re FLORIDA EAST COAST RY. CO.

No. 4827-J.

United States District Court S. D. Florida.

January 22, 1949.

Davis, Polk, Wardwell, Sunderland & Kiendl and Edgar G. Crossman, all of New York City, and Stockton, Ulmer & Murchison, of Jacksonville, Fla., for First & Refunding Mortgage Bondholders' Committee.

Jackson, Nash, Brophy, Barringer & Brooks and Paul B. Barringer, Jr., all of New York City, and Osborne, Copp & Markham and H. P. Osborne, all of Jacksonville, Fla., for First Mortgage Trustees.

Appleton, Rice & Perrin, Clifton S. Thomson and Charles N. Schenck III, all of New York City, and Chester Bedell, of Jacksonville, Fla., for First & Refunding Mortgage Trustees.

James F. Byrnes and Donald Russell, both of Washington, D. C., and Giles J. Patterson, of Jacksonville, Fla., for St. Joe Paper Co.

Oliver & Donnally and Willard P. Scott, all of New York City, and Milam, McIlvaine, Carroll & Wattles and Robert R. Milam, all of Jacksonville, Fla., for S. A. Lynch and associated interests.

Alexander & Green and Edward W. Bourne, all of New York City, Charles Cook Howell and Richard B. Gwathmey, both of Wilmington, N. C., and McCarthy, Lane & Howell, of Jacksonville, Fla., for Atlantic Coast Line R. Co.

Willkie, Owen, Farr, Gallagher & Walton, and Walter H. Brown, Jr., all of New York City, and Fleming, Jones, Scott & Botts and G. W. Botts, all of Jacksonville, for Seaboard Air Line Ry. Co.

Henry L. Walker, Robert N. Lowry and Sidney S. Alderman, all of Washington, D. C., and Cyril C. Copp, of Jacksonville, Fla., for Southern Ry. System.

Macfarlane, Ferguson, Allison & Kelly and Howard P. Macfarlane, all of Tampa, Fla., for F. K. Conn.

Frank L. Mulholland, Clarence M. Mulholland, and Willard H. McEwen, all of

Toledo, Ohio, Edward J. Hickey, Jr., of Washington, D. C., and Edwin C. Coffee, of Jacksonville, Fla., for Railway Labor Executives' Assn.

Debevoise, Plimpton & McLean and Francis T. P. Plimpton, all of New York City, and Rogers & Towers, of Jacksonville, Fla., for New York Trust Co., trustee.

Russell L. Frink, of Jacksonville, Fla., for Debtor's Trustees.

Miller Walton, of Miami, Fla. (Walton, Hubbard, Schroeder, Lantaff & Atkins, of Miami, Fla., of counsel), for W. G. Welbon and others.

SIBLEY, Circuit Judge.

After hearing much evidence and argument I have to decide whether a plan of reorganization of the Florida East Coast Railway Company under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, certified to this court by the Interstate Commerce Commission as fair and equitable, compatible with the public interest and meeting the requirements of Section 77, subs. b and e, should be approved by the court. There is on practically all the debtor Company's property a general mortgage securing a principal of $12,000,000 of bonds dated in 1909 which is not in default and not due till 1959. There is a second general mortgage dated in 1924 securing issues of refunding bonds of a principal of $45,000,000, on which an additional amount of about $35,000,000 of defaulted interest is due. There are large unsecured debts having no priority, and the Company is and has long been insolvent. A receivership in this court was secured on a creditor's bill in 1931; and the following year the trustees in the refunding mortgage moved to foreclose it in this court and secured a receivership, which was consolidated with the other. The receivers operated the railroad successfully and profitably, keeping the interest on the first mortgage of $540,000 per annum paid up and accumulating a large amount of surplus cash. In 1941 a committee representing the holders of about $30,000,000 of the refunding bonds in their behalf filed this reorganization proceeding. The Interstate Commerce Commission in due course in 1942 certified to the count a simple plan of reorganization which would have continued to carry a first mortgage and to vest the new common stock pro rata in the refunding bondholders, but it restricted the capitalization to $37,500,000. In 1943 the court disapproved the plan because the Commission had taken insufficient account of the large earnings and profits during these war years sufficient to pay off the first mortgage and leave a large surplus. In 1945 another plan was certified by which the first mortgage would be paid off out of the cash on hand, and new common stock and income bonds would be divided among the refunding bondholders. $8,700,000 more of the cash on hand was to be set apart for rehabilitation and improvement of the railroad. The reorganization and capitalization value was raised to $40,500,000. St. Joe Paper Company had by this time bought fifty-one percent of the refunding bonds, and to safeguard minority holders against any abuse of the majority control a voting trust was provided in the plan. There was a suggestion by what is known as the Lynch interest, owning some $3,000,000 of the refunding bonds, that a controlling interest be acquired by the Atlantic Coast Line Railroad Company by awarding it common stock to be paid for by new bonds of the latter, but it was repelled by the Commission because of aggressive opposition by other refunding bondholders and their threat to vote to reject the plan, and because the Coast Line's fixed charges could not in view of recent operating deficits be prudently increased. This plan, without the Coast Line control, was declared compatible with the public interest and certified for approval Jan. 8, 1945. Before the certificate became final, the Coast Line bought a large unsecured debt for a small sum and an agreement to divide any collections with the seller, and was allowed to intervene as a party in interest and present a new plan whereby in lieu of the Coast Line's acquiring a majority of voting stock to secure control, the debtor's properties should be merged into the Coast Line and the debtor's creditors should be paid cash and Coast Line securities in satisfaction of their claims. The whole matter was reopened and referred to an examiner and evidence taken especially touching the propriety of control by St. Joe Paper Company or the Coast Line. After a very lengthy discussion the Commission concluded in general terms that there would be betterment of service and economies of operation and increased financial stability by the merger with the Coast Line, and more experience and less distraction by other interests, than if St. Joe Paper Company controlled; and that a plan of reorganization putting the Paper Company in control would not be compatible with the public interest but one putting control in the Coast Line would be compatible therewith. With modifications, the Coast Line plan was certified, by a majority of one Commissioner, on April 8, 1947. 267 I.C.C., 295-391. It was again taken under consideration however, especially on the question whether there was power under Section 77 and the Interstate Commerce Act to propose such a plan of involuntary merger, two additional Commissioners participating. The certification was adhered to by six Commissioners, the other five strongly dissenting both in law and fact. 267 I.C.C., 729-759.

Being thus of opinion that it was not compatible with the public interest for St. Joe Paper Company to own a controlling voting stock interest in the debtor's railroad a majority of the Commission, by way of defeating that control, adopted this present plan of merger which would result in St. Joe having only a relatively small amount of voting stock in the merged setup. The plan as formulated pays off the first mortgage and distributes among the holders of the East Coast refunding bonds pro rata any "free cash" on hand at the plan's consummation, meaning thereby the accumulated earnings not needed by the railroad and not included in the valuation of the railroad property at $40,500,000; and then the debtor's entire remaining property is to be transferred to the Coast Line; and as the equitable equivalent of the bondholders' rights in the property for each $1,000 refunding bond $91.67 of cash is to be paid by the Coast Line, plus $300 par of its new mortgage bonds secured by the transferred property, and its divisional income bonds of a par of $175, and $200 in four-dollar-dividend preferred stock having voting power and participating with the common stock in dividends in excess of the fixed dividend, and one and one-third shares of no par Coast Line common stock put at $133.33. All these at par add up to $900 per bond. The pro rata share of the bond in the railroad property to be transferred at the value of $40,500,000 as fixed by the Commission both for reorganization purposes and as an upset price in case of sale is $900. But the Commission finds that common stock of the Coast Line was then selling at 55, and had recently been as low as 45. The evidence heard by me both from the advocates and opponents of the plan is that none of these securities when issued will likely be worth par. The gist of the matter is that, because the majority of the Commissioners think it not compatible with the public interest for St. Joe Paper Company to own a controlling amount of voting stock in the reorganized East Coast railroad if reorganized in the simple and natural manner several times certified by the Commission unanimously by giving all the refunding bondholders a pro rata share of its common stock, all of them must surrender the investment they have chosen and lawfully own in the East Coast property and must take in return an investment which most of them do not desire to own and do not think is an equivalent.

In the hearing before me, as in those before the Commission, the Coast Line urgently insists on the approval of the plan. It proposed it and as the Commission itself reports eagerly desires it. The Committee of New York bankers, which represented when it instituted this reorganization proceeding over $30,000,000 of the refunding bonds but now represents only $572,400, appears in support of the...