In re Interstate Power Co.

• Decision Date: 10 April 1947
• Docket Number: Civ. No. 1003.
• Court: U.S. District Court — District of Delaware
• Parties: In re INTERSTATE POWER CO. et al.

71 F. Supp. 164

In re INTERSTATE POWER CO. et al.

Civ. No. 1003.

District Court, D. Delaware.

April 10, 1947.

COPYRIGHT MATERIAL OMITTED

Myron S. Isaacs, of Philadelphia, Pa., for Securities & Exchange Commission.

Clement F. Springer (of Matthews & Springer), of Chicago, Ill., for Interstate Power Co.

Douglas A. Calkins (of Simpson, Thatcher & Bartlett), of New York City, for Ogden Corporation.

Frank H. Detweiler (of Cravath, Swaine & Moore), of New York City, for Chemical Bank & Trust Co.

Paul J. Kern, of New York City, for Samuel Plotkin.

LEAHY, District Judge.

This is what the plan of reorganization does — it provides that Interstate, an electric utility company which is also a registered holding company, will reduce its debt, eliminate its preferred stock, create a new common stock with an equity in assets and earnings, raise working capital and reserve the relative rights of its security holders pending the determination of the legal issues relating to the possible subordination of holdings of Interstate's parent, which is also a registered holding company. The machinery employed will be the sale of new first mortgage bonds and a number of sales of the new common stock; the outstanding common stock will be cancelled and the first mortgage bonds will be paid off without premium. There are two alternatives. The first calls for the payment of other outstanding debt securities and the distribution of new common stock to preferred stockholders, together with certificates of contingent interest in later distributions to the parent company; the second calls for an escrow for those security holders junior to the first mortgage bonds by setting aside shares of new common stock not sold to realize cash for the payment of outstanding first mortgage bonds and for working capital. The choice of the alternatives to be utilized depends upon market conditions at the time of the consummation.

1. The plan provides for means of bringing about a fair and equitable distribution of voting power among the security holders. To this extent the plan is necessary to satisfy the provisions of § 11 (b) within the meaning of § 11(e) of the Act.

2. The first mortgage bondholders are receiving fair treatment. Where the retirement of debt occurs under the compulsion of § 11 the retirement is not voluntary or "at the option of the company" within the meaning of the standard redemption provision. Hence, in every case redemption premiums, as such, are not always payable. In re Consolidated Electric & Gas Co., D.C.Del., 55 F.Supp. 211; In re Standard Gas & Electric Co., D.C.Del., 59 F.Supp. 274; Id., 3 Cir., 151 F.2d 326; In re North Continent Utilities Corporation, D.C.Del., 54 F.Supp. 527; In re Central States Power & Light Corporation, D.C.Del., 58 F.Supp. 877; New York Trust Co. v. S.E.C., 2 Cir., 131 F.2d 274 (certiorari denied 318 U.S. 786, 63 S.Ct. 981, 87 L.Ed. 1153; rehearing denied 319 U.S. 781, 63 S.Ct. 1155, 87 L.Ed. 1725); City National Bank & Trust Co. v. S.E.C., 7 Cir., 134 F.2d 665. I agree with the SEC's reasoning and analysis that the investment calibre of the first mortgage bonds in the case at bar compared with their pertinent contract rights does not warrant the payment of the principal amount in excess of par.

3. A holder of both the 6% and 7% preferred stock challenges the SEC's power to institute the present proceedings since, it is argued, it lacks jurisdiction to impose a reorganization on an operating utility company. Much reference to legislative history is had to sustain the point;³ and support for the view is directed to the third sentence of § 11(b) (2) which states: "Except for the purpose of fairly and equitably distributing voting power among the security holders of such company, nothing in this paragraph shall authorize the Commission to require any change in the corporate structure or existence of any company in a registered holding company system which is not a holding company, or of any company whose principal business is that of a public-utility company." (Emphasis supplied.)

It is argued that the Commission may only act with respect to a public utility operating company for the sole purpose of equitably distributing voting power. Such was not the view taken in Re Jacksonville Gas Company, D.C., 46 F.Supp. 852, or by this court in Re United Gas Corporation, D.C.Del., 58 F.Supp. 501, or in Re Laclede Gas Light Company, D.C., 57 F.Supp. 997. I think the point without merit. And it must be remembered that the instant company is, in fact, also a registered holding company.

4. There is further objection, principally from the Chemical Bank & Trust Company, as Successor Trustee under the indenture, on behalf of the debenture holders, to Alternative Two of the plan. The main objections from this source are (1), it is not fair and equitable to debenture holders since it violates the absolute priority rule and because it does not compensate them for loss of their creditor position; and (2), this court should not evaluate the fairness of the plan absent an absolute determination by the SEC as to whether the preferred stock has any present value. These arguments supporting both objections are palpably unsound. But, since these arguments have been made repetitively before this court in § 11 proceedings, I think it time to point out in some detail why I think they must be denominated as fallacious.

Since one of the earliest cases for federal district court enforcement under the Act was brought to me for consideration and approval, it has been consistently conceded by all parties, including the various sets of attorneys for the SEC, in this and in all other cases brought to the enforcement court, that a § 11(e) court has the affirmative and independent duty to consider and find whether a proposed plan is fair and equitable; and consequently such a court must consider whether the senior security holders are to get the "equitable equivalent" of the rights which they are asked to surrender, i.e., is the plan fair and equitable to the security holders affected by it? The Successor Trustee argues the present plan violates the fixed principle of full and absolute priority, as established by Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110; Northern Pacific Railway Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931; and Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982; Group of Institutional Investors v. Chicago, M. St. P. & P. R. Co., 318 U.S. 523, 63 S.Ct. 727, 87 L.Ed. 959; because the plan here does not compensate debenture holders for the loss of their creditor position.

Here is the first point of examination — in Group of Institutional Investors v. Chicago, M. St. P. & P. R. Co., supra 318 U. S. 523, 63 S.Ct. 749, Mr. Justice Douglas, in recognizing that phase of the financial problems facing the Court, said: "It is sufficient that each security holder in the order of his priority receives from that which is available for the satisfaction of his claim the equitable equivalent of the rights surrendered. That requires a comparison of the new securities allotted to him with the old securities which he exchanges to determine whether the new are the equitable equivalent of the old. But that determination cannot be made by the use of any mathematical formula. Whether in a given case senior creditors have been made whole or received `full compensatory treatment' rests in the informed judgment of the Commission and the District Court on consideration of all relevant facts." Resting on this, the Successor Trustee argues that the fixed rule of full priority is incorporated in § 11 of the Act by the use of the term "fair and equitable" ("words of art") in such section and points to In re United Light & Power Co., 3 Cir., 142 F.2d 411, 413, affirmed Otis & Co. v. Securities and Exchange Commission, 323 U.S. 624, 65 S.Ct. 483, 89 L.Ed. 1436, for imprimatur.

True, the Successor Trustee correctly states the language of this Circuit and the Supreme Court. I think, however, that it is and has been the constant use of that language which has caused confusion in the profession. What governmental and private litigants have overlooked is, while the principle of full priority may apply in both situations, i.e., in bankruptcy situations and in proceedings under the Public Utility Holding Company Act, the presence of the insolvency factor often results in different answers. In re United Light & Power Co., D.C., 51 F.Supp. 217, affirmed In re Securities and Exchange Commission, 3 Cir., 142 F.2d 411, 413, affirmed sub. nom. Otis & Co. v. Securities and Exchange Commission, 323 U.S. 624, 65 S.Ct. 483, 89 L.Ed. 511, is absolute proof of this statement; because it is perfectly obvious that had United Light & Power been insolvent and the claims of the senior securities had therefore matured, the common stockholders would not have participated and would have received nothing under the plan there under examination. This was conceded by the parties. It was conceded further that the possibility of the common stock acquiring value was very remote; yet, the SEC thought the common stock should have some participation even in the light of a possibility that the estimate...