Kansas City Terminal Ry Co v. Central Union Trust Co of New York

• Decision Date: 01 June 1926
• Docket Number: No. 265,265
• Parties: KANSAS CITY TERMINAL RY. CO. et al. v. CENTRAL UNION TRUST CO. OF NEW YORK et al
• Court: U.S. Supreme Court

271 U.S. 445

46 S.Ct. 549

70 L.Ed. 1028

KANSAS CITY TERMINAL RY. CO. et al.

v CENTRAL UNION TRUST CO. OF NEW YORK et al.

No. 265.

Argued April 23, 1926.

Decided June 1, 1926.

Messrs. Samuel W. Sawyer, of Kansas City, Mo., Edward J. White, of St. Louis, Mo., N. H. Loomis, of Omaha, Neb., and Bruce Scott and Gardiner Lathrop, both of Chicago, Ill., for Kansas City Terminal Ry. Co.

[Argument of Counsel from pages 446-448 intentionally omitted] Mr. Joseph M. Bryson, of St. Louis, Mo., for Central Union Trust Co. of New York.

[Argument of Counsel from page 449 intentionally omitted] Mr. Justice McREYNOLDS delivered the opinion of the Court.

This cause is here on certificate from the United States Circuit Court of Appeals, Eighth Circuit. Judicial Code, § 239 (Comp. St. § 1216). The relevant facts and the submitted questions follow.

In a proceeding by creditors, the United States District Court, Eastern District of Missouri, appointed a receiver for the Missouri, Kansas & Texas Railway Company. Appellees asked foreclosure of liens upon the whole property, and procured an order of sale. According to a plan for purchase and reorganization, with definite offers to lien creditors, unsecured creditors, and stockholders, Blumenthal and another bid in the assets and then assigned the rights so acquired to the Missouri-Kansas-Texas Railroad Company, a newly organized Missouri corporation.

Pending entry of the final decree, appellants asserted preferential rights. These were denied, and they were held to be unsecured contract creditors. Kansas City Terminal Ry. Co. v. Central Union Trust Co. (C. C. A.) 294 F. 32. Thereupon they challenged the reorganization plan as unfair to them and unduly preferential to stockholders of the insolvent corporation. The trial court overuled their objection, the matter went to the Circuit Court of Appeals, and it has asked for instruction.

The reorganization scheme required the issuance of four classes of securities by the new company:

(1) Prior lien mortgage bonds (authorized, $250,000,000).

(2) Cumulative adjustment, or income, bonds (authorized, $100,000,000), secured by mortgage as to principal.

(3) Preferred stock (authorized, $200,000,000).

(4) Common stock, without par value (authorized, 2,500,000 shares).

Specified amounts of each of these were reserved for future use by the new company. Some of the prior lien bonds bore interest at 4, some at 5, and some at 6 per cent.

New securities were offered to the holders of seventeen separate issues of outstanding bonds of the old company and its various subsidiaries, secured by mortgage, and one issue of notes, secured by the pledge of mortgage bonds. In some cases, but not all, cash was offered to holders of these secured claims in addition to the new securities. Always the par amount of the new securities offered (taking the new nonpar value common stock at $100 per share), plus the cash offered, if any, equaled, but never exceeded, the principal amount of the old securities, in respect of which the offer was made, plus interest to January 1, 1922.

Of these eighteen outstanding issues, five were offered new prior lien bonds and cash; one was offered new prior lien bonds; five were offered new prior lien bonds and new adjustment bonds; three were offered new prior lien bonds, new adjustment bonds, and new preferred stock; one was offered new adjustment bonds and new preferred stock; three were offered new adjustment bonds, new preferred stock, and new common stock.

In all cases the new prior lien bonds and the new adjustment bonds (whether offered to secured creditors, unsecured creditors, or stockholders) were to bear interest from January 1, 1922.

As to stockholders and unsecured creditors, it was provided: (1) Preferred stockholders might receive $14 in prior lien bonds (bearing 6 per cent.), $6 in adjustment bonds, and one share of common stock in the new company, upon payment of $20 for each $100 share of old stock. (2) Common stockholders might receive $17,50 in 6 per cent. prior lien mortgage bonds, $7.50 in adjustment bonds, and one share of common stock, upon payment of $25 for each $100 share of old stock. (3) Unsecured creditors were given the choice of two plans (a) One-third of a share of preferred stock, $100 par value, and two-thirds of a share of common stock without par value, for each $100 of their claims, plus interest to January 1, 1922 (whereas the receiver was appointed and took possession of the property September 27, 1915, foreclosure decree was entered June 30, 1922, offer to creditors was dated July 15, 1922, foreclosure sale was had December 13, 1922, order confirming the sale was entered February 9, 1923, and order approving the master's deed conveying the property to the new company was entered on March 10, 1923); (b) $14 in prior lien mortgage 6 per cent. bonds, $6 in adjustment mortgage bonds, and one share of common stock, upon payment of $18 for each $100 of their claims.

Appellants maintained below that Northern Pacific Railway Co. v. Boyd, 228 U. S. 482, 33 S. Ct. 554, 57 L. Ed. 931, and Louisville Trust Co. v. Louisville Railway Co., 174 U. S. 674, 19 S. Ct. 827, 43 L. Ed. 1130, require that an offer in a reorganization plan, in order to be fair and binding upon him, must preserve 'to the creditor his relative priority over the stockholder. It is not sufficient that he should get a little more than the stockholder. His entire claim must take precedence over any part of the interest of a stockholder. It is not sufficient that he be offered securities of the same grade as the stockholder, but a trifle more in amount, or that the stockholder's right to participate be conditioned upon the payment of an assessment.'

The questions:

I. Is a plan of reorganization of a railway company sufficient as to unsecured creditors, and binding upon them, which does not give precedence to the entire claim of the creditor over any part or interest of a stockholder in the old company?

II. Is such a plan...