MISSOURI PAC. R. CO. 51/4 SECURED SBC v. Thompson

• Decision Date: 15 February 1952
• Docket Number: 14504,14503,No. 14509.,No. 14495,14508,14495,14509.
• Citation: 194 F.2d 799
• Parties: MISSOURI PAC. R. CO. 5¼ SECURED SERIAL BONDHOLDERS' COMMITTEE v. THOMPSON et al. FARWELL et al. v. THOMPSON et al. (four cases).
• Court: U.S. Court of Appeals — Eighth Circuit

194 F.2d 799 (1952)

MISSOURI PAC. R. CO. 5¼ SECURED SERIAL BONDHOLDERS' COMMITTEE v. THOMPSON et al.

FARWELL et al. v. THOMPSON et al. (four cases).

Nos. 14495, 14503, 14504, 14508, No. 14509.

United States Court of Appeals Eighth Circuit.

February 15, 1952.

Lucien Hilmer, Washington, D. C., for appellants John V. Farwell, III, Bolton Sullivan and Cary N. Weisiger, Jr., Independent Directors of Missouri Pac. R. Co.

William H. Biggs, St. Louis, Mo., for appellant Missouri Pac. R. Co. 5¼% Secured Serial Bondholders' Committee.

Russell L. Dearmont, St. Louis, Mo., for appellee Guy A. Thompson, Trustee, Missouri Pac. R. Co., Debtor, and Trustee, International-Great Northern R. Co., Debtor.

Leonard P. Moore, New York City (Clair B. Hughes, Alan S. Kuller and Chadbourne, Parke, Whiteside, Wolff & Brophy, all of New York City, on the brief), for appellee Manufacturers Trust Co., as Corporate Trustee under First and Refunding Mortgage of Missouri Pac. R. Co.

Hugh L. M. Cole, New York City (Milbank, Tweed, Hope & Hadley, New York City, on the brief), for appellee City Bank Farmers Trust Co., as Trustee under First Mortgage dated July 1, 1922, of International Great Northern R. Co., Debtor.

Everett Paul Griffin, St. Louis, Mo. (Edward F. Colladay, Washington, D. C., and Kenneth McEwen, New York City, on the brief), for appellees Edmund Wright, Chairman, et al., constituting Protective Committee for First Mortgage Bondholders of International-Great Northern R. Co., a subsidiary debtor.

Charles W. McConaughy, New York City, Jacob Chasnoff, St. Louis, Mo., Morris D. Crawford, Jr., and Cadwalader, Wickersham & Taft, all of New York City, and Lowenhaupt, Waite, Chasnoff & Stolar, St. Louis, Mo., on behalf of appellee Group of Institutional Investors holding First and Refunding Mortgage 5% Bonds of Missouri Pac. R. Co.

Sanford H. E. Freund and Shearman & Sterling & Wright, all of New York City, on behalf of Protective Committee for holders of General Mortgage Bonds of Missouri Pac. R. Co., submitted a joint brief.

Before SANBORN and COLLET, Circuit Judges, and HULEN, District Judge.

SANBORN, Circuit Judge.

These appeals challenge primarily the legality of two orders of the District Court entered in the reorganization proceedings of the Missouri Pacific Railroad Company and its affiliates, including the International-Great Northern Railroad Company, under Section 77 of the Bankruptcy Act as amended, 11 U.S.C.A. § 205. The orders are No. 3879, entered October 5, 1951, which directs the Trustee of the Missouri Pacific Railroad Company, Debtor, to pay to the public holders of First and Refunding Mortgage Bonds of the Missouri Pacific Railroad Company $33,478,575, the equivalent of three years' interest upon their bonds, and No. 3880, entered October 8, 1951, directing the Trustee of International-Great Northern Railroad Company, Debtor, to pay to the holders of International-Great Northern Railroad Company First Mortgage Bonds $1,610,000, the equivalent of one year's interest upon those bonds.

The Trustee, on September 6, 1951, filed petitions for the orders in suit. Each of the petitions represented, in substance, that available funds in the hands of the Trustee, derived from the earnings of property constituting the security for the mortgage bonds referred to in the petition, were sufficient to warrant the payment suggested; that the Interstate Commerce Commission had approved a "Modified Plan of Reorganization of Debtor Companies"; and that on October 3, 1950, the court had approved the plan. See, In re Missouri Pacific Railroad Company, D.C., 93 F.Supp. 832; affirmed, State of Texas v. Group of Institutional Investors, 8 Cir., 191 F.2d 265. The Trustee proposed that the payment to the bondholders be received by them upon the following conditions:

"(1) If said proposed Modified Plan of Reorganization is finally approved and confirmed in these proceedings, said payment to said bondholders shall be credited as provided in Section A, entitled `Cash Distributions,' of the Fifth Supplemental Order of the Interstate Commerce Commission dated December 29, 1949.

"(2) If said Modified Plan of Reorganization as now proposed is changed or modified, or if any other or different Plan of Reorganization is finally approved and confirmed herein, then said payment shall be applied or credited as may be appropriate in the light of any Plan of Reorganization which may be finally approved and confirmed in these proceedings.

"(3) If a Plan of Reorganization is not finally approved and confirmed in these proceedings, then said payment shall be credited as the Court may hereafter direct."

The appellants, by appropriate pleadings, resisted the petitions of the Trustee. They alleged that a petition under 11 U.S.C.A. § 208 had on July 13, 1951, been filed by parties in interest and referred by the court to the Interstate Commerce Commission; that 11 U.S.C.A. § 208(a) (5)¹ provides that, upon the filing of such a petition, "all further proceedings for confirmation of the plan shall be suspended pending disposition of the petition by the Commission and certification of its action thereon to the court"; that the purpose of this provision is to preserve the status quo of the reorganization proceedings in order to afford the Commission a full, unrestricted opportunity to review the plan in the light of such changes, facts and developments as have occurred since the Commission's approval of the plan; that, under § 208(b), the "changes, facts, and developments" to be considered by the Commission include "retirements and purchases of debt, including retirements and purchases at a discount that have been made or that can reasonably be made"; and that such retirements and purchases depend largely upon the amount of cash in the debtor estates. The appellants also asserted that the filing of the Trustee's petitions in September, 1951, for authority to make interest payments and the assignment of the petitions for hearing were prejudicial to the Commission's statutory consideration of cash that reasonably can be used to retire or purchase debt at a discount; that the petitions of the Trustee upon their face recognize that the proposed expenditures are consistent with and in furtherance of the present approved plan of reorganization and yet might be inconsistent with a changed or modified plan which the Commission might approve if it should determine that, because of changed conditions, the cash which the Trustee proposed to use for interest payments ought to be used to retire or purchase debt at a discount.

The appellants asked that the Trustee's petitions for authority to make the suggested payments be dismissed or denied, or that the hearing thereon be postponed, or that decision thereon be deferred until the Commission had decided the matters referred to it by the court's order of July 13, 1951.

The issues raised by the Trustee"s petitions and the responses of the appellants were heard by the court on September 28, 1951. Evidence was taken which showed that the principal amount of the First and Refunding Mortgage Bonds of the Missouri Pacific Railroad Company held by the public was $223,190,500, that on December 31, 1951, matured and unpaid interest on these bonds would be $96,105,963, and that the Trustee had available in cash or its equivalent $85,340,917, representing earnings of the property securing the bonds. With respect to the International-Great Northern Railroad Company's First Mortgage Bonds, it appears from the record that the principal amount outstanding was $28,750,000, upon which matured interest as of December 31, 1951, amounted to approximately $15,000,000, and that the Trustee had available at the end of August, 1951, in cash or its equivalent, derived from earnings, $7,462,872.

The District Court ruled that the Trustee's petitions and the hearing thereon were not proceedings which were suspended by 11 U.S.C.A. § 208(a) (5) pending the disposition by the Interstate Commerce Commission of the petition filed under 11 U.S. C.A. § 208, and that the petitions of the Trustee should be granted. Orders No. 3879 and 3880 were entered, in conformity with the petitions of the Trustee. These appeals followed.

It is not necessary to detail the testimony adduced at the hearing or to refer to the findings of fact supporting the orders, since it is conceded by the appellants that the orders are valid unless 11 U.S.C.A. § 208(a) (5) precluded the court from making them.

The appellants recognize the general rule that in proceedings for the reorganization of a railroad, the court may, in the exercise of a sound discretion, authorize the payment of matured interest or its equivalent to mortgage bondholders out of available funds earned by the property constituting the security for their bonds. In re Central of Georgia Railway Co., D.C.S.D.Ga., 48 F.Supp. 445, 451, affirmed Central Hanover Bank & Trust Co. v. Callaway, 5 Cir., 135 F.2d 592, 595; In re Wisconsin Central R. Co., D.C.Minn., 72 F.Supp. 669, 672-673; and compare, Application of Realty Associates Securities Corp., D.C.E.D.N.Y., 58 F. Supp. 220. This rule was recognized by this Court in United States Trust Co. of New York v. Zelle, 8 Cir., 191 F.2d 822, 823, in which we said with respect to interest payments to first mortgage bondholders of the Wisconsin Central Railway Company: "The First Mortgage bonds being amply secured, interest was paid during the period of bankruptcy (although not always at regular intervals) at the rate of 4 per cent up to July 1, 1949, the date of maturity of the bonds."

In the instant case, interest on the bonds in suit has been paid from time to time under orders of the court. The interest payments made plus those authorized by Orders 3879 and 3880 will give to the bondholders during the pendency of the reorganization proceedings less than the contract rate and less than 4 per cent interest on their bonds.

The appellants assert that the orders in...