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Document Index: 439443236

Matched Legal Cases: ['§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 4', '§ 22', '§ 347', '§ 77']

Ecker Vs Western Pacific R Corp - Citation 97515 - Court Judgment | LegalCrystal
Ecker Vs. Western Pacific R. Corp. - Court Judgment
LegalCrystal Citation legalcrystal.com/97515
Case Number 318 U.S. 448
Appellant Ecker
Respondent Western Pacific R. Corp.
ecker v. western pacific r. corp. - 318 u.s. 448 (1943) u.s. supreme court ecker v. western pacific r. corp., 318 u.s. 448 (1943) ecker v. western pacific railroad corp. no. 7 argued october 13, 14, 1942 decided march 15, 1943 * 318 u.s. 448 certiorari to the circuit court of appeals for the ninth circuit syllabus 1. section 77 of the bankruptcy act, providing for the reorganization of railroads engaged in interstate commerce, construed with respect to the functions of the district court and the interstate commerce commission. p. 318 u. s. 466 . 2. in respect of a plan of reorganization for the western pacific railroad company, certified to it by the interstate commerce commission, the district.....
Ecker v. Western Pacific R. Corp. - 318 U.S. 448 (1943)
U.S. Supreme Court Ecker v. Western Pacific R. Corp., 318 U.S. 448 (1943)
1. Section 77 of the Bankruptcy Act, providing for the reorganization of railroads engaged in interstate commerce, construed with respect to the functions of the District Court and the Interstate Commerce Commission. P. 318 U. S. 466 .
2. In respect of a plan of reorganization for the Western Pacific Railroad Company, certified to it by the Interstate Commerce Commission, the District Court functioned in accordance with the requirements of § 77 of the Bankruptcy Act. P. 318 U. S. 475 .
3. In a railroad reorganization proceeding under § 77 of the Bankruptcy Act, the Interstate Commerce Commission's determination of value, supported by evidence and in accordance with legal standards, is not subject to reexamination by the court. P. 318 U. S. 472 .
4. The determination of whether a plan of reorganization under § 77 is "compatible with the public interest" is for the Commission. P. 318 U. S. 473 .
5. The phrase "compatible with the public interest" includes questions as to the character and amount of the capitalization of the reorganized corporation, and, so long as legal standards are followed, the judgment of the Commission on such questions is final. P. 318 U. S. 473 .
6. In passing upon a plan of reorganization under § 77, the District Court acts only upon the issues specifically delegated by subsection (e). P. 318 U. S. 474 .
valueless. Such authorization is a valid exercise of the power of Congress in respect of bankruptcies, and does not deprive such claimants of property without due process of law. P. 318 U. S. 475 .
8. Neither the Constitution nor the Bankruptcy Act requires the issuance of warrants to stockholders and creditors whose claims, found to be without value, have been eliminated from participation in the reorganization. P. 318 U. S. 476 .
9. The mere possibility that earnings of the reorganized railroad may exceed expectations does not justify the issue of securities. P. 318 U. S. 476 .
10. There was no violation of legal standards in the Commission's requirement of a capital fund for future routine additions and betterments; nor in the issue of stock to former holders of interest-bearing securities. P. 318 U. S. 476 .
11. Although § 77 does not contemplate an independent examination by the court into the determination of value, it does require that the court be satisfied, upon the record before the Commission, with such additional evidence as may be pertinent to the objections to the Commission's finding of value, that the statutory requirements have been followed. P. 318 U. S. 477 .
12. The Commission's conclusion that certain securities owned by the debtor, representing interests in two companies operating connecting lines (which securities the debtor had acquired in order that it might obtain a fair share of the business from and to those lines), were without value and not entitled to participate in the reorganization -- it appearing before the Commission that the debtor had, for ten years, contributed substantial sums annually to meet deficits of each of the companies; although, in the District Court, it was shown that the companies were useful auxiliaries to the business of the debtor -- was supported by material evidence, and was properly accepted by the District Court. P. 318 U. S. 478 .
13. The provision of § 77(e) that the plan of reorganization need not be submitted to stockholders and creditors when the Commission shall have found their claims to be without value "and the judge shall have affirmed the finding" does not require the court to make an independent appraisal of the valuation found by the Commission. P. 318 U. S. 478 .
14. The court properly affirms the Commission when it finds no legal objection to the Commission's valuation in determining whether particular claimants are entitled to participate in the reorganization. P. 318 U. S. 479 .
financed, and this must be balanced against the satisfaction of claims, without equity, by the issue of securities without reasonable opportunities to earn a return. P. 318 U. S. 481 .
16. Consolidated Rock Products Co. v. DuBois, 312 U. S. 510 , distinguished. P. 318 U. S. 482 .
17. In the circumstances here, the determination by the Commission of the aggregate amount of securities which may be issued by the reorganized company was, in substance, a finding of total value for reorganization purposes, and the lack of a valuation in dollars is immaterial. P. 318 U. S. 483 .
18. It was not incumbent upon the Commission to produce data as to the reproduction cost of the debtor's property. P. 318 U. S. 483 .
19. The allocation to holders of Trustees' Certificates and the First Mortgage, although senior creditors, of preferred and common stock, as well as income bonds, of the new company, while some of the new bonds are allocated to bondholders secured by the General and Refunding Mortgage, who had a first lien on some assets, did not violate the full priority rule. P. 318 U. S. 484 .
20. Under the absolute priority rule, the stratification of securities issued to creditors need not follow invariably the relative priority of the claimants, so long as they receive full compensatory treatment and so long as each group shares in the securities of the whole enterprise on an equitable basis. P. 318 U. S. 484 .
21. The treatment accorded the Reconstruction Finance Corporation in the allocation of new securities, in view of the money advanced by it to the debtor during the reorganization, held not inequitable to other creditors. P. 318 U. S. 485 .
22. The Commission's allocation of securities in the plan of reorganization here was based upon the relative priority, value, and equity of the various claims of creditors, and its conclusions are in accord with the requirements and standards of subsections (b), (d) and (e)(1) of the Act. P. 318 U. S. 488 .
23. In the interest of expedition, the Court considers here a question which, though not passed upon by the Circuit Court of Appeals, was fully presented by the petition for certiorari, and the decision of which is essential to a complete review of the District Court. P. 318 U. S. 489 .
debtor's interest in an after-acquired branch line, and the debtor's title to certain "non-carrier" realty, are here affirmed. Pp. 318 U. S. 489 , 318 U. S. 503 .
is sustained. P. 318 U. S. 503 .
26. The showing made before the District Court as to changed conditions since the certification of the plan by the Commission affords no basis for rejection of the Commission's plan. P. 318 U. S. 508 .
27. The Commission's selection of January 1, 1939, as the effective date of the plan was within its authority under subsection (b) of § 77. P. 318 U. S. 509 .
28. On this review of the action of the District Court, costs are here properly assessed against, the losing parties, without prejudice to an allowance for disbursements under subsection (c)(12). P. 318 U. S. 510 .
Petitioners seek review of a decree of the Circuit Court of Appeals in the reorganization of the Western Pacific Railroad Company under Section 77 of the Bankruptcy Act. That decree reversed the order of the District Court which had approved the plan for reorganization certified to it by the Interstate Commerce Commission. [ Footnote 1 ]
Nevada and Utah. [ Footnote 2 ] For an understanding of this opinion, the obligations of the debtor as of January 1, 1939, the
* The "other collateral" does not belong to the debtor and is unaffected by the plan. See p. 318 U. S. 503 , infra.
There is agreement as to the amount of system earnings available for interest for 1922 to 1939, inclusive. The amounts follow: [ Footnote 3 ]
It further determined that the plan should provide a capital fund for future routine additions and betterments. This was estimated to require $500,000 annually. [ Footnote 4 ] Carrying charges of $94,202 on existing equipment trusts were to be assumed
In view of the foregoing limitation, capitalization of the reorganized company was fixed at.$2,750,050 of undisturbed equipment obligations, $10,000,000 of first mortgage 4% bonds, $21,219,075 of income mortgage 4 1/2% bonds, $31,850,297 of 5% preferred stock, and 319,441 shares of common stock without par value. [ Footnote 5 ] These issues
of preferred and common were based upon possible earnings in addition to the $2,000,000 plus. These securities were allotted by the Commission upon consideration of "the relative priority, value, and equity of the various claims and the value of the new securities available in exchange therefor," as follows: [ Footnote 6 ]
"the equity of the existing stock has no value, and hence holders of such stock are not entitled to participate in the plan. Further, considering that the reorganized company's income available for interest and dividends must total $4,318,035,[ *] plus any undistributed profit tax that will be payable, before dividends of $3 per share may be paid on the new common stock, it is clear that, even though all the securities remaining available for distribution after satisfying the claims of the first-mortgage bondholders are allotted to the other secure creditors, such securities will be inadequate in value to satisfy their claims. For this reason, and for the reasons stated with respect to the finding that the equity of the existing stock has no value, we find that the claims of the unsecured creditors of the Western Pacific Railroad Corporation and of the Western Realty Company have no value, and hence no securities or cash should be distributed under the plan in respect of those claims."
The plan and a transcript of the proceedings before the Commission were duly certified to the District Court. In re Western Pacific R. Co., 34 F.Supp. 493, 495. The plan in complete form and a detailed discussion of the history, property and business prospects of the debtor appears in the various reports of the Commission and the opinion below. See note 1 supra. The District Court heard the protests against the action of the Commission and the additional evidence offered, and found that the plan conformed in all respects to the requirements of Section 77. [ Footnote 7 ] All
These reorganizations require something more than contests between adversary interests to produce plans which are fair and in the public interest. When the public interest, as distinguished from private, bulks large in the problem, the solution is largely a function of the legislative and administrative agencies of government with their facilities and experience in investigating all aspects of the problem and appraising the general interest. [ Footnote 8 ] Congress outlined the course reorganization is to follow. It established standards for administration and placed in the hands of the Commission the primary responsibility for the development of a suitable plan. When examined to learn the purpose of its enactment, Section 77 manifests the intention of Congress to place reorganization under the leadership of the Commission, subject to a degree of participation by the court.
It is clear from the discussions and the statute itself that there was recognition by everyone of the advantages of utilizing the facilities of the Commission for investigation into the many-sided problems of transportation service, finance and public interest involved in even minor railroad reorganizations and utilizing the Commission's experience in these fields for the appraisals of values and the development of a plan of reorganization, fair to the public creditors and stockholders. [ Footnote 9 ] The resulting legislation was an attempted balance between the power of the Commission and that of the court.
enacted March 3, 1933, to reorganize railroads unable to meet their obligations. [ Footnote 10 ] The amendments of 1935 were primarily designed to cure defects disclosed by practical experience. [ Footnote 11 ] Both acts are bottomed upon the theory of debtor rehabilitation by adjustment of creditors' claims. Such treatment was essential for embarrassed railroads, as ordinary bankruptcy liquidation or judicial sales were impossible because of the size of their indebtedness and the paucity of buyers. The acts were a part of the relief granted financially involved corporations, public and private, in the depression years of the early thirties. [ Footnote 12 ] Since railroads could not take advantage of the Bankruptcy Act, § 4, 11 U.S.C. § 22, their financial adjustments for years had been carried out in equity receiverships under judicial control. These were cumbersome, costly, and privately managed with inadequate consideration for the public interest in a soundly financed transportation system. Chicago, Milwaukee & St. Paul Investigation, 131 I.C.C. 615, 671; United States v. Chicago, M. & St.P. R. Co., 282 U. S. 311 , 282 U. S. 331 dissent.
The first bill was introduced in the House January 21, 1933, as H.R. 14359. [ Footnote 13 ] It was drafted so as to place "the entire plan of reorganization under the jurisdiction, supervision and control" of the Commission. After Commission approval, which followed stockholder and creditor approval, it was to transmit the "approved plan, its findings and the record to the court. The court's review must
be based upon the record made before the Commission." [ Footnote 14 ] This substitution of the Commission for an equity receivership under court direction was criticized and amendments suggested to
"eliminate all confusion in regard to the functions to be exercised by the commission and by the court. . . . and [to] remove the most fundamental objections to the bill in its present form. [ Footnote 15 ]"
Notwithstanding the criticism, the bill passed the House with the power lodged in the Commission, as originally proposed. When the House bill for the relief of debtors [ Footnote 16 ] was reported by the Senate Committee, the railroad section was omitted. By a motion from the floor, it was reinstated, but in a changed form. The Senate adopted changes designed to give more power to the court. 76 Cong.Rec. 4907, 5104-5134. Hearings before the court were provided. The judge, it was added, was to be
"satisfied that (1) the approved plan complies with the provisions of subdivision (b) of this section, is equitable and does not discriminate unfairly in favor of any class of creditors or stockholders. [ Footnote 17 ]"
and the Commission. [ Footnote 18 ] While the most important amendment was to furnish means to avoid the obstruction of dissatisfied classes of creditors or stockholders by making a fair and equitable plan effective over dissenters, the requirement of coordinated action by Commission and court was retained.
The function of valuation thus left to the Commission is the determination of the worth of the property valued, whether stated in dollars, in securities, or otherwise. One of the primary objects of the bill was the elimination of obstructive litigation on the issue of valuation [ Footnote 19 ] and the
form finally chosen approached as near to that position as seemed to the draftsmen legally possible. Judicial reexamination was not considered desirable. [ Footnote 20 ] None of the findings required of the judge under subsection (e) relates specifically to valuation. Congress apparently intended to leave the determination of valuation "of any property for any purpose under this section" to the Commission. [ Footnote 21 ] The language chosen leaves to the Commission, we think, the determination of value without the necessity of a reexamination by the court, when that determination is reached with material evidence to support the conclusion and in accordance with legal standards. It leaves open the question of whether, in reaching the result, the Commission had applied improper statutory standards. This latter point is discussed under the heading of Method of Valuation in this opinion, p. 318 U. S. 477 , infra where this plan is reviewed and upheld in this respect.
the reorganized corporation. Cf. New York Central Securities Co. v. United States, 287 U. S. 12 , 287 U. S. 24 . Leaving the problems of public interest to the Commission was not a departure from precedent. The phrase had been employed long before in the grant of authority to supervise the issue of securities. Section 20a, Interstate Commerce Act. [ Footnote 22 ]
in railroad reorganization. These reorganizations may be attained only through properly coordinated action between the Commission and the court. [ Footnote 23 ] In this case, we are of the view that the District Court performed its required functions in accordance with the requirements of the statute. See p. 318 U. S. 466 , supra.
Amount and Character of Capitalization. While the public interest phase of capitalization is not to be independently passed upon by the court, the court does have statutory authority to review for obedience to legal standards. [ Footnote 24 ] Petitioners in seeking certiorari, and now on the merits, concede that the exclusive power in the Commission to pass upon the amount and character of capitalization is subject to review for "arbitrary exercise." The respondent A.C. James Company makes the point that the restriction of the amount of capitalization to an aggregate limited by the reasonable probability of a fair return deprives those creditors and stockholders who are barred as holding claims without value, of their property interest in the debtor without due process and contrary to the mandate of Section 77. The Commission thought that the public interest required a capital structure which would give the reorganized company "a reasonable opportunity to function efficiently and continuously," and that "proposed charges, whether fixed or contingent, shall be within its probable earning power." 230 I.C.C. at 87.
Assuming at this point that the Commission's valuation is sound and reached by allowable methods, a matter discussed later in this opinion at p. 318 U. S. 477 , we hold that the elimination of the claims of stockholders and creditors
which are valueless from participation in the reorganization is in accordance with valid provisions of section 77(e). [ Footnote 25 ] Actual bankruptcy means a loss to some investors. Subsection (e) recognizes this inevitable result and provides a method for their elimination from the reorganization proceedings. After all of the reasonable value had been exhausted by senior securities, warrants might have been authorized for otherwise unsatisfied claims. Such warrants would represent merely the possibility of recoupment, just as the equity of redemption in judicial sales. But there is no constitutional or statutory requirement that such immediately valueless paper should be issued. A mere possibility that traffic might be found to the limit of the physical capacity of the system is not the kind of earning power which justifies the issue of securities based upon such a possibility. Whatever may be the limits of the power of the Commission to find claims worthless, the present plan may not be successfully attacked on the ground that Congress is powerless to authorize in bankruptcy the elimination of claims without value. In re 620 Church St. Corp., 299 U. S. 24 .
The Circuit Court of Appeals found error in the Commission's failure to make definite valuations. It was of the view that it was necessary to determine the values of the respective claims in order to have a basis for the distribution of new assets. [ Footnote 26 ] This position respondents defend
property, 230 I.C.C. 61, 65, its value for ratemaking purposes, id., 230 I.C.C. 76, and the record of its earnings, id., 230 I.C.C. 73 et seq., together with its volume of traffic and other pertinent data. It concluded that these factors would justify fixed and contingent charges of no more than two million dollars annually. In addition, the Commission's plan provided for five percent preferred stock and common stock in such amounts that it would require aggregate available annual earnings of a little more than four and a half million dollars to permit payment of a three percent dividend. Without appraising the effect of income taxation on the remainder of earnings available and partly used for interest, it is significant that only three years in the period from 1922 to 1940 showed earnings available for interest of over four million. See page 318 U. S. 457 , supra. With this data, the Commission determined the new capital structure. See page 318 U. S. 461 , supra. Taking the lowest value for the no par suggested by the Commission, $57 per share, note 6 supra, there is a total value of securities of eighty-four million dollars plus. The Commission was thus of the view that the value of the property for purposes of reorganization was around this figure.
It is said that Consolidated Rock Co. v. Du Bois, 312 U. S. 510 , forbids the substitution of an approved capital structure for determinations of value. In that case, there was no finding of the values of the property involved and this Court said:
"Absent the requisite valuation data, the court was in no position to exercise the 'informed, independent judgment' ( National Surety Co. v. Coriell, 289 U. S. 426 , 289 U. S. 436 ) which appraisal of the fairness of a plan of reorganization entails,"
312 U.S. at 312 U. S. 520 . The district court, it being a section 77B reorganization, was required to make the requisite valuations. The requirements for valuation are the same in a section 77B proceeding as in a railroad reorganization. There is nothing, however, in the Du Bois case to indicate that dollar valuations of the property or claims are essential for recapitalization or the distributions of securities in reorganizations. The defect in Du Bois was not the failure to find dollar values, but the failure to find the worth of the security behind independent mortgages on distinct properties and of assets subject to the claims of particular groups of creditors. Such findings were required in that case because the court was dealing with a parent and two subsidiaries with intercompany accounts. Each subsidiary entity had its own creditors. The system was a unified operation, and we held the claims
against the subsidiaries had priority over stockholders equity in the parent, 312 U.S. at 312 U. S. 523 . Without a separate valuation of assets, it was impossible to tell what assets of the parent were left to form the basis for the securities distributed to the parent's stockholders. In Du Bois, as here, the manner of reaching that valuation, so long as it complies with the statutory standards, is not important. There are subsidiaries here, but there are no claimants of the subsidiaries looking to the parent. The aggregate of the authorized securities in the present case is to be equitably distributed among claimants against a single corporation. Findings were made as to the property covered by the different mortgages of the debtor and securities allocated on the basis of that finding. 230 I.C.C. 61, 98, 99, 100, 101; 233 I.C.C. 409, 414. Under such circumstances, the lack of a valuation in dollars is immaterial. The important element is the allocation of the securities so as to preserve to creditors the advantages of their respective priorities. That is to say, senior claims first receive securities of a worth sufficient to cover their face and interest before junior claims receive anything. Consequently, we are of the opinion that the determination by the Commission of the aggregate amount of securities which may be issued against the system is in substance a finding of total value for reorganization purposes. In view of the factors of value considered and the opportunity given all parties before the Commission and the court to present all desired evidence, the Commission's determination stands upon a firm basis. There is no more important element in the valuation of commercial properties than earnings. [ Footnote 27 ] No offer was made to produce figures upon reproduction cost. It was not incumbent upon the Commission to do so. The Commission's conclusions impress us as in accord with the statutory requirements.
Allocation of Securities. There are two issues collateral to the Commission's valuation. One relates to adverse claims of prior liens between the holders of bonds secured, on the one hand, by the General and Refunding Mortgage, and, on the other, by the First Mortgage. See p. 318 U. S. 489 , infra. The other is as to the correctness of the allocation of securities among the creditors. This latter issue is, of course, affected by the former. In considering allocation, we shall assume at this point what we later find, that the Commission's determination as to priorities is correct.
A. The allocation of securities is shown above at page 318 U. S. 461 . The table sets out that the holders of the Trustees' Certificates and the 5% First Mortgages, although they are senior creditors, receive large quantities of preferred and common stock, as well as new income bonds. These stocks are securities of lower dignity than the income bonds. Some of these bonds, on the other hand, go to creditors secured by the refunding bonds. This is because the refunding bonds have a first lien on some assets. 233 I.C.C. 414. But, at any rate, under the absolute priority rule of the Boyd case, [ Footnote 28 ] the stratification of securities issued to creditors need not follow invariably the relative priority of the claimants. [ Footnote 29 ] Apropos of a somewhat similar situation, we said in Consolidated Rock Co. v. Du Bois, 312 U.S. at p. 312 U. S. 530 :
B. A point is made as to the treatment of the Reconstruction Finance Corporation's claims in the distribution of securities. It is to be noted, p. 318 U. S. 455 , supra, that RFC has two kinds of claims -- one for $10,000,000 upon Trustees' Certificates for money advanced to the debtor while in reorganization, the other for $2,963,000 Collateral Notes, secured by refunding mortgage bonds. The Railroad Credit Corporation and the A.C. James Company are holders of similar collateral notes. The amount of bonds, as compared with the face principal of the indebtedness, varies. The RFC has the most valuable collateral per dollar of indebtedness. To retire the Trustees' Certificates and to raise necessary new money for the reorganization, the Commission deemed it essential to sell $10,000,000 of new first mortgage 4% bonds of 1974. To assure this, the Commission provided:
Rock Co. v. Du Bois, 312 U. S. 510 , 312 U. S. 529 . There is nothing to lead us to a conclusion that the Commission gave any advantage to RFC for which full consideration was not given. New money, the Commission said, "is absolutely necessary to effect a reorganization." 233 I.C.C. 409, 414. We have no reason to think the Commission allowed more compensation for this new money to RFC than it would have been compelled to allow in some way, by interest or additional collateral or otherwise, to another supplier. We conclude there was nothing in the discretionary action of the Commission to justify its invalidation.
From this information, a conclusion was reached as to the debts which could be paid in the order of their full or absolute priority. Case v. Los Angeles Lumber Co., 308 U. S. 106 , 308 U. S. 117 . The secured claim of A.C. James Company could not be satisfied in full even with the more liberal valuation of the common stock. Claims of lesser dignity were eliminated. Those entitled to priority over the mortgages -- that is, current liabilities, trustees obligations, and reorganization expenses -- were to be satisfied by cash or assumed by the reorganized company as a charge on its assets superior to the new securities. 233 I.C.C. 409, 452; 230 I.C.C. 61, 100, 101, 102. This left as creditors only the holders of the old 5% Firsts, with an underlying mortgage on the greater part of the property, the RFC, the Railroad Credit Corporation, and the A.C. James Company, the latter three with refunding mortgage bonds as collateral. We have already explained the arrangement whereby RFC acquired the status of a first mortgage bondholder. Here, it is sufficient to say that, as determined by the Commission, the Refundings had a lien superior to the Firsts on some assets, (233 I.C.C. 414) and the First superiority over the Refunding on the major portion. 230 I.C.C. 61, 97. See infra, Priorities of Conflicting Liens. With the foregoing facts and primary findings before it, the Commission drew the final conclusion as to allocation of securities as set out on page 318 U. S. 461 , supra. This allocation was based upon "the relative priority, value and equity of the various claims." Cf. 233 I.C.C. 414, 416, 417, 451 P. The distribution and report seems in accord with the requirements
Priorities of Conflicting Liens. No. 61 is a petition by the Irving Trust Company, trustee of the General and Refunding Mortgage, which raises questions of the priority between the Refunding Mortgage and the First Mortgage as a lien on three classes of property. These are the debtor's equity in certain rolling stock and equipment acquired under equipment trusts and a lease, the debtor's interest in the Northern California Extension, and the debtor's title to certain "non carrier" property. The Commission's plan is predicated on the priority of the First Mortgage as a lien on these properties, and the Commission accordingly undertook tentatively to determine the legal questions involved. The Commission held that the First Mortgage, senior to the Refunding Mortgage, should be considered to be a first lien on these three classes of property. Petitioner, the Irving Trust Company, as substituted trustee under the Refunding Mortgage, made appropriate objections, but the ruling of the Commission was adopted by the District Court. In reversing on appeal, the Circuit Court of Appeal did not pass on the question though the issue was presented. The point is made here by a party prevailing below, the petitioner Irving Trust Company, on behalf of holders of refunding mortgage bonds. As the matter is fully presented by the petition for certiorari and its decision is essential to a complete review of the District Court, we have concluded to consider the question. Section 240(a) Judicial Code, 28 U.S.C. § 347. United States v. Bankers Trust Co., 294 U. S. 240 , 294 U. S. 294 -295. Such action is in the interest of expedition. Continental Ill. Nat. Bank & Trust Co. v. Chicago, Rock Island & P. Ry. Co., 294 U. S. 648 , 294 U. S. 685 . Cf. Story Parchment Co. v. Paterson Parchment Co., 282 U. S. 555 , 282 U. S. 567 ; Cole v. Ralph, 252 U. S. 286 , 252 U. S. 290 .
"provided that the foregoing or any thereof, whether now owned by the Company or at any time hereafter acquired by it . . . shall be appurtenant to or used or held for use as, or as a part or as parts of, or to facilitate or safeguard the maintenance or operation of, any lines of railroad, extensions, branches . . . or other properties now or at any time hereafter subject to the lien of this indenture. . . . [ Footnote 30 ]"
The refunding mortgage trustee relies, however, on a clause found between the sixth granting clause and the habendum, hereafter referred to as the reservation clause, and reading: [ Footnote 31 ]
It is argued that this reservation permits the acquisition of rolling stock entirely free from the lien of the First Mortgage, unless acquired, as was not the case here, by the use of proceeds of the first mortgage bonds. [ Footnote 32 ]
free of the mortgage. The inconsistency [ Footnote 33 ] of such a result suggests that the phrases "free from the lien hereof" and "superior to the lien of this indenture" are, in a sense, correlative, and were merely suited to the different title situations in the two methods of financing.
B. The Northern California Extension is a 112-mile branch of the debtor's main line, and runs from Keddie, California, to the Great Northern Railroad at Bieber, California. It has been profitable since its construction in 1932, and the Commission expects that its traffic will increase. As has been stated, the question as to the extension is whether it is covered by the after-acquired property clauses of the First Mortgage. Slightly less than one-half the cost of the extension, or about $5,000,000, was financed by the sale of first mortgage bonds; another $5,000,000 was realized from the sale of unsecured debentures to the A.C. James Co., later replaced by collateral notes secured by refunding mortgage bonds, and the remainder, approximately $500,000, was borrowed from the RFC on the security of refunding mortgage bonds. [ Footnote 34 ]
The substantial nature of the financing of the extension by the sale of first mortgage bonds is a matter of record, and we hold that the quoted portion of the third granting clause, and especially the clause beginning "or on account of the purchase, acquisition, or construction thereof or work thereon" bring this extension within the coverage of the First Mortgage. In opposition to this conclusion, it is said that it would permit the First Mortgage to become a lien on the extension if only one penny of first mortgage money had been used. That is, of course, not our case. Here, we have a considered plan for financing an extension which contemplated that 50% of the necessary moneys be procured through the sale of first mortgage bonds. The terms of the after-acquired property clause disclose an intention that, where at least such part of the funds used for the construction of such an extension are first mortgage funds that the entire extension should be subjected to the lien of the mortgage. The refunding mortgage trustee contends that it is inequitable to give the first mortgage bondholders a lien to the extent of all first mortgage bonds outstanding when, in fact, those bondholders contributed only $5,000,000 to the cost of construction, and the refunding mortgage bondholders contributed the remainder. The asserted inequity disappears on a reference to the record, where it plainly appears that the parties concerned had no understanding that the lien situation would be different from what we have held it to be. [ Footnote 35 ]
The greater part of this property, which was not used for railway purposes, was acquired from the debtor's predecessor, the Western Pacific Railway Company, pursuant to its reorganization in 1916, and the question is whether this property is within the terms of the First Mortgage. [ Footnote 36 ] We answer this question affirmatively. Despite the fact that it is or was not used for transportation purposes, the mortgage nevertheless covers it by the conveyance of:
This order arises from the following circumstances. As is shown on page 318 U. S. 455 , infra the Reconstruction Finance Corporation, the Railroad Credit Corporation, and A.C. James Company have notes of the debtor secured by pledges by the debtor of various amounts of the debtor's General and Refunding Bonds and other collateral. [ Footnote 37 ]
The "collateral pledged by the debtor" referred to in the excerpt from subdivision R of the Commission's final order, 233 I.C.C. 453, quoted above, can be only the general and refunding bonds of the debtor, including those previously furnished by A.C. James Company. The words used in subdivision R to describe them are the same used by the Commission in distinguishing the refunding bonds from the remainder of the accommodation collateral. 233 I.C.C. 431, 432. Of course, the collateral loaned to the debtor which was not an obligation of the debtor could not be ordered by the plan to be canceled. It remained with the pledgees. This "collateral pledged by the debtor" was properly to be reduced to possession by the pledgees, surrendered, and cancelled. For these bonds, furnished by A.C. James Company, held as collateral with other bonds of the debtor, the Reconstruction Finance Corporation and Railroad Credit Corporation received their allotment of new securities, 230 I.C.C. 101, as modified by the Reconstruction Finance Corporation arrangement, described in this opinion at page 318 U. S. 485 . See 233 I.C.C. 414, 452. The A.C. James Company's unsecured claim against the debtor for the loan of the bonds is valueless, 233 I.C.C. 452, and the plan does not deal with any possible claim of accommodation pledgors against pledgees of bonds which were not the property of the debtor.
calls for future earnings available for betterments, interest, sinking fund, and dividends of over $4,500,000. The table on page 318 U. S. 457 shows how difficult it had been for the system to earn that amount. Anticipated earnings was the principal factor governing the valuation of the property and the dollar volume of new securities, and past earnings was an important factor in estimating future earnings. A higher estimate of future earnings available for dividends might have created an equity for unsecured creditors or even stockholders. Furthermore, respondents urge that the "earning power" of the property referred to in subsection (e) means not only realized earnings, but the system's ability, utilizing its present facilities to the full, to earn increased returns. This we deem of little weight against the history of past operations. Respondents ask us to take into consideration the changed conditions since the Commission acted. There are a few years of actual experience subsequent to the certification. By stipulation of the parties, reports of operating results, combined, have been filed for our consideration for the period beginning December, 1938, down to and including July, 1942. Since we have agreement among the parties as to the earnings available for interest, as adjusted, through 1939, see page 318 U. S. 457 , supra, we need refer only to subsequent periods. These reports show the following sums available for interest: 1940-$2,513,090; 1941-$4,548, 128; 1942 (7 months) $4,830,986, * less relatively minor deductions which have not been consistently treated in the reports. This last group of figures is utilized by us as a rough extension of the table of earnings on page 318 U. S. 457 . T hey are useful to show the striking increases over the old averages, but have not been adjusted to conform mathematically with the table of earlier years.
The Commission, at the time of its certification to the court, September 28, 1939, acted as the results of increased business were just emerging into increased profits. [ Footnote 38 ] In
Effective Date of Plan. January 1, 1939, was chosen as the effective date of the plan. The debtor objects to this on the ground that subsection (1) fixes the date of filing the petition as the date for the plan. [ Footnote 39 ] The practical result of the debtor's argument is to make the interest
rate of the new securities applicable from August 2, 1935, instead of from January 1, 1939. As the new securities bear lower interest rates than the contract securities, a savings to the estate would accrue. [ Footnote 40 ] But we are of the opinion that the provisions of subsection (b) are sufficiently broad to empower the Commission to select the date for the institution of the reorganization. Cf. Group of Institutional Investors v. C., M., St. P. & P.R. Co., post, p. 318 U. S. 546 .
Costs. The Institutional Bondholders Committee in No. 7 and the Trustees of the First Mortgage in No. 8 call our attention to the provision in the decree in the Circuit Court of Appeals for costs against appellees there, and suggest that costs should be assessed directly against the estate of the debtor in proceedings under section 77. Our reversal of the decree leaves the appellees below free of this provision of the decree, and requires us to assess costs on the review. We see also no reason why costs should not be assessed against the losing parties on this review of the action of the District Court, and it will be so ordered. This assessment is without prejudice to a motion for allowance for disbursements by respondents in accordance with subsection c(12). [ Footnote 41 ]
" Location and general description of the property. -- The debtor owns or operates a total of 1,207.51 miles of standard-gage steam railroad. The main lines extend eastward 924.17 miles from Oakland, Calif., to Salt Lake City, Utah, and northward 111.81 miles from Keddie to Bieber, Calif., with operating rights over the Great Northern Railway, 46.38 miles, from Bieber to Hambone, Calif. The debtor also operates 4.2 miles of ferry service from Oakland to San Francisco, and 185.3 miles of second main track, of which 182.91 miles between Weso and Alazon, Nev., are owned by the Southern Pacific. This territory is known as the 'paired-track district,' since the two lines are used as a double track railroad by both companies. Various branch lines springing from the Oakland-Salt Lake City line are as follows:"
" Owned or controlled and jointly affiliated railroad companies. -- The debtor owns all the outstanding capital stock of the Sacramento Northern Railway, an electrically operated standard-gage freight and passenger railroad, consisting of 276.2 miles of road serving and connecting San Francisco and Oakland with various Sacramento Valley cities, principally Pittsburg, Vacaville, Sacramento, Woodland, Marysville, Colusa, and Oroville, all in California."
Cf. Hearings on H.R. 6249, supra, n 19, pp. 249-250, 291-292, 317.
The bill as recommended by the Federal Coordinator of Transportation, H.Doc. 89, supra, n 18, p. 238, and in a different form as considered by the Committee on the Judiciary of the House, Hearings on H.R. 6249, supra, n 19, p. 8, did not contain the quoted sentence. During the hearings, the Chairman sought advice as to whether it would be legally valid to make the valuation of the Commission final in practice. This was not denied although doubt was expressed whether the Commission's finding could preclude a certain limited amount of judicial review. See Hearings on H.R. 6249, supra, n 20. After this discussion, the bill which was to pass the House was introduced on June 20, 1935, 79 Cong.Rec. 9814. It contained the quoted sentence, above referred to, in the form as it now appears in subsection (e).
Cf. Palmer v. Massachusetts, 308 U. S. 79 , 308 U. S. 87 ; Warren v. Palmer, 310 U. S. 132 , 310 U. S. 138 ; United States v. Morgan, 307 U. S. 183 , 307 U. S. 191 ; Report of President's Committee to Submit Recommendations upon the General Transportation Situation, Dec. 23, 1938, p. 25.
See Opp Cotton Mills v. Administrator, 312 U. S. 126 , 312 U. S. 144 .
Such a result was within the contemplation of the Congressional committee. Hearings on H.R. 6249, supra, n 19, pp. 26, 80, 107, 118, 227, 255, 278.
"To determine the value of the above-mentioned claims, it was necessary to determine the value of (1) the debtor's entire property, (2) the property subject to the first mortgage now outstanding, (3) the $18,999,500 of refunding bonds pledged to secure the claims of A.C. James Company, Railroad Credit Corporation and Reconstruction Finance Corporation and (4) the other collateral pledged to secure each of said claims. To determine the value of the refunding bonds, it was necessary to determine the value of (1) the property subject to the refunding mortgage only and (2) the property subject both to the refunding mortgage and to the first mortgage now outstanding. This, of course, necessitated a determination as to which of the debtor's property is, and which is not, subject to each mortgage. Consolidated Rock Products Co. v. Du Bois supra. "
Cf. Consolidated Rock Co. v. Du Bois, 312 U. S. 510 , 312 U. S. 525 .
Northern Pacific Ry. v. Boyd, 228 U. S. 482 .
Group of Institutional Investors v. Chicago, M., St. P. & P.R. Co., ante, pp. 318 U. S. 562 -565.
No contention is made that fully secured claims do not bear contract interest to the date of reorganization, whenever it may be. Ticonic Nat. Bank v. Sprague, 303 U. S. 406 .
Cf. Reconstruction Finance Corp. v. Bankers Trust Co., ante, p. 318 U. S. 163 .
Another vital step in formulating any plan is committed to the judgment of the Commission. This is valuation of property. Subsection (e) states that, if it shall be necessary to determine the value of any property for any purpose under the Act, the Commission shall determine such value and certify the same to the court in its report. It seems clear, as the opinion states, that the court cannot reject the plan for any mere asserted error in valuation. Its power is limited to an examination of the question whether the Commission acted wholly without evidence, arbitrarily, or in disregard of recognized criteria. [ Footnote 2/1 ]
In equity reorganizations prior to the passage of § 77, the phrase "fair and equitable" had come to have a recognized content. It meant that, in allotting interests in the reorganized company, the priorities existing between lienors and stockholders of the debtor must be substantially preserved. No reorganization could be fair and equitable if, in the new capital structure, junior interests were allowed to participate at the expense of those who had had a senior position in the old. [ Footnote 2/2 ]
Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482 ; Case v. Los Angeles Lumber Co., 308 U. S. 106 ; Consolidated Rock Products Co. v. Du Bois, 312 U. S. 510 .