Source: https://supreme.justia.com/cases/federal/us/347/298/case.html
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Matched Legal Cases: ['§ 77', '§ 77', '§ 1', '§ 77', '§ 5', '§ 77', '§ 5', '§ 77', '§ 77', '§ 77', '§ 77', '§ 5', '§ 77', '§ 77', '§ 77', '§ 77', '§ 205', '§ 77', '§ 77', '§ 77', '§ 5', '§ 5', '§ 77', '§ 5', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77', '§ 77']

St. Joe Paper Co. v. Atlantic Coast Line R. Co. (full text) :: 347 U.S. 298 (1954) :: Justia U.S. Supreme Court Center Log In
U.S. Supreme CourtSt. Joe Paper Co. v. Atlantic Coast Line R. Co., 347 U.S. 298 (1954)St. Joe Paper Co. v. Atlantic Coast Line Railroad Co.Argued October 15, 1953Decided April 5, 1954*347 U.S. 298CERTIORARI TO THE COURT OF APPEALS FOR THE FIFTH CIRCUIT
The sole question for decision in this case is whether the Interstate Commerce Commission has the power under § 77 of the Bankruptcy Act to submit a plan of reorganization to a district court whereby a debtor railroad would be compelled to merge with another railroad having no prior connection with the debtor. Answer to this problem depends on understanding of a long legislative history. First, however, it is necessary to put the problem into its relevant context. Page 347 U. S. 300
In the course of the next ten years, many proposals have been considered by the Commission. Most of them were rejected for one reason or another, but three have, in turn, been certified by it to the District Court. None has as yet been confirmed by that court. The initial plan provided for a simple internal reorganization. It was rejected by the court, and the case was remanded to the Commission with directions to take account of an intervening improvement in the debtor's cash position. 52 F.Supp. 420. Atlantic Coast Line Railroad, the present respondent, first appeared on the scene in November, 1944, when, after the Commission's hearings for the purpose of devising a second plan had been closed, one Lynch, joined by other bondholders of the debtor, sought to reopen the proceedings for the purpose of proposing a new plan whereby each recipient of stock in the reorganized debtor would be required to sell 60% of his interest at par to Atlantic, a connecting carrier, thereby giving that railroad operating control of the debtor. On November 30, 1944, Atlantic was allowed to intervene before the Commission in support of the Lynch proposal. The St. Joe Paper Co., on the other hand, which had by that time acquired a majority interest in the debtor's principal bond issue, opposed the Lynch plan. The Commission rejected Page 347 U. S. 301 the Lynch proposal, indicating that, in view of Atlantic's operating deficits over the past years, combining the two railroads would not be in the public interest at that time. 261 I.C.C. 151, 187.
The subsequent struggle for control of the debtor has been largely between these two interests -- the St. Joe Paper Co., owner of the major interest in the debtor, and Atlantic, a connecting carrier anxious to acquire the debtor's coveted Florida east coast traffic from Jacksonville to Miami. Shortly after the Commission's rejection of the Lynch plan, Atlantic proposed its own plan providing for the merger of the debtor into Atlantic in return for the distribution of cash and various types of Atlantic's securities to the debtor's bondholders. St. Joe again opposed, as did various other bondholders, two competitors of Atlantic, an association representing the debtor's employees, and other interested parties. The matter was referred to an Examiner who, after a lengthy investigation, found that such a merger would not be in the public interest, and that the Atlantic plan would not constitute "fair and equitable" treatment for all the unwilling bondholders, who were, in substance, the owners of the debtor railroad. [Footnote 1] The Commission, however, by a sharply divided decision, overruled the Examiner and sanctioned Page 347 U. S. 302 a "forced merger." [Footnote 2] 267 I.C.C. 295. [Footnote 3] Circuit Judge Sibley, sitting in the District Court, set the plan aside on the ground that the Commission had no power under the statute to force a merger; in addition, he held the plan not "fair and equitable." 81 F.Supp. 926, 933. On appeal to the Court of Appeals for the Fifth Circuit, two judges sustained the Commission's authority to propose such a plan, while the third agreed with Judge Sibley; but a majority agreed with the District Court that the plan was not "fair and equitable." 179 F.2d 538, 541.
The Commission then formulated another plan, which likewise provided for a forced merger of the debtor and Atlantic, 282 I.C.C. 81, and Circuit Judge Strum, sitting in the District Court, while bound on the question of the Commission's power by the prior Court of Appeals decision, again set the plan aside as unfair and inequitable. 103 F.Supp. 825. The Court of Appeals was now convened en banc. Three of its judges, without further consideration of the Commission's power, reversed the District Court and found the plan fair and equitable. The other two judges dissented, and adopted the reasoning of Judge Sibley in the earlier case, i.e., that the Commission had no power under the statute to propose such a compelled merger plan. [Footnote 4] 201 F.2d 325. Page 347 U. S. 303 Because of the importance of this question in the administration of § 77 of the Bankruptcy Act, we granted certiorari. 345 U.S. 948.
The permissive merger provision in plans of reorganization was thus made expressly conditional on compliance with the requirements of §§ 1 and 5 of the Interstate Page 347 U. S. 304 Commerce Act. The reason for this proviso, commonly referred to as the "consistency clause," was stated as follows by Commissioner Joseph Eastman, Chairman of the Legislative Committee of the Interstate Commerce Commission and one of the weightiest voices before Congress on railroad matters: [Footnote 6]
76 Cong.Rec. 2909. Page 347 U. S. 305 And Congressman Rayburn, Chairman of the Committee on Interstate and Foreign Commerce, put it thus:
In view of this deliberate and explicit incorporation of the restrictions attending mergers under the Interstate Commerce Act into § 77 of the Bankruptcy Act, it is necessary to give some consideration to the merger and consolidation provisions of the former, 49 U.S.C. § 5. The history of these provisions is long and tortuous; its detailed summary is relegated to an appendix. Suffice it to say here that one clear thread which runs through a course of legislation extending over a period of twenty years, as well as through the various commentaries upon it, is that only mergers voluntarily initiated by the participating carriers are encompassed by that statute and sanctioned by it. From the initial enactment in the Transportation Act of 1920, 41 Stat. 456, 480, to the most recent comprehensive reexamination of these provisions in the Transportation Act of 1940, 54 Stat. 898, 905, Congress has consistently and insistently denied the Interstate Commerce Commission the power to take the initiative in getting one railroad to turn over its properties to another railroad in return for assorted securities of the latter. The role of the Commission in this regard has traditionally been confined to approving or disapproving mergers proposed by the railroads to be merged. And this adamant position taken by Congress has not Page 347 U. S. 306 been for want of attempts to secure relaxation. Advocacy of giving the Commission power to propose and enforce mergers has been steady and, at times, strong, but it has consistently failed in Congress.
We therefore conclude that the Commission does not have under § 77 of the Bankruptcy Act a power which Congress has repeatedly denied it under the Interstate Commerce Act, namely to initiate the merger or consolidation of two railroads. In light of the continuously and vehemently reiterated policy against endowing the ICC with such a power under § 5 of the Interstate Commerce Act, it is inconceivable, wholly apart from the consistency clause, that such was the sub silentio effect of § 77, an emergency statute hurriedly enacted with scarcely any debate. The consistency clause serves but to strengthen Page 347 U. S. 307 this natural presumption against such a tacit grant. It would require unambiguous language indeed to accomplish a contrary result; yet nowhere in the committee reports and the debates on the original § 77, nor in any of the legislative materials relating to the thorough reexamination of that statute in 1935, [Footnote 8] can we find so much as one word which conveys the impression that, as to mergers under the Bankruptcy Act, Congress stealthily Page 347 U. S. 308 designed to jettison its longstanding and oft-reiterated policy against compulsory mergers. On the contrary, after the enactment of § 77 in 1933, the Commission in its annual reports, and the Federal Coordinator of Transportation in his several reports, had frequent occasion to discuss § 77 of the Bankruptcy Act and § 5 of the Interstate Commerce Act. It would indeed be strange for these railroad authorities to bemoan the Commission's inability to initiate mergers and consolidations [Footnote 9] if it had been a fact that as to the substantial portion of the Nation's railroad mileage then in receivership or § 77 proceedings [Footnote 10] the Commission clearly had this very power. Had it been the declared intention of the drafters of § 77 to confer such a power, it is fair to assume that, in view of the persistent opposition of organized labor and other groups Page 347 U. S. 309 to such attempts under the Commerce Act, [Footnote 11] the statute would not have passed.
All this, of course, is not to say that mergers cannot be carried out in the course of a § 77 reorganization. It merely means that, if they are, they must be consummated in accordance with all the requirements and restrictions applicable to mergers under the Act primarily concerned with railroad amalgamations, the Interstate Commerce Act. So far as here relevant, that means that the merger must be worked out and put before the Commission by the merging carriers. [Footnote 12] It also means that one carrier Page 347 U. S. 310 cannot be railroaded by the Commission into an undesired merger with another carrier.
"* * * *" "This statute and its statutory procedure, statutory safeguards, and statutory rights have been set to one side in the proceedings under section 77 of Page 347 U. S. 311 the Bankruptcy Act. The institutional and other groups, and the Commission, have assumed that they could effect consolidations not under the Interstate Commerce Act, but under the Bankruptcy Act; not under a statute dealing with transportation, but under a statute dealing with financial reorganization; not under a section which considers and specifies one single financial question, the effect of consolidation on fixed charges, but under a section which deals with all sorts of financial problems, most of them not related to consolidation. They have assumed to effect consolidations not under legislation which deals primarily with the rights and interests of States, local communities, and employees, but under a bankruptcy law which deals primarily with the interests of securityholders."
"* * * *" "Those who are trying to bypass this statute and to consolidate railroads as part of a financial reorganization proceeding bring consolidation into the proceeding as something subsidiary, a mere tail to the main kite. When governors of States and representatives of communities and employees' organizations are invited to the proceedings by the Commission, they find the issue which primarily concerns them enveloped in all sorts of other questions of a financial and technical nature. If they should want to appeal to a court from a consolidation decision in this grab bag of proceedings, their task would be far more complicated and far more difficult than Congress intended when it passed section 5 of the Interstate Commerce Act. There is always the available cry -- the courts should not disapprove any part of the reorganization plan, even though it be a consolidation matter, lest all the time and labor and expense Page 347 U. S. 312 which has gone into the reorganization proceeding be lost."
"* * * *" "The Commission justifies its course of action by citing two subsections of section 77 of the Bankruptcy Act. Subsection b lists a number of the substantive changes which can be made through a plan of reorganization under section 77. Then it lists a number of 'means for the execution of the plan,'. . . Among these 'means for the execution of the plan' is included 'the merger or consolidation of the debtor with another corporation or corporations.' Subsection f authorizes the Commission, after the court confirms the plan, 'without further proceedings,' to authorize the issuance of securities, transfer of property, sale, 'consolidation or merger of the debtor's property, or pooling of traffic, to the extent contemplated by the plan and not inconsistent with the provisions and purposes of the Interstate Commerce Act as now or hereafter amended.'"
"It may not be assumed that Congress intended, in section 77, to permit it to bypass the section 5 Page 347 U. S. 313 procedure and proceedings. Section 77 was hurriedly passed by Congress. It was not considered by either a subcommittee or full committee of the Senate, before being taken up on the floor. It was pushed through in the final days of the Seventy-second Congress on the plea that it would prevent receiverships. Congress would not, in such a manner, legislate out of existence, for companies requiring reorganizations, its carefully elaborated safeguards with respect to consolidations or traffic pools. If the Commission's construction of section 77 is sound, that it can avoid the necessity of considering consolidations under section 5 of the Interstate Commerce Act, it is obvious that the legislation enacted as section 77 of the Bankruptcy Act contained a 'joker' of serious and dangerous proportions."
"* * * *" "The most that the Commission may claim under section 77 is that, if it has approved a consolidation by an order under section 5 of the Transportation Act, it may perhaps be able to give effect to that action in the course of reorganization proceedings."
The crucial question, therefore, is whether this merger plan meets the statutory requirements. Since it does not, as we have found, because it is sought to be imposed by Commission fiat, rather than proposed by the merging carriers, it matters not that the security holders might ultimately accept it if it were put to them for a formal vote. The kind of Hobson's choice, more or less, to which security holders are put when voting on a merger plan is not to be put to them on a plan initiated by the Commission, Page 347 U. S. 314 rather than by their own corporation. And so, if a plan does not satisfy the basic conditions which circumscribe the Commission's power, it has a congenital defect, and any interested party can object to its attempted effectuation.
Likewise, the so-called "cramdown" clause, much relied on by respondent, has no bearing on this case. That provision was added to § 77 of the Bankruptcy Act in 1935, 49 Stat. 911, 919, 11 U.S.C. § 205, sub. e, because, under the prior law, a plan had to be accepted by at least two-thirds (in amount) of each class of creditors and stockholders affected by the plan. This enabled a small dissentient minority to block any plan of reorganization, no matter how "fair and equitable," in order to exact inequitable adjustments as the price of its acquiescence. Under the "cramdown" provision, the district court may, under the appropriate circumstances and after making certain required findings, confirm a plan despite the disapproval of more than one-third of each class affected. From the existence of this general power in the district court to confirm a plan despite the opposition of dissentient elements, the conclusion is sought to be drawn that the Commission must therefore have initial power to submit a compulsory merger plan to the court. Obviously this does not follow. Since the vast majority of § 77 proceedings involve internal reorganizations, the "cramdown" provision has a purpose and scope of application wholly independent of mergers, and it therefore has no bearing one way or the other on the question at issue in this case. [Footnote 14] It is true that, in view of our holding here that merger plans cannot be proposed by the Commission under the Bankruptcy Act, the "cramdown" provision can never be applied to such involuntary plans. But there Page 347 U. S. 315 is nothing particularly startling about this. Once its terms are found to be valid, a plan may be imposed on recalcitrant dissenters. But the validity of a plan cannot be derived from the existence of such "cramdown" power. It is still true that a horse-chestnut is not a chestnut horse.
In 1919, when the Government was planning to return the railroads to private ownership, many of the smaller railroads were in very weak condition, and their continued survival was in jeopardy. [Footnote 2/3] Hence, for the first time, governmental encouragement of railroad consolidation was discussed. It was agreed that the Interstate Commerce Commission should be directed to prepare a plan for the Page 347 U. S. 316 consolidation of the railroads of the country into a limited number of systems. But there was sharp disagreement over ways and means for carrying out this program. The House Committee opposed grant of power to the Commission to compel consolidations. [Footnote 2/4] The Senate Committee, however, under the leadership of Senator Cummins, an ardent advocate of compulsory consolidation, recommended a bill providing for voluntary consolidation in accordance with a master plan for a period of seven years, but authorizing compulsory consolidations thereafter. [Footnote 2/5] Although many groups, including virtually all the railroads, opposed the compulsory provisions, [Footnote 2/6] the Senate passed the bill, 59 Cong.Rec. 952. But, in conference, "[t]he Senate receded from the provisions for compulsory consolidation," and the House version was adopted. [Footnote 2/7]
In 1921, the Commission promulgated a tentative consolidation plan. [Footnote 2/8] Strong opposition immediately developed, and long hearings before the Commission ensued. Page 347 U. S. 317 The upshot was that, in 1925, the Commission, recognizing the unfeasibility of working out a national plan of consolidation, asked Congress to be relieved of this burden. [Footnote 2/9] This request was left unheeded until 1940, and, in 1929, the Commission adopted its final plan of consolidation. [Footnote 2/10]
The 1933 Act also established the office of a Federal Coordinator of Transportation to investigate the entire transportation problem and make appropriate recommendations. In his first Report, the Coordinator, Commissioner Page 347 U. S. 318 Joseph Eastman, reviewed the subject of railroad consolidations and concluded that the sweeping proposal of his legal adviser, Mr. Leslie Craven, for compulsory consolidation should not be followed, but that the remedy lay along lines of greater coordination and pooling, with some forced mergers on a "trial" basis. [Footnote 2/17] The third and fourth Reports reiterated the Commission's inability to compel mergers. [Footnote 2/18] Again, no legislative action resulted. [Footnote 2/19]
"We do not think the country is ready for any compulsory system of consolidations. Whether ultimate Page 347 U. S. 319 resort must be had to the principle of compulsion is a question which we think it better to defer until after there has been an opportunity to see what can be accomplished if the railroads are relieved from these limitations and restrictions [of the consolidation plan]. In our opinion, the best results will be achieved by leaving all initiative in the matter to the railroads themselves. . . ."
"There is a very strong sentiment on the part of a great many people that consolidation should be compelled. They say that nothing will be done until such time as that happens. "Page 347 U. S. 320
"* * * *" "After all, when you speak of that [encouraging consolidations], the Interstate Commerce Commission has studied it for years, and no consolidation can take place under this bill until such time as it is a voluntary consolidation. . . ."
"* * * *" "I cannot understand why you are talking about consolidations before this committee, because there is nothing in this bill to indicate that we have taken the position that we are in favor of forced consolidations. There is nothing in the bill that will change the situation at all."
"* * * *" "As a matter of fact, much of the objection to this bill on the part of a number of people has been that it has not got some provision in it making it easier for consolidations; as a matter of fact, forcing consolidations and coordinations, or at least setting up in the Interstate Commerce Commission a committee that will go ahead and suggest how consolidations ought to be made."
"* * * *" "I have repeatedly said that you could not get a bill to force consolidations, or to have in here a provision that the Commission should have an opportunity of carrying on investigations of the subject to Page 347 U. S. 321 try to force consolidations, and so forth. So, as far as this committee is concerned, with reference to this bill, you are just wasting our time in talking about consolidations, because that subject is out the window."
The Court misstates the issue in these cases. The sole question, the Court says, is whether the Interstate Commerce Commission has the statutory power to submit a plan of reorganization under § 77 of the Bankruptcy Act "whereby a debtor railroad would be compelled to merge with another railroad." That is not the issue. Neither the Interstate Commerce Commission nor the reorganization court has attempted to force a merger of these railroads. If, at some future time, any such attempt is made, it will be time enough to deal with it. Hence, it is misleading for the Court to say that the issue is whether a merger may be "foisted upon one of the parties by the Page 347 U. S. 322 Commission." The one and only issue before us at the present time is whether the Commission may include in a plan of reorganization a provision that the debtor or bankrupt railroad should be merged with another road and submit that plan for approval or disapproval to the security holders who are entitled to vote on a plan. To understand the issue in these cases it is necessary to have an understanding of the respective functions of the Commission and the reorganization court under § 77.
"if the plan has not been so accepted by the creditors and stockholders, the judge may nevertheless confirm the plan if he is satisfied and finds, after hearing, that it makes adequate provision for fair and equitable Page 347 U. S. 323 treatment for the interests or claims of those rejecting it; that such rejection is not reasonably justified in the light of the respective rights and interests of those rejecting it and all the relevant facts; and that the plan conforms to the requirements of clauses (1) to (3), inclusive, of the first paragraph of this subsection (e). [Footnote 3/1]"
If the creditors approve the plan by "more than two-thirds" vote but less than 100 percent, would it be lawful Page 347 U. S. 324 to confirm it? I think it plainly would be for the following reasons:
of the Interstate Commerce Page 347 U. S. 325 Act. (Italics supplied.) Section 5 of the Interstate Commerce Act prescribes both a procedure for the Commission to follow in those cases and the standards which the Commission must apply.
There is no objection made nor showing attempted that, in these cases, the Commission failed to make findings on those issues nor that the findings as made were inadequate. The Commission indeed was most explicit. It said that control of Florida East Coast by the petitioner in No. 24, St. Joe Paper Co., would be "contrary to the Page 347 U. S. 326 public interest," since that company, "particularly because of its large banking interests," would be in a position to influence the routing of shipments. 282 I.C.C., p. 187. It found that the merger of the Florida East Coast with Atlantic Coast Line
-- would result in savings as a result of unification. [Footnote 3/5] Id., p. 187. Page 347 U. S. 327
We are not asked to set aside those findings. They are indeed not challenged. On their face, they plainly meet the standards of § 5 of the Interstate Commerce Act. We cannot say, on this record, that they are not consistent with § 5 within the meaning of the consistency clause of § 77, sub. f. So far as this record shows, the Commission has faithfully, painstakingly, and conscientiously performed the obligations which § 5 of the Interstate Commerce Act Page 347 U. S. 328 imposes on it. It would seem obvious, therefore, that the Commission should be allowed to submit the plan, including the provision for a merger, to the security holders for their approval or disapproval.
Once a petition for reorganization is approved, the court appoints trustees who have full management of the business under the court's supervision. § 77, sub. c. The trustees take over the functions of the officers and board of directors. But apparently the Court, when it refers to "the debtor," does not mean the trustees, for it speaks of "those who, in the absence of § 77, would wield the corporate merger powers." That must mean either the old management or the stockholders. Yet such a reading cannot square with § 77. One can look through § 77 in vain for any status granted the old management to approve or disapprove a plan. "The debtor" commonly is identified with the stockholders, i.e., the equitable owners of the road. But the method of getting their consent to any plan of reorganization is prescribed in § 77. They may or may not be entitled to vote, depending on whether their stock represents a value in the railroad. If the stock has no value, they are not entitled to vote. If it has value, they are entitled to vote. § 77, sub. e. If the security holders who have a vote approve the plan, the consent necessary to effect both the recapitalization and the merger has been given. To allow the old management or the stockholders a veto power where Congress has provided they shall not vote is to indulge in as bold a piece of judicial legislation as one can find in the books. Page 347 U. S. 329
No comfort can be found in § 77, sub. d, which gives the debtor, i.e., the old management, standing to propose a plan of reorganization. Plans of reorganization may be proposed by the debtor, by the trustees, by 10 percent of any class of creditors or of stockholders "or with the consent of the Commission by any party in interest." § 77, sub. d. The proposal of a plan expresses merely the wish. In logic and in history, there is no reason why a plan containing a merger may not be proposed by the new management as well as the old, by creditors as well as stockholders. Standing to present a plan has no relevancy to the fairness or feasibility of the plan presented. To say that only "the debtor" may submit a plan that contains provisions for a merger is to give a whiphand to people who do not even have enough of an interest to vote on a plan. The debtor commonly represents the equity, and when, as here, the equity is so far under that it can have no possible interest in the reorganization (except possibly a nuisance value created by long drawn-out litigation), it violates all sense of fairness Page 347 U. S. 330 and disregards the mandate of Congress to let the equity have the preferred position the Court now creates. Congress has set the standards for the protection of the "equitable owners." Where, as here, they have no value in the enterprise, Congress said they should be disregarded.
It is said that, if the security holders reject the plan, the reorganization court may nonetheless force it on them. Page 347 U. S. 331 There are several answers to that, as I have already suggested:
(1) Suppose the election returns bring approval by a bare two-thirds. Suppose the judge is satisfied that one Page 347 U. S. 332 block of securities voting against the plan has a special ax to grind, as the Commission suggests is true in this case of the St. Joe Paper Co., petitioner in No. 24. Would it be unlawful for the court to invoke the "cram down" provision in that case? "Consent" has not been obtained, since Congress provided that "more than two-thirds" should approve a plan. But the public interest might well justify use of the "cram down" provision in that case as the only effective method for dealing with a recalcitrant (or even blackmailing) minority. In light of what we said in the Denver & Rio Grande case (328 U.S. at 328 U. S. 535), such rejection by the one-third minority might well be deemed to have no "reasonable justification" in light of all the facts and circumstances.
The question of the application of the "cram down" provision of § 77 to plans involving mergers has never been Page 347 U. S. 333 presented to us. [Footnote 3/11] That question is premature here, for it may never be reached. It is a large question of great importance, and one that should be decided not in the abstract, but only on the specific facts of specific cases. In these cases, we should specifically reserve decision on it until it is presented. We should affirm the judgment in these cases, allowing the plan to be submitted for approval or rejection, explicitly saving the rights of all parties in case the "cram down" provision is used against them.