Opinion ID: 1566606
Heading Depth: 1
Heading Rank: 1

Heading: Appeal of Protective Committee for Bonds of Old Colony.

Text: 1. The appellant contends that certification by the Commission of its Sixth Supplemental Report and Order without the granting of a hearing after the plan was referred back to it was a procedure inconsistent with the opinions and mandate of this court and contrary to the requirements of Section 77, Bankr.Act, 11 U.S.C.A. § 205; consequently the Commission's Report and Order were invalid and the district court's orders based thereon are erroneous. In its former opinions this court did not determine whether the Commission was required to hold a hearing after the Old Colony features of the plan of reorganization were referred back. We held that the Commission's prior Reports and Orders were defective in that the price proposed for Old Colony properties appeared to be a figure arrived at by compromise and not by an independent exercise of judgment by the Commission, and we reversed the court's order of approval so that the Commission may make its own independent findings of value and of price. We recognized that the Commission might wish to take additional evidence and to modify the plan in the light of new facts, 147 F.2d 40, 54; but there is nothing in our opinions which required the taking of evidence. So far as the appellant's argument rests on supposed inconsistency between the procedure adopted by the Commission and the procedure directed by our opinion, it is based on a faulty premise. There is more substance to the statutory argument, but we are not convinced by it. Subsection e of section 77, 11 U.S.C.A. § 205, sub. e, provides that if, upon disapproval of the plan, the proceedings are referred back to the Commission, it shall proceed to a reconsideration of the proceedings under the provisions of subsection (d) of this section. Subsection d provides After the filing of such a plan, the Commission    shall, after due notice to all stockholders and creditors given in such manner as it shall determine, hold public hearings, at which opportunity shall be given to any interested party to be heard, and following which the Commission shall render a report and order in which it shall approve a plan    The appellant argues that our reversal of the district court's order of approval based on the Fifth Supplemental Report and Order was a judicial disapproval of the plan and rendered mandatorily applicable the above quoted statutory provisions. But the Commission rejected this argument and we agree with its rejection. The provisions relating to Old Colony constituted but one portion, although an important one, of a comprehensive plan for both the principal debtor and the several subsidiary debtors. Our disapproval of the Old Colony provisions was upon a very narrow ground, namely, that the Commission's Report did not show that the proposed price was arrived at in the exercise of its independent judgment as to the value of Old Colony properties. The Old Colony provisions were referred back in order that it might exercise its independent judgment upon the record already made before it and such additional evidence, if any, as in its discretion it might wish to receive. Having declined to receive new evidence, we think the Commission was authorized to make findings as to value and price based on the old record without holding public hearings. As the court stated in Ford Motor Co. v. National Labor Relations Board, 305 U.S. 364, 373, 59 S.Ct. 301, 306, 83 L.Ed. 221: It is familiar appellate practice to remand causes for further proceedings without deciding the merits, where justice demands that course in order that some defect in the record may be supplied.    If findings are lacking which may properly be made upon the evidence already received, the court does not require the evidence to be reheard. To such a situation the above-quoted provisions of subsections e and d do not, in our opinion, apply. In other words the remand of a part of a plan does not require the Commission to reopen the record as to the entire plan nor to take additional evidence if in the Commission's opinion the evidence already in the record is adequate for the correction of its error. See Interstate Commerce Commission v. Jersey City, 322 U.S. 503, 514-516, 64 S.Ct. 1129, 88 L.Ed. 1420; In re Chicago, M., St. P. & P. R. Co., 7 Cir., 145 F.2d 299, certiorari denied Park v. Group of Institutional Investors, 324 U.S. 857, 65 S.Ct. 860, 89 L.Ed. 1415. 2. The appellant further contends that there has never been a public hearing on the plan provisions as to Old Colony. This point was argued on the former appeal but was not passed upon and is still open. [4] The report of the Compromise Committee was before the Commission at the February 1942 hearings, but it contained nothing as to the price to be paid for Old Colony properties. The purchase price was first proposed in the Joint Report dated April 4, 1942. The February hearings had been closed except for reception of the Joint Report but provision was made for the filing of briefs after that Report should be received. Section 77, sub. d, permits plans to be filed before, or with the consent of the Commission during, the hearings and says that after the filing of such a plan the Commission shall, after due notice, hold public hearings. The appellant argues that the Joint Report plan was filed after the close of the February 1942 hearing. With this premise we cannot agree. It was filed during that hearing which remained open to receive it and allowed briefs to be filed thereafter in opposition to it. Since it was filed during the hearing, the public notice under which the February hearing was held should suffice; we do not construe subsection d to require a new notice every time a modification of the plan is proposed during the progress of a hearing thereon. Apparently no request was made by the appellant after the Joint Report was filed on April 4, 1942 to have the Commission take additional evidence relative to value and price of Old Colony assets. Only after the Commission's Third Supplemental Report and Order adopted the price proposed in the Joint Report did the present appellant feel aggrieved. The contention that no public hearing such as the statute requires was ever had with respect to the plan provisions as to Old Colony cannot be sustained. 3. The principal objection of the appellant is that the purchase price to be paid for the assets of Old Colony as provided in the plan certified by the Commission, and approved by the District Judge, is inequitable and unfair. The assets consist both of railroad properties and non-operating properties, the latter comprising four items: Stock of Union Freight Railroad having a book value of $235,000; $3,600,000 (face) of New Haven first and refunding bonds; a claim against Bankers Trust Company for breach of covenants in the Old Colony lease assigned to it as trustee under New Haven's first and refunding mortgage; and a claim against New Haven, which had been liquidated by the district court in the sum of $47,186,963, arising out of repudiation of the lease by the principal debtor's trustees. In exchange for Old Colony assets New Haven is to release its prior lien claim against Old Colony amounting on December 31, 1943 to $6,081,048, to pay Terminal bond interest and reorganization expenses of Old Colony estimated at $4,413,796, and to deliver to Old Colony $4,398,305 (face) of new First and Refunding Bonds and $3,298,728 (face) of new Income Bonds. The Commission considered each of the assets and the evidence of record bearing upon its value and, without determining a definite value for each or an over-all valuation in dollars, found an equivalence in value between what Old Colony was to transfer to the reorganized New Haven and what it was to receive in exchange. Judge Hincks affirmed this equivalence by determining what he calls a permissible valuation for each of the items involved; and although his permissive valuation does not correspond with any finding in the Commission's Report, neither does it conflict with anything in the Report. In short, we cannot say that the Commission did not appraise the properties in the same manner as did the Judge; indeed, we cannot say anything about how it did appraise them, for the Report does not disclose its method. However, it is established by the Western Pacific case, Ecker v. Western Pac. R. Corp., 318 U.S. 448, 63 S.Ct. 692, 87 L.Ed. 892, the Milwaukee case, Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., 318 U.S. 523, 63 S.Ct. 727, 87 L.Ed. 959, and the Denver & Rio Grande case Reconstruction Finance Corp. v. Denver & R. G. W. R. Co., June 10, 1946, 66 S.Ct. 1282, 90 L.Ed. 1400, that valuations by the Commission need not be expressed in dollars nor broken down into items; they need be no more than appraisals in equivalent securities of the reorganized debtor. And this is true although the assets appraised include non-operating property as well as operating railroad property. [5] The function of the court is only to see whether the Commission had applied improper statutory standards. [6] Hence, if it is apparent that the Commission has conducted fair hearings, has given consideration to each element of value concerned in its over-all appraisal, and has not wrongly decided legal questions involved in the problems of valuation and of allotment of equivalent securities, we believe that the requirements of the statute are satisfied. 4. Even on the assumption that the law is as we have stated it, the appellant raises a number of objections to the Commission's appraisal. The first is that the finality of an appraisal by the Commission is limited to a true reorganization, that is, to one where the property for which the new securities are to be issued belongs to the debtor. Since in the case at bar the plan contemplates a sale of Old Colony assets to the reorganized New Haven, the appellant argues that the Commission could not lawfully proceed as it did, but must follow the doctrine applied in First Nat. Bank v. Flershem, 290 U.S. 504, 527, 54 S. Ct. 298, 307, 78 L.Ed. 465, 90 A.L.R. 391, under which A detailed appraisal must    be made of the corporation's assets as of the date of the sale, based upon then values and the possibility of disposing of them in parcels, as well as an entirety. Again,    a detailed valuation of the many items    was essential to intelligent bidding for the property in such parcels or as scrap. It is true that if the transfer of Old Colony assets is like a judicial sale on foreclosure or execution, the Commission's appraisal was not valid. But we think it is not. The purpose of the kind of appraisal required in the Flershem case is to protect those creditors who do not choose to come in; it is to provide an honest upset price. The same procedure is not required under section 77, for the reason that if minority creditors are not content with the plan, the court, under the cram down provisions added in 1935, 49 Stat. 919, can force them in; and if it does not, must reject the plan. Hence nothing should turn upon the fact that deeds of conveyance must be executed and exchanged for new securities, or that these transactions are described in terms appropriate to a sale. The transfer is as much a part of a true reorganization as if the title to the assets had been in New Haven. The statute itself so treats such a transaction, for section 77, sub. a, allows a subsidiary railroad corporation, such as Old Colony, to file a petition stating that it desires to effect a reorganization in connection with, or as a part of the plan of reorganization of the principal debtor. The plan now under consideration adopted the second alternative because the Commission determined that integration of the two railroads is required in the interests of the public. In such a situation we cannot understand how it can make the slightest difference, so far as concerns the appraisal of property, that there must be deeds to effect the transfer of the subsidiary's assets and that the new securities, the release of the principal debtor's prior lien claim against the subsidiary and the payment by the principal debtor of the subsidiary's reorganization expenses are treated as constituting the price. We agree with appellees' argument that the properties of the Old Colony are, for purposes of the plan, on the same footing with respect to the whole system as are lines securing a divisional mortgage of New Haven. In the St. Paul case, 318 U.S. 523, 63 S.Ct. 727, 87 L. Ed. 959, it was held that bondholders whose claims were secured upon part of a single railroad  a division  were not entitled to a separate appraisal. Yet the transaction by which their lien was wiped out and they were given new securities is as much a transfer for a price and therefore a sale as is the proposed extinguishment of the lien of Old Colony bond-holders in exchange for new securities. Because section 77, sub. b (5), 11 U.S.C.A. § 205, sub. b (5), declares that a plan shall provide adequate means for the execution of the plan, which may include    the sale of all or any part of the property of the debtor    at not less than a fair upset price, it is urged that the Commission was bound to set an upset price in dollars. But in our opinion the quoted provision is optional, not mandatory, as to any property which passes to the debtor or to the new reorganized company; indeed, there is some reason to suppose that it was interpolated in 1935 to provide against the possibility that the cram-down provision, also then introduced, might prove unconstitutional. As we have said, the Commission's overall valuation was not expressed in terms of dollars. However, in analyzing the record as to values it tentatively assigned cash values to certain assets in order to make sure that New Haven's prior lien claims could be satisfied. It then considered Old Colony's railroad properties and determined what their capitalization might be on various hypotheses. By aggregating the values so assigned the appellant attempts to prove that the total value of the assets was greater by some $2,700,000 than the price to be received for them. Such a method of attack is not justified, for the values assigned by the Commission were but tentative. As the Commission stated in concluding its discussion: The value of Old Colony properties and assets should not be determined solely by mathematical calculations since it is essentially a matter of judgment based upon a consideration of intangible as well as tangible elements and a general knowledge of system requirements. The Commission's finding of equivalence in value between the assets to be transferred and the price to be paid can be upset by the court only if the Commission applied improper legal standards. 5. The appellant urges that it did apply an improper legal standard with respect to the $3,600,000 of New Haven first and refunding bonds in that Old Colony was not credited with interest of $928,000 paid on these bonds into a special bank account and held subject to further orders of the court. The Report does not expressly mention this item of interest. Old Colony's right to it has never been adjudicated by the District Court, but for the purpose of testing the Commission's valuation of Old Colony assets Judge Hincks assumed it to be an asset belonging to Old Colony and construed the Commission's Report to have treated it as an unliquidated claim the proper value of which in its independent judgment was duly reflected in its comprehensive valuation of all Old Colony assets and as an asset which would pass to the New Haven upon the payment of the purchase price proposed for all Old Colony assets. He attributed the absence of discussion relating to the interest item not to oversight by the Commission but to absence of contention as to the existence and amount of the asset. We understand this to mean that he ruled that in treating the claim as an Old Colony asset worth $928,000 the Commission did not violate legal standards. The appellant, of course, agrees that legal standards were observed if the interest item was included in the Commission's over-all valuation, and argues that they were violated because it was not included. We think Judge Hincks was right in construing the Report to mean that it was included. It is not necessary for the Commission to show the precise method by which it reaches its over-all valuation. The objector to the valuation must show that legal standards were violated. 6. A somewhat similar objection is urged by the appellant with respect to Old Colony's claim against Bankers Trust Company. The Commission noted that the record shows that special counsel for Old Colony offered to compromise this suit for $4,000,000 and special counsel for the New Haven trustees recommended a compromise of $2,500,000, while certain of the secured creditors asserted that it had only a nuisance value. The Commission said that For the purposes of this proceeding we will consider this claim as having a value of $3,250,000. Later, in considering the amount of Old Colony's claim of $47,186,963 against New Haven for breach of lease, the Commission suggested that if there be deducted from that the full recovery sought in the suit against the Bankers Trust Company ($13,379,215), the claim would be reduced to $33,807,748    The appellant does not object to using the compromise value, $3,250,000, of the claim against Bankers Trust Company as a setoff against the breach of lease claim against New Haven, but strenuously protests against setting off the full ad damnum of the suit against Bankers Trust Company. In determining the compromise value of a claim, the Commission deals with a matter which is also within the province of the court. The validity of a claim presents a legal question which must necessarily be taken into account in determining its compromise value. If its validity were indisputable, we believe that the district judge could disapprove an inadequate compromise value as violating legal standards; conversely, if the claim were very doubtful, he could disapprove an excessive valuation. The opinion of Judge Hincks shows that he thought $3,250,000 a permissible compromise value for the claim against Bankers Trust Company, and the appellant does not controvert this. How much should be deducted as a setoff against the breach of lease claim is primarily a question of fact depending upon what the parties agreed to in the supposititious settlement. Whether their agreement produced a settlement so unreasonable as to require judicial disapproval would also, we assume, be a matter within the province of the court. Judge Hincks' opinion expressed the view that it is perfectly obvious as a matter of law that if the claim were liquidated in the amount of $3,250,000, the breach of lease claim should be reduced by only the same amount. He did not read the Report as predicating the Commission's comprehensive valuation upon a process whereby the value of the unsecured breach of lease claim was reduced by the ad damnum of the Bankers Trust suit. The Commission merely considered the possibility of deducting the full ad damnum, it did not say that it did value the breach of lease claim on that basis. The Third Supplemental Report of October 6, 1942 referred to the suggestion that $3,250,000 would be a fair compromise value of the suit and that Old Colony's unsecured lease claim should be reduced only by the latter amount. Judge Hincks was of opinion that when the Commission had thus stated the correct basis of setoff, its recital in the Sixth Report in hypothetical form of the extreme claim of certain New Haven parties did not justify the inference that the Commission's valuation was based upon the adoption of such contention. We agree. 7. The appellant objects also to taking December 31, 1943 as the cut-off date, since it is now apparent that the plan will not be consummated until years later. When the Commission initially proposed this cut-off date it was in futuro. When it appeared from the trustees' annual reports that estimates of Old Colony earnings up to that date were inaccurate, the Commission made corrections to conform to actualities. Because of the unexpectedly long delay in consummating the plan we see no reason for the Commission to postpone the cut-off date. As a practical matter some closing time must be set and it cannot be progressively postponed without reopening the issues and making new findings, with resulting new appeals. By the time these are finished conditions may again have changed, and so on ad infinitum. See Interstate Commerce Comm. v. Jersey City, supra. Indeed, if the closing date were to be advanced to 1946 or 1947 the change would probably be detrimental rather than beneficial to the appellant, for the court may take judicial notice that war earnings have ended and costs of labor and materials have advanced. 8. It is urged that the order of confirmation is erroneous because the plan was submitted to vote prematurely. The vote was taken while the prior appeal was pending from the order of December 8, 1944. Subdivision e of section 77 provides that after the judge has approved the plan, he shall certify his opinion and order to the Commission. The plan shall then be submitted by the Commission to the creditors    for acceptance or rejection, within such time as the Commission shall specify,   . We find nothing in the statute to suggest that the plan may not be submitted for vote pending an appeal from the order of approval. Nor do we see any good reason why this should not be done, thereby saving time if the order of approval is affirmed. Although the order was reversed on the appeal of Old Colony interests because of a formal defect which the Commission's Sixth Report has cured, it would be a useless formality to submit the plan again to those creditors who have already voted in favor of it. It is urged that the plan, when submitted, was invalid as to Old Colony bondholders, and must therefore be resubmitted at least to them. This technically logical argument would have more persuasive force if acceptance by Old Colony bondholders were requisite for confirmation of the plan. But section 77, sub. e, permits confirmation even though certain creditors have rejected it if the judge finds that the statutory conditions are met. Judge Hincks found that they were. Hence resubmission to the bondholders would be futile. If they voted favorably, confirmation would follow mandatorily; if they again rejected it (as appellant says they would) discretionary confirmation would follow. So the only question of importance is whether the judge's findings (a) as to fair and equitable treatment, (b) unreasonable rejection, and (c) conformity with clauses (1) to (3) of the first paragraph of subsection e are warranted. In sustaining the order of approval we have already passed on conditions (a) and (c). It is urged that it cannot have been unreasonable for the bondholders to reject a plan which did not represent the Commission's independent judgment, as this court subsequently held the plan did not. But there is little reason to suppose that this formal defect in the plan was the basis for the negative vote of the dissenters, rather than their belief that the plan provided unfair treatment. In the Denver & Rio Grande case, supra, 66 S.Ct. at page 1303, the court says that If a plan gives fair and equitable treatment to dissenters, the elements which make the plan fair and equitable cannot be the basis for a reasonably justified rejection. Since Judge Hincks has found the plan fair and equitable, a resubmission followed by a second rejection would accomplish nothing.