Opinion ID: 1483191
Heading Depth: 1
Heading Rank: 11

Heading: Lease by Pacific.

Text: Mr. Meyer urges that, after Pacific acquired control, it should have leased Debtor's lines. The evidence is that operation under a proper lease would have resulted in material saving to Debtor and a definite increase in earnings through making Debtor's line an integral part of the Pacific system. It is quite conceivable that such lease might have been advantageous both to Debtor and to Pacific. There existed, however, certain practical considerations which entered into this matter. One of these was possibly the conditions which the Commission might attach to operation under a lease, if it allowed one. In the order permitting acquisition of stock control by Pacific, the Commission stated certain conditions which it deemed in the public interest. One of these was that Pacific should maintain and keep open all routes and channels of trade via existing gateways unless and until otherwise authorized by us. Unless the Commission should change its view as to what the public good required in this regard, the revenue to Pacific would be affected by this limitation in a lease. However, as to Mr. Meyer's contention that Pacific should have sought modification of this condition, the Commission, in its original report, stated: He urges that the Southern Pacific should have moved for a modification of that order permitting it to close such routes and channels of trade as might be necessary to provide increased traffic moving over the debtor sufficient in amount to cover all interest charges on its bonds. We cannot tell in this collateral proceeding whether we would have found merit in a petition for a modification of the order in question, but the retention of the existing routes and channels of traffic to the utmost extent possible has always been considered by us as required in the superior public interest. The contention of Mr. Meyer is that the refusal of Pacific to make such a lease is clear proof of its desire to put Debtor through reorganization so that the responsibility of Pacific to the creditors and stockholders of Debtor might be reduced and then it could make a more advantageous lease. That such results might well follow is evident. However, this does not prove such intent of Pacific. Mr. Holden, Chairman of Pacific board, testified before the Commission that the Pacific had intended, when it acquired control, to make Debtor eventually a part of Pacific but had been deterred by the situation. [15] As to this, the Commission stated, in its original report, as follows: As to the possibilities of a lease of the debtor by the Southern Pacific, as an alternative to reorganization, it appears that such an arrangement, or a consolidation of the properties, holds promise of large savings in operating expenses, with the further promise of some increase in traffic. The Southern Pacific apparently is of the view that the saving in expense and increase in traffic would not be sufficient in amount to justify it in assuming the obligation of the debtor's fixed charges at their present level. It cannot be said in the light of the record that this view of the Southern Pacific is unreasonable. A possible lease cannot under the present law be forced on the Southern Pacific. Such a unification of operation is a step that may follow reorganization of the debtor, rather than a means by which a reorganization otherwise clearly necessary might be avoided. In any event it could not be accomplished without giving the States involved and the general public opportunity to be heard on the reasonableness of the terms and the underlying question of public interest. In connection with Mr. Meyer's request for finding 14. That a lease of the debtor will result in increased economies in the amount of not less than $500,000 to $1,000,000 annually, the Commission stated: For reasons hereinbefore appearing, the requests for findings 1 to 13 are denied. The request for finding 14 is also denied as immaterial to these proceedings, since it does not appear that a lease prior to reorganization is contemplated or practicable. Also, Mr. Meyer urged that reorganization capitalization be affected by the effect of a lease by Pacific. As to this, the Commission, in its supplemental report, stated as follows. Walter E. Meyer's contention that we should base new capitalization on earnings which might be received after a lease of the property by the Southern Pacific is not sustained. Such a lease under present law cannot be forced upon the Southern Pacific, since there appear no prospects of such a lease until after reorganization is consummated, and since it is impossible to determine the earnings of the property under a lease until the terms of the lease are agreed upon and made known.    In support of the proposed new capitalization, the petitioner suggests a lease of the debtor by the Southern Pacific with one-line solicitation of traffic, which he estimates would provide an opportunity for economies or savings in operating expense of from $500,000 to $1,000,000 annually, and produce from $20,000,000 to $30,000,000 of additional traffic for the debtor. The debtor's railway system operating revenues were $20,642,003 in 1940, and freight revenues were $19,422,734. The basis offered for the petitioner's estimate of increased revenues is in part an examination of 1931 traffic made by the debtor. On the basis of the traffic of that year it was estimated that the annual revenues of the greater system were some $30,000,000 less than they would have been if that system had received its longest haul on all originated and terminated traffic. Of this $30,000,000, about $12,750,000 represented traffic moving under the Central Pacific agreement, and about $17,000,000 represented traffic not covered by that agreement. The $17,000,000 was equal to somewhat more than 50 percent of the revenues which were then received from the traffic not covered by the agreement. The amount estimated as loss to the debtor through short-hauling the greater system on traffic not covered by the Central Pacific agreement was about $14,035,087, offset in part, however, through gains by the Pacific lines and the Texas & New Orleans through the same short-hauling of the system. It does not appear that these amounts were necessarily attainable. They represented merely the amount by which revenues might have been increased in 1931 if the routing of all originated and terminated traffic (other than traffic coming under the Central Pacific agreement) had been procured via the Southern Pacific-debtor long haul, and if there had been no retaliation by competitors on other traffic. Besides the $14,035,807 mentioned, the petitioner says it is reasonable to estimate that an additional $14,000,000 of traffic in the movement of which the Southern Pacific does not at present participate would be obtained by the Southern Pacific for the debtor if the Southern Pacific system through a lease of the debtor and one-line solicitation extended to Mississippi River bridgeheads. He thus arrives at an increase of $28,000,000 for carload traffic, to which he adds a somewhat less than proportionate increase of $2,000,000 for less-than-carload traffic, producing a total of $30,000,000. It is clear that the petitioner has misapplied the debtor's figure of $14,035,807, and his own estimate of an additional $14,000,000 of carload traffic is merely an assertion unsupported by any analysis or computation. The evidence is not convincing. Apparently led to his conclusion by the estimate we have just rejected, the petitioner charges that the conduct of the Southern Pacific in failing to lease the debtor was unconscionable and inequitable. He urges that, in reorganization, the Southern Pacific should be required as an alternative to loss of all interest in the debtor, to enter into a lease of the debtor and to introduce one-line solicitation. Our views on these questions were stated in our prior report. We adhere to those views and to the conclusion there stated, that the Southern Pacific was apparently of the view that the saving in operating expense and increase in traffic would not be sufficient in amount to justify it in assuming the obligation of the debtor's fixed charges at their present level, and that it could not be said in the light of the record that such view of the Southern Pacific was unreasonable. Thus it appears that there was positive and frank evidence as to practical considerations which Pacific thought prevented lease or merger of Debtor. Obviously, the Commission was correct in its view in eliminating a possible future lease from its estimate of valuation for capitalization under a plan of reorganization. Our conclusion is that the Commission was supported by material evidence in its determination of the valuation of Debtor for reorganization capitalization purposes, at the time such valuation was made.