Opinion ID: 1566606
Heading Depth: 1
Heading Rank: 2

Heading: Appeal of Boston Terminal Bondholders.

Text: These appellants are the trustee under the Terminal Company's mortgage and two groups of holders of its mortgage bonds. In so far as their appeals question the procedure adopted by the Commission and the district court subsequent to the former appeal, no further discussion is needed. The principal questions presented by their appeals are whether the bondholders are unsecured creditors of the New Haven, whether the plan makes provision for them as such, whether their claim has been allowed, and whether they must be given an opportunity to vote upon the plan before it can be confirmed. 1. The Boston Terminal Company is a Massachusetts corporation created by special act, Acts of 1896, c. 516, for the purpose of providing a union terminal for five specifically named railroads, among which are the New Haven and the Old Colony. The Massachusetts statute imposed upon the five railroads three distinct obligations: (1) To use the terminal (Section 9 of the Act); (2) to pay the Terminal Company's operating costs mostly bond interest and taxes), each railroad paying in proportion to its own use (Section 10); and (3) to pay any deficiency established upon foreclosure of the mortgage securing the Terminal Company's bonds, each railroad paying in such proportion as the Supreme Judicial Court of Massachusetts shall determine (Section 4). The obligation for operating expenses runs directly to the Terminal Company, for whom a trustee in reorganization has been appointed by the bankruptcy court in Massachusetts, but the obligation for any deficiency on foreclosure runs to the bondholders or their mortgage trustee. Upon the prior appeal, these appellants took the position that the bankruptcy court had no power to discharge New Haven or Old Colony of their statutory obligations under the Massachusetts Act of 1896; hence they contended they were not creditors. We rejected the contention that the statutory obligations could not be modified. [7] Consequently, for purposes of the present appeal, the appellants claim to be creditors of New Haven and Old Colony by reason of the contingent obligation of each to make payment in such sums as the Massachusetts Supreme Court may determine in the event that a deficiency is established by foreclosure of the Terminal mortgage. This statutory contingent obligation the plan proposes to abrogate. Although their claim is contingent and unliquidated, we think it plain that they are creditors within the statutory definitions. [8] Indeed, the appellees do not dispute this, but contend only that the claim is not presently provable. The Terminal Company is also a creditor of New Haven and of Old Colony based on their statutory obligations to pay proportionate shares of its operating expenses. Strictly, this question may not be before us because its reorganization trustee has not appealed; but consideration of its right seems proper, since the amount of the bondholders' deficiency claims will be materially affected by enforcement of the right of the Terminal Company to collect part of its operating expenses from New Haven and Old Colony. 2. Article N 1(a) of the plan, which is set out in the margin, [9] provides that the charters of the reorganized company (New Haven) and Old Colony shall be amended so as to release them from the obligation to use the terminal, to reduce retroactively to October 30, 1939, [10] the annual compensation to be paid for such use subsequent to that date to a proportionate percentage of $275,000, and to abrogate the obligation to pay any deficiency on foreclosure of the bond issue. Since the bondholders and Terminal's reorganization trustee are unsecured creditors whose rights the plan proposes thus to modify, provision must be made to take care of their claims. See Kuehner v. Irving Trust Co., 299 U.S. 445, 453, 57 S.Ct. 298, 81 L.Ed. 340. Article N 1(b) [11] plainly does so with respect to the claim of Terminal's reorganization trustee. It provides that he shall have the right to elect whether to exclude the bankrupt railroads from further use of the Terminal Company's property and file a claim for damages in these proceedings or to accept the terms proposed in the plan for continued use by such railroads and thereby waive all claim of damages arising from the rejection and all claims for compensation for the use of its property other than such compensation as is provided by the plan. We understand this to mean that acceptance by Terminal's trustee will release New Haven and Old Colony not only from any claim for damages but also from any administration claim for use and occupation during reorganization in excess of their proportion of the $275,000 annual compensation. These provisions appear to provide adequately for the claims of the trustee. If he rejects the offered terms, he may claim damages as an unsecured creditor and under Article J(17) of the plan will be entitled to receive common stock for his claim against New Haven; he will also have an administrative claim for use and occupation against the reorganization trustees of New Haven and Old Colony. If he accepts the offered terms, he will voluntarily relinquish these claims and accept in substitution therefor the reduced compensation which Article N 1(a) offers. The parties are not in accord as to whether acceptance by Terminal's trustee is intended to operate as a release of the bondholders' claim for damages based on abrogation of the deficiency obligation in the event of foreclosure of the bond issue. The final clause of Article N 1(b) provides that if Terminal's trustee shall exercise his election by rejecting the plan and shall not file a claim for damages within the two weeks next succeeding, then such trustee, his successor-receiver, the Boston Terminal Company and its creditors and stockholders shall, each and every one of them, be barred from participating as a creditor or creditors in these proceedings, or from prosecuting any claim for damages against the estate of the using bankrupt railroads. The appellants assert that, since they are creditors of Terminal, the quoted provision means that its trustee by accepting the plan can extinguish their right to damages against New Haven and Old Colony. Obviously that would be unlawful and the appellees so admit, at least by implication. They assert, however, that The plan does not purport to affect the rights of the bondholders arising out of any deficiency which may be established through foreclosure of the Terminal Mortgage and if such a claim is finally determined, Article J(17) which reserves common stock for unsecured creditors, is adequate to compensate for it. Only if the district judge accepts the appellees' concession as to the meaning of the plan can his order approving it be sustained. Article R provides that The construction of the plan by the court shall be final and conclusive, and that the court shall have power to cure any defect therein. We find nothing in Judge Hincks' opinions to indicate that he has construed the plan differently from what we hold necessary for its validity, namely, that the trustee's acceptance of the offer can have no effect upon the bondholders' claim for damages arising out of repudiation of the deficiency obligation under section 4 of the Act of 1896. On the assumption that consummation of the plan will be carried out in conformity with these views, we think it unnecessary to remand the cause in order that the district judge may make an explicit ruling that the plan does mean what we hold it must mean to be valid. The bondholders further argue that the plan is inequitable because it fails to provide for payment of their deficiency claim against Old Colony. Under Article N 4 substantially all the assets of Old Colony are to be transferred to the recognized New Haven and the new securities which pay for them are to be issued and delivered to Old Colony's bondholders. Thus Old Colony will have no assets with which to satisfy any deficiency judgment the Terminal bondholders may obtain against it, and the plan does not require the reorganized New Haven to assume this obligation of Old Colony. However, there is nothing inequitable in this result. Old Colony is insolvent; hence its unsecured creditors are entitled to nothing until its bondholders have been paid in full. The new securities which Old Colony bondholders are to receive do not equal the face value of their bonds. The parties are also not in accord as to what, if the offer to the Terminal Company be rejected by its trustee, the plan provides with respect to the administration claim for use of its property by the reorganization trustees during these proceedings. The appellants assert that Article N 1(a) puts a ceiling upon the amount of such claim, limiting it to the proportionate percentage of the $275,000 annual compensation. The appellees answer that both Judge Hincks and this court have held the contrary. This is correct. See 54 F.Supp. at page 625; ibid. at page 638; 147 F.2d at page 51. The argument that the proposed amendments to the charter of the reorganized company would make any greater payment ultra vires is not sound. Such charter limitations will not affect administration claims against the reorganization trustees. Payment of such claims is required by the statute, 11 U.S. C.A. § 102, sub. a, § 205, sub. l. Article L of the plan provides that priority claims, except those against Old Colony, shall be paid in cash or assumed by the reorganized company with the same relative priority as they now have with respect to the other obligations of such debtors. And Article N 4 states that the reorganized company shall assume and pay    (c) current liabilities and obligations of Old Colony trustees incurred during the reorganization proceeding. Thus the administration claim is properly cared for. 3. The appellants contend that Order No. 45, together with subsequent proceedings in this cause, constitute a sufficient allowance of their claim to entitle them to vote upon the plan. The New Haven's petition, upon which Order No. 45 was entered, alleged that the principal amount of Terminal bonds outstanding was $15,155,000, and stated that the Debtor, together with other railroad companies, is liable to pay any deficiency following foreclosure of the mortgage securing said Bonds. The order provides that the debtor's petition shall constitute a sufficient filing or evidencing of said claims but that nothing contained in the order shall constitute a determination of the nature or extent of the debtor's liability or constitute the allowance by the court of any claim against the debtor. Paragraph 6 of the order granted any party in interest upon leave of court the right to protest any claim within sixty days, concluding with the sentence: In the absence of protest the aggregate amount of the bonds or other securities outstanding shall be considered as prima facie correct for the purposes of these proceedings. This order, coupled with the fact that no protest was ever filed and that the plan recognizes the existence of the bondholders' claims by undertaking to deal with them, should, the appellants argue, serve as an effective allowance. See Hammer v. Tuffy, 2 Cir., 145 F.2d 447, 450; In re Jayrose Millinery Co., 2 Cir., 93 F.2d 471, 475; In re Two Rivers Woodenware Co., 7 Cir., 199 F. 877. There would be force in this argument were not the bondholders' claims contingent on foreclosure and unliquidated in amount. The obligation running to the bondholders under section 4 of the 1896 Act is not a guaranty of the bonds; it is only an indemnity obligation to make good any deficiency upon a foreclosure of the mortgage securing them. Moreover, after the deficiency is ascertained it has to be apportioned between the several railroad obligors by the Supreme Judicial Court of Massachusetts. The appellants concede that the bankruptcy court has no power to foreclose the mortgage or to apportion any deficiency which may be established by foreclosure in Massachusetts. We are at a loss to understand upon what theory it can be supposed that the bankruptcy court has allowed the claim, when it is without power to determine the amount of it. 4. But we see no reason why a plan of reorganization cannot lawfully make provision for an unliquidated claim, or why, if such provision is adequate, the court cannot approve the plan before the liquidation and allowance of the claim. See In re Akron, Canton & Youngstown R. Co., 6 Cir., 117 F.2d 961, 964. Section 77, sub. c(7), 11 U.S.C.A. § 205, sub. c(7), [12] seems to recognize that a creditor who has filed his claim may participate in the reorganization, subject to the later allowance of his claim. Article J(17) provides that the court shall reserve enough of the new common stock to allow equal proportionate distribution to any unsecured creditors whose claims at the time of consummation are not then liquidated. Since the amount of common stock which the reorganized company is authorized to issue is of necessity limited, no other way exists but to give to each unsecured creditor his proportionate number of shares determined by the fraction which his claim, when liquidated, bears to the whole amount of liquidated claims. The Article presupposes that the reserved shares will be more than enough to meet the liquidated value of the claims, and provides that any excess so reserved shall be sold and the proceeds distributed among the holders of the new common stock, thus effecting a perfect equality of distribution. 5. There remains the question whether the Terminal bondholders must be given an opportunity to vote upon the plan before it can be confirmed. Section 77, sub. e, 11 U.S.C.A. § 205, sub. e, provides that the plan, after approval, shall be submitted for acceptance or rejection to creditors whose claims have been filed and allowed. Since the appellants' claim had not been allowed, the district court had only two alternatives  either to exclude the bondholders from any vote at all, or to postpone confirmation of the plan until their claim should be liquidated and allowed. It chose the former alternative. We think this was permissible under the Act. Section 77, sub. l, 11 U.S.C.A. § 205, sub. l, provides that In proceedings under this section and consistent with the provisions thereof    the rights and liabilities of creditors    shall be the same as if a voluntary petition for adjudication had been filed and a decree of adjudication had been entered on the day when the debtor's petition was filed. In straight bankruptcy the right to vote is limited to creditors whose claims have been allowed. 11 U.S.C.A. § 93, sub. a. Among debts which may be approved and allowed, are included contingent debts and contingent contractual liabilities, 11 U.S.C.A. § 103, sub. a(8), and claims for anticipatory breach of contracts, executory in whole or in part, including unexpired leases of real or personal property. 11 U.S.C.A. § 103, sub. a(9). Similarly broad definitions are contained in the section dealing with the reorganization of railroads, section 77, sub. b, 11 U.S.C.A. § 205, sub. b, defining claims to include debts, whether liquidated or unliquidated, and creditors to include all holders of claims of whatever character    whether or not such claims would otherwise constitute provable claims under this Act.    But the proviso added to section 57, sub. d in 1938, 11 U.S.C.A. § 93, sub. d, states That an unliquidated or contingent claim    shall not be allowed if the court shall determine that it is not capable of liquidation or of reasonable estimation or that such liquidation or estimation would unduly delay the administration of the estate or any proceeding under this title. This procedural section regulating the rights of creditors in straight bankruptcy is made applicable to railroad reorganization by section 77, sub. l, 11 U.S.C.A. § 205, sub. l, since it is not inconsistent with the provisions of section 77. To ascertain the deficiency for which New Haven is liable to Terminal bondholders will certainly unduly delay confirmation of the plan, but it will not unduly delay payment to the bondholders out of the reserve of common stock held under Article J(17) of the plan. Are we to say that liquidation of their claims, which will not unduly delay the final step in administration  distribution of the new securities  must cause the postponement of an earlier step, like voting, until the claims are liquidated? That would be unreasonable, for it would subject all the other creditors to that kind of delay which the proviso to § 57, sub. d, was meant to avoid. We think that the correct construction of the statute is to say that a creditor whose claim cannot be liquidated or otherwise estimated without unreasonably delaying a given step in the administration of the debtor's estate, may not share in that step; but if his claim can be liquidated or estimated without unreasonably delaying a later step he is to be allowed to share in that step. As in many cases, the court must choose between a more complete justice to part of those involved and an indefinite delay detrimental to the whole group. The reorganization procedure was devised in the interest of expedition, Continental Illinois Nat. Bank & Trust Co. v. Chicago, Rock Island & P. Ry., 294 U.S. 648, 685, 55 S.Ct. 595, 79 L.Ed. 1110, although experience often shows, unfortunately, that it fails to accomplish that purpose. It is true that Judge Hincks did not expressly decide that it would unduly delay confirmation to have it wait upon ascertaining the amount of the deficiency claim of the bondholders. But to remand the cause for such a finding is unnecessary, for it is perfectly clear that such ascertainment would unduly delay confirmation. A decision otherwise we should consider an abuse of discretion. The appellants argue that on the prior appeal we held that The plan enables New Haven to reject what in effect amounts to a burdensome lease, 147 F.2d at page 52; that the last paragraph of § 77, sub. b, 11 U.S.C.A. § 205, sub. b, provides that if an unexpired lease shall be rejected by any plan, any person injured by such rejection shall for all purposes of this section be deemed to be a creditor of the debtor to the extent of the actual damage or injury determined in accordance with principles obtaining in equity proceedings; hence, they say, their right to vote upon the plan cannot be defeated. Our reference to the rejection of a burdensome lease was only by way of analogy; but even if the analogy were perfect the above quoted provisions of § 77, sub. b, do not provide what are the rights of the lessor when the extent of his actual damage cannot be determined in accordance with principles obtaining in equity proceedings, but must, as here, be determined by a special tribunal  the Supreme Judicial Court of Massachusetts. In such a case, for reasons already stated, we think § 57, sub. d, 11 U.S.C.A. § 93, sub. d, prescribes the procedure. Accordingly we hold that the bondholders were not entitled to vote upon the plan and that the order of confirmation was not premature.