Court Opinion

ID: 9442304
Source: CourtListenerOpinion
Date Created: 2023-08-03 18:43:36.252054+00
Date Added: 2024-06-11T17:29:03.422290
License: Public Domain

HOLMES, Circuit Judge,
dissenting.
I shall not undertake to point out with particularity any of the errors or imperfections that may be in the majority opinion. My view of this case can be stated more concisely by a discussion of the lower court’s opinion, which failed to defer fully to the findings of the Commission. After stating that there seemed to be a fault in the Commission’s finding of equivalency in value of the Coast Line securities to the debtor’s property, the court below said: “I have no right to make new valuations, but these considerations further move me to *546disapprove the plan as not fair and equitable.”
The disapproval of the plan for reasons not within the province of the court to consider was clearly erroneous; but the fundamental error that infects the judgment under review, and necessitates its reversal, is the holding that Section 77 does not permit a merger such as is proposed, and that this feature "ends this plan”. In the first place, neither the statute nor the plan says anything about a forced merger. The statute expressly provides that a plan of reorganization may include a merger. This plan contemplates, first, the voluntary consent of the railroad not in reorganization and, second, the approval of the plan by the court having jurisdiction of every asset of the debtor. The latter’s insolvency is such that the stockholders are not interested parties. The first-mortgage bondholders are to be fully paid in cash, and there can be no complaint in their behalf. The refunding bondholders are the parties primarily interested; but they are not (as the court below held) the equitable owners of the property. Under Section 77, as amended, they are merely creditors with a lien that is preserved in bankruptcy. The property has been dedicated to a public use, subject to well known rights of stockholders and creditors. It is now in the custody of the bankruptcy court to be protected and administered under said section.
Lienors do not become stockholders or succeed to the latter’s rights merely because the debt secured by the lien so far exceeds the value of the property that nothing will be left for stockholders. The primary object of Section 77 is not the rehabilitation of a debtor that is hopelessly insolvent, but the protection of the priority rights of lienors and the continuation of the railroad as a going concern. Priority rights of lienors may involve a surrender of their liens in exchange for new securities of equal value. Under this section, it is for the Commission to prepare a plan that will insure against capitalization which is incompatible with the public interest. The judicial functions of the court are brigad-ed with the administrative powers of the Commission to determine congressional intent and to effectuate the legislative will. These powers or functions are not blended; they are exercised cooperatively but not jointly. The court has its limited duties to perform, as does the Commission; but each acts separately within its special sphere, and neither is permitted to usurp the prerogatives of the .other.
The Commission’s finding that the plan is compatible with the public interest is fully supported by substantial evidence. The court below did not hold that the plan violated the absolute priority rule, and neither does this court; but it is plain that the learned trial judge was largely influenced in his decision to reject the plan by the opinion that it contemplated a merger not permitted by law. This conviction colored his view of the entire case. He said: “I do not think Congress intended to force a merger undesired by the majority in amount of the affected parties by permitting a merger to be a part of a plan. This conclusion makes it unnecessary to determine whether the court’s power in bankruptcy could be extended to force a merger consistently with the Fifth Amendment. It also ends this plan.”
The judge also concluded to disapprove the plan, even if it were lawful, because (he said) it was testified under oath before him and seemed plain to him that it would be rejected almost unanimously by the refunding bondholders. This ruling was premature, and was not warranted on the supposition that he would not later confirm the plan. Judicial discretion must be exercised at the time prescribed for the exercise thereof, and in the light of the facts existing at the appropriate date. No judge can foretell what his decision will be on a record that is not complete and that is to be made up of facts concealed in the womb of time. Such a decision in futtaro would be uncertain even if it could be known that the same judge would preside at a subsequent hearing; but when it is impossible to foretell not only what the facts will be but who will be the presiding judge, the prediction is rendered doubly doubtful. This uncertainty as to the main element is ex*547traordinary in the present case, because a member of the court of appeals was designated to hear it in the district court, and a district judge was designated to sit in the case on appeal to this court. When the same or an amended plan comes back from the Commission, a new judge may be presiding in the district court, and on appeal it may be heard before the court en banc. The circuit judge below said that ordinarily his conclusion would be premature but “the atmosphere” of the trial and the “feeling manifested” satisfied him absolutely that there would be no material change. In a matter of statutory procedure, where nice distinctions are drawn between the judicial functions of the court and the administrative powers of the Commission, it cannot be considered a waste of time to follow strictly the provision which provides that the plan, if approved, shall then be submitted by the Commission to the creditors of each class. There is no provision of law for the court or judge to submit the plan to the creditors or to give any consideration before the vote is taken to how the creditors will vote on it. The best rule for any court, trial or appellate, is to decide the issues presented to it and to decide nothing more than is necessary to dispose of the case. Dictum should be avoided and forecasts discountenanced.
Another misconception evidenced by the opinion of the court below was that the rights of these creditors were comparable to the rights of bondholders in a receivership proceeding. The statement is made that such bondholders had the right to a decree of foreclosure and a judicial sale of the railroad property, accompanied by the right to bid for the property if they wished. This statement is followed by the assertion that in equity the property belongs to the refunding bondholders who practically replace the stockholders as owners and naturally, on a reorganization, would receive the common stock pro rata. It is conceded that each of the bondholders took all of the rights of his vendor, and that the debtor owes the full amount of principal and interest due on each bond; but the bondholders are not entitled, as a matter of right, to a public sale of the property or to take over and run the railroad. They have the right to the fair value or equitable equivalent of the railroad’s property, tangible and intangible, but the Commission is the sole judge of such values, and its findings are binding on the court if supported by substantial evidence. The statute provides that, if it shall be necessary to determine the value of any property for any purpose, the Commission shall determine such value and certify the same to the court in its report on the plan. 11 U. S.C.A. 205, sub. e.
Finally, when a railroad corporation files a petition for reorganization under said Section 77, it voluntarily submits all of its assets and liabilities to the jurisdiction of the bankruptcy court; but it remains a legal entity, and does not lose its corporate identity. Creditors do not become stockholders, but remain creditors, with their liens and priority rights preserved. There is no applicable constitutional prohibition against impairing the obligations of contracts. One of the very objects of the bankruptcy proceedings is to impair the obligation of contracts within the limits of the Fifth Amendment. The lower court refers to the original rights of bondholders to a receivership and a judicial sale, including the right to bid in the property if they wish; but, as we have noted, secured creditors in bankruptcy have no such rights, especially in railroad reorganizations where the property in custody of the court is affected with a public interest. In ordinary bankruptcy, the court may permit the trustee to abandon property that is mortgaged beyond its value, but Section 77 does not contemplate any such thing with reference to railroad property. In railroad reorganizations, creditors must be protected to the extent of the value of the property covered by their lien, and absolute priorities must be preserved; but beyond that the public interest is the principal thing to be considered; and, therefore, it is for the Commission, skilled in dealing with going railroads, to work out essentially business problems affecting them. The functions of the court, in approving or reject*548ing a plan, are purely judicial. The delegated power of the Commission in devising and proposing the plan is legislative, executive, and quasi-judicial. The greatest tribute that can be paid to the federal courts is that they do not seek to extend their jurisdiction by usurpation. Cf. Rose on Federal Jurisdiction (2nd Ed.), Section 16, p. 21.
In Palmer v. Massachusetts, 308 U.S. 79, at page 86, 60 S.Ct. 34, at page 37, 84 L. Ed. 93, the court said: “Until the amendment of March 3, 1933, railroads were outside the Bankruptcy Act. But the long history of federal railroad receiverships, with the conflicts they frequently engendered between the federal courts and the public, left an enduring conviction that a railroad was not like an ordinary insolvent estate. Also an insolvent railroad, it was realized, required the oversight of agencies specially charged with the public interest represented by the transportation system. Indeed, when, in the depth of the depression, legislation was deemed urgent to meet the grave crisis confronting the railroads, there was a strong sentiment in Congress to withdraw from the courts control over insolvent railroads and lodge it with the Interstate Commerce Commission. Congress stopped short of this remedy. But the whole scheme of § 77 leaves no doubt that Congress did not mean to grant to the district courts the same scope as to bankrupt roads that they may have in dealing with other bankrupt estates.”
The court further said that about one-fourth of the railroad mileage of the country was in bankruptcy, which included lines in twenty-nine states, and that it had become “the settled social policy both of the states and the nation to entrust the type of public interest here in question to expert administrative agencies because of ‘the notion’, as Judge Learned Hand pointed out below, ‘that a judge is not qualified for such duties.’ ”
See also R. F. C. v. Denver & R. G. W. R. Co., 328 U.S. 495, 66 S.Ct. 1282, 1384, 90 L.Ed. 1400, wherein the plan was approved although a majority of the general mortgage bondholders voted against it.