Rfc v. Denver & Rio Grand Western R. Co., 328 U.S. 495 (1946)
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Reconstruction Finance Corporation v.
Denver & Rio Grande Western Railroad Co.
No. 278
Argued March 5, 6, 1946
Decided June 10, 1946 *
328 U.S. 495
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE TENTH CIRCUIT
Syllabus
During lengthy proceedings for the reorganization of a railroad under § 77 of the Bankruptcy Act, it realized abnormally large earnings from war business. Most of these earnings were utilized to make capital improvements, and a large amount was held as free cash. Meanwhile, the claims of secured creditors were increased substantially by the accumulation of interest and the position of holders of general mortgage bonds (the most junior lien holders) deteriorated 90%. The Interstate Commerce Commission approved a plan of reorganization which eliminated the claims of all existing stockholders and unsecured creditors, gave the holders of general mortgage bonds new common stock in face amount of 10% of their claims, and gave senior bondholders new securities (including about 88% of the new common stock) having an aggregate face value equal to 100% of their claims. This was based upon a determination that the aggregate of the securities in the plan represented the value of the properties for reorganization purposes, and that, through prospective earnings, there was adequate coverage for the charges. The large accumulation of free cash was not distributed. The plan was approved by the District Court and accepted by all creditors entitled to vote except the holders of general mortgage bonds. The District Court held that the latter’s rejection of the plan was not "reasonably justified," and confirmed the plan.
Held:
1. The orders of the District Court approving and confirming the plan are affirmed. P. 536.
2. Under § 77 of the Bankruptcy Act, the experience and judgment of the Commission must be relied upon for final determinations of value and of matters affecting the public interest, subject to judicial review to assure compliance with constitutional and statutory requirements. Ecker v. Western Pacific R. Co., 318 U.S. 448; Group of Investors v. Milwaukee R. Co., 318 U.S. 523. P. 508.
3. The Courts are empowered to review the plan to determine whether the Commission has followed the statutory mandates of § 77(e) and had material evidence to support its conclusions. Id. P. 509.
4. The congressional authorization for the Commission to eliminate valueless claims from participation in reorganization is a valid exercise of the federal bankruptcy power. Id. P. 509.
5. The Commission’s judgment that the earning prospect did not justify a greater capitalization than the one given is controlling. P. 515.
6. It was not required to add, and would not be justified in adding, to the capitalized value the amount of expenditures for improvements made during the reorganization proceedings if, in the exercise of sound discretion, it felt that the reasonable prospective earnings of the road, after the improvements, did not justify it. P. 515.
7. There was ample evidence to justify the valuation made by the Commission. Pp. 512-516.
8. The valuation having been based on earnings, the segregation of the system earnings to each existing lien and the allocation of new securities representing the system value to each class of claimants, was in full accord with the principle that senior creditors are to retain their relative priority of position in a reorganization. P. 517.
9. Junior claims can receive nothing until senior claims receive securities of a value equal to their indebtedness. P. 517.
10. When the Commission made its allocations of securities, it did not find that the cash value of those awarded senior claimants equalled the face value of their claims, and it definitely had in mind that one thing that gave them compensation for the admission of junior claimants to participation in securities before the seniors obtained full cash payment was their chance to share in the unlimited dividends that might be earned and paid on the common stock in the "lush years," thus taking into account the abnormal earnings during the war. P. 518.
11. The improved physical condition of the road through expenditures of the trustees for previously deferred maintenance, improvements, and new equipment necessarily entered into the Commission’s valuation of the property. P. 518.
12. That the creditors who received common stock to make them whole obtained with it an interest in all cash on hand or that might be accumulated was an important factor in the allocation of the new securities. Pp. 518-519.
13. The senior creditors having accepted the plan as fair and equitable as between themselves, if the method and result of valuation are sound, the allocation of 10% of their claim in common stock to the junior creditors follows as a matter of computation. P. 519.
14. The objection of a stockholder to a voting trust for future control of the debtor is ineffective, because the stockholder was eliminated from the reorganization by the valuation of the property and allocation of securities. P. 520.
15. The Commission’s action in fixing the effective date of the plan as January 1, 1943, was within its power. P. 521.
16. Assuming that the courts may set aside a plan which was fair and equitable when adopted by the Commission merely on account of subsequent changes in economic conditions, they should not do so when the changes are of the kind that were envisaged and considered by the Commission in its deliberations upon, or explanations of, the plan. Pp. 521-522.
17. It would be erroneous to assume that the senior bondholders were paid in full by the securities allotted to them without also accepting the Commission’s determination that the assets represented as of the effective date, and all subsequent earnings, were a part also of the common stock that was awarded to them, since the opportunity to participate in war earnings and in the accumulations of cash beyond operating fund needs was part of their compensation for their loss of position. Pp. 522-524.
18. When common stock is issued in partial satisfaction of the claims of senior creditors and a reduction of senior capital takes place after the adoption of the plan by the use of anticipated earnings or existing cash, there can be no corresponding readjustment of junior participation; because assets in the balance sheet at the adoption of the plan and subsequent earnings are for the benefit of stockholders in the new company, the senior claimants, so that they may be compensated through these common stock advantages for their loss of payment in full in cash. Pp. 524-525.
19. The settled rule in bankruptcy proceedings that a creditor secured by the property of others need not deduct the value of that collateral or its proceeds in proving his debt is applicable in proceedings under § 77. P. 529.
20. A provision in a plan of reorganization that the trustee under a certain bond issue secured in part by a lien on stock owned by a third party shall be permitted to obtain the release of the equities in the stock and distribute it among the bondholders or to enforce its rights as pledgee of the stock and distribute the proceeds to the bondholders did not change or affect existing rights in the stock, and those rights remained subject to judicial determination. Therefore, it could not result in the holders of the bonds secured thereby receiving more than they were entitled to, nor deprive the holders of a junior lien on the stock of any of their rights, even though the Commission made no definite finding as to the value of the stock and the holders of the senior lien on the stock may have been fully compensated by other provisions of the plan. Pp. 525-531.
21. The provisions of § 77(e) for confirmation of a plan of reorganization over the creditors’ objection, if the reviewing court finds that it makes "adequate provision for fair and equitable treatment" of those rejecting it, that their rejection is not "reasonably justified" and that the plan complies with the requirements of the section, are within the bankruptcy powers of Congress. P. 533.
22. The finding of the District Court that the plan made "adequate provision for fair and equitable treatment" of the dissenters, as of its effective date, was justified. P. 533.
23. In view of the District Court’s familiarity with the reorganization, this finding has especial weight with this Court. P. 533.
24. The rejection of the plan by the holders of general mortgage bonds was not "reasonably justified" within the meaning of § 77(e). Pp. 533-535.
25. It is the duty of the Commission to plan reorganizations with an eye to the public interest, as well as the private welfare of creditors and stockholders. P. 535.
26. The public interest in an efficient transportation system justifies the Commission’s requirements for reasonable maintenance and improvements of the properties and for a capitalization with fair prospects for dividends on all classes of securities. P. 536.
150 F.2d 28, reversed.
The Interstate Commerce Commission approved a plan of reorganization of a railroad under § 77 of the Bankruptcy Act. 254 I.C.C. 349. The District Court approved it. C.C.H. Bankruptcy Law Service 54,562. All creditors entitled to vote accepted the plan except holders of the general mortgage bonds. The District Court held that the latter’s rejection of the plan was not "reasonably justified," and confirmed the plan. 62 F.Supp. 384. The Circuit Court of Appeals reversed the District Court and remanded the reorganization proceedings to the Commission for further consideration. 150 F.2d 28. This Court granted certiorari. 326 U.S. 699. The judgment of the Circuit Court of Appeals is reversed; the orders of the District Court approving and confirming the plan are affirmed, and the cause is remanded to the District Court for further proceedings. P. 536.