Before SWAN, AUGUSTUS N. HAND and FRANK, Circuit Judges.
These fifteen appeals have been heard together upon a consolidated record. All of the appellants have appealed from an order of the district court entered March 6, 1944 approving a plan of reorganization for the New York, New Haven & Hartford Railroad Company (hereafter for brevity called "New Haven" or the "debtor") under section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. Three of the appellants, Bank of the Manhattan Company, Rhode Island Hospital National Bank of Providence, and Merchants National Bank of Boston, have appealed also from an order of the district court entered March 13, 1944 classifying creditors and stockholders. The appellants fall into several groups having common interests and raising the same or similar contentions. The issues presented will be discussed as distinct problems in so far as practicable and without necessarily referring to all of the appellants affected by them.
1.Objections to procedure: Numerous appellants complain of the procedure adopted by the district court and the Interstate Commerce Commission with respect to the fourth and fifth supplemental reports of the Commission. Its fourth supplemental report was filed with the court on July 13, 1943. After hearings upon objections to the plan approved by the Commission in its fourth supplemental report the district judge filed an opinion, 54 F.Supp. 595, expressing his approval of it in general but stating that in a few particulars the plan did not comply with legal standards, and indicating certain corrections that should be made. The opinion also invited the Commission, if it saw fit, to file a further supplemental report while the judge was holding the matter under advisement. Acting upon this suggestion the Commission, without further public hearings, filed its fifth supplemental report on February 8, 1944. The court ordered that all objections to the fourth supplemental report should be treated as objections to the fifth, permitted the filing of additional objections and, after hearing all objectors, rendered an opinion approving the plan, 54 F.Supp. 631, and made a formal order of approval.
Appellants urge that upon the certification of a plan by the Commission to the court, section 77, sub. c, 11 U.S.C.A. § 205, sub. e, requires the judge either to approve it or to dismiss the proceedings or to refer them back to the Commission for further action. We do not think that the statute compels a procedure so inelastic. Subdivision d of the section provides that after public hearings the Commission may either approve or refuse to approve any plan, and "may thereafter, upon petition for good cause shown filed within sixty days of the date of its order, and upon further hearings if the Commission shall deem necessary, in a supplemental report and order modify any plan which it has approved, stating the reasons for such modification." Under this provision we cannot doubt that until the court has acted upon the plan certified to it, the Commission has power, upon the timely petition of a party in interest or upon its own motion, to clarify, perfect or modify the plan on the basis of evidence already before it and without further hearings, if it deems such hearings unnecessary. Nor has the Commission doubted its power to render on its own motion a supplemental report modifying a plan previously certified to the court. Chicago Great Western Railroad Company Reorganization, 233 I.C.C. 63, 64; Chicago, Rock Island & Pacific Railway Company Reorganization, 249 I.C.C. 297. In the case at bar the court took under advisement the plan of the Commission's fourth supplemental report; it had entered no order of approval or disapproval before the fifth supplemental report was received. The fact that the court wrote an opinion inviting the filing of a fifth supplemental report and suggesting certain corrections in the plan of the fourth report certainly did not deprive the Commission of its statutory power under subdivision (d) to improve the plan by a supplementary report. We regard it as a commendable instance of "properly coordinated action" between the court and the Commission, the importance of which was noted in Ecker v. Western Pacific R. Corp., 318 U.S. 448, 475, 63 S. Ct. 692, 708, 87 L. Ed. 892.
2. Capitalization and stockholders' equities: Four appellants, namely, the debtor, the Pennsylvania Railroad Company (which owns a large block of the debtor's common stock) and two committees for New Haven stockholders (one representing holders of preferred stock, the other holders of common) complain of approval of the plan because it excludes existing stockholders from any participation therein.
The plan first approved by the Commission in March 1940, on the basis of a record closed in June 1939, fixed the total capitalization of the reorganized debtor at $365,000,000 and found that existing preferred and common stock was worthless. In September 1940 the Commission reopened the record to take further evidence with respect to the reorganization of the Old Colony Railroad, and a supplemental report was made in February 1941, modifying the plan of reorganization but making no change in the total capitalization or in the finding of no value for New Haven stock. This plan the court disapproved in an opinion of December 8, 1941 (unreported) without passing on the new capitalization and the lack of value of existing stock. After further hearings the Commission issued its third and fourth supplemental reports, the latter dated July 13, 1943. The plan approved in the fourth supplemental report reaffirmed the finding of no value for the stockholders' equity and left unchanged the authorized capitalization of the reorganized company, although it decreased the amount of senior securities and increased the amount of common stock to be issued in order to reflect a reduction of about $25,000,000 in the debtor's secured obligations resulting from payments of back interest and matured principal made in December 1942 and April 1943 pursuant to authorization by the court. The Commission's fifth supplemental report filed on February 8, 1944 again made no change in the authorized capitalization or the finding of worthlessness of existing stock. The district judge approved the elimination of stock equities, 54 F.Supp. 631, at page 634 for reasons stated in his opinion discussing the plan approved by the Commission in its fourth supplemental report, 54 F.Supp. 595, at pages 600-603.
Recent opinions of the Supreme Court in the Western Pacific and Milwaukee cases, Ecker v. Western Pacific R. Corp., 318 U.S. 448, 63 S. Ct. 692, 87 L. Ed. 892, and Group of Institutional Investors v. Chicago, M., St. P. & P.R. Co., 318 U.S. 523, 63 S. Ct. 727, 87 L. Ed. 959, make plain that determination of the amount and character of the capitalization of a reorganized railroad and the making of valuations upon which the capitalization depends are functions of the Commission which may be reviewed by the court only to the limited extent of seeing that the Commission has observed legal standards.The district judge found no violations of legal standards; and we agree. It is true that the Commission did not marshal its facts and figures to show just how it reached a capitalization of $365,000,000; but it considered all relevant factors, and the Supreme Court has said that "* * * the lack of a valuation in dollars is immaterial." Western Pacific case, 318 U.S. 448, at page 483, 63 S. Ct. 692, at page 712, 87 L. Ed. 892; see also Milwaukee case, 318 U.S. 523, at page 539, 63 S. Ct. 727, at page 737, 87 L. Ed. 959. Hence there is no merit to the objection that no specific valuation was found for the debtor's rights giving it access to the Grand Central Terminal. As the third supplemental report states, those rights were considered in determining the amount of the new capitalization.
The main complaint of the equity interests is based on the contention that during the pendency of these proceedings there have occurred such reductions in the debtor's secured obligations by reason of payments on account of accrued interest or principal, such increases in its recent earnings,*fn1 and such improvement in the ratio of current assets to current liabilities that the Commission's finding that the existing stock has no value should not be sustained. Each of these factors was considered by the Commission in its fourth supplemental report (254 I.C.C. 405, 406 et seq.), and the conclusion was reached that they did not warrant an increase in the authorized capitalization or a finding of value for existing stock. These were matters for its expert judgment and its conclusions are supported by material evidence. As the Supreme Court recognized in the Milwaukee case, 318 U.S. at page 543, 63 S. Ct. at page 739, 87 L. Ed. 959, war-time earnings are not a reliable criterion for establishing the financial structure which is to serve the reorganized railroad for an indefinite future. Having established the capitalization at $365,000,000, the fourth supplemental report demonstrates that the existing stock had no value on June 30, 1943 by estimating the secured claims as of that date at $274,040,694 and the unsecured claims, without interest, at $104,582,706. The district judge was therefore justified in affirming the Commission's finding that "at the time of the finding the equity of * * * stockholders has no value," section 77, sub. e.
It is true that the district court has power to determine whether changed circumstances require that the plan be referred back to the Commission for reconsideration. Milwaukee case, 318 U.S. at page 542, 63 S. Ct. at page 739, 87 L. Ed. 959. But the judge's opinion, 54 F.Supp. at page 603, found that the objecting stockholders had not carried the burden of showing that subsequent events make necessary a rejection of the Commission's plan. Nor are we convinced, despite the large current assets (including cash) which the debtor has built up, that earnings subsequent to June 30, 1943 have already or certainly will produce an increase in assets and a reduction in debt sufficient to create an equity value in the stock. It is for the informed judgment of the Commission rather than for the courts to determine the sufficiency of any cash reserve to meet the uncertainties ahead. Consequently we find no error in the district court's refusal either to recommit the plan to the Commission, or to delay reorganization until the probable extent and duration of war earnings can be more accurately determined, or to issue stock warrants to represent an equity which may develop in the future but does not presently exist. Similar contentions were rejected in the Western Pacific and Milwaukee cases, supra. See also Interstate Commerce Commission v. Jersey City, 322 U.S. 503, 517, 64 S. Ct. 1129.
Finally it is urged that the judge's opinion, 54 F.Supp. at page 603, shows that he formed no independent judgment as to the correctness of the Commission's finding that the equity of the stockholders has no value, and that such an abdication of the statutory duty imposed upon the judge by § 77, sub. e, constitutes in itself reversible error. Appellants rely upon the statement in the Western Pacific case, 318 U.S. at page 478, 63 S. Ct. at page 710, 87 L. Ed. 892, that "The specificity of the direction for reexamination of the Commission's action points to a wider scope of review than an inquiry as to whether statutory standards for valuation have been followed." But the paragraph in which this sentence appears, when read as a whole, fully justifies, in our opinion, the limited inquiry made by the judge in the case at bar where the excess of obligations over authorized new capitalization required merely a mathematical calculation.
For the foregoing reasons we affirm the order in so far as the stockholder interests are concerned but we do so without prejudice to the right of the Commission, if it sees fit, to reconsider the plan in the light of changes in the circumstances of the debtor in respect to increase of assets or reduction of debts which have occurred or may occur before the plan is finally approved by the district court.
3. Housatonic 5% bonds: A committee for holders of 5% fifty year consolidated gold bonds of Housatonic Railroad Company have appealed from approval of the provisions of the plan with respect to these bonds. The principal amount outstanding is $2,819,000; they matured November 1, 1937; interest has been paid by the New Haven trustees as it has accrued and presumably will continue to be paid until consummation of the reorganization. The plan gives them 100 per cent. face value of new first and refunding bonds bearing 4 per cent, interest and maturing in the year 2003. They ask to be paid in cash, and argue that the plan is not fair and equitable as to them in view of the treatment accorded other bond issues less well secured and the payment in cash of certain other secured debts.
The first problem is whether the district court erred as a matter of law in basing its approval on the Commission's findings instead of making independent findings that the plan is fair and equitable, affords due recognition to each class of creditors, does not discriminate unfairly in favor of any class of creditors, and will conform to the requirements of the law of the land regarding the participation of the various classes of creditors. In its third supplemental report, 254 I.C.C. 63, 75, the Commission found that "the new fixed-interest bonds have elements of value which compensate for any comparatively unfavorable features and that they will constitute a fair and equitable equivalent for the Housatonic bonds." Considering himself bound to accept the Commission's finding of equivalence between the new bonds and the old, if supported by evidence and in accord with legal standards, the judge confined his inquiry to these two questions; and having answered them in the affirmative, he found "upon that authentic premise" that the plan was fair and equitable as to Housatonic bondholders. In so limiting his review the judge thought he was following the rule laid down in the Western Pacific case, 318 U.S. 448, 63 S. Ct. 692, 87 L. Ed. 892. This interpretation of the majority opinion appears to be the same as Mr. Justice Roberts put upon it, as is shown by his concurring opinion at page 514 of 318 U.S., at page 726 of 63 S. Ct., which expresses his own view that th statute contemplated independent findings by the court as to the equity and fairness "of rights accorded under the plan in relation to those theretofore enjoyed." We do not read the Milwaukee case, 318 U.S. 523, 63 S. Ct. 727, 87 L. Ed. 959, as modifying the rule of the ...