The opinion of the court was delivered by: KNIGHT
This is a proceeding to determine whether the Plan of Reorganization of International Railway Company, Debtor, as amended, proposed by the Trustees, John W. Van Allen and Henry W. Keitzel, should be approved as fair, equitable and feasible and as complying with the provisions of Section 216 of the Bankruptcy Act, 11 U.S.C.A. § 616.
This plan has been developed as a result of the efforts during the past two years of the Trustees and representatives of the bondholders and of the accident claimants. It has been the subject of extensive hearings before this Court during the past eight months. It has been approved by the Public Service Commission of the State of New York. The Securities and Exchange Commission recommends approval of the Plan with the addition of the amendment hereinafter discussed. The Interstate Commerce Commission has considered the Plan and offers no objections. The Bureau of Internal Revenue advises that it will recommend the Plan to the Secretary of the Treasury of the United States.
The Plan provides for a reorganized Company to be owned solely by those who are now bondholders or other creditors of the Debtor. With the purchase of the 300 new buses recently ordered, the reorganized Company will have assets of approximately $ 14,000,000. It will have a net worth according to its books of approximately $ 5,000,000. Of the $ 14,000,000 of assets over $ 8,000,000 will be represented by new buses purchased within three years. The new equipment will permit the Reorganized Company to render excellent service to the public and to operate efficiently and profitably. The Reorganized Company will have a sound capitalization. It will have only one class of stock. Its major indebtedness will consist of equipment obligations payable over a period of years at interest rates varying from 2 3/4 % to 4% per annum. It will have a new Board of Directors. The former control of the so-called 'Robinson' interests which, prior to July 28, 1947, had existed for thirty years will be eliminated.
The distribution of the securities of the Reorganized Company gives effect to the rights of the various classes of creditors. The participation accorded bondholders and accident claimants was the result of extensive negotiations between representatives of these groups and a compromise of their differences with the thought that a prompt reorganization rather than extensive litigation would be in the best interest of all concerned. Approval of this method of arriving at the participation to be accorded each group of creditors has been expressed by the United States Supreme Court. Case v. Los Angeles Lumber Products Co., Ltd., 308 U.S. 106, 130, 60 S. Ct. 1, 84 L. Ed. 110.
Evidence introduced at the hearings on the Plan is to the effect that with the new buses recently ordered the earnings of the Reorganized Company will support the securities to be issued by it. This evidence was based on the existing rates of fare which are considerably lower than the rates charged in many other major cities.
I am satisfied and find that the Plan is fair, equitable and feasible and have approved the Plan as complying with the provisions of Section 216 of the Bankruptcy Act, and directed that the Plan be submitted to creditors.
The petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., was filed by the International Railway Company on July 28, 1947. For many years prior to July 28, 1947 the Public Service Commission of the State of New York and others urged the reorganization of International Railway Company on the ground that it was insolvent and because of insolvency could not render adequate service. In March of 1947 the Legislature of the State of New York amended the Public Service Law of the state, Consol. Laws, c. 48, § 119, to authorize the Public Service Commission to direct the officers of an insolvent public utility to file a petition for reorganization under Chapter X. Following the enactment of this Act the Public Service Commission initiated proceedings to force the officers on International Railway Company to file such a petition. These proceedings were opposed by the Company. In the meantime, because of operating losses the International Railway Company had sought rate increases from the Public Service Commission. In July of 1947 the Public Service Commission authorized an increase in rates of fare on conditions which the International Railway Company could not meet. Faced with this situation the International Railway Company capitulated and on July 28, 1947 filed a petition for reorganization under Chapter X of the Bankruptcy Act.
The first objective of the Commission and others had then been accomplished and the jurisdiction of this Court had been invoked for the purpose of effecting a reorganization of International Railway Company under and in accordance with the federal laws relating to bankruptcy.
The present preferred and common stockholders of International Railway Company can and will receive nothing for their stock as the company is insolvent. This leaves two major groups interested in the reorganization, the riding public and the creditors, including bondholders, accident claimants and the City of Buffalo. The riding public must be considered because they will be the customers of the Reorganized Company and no company can succeed without the good service at reasonable rates. On the other hand, the interest of creditors, including bondholders, accident claimants and the City of Buffalo, must also be considered in any reorganization because they are the real owners of the property.
At the time the petition for reorganization was filed on July 28, 1947, the outlook for the creditors and for the riding public was a dismal one. Operations for the previous six months had been at a loss of more than $ 235,000 before depreciation, retirements, provisions for rail removal and bond interest. After all charges, the loss for the six months' period had been approximately $ 1,000,000. Current operations were at an even greater loss, for wage increases had been granted effective July 1, 1947 which would increase labor costs by approximately $ 600,000 per year. A substantial portion of the purchase price of 71 new buses which had been delivered late in 1946 and early 1947 was to become due within the next ten months and had to be refinanced if the buses were to be retained in service. Fifty additional buses had been ordered for delivery in the fall of 1947 at a cost of approximately $ 760,000, for which funds were not available. The acknowledged liabilities of the International Railway Company, exclusive of capital stock and reserves, were in excess of $ 15,000,000 as compared with assets carried on its books at a value of approximately $ 10,000,000. In addition there were approximately 1,500 claims for wrongful death or injuries to person or property. These were carried on the books at approximately $ 700,000 but the total amount claimed was over $ 7,500,000. The International Railway Company was under obligation to the City of Buffalo to substitute motor vehicles on the eight streetcar lines then operated in the City of Buffalo and to remove the rails and resurface the track area. The International Railway Company was operating streetcars built in the years 1912-1918, some old gas-electric buses approximately twenty years of age, and a large number of small buses approximately ten years of age. This old equipment and the small buses were the subject of severe criticism by the public and the Public Service Commission and were expensive to operate. The cost of substituting buses for streetcars, of removing the rails and resurfacing the track area and of substituting new and larger buses for the 15-passenger buses was estimated at $ 9,000,000 to $ 10,000,000. Rates of fare were inadequate but the Public Service Commission was adamant that there should be no increase in rates of fare without an improvement in service through the purchase of new and modern equipment.
To remedy this situation four major steps had to be taken: The first step was the purchase of new equipment. The purchase of new equipment would increase riding and would result in a material saving in operating expenses. It would meet one of the major conditions imposed by the Public Service Commission for an increase in rates of fare. The second step was the refinancing over a period of years of the maturing equipment obligations on buses recently purchased. The third step was an increase in rates of fare. From June 30, 1945 to July 1, 1947 labor costs alone had increased about $ 2,500,000 per year and in addition there had been a substantial increase in the cost of materials and supplies. No company could absorb these increases in cost without an increase in the rates of fare. The last step was the elimination of excessive debt. The International Railway Company since its inception had been plagued by too much indebtedness. The position of the bondholders and the general creditors had to be shifted from that of creditors to that of stockholders if a sound reorganized company were to result from these proceedings.
Two years have elapsed since July 28, 1947, and through the efforts of the Trustees and the cooperation of the Public Service Commission, the Securities and Exchange Commission and representative of the various classes of creditors, the outlook for the riding public and for creditors has improved materially. Operations for the first three months of this year showed a profit before depreciation of approximately $ 168,000. The 50 buses ordered for delivery in the fall of 1947 were purchased and 85% of the purchase price financed over a period of six years at an interest rate of 2 3/4 % per annum. 100 additional new buses were purchased in the fall of 1947 and additional new buses were purchased in the fall of 1947 and the spring of 1948 and 75% of the purchase price financed over a period of six years at an interest rate of 3% per annum. The $ 620,000 becoming due in 1948 on the 71 buses previously purchased by the International Railway Company was refinanced over a period of five years at an interest rate of 2 3/4 % per annum. Rate increases were granted by the Public Service Commission which were estimated to increase revenues by approximately $ 2,000,000 per year. Buses were substituted for streetcars on two of the eight streetcar lines in the City of Buffalo. Orders have recently been placed for 300 additional new buses in order to permit the substitution of buses on the remaining streetcar lines in the City of Buffalo and also to replace the 25-passenger buses which cannot be economically operated. It is estimated that the purchase of these new buses will increase earnings by approximately $ 2,000,000 per years. Arrangements for the financing of the purchase price of these buses have been made with the Metropolitan Life Insurance Company on the basis of payment by the Trustees or the Reorganized Company of 10% of the purchase price at the time of delivery and the balance over a period of six years with interest at the rate of 4% per annum. With the purchase of this new equipment $ 8,600,000 will have been spent for new equipment within the past three years and 70% of the seats offered to the public by the Reorganized Company will be on buses purchased within three years. To complete the picture, a plan of reorganization has been developed which has been found to be in the interest of the public and of creditors.
In spite of the complexities of the situation, the Trustees' Plan of Reorganization is a relatively simple one. The Reorganized Company is to carry on the passenger transportation business of the International Railway Company. The international toll bridge, the freight line and other properties not useful in such business are to be sold and the proceeds of the sale applied on the purchase price of new equipment. The Reorganized Company is to issue 325,000 shares of capital stock and these are to be distributed to bondholders and general creditors.
There are five major groups of creditors. The holders of Refunding bonds, the holders of Buffalo Traction bonds, the holders of bus accident claims, the holders of streetcar accident claims and the City of ...