# In Re Jartran, Inc.

> United States Bankruptcy Court, N.D. Illinois · September 29, 1984 · 44 B.R. 331

URL: https://www.frixlaw.com/law-library/cases/1969284

## Case

- **Full name:** In Re JARTRAN, INC., Debtor
- **Court:** United States Bankruptcy Court, N.D. Illinois
- **Decided:** September 29, 1984
- **Citations:** 44 B.R. 331; 1984 Bankr. LEXIS 4909
- **Precedential status:** Published
- **Opinion:** Opinion by Fisher
- **Judges:** Lawrence Fisher
- **Cited by:** 42 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1969284

## How later opinions describe it (automated extraction)

- holding that “the realization of the tax savings [from use of NOLs] is subject to a number of contingencies, including continuation in effect of relevant tax provisions, potential challenge under section 269 of the Internal Revenue Code, and possible recapture of the benefits …
- holding that “the purpose and intended goal of § 1122(b) is the reduction of administrative costs accomplished by reducing the number of claims to be dealt with postpetition”

## Opinion text

ORDER
LAWRENCE FISHER, Bankruptcy Judge.
This matter coming before the Court at the hearing on confirmation of Debtor’s-Fifth Amended Plan of Reorganization, thrice modified, and upon certain other matters arising in connection therewith, including,
inter alia,
the Joint Application for Approval of Settlement filed by Debtor and others, the Application of Debenture-holders for Leave to Amend their Ballots to Vote in Favor of Confirmation of Debtor’s Plan of Reorganization, and the Motion for Summary Denial of Confirmation filed by U-HAUL INTERNATIONAL, INC. (“U-Haul”), and
The Court having examined the pleadings filed in this matter, and having received and examined the evidence adduced, and having heard the testimony of witnesses and arguments of counsel, and having received and examined memoranda of the parties in support of their respective positions, and the Court being fully advised in the premises;
The Court Finds:
1. Debtor, JARTRAN, INC. (“Jartran”), is engaged in the one-way and local rental
*338
of trucks and utility trailers, operating through a nationwide network of approximately 2,000 independent dealer agents. Its customers are primarily consumers, although Debtor provides contract carriage and other services for industrial and commercial firms through its wholly-owned subsidiary, Engineered Transport Services, Inc. (“ETS”). ETS is not a debtor in this or any other case under title 11.
Debtor’s executive offices are located in Florida, and it maintains division and regional operations management facilities in nineteen states. In the intercity one-way rental of trucks to consumers, Debtor competes principally with three other national firms, U-Haul, Ryder Systems, Inc. (RSI), and Hertz Corporation. U-Haul’s share of this market at least 60%, RSI’s is almost 20%, Jartran’s is close to 10%, and Hertz Corporation’s is approximately 5%. Jar-tran’s only competitor in the nationwide, one-way rental of trailers is U-Haul, which controls approximately 90% of this market. In addition, Debtor competes in local markets, not only with U-Haul, RSI, and Hertz, but also with local companies.
The truck rental industry and corresponding market share depend upon a nationwide distributorship system having available and well-maintained equipment. Consequently, it is an industry with high entry barriers, requiring thousands of units of high-priced equipment and the establishment of a well-organized distribution system providing adequate equipment servicing and pick-up and drop-off facilities.
Jartran was organized as a Florida corporation by James A. Ryder (“Ryder”) in August, 1978
1
but had no significant operations until the latter part of 1979. As of January, 1984, Debtor’s fleet consisted of approximately 10,800 trucks and 18,700 trailers. All of Debtor’s vehicles are either leased from Fruehauf Corporation (“Frue-hauf”) or purchased and financed on a secured basis with Fruehauf, Chrysler Credit Corporation (“Chrysler”), or Ford Motor Credit Company (“Ford”).
Debtor is currently involved in a number of important and complex litigations which affect its operations and potential for reorganization in this case. These suits include one filed by Jartran in September, 1980 against U-Haul and others in the United States District Court for the Southern District of Florida, entitled
Jartran, Inc. v. L. Samuel Shoen, et al.,
No. 80-2460 CIV WMH (the “Miami suit”). In the Miami suit, Debtor alleges that the defendants participated in predatory, monopolistic, and conspiratorial acts to impede Debtor’s entry into the household truck and trailer rental markets, to damage Debtor’s operations, and to drive Debtor out of business; that U-Haul abused its monopoly position in the truck and trailer rental markets by engaging in pricing practices injurious to Debtor and by interfering with Debtor’s dealer agents; and that U-Haul engaged in systematic disparagement and libel of Debtor. The Miami suit seeks injunctive relief and $10,000,000 in compensatory damages. The action is not yet ready for trial.
Also in 1980, U-Haul filed an action in the United States District Court for the District of Arizona, entitled
U-Haul International, Inc. v. Jartran, Inc., et al.,
No. CIV 80-454-PHX-EHC (the “Phoenix suit”). In the Phoenix suit, U-Haul alleges that Debtor, in connection with an advertising campaign conducted in 1979 and 1980, engaged in false advertising, disparagement of U-Haul, wrongful interference with U-Haul’s prospective business advantage, and unfair competition. U-Haul seeks up to $375,000,000 in damages and preliminary and permanent injunctive relief. In February, 1981, U-Haul’s motion for a preliminary injunction relating to Jar-tran’s advertising practices was granted, which ruling was upheld on appeal by the United States Court of Appeals for the Ninth Circuit in July, 1982. The trial has
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been concluded, and the district court has the matter under advisement.
2. Soon after Jartran commenced operations, its massive debt service requirements depleted working capital, and Debtor’s principals initiated efforts to obtain additional funds. As part of these efforts, an offering document was prepared and utilized in the solicitation of prospective investors. Over fifty individuals and entities were contacted in 1980 and 1981, in connection not only with capital infusion proposals but also potential stock acquisitions. Except for the deal ultimately consummated with Frank B. Hall & Co., Inc. (“Hall”), discussed below, these efforts to obtain financing were unsuccessful. The only capital obtained was in the amount of $250,000 from Roy Carver, Chief Executive Officer of Band Aid Corporation.
2
One of the companies contacted during this period was Ameribond Securities Associates (“Ameribond”). Ameribond’s managing partner, Stanley Cheslock, Jr., learned of Debtor’s marketing efforts in March of 1981. He met with Jartran representatives, reviewed their offering document, and discussed plans for restructuring the company’s debt. According to Mr. Cheslock’s testimony, offered by U-Haul at the confirmation hearings held herein, Debtor was seeking additional capital of about $5,000,000.
On or about April 21, 1981, Debtor and Ameribond executed a letter of intent pursuant to which Ameribond was engaged by Jartran for the purpose of securing additional capital and working out a debt restructuring arrangement. The letter of intent proposed a capital infusion of $20,000,-000 in exchange for a 55% ownership interest in Jartran, after giving effect to conversion of all outstanding convertible debt, exercise of options, and other similar rights. The 55% interest was equivalent to an interest of 80% or more on an undiluted basis.
In accordance with this arrangement, Ameribond initiated efforts to find investors for Jartran. Mr. Cheslock testified that Touche, Ross & Company was engaged to make an evaluation of Debtor’s viability, which evaluation was prepared in report form by Touche, Ross and paid for by Debtor.
3
This report was circulated, along with a document prepared by Ameri-bond and describing,
inter alia,
Jartran’s business plan and financial history, to various potential investors, including Hall.
Subsequently, Ameribond arranged a meeting with Jartran’s major secured creditors for September 1, 1981. In anticipation of that meeting, Ameribond contacted and invited all the individuals and entities considered to be prime prospects for investment in Jartran. Only two of those potential investors attended the meeting, Hall and one other firm.
According to Mr. Cheslock’s testimony, he made a commitment at the September 1st meeting on behalf of Ameribond and its primary partner, The Securities Groups, to supply $20,000,000 in capital considered by Ameribond as necessary to a restructuring arrangement. Hall did not participate in the commitment. Thereafter, Mr. Cheslock delivered to the creditors what he referred to as a “firm commitment” in writing, dated September 11, 1981, wherein he stated that Ameribond and its partners were committing to provide Jartran with $20,000,000 in capital “[sjubject to satisfactory resolution of th[e] debt restructuring.”
The proposed resolution .of Jartran’s debt restructuring upon which this commitment was conditioned was the subject of a mid-September, 1981 meeting between Cheslock and representatives of Jartran and the major secured creditors. At that meeting, they reviewed a proposed restructuring plan prepared by Cheslock in concert with
*340
Jartran representatives, which plan had been sent to the creditors along with the September 11, 1981 commitment letter. Mr. Cheslock testified that an agreement in principle was reached at that meeting with regard to the proposed debt restructuring plan. According to Mr. Cheslock, the agreement was a verbal understanding, later documented. No such documents were produced, however, or offered into evidence. Counsel for U-Haul, when asked by the Court about the documents, stated for the record that he thought he had them but did not consider them “... necessary ... to go forward.” He then asked Mr. Cheslock, “[I]n your mind, did you reach an agreement at your mid-September meeting in 1981?” Mr. Cheslock responded affirmatively.
Mr. Cheslock further testified that toward the end of September, 1981, he learned of an attempted take-over of Hall by RSI and again contacted Hall concerning possible acquisition of stock in Jartran. When asked why he would have considered selling part of his participation to Hall, he responded in part, “Basically, we were just leveraging our own position.” Several meetings were then held with Hall representatives. According to Mr. Cheslock, Hall expressed an interest in acquiring Jar-tran stock, but at the time of Mr. Ches-lock’s departure for a vacation in Italy on September 29, 1981, Hall had as yet made no commitment to Cheslock with respect to such a stock acquisition.
While in Europe, Mr. Cheslock learned of negotiations between Hall and Jartran and telexed a message to his chief financial officer, Bernie Hubert. In the telex, Mr. Cheslock authorized Hubert, on behalf of Cheslock and Ameribond, to execute and deliver a letter of intent “... as previously discussed, including a provision permitting Ameribond to furnish $20,000,000 equity to Jartran.” Cheslock testified that he then returned from his vacation and took steps to reaffirm his position with Jartran and the secured creditors. Thereafter, he entered into negotiations with Hall to jointly acquire an interest in Jartran. He stated that a joint acquisition “... was suggested by the people at Jartran and agreed to by us and the Frank B. Hall people.”
The joint acquisition never came to fruition, and Hall ultimately acquired 92% of Jartran stock issued and outstanding, as discussed below. When asked why the joint efforts failed, Mr. Cheslock stated that he and his participants “stepped aside” temporarily so that the deal could close by December 31, 1981 and the value of Jar-tran’s net operating losses could be preserved. James A. Ryder, director and former majority shareholder of Jartran, was asked during his testimony at the confirmation hearings held herein why the Ameri-bond negotiations failed. He explained that “[t]hey never came up with a definite deal.”
3. On December 31, 1981, Hall entered into a series of agreements (the “December 31 transaction”), pursuant to which,
inter alia,
it acquired 3,682,643 shares of common stock in Jartran. Of the shares so acquired, 3,595,043 were purchased from Ryder and 87,600 from five Jartran executives, viz., Walter LeMasurier (“LeMasurier”), Arnold Braun (“Braun”), Steven Lowe (“Lowe”), Vincent Scarano (“Scarano”), and Charles Stiller (“Stiller”). Hall agreed to pay the five named executives $1.00 per share thirty days after confirmation of a “Successful Plan”. A Successful Plan was defined as a plan of reorganization pursuant to which Hall obtains at least 80% of the outstanding voting stock in Jartran and Ryder obtains releases from all guarantees of Jartran indebtedness entered into by Ryder or James A. Ryder Corporation (“Ryder Corporation”), except to the extent such releases are waived. On the date of the stock acquisition, the five named executives entered into employment agreements with Debtor, compensation thereunder being guaranteed by Hall. Debtor has rejected the employment agreements pursuant to Court approval.
The “Stock Purchase Agreement” executed by Ryder and Hall on December 31, 1981 provided an aggregate purchase price of $100 for the 3,595,043 shares acquired
*341
by Hall from Ryder. Previously, JAR Corporation owned the stock of Jartran, and Ryder owned the stock of JAR Corporation. As part of the Hall acquisition transaction, JAR Corporation was merged into Jartran and Ryder thereby acquired his Jartran stock.
Ryder, Jartran, and Hall also entered into a “Consulting Agreement”, pursuant to which Jartran hired Ryder as a consultant for a term beginning January 1, 1982 and ending December 31, 1991. The Consulting Agreement obligates Ryder to devote 70% of his business time and attention to the performance of his duties as consultant and to promoting Debtor’s best interests. In consideration of the performance of such services, Ryder is to receive “Base Salary” of $100,000 per year, payable biweekly, plus fringe benefits customarily afforded to executive officers of Jartran. The Consulting Agreement also contains a covenant by Ryder not to compete with Debtor, for which Debtor is to pay Ryder “Non-Competition Compensation” of $25,-000 quarterly, payable at the end of each calendar quarter for a period of ten years commencing March 31, 1982.
According to the agreement, Jartran is obligated to continue to pay Base Salary and Non-Competition Compensation in the event that Ryder becomes disabled. If Ryder dies on or before December 31, 1986, Jartran remains obligated to pay to Ryder’s estate Base Salary and Non-Competition Compensation due and payable through December 31, 1986. If Ryder dies after December 31, 1986, the Consulting Agreement is to automatically terminate, and Jartran is to have no further obligation thereuncler except to pay to Ryder’s estate any unpaid Base Salary and Non-Competition Compensation for the period through termination.
In the Consulting Agreement, Hall irrevocably and unconditionally guarantees the payment of the first five years of Base Salary and Non-Competition Compensation payable by Jartran thereunder. Hall further agrees that nothing which might ordinarily act as a release of such liability shall in any way affect or impair its guarantee. In addition, Hall agrees to make an interest-free loan to Ryder on or before January 31, 1982 in the aggregate amount of $300,-000, payable in full five years from the date of such loan. Finally, the Consulting Agreement provides that in the event there is a Successful Plan, as defined above, Hall is to pay Ryder an amount based and contingent upon Debtor’s earnings and cash flow for each of the first three calendar years following confirmation. The amount to be paid is to equal one-half the amount legally available for payment to Hall as dividends or pursuant to any tax sharing agreement between Hall and Jartran. The payments under this “Contingent Earnout” provision are not to exceed $600,000 annually.
The Consulting Agreement contains a severability clause, which provides as follows:
... To the extent that the terms set forth in this Agreement or any word, phrase, clause, or sentence is found to be illegal or unenforceable for any reason, such word, phrase, clause or sentence shall be modified or deleted in such manner so as to afford [Jartran] the fullest protection commensurate with making this Agreement, as modified, legal and enforceable under applicable laws, and the balance of this Agreement shall not be affected thereby, the balance being construed as severable and independent.
During the confirmation hearings held herein, the Court issued a rule upon Debt- or, Hall, and Ryder to show cause why the Consulting Agreement should not be set aside. Immediately prior to hearing, Debt- or filed an Application to Modify and Affirm the Consulting Agreement. Thereafter, and during the course of the confirmation hearings, the Court considered the Rule and Application and received evidence in connection therewith. The Court has decided these matters by separate order entered concurrent herewith, wherein the Application to Modify and Affirm has been denied and the Consulting Agreement has been declared of no force and effect with
*342
respect to Jartran’s obligations thereunder, from execution to this date, in all respects, but allowed prospective validity as to its non-competition provisions.
As part of the December 31 transaction, Hall and Ryder also entered into an “Option/Call Agreement”, in which Hall granted to Ryder an option to purchase, for the sum of $100,
22xk
of all shares owned by Hall on the date of confirmation of a Successful Plan, as defined above. The option is to be exercisable during the thirty day period beginning three years after the date of such confirmation. Pursuant to the Option/Call Agreement, Hall is granted the right to reacquire the option shares during the period March 1 through June 30 of any year beginning the fifth year after confirmation of a Successful Plan, to and including 1991. Hall may exercise these call rights by giving written notice of its election to do so during any of the foregoing call periods. Ryder
4
is given the right to force Hall to reacquire the option shares, if not previously called by Hall as aforesaid, during the period January 1, 1992 to January 31,1992. The purchase price to be paid by Hall, upon the exercise of its call or Ryder’s put rights, is the appraised value of the option shares, determined on a going concern basis. Except for a transfer of shares pursuant to a call or put, or in certain other limited circumstances described in the Option/Call Agreement, the option shares are not freely transferable without Hall’s written consent prior to December 31, 1991.
Another contract executed by the parties on December 31, 1981 provided that if Hall proposed to sell any shares in Debtor prior to the earliest of confirmation, conversion, or dismissal of these proceedings, Ryder would have a right of first refusal to purchase such shares. In the event Ryder were to purchase shares by virtue of this right of first refusal, he would be required, in addition to meeting the terms bona fide offered by any third party, to release all guarantees given to him by Hall on December 31, 1981 and to repay any unpaid balance of the interest-free loan made by Hall pursuant to the Consulting Agreement.
Finally, a “Letter Agreement” was executed by Hall and Ryder on December 31, 1981, in which Hall agreed, in connection with its acquisition of stock in Jartran, to use its best efforts to secure the release of all guarantees of Jartran indebtedness given by Ryder or Ryder Corporation. In particular, Hall agreed that it would not propose a plan which would not, if confirmed, constitute a Successful Plan, as defined in the Option/Call Agreement, and that it would not support a plan which failed to provide for the release of all guarantees of Jartran indebtedness given by Ryder or Ryder Corporation.
4. On December 31, 1981, Jartran commenced these proceedings by filing a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
5. Four months later, on April 30, 1982, Hall, Ryder, and Ryder Corporation entered into another letter agreement, offered and received into evidence as U-Haul Exhibit No. 40-A (“Exhibit 40-A”), in which Hall agreed to defend, or to cause Jartran to defend, Ryder and Ryder Corporation in any litigation brought by U-Haul and relating to the business of Jartran.
5
Hall further agreed to indemnify Ryder
*343
and Ryder Corporation and to hold them harmless against any loss or damage suffered as a result of such litigation. The right of indemnification is to apply, with respect to a money judgment, only to the extent that Ryder or Ryder Corporation actually pays such judgment, and the indemnification obligation with respect to all money judgments is not to exceed $2,000,-000. In addition, Hall agreed not to commence a proceeding under the bankruptcy laws against Ryder or Ryder Corporation.
In exchange for these benefits, Ryder agreed not to oppose a Successful Plan, as defined in the Option/Call Agreement, proposed or supported by Hall. However, in determining whether a plan is a Successful Plan as so defined, Ryder and Ryder Corporation retained their right to waive or not to waive releases of their guarantees of Jartran indebtedness. Further, Ryder may oppose any plan which impairs his or Ryder Corporation’s rights under Exhibit 40-A or under any agreement entered into by Ryder with Hall or Jartran on December 31, 1981.
U-Haul has made an oral motion to deny confirmation based upon Exhibit 40-A. The Court will deny that motion for reasons discussed
infra
in connection with the Court’s consideration of the good faith and other confirmation requirements of § 1129(a)(3).
6. On November 15, 1982, an adversary complaint, No. 82 A 3964, was filed against Debtor, Hall, Ryder, and Ryder Corporation by certain holders of Debtor’s convertible subordinated debentures (the “debentures”) due November 15, 1994, viz., Morgan Guaranty Trust Company of New York, as Trustee of a Commingled Pension Trust Fund (“Morgan”), Walter E. Heller & Company, Inc. (“Heller”), Southeast Venture Capital, Inc. (“Southeast”), and Vollm-ers & Co. (“Vollmers”) (collectively, the “Debentureholders”). The amended complaint seeks,
inter alia,
a declaration that the December 31 transaction is null and void and alleges in substance as follows: In the latter part of 1979, Morgan, Vollmers, Heller, and Southeast entered into essentially identical Purchase Agreements (the “Purchase Agreements”) with Debtor for purchase of the debentures at an aggregate price of $5,000,000. The Purchase Agreements provided,
inter alia,
that as long as any of the debentures were outstanding, Debtor would not enter into a transaction with an Affiliate (defined in the Purchase Agreements as any Person which directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with Debtor) other than in the ordinary course of business and upon terms no less favorable to Debtor than would be obtained in a comparable arm’s length transaction. The Purchase Agreements further provided that Debtor would not consolidate or merge with any other corporation if immediately after the merger or cqnsolidation, the surviving corporation would be in default under the Purchase Agreements or the debentures. In Section 7.9 of the Purchase Agreements, the parties agreed that the obligation to purchase the debentures was conditioned on execution by Ryder and Ryder Corporation of an agreement that their guarantees of Jartran indebtedness would not be diminished or terminated without the Deben-tureholders’ consent. Such an agreement (the “No Release Agreement”) not to cancel or otherwise acquiesce in the release of their guarantees was executed by Ryder and Ryder Corporation. Finally, the De-bentureholders allege that Section 5.5 of the Purchase Agreements provides for their subrogation, upon payment in full of the Senior Indebtedness (as defined in the Purchase Agreements), to all the rights and claims of the holders of such indebtedness against the guarantors thereof, viz., Ryder and Ryder Corporation.
The Amended Complaint is in three Counts, the first and second of which sound in contract and tort. The Deben-tureholders allege that the December 31 transaction was in violation of their rights under the Purchase Agreements and the No Release Agreement. Specifically, they aver 1) that the Consulting Agreement is a transaction with Affiliates (Ryder and Hall) that was not entered into upon fair and
*344
reasonable terms no less favorable than would be obtained in a comparable arm’s length transaction; 2) that immediately after the merger of JAR and Jartran, the surviving corporation was in default under the Purchase Agreements and the debentures; and 3) that the Letter Agreement executed on December 31, 1981 seeks to repudiate the Debentureholders’ rights with respect to the guarantees of Jartran indebtedness, and Ryder’s (and Ryder Corporation’s) knowing acquiescence in Hall’s efforts to secure releases of those guarantees constitutes a material breach of the No Release Agreement.
In Count I of the Amended Complaint, the Debentureholders seek a declaration that the December 31 transaction is null and void, a determination of the damages suffered by reason of Debtor’s, Ryder’s, and Ryder Corporation’s breaches of their contractual obligations with the Debenture-holders, and a permanent injunction against all attempts on behalf of Ryder and Ryder Corporation to secure the release of their guarantees of Jartran indebtedness. In Count II, the Debentureholders allege that Hall and Ryder knowingly and intentionally caused Debtor, Ryder, and Ryder Corporation to breach the Purchase Agreements and the No Release Agreement by entering into the December 31 transaction. They state that Hall and Ryder structured the December 31 transaction in a knowing and deliberate effort to interfere with the contractual relationships existing between Debtor and the Debentureholders and among Ryder, Ryder Corporation, and the Debentureholders and to deprive the De-bentureholders of their bargained-for protection. In this Count, they seek a declaration that the December 31 transaction is null and void, an award of actual and punitive damages for the alleged tortious interference by Hall and Ryder, and a permanent injunction prohibiting such conduct in the future. In Count III, the Debenture-holders pray,
inter alia,
for a declaratory judgment concerning their alleged rights of subrogation as against the guarantors of Jartran indebtedness.
Debtor, Hall, Ryder, and Ryder Corporation filed an Answer to the Amended Complaint generally denying the material allegations thereof and claiming certain defenses, including failure to state a claim and the absence of a case or controversy. Soon after the discovery process began, the parties commenced settlement negotiations, discussed at length
infra.
7. Debtor’s initial Plan of Reorganization, filed on April 8, 1982, was amended a number of times, culminating in the Fifth Amended Plan of Reorganization (the “Plan”)
6
, which, as modified, was the subject of lengthy confirmation hearings held herein. The Plan divides claims and interests into seven classes. Class 1 consists of secured claims other than those held by Chrysler, Ford and Fruehauf.
7
Class 2 consists of claims entitled to priority under clauses (3), (4), (5), and (6) of § 507(a) of the Bankruptcy Code. In Class 3, Debtor places all claims of Chrysler, Ford, and Fruehauf, including all claims secured by liens on Debtor’s vehicles. Class 4 includes general unsecured claims not exceeding $500, as well as those voluntarily reduced to $500. Class 5 comprises general unsecured claims in excess of $500, up to and including $2,500, as well as those voluntarily reduced to $2,500. In Class 6, Debtor places all general unsecured claims, except those contained in Classes 3, 4, or 5. U-Haul’s claim and the claims filed by the Debentureholders are included in Class 6. Class 7 consists of the interests of the holders of Debtor’s common stock. In addition to these numbered classes, Debtor designates a class consisting of administrative claims.
Under the terms of the Plan, administrative claims and Classes 1, 2, and 4 are
*345
unimpaired within the meaning and purview of § 1124 of the Bankruptcy Code. Class 5 claims are to be paid one-half on the Effective Date of the Plan, (the “Effective Date”), as defined therein and discussed
infra,
and the balance six months thereafter. With respect to Class 7, the Plan provides that all common stock and all options, warrants, or rights to acquire capital stock in Jartran are to be cancelled upon the Effective Date.
Class 6 claims are to be paid the aggregate sum of $10,000,000 in equal annual installments of $1,000,000 commencing June 30,1983, with the last installment due June 30, 1992. In the event that U-Haul’s claim, as determined by judgment or settlement, exceeds $5,000,000, Class 6 claims are to receive certain additional sums, limited to $6,000,000, based upon the size of the TJ-Haul judgment. In addition, Class 6 claims are to receive 6%% of Jartran’s “Excess Cash Flow,” as defined in the Plan, for fiscal years 1984 through 1988. An annual limit of $500,000 is provided for the years 1984 through 1987, and a limit of $5,000,-000 is designated for the total of Excess Cash Flow payments under the Plan. Finally, Jartran is to deposit $150,000 on the Effective Date for the establishment of the Class 6 Claims Defense Fund. Objections to Class 6 claims, other than U-Haul’s, are to be prosecuted by counsel selected by the Unsecured Creditors’ Committee and approved by the Court. The defense fund is for payment of fees and expenses incurred by such counsel. Any balance remaining after payment of fees and expenses will inure to the benefit of Class 6 creditors.
Article 5 of the Plan, concerning treatment of Class 3 claims, states that the allowed Class 3 claims of Chrysler, Ford, and Fruehauf shall be $69,927,999.96, $75,-772,000.04, and $54,700,000.09, respectively. These claims are to be discharged by monthly payments described in Exhibit C to the Plan. According to Exhibit C, Debtor’s total monthly payments to these creditors would be $1,250,000 for each month through December, 1985, $1,583,333.34 for each month from January through December of 1986, $1,750,000 for each month from January of 1987 through December of 1989, $1,749,540.91 for each month from January of 1990 through November of 1990, and a balloon payment of $41,651,-750.00 on December 30, 1990. Monthly payments due prior to the Effective Date of the Plan are to be paid on the Effective Date,
8
after deducting all amounts paid pursuant to the adequate protection orders entered herein. Chrysler, Ford, and Frue-hauf are each entitled to 11.1% of any Excess Cash. Flow for fiscal years 1984 through 1989. The Excess Cash Flow payments are not in addition to the monthly payments designated in Exhibit C but are prepayments, to be credited against those monthly payments in inverse order of maturity on a present value basis computed at 10% interest, compounded annually. On or about the Effective Date of the Plan, Jar-tran and Hall are to enter into restructuring agreements with each of Chrysler, Ford, and Fruehauf concerning the obligations of Jartran under the Plan.
The Plan is to be funded through income derived from operations, periodic borrowings, and $5,000,000 to be paid by Hall on the Effective Date in consideration of the issuance to Hall of 1,000,000 common shares with a par value of $1.00 per share. The difference between the par value of such stock and the $5,000,000 paid by Hall is to be treated as paid-in surplus. Under the terms of the Plan, Hall is entitled to a credit against the $5,000,000 payment for any allowed administrative claims held by Hall pursuant to §§ 364(b) and 503(b) of the Bankruptcy Code.
The Plan further provides that Hall shall guarantee the first three $1,000,000 annual installments to Class 6. During the course of these proceedings, Hall has guaranteed $1,200,000 of rental obligations for Debt- or’s Miami headquarters and $340,000 for a telephone system installed at that location. In addition, Hall has guaranteed Debtor’s
*346
substantial line of credit with the Bank of New York, which, as discussed
infra,
is to be increased from $10,000,000 to $16,500,-000.
Hall is required to retain at least 90% of Jartran’s common stock at all times during the first three years after the Effective Date of the Plan. At all times during the fourth through sixth years after the Effective Date, Hall is required to own at least 51% of such stock. As defined in the Plan, the Effective Date is as follows:
The first business day occurring on or after the eleventh (11th) day after the Confirmation Date; provided, however, that if a stay of the order confirming the Plan is in effect on such first business day, then the Effective Date shall be the first business day thereafter on which (i) no stay of the order confirming the Plan is in effect and (ii) the order confirming the Plan has not been vacated.
On January 24, 1983, Jartran filed certain modifications to the Plan (the “First Modification”). In the First Modification, the definition of Effective Date is supplemented to provide for the situation where the confirmation order is certified to the district court pursuant to paragraph (E)(2)(a)(ii) of the General Order of the United States District Court for this district, dated December 20, 1982 and commonly described as the Emergency Rule. That Rule ceased to be effective on July 10, 1984, the date of the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984. Accordingly, the supplemental provision is no longer effective.
The only other amendment to the Plan as a result of the First Modification concerns the treatment of Class 6. The amendment provides that Class 6 creditors are to receive an additional payment measured as 25% of any net recovery in excess of $10,-000,000 received by Jartran in connection with the Phoenix and Miami suits.
8. Objections to confirmation and rejections of Debtor’s Plan were filed,
inter alia,
by U-Haul and the Debentureholders. The Equity Security Holders’ Committee (the “shareholder committee”) also filed objections to confirmation on behalf of Debt- or’s shareholders (Class 7), who are deemed to have rejected the Plan.
See
11 U.S.C. § 1126 (g).
U-Haul’s objections are numerous and will be discussed in detail
infra.
The objections of the shareholder committee are three-fold. First, they contend that there is intraclass discrimination violative of § 1123(a)(4) of the Bankruptcy Code
9
, because Ryder, Braun, LeMasurier, Lowe, Scarano, and Stiller received substantial benefits for sale of their stock on December 31, 1981, while the remaining shareholders (the “minority shareholders”) were offered nothing and are to receive nothing under the Plan. The committee contends that for purposes of determining whether the Plan discriminates unfairly, the six named shareholders must be considered as members of Class 7 notwithstanding the sale of their stock to Hall, because the December 31 transaction and the commencement of these proceedings were conceived of and carried out as a single transaction. According to the committee, the Plan, in conjunction with the December 31 transaction, effects a freeze out of the minority shareholders. In its second objection, the shareholder committee alleges that even if Hall’s acquisition of stock from Ryder and the other named shareholders is seen as a transaction separate from these proceedings (rendering Hall the majority shareholder in Class 7), the Plan nevertheless violates § 1123(a)(4) by giving Hall the right to acquire all of the Debtor’s stock. The shareholder committee contends that the Plan discriminates unfairly against the minority shareholders by failing to provide them an opportunity to acquire stock in the
*347
reorganized company. In its third objection, the shareholder committee alleges that Ryder, Braun, LeMasurier, Lowe, Scarano, and Stiller have breached their fiduciary duty to the minority shareholders in connection with the December 31 transaction. According to the committee, the Plan, which in conjunction with the December 31 transaction effectively freezes out the minority shareholders, is not a plan “... proposed in good faith and not by any means forbidden by law”, as required by § 1129(a)(3).
The Debentureholders objected to confirmation on various grounds, including lack of good faith and improper classification of claims. They also contend that the Plan may not be confirmed under § 1129(b), because Hall is underpaying for its participation in the reorganized company.
9. During the initial hearings on confirmation, which extended from January to June of 1983, the Debentureholders, Hall, Ryder, Ryder Corporation, and others negotiated a settlement of Adversary No. 82 A 3964, filed by the Debentureholders as aforesaid. On May 5, 1983, a Joint Application for Approval of Settlement was filed by the parties to that suit praying for its dismissal pursuant to their “Litigation Settlement Agreement.” The Litigation Settlement Agreement and other settlement documents were appended as exhibits to the Stipulation to Approve Settlement with Debtor and to Dismiss (the “Stipulation”), which was filed with the Joint Application. In the Stipulation, the parties agree,
inter alia,
to the entry of an order dismissing Adversary No. 82 A 3964 and authorizing Debtor to consummate the transactions required of it by the Litigation Settlement Agreement. The Stipulation is signed not only by Debtor and the other parties to the proceeding, but also by the Unsecured Creditors’ Committee, which “... acknowledges that its members and its counsel have reviewed and considered the Litigation Settlement Agreement and each of the Exhibits thereto, ... and that the Committee has voted in accordance with the bylaws to approve the settlement of this adversary proceeding in accordance with the terms therein contained.”
Pursuant to the settlement documents, and in consideration,
inter alia,
of the De-bentureholders releasing their claims against Hall and the other defendants in the adversary proceeding and waiving participation in the distribution to Class 6, Hall agrees to pay to the Debentureholders 3% of the value
10
of Jartran determined as of December 31st of the year next preceding notice of the Debentureholders’ election to be paid. The Debentureholders may give such notice during the period beginning May 1st and ending June 30th of any year from 1988 through 1992.
11
Hall’s maximum liability under this section of the Litigation Settlement Agreement depends upon the timing of the Debentureholders’ notice of election to be paid. The maximum liability ranges from $1,500,000 for value determined as of December 31, 1987 to $3,000,000 for value as of December 31, 1992.
In addition to the foregoing sums, Hall agrees to pay to the Debentureholders, under circumstances described in the Litigation Settlement Agreement, 1.2% of any net proceeds in excess of $10,000,000 received by Jartran in connection with the Phoenix and Miami suits. These payments, when combined with the payments discussed above (measured by 3% of Debtor’s value), are not to exceed $3,000,000. Finally, Hall agrees to reimburse the Debentureholders for the first $100,000 in legal fees and expenses incurred in connection with any suit brought against them seeking to enforce a right of subordination with respect,
inter alia,
to the settlement payments proposed to be made.
The final consideration flowing directly to the Debentureholders comes from Ry
*348
der, who agrees to assign to them his right to purchase %5 of the shares which are subject to his option under the Option/Call Agreement. The assignment is intended to provide the Debentureholders with that number of shares in Debtor which will yield, when sold in a put, call, or sale under the Option/Call Agreement, an amount equal to 4% of Debtor’s value. The Deben-tureholders agree to take the assignment subject to all of Ryder’s rights and obligations under that agreement.
Ryder’s and the Debentureholders’ rights under the Option/Call Agreement are to be pledged
12
, pursuant to an “Assignment/Escrow Agreement,” to Chrysler, Ford, and Fruehauf to secure the payment of all sums due to those creditors under Section 5.1 and Exhibit C of the Plan.
13
Upon Debtor’s failure to pay such sums when due (and the continuation of such failure for 30 days after notice to Debtor), the rights pledged by Ryder and the Debentureholders as aforesaid may be applied as necessary to cure the default.
14
If property pledged under the Assignment/Escrow Agreement is used to cure any such default, then the pledging party, viz., Ryder or the Debentureholders, is to be subrogated to the rights of the creditor against Debtor to the extent of the value of collateral so applied.
15
The agreement further provides that it may be assigned, in whole but not in part, by Chrysler, Ford, or Fruehauf, or by Ryder or the Debentureholders.
As a part of the litigation settlement, Ryder and Ryder Corporation are to be released from certain of their guarantees of Jartran indebtedness. The Litigation Settlement Agreement calls for execution of an Agreement of Release of Guarantees (the “Release Agreement”) by each of eighteen creditors of Jartran, including Chrysler, Ford, and Fruehauf. Pursuant to each Release Agreement, and in exchange for a sum calculated as a percentage of the creditor’s unsecured claim,
16
the creditor agrees to release Ryder and Ryder Corporation from their guarantees of Jartran debt owed to that creditor. Ryder and Ryder Corporation are to obtain the funds necessary to make these payments from Hall. Hall, in turn, will receive from Ryder an assignment of his right to purchase and to require Hall to sell under the Option/Call Agreement a stated percentage of Jartran shares owned by Hall on the date of confirmation.
Pursuant to the Release Agreements, the eighteen "Creditors consent to the payment of sums due the Debentureholders under the settlement documents, notwithstanding the subordination of the debentures, and release the Debentureholders from any causes of action the creditors may have by virtue of the consummation of the settlement or the Plan. The Debentureholders consent to the release of Ryder’s and Ryder Corporation’s guarantees of Jartran indebtedness, waive any rights they may have under the No Release Agreement, and release each of the eighteen creditors from any causes of action the Debentureholders may have by virtue of the consummation of the settlement or the Plan. Finally, each Release Agreement provides that it may be assigned by the creditor, in whole but not
*349
in part, by operation of law or voluntarily to one of the other seventeen creditors listed in Exhibit A thereto, but that it shall not otherwise be assignable.
In the Litigation Settlement Agreement, the parties recite that it is their intention that the consideration to the Debenture-holders shall flow from Hall, Ryder, and Ryder Corporation, “... and Hall represents that no payments to be made by it to the Debentureholders pursuant to the terms hereof shall, directly or indirectly, be made with funds of [Jartran].” The only consideration flowing from Debtor to the Debentureholders under the Litigation Settlement Agreement is a proposed Release and Consent to Subrogation, in which Debt- or releases the Debentureholders from all causes of action it may have against them and consents to the subrogation of Ryder and the Debentureholders to the rights of the secured creditors to the extent contemplated by the Assignment/Escrow Agreement.
Pursuant to the settlement documents, each member of the Unsecured Creditors’ Committee is required to execute a release of subordination claims against the Deben-tureholders. One of the members of that committee, Sandra Tinsley, Inc., has filed an objection to the proposed settlement and presumably will not execute the release. Counsel for the Debentureholders represented at the hearing on the proposed settlement that a written waiver of this requirement has been signed by the Deben-tureholders.
The Litigation Settlement Agreement is dated January 17, 1983 and has been executed by each of the parties thereto, viz., Hall, Ryder, Ryder Corporation, Morgan, Southeast, Heller, and Vollmers. Its effectiveness is tied to certain events which are defined in the agreement substantially as follows:
Preliminary Effective Date: “...
the date upon which (i) the Court ... has entered a Confirmation Order ... (ii) the Court has entered an order in the form attached as Exhibit A to the Stipulation to Dismiss [i.e., the order dismissing Adversary No. 82 A 3964] ..., and (iii) the Effective Date as defined in the Plan has occurred.”
Relevant Appeal: “...
any motion for rehearing, appeal or certiorari proceeding respecting the Confirmation Order which, if decided against the Confirmation Order, could have the effect of materially and adversely affecting the rights of any of the parties to this Litigation Settlement Agreement under the Settlement Documents unless waived by the adversely affected party.”
Adverse Ruling: “...
any final order in a Relevant Appeal which has the effect of materially and adversely affecting the rights of the parties hereto under the Settlement Documents and which is not subject to a further appeal or rehearing.”
Terminating Bankruptcy: “...
a voluntary or involuntary proceeding under the bankruptcy laws of the United States commenced on or before the ninetieth day subsequent to the Preliminary Effective Date and in which the debtor is Ryder or [Ryder] Corp., which proceeding is not dismissed within 90 days of the date upon which the petition commencing it is filed.”
Final Effective Date: “...
the first date after the Preliminary Effective Date upon which (i) the 90-day period after the Preliminary Effective Date has passed without the occurrence of a Terminating Bankruptcy, and (ii)(a) the time for filing a Relevant Appeal under applicable federal rules and statutes has passed without the filing of such appeal; or (b) if a Relevant Appeal has been filed, no such appeal is then pending and no Adverse Ruling therein has been issued.”
Event of Termination:
"... (i) September 1, 1983, unless prior to that date there has occurred the Preliminary Effective Date; (ii) the issuance in any Relevant Appeal of an Adverse Ruling; (iii) failure of the parties thereto to close the transactions contemplated by any one or more of the various Agreements of Release of Guarantees of even date herewith ... on or before the Preliminary
*350
Effective Date; and (iv) the occurrence of a Terminating Bankruptcy.
If an Event of Termination occurs prior to the Final Effective Date, the Litigation Settlement Agreement is rendered null and void, the parties return to their status immediately prior to execution of the agreement, and the Debentureholders repay any funds received from Hall and reassign to Ryder his rights under the Option/Call Agreement. Consistent with the terms of the Litigation Settlement Agreement, the parties agree in the Stipulation that if the Final Effective Date
17
arrives prior to the occurrence of an Event of Termination, the dismissal of Adversary No. 82 A 3964 would be with prejudice. If, however, an Event of Termination occurs prior to the Final Effective Date, then the Stipulation and the dismissal order would be of no further force nor effect. Any termination of the Litigation Settlement Agreement would not affect the validity and binding character of the Release Agreements or the releases delivered pursuant thereto. Those agreements are effective on the Effective Date provided certain requirements enunciated therein are met. The Release Agreements terminate if (i) a bankruptcy proceeding is filed with respect to Ryder or Ryder Corporation prior to the Effective Date and is not dismissed within 90 days, or (ii) if the Effective Date has not occurred prior to September 1, 1983. The Assignment/Escrow Agreement is also effective on the Effective Date of the Plan, subject only to the effectiveness of the Release Agreements and the releases delivered pursuant thereto. However, upon the occurrence of an Event of Termination under the Litigation Settlement Agreement, the Assignment/Escrow Agreement is rendered void with respect to the Debenture-holders, who then reassign their Option/Call rights to Ryder to be pledged to Chrysler, Ford, and Fruehauf pursuant to the terms of the Assignment/Escrow Agreement.
In the absence of any amendment, Events of Termination would, of course, have occurred under these settlement agreements, because September 1, 1983 passed without the occurrence of the Effective Date of the Plan. However, the parties to the Litigation Settlement Agreement, by letter agreements filed with the Court, have extended this termination date to October 31, 1984. The termination date in the Release Agreements has also been extended by agreement of the parties thereto.
As mentioned
supra,
the settlement calls for the Debentureholders’ waiver of participation in any distribution to Class 6. The waiver is accomplished through an amendment to the Plan (the “Second Modification”), which was filed on December 1,1983 and provides in relevant part as follows:
1. The Plan is amended by adding a new Article 7.9 thereto as follows:
“(a) Notwithstanding any other provision hereof and contingent on there being no Event of Termination under the terms of that certain Litigation Settlement Agreement dated January 17, 1983, ... the Debentureholders shall not participate in any distributions to Class 6 Creditors under this Plan....”
The Second Modification also includes a release by Jartran of the Debentureholders from all causes of action it may have against them and Debtor’s consent to sub-rbgation of Ryder and the Debenturehold-ers as contemplated by the Assignment/Escrow Agreement, already discussed.
In addition to their release of claims against Debtor and the other defendants in Adversary No. 82 A 3964 and their waiver of participation in the Class 6 distribution, the Debentureholders also agree as part of the settlement to vote for confirmation of Debtor’s Plan. The Debentureholders filed a rejection of the Plan on January 6, 1983, one day before the voting deadline of January 7, 1983.
18
In accordance with the pro
*351
visions of the Litigation Settlement Agreement, they have filed with the Court an application to change their vote. However, at the hearings on approval of the Litigation Settlement Agreement, counsel for the Debentureholders represented that the failure of the Debentureholders to vote for confirmation of the Plan, as a result of the Court’s denial of their request to change their vote, would not constitute a breach of the Litigation Settlement Agreement or a default thereunder. On June 9, 1983, the parties filed with the Court a position paper to that effect.
10. During the initial hearings on confirmation, a settlement was also negotiated between Hall and the shareholder committee concerning the latter’s claims that the Plan, in conjunction with the December 31 transaction, effected a freeze out of minority shareholders. The settlement agreement (the “shareholder agreement”) provides for payment by Hall to the minority shareholders of $.50 for each share of common stock held by them on December 31, 1981. The payment is to be made after the Effective Date of the Plan to any shareholder who chooses to deliver to Hall a properly executed Letter of Transmittal and the stock certificate or certificates (or Affidavit of Lost Certificate) representing the shares of stock held on the relevant date.
In the Letters of Transmittal, the shareholders release Hall and Jartran from all causes of action they may have relating in any way to their ownership of Jartran stock. A similar release is contained in the shareholder agreement itself, running from the committee and its members to Hall and the Debtor. In the agreement, the parties recite that it is their “.. .intention.. .that the consideration to the Shareholders under this Agreement flows and shall flow from Hall, and Hall represents that no payments to be made by it to the Shareholders pursuant to the terms hereof shall, directly or indirectly, be made with the funds of Debt- or.”
The agreement requires that the shareholder committee present an application to withdraw its objections to confirmation, and Hall’s agreement to pay the minority shareholders is conditioned upon allowance of that application. However, the parties subsequently filed a Stipulation and Agreement to the effect that a failure to withdraw the objections would not constitute a breach of the shareholder agreement or the failure of a condition precedent to Hall’s obligations thereunder.
The application to withdraw objections was filed on May 10, 1983, and the shareholder agreement was appended as an exhibit thereto. Notice of the application was mailed to the 700 or more minority shareholders and was also published in the Wall Street Journal. Counsel for the shareholder committee used a skip-tracing agency to obtain addresses for shareholders who could not otherwise be located. In the notice, the shareholders were advised of the prospective hearing on the application to withdraw objections and of their right to object to the shareholder agreement or to the withdrawal of the shareholder committee’s objections.
19
After hearing, the Court allowed the shareholder committee’s application to withdraw objections to confirmation. The Court was not called upon, and did not, at that time rule on the validity and propriety of the shareholder agreement. The propriety of that settlement is discussed
infra,
in connection with the fairness of Debtor’s Plan and also in connection with U-Haul’s objections concerning the confirmation requirements of § 1129(a)(3). In the ruling on the application to withdraw, the Court indicated that the shareholder committee’s objections would remain the subject of the Court’s determination insofar as they were raised or reiterated by U-Haul.
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11. The evidence concerning the value of Jartran as a going concern was presented through the testimony of Debtor’s witness, Dr. Robert S. Hamada, Professor of Finance and Director of the Center for Research in Security Prices at the University of Chicago’s Graduate School of Business. Dr. Hamada also prepared a report of his analysis, entitled “Evaluation of Debtor’s Going Concern Value” (the “Report”), which was appended as Exhibit F-l to the Disclosure Statement and was also separately admitted into evidence as U-Haul Exhibit No. 8.
Dr. Hamada employed the discounted cash flow, or present value, method of valuation, rather than the capitalization of earnings approach.
20
As explained in his Report, the latter method requires an estimate of a firm’s average annual accounting earnings, which are then capitalized at an appropriate rate. Dr. Hamada explained that the discounted cash flow approach has the advantage of “dating” the anticipated cash flows from operations, “... so that fluctuating and erratic cash flows [can] be considered precisely for their timing impact, rather than averaging all of these positive and negative yearly figures into one composite number to capitalize.”
21
In his analysis, Dr. Hamada first calculated Debtor’s going concern value
22
unencumbered by the reorganized debt.
23
He then estimated the market value of the reorganized debt and subtracted that value from the going concern value of the firm. The residual was reported as the value of the shareholders’ equity in reorganized Jar-tran.
Dr. Hamada’s valuation is based upon cash flow projections supplied by Debtor. He testified that he relied upon the Pro Forma Receipts/Disbursements statement set forth in Exhibit E-6 to the Disclosure Statement (“Exhibit E-6”). Exhibit E-6 contains Debtor’s projected cash flows through 1987 and is reproduced as Appendix A hereto. In his testimony, Dr. Hama-da explained that he “rearranged” the figures presented in Exhibit E-6 as required by the discounted cash flow method.
24
The projections in Exhibit E-6 embrace the cash flows forecast for ETS, Debtor’s subsidiary. The Detail of Assumptions contained in Exhibit E to the Disclosure Statement indicates that increases in the consumer price index are assumed to be 7.5% per year and that the projected rental revenue reflects that annual increase. Real growth in rental revenue is projected in Exhibit E-6 at 12.5% per year for 1983 and 1984 and at 6.5% annually for 1985 through 1987. Dealer commissions and physical damage expenses are included at 19.1% and 3.8% of revenue, respectively. Maintenance expenses are included at 20% of truck rental revenue and 6% of trailer rental revenue. Other operating costs are
*353
projected to be 3.6% of revenue for 1982 and 4.5% annually for 1983 through 1987.
The cash flow forecast of Exhibit E-6 also reflects expenditures in connection with Debtor’s truck refurbishment program, described in the Detail of Assumptions. The refurbishment program calls for 370 trucks to be overhauled in 1983, 1,600 in 1984, and 2,600 in 1985, at a projected cost of $4,000 per unit (in 1982 dollars). The costs are projected to increase annually at the rate of 7.5%.
A replacement program is also planned, as reflected in the projections of Exhibit E-6. Pursuant to this program, 9,000 vehicles are to be purchased, 1,000 per year for 1984 through 1986 and 3,000 per year during 1987 and 1988. The replacement program is predicated upon 90% financing and the cost per unit is projected at $14,000 (in 1982 dollars). These costs are increased at the assumed annual inflation rate of 7.5%. According to Debtor’s plan, outservicing of vehicles will take place in October and in-servicing in February through April of the following year.
For the years beyond 1987
25
, it was assumed that a steady state, viz., no real positive or negative growth, would be reached in all operating cash inflows and outflows, other than vehicle investment and disposal. Jartran supplied the information necessary to obtain the steady state cash flow figures for these years.
A steady state in the replacement and disposal policy begins in 1989. According to the Report, Jartran provided Dr. Hama-da with two different replacement strategies in the steady state years. Each strategy assumes a constant fleet size of 11,000 trucks. Under the “slow” replacement strategy, one-fifth of the fleet is to be replaced in each year, while under the “fast” program, one-fourth of the fleet will be replaced.
In performing his discounted cash flow analysis, Dr. Hamada took into consideration Debtor’s substantial net operating loss carryforwards and investment tax credits. The pre-petition tax attributes alone aggregate approximately $122,000,000. Dr. Ha-mada stated that in his analysis, both pre-petition and post-petition net operating losses and investment tax credits had been used to offset projected taxable income of Jartran.
In his Report, Dr. Hamada explained that “[i]n order to avoid forecasting national inflation rates for five or more years into the future, all necessary forecasts of cash flows and cost of capital (discount rate) will be done in constant 1982 dollars.”
26
Accordingly, the inflationary component of the operating cash flows presented in Exhibit E-6, viz., 7.5% per year, was removed before the flows were discounted to present value. Dr. Hamada then estimated the appropriate “inflation-adjusted” discount rate, or real cost of capital,
27
with which to perform his present value computations.
As explained in the Report, the method by which Dr. Hamada estimated Jartran’s real cost of capital rests upon
the following relation between firm i’s expected rate of return or required cost of capital r(i), the risk-free rate r(f), and the expected rate of return on the overall market r(m):
r(i) = r(f) + b(r(m) - r(f))
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where b is a measure of the relative riskiness of firm i (relative to the entire market). If b (or “beta”) equals I, then firm i is just as risky as the overall market; if beta equals 0, investing in firm i is riskless.
28
The variable “r(m) - r(f)” in the above equation is the risk premium required by the market of investors.
29
In calculating Jartran’s real cost of capital, Dr. Hamada assumed that the real risk-free annual rate of interest is 2% and that the required market risk premium is 8.3% annually.
30
The remaining variable in the equation quoted above is the appropriate beta coefficient for Jartran.
Dr. Hamada required the “unlevered” beta (b(u)) for Jartran, that is, the beta coefficient it would have if it had no debt.
31
To estimate Jartran’s unlevered beta, he first made a determination that the appropriate industry classification for Jartran was “Automotive Rental and Leasing Without Drivers”, SIC Code 751.
32
He then obtained a list of all the firms included within that classification since 1970 and ascertained which of them had been traded on either the New York or American Stock Exchanges. According to the Report and Dr. Hamada’s testimony, there were eleven such firms for that period.
33
He then examined daily stock price and dividend data to establish daily rates of return
34
for each company. A series of these daily rates of return was obtained for each of the eleven companies, and Dr. Hamada testified that he used “... an econometric technique that related those rates of return to comparable rates of return on the general stock market in total.” This procedure yielded estimates for the beta of each firm’s stock (b(s)). Information from annual reports and other sources was examined to obtain annual debt-equity ratios for each firm. All the above data were then used to solve for each firm’s unlevered beta in the following equation:
b(u) = (S/V) x b(s) + (I - S/V) x b(d) where b(d) is the beta of the firm’s debt, S represents the market value of the firm’s stock, and V is the market value of the firm, or the value of stock plus the value of debt. The average of the unlevered beta coefficients for the eleven firms was .6506. Employing the formula relating risk to return, Dr. Hamada then calculated Jartran’s
*355
real “pure equity” cost of capital as follows:
r = r(f) + b(r(m) — r(f))
r = 2% + .6506(8.3%)
r = 7.4%
Dr. Hamada stated that his best estimate of Debtor’s real cost of capital is 7.4%. He added, however, that Ryder System, Inc. was the firm most comparable to Debtor. The unlevered beta for Ryder System, Inc. was estimated at .7410, and its real cost of capital was accordingly found to be 8.15%.
Having obtained Debtor’s real, pure equity cost of capital, Dr. Hamada then discounted the unlevered cash flows previously discussed to September 1, 1982.
35
As stated in his Report and in testimony, Dr. Hamada’s best estimate of the September 1, 1982 going concern value of Jartran, unencumbered by the reorganized debt, is $129,864,000.
To determine the market, or present, value of the reorganized debt, Dr. Hamada first obtained from Jartran the set of payments projected to be made to creditors under the terms of the Plan.
36
As with the projected cash flows, the projected distribution to creditors was specified in each instance to the month of payment. Dr. Ha-mada explained that the stream of payments was expressed in nominal, as opposed to real, dollars, viz., “... dollars of whatever period they’re being paid or received.” Accordingly, he discounted the payments at a nominal (inflation-inclusive) rate.
In determining the appropriate discount rate to be applied, Dr. Hamada noted that the risk associated with each set of payments must be reflected in the discount rate selected. He determined that the appropriate annual rates to discount the proposed payment streams were as follows: (1) Class 3 scheduled payments: 15.63%; (2) Class 3 prepayments — equipment disposal; 7.4% (or Jartran’s real, pure equity cost of capital); (3) Class 3 prepayments— excess cash distribution: 7.4% (or Jartran’s real cost of equity capital); (4) Class 6 scheduled payments — 1983-85: 12.94%; (5) Class 6 scheduled payments — 1986-92: 15.63%; (6) Class 6 prepayments — excess cash distribution: 7.4% (or Jartran’s real cost of equity capital); (7) Classes 2, 4, and 5 payments: 15.63%; and (8) ETS debt: 15.63%.
The 15.63% rate represents the average yield for Moody’s Baa bonds as of September 1, 1982. The 12.94% rate represents the average yield for Moody’s Aaa bonds as of September 1, 1982. Dr. Hamada explained that because the first three annual installments to Class 6 are guaranteed by Hall, they are a safer set of payments and should be discounted at the lower Aaa rate. With regard to the excess cash and equipment disposal payments, Dr. Hamada explained that he considered them to be “... as risky as the rest of the business”, and consequently discounted them at the cost of capital.
37
Discounting the proposed payments at the rates discussed above, Dr. Hamada estimated the present value of .Jartran’s reorganized debt as of September 1, 1982 at $113,497,000. The value of the September 1, 1982 shareholders’ equity in reorganized Jartran was accordingly reported as $16,-367,000, being the difference between the going concern value of the firm ($129,864,-000) and the market value of the reorganized debt ($113,497,000).
Dr. Hamada stated in his Report and in testimony that while these figures represent his best estimates of the values reported, “... they are highly sensitive to unavoidable predictions and forecasts of the future.” Accordingly, he performed a sen
*356
sitivity analysis
38
to estimate the impact of deviations in those forecasts on the going concern values reported.
One of the items as to which Dr. Hamada performed a sensitivity analysis was “rental revenues minus variable costs”, where variable costs include commissions, maintenance, physical damage, sales tax, and other operating expenses. In other words, he determined what the going concern value of Jartran (and corresponding value of shareholders’ equity) would be if rental revenues minus variable costs were actually 5% lower than the projections of Exhibit E-6 (and the forecast for subsequent years). He then determined what the going concern value of Jartran would be if rental revenues minus variable costs were actually 5% higher than the projections of Exhibit E-6. He made similar computations varying rental revenues minus variable costs 10% above and below the projections relied upon.
As explained in the Report, Dr. Hamada also performed sensitivity analyses with respect to fixed costs,
39
vehicle disposal revenue, vehicle replacement cost, and the sum of vehicle replacement cost and disposal revenue. Each item was varied (by positive 5% and 10% and by negative 5% and 10%) from its respective forecast in Exhibit E-6. The going concern value of Debtor (and value of shareholders’ equity) resulting from each of these deviations is indicated in Tables 1 through 4 of the Report, which are reproduced as Appendix B hereto. Tables 1 and 2 present the values obtained when Debtor’s cost of capital is assumed to be 7.4%. Tables 3 and 4 are based upon an 8.15% cost of capital. In Tables 1 and 3, Dr. Hamada reports the values predicated upon a “slow” vehicle investment and disposal strategy in the steady state years. In Tables 2 and 4, values are predicated upon a “fast” replacement policy.
Dr. Hamada explained that the information in Tables 1 through 4 may be examined to determine the going concern value of Jartran (and the value of shareholders’ equity) based upon combinations of deviations from the projections relied upon in the Report. He concluded that “[ujnder fairly feasible deviations from our best, unbiased estimates of the future for Jar-tran, the September 1, 1982, ‘going concern’ value of Jartran’s assets can fall between $69,272,000 and $174,982,000; this implies that the September 1, 1982, ‘going concern’ value of the stockholders’ equity in the reorganized Jartran can fall between [negative] $44,069,000 and $61,485,000.” The figures representing the lower end of the feasible range were obtained from Table 4, assuming an 8.15% real cost of equity capital, a fast steady state replacement policy, and a negative 5% variance in rental revenues minus variable costs. The higher figures were obtained from Table 1, assuming a 7.4% cost of capital, a slow steady state replacement strategy, and a positive 5% variance in rental revenues minus variable costs.
At Debtor’s request, Dr. Hamada updated his analysis to obtain going concern values for the firm and for shareholders’ equity as of January 1,1983. He explained that in his updated analysis (the “Update”), he did not repeat the entire procedure previously performed in connection with the Report. He began the Update with the $129,864,000 figure representing the September 1, 1982 going concern value of the firm.
40
He then proceeded with his analy
*357
sis as outlined in Table 9 of the Update
41
, a portion of which is reproduced below:
Table 9
Breakdown of Components Resulting in Changes in Jartran’s Estimated Values: Values as of 9/1/82 and 1/1/83 Estimated Real Cost of Capital = .0740 (thousands of dollars)
Steady-State Replacement Policy Slow
September 1, 1982 Present Value Per ... Report $129,864 [Table 1]
Removing 1982 Flows (Last Four Months), Present Value as of September 1, 1982 123,839
Change -$6,025
Redating Present Value as of January 1, 1983 126,822
Change + 2,983
Adjusting for Favorable 1982 Cash Flow Variance 128,151 [Table 5]
Change + 1,329
As indicated above, Dr. Hamada subtracted from the September 1, 1982 going concern value of the firm the present value (as of September 1, 1982) of all cash flows which were projected to occur during the last four months of 1982. The resulting figure, $123,839,000, represents the present value, as of September 1, 1982, of all post-1982 cash flows. These flows would have a greater value as of January 1, 1983 than they would as of September 1, 1982, and Dr. Hamada determined that the magnitude of that increase was $2,983,000. Accordingly, he “redated” the post-1982 flows by adding $2,983,000 to the $123,839,000 previously obtained. He thus found the present value, as of January 1, 1983, of all post-1982 cash flows as projected by Debt- or to be $126,822,000
42
His final adjustment was based upon Debtor’s Cash Flow Variance Report for the year 1982, a copy of which was offered and received into evidence as Jartran Exhibit No. 11. In that report, actual cash receipts for 1982 (including,
inter alia,
rental revenues, ETS profit, short-term borrowings, and equity contribution) exceeded disbursements (including commissions, insurance, licenses, sales tax, maintenance, advertising, other operating expenses, SRE
43
purchases, debt service,
44
exposure from leases, administrative overhead, and interest on short-term borrowings) by $895,000 (identified as “Net Cash Change”). The report further indicates that Net Cash Change was projected at negative $434,000 for 1982. Accordingly, $1,329,000 is reported as the positive cash flow variance. The entire positive variance was attributed to the last four months of 1982, because the projections which were used to calculate that variance incorporated actual results for the first eight months of 1982. Dr. Hamada added the $1,329,000 positive cash flow variance to the January 1, 1983 present value of post-1982 cash flows to arrive at the updated going concern value of the firm, viz., $128,151,000.
Having obtained his updated estimate of the going concern value of the firm, Dr. Hamada proceeded to update the value of the reorganized debt to January 1, 1983. He again began with the September 1, 1982
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value and made necessary adjustments, as summarized in Table 11 of the Update,
45
a portion of which is reproduced below:
Table 11
Breakdown of Components Resulting in Changes in the Value of Jartran’s Debt: Values as of 9/1/82 and 1/1/83: (thousands of dollars)
Real Cost of Capital .0740
September 1, 1982 Present Value Per ... Report $113,497
Removing 1982 Flows (Last Four Months), Present Value as of September 1, 1982 (September 1 Interest Rates) 108,425
Change - 5,072
Redating Present Value as of January 1, 1983 (September 1 Rates) 113,779
Change + 5,354
Using January 1, 1983 Interest Rates 118,992
Change + 5,213
The first two adjustments are similar to those made in Table 9, in connection with the change in going concern value of the firm. Dr. Hamada first subtracted from the September 1, 1982 market value of the debt the present value (as of September 1, 1982) of all proposed payments to creditors projected to be made during the last four months of 1982. The present value of those projected payments was $5,072,000, discounted at the September 1, 1982 interest rates previously discussed. The resulting figure, $108,425,000, represents the present value, as of September 1, 1982, of all post-1982 payments to creditors. These proposed payments would have a greater value as of January 1, 1983 than they would as of September 1, 1982, and Dr, Hamada determined that the magnitude of that increase was $5,354,000. Accordingly, he concluded that the present value, as of January 1, 1983, of all post-1982 projected payments to creditors was $113,779,000.
The final adjustment reflects the change in interest rates from September 1, 1982 to January 1, 1983. Dr. Hamada testified that the average yield for Moody’s Aaa bonds had dropped from 12.94% to 11.83% and that the average yield for Baa bonds had dropped from 15.63% to 14.14%. As a result of the drop in interest rates, the discounted value of the reorganized debt was increased by $5,213,000, for a total of $118,992,000.
The difference between the updated going concern value of the firm ($128,151,000) and the updated market value of the reorganized debt ($118,992,000), or $9,159,000, was reported as Dr. Hamada’s “single” best estimate of the January 1, 1983 value of shareholders’ equity in reorganized Jar-tran. His best estimates of going concern value, market value of debt, and value of shareholders’ equity as of September 1, 1982 and January 1, 1983, based upon differing assumptions concerning the cost of capital and steady state vehicle replacement strategy, are summarized in Jartran Exhibit No. 29A. Tables 5 through 8 of the Update, offered and received into evidence as Jartran Exhibits Nos. 29B through 29E, respectively, comprise the updated sensitivity analysis for the January 1, 1983 values and are reproduced as Appendix C hereto.
12. After the conclusion of the initial hearings on confirmation and while the Court had the matter of confirmation under advisement, Debtor commenced negotiations with the secured creditors for the purpose of relieving a cash shortage which had developed. As a result of these negotiations, the Third Modification, which completely alters the treatment of Class 3 under the Plan, was proposed and filed.
In connection with the Third Modification, Jartran, Hall, Chrysler, Ford, and Fruehauf entered into an agreement (the “December 5 agreement”) in which Hall agrees to make a cash payment (the “Hall Payment”) to the secured creditors in the amount of $52,000,000 for the assignment of certain rights held by the secured creditors against Jartran. Of this amount, $45,-000,000, equally divided between Chrysler and Ford, represents the purchase price for their aggregate respective rights against Debtor and its property, and $7,000,000
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represents advance lease payments to Fruehauf. The $52,000,000 payment is to be reduced by all payments made by Debt- or on and after January 1, 1984, pursuant to the amended adequate protection orders entered herein. The December 5 agreement calls for the execution of a “Debt Restructuring Agreement” between Debtor and Hall and an “Obligation Restructuring Agreement” among Debtor, Hall, and Fruehauf. The Debt Restructuring Agreement obligates Debtor to make and deliver to Hall a promissory note (the “Hall Note”) evidencing Debtor’s obligation to pay to Hall as principal an amount equal to the Hall Payment plus interest to December 31, 1984, with interest on the principal sum subsequent thereto.
46
The Obligation Restructuring Agreement requires Debtor to pay to Fruehauf the sum of $14,400,000 in seventy-two equal monthly installments of $200,000 each beginning in January, 1985. In addition, Fruehauf is to receive on a quarterly basis an amount equal to 2% of Jartran’s rental revenue for the years 1984 through 1990 derived from equipment leased to Debtor by Fruehauf.
In addition to reducing total payments due to Class 3, the Third Modification and the above agreements incorporated therein were intended to relieve the cash flow shortage by effecting a moratorium on debt service for the year 1984 (other than the two percent of rental payments). The Third Modification provides that Article 5 of the Plan concerning treatment of Class 3 claims is deleted in its entirety and that a new Article 5 is substituted therefor, which again specifies that the allowed Class 3 claims of Chrysler, Ford, and Fruehauf are $69,927,999.96, $75,772,000.04, and $54,-700,000.09, respectively. These claims are to be discharged by the payments provided in the restructuring agreements described above. In the event the Effective Date of the Plan is subsequent to January 1, 1985, the Third Modification provides that the scheduled monthly installment payments due under the Restructuring Agreements prior to the Effective Date, reduced by any sums paid pursuant to the amended adequate protection orders entered herein, shall be due and payable on or about the Effective Date of the Plan. Finally, the Third Modification provides to Fruehauf the same Excess Cash Flow prepayments as provided in the Plan.
13. In connection with the Third Modification, Debtor prepared revised pro forma financial statements through 1987. Mr. Kenneth Rumsey, Jartran’s senior vice president and chief financial officer, testified in January, 1984 concerning Debtor’s revised business plan and the assumptions underlying the new cash flow forecast. He stated that although Jartran had not met the revenue projections for 1983 set forth in the Disclosure Statement, its rental transactions had increased approximately 13% over 1982. According to Mr. Rum-sey’s testimony, the revenue shortfall was principally due to pricing activities in the industry. He indicated that prices ordinarily rise significantly during the summer months but that in 1983, the customary seasonal price increases did not materialize.
The revised revenue forecast is contained in the Statements of Operation offered and received into evidence as Jartran Exhibit No. 102 (“Exhibit 102”), a portion of which is reproduced as Appendix D hereto. Exhibit 102 presents the actual financial results of operations for the period 1978 through 1982, the estimated actual financial results for the year 1983, and.projections for the years 1984 through 1987. According to Mr. Rumsey’s testimony, the projections of Exhibit 102 are more conservative than the forecast prepared in connection with the hearing on the Disclosure Statement. The Detail of Assumptions included in Exhibit 102 summarizes the annual percentage increases in revenue resulting from productivity improvements, pricing practices, and other factors as follows:
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Year Over Year Improvements 1984 1985 1986 1987
Transaction AcctAdj.; May-June 3.0% - % - % - %
Econ. 4.0 3.0 2.0 4.0
Productivity
5S
12.5% 2j> 5.5%
Z5
4.5% 2jj 6.5%
Pricing 3.0% 5.0% 5.0% 5.0%
Total 15.5% 10.5% 9.5% 11.5%
In addition to the increases listed above, the Detail of Assumptions also indicates that substantial increases in revenue are expected to result from expansion of the existing fleet, as explained
infra.
Mr. Rumsey testified that the increase in 1984 revenues labeled above as “Acct.Adj; May-June” refers to a change in Debtor’s accounting practice from a calendar month year to a "... four-five week year ... [which] relates to thirteen week quarters.” Mr. Rumsey stated that the result of the change was a one-week revenue loss in 1983 and a one-week gain in 1984.
A further increase in revenues for 1984 is based upon the assumption that Debtor will “recapture” market share lost when Debtor raised its prices during May and June of 1983. With regard to the projected annual revenue increases related to the economy, Mr. Rumsey stated that the percentages indicated above represent a composite of various forecasts, including projections published by the National Association of Realtors, the Department of Commerce, and the Wharton School of Finance.
47
A 5.5% increase in revenues for 1984 is predicated upon projected improvement in Debtor’s productivity, attributable to new and improved marketing programs and a 30% increase in its dealer base.
48
For the years 1985 through 1987, a 2.5% projected annual increase in revenues is ascribed to this factor.
An additional 3.0% projected increase in revenues for 1984 is based upon improvement in industry pricing. Mr. Rumsey testified that Debtor’s pricing department conducts telephone surveys of Debtor’s competitors on a regular basis to ascertain current price levels in the industry. The 3.0% revenue increase ascribed to this factor is based upon Debtor’s belief that pricing in the industry began to firm during the fourth quarter of 1983. For the years 1985 through 1987, the corresponding increase in revenues is projected to be 5.0% annually, based upon the Wharton School’s
49
estimate for transportation inflation.
A substantial increase in revenues is also projected as a result of Debtor’s new acquisition plan, which has supplanted the vehicle replacement program embraced within the original cash flow forecast of Exhibit E-6.
50
Pursuant to the new acquisition plan, Jartran will not replace any units but will add a specified number of vehicles to its fleet each year.
51
Debtor proposes to purchase 1,200 trucks
52
in 1985, 800 trucks in 1986, and 2,400 trucks in 1987. According to Mr. Rumsey’s testimony, “some” vehicles would be purchased in 1988, but no decision has yet been made as to the exact
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number that would be acquired. He stated that as a result of the vehicle acquisition program contemplated by the Third Modification, Jartran’s fleet would be approximately 40% larger than it would have been under the business plan reflected in the Disclosure Statement. The truck fleet is projected to increase under the new acquisition program to 15,000 units.
53
In projecting the revenue increases attributable to new vehicles, Debtor assumed that the additional revenue per truck would decline as the fleet grew in size.
54
Debtor projects that the revenue yield of the new vehicles will be as follows relative to existing fleet:
1984 1985 1986 1987
F-700’s 0 1,200 800 2,400
Revenue effectiveness compared to existing fleet - 100% 90% 80%
Debtor’s new business plan, as reflected in the projections of Exhibit 102, does not include a formal refurbishment program of the type described in Debtor’s Disclosure Statement. According to Mr. Rumsey’s testimony, Debtor repairs and replaces major components of its trucks on a routine basis and has found that the goals of the refurbishment program previously planned are being achieved in the context of Debt- or’s regular repair and maintenance program.
In addition to Exhibit 102, Debtor offered and the Court received into evidence as Jartran Exhibit No. 103 (“Exhibit 103”) a summary of receipts and disbursements for the years ended December 31, 1982 through December 31, 1987. It reflects the same financial projections (and revenue and expense assumptions) as Exhibit 102, discussed above.
55
The cash flow forecast of Exhibit 103 is the analogue of the forecast in Exhibit E-6 to the Disclosure Statement and is reproduced as Appendix E hereto. Exhibits 102 and 103 were prepared on the assumption of a March 31, 1984 Effective Date.
In Exhibit 103, disbursements for the year 1984 include,
inter alia,
payments to creditors in Classes 2, 4, 5, and 6.
56
The amount scheduled therein to be paid to Class 6 in 1984 is $2,000,000. Mr. Rumsey testified that the $2,000,000 disbursement represents the two annual $1,000,000 installments payable to Class 6 under the Plan on June 30, 1983 and June 30, 1984. Payments to Class 6 for the years 1985 through 1987 are projected in Exhibit 103 at $1,500,000 annually. According to Mr. Rumsey’s testimony, $1,000,000 of each $1,500,000 payment represents the annual installment due to Class 6 under the Plan. In addition, $500,000 per year is projected to be paid to Class 6 under the Excess Cash Flow formula. Mr. Rumsey explained that for conservative purposes, Jartran projected the maximum payment possible under that formula.
57
Exhibit 103 also includes projected short-term borrowings for the years 1983 through 1987. At the time that Exhibit 103 was prepared, viz., December 1,1983, Debt- or anticipated peak short-term borrowings of $11,750,000 for 1983. However, operations were more favorable than projected, and Debtor found it unnecessary to exceed its existing $10,000,000 line of credit. The projected peak short-term borrowings for 1984 are $15,000,000, which includes Jar-tran’s current $10,000,000 line of credit
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with the Bank of New York, guaranteed by Hall. It is anticipated that the projected $5,000,000 increase in that line of credit will also be guaranteed by Hall, as provided in the Third Modification. Mr. Rumsey testified in January of 1984 that negotiations were under way to increase Debtor’s line of credit to $16,500,000, rather than the $15,000,000 contemplated by the Third Modification. With respect to the additional $1,500,000, Hall, through its representative John Addeo, has made a verbal commitment to guarantee the loan. For the years 1985,1986, and 1987, peak short-term borrowings are projected at $18,500,000, $22,000,000, and $16,500,000, respectively.
In addition to the new projections of Exhibits 102 and 103, Debtor offered and the Court received into evidence Jartran Exhibit No. 101 (“Exhibit 101”), which compares the proposed payments to Hall and Frue-hauf under the Third Modification with the Class 3 payments originally called for by the Plan. Exhibit 101 is reproduced as Appendix F hereto. In preparing Exhibit 101, Debtor assumed that the Hall Payment would be made on April 1, 1984 in the amount of $52,000,000 and that Debtor’s obligation to repay Hall would bear interest at the rate of 13.5% annually. Debtor further assumed that the quarterly payments to Fruehauf, representing 2% of Jar-tran’ s rental revenue derived from equipment leased by Fruehauf, would increase from $79,000 per quarter in 1984 to $120,-000 in 1990. Mr. Rumsey testified that Debtor’s estimate of the quarterly payments to Fruehauf was “... based on our experience and what the revenue generation capacity is on Fruehauf equipment to this date extended through the period 1990 consistent with the financial projection we have made for this period of time.”
In Exhibit 101, which assumes a March 31, 1984 Effective Date, Debtor indicates that the sum of all payments to Hall and Fruehauf under the Third Modification would be $96,700,000. According to Debt- or’s calculations, the total of Class 3 payments originally proposed under the Plan was $172,900,000, for a savings under the Third Modification of $76,200,000. In addition, Debtor computes the present value, as of January 1, 1984, of all payments to Hall and Fruehauf under the Third Modification and of the Class 3 payments originally proposed under the Plan. Discounted at 13.5%, Debtor reports these values as $62,-399,000 and $98,470,000, respectively. The difference, or $36,071,000, is Debtor’s estimate of the present value of savings to be realized pursuant to the Third Modification’s restructuring of Class 3 debt.
The last of the exhibits prepared by Debtor to demonstrate the feasibility of the Plan as modified is Jartran Exhibit No. 104, which presents Debtor’s consolidated balance sheets at December 31, 1978 through 1983, as well as estimated balance sheets as of March 31, 1984 and April 1, 1984. The estimated balance sheets as of the latter two dates are intended to depict the accounting effects of a confirmation of Debtor’s Plan. According to Debtor’s estimates, the stockholders’ equity in reorganized Jartran as of April 1, 1984, for accounting purposes, would be $6,000,000.
14. At the initial evidentiary hearings held in 1983, Debtor submitted Jartran Exhibit No. 60 as proof of the liquidation value of its assets. Subsequently, in January, 1984, in connection with the continued hearings on confirmation required with respect to the Third Modification, Debtor offered a revised and updated liquidation analysis, received into evidence as Jartran Exhibit No. 160 (“Exhibit 160”). According to Exhibit 160, no distribution would be made upon Class 6 claims if the Debtor were liquidated under Chapter 7 of the Bankruptcy Code.
The Court Concludes and Further Finds:
1. One of the conditions of confirmation of a reorganization plan is that each class has voted to accept it or is not impaired thereunder. Central to the Court’s determination in this case is whether Class 6 has rejected the Plan, for if it has, then the Plan may only be confirmed if the so-called “cram-down” requirements of
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§ 1129(b) are met with respect to Class 6.
58
In determining whether Class 6 has rejected the Plan, the Debentureholders’ application for leave to amend their ballots will first be considered.
Bankruptcy Rule 3018
59
provides in relevant part as follows:
“... For cause shown and within the time fixed for acceptance or rejection of a plan, the court after notice and hearing may permit a creditor or equity security holder to change or withdraw an acceptance or rejection....”
Here, the Debentureholders sought leave to amend their ballots after the voting deadline had passed. The language of Rule 3018 appears to bar the change of vote from rejection to acceptance. The De-bentureholders argue, however, that the rule should not be read to preclude all exercise of judicial discretion. They urge that such a reading would subvert Congressional intent to have negotiated, consensual plans wherever possible.
The Court is reluctant to rule that the exercise of judicial discretion concerning a tardy change or withdrawal of vote is completely precluded by the language of Rule 3018. There may be exceptional circumstances which, in light of the spirit of Chapter 11 to promote consensual plans, would warrant such a change notwithstanding the unequivocal language of the Rule. However, in this case no such exceptional circumstances exist. As discussed
infra,
the case is in a cram-down posture with respect to Class 6 regardless of any vote by the Debentureholders.
There is a further reason for disallowing the vote change in this case. In the Litigation Settlement Agreement, the De-bentureholders agree not only to waive participation in the Class 6 distribution and to release the defendants from all causes of action in Adversary No. 82 A 3964, they also agree to amend their ballots from rejection to acceptance of Debtor’s Plan. There has been full disclosure of the contractual commitment to the Court and parties in interest throughout the negotiation process and at the hearings on the Deben-tureholders’ application. Notwithstanding such disclosure, the change of vote must be disallowed. Where leave to amend a ballot is sought pursuant to a contract with fewer than all members of a class and constitutes partial consideration thereunder, the proposed amendment is inappropriate as against public policy, even if the contract is also in settlement of' claims or actions brought by those contracting members of the class.
60
The parties to the Litigation Settlement Agreement have filed a position paper to the effect that the failure of the Debentureholders to amend their ballots would not be a breach of the Litigation Settlement Agreement or constitute a default thereunder. In light of the Court’s ruling that the provision concerning change of vote is against public policy, the Court considers the provision expunged from the Litigation Settlement Agreement, and deemed not enforceable.
2. By separate order entered concurrent herewith, the Court has estimated the claim of U-Haul, arising out of Jartran’s alleged unlawful conduct which is the subject matter of the Phoenix suit. The Court has allowed U-Haul’s claim in the amount of $22,500,000. Based upon the Report of the Creditors’ Committee on
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Ballots Received, the amount of claims voted, other than U-Haul’s claim, total approximately $18,500,000. Approximately $11,-250,000 voted to accept the Plan.
61
The request of the Debentureholders to register a change of vote has been denied. Accordingly, Class 6 has not accepted the Plan by the requisite two-thirds in amount. The Plan is in a cram down posture regardless of the magnitude of U-Haul’s claim. The Plan would remain in cram down, even if the Debentureholders were to be allowed to change their vote from rejection to acceptance, unless U-Haul’s claim, filed in the amount of $375,000,000, were found to be less than $7,000,000.
3. As Class 6 has rejected the Plan by vote, and Class 7 is deemed to have rejected the Plan pursuant to § 1126(g), the Plan may only be confirmed if it meets the requirements of § 1129(b), which provides in part as follows:
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
Accordingly, the Court may confirm the Plan only if it does not discriminate unfairly, and is fair and equitable, with respect to Classes 6 and 7.
Section 1129(b)(2) “... provides guidelines for a court to determine whether a plan is fair and equitable with respect to a dissenting class.” 124 Cong.Rec. Hll,-104 (1978).
62
That section provides in relevant part as follows:
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(B) With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain on account of such junior claim or interest any property.
(C) With respect to a class of interests—
(i) the plan provides that each holder of an interest of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, and the value of such interest; or
(ii) the holder of any interest that is junior to the interests of such class will not receive or retain under the plan on account of such junior interest any property.
The above-quoted provisions require payment of the allowed amount, as opposed to the value, of the unsecured claim or interest. 124 Cong.Rec. S17,421 (1978).
These provisions codify the absolute priority rule with respect to dissenting classes of unsecured claims and dissenting
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classes of interests. H.R.Rep. No. 595, 95th Cong., 2d Sess. 413-14 (1978), U.S. Code Cong. & Admin.News 1978, 5787. Under the absolute priority rule, which formed a part of the “fair and equitable” test under former Chapter X
63
, a class must be compensated in full before any junior class may participate.
See
Klee,
All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code,
53 Am.Bankr.L.J. 133, 143 (1979) One of the seminal decisions concerning the fairness of reorganization plans and the standards by which they are to be evaluated was
Northern Pacific Railway Co. v. Boyd,
228 U.S. 482 , 33 S.Ct. 554 , 57 L.Ed. 931 (1913).
Boyd
was an equity receivership reorganization in which the assets of the Northern Pacific Railroad (the “Road”) were sold on foreclosure to the newly organized Northern Pacific Railway (the “Railway”). Pursuant to the reorganization plan, the Road’s bondholders exchanged their bonds, in the approximate amount of $147,500,000, for new bonds in the Railway.
64
The stockholders of the Road, upon payment of certain assessments, likewise exchanged their shares for new shares in the Railway.
65
Under the reorganization plan, no provision was made for payment of unsecured debts.
66
An unsecured creditor of the Road brought a bill in equity against the Road and the Railway seeking to subject the property purchased to the payment of his claim. The Court, noting that the reorganization agreement contained a recital that the value of property foreclosed upon was agreed to be $345,000,000, upheld the decree making Boyd’s claim a lien upon the property of the Road in the hands of the Railway, subject only to mortgages placed thereon at the time of reorganization.
The fact that at the sale, where there was no competition, the property was bid in at $61,000,000 does not disprove the truth of that recital, and the shareholders cannot now be heard to claim that this material statement was untrue and that as a fact there was no equity out of which unsecured creditors could have been paid, although there was a value which authorized the issuance of $144,-000,000 fully paid stock. If the value of the road justified the issuance of stock in exchange for old shares, the creditors were entitled to the benefit of that value,
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whether it was present or prospective, for dividends or only for purposes of control. In either event it was a right of property out of which the creditors were entitled to be paid before the stockholders could retain it for any purpose whatever.
Id.
at 508 , 33 S.Ct. at 561 . While the foreclosure sale was valid as between the parties and the general public, it was “a mere form” with respect to the Road’s creditors. The shareholders held the property under a new charter but subject to existing liabilities, in the same fashion as "... a defendant who buys his own property at a tax sale.”
Id.
at 507 , 33 S.Ct. at 561 .
The rule of full and absolute priority was reaffirmed in
Case v. Los Angeles Lumber Products Co., Ltd.,
308 U.S. 106 , 60 S.Ct. 1 , 84 L.Ed. 110 (1939). In
Los Angeles Lumber,
the debtor had bonds outstanding in the amount of $3,807,071.88, including principal and interest. Under the proposed reorganization plan, a new corporation would be formed which would acquire substantially all the debtor’s assets.
67
The corporation was to issue 811,375 shares of preferred stock and 188,625 shares of common stock.
68
Of the preferred stock, 170,-000 shares were to be sold to raise money for necessary betterments, and the remaining 641,375 shares were to be issued to the debtor’s bondholders.
69
The shareholders
70
were to receive the 188,625 common shares without payment of any subscription or assessment. The par value of preferred and common shares to be issued to the debtor’s security holders was $830,000, the going concern value of the enterprise.
The Court held that the plan was not fair and equitable because the full value of corporate property was not first applied to the bondholders’ claims. Rather, 23% of the value of the enterprise was to be diverted to the shareholders, even though the bondholders would realize less than 25% of their claims if all the assets were awarded to them.
Id.
at 120 , 60 S.Ct. at 9 . The Court explained:
It is, of course, clear that there are circumstances under which stockholders may participate in a plan of reorganization of an insolvent debtor. This Court, as we have seen, indicated as much in
Northern Pacific Ry. Co. v. Boyd, supra,
and
Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra
[ 271 U.S. 445 , 46 S.Ct. 549 , 70 L.Ed. 1028 (1926) ]. Especially in the latter case did this Court stress the necessity, at times, of seeking new money “essential to the success of the undertaking” from the old stockholders. Where that necessity exists and the old stockholders make a fresh contribution and receive in return a participation reasonably equivalent to their contribution, no objection can be made. But if these conditions are not satisfied the stockholder’s participation would run afoul of the ruling of this Court in
Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra,
that
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“Whenever assessments are demanded, they must be adjusted with the purpose of according to the creditor his full right of priority against the corporate assets, so far as possible in the existing circumstances” _ If, however, those conditions we have mentioned are satisfied, the creditor cannot complain that he is not accorded “his full right of priority against the corporate assets.” If that were not the test, then the creditor’s rights could be easily diluted by inadequate contributions by stockholders. To the extent of the inadequacy of their contributions the stockholders would be in precisely the position which this Court said in
Northern Pacific Ry. Co. v.
Boyd,
supra,
the stockholders there were in, viz., “in the position of a mortgagor buying at his own sale” ....
In view of these considerations we believe that to accord “the creditor his full right of priority against the corporate assets” where the debtor is insolvent, the stockholder’s participation must be based on a contribution in money or in money’s worth, reasonably equivalent in view of all the circumstances to the participation of the stockholder.
Id.
at 121-22, 60 S.Ct. at 10 (footnotes and citations omitted).
The Court’s holding can be illustrated thus: Suppose the debtor corporation has assets valued on a going concern basis at $9,000,000, and its only liabilities are unsecured claims aggregating $15,000,000. If stock is awarded to creditors in payment of their claims and the shareholders wish to retain a 10% interest after reorganization, they must make a contribution
71
of $1,000,-000 to the enterprise.
72
In that event, the 90% interest of the creditors would be worth $9,000,000, the shareholders’ 10% participation in the company would be equal in value to their contribution of $1,000,000, and the full value of corporate property, viz., $9,000,000, would have been applied in satisfaction of creditors’ claims.
If, on the other hand, the shareholders were to contribute only $500,000, the company would then have a going concern value of $9,500,000, and the creditors’ 90% interest would be worth only $8,550,000. Of the $9,000,000 going concern value to which the creditors were entitled, $450,000 would have been appropriated for the benefit of the shareholders, whose 10% participation in the company would be worth $950,000, or $450,000 more than their contribution.
73
Debtor contends that Hall’s proposed contribution of cash in the amount of $5,000,000 plus the value of its guarantees is reasonably equivalent in value to the equity in the reorganized company. According to Debtor, if the equity in reorganized Jartran is worth $9,000,000, then Hall must contribute to Debtor property having a value of $9,000,000. U-Haul disputes the amount that Hall must pay to the Debtor, arguing that the appropriate measure is the value of benefits which will accrue to Hall through ownership of the reorganized company.
74
Both parties misconstrue the holding of
Los Angeles Lumber,
for even if the equity in reorganized Jartran were held to be $20,-000,000, payment by Hall to Debtor of $20,-000,000 in cash would not satisfy the conditions for shareholder participation enunciated in that case. Hall’s participation
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would then be worth $40,000,000, or twice the amount of its $20,000,000 contribution. The payment by Hall to its wholly owned subsidiary would redound directly to Hall’s benefit and would in no way benefit the creditors of this estate.
Under the holding of
Los Angeles Lumber,
Hall may only retain a 100% interest in reorganized Jartran if the full going concern value of the company has first been allocated to creditors’ claims. If the present value of deferred cash payments proposed to be made to creditors under the Plan is less than the going concern value of the firm, then the shareholders’ equity has some value, and any contribution by Hall will of necessity be less than the value of its participation. On the other hand, if the present value of proposed payments is equal
75
to the going concern value of the firm, then the shareholders’ equity is valueless, and any necessary contribution by Hall would be at least equal to the value of its 100% participation.
4. The value of a firm for corporate reorganization purposes depends primarily upon its earning capacity, for “ ‘the commercial value of property consists in the expectation of income from it.’ ”
Consolidated Rock Products Co. v. DuBois,
312 U.S. 510, 526 , 61 S.Ct. 675, 685 , 85 L.Ed. 982 (1941) (quoting with approval
Galveston, H. & S.A. Ry. Co. v. Texas,
210 U.S. 217, 226 , 28 S.Ct. 638, 639 , 52 L.Ed. 1031 (1908)). In arriving at a value for these purposes, an estimate must be made of the present value of future earnings. The discounted cash flow approach employed by Dr. Hamada achieves this objective.
In his Report, Dr. Hamada stated that his best estimate of the September 1, 1982 value of shareholders’ equity in reorganized Jartran was $16,367,000. This figure was based upon his best estimate of Jar-tran’s real, pure equity cost of capital of 7.4% and a slow vehicle replacement policy in the steady state years. In addition, Dr. Hamada reported “fairly feasible deviations” from this best estimate, ranging from negative $44,069,000 to positive $61,-485,000. The lower value was based upon an 8.15% real cost of equity capital, a fast steady state replacement policy, and a negative 5% variance in the sum of rental revenues and variable costs. The higher figure was based upon a 7.4% cost of capital, a slow steady state replacement policy, and a positive 5% variance in the sum of rental revenues and variable costs.
In the Update, Dr. Hamada reported his best estimate of the January 1, 1983 value of shareholders’ equity in reorganized Jar-tran as $9,159,000. Presumably, “fairly feasible deviations” from this updated estimate would range from negative $52,156,-000 (based upon an 8.15% cost of capital, fast replacement policy, and a negative 5% variance in the sum of rental revenues and variable costs) to positive $54,923,000 (based upon a 7.4% cost of capital, slow vehicle replacement policy, and a positive 5% variance in the sum of rental revenues and variable costs).
In making the informed and independent determination of value called for in this proceeding, the Court must first decide upon the appropriate rate at which to discount Jartran’s projected cash flows. If cash flow projections are made without regard to inflation, then the cost of capital used to discount those cash flows must be a real, inflation-free cost of capital. The reverse is also true; if projections incorporate inflationary increases, then a nominal cost of capital must be used.
See Doca v. Marina Mercante Nicaraguense, S.A.,
634 F.2d 30, 40 (2d Cir.1980); Roger G. Ibbotson and Rex A. Sinquefield,
Stocks, Bonds, Bills and Inflation: The Past and the
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Future
85 (1982);
see also
Recent Development,
Inflation and the Concept of Reorganization Value,
34 Vand.L.Rev. 1727 (1981). Dr. Hamada estimated Jartran’s real, inflation-free cost of capital, and he required cash flow projections expressed in constant 1982 dollars. He explained that this approach was used in an effort to avoid speculation as to the level of future inflation.
In
Doca v. Marina Mercante Nicaraguense, S.A., supra,
the court approved the use of an “adjusted discount rate approach” in the context of computing damage awards for lost future wages. There, the court suggested that lost future wages may be calculated without regard to inflation and then discounted to present value at the real, risk-free rate of interest.
76
Noting that this method “... avoids all predictions about the level of future inflation ...”, the court concluded that a discount rate of 2% would be appropriate to compute the damage award in issue.
Id.
at 39 . The court observed:
Although economists disagree over the validity of the assumption that the real rate of interest is constant and consequently independent of inflation,
cf.
Pama,
Interest Rates and Inflation: The Message in the Entrails,
67 Amer. Econ.Rev. 487 (1977) (real rate constant)
with
Carlson,
Short-Term Interest Rates as Predictors of Inflation: A Comment,
67 Amer.Econ.Rev. 469 (1977) (real rate varies), there is substantial opinion that during periods of stable rates of inflation, the real yield of money, whether constant or slightly fluctuating, is approximately 2% ....
Id.
at 39 n. 10. For purposes of the valuation to be made herein, the Court approves the use of an adjusted discount rate, or real cost of capital, as well as the 2% real, risk-free rate of interest selected.
77
Dr. Hamada used the 2% risk-free rate (r(f)) to compute Jartran’s cost of capital in the equation relating risk to return:
78
r = r(f) + b(r(m) — r(f)). For the required market risk premium (r(m)-r(f)) (that is, the risk premium demanded for investing in a stock of average risk), he estimated an annual rate of 8.3% based upon historical findings of Roger G. Ibbotson and Rex A. Sinquefield in
Stocks, Bonds, Bills and Inflation: The Past and the Future
(1982). No evidence was presented to contradict this estimate. In
In re The Valuation Proceedings under Sections 303(c) and 306 of the Regional Rail Reorganization Act of 1973,
531 F.Supp. 1191, 1232 (Regional Rail Reorg. Ct.1981), the court noted that “[tjhere is rough agreement among the experts on the rate of return on average-risk investments. [Experts who testified in the case] relied on a study performed by Ibbotson and Sinquefield which found that, for the period from 1926 to 1976, the real rate of return for the Standard and Poor’s index of 500 stocks was 9.2 percent.”
Id.
The real rate of
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return of 9.2% would include both the required market risk premium and the real, risk-free rate of interest.
79
The Court finds that the 8.3% estimate of the required market risk premium is within a reasonable range and is appropriate, in the context of Dr. Hamada’s methodology, for obtaining Jartran’s real cost of equity capital.
The remaining variable required to compute cost of capital in the equation relating risk to return is the beta coefficient. As explained
supra,
Dr. Hamada relied on stock market data to determine the unlev-ered beta coefficients for eleven firms in Jartran’s business classification. He chose as his best estimate of Jartran’s beta the average of the unlevered beta coefficients for the eleven firms. He added, however, that of the eleven businesses studied, Ryder Systems, Inc. was the firm most comparable to Debtor.
While it is appropriate to consider stock market data of the type relied upon by Dr. Hamada, some consideration must also be given to Jartran’s particular situation and the risks associated therewith. In this regard, it should be observed that the beta coefficient “... measures the amount of risk which a stock contributes to a portfolio made up of a large number of stocks.”
In re The Valuation Proceedings under Sections 303(c) and 306 of the Regional Rail Reorganization Act of 1973, supra,
at 1233. It does not measure all the risk of a stock held in isolation. For purposes of the instant valuation, the difference is significant. Stocks held as part of a portfolio are not as risky as stocks held in isolation, because in a portfolio, negative trends in the returns of some stocks may be offset by positive trends in the returns of others. Thus, as more and more stocks are added to a portfolio, the portfolio’s risk declines. The only risks which theoretically remain in a well-diversified portfolio are those risks which affect all firms simultaneously, such as inflation, and therefore cannot be eliminated by diversification.
80
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The model employed by Dr. Hamada was developed by financial experts on the assumption that investors are risk-averse and will hold stocks in portfolios. Accordingly, the beta coefficient measures the degree to which the stock fluctuates in response to forces which affect the market as a whole. It does not measure the added risks associated with events unique to a particular business, because those risks can be eliminated by diversification.
These additional risks associated with events unique to Jartran must be given some consideration.
81
They include,
inter alia,
Jartran’s recent financial problems, its changing management, and its exposure with regard to a number of substantial lawsuits. In order to allow for deviation occasioned by these additional risks, the Court has modified the 7.4% best estimate arrived at by Dr. Hamada and concludes that Jartran’s real cost of equity capital is more appropriately in the range of 8.15% (the rate ascribed to Ryder Systems, Inc.), which rate was included within Dr. Hama-da’s range of “fairly feasible deviations.”
5. Dr. Hamada’s best estimate of the January 1, 1983 value of shareholders’ equity in reorganized Jartran, based upon an 8.15% cost of capital and slow vehicle replacement strategy, is negative $3,628,000, and the corresponding going concern value of the firm is estimated at $115,227,000. These figures (“the January 1, 1983 values”) are based upon the original projections of Exhibit E-6. At the hearing on confirmation, Dr. Hamada was extensively cross-examined concerning both the methods he employed and his calculations of value. The Court finds that those methods and calculations were proper and that the January 1, 1983 values represent accurate calculations of what the going concern value and value of shareholders’ equity would have been as of that date if the cash flow forecast of Exhibit E-6 were adopted by the Court as its estimate of Jartran’s reasonably foreseeable earnings future.
However, the cash flow forecast of Exhibit E-6, because of substantial change of circumstances involving the Debtor, its business plan and property, and the Plan of Reorganization, is not an appropriate estimate of Jartran’s reasonably foreseeable earnings. The Third Modification has reduced the capital requirements necessary under the Plan to service the secured Class 3 debt of Chrysler, Ford, and Fruehauf, which is now to be acquired in large part by Hall. Debtor has also formulated a new business plan, which includes management policy decisions affecting expense and capital requirements, such as the elimination of the truck replacement program and substitution therefor of a new vehicle acquisition program described above.
For the basis of the Court’s judgments herein, the Court has formulated an estimate of Debtor’s future earnings. In arriving at this estimate, the Court begins its analysis with the projections incorporated in Exhibits 102 and 103 prepared by Debtor in connection with the Third Modification and the formulation of Debtor’s new management plan. The revenues for 1983, oth
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er than ETS contribution, were projected by Debtor in Exhibit 103, dated December 1, 1983, as $85,764,000. For 1984, Debtor projected revenues of $96,000,000 based upon revenue assumptions contained in the Detail of Assumptions to Exhibit 102 and discussed in depth
supra.
The Court has determined that the percentage increases attributable to general improvement in the ecohomy, improvement in industry pricing, recapture of market share lost during the early summer of 1983, and Debtor’s revised accounting procedures, are reasonable adjustments, of proper magnitude. With respect to adjustments for productivity for 1984, each of the factors detailed in Debt- or’s Explanation of Variance, other than the increase described therein as “emergence from chapter 11”, are entitled to consideration for their revenue effect. The Court, however, has determined that the aggregate 5.5% increase is unrealistic and requires substantial reduction. Accordingly, the projected revenue increase for 1984 attributable to productivity has been reduced to 3%. The Court’s adjusted percentage increase in revenue for 1984 is 13%, resulting in revenues of approximately $97,00Q,000.
For the years 1985, 1986, and 1987, the accounting procedure adjustment and the one-time adjustment for recapture of market share lost during 1983 are inapplicable and have no revenue effect. The Court has determined that the projected increases for each of the years 1985, 1986, and 1987 attributable to general improvement in the economy and to improvement in industry pricing are reasonable adjustments, all of proper magnitude. For each of these years, it is the Court’s opinion that the productivity adjustment has been overstated, and the Court has reduced the adjustments to a level of 1.5% for each year. The Court’s adjusted percentage increases in revenue for 1985, 1986, and 1987 are therefore 9.5%, 8.5% and 10.5%, respectively. The Court further finds Debtor’s adjustments to revenues for these years, based upon revenue effectiveness of new trucks, as compared to existing fleet, of 100% in 1985, 90% in 1986, and 80% in 1987 to be reasonable and within the realm of realization.
82
The net result is revenue of $115,000,000, $130,000,000, and $160,000,-000 for the years 1985, 1986, and 1987.
6. The sensitivity analysis performed by Dr. Hamada provides an appropriate vehicle for adjusting the January 1,1983 values to reflect the cash flow forecast adopted by the Court (the “adjusted forecast”). The first item as to which Dr. Hamada performed a sensitivity analysis was “rental revenues minus variable costs”, which for convenience the Court shall refer to as “net rental revenues”. In applying the sensitivity analysis, the Court has estimated the percentage by which net rental revenues in the adjusted forecast fall short of rental revenues in Exhibit E-6.
83
The Court’s calculations are shown in Appendix F hereto. The percentage deviation in net rental revenues was calculated by estimating first the present value,
84
as of January 1, 1983,
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of the net rental revenues projected in Exhibit E-6 and then the present value of the net rental revenues in the adjusted forecast.
The present value of net rental revenues projected in Exhibit E-6 was computed as follows: 1) the inflationary component (7.5% per year) was removed from the relevant revenue and expense figures; 2) an annual
85
net rental revenue figure was calculated for each year covered by Exhibit E-6; 3) an estimate was made of the annual net rental revenue in the steady state years;
86
and 4) the net rental revenue figures were discounted to January 1, 1983 at the annual rate of 8.15%. The resulting figure is $843,313,000.
The present value of net rental revenues projected in the Court’s adjusted forecast was estimated in a similar fashion, as shown in Appendix G. Exhibit 103, upon which the adjusted forecast is based, contains no detail as to variable costs, but combines all operational expenses into one figure. Accordingly, the Court has estimated the variable costs for each year of the adjusted forecast. Based upon information contained in Exhibit 102 and in Exhibits E-3 and E-6 to the Disclosure Statement, variable cqsts in the adjusted forecast are assumed to be 50% of rental revenues.
87
The present value of net rental revenues in the adjusted forecast is estimated at $644,709,000, or 23.6% less than in the original cash flow forecast relie

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1969284. Public record. Not legal advice.