Motion — Pacific Gas & Elec. Co. v. City and County of San Francisco

Supreme Court of the United States

Ocroper Term, A. D. 1942.

Nos, 34-35-36.

In the Matter of

CHICAGO AND NORTH WESTERN RAILWAY

COMPANY,

Debtor.

CHICAGO AND NORTH WESTERN RAILWAY

COMPANY, Debtor,

Petitioner,

v8.

MUTUAL SAVINGS BANK GROUP COMMITTEE,

et al.,

Respondents.

MOTION FOR PERMISSION TO FILE ATTACHED

SUPPLEMENTAL BRIEF IN SUPPORT OF

PETITION FOR WRITS OF CERTIORARI.

i

al

HELEN W. MUNSERT,

LUTHER M. WALTER,

Attorneys for Chicago and North

Western Rai.way Company,

Debtor, Petitioner.

April 1, 1943.

BARNARD & MILLER, 33 S. Market St., Chicago. Fra nklin 0562

RT MS RIE RT ERE CT I me

Motion ......

TABLE OF CONTENTS.

0 22 P6 OP OOS. KOS 8 CCE OBR OHS 8 O'S 6 CDRA BDO

Supplemental Brief in Support of Petition for Writs

OE TNE eo bp Lice tana thee eis enti

Foreword

cee eee eee ere eee eee eee esses seeeeeseeeeees

Debtor’s objections to plan of reorganization...

Objection No. 1. Maximum capitalization...

Objection No. 2. Value of equity of Debtor’s

preferred and common stock.............

Objection No. 6. The treatment accorded to

the

Reconstruction Finance Corporation is

unfair and inequitable...................

(a)

(b)

(c)

(d)

(e)

The amount of securities allotted to

Reconstruction Finance Corporation is

CREOUIRE. eg cixc hc vctnos See OER ATE See

Treatment of other creditors compared

with Reconstruction Finance Corpora-

ER One Heere Prom rom rye tar

The reorganized company should have

the right to redeem collateral of Re-

construction Finance Corporation....

Reconstruction Finance Corporation

should not receive any outright un-

conditional conveyance of _ securities

fee of lessening effect on its claim..

The proposed agreement submitted

under date of July 19, 1940, by the

Reconstruction Finance Corporation

for release of all securities of the re-

organized company by payment of a

cash sum, is evidence of the excessive

character of the securities allotted to

the Reconstruction Finance Corpora-

Tv ccnves i asgse dak Oekear cee ens

18

23

26

27

ii

PAGE

Objection No. 7. Duplication in allowances

for interest on Reconstruction Finance Cor-

NN WD Viv ccviayatnuaeustenereae

Objection No. 8. Alternative treatment of

Reconstruction Finance Corporation......

Objection No. 9. Finance committee.......

Objection No. 10. Voting trust...........

Objection No. 11. Reorganization managers

Objection No. 12. Rehabilitation program. .

Objection No, 13. Earnings in normal year,

and Objection No. 14. Additional prospec-

tive earnings not considered by the Com-

RE rk aS TERED hie ean ns 36

Objection No. 15. Common stock reserved for

ee SP ee a 5 eee 37

Objection No. 16. Debtor’s pension system.. 37

Objection No. 17. Determination of value of

DOGE'S Properties: Pees s ccc seas 37

Objection No. 18. Refusal of Commission to

consider plan of consolidating properties

of Debtor and Chicago, Milwaukee, St.

Paul and Pacific Railroad Company......

The modifications in the plan of reorganization made

by the District Court should have been referred

to the Interstate Commerce Commission for em-

SN te WON DOME ss cada bi deaee. ddiva vanes

Claims for equitable treatment.................-0-

The effective date of plan of reorganization herein

should be fixed at June 28, 1935..............

Coomreensaen 06 Te cai bi wo eR hi ks ae

The tax burden vitally affects the plan of reorganiza-

tion and should be further considered by the Com-

SNE, ics) b ches aa hous. 25.5 S08 Cas Roo Rea A eyes

SIE ai Gis Seas aa Sere oa ee ee ROE oa hn a

PTAA ONO REI RT RI oF BAe EY ry aS

TaBLe oF Cases CITep.

PAGE

Case v. Los Angeles Lumber Products Co., 308 U. S.

DRO ie 5 on Hap ORERVERE A Aa as DEKH CASS haw EE ER Ce 48

Carey ¥. Demons, 200 UU. Bo OB. a vice dvinas 46

Chicago & North Western Railway Company Recon-

struction Loan, 202 I. C. C. 347, 349............. 12, 13

Consolidated Rock Products Co. v. DuBois, 312 U. S.

TOs kvass 8 0005 $4 Cea eee een Seka Chie 6

Ecker et al. v. Western Pacific Railroad Corporation

ght RET ELT ELT ORT Ee eT OES er eee eae aoe 2,9

Group of Institutional Investors et al. v. Chicago,

Milwaukee, St. Paul & Pacifie Railroad Company

rere ST sey eee. Yak ee Tera nae 2,5

Northern P. R. Co. v. Boyd, 228 U. S. 482.......... 6

Pennsylvania Railroad Company v. International Coal

Mining Company, 230 U. S. 184, 198............... 46

Securities of Louisville & Nashville R. R., 76 I. GC. C.

FEey FE Skoda eR adds he vee We eo eda tee ke ce 9

Stock of Delaware, Lackawanna & Western R. R., 67

BO ce cece rawness boars at he 9

U.S. v. Delaware & Hudson Co., 213 U. S. 336, 414.. 46

SEARO LIL Sy ORE ETON ILE YEON

SL ALE RRNA Ge,

Supreme Court of the United States

Ocroper Term, A. D. 1942.

Nos, 34-35-36.

In the Matter of

CHICAGO AND NORTH WESTERN RAILWAY

COMPANY,

Debtor.

CHICAGO AND NORTH WESTERN RAILWAY

COMPANY, Debtor,

Petitioner,

v8.

MUTUAL SAVINGS BANK GROUP COMMITTEE,

et al.,

Respondents.

MOTION FOR PERMISSION TO FILE ATTACHED

SUPPLEMENTAL BRIEF IN SUPPORT OF

PETITION FOR WRITS OF CERTIORARI.

_—

—

To the Honorable the Chief Justice and the Associate

Justices of the Supreme Court of the United States:

Counsel for petitioner respectfully move for permission

to file the supplemental brief attached hereto in support of

a coal

2

petition for writs of certiorari, and in support thereof show

as follows:

On March 15, 1943, this Court handed down its decisions

in Docket Nos. 11-19, 32, Group of Institutional Investors

et al. v. Chicago, Milwaukee, St. Paul & Pacific Railroad

Company et al., and Docket Nos. 7, 8, 20, 33, and 61,

Ecker et al. v. Western Pacific Railroad Corporation et al.,

in which important principles of law and procedure affect-

ing reorganization of railroad companies under Section

77 of the Bankruptcy Act are enunciated. Counsel for

petitioner herein desire to submit certain observations as

to the effect which such decisions may have upon the dis-

position of the petition for writs of certiorari herein.

These proceedings relate to a plan of reorganization of

the Debtor, Chicago and North Western Railway Company,

under Section 77 of the Bankruptcy Act. A number of ques-

tions involved in these proceedings are related to, or are

similar to, questions considered and disposed of in the

two decisions above named, but many important ques-

tions involved in these proceedings did not exist in those

cases and should be considered and specifically passed upon

by this Court.

The two decisions above referred to do not dispose of

the objections raised by the Debtor to the plan of reorgan-

ization which was approved by the District Court on Octo-

ber 12, 1940 (Tr. 5072), nor do these decisions dispose of

the objections to the decree of the District Court of June

27, 1941, confirming the plan of reorganization of the

Debtor. (Tr. 5591)

The questions involved in the two appeals from the

orders of October 12, 1940, approving the plan of reorgan-

ization and of June 27, 1941, confirming the plan of re-

organization are important and their determination should

Pe

yuld

3

be helpful in other proceedings for reorganization of

railroads.

WHEREFORE, request is respectfully made that the sup-

plemental brief attached hereto be received and considered

in connection with said petition for writs of certiorari.

Heten W. Monsert,

Luruer M. Watrer,

Attorneys for Chicago and North Western

Railway Company, Debtor,

Petitioner.

Dated at Chicago, Illinois,

April 1, 1943.

SU

SUPPLEMENTAL BRIEF IN SUPPORT OF PETITION

FOR WRITS OF CERTIORARI.

ns

Foreword,

The decisions of this Court on March 15, 1943, in

Docket Nos. 11-19, 32, Group of Institutional Investors

et al. v. Chicago, Milwaukee, St. Paul & Pacific Railroad

Co. et al., and in Docket Nos. 7, 8, 20, 33 and 61, Ecker

et al. v. Western Pacific Railroad Corp. et al., had rela-

tionship primarily to the facts of record in each case, and

where, as here, there is a different set of facts, the prin-

ciples announced in those cases may not have complete

application. In this brief we are undertaking to em-

phasize the points involved in the instant application for

writs of certiorari which are not controlled by the opinions

of this Court in said two cases.

Petitioner seeks a reversal of the decision of the Circuit

Court of Appeals for the Seventh Circuit affirming the

decree of the District Court of October 12, 1940, approving

the plan of reorganization of the Debtor, and of the decree

of June 27, 1941, confirming such plan of reorganization.

There is a fundamental fact which must be kept con-

stantly in mind in determining the various legal and admin-

istrative questions in every plan of reorganization of a

railroad company. All the operating revenues of the rail-

road company are determined by the same administrative

body, the Interstate Commerce Commission, that prepares

the plan of reorganization; such plan must in a very large

measure depend upon the revenues which the Commission

permits the railroad company to receive. In other words,

the Interstate Commerce Commission is responsible pri-

6

marily for the corporate structure, for the revenues, and

in a large measure for the expenditures of the company,

Thus, the Commission, in the long run, is responsible for

the financial plight of any of the interstate railroads of

this country.

Debtor’s petition under Section 77 was filed because

of its inability to pay interest on its outstanding debt

securities, and it sought to effect a plan of reorganiza-

tion. Had the interest on its debt been contingent upon

earnings, no such proceeding would have been neces

sary. There has been no finding, either of a court or

the Commission, that the Debtor is insolvent. The rights

of investors in securities of a public utility, subject as

these public utilities are to Governmental regulation,

should not be disposed of on the primary basis of earnings

thus controlled. If the Government may of right determine

through rate-making and other regulation how much a util-

ity will be allowed to earn, then it should not force the

earnings which it permits, to be the controlling basis for

capitalization to be issued to investors. We think that

Congress intended by Section 77 to reorganize railroad

corporations unable to meet their debts as they mature,

by a minimum change in capital structure which would

enable the corporation to continue as a public utility.

By change in rate and character of interest, whether fixed

or contingent, a new plan of reorganization can always

be effected without changing priority of debt or in any

way violating the recognized principles such as set forth

in Northern P. R. Co. v. Boyd, 228 U. S. 482, and in the

ease of Consolidated Rock Products Co. v. DuBois, 312 UV.

S. 510.

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7

Debtor’s Objections to Plan of Reorganization.

Debtor’s objections to the plan of reorganization were

eighteen in number and are set forth at pages 42 to 44,

inclusive, of the Petition and Brief in Support of Petition

for Writs of Certiorari herein, and more fully in the

transcript at pages 4000-15. These objections have not

been passed upon by this Court and we think it important

to call them to the Court’s attention so that they may be,

since they raise points appearing in many railroad re-

organizations.

Objection No. 1. Maximum Capitalization.

The plan of reorganization fixed the maximum limits of

capitalization at $449,974,309, but the Commission author-

ized as against the assets as of January 1, 1939, the issue

of only $423,774,309; first and general mortgage bonds,

Series B, in the sum of $13,100,000 (Tr. 3634), and common

stock in a like amount (Tr. 3653), were reserved to finance

subsequent expenditure in the rehabilitation and improve-

ment program, and when issued would represent additional

capitalizable assets. The District Court affirmed the find-

ing of the Commission as to maximum capitalization. (Tr.

5031)

Moreover, there have been large expenditures during

trusteeship since the record before the Commission was

closed; how great these expenditures may be is not dis-

closed by the record. We do know that current assets,

principally cash, of the Debtor have increased from

$28,533,540 (Tr. 1469) on February 29, 1940, to $89,009,584

on January 31, 1943 (pages 15-16 of Second Motion Fur-

ther to Supplement Record), an increase of $60,476,044 in

assets, a sum much more than adequate to warrant issue

of additional securities required to take care of the

Q

$40,790,912, including interest to December 31, 1938, of

convertible debentures which did not participate in the

Commission’s plan. (Tr. 3677)

Then, too, it must not be forgotten that during trustee-

ship, subsequent to February 29, 1940, and prior to Feb-

ruary 1, 1943, there has been redemption of debt in the

aggregate amount of $9,248,948 and payments of interest

totaling $19,351,456, an aggregate principal of debt and

interest payments of $28,600,404. See statement of assets

at February 29, 1940 (Tr. 1469), and same at January

31, 1943 (pages 15-16 of Second Motion Further to Sup-

plement Record). Certainly, these changes in financial

position and assets warrant remanding of the proceedings

to determine whether, in the opinion of the Commission,

modification should be made in the certified plan of reor-

ganization.

We are not unmindful of the rule in the Milwaukee and

Western Pacific eases which gives to the Commission vast

discretionary powers in determining the capitalization of

a reorganized company but we believe that in the instant

case the action of the Commission was without adequate

support in the evidence and violates recognized principles

which the Commission has followed in a number of other

cases.

Under date of March 9, 1938, a member of Division 4

of the Interstate Commerce Commission transmitted to

all parties to the proceeding a memorandum of its Bu

reau of Finance concerning total capitalization, fixed

charges, contingent charges, and equity of common and

preferred stockholders in connection with the plan for re-

organization of the Chicago and North Western Railway

Company, Debtor. That memorandum formed the basis

for the report of the Commission on its final plan of re-

organization in these proceedings. In two important re-

9

spects the report of the Commission departs from the

memorandum which was filed in the District Court as

Debtor’s Exhibit 21. In considering this memorandum

it is important to note that it represents the views of the

Bureau of Finance which had been in control of the pro-

ceeding and, in a sense, performed the functions of a

master.

The Commission omits from its report the following

paragraph found at the bottom of page 14 of Exhibit 21:

‘*The assets of the debtor as carried on the debtor’s

books of account which are capitalizable as of De-

cember 31, 1936, within the limitations announced in

Securities of Louisville & Nashville R. RK, 706.

718, are approximately $597,449,127, composed of

$548,543,132 investment in road and equipment, $379,-

209 improvements on leased railway property, $2,779,-

070 miscellaneous physical property, $26,983,539 in-

vestments in stocks of affiliated carriers, $18,664,207

working capital and material and supplies, and $99,-

970 special deposits for mortgaged property sold.’’

In Securities of Louisville & Nashville R. RK, 746L ©

C. 718, 720, to which reference is made in the memorandum

of the Bureau of Finance, the Commission stated that

it is ‘‘ ‘convinced that a substantial surplus should re-

main uncapitalized as a support for the applicant’s credit,

providing for emergency needs, off-setting obsolescence

and necessary investments in non-revenue-producing prop-

erty, and serving as a general financial balance-wheel.’ ”’

The quotation is from the statement of the Commission

in Stock of Delaware, Lackawanna & Western R. R., 67

I. C. C. 426, 433, cited with approval by the Commission

in the Securities of Louisville & Nashville case, supra,

and to which citation the Commission added the further

expression of opinion (page 720):

‘Nor is it true that the nature of the assets which

a carrier seeks to capitalize is immaterial. We should

10

authorize the capitalization of those assets of the car.

rier only which have been provided and which are in.

tended for continuing productive use in the service of

transportation. Such assets will be hereinafter re.

ferred to as ‘capitalizable assets.’ ”’

The Commission allowed the issuance of new stock in

that case to the amount of $45,000,000, leaving uncapi-

talized the sum of $29,442,773 capitalizable assets of the

Louisville & Nashville.

The Commission’s maximum permissible capitalization

herein of $423,774,309, exclusive of $13,100,000 of bonds

to be sold for cash and $13,100,000 of stock to be allotted

to the purchaser of such bonds, for improvement. pur-

poses, falls short of the capitalizable assets of the Debtor

as of December 31, 1936, as found by the Bureau of

Finance, in its memorandum above referred to (Exhibit

21), in the sum of $173,674,818, exclusive of non-carrier

property. That memorandum stated the views of the

Bureau of Finance as to maximum capitalization as fol-

lows (page 30, Ex. 21):

‘‘Consideration of the existing capitalization, in-

vestment, probable capitalizable assets, valuation

data, the earnings of the carrier, along with the other

facts developed in the hearings, and the capitaliza-

tions proposed in plans heretofore presented, leads

to the view that the total capitalization which the

Commission should find permissible in the reorganiza-

tion is approximately $468,000,000.’’

Thus we think we have established that the Commis-

sion’s maximum limitation of capitalization, as carried

into effect under its plan of reorganization, takes capi-

talizable assets of the present stockholders of the Debtor,

Chicago and North Western Railway Company, and trans-

fers them to the new or reorganized company, without

any consideration whatever to the stockholders of the

SAT eS IAS

a a BF a

11

Debtor, thus depriving them of their property in viola-

tion of statutory and constitutional rights. The issuance

of stock subordinate in kind to that provided for in the

authorized capitalization evidencing ownership of such

capitalizable assets as found by the Bureau of Finance,

would have in no wise deprived the holders of obliga-

tions of the Debtor, having priority over the present

preferred and common stockholders, of any right to which

they are morally, equitably or legally entitled. The total

capitalization provided for at the time of reorganization

is grossly less than capital assets and in that respect the

plan fails to meet the requirements of the law of the land.

In our brief in support of the petition for writs of cer-

tiorari, page 45, and appendix, pages 49 and 50, we set

forth a comparison of certain data of the Milwaukee and

of the North Western. Briefly, it there appears that as

of December 31, 1938, the total capitalization of the Mil-

waukee exceeded its rate-making value by $16,000,000,

while the North Western capitalization was $220,000,000

less than its rate-making value. Under the plans of re-

organization as of January 1, 1939, the debts of the re-

organized companies are practically the same, yet the fixed

charges of the Milwaukee are approximately $900,000

greater than the fixed charges of the North “Western.

The authorized preferred stock of the reorganized com-

panies is practically the same but the authorized common

stock of the Milwaukee is approximately $95,000,000

greater than the common stock of the North Western.

The authorized debt of the Milwaukee is 40.8 per cent

of the total capitalization, while in the case of the North

Western the debt is 49.4 per cent of the capitalization.

Had the plan of reorganization of the North Western

provided that the debt of $222,000,000 bear the same ratio

to total capitalization as in the case of the Milwaukee, the

total capital stock of the reorganized debtor would have

12

been $322,000,000, an increase of $96,000,000 over that

authorized in the plan of reorganization.

In the case of the Milwaukee, the estimated future

‘normal earnings’’ were $15,894,000, which should be

compared with the estimated ‘‘normal earnings’’ in the

case of the North Western of $14,625,000. While the

normal future year earnings were only $1,269,000 greater

than in the case of the North Western, the Commission

authorized a total capitalization approximately $100,000,

000 greater for the Milwaukee than for the North Western.

No dividends had been paid on the stock of the Mil-

waukee since 1917, but in the case of the North Western,

as found by the Commission in Chicago & North Western

Railway Company Reconstruction Loan, 202 I. C. C. 347,

349, there had been an unbroken record of dividends on

its common stock by the North Western prior to the clos-

ing months of 1931 over a period of 54 years. No breath

of scandal has ever touched the financial structure of the

petitioner.

Debtor’s contention is that the Commission should fix a

capitalization of the new company that gives recognition

to the present existing capital including the reasonable

investment represented by the physical properties of the

company, both common carrier and non-common carrier,

and that earnings should be determinative of the kind of

security and the character of interest on debt of the new

company, whether fixed or contingent.

The action of the Commission in approving the plan of

reorganization herein with a maximum capitalization of

$423,.774,309 is at variance with the action of the Com-

mission approximately eight months earlier than the date

of bankruptcy herein, for on October 17, 1934, the Com-

mission in the case of Chicago & North Western Railway

Company Reconstruction Loan, 202 I. C. C. 347, found the

13

Chicago and North Western Railway not to be in need

of financial reorganization in the public interest at that

time, and approved a loan of not to exceed $4,138,000 for

the payment of unpaid vouchers, of taxes and interest.

In passing on the loan, the Commission said (page 349):

‘*Prior to the closing months of 1931 the applicant

had an unbroken record of dividends on its common

stock over a period of 54 years. Jt is reasonably

capitalized, as evidenced by an investment ‘of ap-

proximately $643,518,85% and capital liabilities in the

amount of $527,688,900. Its corporate surplus on De-

cember 31, 1933, was $39,387,231. From 1922 to 1930,

inclusive, it earned its fixed charges each year by not

less than one and a half times. The evidence is that

its financial difficulties began with and are incident

to the general depression and have been aggravated

by the drouth and the severity of hard times in the

vast agricultural territory which it serves. It is pos-

sible that its resources may not prove to be sufficient

to carry it on and into better times. But its record

in the past and the nature of its difficulties are such

as to lead us to believe that the applicant’s present

need is not reorganization of capital structure so

much as it is an opportunity with reasonable aid to

work out its problems.’’ (Our italics.)

In a decision dated September 29, 1934, less than three

weeks earlier than the case just cited, the Commission

said, in its findings in Chicago & North Western Railway

Company Reconstruction Loan, 202 I. C. C. 271, at page

274:

‘“‘The applicant’s funded debt outstanding on July

31, 1934, was $347,184,100, including $15,447,200 of

reconstruction loans, and capital stock outstanding

was $180,869,503. If to the rate-making value as of

June 30, 1917, of the property owned by the appli-

eant on December 31, 1930, there be added the net

cost of property changes between then and date of

valuation, the sum is $642,736,392, adjusted for work-

ing capital as of December 31, 1931. This is exelu-

sive of investments of $80,692,410 in other companies

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