Petition for Writ of Certiorari — St. Joe Paper v. The Atlantic Coast Line Railroad

HAROLD B. W!LLEY, Clerk

IN THE

Supreme Court of the United States

Ocroser Term, 1952.

No. 692-33

In THE MaTTrer

of

THE FLORIDA EAST COAST RAILWAY CO.,

Debtor,

S. A. LYNCH, 8. A. LYNCH CORPORATION, et al.,

Petitioners,

v.

ATLANTIC COAST LINE RAILROAD COMPANY,

Respondent.

"PETITION FOR A WRIT OF CERTIORARI TO THE

__ UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT.

3 y J. Turner Butier,

Graham Building,

Jacksonville, Florida

E ~ Frep N. OLIver,

Wituarp P. Scort,

Vv 110 East 42nd Street,

New York, N. Y.

Attorneys for Petitioners.

Dated: April 8, 1953.

Pandick Press, Inc., 22 Thames St., New York 6, N. Y., U. S. A.

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INDEX.

PAGE

JuRIspDICTION TO REVIEW .... D)

Oprnions BELow D)

Questions PRESENTED 2

SraTEMENT ms 3

Summary of Earlier Proceedings 4

The Reopened Proceedings Before the Com-

mission 6

The Proceedings Before The District Court........

Decision by Court of Appeals

Reasons RELIED ON FOR THE ALLOWANCE OF THE

Writ i)

I, The decision below conflicts with decisions of

this Court concerning the relative functions of

Commission and District Judge.......................... 9

II. The decision below conflicts with decisions of

this Court in substituting the judgment of the

Appellate Court for that of the District Judge.. 15

III. The decision below conflicts with decisions of

this Court relating to the rule of absolute

priority 17

APPENDIX la

COPY

ii

TasLe or Cases.

PAGE

Atlantic Coast Line Railroad Company v. St. Joe

Paper Company, 201 F. (2d) 325 2,11

Atlantic Coast Line Railroad Co. et al. v. St. Joe

Paper Co. et al., 339 U. 8. 929 6

Atlantic Coast Line R. Co. v. St. Joe Paper Com-

pany, 179 F.. (2d) 538 2, 5, 6, 10, 16, 19

Comstock v. Group of Institutional Investors, 335

ETERS nee erro ncomE NS 13, 18

Consolidaied Rock Products Co. v. Du Bois, 312 U.S.

510 (1941) 20

Ecker v. Western Pacific R.R. Co., 318 U. S. 448_...... 10, 12

Florida East Coast Railway Company Reorganiza-

tion, 267 I. C. C. 295 and 729 2, 5, 20

Florida East Coast Railway Company Reorganiza-

tion, 282 I. C. C. 81 and 282 I. C. C. 195........ 2, 6, 18, 19, 20

Group of Institutional Investors v. Chicago, Mil-

waukee, St. Paul & Pacific R. Co., 318 U. S. 523

GRID edcinenchcesae 12, 17, 20

In re Denver & Rio Grande Western Railroad Co.,

150 F. (2d) 28 (1945), rev’d on other grounds,

328 U. S. 495 (1946) 17

In re Florida East Coast Railway Company, 103 F.

Supp. 825 2,7

In re Florida East Coast Railway Company, 81 F.

Supp. 926 . 25

In re Florida East Coast Railway Co., 52 F. Supp.

SUID sacsssiscshinceaceidccaihartiehehscioesnaionebametictesitiodinclgiaenGisdens +

In re Florida East Coast Ry. Co., 103 F. Supp. 825... 7,18

New England Coal and Coke Co. v. Rutland R.R.,

143 F. (2d) 179... ; 22

Northern Pacific Railway Co. v. Boyd, 228 U. S.

SEE taactinsdesiceateiptiieb aeilcaaininitigniglancnasha tees aitibiesanbadasioiahadailabuea 19, 20

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Old Colony Bondholders, et al. v. New York, N. H. &

H. R. Co., 161 F. (2d) 413 (1947)... 14

Palmer v. Massachusetts, 308 U. S. 79, 87 (1939)........ 12

Warren v. Palmer, 310 U. 8. 132, 138 (1940) ................ 12

SrarTures.

Bankruptcy Act, 11 U. 8. C. 205, 49 Stat. 911

Section 77 2, 3, 7, 12, 16, 21, 22

Section 77 (e) 2, 9, 11, 21, 23, la

United States Code, Title 28,

Section 1254 2

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IN THE

Supreme Court of the Gnited States

OcrosEr TERM, 1952.

ari ca

In THE MaTTEeR

of

Tue Forma East Coast Rartway Co.,

Debdtor,

S. A. Lyncu, 8. A. Lyncn Corporation, et al.,

Petitioners,

v.

Atzantic Coast Line Rartroap Company,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT.

To the Honorable the Chief Justice and the Associate

Justices of the Supreme Court of the United States:

Your petitioners, S. A. Lynch, 8. A. Lynch Corporation

and certain others, acting together for the protection of

their interests as owners of First and Refunding bonds of

Florida East Coast Railway Company, respectfully pray

for a writ of certiorari to the Court of Appeals for the

Fifth Circuit to review a judgment, entered in this cause

on January 19, 1953, reversing an order of the District

Court for the Southern District of Florida disapproving a

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plan of reorganization for Florida East Coast Railway

Company under Section 77 of the Bankruptey Act, 11

U.S. C. 205, 49 Stat. 911.

The record, consisting of six volumes numbered I to

VI, inclusive, is now before this Court upon petition for

certiorari by St. Joe Paper Company, et al., No. 670,

October Term 1952. This record is made a part hereof by

reference, in support of this petition.

Jurisdiction to Review.

The jurisdiction of this Court is invoked under Title 28,

United States Code, Section 1254.

Opinions Below.

The opinion of the Court of Appeals is reported in

Atlantic Coast Line Railroad Company v. St. Joe Paper

Company, 201 F. (2d) 325; R. Vol. Il, 717; the opin-

ion of the District Court is reported in In re Florida East

Coast Railway Company, 103 F. Supp. 825; R. Vol. I,

127; the decisions of the Interstate Commerce Commission

relating to the 1951 plan here involved are reported in

Florida East Coast Railway Company Reorganization, 282

I. C. C. 81 and 282 I. C. C. 195; R. Vol. I.

The earlier decisions relating te the 1948 plan are

reported as follows: opinion of the Court of Appeals, Atlan-

tic Coast Line R. Co. v. St. Joe Paper Company, 179 F. (2d)

538; opinion of the District Court, In re Florida East Coast

Railway Company, 81 F. Supp. 926; opinion of the Inter-

state Commerce Commission, Florida East Coast Railway

Company Reorganization, 267 I. C. C. 295 and 729.

Questions Presented.

1. In reviewing the decision of a district judge under

Section 77(e) of the Bankruptcy Act that a plan of reorgan-

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ization does not comply with applicable legal standards,

may a Court of Appeals

(i) confine the functions of the district judge to

a determination of constitutional questions, and

(ii) ignore the findings and conclusions of the

district judge, made after hearing, and substitute its

own judgment therefor?

2. Does the rule of absolute priority permit the enforced

sale of a debtor’s property for securities of a third party

having a value substantially less than the value of the prop-

erty required to be sold?

3. Does the due process clause of the Fifth Amendment

permit the adoption of a plan of reorganization requiring

the enforced sale of a debtor’s property to a third party at

a valuation made contrary to applicable legal standards and

even as so established, greater than the value of the securi-

ties to be paid therefor?

4. Does Section 77 empower the Commission to certify

a plan that requires an involuntary merger of a debtor in

reorganization with a third party carrier previously unre-

lated to the debtor?

Statement.

The Interstate Commerce Commission has proposed a

plan of reorganization under Section 77 of the Bankruptcy

Act requiring that the entire properties of the debtor, an

independent railroad, be sold to another carrier. Substan-

tially all of the affected security holders of the debtor have

opposed the enforced sale of their properties on the terms

and conditions proposed. The District Court having juris-

diction of the proceeding since its inception has found

that the plan violates applicable legal standards in many

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respects. Nevertheless, the Court of Appeals, by a divided

vote of 3 to 2, substituted its judgment for that of the Dis-

trict Court as to specific findings and directed that the Dis-

trict Court approve the plan.

Petitioners, who have been in this proceeding since

1938, are interested only in fair and equitable treatment for

the Refunding bondholders. Their position throughout has

been independent of that of either of the two major parties.

Se ee Se

Summary of Earlier Proceedings.

The debtor entered Section 77 proceedings in 1941 from

a preceding equity receivership. Its unsecured debt is

small and its stock is without value. All are agreed that

its First Mortgage bonds should be paid in full. This leaves

only the treatment of the Refunding bonds, which are out-

standing in the amount of $45,000,000 with unpaid interest

of $37,125,000, as the central problem of any plan.

The Commission’s 1942 plan (252 I. C. ©. 423 and 731)

was disapproved by the District Court and referred back

to the Commission for ‘‘an opportunity to re-examine the

entire situation in the light of the facts which have devel-

oped since the former hearing’’, In re Florida East Coast

Railway Co., 52 F. Supp. 420, 424.

After further hearings, the Commission proposed its

1945 plan, in which it rejected an offer by Atlantic Coast

Line Railroad to acquire the debtor or its property, point-

ing out that since the securities proposed to be issued by

Atlantic Coast Line for the property did not satisfy the

claim of the Refunding bondholders, the latter must be

given the entire equity in the reorganized company to pro-

vide for recoupment (261 I. C. C. 151, 192).

Thereafter, the Commission received representations

from Atlantic Coast Line that control of the reorganized

debtor by St. Joe Paper Company, a holder of a majority

of the Refunding bonds, would not be in the public interest.

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Further hearings were held. After long preoccupation

with the question of control, with very little attention to the

problems of fair and equitable treatment,* the Commission

by a split vote of 5 to 4, issued its 1947 plan. This provided

for an enforced sale of the debtor’s properties to Atlantic

Coast Line for a price of $40,500,000, payable partly in cash

but principally in face amount of various classes of securi-

ties of Atlantic Coast Line (267 I. C. C. 295). Following

reargument and re-consideration, the Commission issued its

1948 plan of substantially similar effect, this time by a split

vote of 6 to 5 (267 I. C. C. 927).

After hearings before the District Court, Cireuit Judge

Sibley, sitting as District Judge designate, disapproved the

plan, on the ground, among others, that it was unfair and

inequitable, In re Florida East Coast Railway Company,

81 F. Supp. 926.

This disapproval was upheld by the Court of Appeals,

Atlantic Coast Inne R. Co. v. St. Joe Paper Company, 179

F, (2d) 538. That court pointed out that over a period of

eight years the Commission ‘‘has changed and vacillated,

and vacillated and changed, and vacillated again’’ and that

‘it seems in desperation to have seized upon the Coast Line

offer as its only way out’’ (179 F. 2d, 538, 544).

The Court of Appeals stated that, if it appeared to the

trial judge that the Commission had unfairly cut down the

legal rights of the bondholders to fit them into the Atlantic

Coast Line public interest pattern, the judge was ‘‘not only

authorized but required to disregard the Commission’s

findings, that the plan was fair and equitable, in favor of

his own, that the plan was not.’’ Also, that ‘‘it would be

* As found by both the District Court and the Court of Appeals

for the Fifth Circuit (see In the Matter of Florida East Coast Rail-

way Company, 81 F. Supp. 926, 933; Atlantic Coast Line Railway

Company v. St. Joe Paper Company, 179 F. (2d) 538, 544).

6

our duty to accord full weight to his conclusions’’ (179 F.

2d 538, 543).

An application by Atlantic Coast Line for a writ of

certiorari was denied, Atlantic Coast Line Railroad Co.

et al. v. St. Joe Paper Co. et al., 339 U.S. 929.

The proceedings again went back to the Commission.

The Reopened Proceedings Before the Commission.

After further hearings, the Commission by a divided

vote of 7 to 3, issued its 1951 plan, again providing for a

forced sale of the debtor’s properties to Atlantic Coast Line.

The 1951 plan was substantially identical to the dis-

approved 1948 plan. The principal difference was an

increase of $6,000,000 in face amount of securities to be

paid by Atlantic Coast Line, which was the entire recog-

nition given to an increase of $800,000 in estimated earning

power and to an annual credit of $462,000 for unification

savings (282 I. C. C. at 158-160).

This increase was commented upon in the dissenting

opinion of Commissioner Mahaffe (282 I. C. C. 81, 190):

‘‘as a matter of fact the increase of some $6,000,000

in the purchase price found necessary at this time

accentuates the inherent unfairness of the plan.

Had the plan of 1947 been consummated such increase

in value would have inured largely to the Coast Line

security holders. This would have been the result

of divesting the creditors of the debtor of their prop-

erty on the basis of value derived from estimates

of future normal year earnings. Estimates as now

presented by the various parties vary by nearly 1

million dollars. Clearly no such inequitable result

could occur under an internal reorganization in which

the entire interest in the debtor’s property would be

turned over to its creditors. Yet it is impossible at

this time, on the basis of the most recent estimates

of future normal earnings of the debtor, to exclude

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the possibility, or even the probability of future

further changes in the value of the debtor’s

property.’’

Although opposed by substantially all of the creditor

parties, who pointed out in their briefs that the 1951 plan

was less fair to the Refunding bondholders than the 1948

plan, the plan proposed by the Commission was certified

to the District Court.

The Proceedings Before The District Court.

Elaborate hearings, lasting a full week, with four days

devoted to testimony, were held by the District Court

(R. Vol. II, 247-659). Circuit Judge Strum, who has had

charge of the proceedings since their inception, sat as

District Judge pro hac vice. The principal creditor par-

ties not only unanimously opposed approval of the plan,

but joined in a motion to dismiss the proceedings and to

reinstate the earlier equity proceedings. In support of

this motion, they filed a copy of an agreed plan of internal

reorganization, in contrast to a sale to a third party, which

they undertook to support in an equity reorganization

(R. Vol. I, 25-39).

The District Court concluded that the plan should be

disapproved, the Section 77 proceedings dismissed and the

equity proceedings reinstated (R. Vol. I, 168). The deci-

sion was accompanied by an extensive opinion which fully

and carefully analyzed the evidence, the Commission’s pro-

posals and the objections thereto (R. Vol. I, 127; In re

Florida East Coast Ry. Co., 103 F. Supp. 825). In essence,

the District Court concluded, in the exercise of his informed

discretion, that the 1951 plan retained ‘‘the basic inequi-

ties’’ for which the 1948 plan had been rejected (103 F.

Supp. 825, 832; R. Vol. I, 1937). The Court of Appeals

made no finding of an abuse of discretion.

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Among the defects pointed out by Judge Strum were:

(a) failure of the Commission to give due con-

sideration to the earning power of the debtor, in its

findings as to normal annual income (103 F. Supp.

825, 836; R. Vol. I, 143);

(b) failure of the Commission to give due con-

sideration to the earning power of the debtor in trans-

lating earning power into capitalizable value (103 F.

Supp. 825, 837 et seq.; R. Vol. I, 147);

(c) requirement by the Commission of the reser-

vation of $4,000,000 cash in capital reserve funds,

to be turned over to Atlantic Coast Line for property

improvements, thus offsetting the $4,000,000 cash to

be paid by Atlantic Coast Line as part of the pur-

chase price (103 F. Supp. 825, 838 et seq.; R. Vol. I,

149) ;

(d) failure of the Commission to give more than

nominal effect to estimated unification savings by an

increased allowance of only $500,000 instead of

$7,337,000 which the Commission itself found was

the debtor’s share of their value (103 F. Supp. 8235,

840; R. Vol. I, 153); |

(e) failure of the Commission to permit the

Refunding bondholders to recoup past losses through

the additional income realizable in future years of

higher earnings (103 F. Supp. 825, 841; R. Vol. I,

155-156) ;

(f) disregard of the rule of absolute priority as

heretofore applied by this Court (103 F. Supp. 825,

842; R. Vol. I, 156-157).

Decision by Court of Appeals.

The appeal by Atlantic Coast Line was heard by the

Court of Appeals en bane, five judges sitting. The sixth

judge of that court, Judge Strum, had already disapproved

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the plan while sitting as District Judge. By a 3 to 2 deci-

sion, the court reversed Judge Strum and directed that

the plan be approved (201 F, 2d 325, 331; R. Vol. IT).

The majority opinion is silent as to how the 1951 plan

meets the defects of the 1948 plan condemned by the same

court. Disregarding its earlier expression of views, the

majority of the court below devote only five short para-

graphs to the question of fair and equitable treatment,

without referring to a single one of the objections raised

by petitioners and upheld in detail by the District Court.

While referring specifically to one of the twelve supporting

reasons given by the District Judge for disapproving the

plan, the majority opinion deals with the fundamental con-

clusions and the remaining eleven supporting reasons by

substituting the judgment of the appellate court for that of

the trial court, holding that the findings of the trial judge

‘sare themselves without support in law or fact.’’ Reasons

for this conclusion are not set forth.

It is this decision of which review is sought.

Reasons Relied on for the Allowance of the Writ.

Il. The decision below conflicts with decisions of

this Court concerning the relative functions of Commis-

sion and District Judge.

The effect of the decision below would be to deprive a dis-

trict judge of his statutory functions under Section 77(e)*

and to reduce his position to that of little better than a

rubber stamp, except for constitutional questions. The

majority opinion states at the outset that ‘‘except as to the

question of unconstitutional taking, it [Congress] had also

confided to the Commission the question of valuation’’

(201 F. 2d, 325-326).

a * The relevant portions are set forth in the Appendix.

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This position is in sharp contrast with the rule stated

by this Court in Ecker v. Western Pacific R.R. Co., 318

U. S. 448, that valuations of the Commission are final when

reached ‘‘with material evidence to support the conclusion

and in accordance with legal standards.’’ In the same case

this Court said that there is always open to the district

court ‘‘the question of whether in reaching the result, the

Commission had employed improper statutory standards”’,

ibid, page 473.

The present position of the court below is an almost

complete reversal of its position on the earlier appeal two

years earlier. It then said (179 F. 2d, 538, 542) :

‘“«The case we have here is that of one railroad

company coveting, and pressing to possess, a com-

peting debtor railroad company, against the wishes

of 98 per cent of the equitable owners of the debtor

* @ #9)

‘When, too, the concern of the courts with the

interests of the owners and creditors of the debtor,

evidenced by the ‘absolute priority’ rule, the rule of

the Boyd case, 228 U. S. 482, is taken into considera-

tion the conclusion becomes inescapable that where,

as here, it appears that substantially all the creditors

are arrayed against the plan, the act, requiring the

judge to be satisfied before approving the plan, as

fair and equitable, imposed upon the trial judge in

this case a primary and most exacting duty.’’

‘“‘This duty was, in according due weight to the

determination of the commission on that issue, that

the plan was fair and equitable to the bondholders,

to subject the proceedings to the closest scrutiny, to

find out whether this determination was lawfully and

constitutionally arrived at * * *”’. |

‘He should particulerly seek to ascertain whether,

as a result of this subordination and weighting, the

determination of what is fair and equitable to the

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bondholders has been reached at a sacrifice of the

private interests in order to give effect to the pro-

posed dominant public interest that Coast Line

should have the properties.”’

Despite its clear statement two years ago, the court

below has now overrruled the trial judge without regard

to his elaborate analysis of the plan and his specific rulings

thereon. In disapproving the plan, the District Judge

stated 12 specific grounds for his disapproval, including

failure to give due consideration to earning power, failure

to apply proper and consistent standards of valuation,

failure to give more than lip service to the crediting of

unification savings, the plan requirement that $4,000,000 in

cash be turned over to Atlantic Coast Line, and disregard

of the rule of absolute priority. Despite these detailed

supporting reasons given by the District Judge, the major-

ity opinion below fails to refer to a single one of them.

Instead, the majority opinion states that the Commis-

sion’s ‘‘finding that the plan was fair and equitable finds

full support in the evidence’’ (201 F. 2d at 329). It then

concludes that ‘‘It will, therefore, serve no useful purpose

for us to take up one by one, as the appellants and appel-

lees have done, to dissect and discuss them, the findings

made and reasons given by the Commission, on the one

hand, and those set out in the lengthy opinion of the trial

judge, on the other * * *’’ (201 F. 2d, at 330).

Thus the majority below treated the Commission’s

action as conclusive because supported by some evidence.

It disregarded completely the necessity for compliance with

legal and. statutory standards. It ignored the defects

pointed out in detail by the District Judge.

Its decision effectively deprives the District Judge of

the exercise of the duties placed upon him by Section 77 (e).

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In so doing, the decision below is directly in conflict

with the decision by this Court in which the relative func-

tions of court and commission have been delineated.

In Palmer v. Massachusetts, 308 U. 8. 79, 87 (1939) it

was pointed out that the ‘‘judicial process in bankruptcy

proceedings under §77 is, as it were, brigaded with the

administrative process of the Commission’’. Again in

Warren v. Palmer, 310 U. 8. 132, 138 (1940) it was said:

‘‘The judicial functions of the bankruptcy court

and the administrative functions of the Commission

work cooperatively in reorganization.’’

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That the brigading of the functions of Commission and

court did not mean the practical elimination of review by

the district judge was further clarified by this Court in

subsequent decisions.

Ecker v. Western Pacific R. R. Co., 318 U. S. 448 made

it clear that the district court was expected to examine

carefully the Commission’s treatment of creditors to

% determine whether the statutory mandates had been fol-

F lowed.

; In Group of Institutional Investors v. Chicago, Mil-

waukee, St. Paul & Pacific R. Co., 318 U. S. 523 (1943) this

Court remanded the plan to the Commission after finding

that the treatment accorded the General Mortgage bond-

holders was not the equivalent of the rights surrendered,

‘ since it did not include compensation for loss of seniority.

j It said (p. 566):

‘*Whether in a given case senior creditors have

j been made whole or received ‘full compensatory

treatment’ rests in the informed judgment of the

Commission and the District Court on consideration

of all relevant facts.’’

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As to whether full compensatory treatment was accorded,

‘‘The question in each case is one for the informed discre-

tion of the Commission and the District Court?’ (at page

564). And again it was said that ‘“‘the Commission and

the District Court should determine what the General Mort-

gage bonds should receive’”’ as compensatory treatment

(at page 571).

In Comstock v. Group of Institutional Investors, 335

U. S. 221 (1948), it was held that the district court had

authority to pass on objections to a plan that were not

even raised before the Commission. This Court said (at

p. 227):

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“In view of the functions cast upon the court in

such cases, we cannot say that it may not, in its

discretion, consider objections on their merits even

though they have not been presented to the Commis-

sion. Some circumstances might be disclosed to

indicate a remand for their consideration by the

Commission. They might indicate that the courts

would withhold approval, not out of deference to the

objecting parties’ rights but because of the broad

responsibility laid upon the court for the equity and

fairness of the plan as a whole. The court will be

diligent to protect itself and the public from approval

of unfair plans, even by default, and may take for

its own use evidence no party would have a right to

force upon it. The court below evidently considered

the circumstances of this case to warrant such inquiry

into the merits, and we do not inquire whether the

discretion was wisely exercised.’ (Emphasis sup-

plied.)

In contrast to the conclusions of this Court concerning

‘the broad responsibility’’ cast upon the district judge by

the statute, the decision below would eliminate a very sub-

stantial part of the duties of the district judge concerning

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applicable legal standards and, it is submitted, is in square

conflict with prior decisions of this Court.

The Court of Appeals for the Second Circuit has taken

the position that in the case of an enforced sale the scope

of action of the district court is even broader than in the

ordinary reorganization. In Old Colony Bondholders, et

al. v. New York, N. H. & H. R. Co., 161 F. (2d) 413 (1947),

Old Colony Railroad, a subsidiary of New Haven Railroad,

was in the same reorganization proceedings with the latter,

and a joint plan of consolidation was proposed. Old Colony

bondholders opposed the plan on the ground that a proper

valuation had not been made by the Commission because

a sale was involved. The Court of Appeals denied this

contention, for the reason that Old Colony was a subsidi-

ary and its properties were the same as though owned by

the New Haven. It pointed out, however, that if a sale

had been involved entirely different questions would have

been presented (pp. 420-421) :

14

‘<* * * the appellant raises a number of objec-

tions to the Commission’s appraisal. The first is

that the finality of an appraisal by the Commission is

limited to a true reorganization, that is, to one where

the property for which the new securities are to be

: issued belongs to the debtor. Since in the case at

4 bar the plan contemplates a sale of Old Colony

7 assets to the reorganized New Haven, the appel-

lant argues that the Commission could not lawfully

: proceed as it did, but must follow the doctrine

: applied in First Nat. Bank v. Flershem, 290 U. S.

j 504, 527, * * * It is true that if the transfer of

: Old Colony assets is like a judicial sale on fore-

; closure or execution, the Commission’s appraisal

: was not valid. But we think it is not. * * * the

properties of Old Colony are, for purposes of the

plan, on the same footing with respect to the whole

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system as are lines securing a divisional mortgage

of New Haven.’’ (Emphasis supplied.)

The sole ground on which the Court of Appeals for the

Second Circuit concluded that ordinary reorganization

standards were not applicable, i. ¢., that Old Colony was

in effect a division of New Haven, is not present here.

Atlantic Coast Line is a third party stranger, having no

relationship to the debtor. The forced sale proposed by

the Commission cannot be distinguished, in practical effect,

from a foreclosure.

If this reasoning of the Court of Appeals for the

Second Circuit is sound, it follows that not only does an

enforced sale involve different standards of valuation, but

that likewise different presumption attach to the Commis-

sion’s action.

II. The decision below conflicts with decisions of

this Court in substituting the judgment of the Appellate

Court for that of the District Judge.

In reversing the District Judge, the Court of Appeals

merely substituted its judgment for that of the District

Judge, without explanation. Its conclusion on this point

is explicit. The opinion states (201 F. 2d at 329):

‘‘unless an examination of the record shows, as we

thought it did on the former hearing, that the bond-

holders will not receive under this plan the equiva-

lent in value of what they will part with, the judg-

ment must be reversed and the cause remanded to

the district court with directions to approve the

plan.’’

The opinion then states that the record has been examined

and that the Commission’s ‘‘finding that the plan was fair

and equitable finds full support in the evidence’’ and that

COPY

16

‘*the Commission’s findings and estimates * * * was most

favorable to the bondholders of East Coast.’’

The position of the court below is almost a complete

reversal of its position on the earlier appeal, where it

upheld Judge Sibley in disapproving a substantially like

plan. That court had earlier said (179 F. 2d, 538, 543) :

**It is quite clear, too, that in reviewing the find-

ings of the trial judge upon such a record, it would

be our duty to accord full weight to his conclusions

that the plan was not fair and unless they are found,

as a matter of law, to be wholly wrong, or, as matter

of fact, to be clearly erroneous, these conclusions and

the order based on them should be sustained.’’

‘«* * * we are left in no doubt that the trial judge

was right, for these reasons and for the other rea-

sons that he gave, in disapproving the plan as not

fair and equitable and not affording due recognition

to the rights of the bondholders. Indeed, we are of

the opinion that a contrary holding could not have

been sustained and that the order declining to

approve the plan and referring the proceeding back

to the Commission must be affirmed.”’

Despite its earlier position, and without explanation the

court below has now reversed the District Judge, apparently

on the basis of its own conclusions and without regard to

the detailed findings of the Distriet Judge.

In so doing, the court below assumed to itself the func-

tions of the District Judge. It disregarded, almost with-

out comment, his findings and conlusions, and substituted

its own judgment.

This action of the court below is in conflict with the

scope of review heretofore applied by this Court and by

other Courts of Appeal in cases under Section 77.

BLURRET

—,

17

In Group of Institutional Investors v. Chicago, Mil-

waukee, St. Paul and Pacific R.R. Co., 318 U. 8. 523, 564,

this Court said:

‘‘Our role on review is a limited one. It is not

enough to reverse the District Court that we might

have appraised the facts somewhat differently. If

there is warrant for the action of the District Court,

our task on review is at an end.’’

Again, in Comstock v. Group of Institutional Investors,

supra, the Court said (335 U.S. at p. 228):

‘*The court below evidently considered the cir-

cumstances of this case to warrant such inquiry into

the merits, and we do not inquire whether the dis-

cretion was wisely exercised.”’

And in In re Denver & Rio Grande Western Railroad

Co., 150 F. (2d) 28, (1945), rev’d on other grounds, 328

U. 8. 495 (1946), the Court of Appeals for the Tenth Cir-

cuit said (at p. 36):

‘‘On appeal, our scope of review is more limited

than even that of the District Court. We inquire

only to ascertain whether the District Court per-

formed its judicial functions under Subsection (e)

and whether its conclusions find support in the ree-

ord. We may not reverse the District Court merely

because we would have reached a different con-

clusion.’’

III. The decision below conflicts with decisions of

this Court relating to the rule of absolute priority.

In still a third respect, the decision below is in conflict

with applicable decisions of this Court, namely those

relating to the rule of absolute priority.

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18

This question was raised before the Commission and

was referred to in the dissenting opinion by Commissioner

Mahaffie as follows (282 I. C. C. 81, 189):

‘ce * * although under the plan approved the

creditors received much less ‘in value than the face

of their claims,’ they were required to give up their

interest in the debtor, including the right to control

the property and accept securities of the Coast Line

also having a value much less than the value deter-

mined for the property. In view of the inconsistency

of this process, and the results obtained, with the

doctrine of the Boyd case, supra, I am unable to

accept the resulting subordination of the principles

laid down as the authoritative test of what is fair

and equitable to the Commission’s conclusions as to

what is required by the public interest.’’

The District Court reached an equally clear conclusion

(103 F. Supp. 825, 842; R. Vol. I, 156):

‘‘The Coast Line, as an unsecured creditor, may

not participate in the debtor’s mortgaged assets

which are less:in value than the mortgage debt, unless

the debt be paid in full, either in cash or in new

securities of equal worth and having the same

priority as the old securities to be displayed. Yet

the effect of the fourth plan is to divest the 5% bond-

holders of their present equitable ownership of the

mortgaged property and vest it in the Coast Line

free of the mortgage lien, for a consideration less

than the mortgage debt.’’

The point was ignored by the Court of Appeals, although

in its earlier opinion it had been specifically recognized.

Likewise the court below ignored its earlier statement that

Atlantic Coast Line is a ‘‘railroad company coveting, and

ERP PO NAEP LNT CORI G14. keene

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———

pressing to possess, a competing debtor railroad company”’

(179 F. 2d, 538, 542).

The fact that Atlantic Coast Line has striven so long

and so hard to acquire the debtor demonstrates that it

expects to acquire a bargain, to pay less than the true value.

This conclusion is supported by the Commission’s own

findings, i.e., that the debtor has a value of $46,500,000, for

which Atlantic Coast Line would pay a consideration worth

only $43,694,000 (282 I. C. C. at 162-163).

The absolute priority rule, enunciated in Northern

Pacific Railway Co. v. Boyd, 228 U. S. 482, is applicable.

There a reorganization contract was made between secured

creditors and stockholders in which the property was valued

and capitalized at $345,000,000, and the stockholders allowed

to participate in the new company organized for the pur-

pose of acquiring the assets of the old company. The con-

tract was then consummated by a so-called foreclosure sale

at which the property was sold for $61,500,000, which was

less than the amount of the senior creditors’ claims, thus

‘*freezing out’’ the unsecured creditors. This Court held

that the reorganization was fraudulent and void as to unse-

cured creditors, because they had been deprived of their

rights in the company’s property, which was a trust fund

for the payment of creditors, 228 U. S. at page 504. If

there were sufficient value to permit the stockholders to

participate, there must have been sufficient value for the

unsecured creditors. In that case the decision revolved

around the fact that a mere distribution of the consideration

received by the old company, namely the $61,500,000 for

which its assets were sold, was fraudulent. This Court

looked instead to the value of the property in the hands of

the successor corporation and took that as the considera-

19

COPY

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:

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20

tion to be distributed, holding that the stockholders of the

new company could not be permitted to gain at the expense

of the creditors of the old.

A majority of the Commission has here done what was

condemned by this Court in the Boyd case. The Commis-

sion has proposed a distribution among the Refunding

bondholders of an amount representing the equivalent of

the $61,500,000 distribution in the Boyd case that this Court

held illegal. It has valued the property ‘‘for reorganization

purposes’’ at $46,500,000, but has proposed a sale price of

$43,694,086 (282 1. C. C. 81, 163). In its preoccupation with

the public interest in the question of control, it has placed

two different valuations upon the property, and thus disre-

garded the rule of absolute priority.

This Court said in the Milwaukee case, supra, quoting

with approval its language in Consolidated Rock Products

Co. v. Du Bois, 312 U. S. 510 (1941), that the application

of the rule of absolute priority ‘‘will be dependent on the

facts and requirements of each case’’. It pointed out the

necessity of preventing the property of one interest from

being ‘‘subtly appropriated to pay the claims of another

while lip service is rendered the principles of priority’’,

318 U.S. at p. 570.

Commission Mahaffie, speaking for the dissenting Com-

missioners in connection with the 1948 plan, well summar-

ized the situation, which is still unchanged except as to

figures (267 I. C. C. at p. 745):

‘c* * * The report attributes to the Coast Line

securities to be paid for the property a value of

approximately $31,000,000. The question presented

is whether the persons who normally would be entitled

to receive the $40,500,000 of securities found by us to

POR ie ee : Be Wal et ea a on ae os do rh ER PROP FE RE RRs ETRE LS PRS

21

be properly issuable, and the resulting control of

the property may be required to give up that control

and to accept instead Atlantic Coast Line securities

having a value much less than that amount.’’

Respectfully submitted,

J. Turner But es,

Graham Building,

Jacksonville, Florida

Frep N. OLtver,

Wuuarp P. Scort,

110 East 42nd Street,

New York, N. Y.

Attorneys for Petitioners.

Dated: April 8, 1953.

ee —

BLURRED Ci

la

APPENDIX

The pertinent provisions of Section 77(e) of the Bank-

ruptey Act are as follows (11 U.S. C. A. §205, 49 Stat. 911):

‘*(e) Upon the certification of a plan by the Commission

to the court, the court shall give due notice to all parties in

interest of the time within which such parties may file with

the court their objections to such plan, and such parties

shall file, within such time as may be fixed in said notice,

detailed and specific objections in writing to the plan and

their claims for equitable treatment. The judge shall, after

notice in such manner as he may determine to the debtor,

its trustee or trustees, stockholders, creditors, and the

Commission, hear all parties in interest in support of, and

in opposition to, such objections to the plan and such claims

for equitable treatment. After such hearing and without

any hearing if no objections are filed, the judge shall

approve the plan if satisfied that: (1) It complies with the

provisions of subsection (b) of this section, is fair and

equitable, affords due recognition to the rights of each

class of creditors and stockholders, does not discriminate

unfairly in favor of any class of creditors or stockholders,

and will conform to the requirements of the law of the land

regarding the participation of the various classes of credi-

tors and stockholders; (2) the approximate amounts to be

paid by the debtor, or by any corporation or corporations

acquiring the debtor’s assets, for expenses and fees inci-

dent to the reorganization, have been fully disclosed so far

as they can be ascertained at the date of such hearing, are

reasonable, are within such maximum limits as are fixed

by the Commission, and are within such maximum limits

to be subject to the approval of the judge; (3) the plan

provides for the payment of all costs of administration

and all other allowances made or to be made by the judge,

except that allowances provided for in subsection (c), para-

graph (12) of this section, may be paid in securities pro-

vided for in the plan if those entitled thereto will accept

an

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Appendia.

such payment, and the judge is hereby given power to

approve the same.

If the judge shall not approve the plan, he shall file an

opinion, stating his conclusions and the reason therefor,

and he shall enter an order in which he may either dismiss

the proceedings, or in his discretion and on motion of any

party in interest refer the proceedings back to the Com-

mission for further action, in which event he shall trans-

mit to the Commission a copy of any evidence received.

If it shall be necessary to determine the value of any

property for any purpose under this section, the Commis-

sion shall determine such value and certify the same to the

court in its report on the plan. The value of any property

used in railroad operation shall be determined on a basis

which will give due consideration to the earning power of

the property, past, present and prospective, and all other

relevant facts. In determining such value only such effect

shall be given to the present cost of reproduction new and

less depreciation and original cost of the property, and

the actual investment therein, as may be required under

the law of the land, in light of its earning power and all

other relevant facts.’’

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