Reply Brief for the Petitioner — St. Joe Paper v. The Atlantic Coast Line Railroad

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RE Acai Hose &

_W.G. WELBON, E. N. CLAUGHTON,

- ATLANTIC COAST LINE

_ PETITION FOR A WRIT OF CERTIORARI TO THE

Ra etondnie eaten eno = Se De LTD:

IN THE

Supreme Court of the United

OCTOBER TERM, 1952

a AR met

No. ++ ~7

In the Matter of

FLORIDA EAST COAST RAILWAY

COMPANY,

Debtor.

and A. W. CORBETT,

Petitioners,

vs.

RAILROAD COMPANY,

Respondent.

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT AND

SUPPORTING BRIEF

MILLER WALTON,

916 Alfred I. duPont Building

Miami 32, Florida

Attorney for Petitioners

INDEX

PAGE

PETITION FOR CERTIORARI .............--..-----..----2eeeeceeeeeeeeeeeees 1

L Summary Statement .......................................... 1

Il. Statement of Jurisdiction....................-......-...... 11

III. Questions Presented ..........................---..----.------ 11

IV. Reasons Relied on for Allowance of Writ...... 13

BRIEF IN SUPPORT OF PETITION FOR CERTIORARI.......... 14

I. The Opinions of the Courts Below.................. 14

II. The Reports of the Interstate Commerce

iS SN ROLE 14

a apaie claibbncinininicomedoiennn 15

ase se nmctticaeioviiiambatiiet 16

V. Specifications of Error ..........................----.------- 16

VI. Argument in Support of Reasons Relied on

for Allowance of Writ.............................. 17

I gla aE Teale cpainaaisiniiisenebiine 17

Te a ncadgianmibeiobieennnebin 18

aia le ta ceeacisamnstchionnininiaien 22

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M _ ,

CASES CITED

PAGE

Atlantic Coast Line R Co v. St Joe Paper Co, 179 F2d

538 (CA 5, 1950, cert den 339 US 929) ..2, 4, 7, 8, 14, 19

Case v. Los Angeles Lbr Products Co, 308 US 106

UNITE susnissidhsep sacemsnenshiscuaisbnanesipitemasianseniinedekibaaiaieel 12, 21, 24

‘ Consolidated Rock Products Co v. DuBois, 312 US 510

SRT secinsihishsiasieathielienithabicassanaieniniosetinibaititicsnianavanliaiaadl 12, 21, 24

Continental Illinois N B & T Cov. ChicagoRI& PR f

Co, 294 US 648 (1935) —_...-2...---n.--neeeneeeeeen cece ee eeeeeeee- 20

Ecker v. Western Pacific R Corp,318 US448 (1943) 12, 24

Florida East Coast Ry Co, In re, 52 F Supp 420

SURI octadajiddtleiblaaninichtanaddagiancigeiadiaistaaaaadaaaebesiie’ 5, 14

Florida East Coast Ry Co, In re, 81 F Supp 926 '

SUNUIIT sehscioccasatcceonhisctusursaieisnicdnenueaeieseteasetatis 4,7,14,19,21 ,

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

EET siccccenidaeinlsethcnidcdenindncseatiedonduatia 4,9, 10, 14, 19, 21, 24

Florida East Coast Ry Co, In re, 201 F2d 325 (CA |

TP ee

i RE siksiepeissahaneentacsisinanibeciiaibelinaieibiaceimatatadiia 4,10, 11, 14,19

Hanover Nat'l Bank v. Moyses, 186 US 181 (1902) ...... 20 |

Institutional Investors v. Chicago M St P &€ P R Co,

318 US 523 (1943) ............---2..---...---20--00-0+- 12, 22, 23, 24

Kansas City Terminal RCo v. Central Union Trust

Co, 271 US 445 (1926)

Kelley v. Everglades Drainage Dist,319 US 415 (1943) 21°

Louisville Joint Stock Land Bank v. Radford, 295 .

Os 20

Marine Harbor Properties v. Manufacturer’s Trust

Ee gt) enn ene 12, 24, 25

Northern Pacific R Co v. Boyd, 228 US 482

ARSE ie SRS ee ORR Ciro ne 12, 15, 16, 24 '

Pilsener Brewing Co, In re, T9 F2d 63 (CA 9, 1935) .... 21

Reconstruction Finance Corp v. Denver dé RG WR

Dh, Rae ee ee CI iin streteersenieseninennersion 12, 24

Reiman, In re, DC NY, Fed Case No. 11,673................ 20

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PAGE

Scherck, Richter Co v. Dysart, 123 F2d 364 (CA 8,

Se ee mmm 21

United States v. Bekins, 304 US 27 (1938) -...-.------------ 20

Wright v. Union Central Life Ins Co, 304 US 502

eer eee nee caanmemmemmmmmemnmanies 20

Youtie, In re, 44 F2d 56 (CA 3, 1930) ......-.--.----------------- 21

INTERSTATE COMMERCE COMMISSION REPORTS

Florida East Coast Ry Co Reorganization,

BEF WO 4B ~~. -nnnnnn-n-nvnnnnnnnnsnverenenseneennnnororenennren 14

Florida East Coast Ry Co Reorganization,

I TS TO ian neers mmr 15

Florida East Coast Ry Co Reorganization,

— 20 wh W....- 5,15

Florida East Coast Ry Co Reorganization,

967 ICC 295 ......--------------cceeererenee 4,5, 6, 7,15, 22

Florida East Coast Ry Co Reorganization,

967 ICC 72D ...----------------n--n--nescernnroeeenneneerenn" 4, 6, 7, 15, 23

Florida East Coast Ry Co Reorganization,

PRP ICC BI .......--------------nc-n--nennnnenererneesetnereenenee” 4,9, 15, 23

Florida East Coast Ry Co Reorganization,

982 ICC 1995 ......------------n--0--ceneensceneeer eee 4, 9, 15, 23

United States Constitution

Art. 1, § 8, Clause 4 (Bankruptcies ) ..10, 11, 12, 13,19

Fifth Amendment ..........-.---------------------" 8, 9, 16, 19, 20

STATUTES

Bankruptcy Act

$77 (11 USC 205) -.....-.-------- 2, 3, 4, 5, 7, 8, 9, 10, 11, 12

13, 16, 17, 18, 19, 22, 25

$77(b) (11 USC 205 (b) } -...-------------rrrerrrrerrreree 18

$77(e) (11 USC 205(e)) ------------------ 3, 13, 21, 22, 23

$77(£) (11 USC 205(f£) ) -------------------rrrrr 18

Chana Ke nnn nenn nnn ann enn nnn nnnnnnnn nen nnrnnnr terns 25

OPY

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PAGE

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A TS SE Oe ER RE SO 25

a lac icahcldeninsecinaarebieaichaidlieaidennialidceneiorenttienian 21

I cca edaticeningnecbnctiveinavmmnnsert 11, 16

Federal Rules of Civil Procedure

RE I ene 19

Senate Report No. 1395, 82nd Congress, 2nd Session,

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par 43

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————————————— ——EEE

IN THE

Supreme Court of the United States

OcTOBER TERM, 1952

In the Matter of

FLORIDA EAST COAST RAILWAY

COMPANY,

Debdtor.

W. G. WELBON, E. N. CLAUGHTON,

and A. W. CORBETT,

Petitioners,

vs.

ATLANTIC COAST LINE

RAILROAD COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

To the ZZonorable Fred M. Vinson, Chief Justice of the

United States,.and the Associate Justices of the

Supreme Court of the United States:

Petitioners, W. G. WELBON, E. N. CLAUGHTON

and A. W. CORBETT, respectfully show:

I.

SUMMARY STATEMENT

Petitioners pray the issuance of a Writ of Certiorari

to review the judgment of the United States Court of

*

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OPY

Appeals for the Fifth Circuit, two of five judges dissent-

ing, in the appeal numbered and entitled on its docket

14163, In the Matter of Florida East Coast Railway

Company, Debtor—Atlantic Coast Line Railroad Com-

pany, Appellant, vs. St. Joe Paper Company et al, Ap-

pellees. (II, 734)!

The record of said appeal, 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, except that said

record does not include the matters evidenced by the

following exhibits attached to and made a part hereof:

Exhibit A—Record of petitioners’ Petition for Re-

hearing and order denying same.

Exhibit B—Record of opinions and judgment of said

Court of Appeals in the 1949 appeal numbered and en-

titled on its docket 12821, Atlantic Coas* Line Railroad

Company et al vs. St. Joe Paper Company, et al.

The record in Certiorari No. 670 October Term, 1952,

is made a part hereof by reference, and petitioners pray

reference thereto in support of this petition.

The judgment sought to be reviewed reversed an

order by Circuit Judge Strum, presiding in the United

States District Court for the Southern District of Flor-

ida, Jacksonville Division. His order disapproved the

Interstate Commerce Commission’s fourth plan for the

reorganization of debtor under $77 of the Bankruptcy

Act. The grounds of disapproval were that the plan is

“neither fair nor equitable” and “does not afford due

recognition to the rights of the 5% bondholders, par-

ticularly the minority groups.” (Emphasis supplied)

Based on the disapproval and on a finding of “undue

delay in a reasonably expeditious reorganization” of

1. This is a reference to page 734 in Volume II of the record in

Certiorari No. 670 October Term, 1952. All references to that record will

be made in the same manner.

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debtor, the order also dismissed the $77 proceeding.

(I, 168-170)

Without making the findings required by §77(e),?

the Court of Appeals directed Judge Strum to approve

the plan. (II, 734)

Petitioners comprise one of the minority bondholder

groups. They are holders of debtor’s 5% First and Re-

funding Bonds, the senior class of securities that would

not be paid in full. The principal of the issue is $45,000,-

000. Interest presently in default amounts to $37,125,-

000. The total principal and interest is $82,125,000.

St. Joe Paper Company and affiliated interests own a

majority of the bonds. They frequently are referred to

collectively as the majority bondholder.

The questions presented grow out of the forced sale

which would result from enforcement of the so-called

“forced merger” provisions of the third and fourth

plans. The provisions are that all of debtor’s business,

assets, franchises and property shall be “vested” in

Respondent, Atlantic Coast Line Railroad Company,

free and clear of all of debtor’s indebtedness and dis-

charged from the lien of the 5% mortgage, by merger

2. “*** the judge shall approve the oy if satisfied that: (1) It

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

itable, 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 creditors

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 incident to the reorganization, have been fully disclosed

so far as they can be ascertained at the date of such hearing, are reason-

able, are within such maximum limits as are fixed by the Commission, and

are within such maximum limits to be subject to the , geen 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 allow-

ances provided for in subsection (c), paragraph (12) of this section,

may be paid in securities provided for in the plan if those entitled thereto

= accept such payment, and the judge is hereby given power to approve

the same.”

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of debtor into or its consolidation with or transfer and

conveyance of its property to Coast Line, and that the

5% bondholders shall be compelled to accept unwanted

Coast Line securities ($42,500,000 par and stated value)

and a modicum of cash ($4,000,000) in extinguishment

of their present equitable ownership of debtor. (282 ICC

213-226; I, 213-226; 267 ICC 748-759; IV, 748-759)

Those provisions have been consistently opposed

before the Commission and in the courts on behalf of

the holders of overwhelming majorities in amount of

the 5% bonds. They are not supported by any bond-

holder. (267 ICC 295-391; IV, 295-391; 267 ICC 729-747:

IV 729-747; 81 F Supp 926; V, 466-481; 179 F2d 538;

Exhibit B, 1-22; 282 ICC 81-191; I, 81-191; 282 ICC 195-

212; I, 195-212; 103 F Supp 825; I, 127-168; 201 F2d

325; II, 717-733)

Coast Line is the only proponent of the plan. It is one

of debtor’s three connecting carriers. It is not being

reorganized under $77 or otherwise, is not affiliated

with debtor in any way, and has never controlled or had

any proprietary interest in debtor. The two railroads

have never been commonly owned or contrelled. There

has never been any interlocking, overlapping or integra-

tion of their financial structures. They have been com-

pletely independent of each other, their only relationship

having been that of connecting carriers. (Record refer-

ences in immediately preceding paragraph)

During the pendency of the reorganization proceed-

ing Coast Line purchased unsecured claims against

debtor aggregating $1,900,000 which the Commission

had found to be without value. It paid $5,000 for the

claims and agreed with the former owners to pay an

additional 50% of whatever might be realized on them,

less expenses. Until it bought the unsecured claims,

Coast Line never had any financial interest in debtor,

and was not even a creditor. (VI, 920-921; IV, 144-146;

also record references in second preceding paragraph)

Coast Line’s initial appearance in the proceeding

came after Judge Strum had disapproved the Commis-

b.

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5

ion’s first plan} and hearings before the Commission on

second plan had been closed. The appearance took the

rm of a petition by a bondholder group to have the

roceeding reopened for the submission of a plan under

hich Coast Line would acquire control of the reorgan-

ed debtor by a forced sale to Coast Line of 60% of the

ew common stock. The Commission unanimously re-

scted this proposal/ and approved a second plan provid-

ig for full payment of the 412% first mortgage bonds

ut of surplus cash, the setting aside of $8,700,000 re-

sarves for betterments and improvements and cash

squirements upon reorganization, and the receipt by

ne 5% bondholders, for each $1,000 bond, of $450 new

rst mortgage income bonds and 41% shares of common

tock. (261 ICC 187-193; IV, 187-193; 261 ICC 170-187;

V, 170-187)

On petitions for modification the Commission re-

pened the proceeding and Coast Line proposed the

forced merger” plan. (267 ICC 295-298; IV, 295-298)

3. The plan provided that the 4%% first mortgage bondholders

jould receive new first mortgage bonds equal in amount and seniority

_ the bonds then held, and the 5% bondholders should receive, for

ich $1,000 bond, $100 of new general mortgage bonds and 10 shares

f no par value stock. (252 ICC 423; VI, 528; 252 ICC 731; VI, 641)

was disapproved solely on the ground that it should have allocated for

organization purposes, instead of leaving as a floating surplus, approxi-

ately $17,000,000 in cash or its equivalent which had accumulated in

¢ hands of the trustees. (52 F Supp 420; VI, 690-697)

4. For the reasons that the fixed charges proposed for debtor and

oast Line might, during a depression of any considerable duration, con-

ibute toward precipitating bankruptcy —— for both carriers;

e securities proposed, taken at par, would fall far short of satisfying the

nount of the claim of the 5% bondholders and if, in their view, the

rospects of future earnings or the control value were such that the stock

ight later have a market value in excess of par and they desired to hold

to realize the higher price, they should be at liberty to do so, as they

ould not be reimbursed in full on their claim by accepting $100 per

are for stock representing a part of their share of debtor's estate; the

ajority bondholder would vote to reject the proposal; the § 77 power

) order a judicial sale of the property of debtor for the benefit of cred-

ors did not confer power “‘to sell the interests of one or all the creditors

) another creditor or to an outsider for the benefit of the purchaser’;

id the proposal was prima facie impracticable. (261 ICC 187-193;

7, 187-193)

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After lengthy hearings, the Examiner’s full and care-

fully considered report recommended strongly that the

second plan be modified in relatively minor respects and

otherwise be adhered to.’ (VI, 734-848 )

By a five to four vote the Commission overruled the

Examiner and approved Coast Line’s forced merger

plan, with modifications, as the Commission’s third

plan. (267 ICC 390-391; IV, 390-391) The approving

report refused to permit a judicial sale of debtor’s

property. The reason given was that it would defeat

the proposed transfer, “since Coast Line obviously

could not compete successfully in bidding with the

debtor’s first and refunding bondholders.” (267 ICC

307; IV, 307)

Approval of the plan was based on findings, with

strong dissents,‘ that the vesting of debtor’s property

5. The Examiner saw and heard the witnesses and was better able

than the Commission to evaluate the evidence. He said: “ * * * the

Commission should find that a merger of the debtor with the Coast Line

would result in no appreciable improvement in transportation service to

the public as compared with such service under independent operation;

that the eventual savings from such merger would not be such as to war-

rant consideration of them as a controlling factor and would be realized

only by having an immediately adverse effect upon the city of St. Augus-

tine, Fla. and surrounding territory; that the predominant sentiment of

residents, shippers and communities on the east coast of Florida in the

territory served by the debtor is in favor of independent operation of the

debtor; that a merger of the debtor with the Coast Line is not necessary

to assure the future financial stability of the debtor, or continued adequate,

economical and efficient service and that the nature of the holdings, man-

agement and affiliations of the St. Joe Company is not such as to preclude

it as a proper party to control the debtor's property.

“For these reasons the Commission should find and conclude that a

plan of reorganization of the debtor which shall vest control of the

reorganized company in the first and refunding mortgage bondholders,

with resulting control in the St. Joe Company, will, with provisions for

proper recognition of the rights of minority interests after reorganiza-

tion, be compatible with the public interest.’ (VI, 790-791)

6. In Commissioner Mahafhe's first dissent (267 ICC 390; IV, 390),

in which four other Commissioners joined, some initially, others later

(267 ICC 747; IV, 747), he said: “Aside from what seems to me a

fatal legal defect in the report, I think it wrong on the merits. The prin-

\

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7

in Coast Line would result in operating economies, but

reorganization by the 5% bondholders would result in

control of the reorganized debtor by the majority bond-

holder, and “While no violation of the letter or the spirit

of the so-called commodities clause of the Interstate

Commerce Act would necessarily result through St. Joe

Company control of the reorganized debtor. neverthe-

less the Du Pont estate will be in a position, particular-

ly because of its large banking interests, to influence a

great number of shippers to route their shipments over

any connecting carrier which, because of advantageous

division arrangements or for other reasons of its own,

it may wish to favor.” Also, “that such opportunity

given to a private institution of admittedly widespread

power, presents a situation which might have grave

consequences and against which it would be impossible

adequately to protect the shipping public and the car-

riers with which the debtor’s line connects * * *.” (267

ICC 346; IV, 346)

Upon reconsideration by the full Commission the

plan was adhered to by a six to five vote. (267 ICC 729-

747; IV, 729-747)

The plan was objected to in the District Court on

behalf of holders of more than 98% in amount of the

5% bonds. (81 F Supp 932; V, 476; 179 F2d 542; Exhibit

B, 7) It was disapproved by Circuit Judge Sibley,

presiding as judge designate. (81 F Supp 926; V, 466)

His grounds were that § 77 does not authorize a plan

cipal controversy before us is whether the public interest will be best

served by making this property a part of the Atlantic Coast Line system

or by permitting it to remain independent of railroad control. On that

issue much testimony was taken. Extensive briefs were filed and argument

lasting two days was heard. The majority decide the issue in favor of the

Atlantic Coast Line. I submit that the great preponderance of the per-

tinent testimony is to the contrary. The views of the persons served by the

railroad, the persons dependent on it for a livelihood, and of those who

own its securities all have to be very largely disregarded in order to reach

the majority conclusion. I would approve a plan which, in its main

features, is substantially as proposed by the examiner. This would permit

the property to be reorganized. The result of the present report, in my

judgment, is more likely to be prolonged litigation.” (267 ICC 391;

IV, 391)

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Sa aren:

providing for “a forced merger of debtor with Coast

Line” (81 F Supp 932; V, 476), but if it does, and is

within constitutional bankruptcy power, the plan was

not fair and equitable and did not afford due recognition

to the rights of the bondholders.

He also decided that the minority bondholders had

“done nothing amiss,” and the plan was “unfair, in-

equitable, and not a due recognition of their rights,”

because the findings regarding control by the majority

bondholder in a bondholder reorganization did not just-

ify the requirement that the minority bondholders

“must surrender the investment they have chosen and

lawfully own in the East Coast property and must take

in return an investment which most of them do not de-

sire to own and do not think is an equivalent.” (81 F

Supp 933-934; V, 478-481)

The Court of Appeals affirmed, one of three judges

dissenting. (179 F2d 538; Exhibit B, 1-22) This Court

denied certiorari. (339 US 929) However, two judges in

the Court of Appeals thought Judge Sibley was wrong

on the question of forced merger and agreed that § 77

authorizes a plan providing for a forced merger over

the objections of the 5% bondholders. No reference was

made by either ‘judge to petitioners’ contention that, so

construed, §77 violates the due process and eminent

domain clauses in the Fifth Amendment.’

Because petitioners prevailed in the Court of Ap-

peals, review of the adverse ruling on the forced merger

question was not open to them, and the Commission

and the courts have regarded the ruling as the law of

the case in all subsequent proceedings. Nevertheless,

petitioners have consistently advanced the contention

that §77 does not authorize a forced sale of debtor’s

property to Coast Line over the objections of the 5%

7. The fourth point argued in petitioners’ brief was: “If § 77 author-

izes the proposed expropriation, the section itself is not within but exceeds

the bankruptcy power of Congress, is not a valid exercise of the power,

and violates the due process and eminent domain clauses in the Fifth

Amendment.”

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bondholders, but if it does, it violates the due process

and eminent domain clauses in the Fifth Amendment.

(I, 20, 17th objection — 44, 4th objection; Exhibit A,

3rd and 4th grounds of Petition for Rehearing)

Coast Line proposed another forced merger plan.

With modifications, it was approved by a seven to three

vote as the Commission’s fourth plan. (282 ICC 81-191;

I, 81-191) Petitioners’ petition for modification was

denied by a seven to three vote. (282 ICC 195-212; I,

195-212)

The fourth plan was objected to in the District Court

on behalf of holders of more than 99% in amount of

the 5% bonds. (103 F Supp 833; I, 138) Judge Strum

thought he was bound by the law of the case that § 77

authorizes a forced merger with Coast Line (103 F

Supp 834; I, 140), but in disapproving the plan as un-

fair, inequitable and not a due recognition of the rights

of the 5% bondholders, he found that “One of the out-

standing infirmities of the fourth plan, as it was also

of the third, is its adverse impact upon the rights of

the minority 5% bondholders.” (103 F Supp 834; I,

141)

His exhaustive opinion analyzed and discussed the

plan, proceedings and evidence. He demonstrated that

the findings regarding the majority bondholder were

mere speculations, wholly unsupported by any evidence,

but, if the evidence had supported them, they could not

equitably serve as a basis for penalizing the minority

bondholders in the manner attempted by the plan.é

8. “ * ** the Commission is still preoccupied with, and completely

immersed in, this struggle for control between A.C.L. and the duPont

interests, in which it has favored the Coast Line with adamant consistency

since 1947, and to the distinct prejudice of the $20,000,000 of minority

5% bondholders, who, in order to effect a merger with the Coast Line,

are required to relinquish what they now lawfully own and desire to keep,

and to become involur*ury security holders in Atlantic Coast Line, a

wholly unrelated corporation. This result is unfair to all the 5% bond-

holders, but particularly to the minority groups, who are innocent by-

standers caught between the upper and nether millstone, and who now,

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The controlling opinion in the Court of Appeals in-

dicates that no consideration was given to the rights

and equities of the minority bondholders, as distin-

guished from those of the majority bondholder. (201

F2d 325-331; II, 717-731) Neither does it refer to peti-

tioners’ contention that if §77 authorizes the forced

merger, the section violates the due process and eminent

domain clauses in the Fifth Amendment. The material

parts of the opinion are largely a series of dogmatic

assertions that the commission majority’s findings are

supported by evidence and Judge Strum’s are not, and

that the commission majority was right and Judge

Strum was wrong. In effect, it holds that Judge Strum

had no power to exercise an “informed, independent

judgment” on the questions whether the pian is fair and

equitable, affords due recognition to the rights of the

5% bondholders, discriminates unfairly in favor of

Coast Line as an unsecured creditor, and conforms to

the requirements of the law of the land regarding the

participation of the minority bondholders. In an at-

tempt to fortify the dogmatic conclusions previously

stated, and far in advance of the event, it also holds

that after the anticipated rejecting vote of the bond-

holders, the plan must be confirmed unless “conditions

like ancient Odysseus, drift helplessly between Scylla and Charybdis,

hoping to be rescued.’” (103 F Supp 835; I, 141)

“* * * the Commission had before it a plan proposed by the duPont

interests under which the duPonts agreed to accept all common stock in a

reorganized company in lieu of their present $25,000,000 of 5% bonds,

giving to all other bondholders new 4% fixed interest first mortgage

bonds, which would be worth par, on a dollar for dollar of principal

basis of exchange. Thus, the minority 5% bondholders would receive more

and better bonds than under the Coast Line plan, and would be assured

of a good return on a sound investment, while the duPont interests would

take all the chances as to earnings. The minority 5% bondholders enthusi-

astically favored and urged this plan. But the Commission rejected it in

favor of the Coast Line plan, under which these bondholders would re-

ceive less, because the Commission found that the public interest required

operation and control of F.E.C. by A.C.L.” (103 F Supp 842; I, 156)

“It should here be mentioned again that there are $20,000,000 of

minority 5% bondholders who do not own any Florida banks, but who

will nevertheless be penalized by the Commission’s apprehensions as to

the public interest.” (103 F Supp 845; I, 164)

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11

should so change” as to render it no longer “fair and

reasonable.”

The minority opinion by Judge Russell, with whom

Judge Borah joined, agreed with Judge Strum that the

plan provided for “an enforced, noncompetitive sale of

F.E.C. to A.C.L., a wholly unrelated corporation, over the

objections of 99% of the present bondholders, whose

property interests are at stake, and who do not wish to

sell, and * * * virtually gives A.C.L. the power of eminent

domain over F.E.C., with authority to pay, not in cash,

but 90% in Coast Line securities of debatable value.”

(201 F2d 331; II, 731-733) It also agreed with Judge

Sibley that the plan is not authorized by §77, and

pointed out that the majority holding “poses a serious

constitutional question as to whether the court’s power

in bankruptcy could thus be extended to force a merger

consistent with the Fifth Amendment.”

Petitioner’s petition for rehearing was the only one

filed. Judges Russell and Borah dissented from its denial.

(Exhibit A, 5)

Il.

STATEMENT OF JURISDICTION

The jurisdiction of this Court is invoked under 28

USC §1254(1), conferring on this Court jurisdiction to

review the judgment of the Court of Appeals by writ

of certiorari.

The judgment of the Court of Appeals was rendered

January 19, 1953. (II, 734) The petition for rehearing

was denied March 2, 1953. (Exhibit A, 5)

Ill.

QUESTIONS PRESENTED

1. Does $77 of the Bankruptcy Act authorize the

“forced merger” plan providing that debtor’s property

shall vest in Coast Line free and clear of debtor’s in-

debtedness and discharged from the lien of the 5%

oY

12 i .

mortgage, and that the 5% bondholders, in extinguish-

ment of their present equitable ownership of debtor,

shall be compelled to accept unwanted Coast Line secur-

ities and nominal cash in an aggregate amount sub-

stantially less than the principal and interest of their

bonds?

2. If §77 authorizes the “forced merger” plan, does

the section violate the due process and eminent domain

clauses in the Fifth Amendment to the Constitution of

the United States?

3. If § 77 authorizes the “forced merger” plan and is

constitutional, are the findings regarding the majority

bondholder a sufficient justification for depriving the

minority bondholders of their present prorata equitable

ownership of debtor? Does the deprivation afford due

recognition to their rights and conform to the require-

ments of the law of the land regarding their partic-

ipation?

4. If $77 authorizes the “forced merger” plan and

is constitutional, is the plan unfair, inequitable and not

a due recognition of the rights of the 5% bondholders be-

cause one of its stated purposes is to preclude realizing

the highest possible sale price for the bondholders’

security and to limit the sale price to so-called reorgan-

ization value expressed in terms of securities of a wholly

unrelated corporation?

5. If §77 authorizes the “forced merger” plan and

is constitutional, does the plan violate the absolute pri-

ority rule of the Boyd and later cases? by appropriating

the 5% bondholders’ security to the payment of Coast

Line’s unsecured claim?

9. Reconstruction Finance Corp. v. Denver 6 RG W R Co, 328 US

495 (1946); Ecker v. Western Pacific R Corp, 318 US 448 (1943);

Institutional Investors v. Chicago M St P & P R Co, 318 US 523 (1943);

Marine Harbor Properties v. Manufacturer's Trust Co, 317 US 78 (1942);

Consolidated Rock Products Co v. DuBois, 312 US 510 (1941); Case v.

Los Angeles Lbr Products Co, 308 US 106 (1939); Kansas City Terminal

R Co v. Central Union Trust Co, 271 US 445 (1926); Northern Pacific

R Co v. Boyd, 228 US 482 (1913).

i

os

BLURRED CC

BLEED THROUGH

aa———_

13

6. Absent a clear abuse by Judge Strum of the in-

formed discretion conferred by the term “if satisfied”’

in §77(e), was the Court of Appeals justified in setting

aside his findings that the plan is unfair, inequitable

and not a due recognition of the rights of the minority

bondholders?

IV.

REASONS RELIED ON FOR ALLOWANCE OF WRIT

1. By construing $77 of the Bankruptcy Act as

authorizing the so-called “forced merger’ plan, the

Court of Appeals decided an important question of

federal law which has not been, but should be, settled

by this Court.

2. The Court of Appeals so far departed from the

accepted and usual course of judicial proceedings as to

call for an exercise of this Court’s power of supervision.

The departures were: First, the failure of the Court

of Appeals to decide petitioners’ contention that § 77

of the Bankruptcy Act, as construed, violates the due

process and eminent domain clauses in the Fifth Amend-

ment; second, the failure of the Court of Appeals to give

any consideration to the rights and equities of the

minority bondholders, as distinguished from those of

the majority bondholder.

3. The questions decided by the Court of Appeals

are of paramount importance in the administration of

reorganization proceedings under § 77 of the Bankruptcy

Act, and have not been, but should be, settled by this

Court.

4. The decision of the Court of Appeals that the

fourth plan does not violate the absolute priority rule

conflicts with principles enunciated by this Court in the

Boyd and later cases./0

MILLER WALTON

916 Alfred I. duPont Building

Miami 32, Florida

Attorney for Petitioners

10. Cases cited page 12, footnote 9.

ry

14

BRIEF IN SUPPORT OF PETITION

FOR CERTIORARI

I.

The Opinions of the Courts Below

The Court of Appeals opinions in connection with

the judgment sought to be reviewed were handed down

January 19, 1953 and are reported as In re Florida East

Coast Ry Co, 201 F2d 325. They are in Volume II of the

record, at pages 717-733.

Judge Strum’s District Court opinion of March 11,

1952 in connection with his order disapproving the

fourth plan of reorganization is reported as In re Florida

East Coast Ry Co, 103 F Supp 825. It is in Volume I of

the record, at pages 127-168.

Judge Strum’s District Court opinion of October 19,

1943 disapproving the first plan of reorganization is

reported as In re Florida East Coast Ry Co, 52 F Supp

420. It is in Volume VI of the record at pages 690-697.

Judge Sibley’s District Court opinion of January 22,

1949 disapproving the third plan of reorganization is

reported as In re Florida East Coast Ry Co, 81 F Supp

926. It is in Volume V of the record, at pages 466-481.

The Court of Appeals opinions of January 17, 1950

in connection with its judgment affirming Judge Sibley’s

disapproval of the third plan are reported as Atlantic

Coast Line R Co v. St. Joe Paper Co, 179 F2d 538. They

are in Exhibit B at pages 1-22.

Il.

The Reports of the Interstate Commerce Commission

The Commission’s report of April 6, 1942 approving

the first plan of reorganization is reported as Florida

East Coast Ry Co Reorganization, 252 ICC 423. It is in

Volume VI of the record, at pages 528-640.

en

BLURRED ¢

' 15

The Commission’s Supplemental Report of August

10, 1942 modifying the first plan of reorganization is

reported as Florida East Coast Ry Co Reorganization,

252 ICC 731. It is in Volume VI of the record, at pages

641-689.

The Commission’s Second Supplemental Report of

January 8, 1945 approving the second plan of reorgan-

ization is reported as Florida East Coast Ry Co Re-

organization, 261 ICC 151. It is in Volume IV of the

record, at pages 151-194.

Examiner Jewell’s Proposed Third Supplemental Re-

port is in Volume VI of the record, at pages 734-848.

The Commission’s Third Supplemental Report of

April 8, 1947 approving the third plan of reorganization

is reported as Florida East Coast Ry Co Reorganization,

267 ICC 295. It is in Volume IV of the record, at pages

295-391.

The Commission’s Fourth Supplemental Report of

March 25, 1948 adhering to the third plan of reorganiza-

tion is reported as Florida East Coast Ry Co Reorgan-

ization, 267 ICC 729. It is in Volume IV of the record,

at pages 729-759.

The Commission’s Fifth Supplemental Report of July

12, 1951 approving the fourth plan of reorganization is

reported as Florida East Coast Ry Co Reorganization,

282 ICC 81. It is in Volume I of the record, at pages

81-191.

The Commission’s Sixth Supplemental Report of

October 25, 1951 adhering to the fourth plan of reorgan-

ization is reported as Florida East Coast Ry Co Re-

organization, 282 ICC 195. It is in Volume I of the rec-

ord, at pages 195-226.

Jurisdiction

Jurisdiction to review the judgment of the Court of

SPY

16 ¥

Appeals by writ of certiorari is conferred on this Court -

by 28 USC § 1254(1).

The judgment of the Court of Appeals was rendered

January 19, 1953. (II, 734) Petitioners’ petition for

rehearing was denied March 2, 1953. (Exhibit A, 5)

IV.

Statement

The nature of the case and the decisions of the Court

of Appeals for the Fifth Circuit are stated in the fore-

going petition, pages 1-11, which, in the interest of

brevity, is adopted as a part of this brief.

V.

Specifications of Error

The Court of Appeals erred in the following respects:

1. In deciding that §77 of the Bankruptcy Act au-

thorizes the so-called “forced merger” plan of reorgan-

ization.

2. In failing to decide petitioner’s contention that

$77 of the Bankruptcy Act, as construed, violates the

due process and eminent domain clauses in the Fifth

Amendment.

3. In not deciding that the fourth plan is unfair, in-

equitable, and not a due recognition of the rights of

the 5% bondholders, because one of its stated purposes

is to preclude realizing the highest possible sale price

for the bondholders’ security and to limit the sale price

to so-called reorganization value expressed in terms of

securities of a wholly unrelated corporation.

4. In not deciding that the fourth plan violates the

absolute priority rule of the Boyd and later cases by

appropriating the 5% bondholders’ security to the pay-

ment of Coast Line’s unsecured claim.

i

BLURRED CO

—_—- =_ = —., OO Es

———————e

5. In setting aside Judge Strum’s findings and direct-

ing approval of the plan, without making alternative

findings and without considering the rights and equities

of the minority bondholders, as distinguished from those

of the majority bondholder.

6. In reversing Judge Strum’s order disapproving

the fourth plan.

VI.

Argument in Support of Reasons Relied on for

Allowance of Writ

Reason I

By construing § 77 of the Bankruptcy Act as authorizing

the so-called “forced merger” plan, the Court of

Appeals decided an important question of federal

law which has not been, but should be, settled by

this Court.

It is believed that this is the only reorganization pro-

ceeding in which an attempt has been made to utilize

$77 to force the transfer of a debtor’s property to an

unaffiliated, wholly unrelated railroad, which is not being

reorganized under § 77 or otherwise, and to compel the

senior claimants to accept the other railroad’s securities

in extinguishment of their equitable ownership of the

debtor. No decision of this Court has dealt with such

a proposal.

The resulting questions of law are novel. There is a

dearth of pertinent authority. Both the Commission and

the Court of Appeals divided sharply. The two circuit

judges who presided in the District Court disagreed

with the controlling opinions in the Court of Appeals.

Of the seven circuit judges who presided in the District

Court or the Court of Appeals, Judges Sibley, Strum,’/

Russell and Borah disagreed with the result, but by the

accident of their assignments to preside the views of

11. These two saw and heard the witnesses and were better able than

the others to evaluate the evidence.

18

Judges Hutcheson, Holmes and Rives prevailed. This

extraordinary conflict of opinion emphasizes the need

for decision of the questions by this Court.

The findings of the Commission majorities and the

controlling opinions in the Court of Appeals were made

to turn on the provisions in §77(b) that a plan of re-

organization “shall provide adequate means for the

execution of the plan, which may include the transfer

of any interest in or control of all or any part of the

property of the debtor to another corporation or cor-

porations, the merger or consolidation of the debtor

with another corporation or corporations * * * .”

Petitioners contend that these provisions cannot be

considered in splendid isolation, but should be construed

in pari materia with all other provisions of $77, and

when so construed, it is evident that the quoted provi-

sions were merely intended to preserve and authorize

the established equity device of organizing a corporation

or corporations as a means for the execution of a plan.

In support of that construction they point to the § 77 (f)

provisions that upon confirmation of the plan “the debtor

and any other corporation or corporations organized or

to be organized for the purpose of carrying out the plan,

shall have full power and authority to, and shall put

into effect and carry out the plan.” (Emphasis supplied )

Petitioners also urge that the legislative history of

the Act clearly and explicitly confirms this construction,

and the quoted provisions regarding “means for the exe-

cution” of a plan relate not to fair and equitable treat-

ment of creditors but only to procedure for accomplish-

ing what is determined to be fair and equitable.

Reason 2

The Court of Appeals so far departed from the accepted

and usual course of judicial proceedings as to call

for an exercise of this Court’s power of supervision.

The departures were: First, the failure of the Court

of Appeals to decide petitioners’ contention that § 77

i 19

of the Bankruptcy Act, as construed, violates the due

process and eminent domain clauses in the Fifth

Amendment; second, the failure of the Court of

Appeals to give any consideration to the rights and

equities of the minority bondholders, as distinguished

from those of the majority bondholder.

Judge Sibley did not reach the constitutional question

in disapproving the third plan. His decision that § 77

does not authorize a forced merger eliminated the con-

stitutional question. (81 F Supp 926; V, 466-481) On

appeal Judge Russell agreed with him (179 F2d 538;

Exhibit B, 16), but Judges Hutcheson and Holmes

agreed, in separate opinions (179 F2d 538; Exhibit B,

1-15; 179 F2d 545; Exhibit B, 16-22), that §77 does

authorize a forced merger. They did not notice nor

decide the contention that, so construed, $77 violates

the Fifth Amendment.

Judge Strum did not reach the constitutional ques-

tion in disapproving the fourth plan because he thought

he was bound by the law of the case as agreed by Judges

Hutcheson and Holmes. (103 F Supp 834; I, 140) On

appeal the constitutional question was not noticed or

decided in the controlling opinion (201 F2d 325; II, 717-

731), but the minority opinion points out that the con-

stitutional question is posed by the holding that §77

authorizes a forced, noncompetitive sale of debtor’s

property to Coast Line. (201 F2d 331; I, 731-733)

As construed by the commission majorities and the

controlling opinions in the Court of Appeals, §77 at-

tempts to extend the scope of the bankruptcy power’?

into the field of eminent domain. The plan provides for

the taking of the bondholders’ security by Coast Line—

as much so and with identically the same effect as if

Coast Line had proceeded directly under Rule 71A of the

Federal Rules of Civil Procedure by bringing an action

in the District Court to condemn debtor’s property. The

12. Constitution, Article 1, §8: “The Congress shall have Power * * *

To establish * * * uniform Laws on the subject of Bankruptcies through-

out the United States * * * .””

ite

20

only differences are that in the condemnation action

Coast Line would be required to pay cash representing

the present fair value of the property, but the plan per-

mits Coast Line to pay only so-called reorganization

value expressed in terms of Coast Line securities. This

is contrary to all existing concepts of due process and

just compensation.

The bankruptcy power is not susceptible of final defi-

nition, its scope being the “subject of the relations be-

tween an insolvent or nonpaying or fraudulent debtor,

and his creditors, extending to his or their relief.”!:

Nevertheless, “The bankruptcy power, like all the other |

great substantive powers of Congress, is subject to the

Fifth Amendment.”!4

ele eA akc

This case is the first in which any section of the

Bankruptcy Act has been construed as authorizing an

unsecured creditor to appropriate the security under-

lying senior claims. Petitioners urge that the Fifth

Amendment inhibits such an enlargement of the bank-

ruptcy power. They submit that the proposed taking of

their property by Coast Line, at a price which has never

been determined to be its present fair value, for com-

pensation which is not payable in cash, violates the

inhibitions of the Fifth Amendment.

PB SS Ssh POR S ES IE.

> ST TENS

The Court of Appeals also failed to give any con-

sideration to the rights and equities of the minority

bondholders, as distinguished from those of the majority

bondholder. Judges Sibley and Strum made the distinc-

tion clearly and explicitly—the former in disapproving

the third plan, the latter in disapproving the fourth plan.

Each decided that regardless of what might be said

about the majority bondholder, the plan under consid-

13. In re Reiman, DC NY, Fed Case No. 11,673; Wright v. Union

Central Life Ins Co, 304 US 502 (1938); United States v. Bekins, 304

US 27 (1938); Continental Illinois N B & T Cov. ChicagoRI&PR

Co, 294 US 648 (1935); Hanover Nat'l Bank v. Moyses, 186 US 181

(1902).

14. Louisville Joint Stock Land Bank v. Radford, 295 US 555 (1935).

eames e246cGeaan.@iam az

On ————

eration was unfair and inequitable to the minority

bondholders, and not a due recognition of their rights.

(81 F Supp 926; V, 466; 103 F Supp 825; I, 127)

21

Judge Strum disapproved the fourth plan ‘For the

same cogent reasons given by _udge Sibley and by Chief

Judge Hutcheson as to the third plan, namely, because

the fourth plan, as did the third, unjustly and inequit-

ably subordinates the rights of the 5% bondholders,

particularly the $20,000,000 of minority bonds, to the

accomplishment of a forced merger with Atlantic Coast

Line.” (103 F Supp 846; I, 164-165—EEmphasis supplied )

The legal effect of Judge Strum’s determination and

findings in disapproving the plan for this and other

reasons was completely ignored by the majority opinion

in the Court of Appeals. Section 77(e) leaves this deter-

mination within the informed discretion of the Distri¢t

Court. It provides that he shall approve a plan only “if

satisfied” that it meets the conditions therein set forth,

including fairness and equity, and the due recognition

of the rights of bondholders. Those words, “if satisfied,”’

have appeared in various sections of the Bankruptcy

Act at least since the Act of 1898 (see 11 USC §30 re

confirmation of composition). They have always been

construed to invest in the District Judge a discretionary

judicial function, which could only be reversed upon an

appellate finding of a clear abuse of discretion.!>5

The majority in the Court of Appeals made no such

finding. The majority merely decided that, considering

the question de novo, they would have decided, and did

decide, to the contrary. Nor, in doing so, did the majority

itself make the findings required of the District Court

15. In re Youtie, 44 F2d 56 (CA 3, 1930); In re Pilsener Brewing

Co, 79 F2d 63, 68 (CA 9, 1935); Scherck, Richter Co v. Dysart, 123 F2d

364, 369 (CA 8, 1941). This Court has said that other sections requiring

that the judge be “‘satisfied’’ before approving a plan call for the exercise

of his “informed, independent judgment.” Case v. Los Angeles Lbr

Products Co, 308 US 106, 115 (1939); Consolidated Rock Products Cov.

DuBois, 312 US 510, 520 (1941); Kelley v. Everglades Drainage District.

319 US 415, 418 (1943).

~ oes

22

under §77(e). They merely decided that a contrary

result should be achieved./6

Petitioners urge that when the Court of Appeals

ignored the question of unfairness to the minority bond-

holders, it was guilty of a departure from the accepted

practices of judicial proceedings calling for the exercise

of this Court’s power of supervision.

Reason 3

The questions decided by the Court of Appeals are of

paramount importance in the administration of re-

organization proceedings under §77 of the Bank-

ruptcy Act, and have not been, but should be, settled

by this Court.

A question of paramount importance in the admin-

istration of $77 is whether the fourth plan is unfair,

inequitable and not a due recognition of the rights of

the 5% bondholders because one of its stated purposes

is to preclude realizing the highest possible sale price

for the bondholders’ security and to limit the sale price

to so-called reorganization value expressed in terms of

securities of a’wholly unrelated corporation.

The report approving the third plan refused to permit

a judicial sale of debtor’s property. The commission

majority said: “In any plan purporting to transfer

control of the debtor to the Coast Line, a provision per-

mitting a judicial sale of the mortgaged property * * *

would defeat such a transfer, since the Coast Line

obviously could not successfully compete in bidding with

the debtor’s first and refunding bondholders.” (267 ICC

307; IV, 307)

16. Compare Institutional Investors v. Chicago M St P & P R Co, 318

US 523, 564 (1942): “We would have quite a different problem if the

District Court had failed to perform the Tenens which §77(e) places

upon it. * * * 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.”

BLURRED COP

. 23

The report adhering to the third plan says: “The

valuation of $40,500,000 is not intended to represent

worth of the property such as would be determined by

an inventory of the physical assets. * * *Value for

reorganization purposes, physical value, and market

value, are each entirely different, and we concern our-

selves only with the first. The requirement that the plan

be fair and equitable is satisfied if the creditors of the

debtor receive Coast Line securities which are the equit-

able equivalent of the securities which they would

receive under an independent reorganization of the

debtor.”!7 (267 ICC 736; IV, 736)

The report approving the fourth plan says nothing

about a judicial sale, but the plan does not provide for

one. (282 ICC 81; I, 81; 282 ICC 213; I, 213) The report

does say: “We conclude that the value of debtor’s prop-

erty in terms of Coast Line securities, including one-half

of the prospective savings, is $46,500,000, plus outstand-

ing equipment obligations.” (282 ICC 160; I, 160)

It thus appears that a stated purpose of the plan is to

preclude realizing the highest possible sale price for the

bondholders’ security and to limit the sale price to so-

called reorganization value expressed in terms of Coast

Line securities.

The majority of the Court approves this wholly arbi-

trary purpose and its attitude is fully revealed by its

action in attempting to pass upon a matter not before

it and in advance of the event. It has condemned the

bona-fide protests of the objecting bondholders as futile

in an erroneous construction of the cramdown clause of

§77(e). Thus the majority would disrupt the orderly

17. This paraphrases and misapplies the following statement in Insti-

tutional Investors Vv. Chicago M St P & P R Co, 318 US 523, 565 (1943):

“It is sufficient that each security holder in the order of his priority re-

ceives from that which is available for the satisfaction of his claim the

equitable equivalent of the rights surrendered.’’ That was said regarding a

plan designed to rehabilitate the debtor by reducing existing indebtedness

to bring it within ability to pay. The statement has no application to a

plan forcing a sale of the security underlying senior claims in a manner

avowedly designed to prevent realizing the highest possible sale price.

24

administration of the reorganization provisions of the

Act by ordering the plan approved and confirmed at one

sitting, and bolstering its arguments for approval with

its preconceptions of the course which should be fol-

lowed on confirmation.

Reason 4

The decision of the Court of Appeals that the fourth

plan does not violate the absolute priority rule con-

flicts with principles enunciated by this Court in the

Boyd and later cases.

The plan provides that the senior creditors’ security

will be transferred to an unsecured creditor, free and

clear of the mortgage lien, for a consideration which is

substantially less than the mortgage debt and is payable

principally in the junior creditor’s stocks and bonds.

The junior creditor wants and will get the senior

creditors’ security. The senior creditors do not want but

will be forced to accept the junior creditor’s stocks and

bonds.

Judge Strum decided that the plan violates the abso-

lute priority rule of the Boyd and later cases./8 (103 F

Supp 842; I, 156-157) Petitioners urge that he was right.

The Denver case says/9 that “junior claims can re-

ceive nothing until the senior claims receive securities

of a worth or value equal to their indebtedness.” (Em-

phasis supplied) The Ecker case says the rule requires

18. Reconstruction Finance Corp v. Denver & R G W R Co, 328 US

495 (1946); Ecker v. Western Pacific R Corp, 318 US 448 (1943);

Institutional Investors v. Chicago M St P & P R Co, 318 US 523 (1942);

Marine Harbor Properties v. Manufacturer's Trust Co, 317 US 78 (1942);

Consolidated Rock Products Co v. DuBois, 312 US 510 (1941); Case V.

Los Angeles Lbr Products Co, 308 US 106 (1939); Kansas City Terminal

R Co v. Central Union Trust Co, 271 US 445 (1926); Northern Pacific

R Co v. Boyd, 228 US 482 (1913).

19. Reconstruction Finance Corp v. Denver & RG W R Co, 328 US

495, 517 (1946).

20. Ecker v. Western Pacific R Corp, 318 US 448, 483 (1943).

BLURRED C

rmrerenre =~ —~—s +e see a fPE ST

i

25

that “senior claims first receive securities of a worth

sufficient to cover their face and interest before junior

claims receive anything.” (Emphasis supplied)

Here the senior claims will not receive securities

sufficient to cover their face and interest, nor of a worth

or value equal to their indebtedness. Nevertheless, the

junior claim will receive all of debtor’s property.

Petitioners submit that if this can be done, it can be

“only under the composition theory of reorganization,”

but that $77, like Chapter X, rejected the composition

theory “in favor of the full priority rule of the Boyd

case. * * * That rule protects the rights of senior cred-

itors against dilution either by junior creditors or by

equity interests.”?/

Conclusive evidence of this congressional intent is

found in the 1952 Amendments to the Bankruptcy Act.

Congress wrote the full priority rule out of the “com-

position” sections of the Act (Chapters XI, XII and

XIII), but retained it in the reorganization provisions. ?-

All of which is respectfully submitted.

MILLER WALTON

916 Alfred I. duPont Building

Miami 32, Florida

Attorney for Petitioners

21. Marine Harbor Properties v. Manufacturer's Trust Co, 317 US

78, 86-87 (1942).

22. “The proposed amendment is designed to remove the fair and

equitable provision, and by the ——— added to each of the amended

sections it is made clear that the rule of the Boyd and Los Angeles cases

shall not be operative under those three chapters.’” Senate Report No.

1395 and House Report No. 2320, 82nd Congress, 2nd Session, paragraph

No. 43 in each report.

ps =

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a