Petition for Writ of Certiorari Supporting Brief — St. Joe Paper v. The Atlantic Coast Line Railroad
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SiUCCEME COURT Udi t
¥
re
Sprome Cort ofthe Ute Sa as
_Octosen Team, 4062 i953:
Ne 3:7
In the Matter a
FLORIDA EAST COAST RAILWAY
COMPANY,
>»
W. G. WELBON, E. N.
and A. W. CORBETT,
f
PETITION FOR A WRIT OF CERTIORARI TO THE.
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT AND
SUPPORTING BRIEF
hott
x
MILLER WALTON,
916 Alfred I. duPont Building
Miami 32, Florida
; _ Attorney for Petitioners
INDEX
‘ \
a PAGE
PETITION FOR CERTIORARI ........... Bir OEE —
x. Gammery Giatement ...........- 5s 1
‘Il. Statement of Jurisdiction... ae oe ae
Ii. / Questions Peewemted. ..........«..... PRES. EN ae:
/ IV. Reasons Retied on for Allowance of Writ. sii 13
: _ BRIEF IN SUPPORT OF PETITION FOR CERTIORARL.......... 14
I. The Opinions of the Courts Below... 14
II. The Reports of the Interstate Commerce |
RE RIS HES AR NC ae 14
. Mi. eal a alco 15
eI secnipiecsdechcosinchonesieitceideinbineinippiieleleacatiide 16
V. Specifications of Error .................. aiilideninlalianiiadie 16
_ VIL Argument in Support of Reasons Relied on ;
bee BELA | for Allowance of Writ..........-2-..-...... ~ i
ee Si oiraeth adie ese raped se ets teem ie
a icesidininicabdian 18
TI slats stavinisctdlsciaainscsptchdaaaolendissigbdamalaias da 22
Reason RE en MM ec eee TO” 240
RR tigi inncicnimnnysTncciniecisuitiimtacmainiaitcisitioien 14
NER UN Fenian? De ieee REESE SS dS A-24
f,
hak ~ PAGE
Atlantic Coast Line R Co v.
538 (CA 5, 1950, cert den 338°US 929) 2, 4, 7, 8, 14, 19
_ Case v. Los Angeles Lbr Products Co, 308 US 106
Paper Co, 179 F2d..—-
Fe a 12, 21,24 .
Consdlidated Rock Products Cov. DuBois, 312 US 510 -
a gitiitiicelaciinsillantensieicestin wiiceasieueincanlinahoredestoniig 12, 21,24 .
Continental [li
Co, 294 US
Ecker v. Western Pacific R R Corp,3i8 UB448 (1943) 12, 24
Florida East Coast Ry Co, In re, 52 F Supp 420 :
“SIME. soalocslh hiobbasthih leibishils-coiteeipepcopasagansciniaiasbemaibniaddiedte 5,14
Florida East Coast ‘Ry Co, In re, 81 F Supp 926
CRE aden ibirnchedelanicrcanacstncnenaeammaabineiienie 4, 7, 14, 19, 21
Florida East Coast Ry Co, In're, 103 F Supp —
CHB an rcreeesing NEA WEUS ARDEA roe 4, 9,10, 14, 19, 21, 24
Florida East Coast Ry Co, In re, 201 F2d 325 (CA
His PND uisicestessicsisctiicaceninncaioasapubbiacociuaniinaioblee 4,10, 11,14, 19
NB&T Cov. CMenge RIGPR
Hanover Nat'l Bank v. Moyses, 186 US 181 (1902)...... 20
- Institutional Ifvestors v. Chicago M St P)& P R Co,
318 US 523 (1943) ..................... MS pres Bs 12, 22, 23, 24
rg Kansas City Terminal R Co v. 1. Central Union Trust
Co, 271 US 445 (1926) 2... 12,24
Kelley v. Everglades Drainage Dist, 319 US 415 (1943) 21 :
Louisville Joint Stock Land Bank’y. “Radford, 295
US 555 (1935) -..... TosecnnsnliGhicoonsnabasbio-ieetaha celkdpaaiabaeidiiniuni comic 20
~ Marine Harbor v. Manufacturer's Trust
‘Ce, BET UB TS (i088) ss er ES, 24,25
Northern Pacific R Co v. Boyd, 228 US 482 —
, A seleccshcaseNiailecansineeiienhbienidiicananladapelababendiod 12, 15, 16, 24
_ Pilsener Brewing Co, In re, 79 F2d 63 (CA 9, 1935) .... 21
Recons Finance Corp v. Denver & RGWR
€o, 328 US 436 (1946) __........ Pe SWEAR CSSA noe hele 12, 24
Reiman, In re, DC NY, Fed Case No. 11,673 a sete 20
IUD sen ise 20
? ii¥ e oe .
! 5 PAGE ;
Sahar’, Richter Co v. Dysart, 123 F2d 964 CA 8 Se sat
United States \ v. | Mebine, 304 us od (1938)... eis 20
Wright v. Union Central Life Ins Co, 304 us 502° 0
5 EE nace cade sloleabked aiaidiaallpinipeelicianeniciessiinctscueetnese.ccvwsd : 20.
—— In re, 44 F2d 56 (CA 3, 1930 F sin stnigeninibiiesSsbeeiod ae
: INTERSTATE COMMERCE Commission Siete
Florida East Coast Ry Co Reorganization, ; 2 "=
Florida East Coast Ry ‘Co Reorganization,
NE SD spinvicinernnrsstnins niembincincliipatenincbovenz4i. elevates 15
‘Florida East Coast Ry Co citienecetiaiie ers
‘>. +261 ICC 151 . scihus oe
Florida East Osest Ry Co Reorganization,
_ go + 8h aeNeneeacnneenienae A Sih ASHEY 4,5, 6, 7,15, 22
‘ . Plorida East Coast Ry Co Reorganization, 7
SN aR TE Oa oe a ts a 4, 6, 7, 15, 5 23 .
Florida East Coast Ry Co Reorganization, |
I aia seek tcabcci gh nce cosdcompnrscsscen’ 4,9, 15, 23
Florida Bost Coast Ry Co Reorgonization, eae aot,
{Srl I lise Natta tgee cael coop aniot sk 4, 9, 15, 23
United States Constitution’
Art. 1, £8, Clause 4 ( Bankruptcies) ..10, 11, 12, 13, 19
SPER ROE aise eres srcceeews 8, 9, 16, 19, 20
a : ee : |
STATUTES
Bankruptcy Act | Tepes | } .
$77 (11 USC 205) |. 22.00.00... 2, 3, 4, 5, 7, 8, 9, 10,213,183 — - ——
| ae 18, 16, 17, 18, 19, 22, 25
[77(h): (1 COC MS) 18
$77(e) (11 USC 205(e)) - 2. 3, 13, 21, 22, 2
§77(f) (11 USC 205(f) ) cael ip snisiiueiancnaiae sinewsostnes See \
Chapter X nned AE weeecteredereeeecseenereereecsenseeesessesanesoneneeeeens 25
tree | PAGE
dc, TSE, ERS ET REE Ge 25.
Chapter X00. PERSE as POT MEA, RITE 25
(NN MIE Sictetcccieniciaencsiniecs ceoacth a. 25
aap 5
PI inlet i oe cy 21
i | EST EL AL: AA LONI: 11, 16
Federal Rules of Civil Procedure Perens:
RARER ASSES cee 19
Senate Report No. 1395, 82nd Cuiiaien 2nd Seasion,
a gh otter ote NOLSD 91 FI SR a a 25
House Report No. 2320, 82nd Congresi, 2nd Session,
TP catherine ncn es PO SEN Rho ae 25
In the Matter of
FLORIDA EAST COAST RAILWAY
COMPANY,
W.G. IN, Eg N. CLAUGHTON,
and A. W. CORBETT, |
Petitioners,
Sace vs. i
ATLANTIC COAST LINE
_ Respondent.
td
\
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
To the Honorable Fred M. Vinson, Chief Justice of the
United States, andthe Associate Justices sale the
Supreme Court of the United States:
ae tee W. G. WELBON, E. N. CLAUGHTON
and A. W. CORBETT, respectfully show:
rs . F EL ;
SUMMARY STATEMENT
: Petitioners pray the issuance of a Writ of Certiorari
_ to review the judgment of the United States Court of
;
:
g
;
oh:
tic Coast: Line Railroad Com-
pany, pda va oe: Bt. Joe Paper Company et al, Ap-
record of said appeal, consisting of six volumes
to VI, inclusive, is now before this Court
pon Petition for Certiorari by St. Joe Paper Company
» 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 ofder 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 Coast 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
of debtor under §77 of the Bankruptcy
Act. The grounds of proval were that the plan is
“neither fair nor cautable” 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 @ soar ics 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 et record will
be made in the same manner, j
debtor, ‘the order also dismissed the {77 proceeding. eS
(I, 168-170) 7
- Without making the findings required by § 77(e),-
the Court of Appeals directed Judge Strum to papprave
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 lan if satisfied that: (1) It
complies with the isions of subsection (b) of this section, is fair and
equitable, affords due recognition to the ri 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 iand regarding the participation of the various classes of creditors
and stockholders; (2) the approximate amounts to be paid by the debtor,
or by any tion or corporations acquiring the debtor's assets, for
expenses and fees incident to the reor dection have been tally Siachenod
so far as they can be ascertained at date of such hearing, are reason.
able, are within such maximum limits as are fixed by the Commission, and
or iin bak leniions tebe te sheet Ae al of the judge,
Ele provides for the payment of all costs poise wp may
pate bas ot yang behybing! tend q ~ that allow.
ances. provided for in subsection (c), paragraph this section,
may be paid in securities provided for in the plan if ane entitled thereto
rages, eae payment, and the judge is hereby given power to approve
the same
ih on tometer end
“conveyance of sos Suuetiee ts thaee thee cen ee ae
‘5% bondholders shall be compelied 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 —. 825; I, 127- 168; 201 F2d
325; I, 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 controlled. There
has nevér 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 Commia-
“ft
‘
jected this proposal‘ and approved a second plan provid-
ing for full payment of the 412% first mortgage bonds
* out of surplus cash, the setting aside of $8,700,000 re-
serves for betterments and improvements and cash
requirements upon reorganization, and the receipt by
the 5% bondholders, for each $1,000 bond, of $450 new
first mortgage income bords and 41% shares of common
atock. (261 ICC 187-193; IV, 187-193; 261 ICC 170-187;
IV, 170-187) 3 a
On petitions for modification the Commission re-
opened the proceeding and Coast Line proposed the
“forced merger” plan. (267 ICC 295-298; IV, 295-298)
3. The plan provided that the 442% first mortgage bondholders
should receive new first mortgage bonds equal in amount and seniority |
to the bonds then held, and the 3% bondholders should receive, for -
each $1,000 bond, $100 of new general mortgage bonds and 10 shares
of no par value stock. (252 ICC 423; VI, 528; 252 ICC 731; VI, 641)
It was disapproved solely on the ground that it should have allocated for
reorganization purposes, instead of leaving as a floating surplus, approxi-—
mately $17,000,000 in cash or its equivalent which had accumulated in
the hands of the trustees. (52 F Supp 420; VI, 690-697) .
4. For the reasons that the fixed charges proposed for debtor and
Coast Line might, during a depression of any considerable duration, con-
tribute toward precipitating bankruptcy ings for both carriers: |
the securities ps taken at par, w fall far short of satisfying the
amount of the claim of the 5% bondholders and if, in their view, the
ects of future earnings or the control value were such that the stock
later have\s market value in excess of par and they desired to
so, as
share for stock “s a part of their share .
majority bondhol vote to reject the ; the §77
a aie © ee Se ee or the.
itors did not confer power “to sell the interests of one or all the creditors
to another creditor or to an outsider for the benefit of gine
_and the proposal was prima facie impracticable. (261 ICC 187-193:
_TV, 187-193)
‘1
After lengthy hearings, the Examiner's full and care-
considered report recommended strongly that the
second plan be modified in relatively minor respects and
otherwise be adhered to.’ (VI, 734-848)...
g
- By a five to four vote the Commission overruled the
er 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
. 807; IV, 307) =
Approval of the plan was based on findings, with
strong dissents,‘ that the vesting of debtor's property
as a controlling factor and would be realized
only by having an immediately ect q .
3
F
2
&
?
(267 ICC 747; IV, 747), he said: “Aside from whet seems to me a
fatal legal defect in the report, 1 think it wrong on the merits. The prin-
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 puYilic 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, 128-747) 7
inka ads es iat 6 in ths Sein Ce oe
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
controversy before us is whether the public interest will. be best
shel ty wihig he pape 2 of the Atlantic Coast Line system
pall fpr Madea of railroad control. On that
issue much testimony was taken. Extensive briefs were filed and argument
ing two days was heard. majority decide the +
Atlantic Coast Line. 1 submit /that the great: e of the per-
tinent testimony is to the . The views of the persons served by the
: on it for a livelihood, and of those who
own its securities all have to be very largely disre in order to reach
the majority conclusion. | would a a plan which, in its main
ey ne eee, the examiner. Th:s would permit
the property to be reorgani eo cee ed an ye ae
F
~
é
g
t
IV, 391)
RAEI er Ra Rec Hae ene eon mie ease
a
because the findings regarding control by the majority
bondholder in a bondholder reorganization did
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)
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 cminent domain clauses in the Fifth
_
. | “ : rae
2a
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 |
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,
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% bondho » 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) OOS | |
_ bondholders in the manner attempted by the plan.*.
8. “* * * the Commission is still preoccupied with, and o
immersed in, this struggle for control between A-CL. and the :
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 involuntary . security holders in Atlantic Coast Line, a°
wholly unrelated corporation. This result is unfair to all the $% bond-
holders, but icularly to the minority groups, who are innocent by-
standers ile tt the upper and nether millstone, and who now,
10 .
no
and equities of the minority bondholders, as distin- —
guished front ‘those of the majority bondholder. (201
-T31) gry ~ ged ue it refer to peti- °
tioners’ contention that if §77 authorizes the forced
merger, the section violates the due process and eminent
peng sy ony crema og Banepa ts The material
parts of the opinion are largely a series of dogmatic
azsertions 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 , to exercise an “informed, independent |
’ on the questions whether the plan is fair-and
so. 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
cipation of the minority bondholders. In an at-
to fortify the dogmatic conclusions previously
stated, and far in advance of the event, it alao 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 8 835; I, 141) ©
* 2 * the had before it a plan by the duPont —
iatagalle olek te tahoe: apes cept all common stock in a
reorganized ia Lieu of there present $25,000,000 of 3% bonds,
giving to all bondholders new 4% fixed interest first mortgage
bonds, which would be worth par, on « dollar for dollar of principal
Sane Thus, the minority 5% bondholders would receive more
the Coast Line plan, and would be assured
& good return on a sound investment, while the duPont interests would
take all the chances as to earnings. The minority 5% bondholders enthusi-
favored and urged this plan. But the Commission rejected 2 in
favor of the Coast Line~ plan, 1 hah Gets Nendalgs Wedd ov-
because the Commission found that the public interest required
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) :
Hie
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; Il, 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.” f
Petitioner's petition for rehearing was the only one
‘ filed. Judges Russell and Boral dissented from its denial.
(Exhibit \A, 5) . feecy :
| il. baat
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)
i. =
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%
\
‘
‘eo
_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
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? ee eae
4. If §77 authorizes the “forced merger” rian and
is constitutional, is the-plan unfair, inequitable and not
, & 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 & 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 (1943);
Marine Harbor Properties v. Manufacturer's Trust Co, 317 US 78 (1942);
Consolidated Rock Products Co v. DuBois, 312 US $10 (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); Sinaloa Pacific
R Co v. Boyd, 228, US 482 (1913).
» 2
' » & .
: J
13
“4, 6. Absent a clear abuse by Judge Strum of the in-
formed diacretion confefred 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 Appeais 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 y Act, as construed, violates the due
process and eminent domain cla in the Fifth Amend-
merit; 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. s
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
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./°
MILLER WALTON -
vy Se 916 Alfred I. duPont Building
1" Miami 32, Flori
Attorney for Petitioners
{
10. Cases cited page 12, footnote 9.
"BRIEF IN SUPPORT OF PETITION
_). ".. OR CERTIORARI _
: §
The Ra of the Courts Belaw
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. See
- Pecord, 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 i is reported as In re Florida
| Bast Coast Ry Co, 103 F Supp 825. It is in Volume I of
the record, al pages 127-168. :
Judge Strum’ s District Court opinion of Geteber 19,
1943 disapproving the first plan of reorganization is
as In re-Florida East Coast Ry Qo,
ri 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
qs In re’ Florida Eastoast Ry Co, 8] F.Supp
reported
_ , 926, Ty ifgn Volume ‘© of the record, at pages 466-481.
-- The Court of Appeais opinions of January 17, 1950
in connection with ita judgment-affirming Judge Sibley’s
_disapproeval ‘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.
cee
: vie ; ee ee
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 isin
- Vokume VI of the record, at pages 528-640.
e
15
The Commission's Supplemental Report of Sines
10, 1842: modifying the first plan of reorganization is
reported #3 Florida East Coast Ry Co Reorganization,
252 2 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 reorgap-
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. j s
Examiner Jewell’s Proposed Third Supplemental! Re-
port is in Volume VI of the record, st 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. : 6
The Commission's Fourth sesahiantabel Report of
‘tion is repo t
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.
7 é Ii}.
rene ,* Jurisdiction
Jurisdiction to review the judgment of the Court of
25, 1948 adhering to the third plan of reorganiza- —
16
Appeals by writ of certiorari is conferred on thia Court
by 28 USC § 1254(1). a | |
- 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)
Cs a ee
a Statement
The nature of the case and the decisions of the Court
_ of Appeals for the Fifth Cireuit are stated in the fore-
going petition, pages 1-11, which, in the interest of
brevity, is adopted as a part of this brief.
“*
ve
es 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. : ; ee
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 bondibiders’ security and to limit the fale price
to so-called reorganization value expressed in terms of
securities of a wholly unrelated corporation.
4. In not dec ‘ding that the fourth lan 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. |
17 c
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. aaa
6. In reversing Judge Strum’s order disapproving
the fourth plan. — te
Vi.
Argument in Support of Reasons Relied on for
Allowance of Writ
/
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 thig is the only reorganization pro-
ceeding in which an attempt has been made to utilize
$77 to force the tranafer of a debtor’s property to an
unaffiliated, wholly unrelated railroad, which is not being
reorganized under §77 or otherwise, and to compel the pe
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 p 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 prevailea. This
extraordinary. conflict of opinion emphasizes the need
_ for decision of the questions by this Court.
The findings of the Comission 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
ae 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 lan ‘rebate 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
°
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 ri
_ 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 didnot 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; I, 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 49 Coast Line. (201 F2d 331; I, 731- 733)
As construed by the commission majorities and the i
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 pian 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 * * * .”
Sealers
& 20
only differences are that in the condemnation action
Coast Line would be required to pay cash
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 ;
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.
os ee
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 bondhoider, the plan under consid-
13. In ve Rerman, DC NY, Fed Case No. 11,673; Wright v. Union
Central Life ins Co, 304 US $02-(1938); United States Vv. Behins, 304
US 27 (1938); Continental Illinois N B & T Co v. 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 $55 (1935).
mnt
Judge Strum disapproved the fourth plan “For the
by Chief
i
:
4
:
particularly the $20,000,000 of minority bonds, to the
accomplishment of a forced merger with Atlantic Coast
Vine.” (103 F Supp 846; I, 164-165—Emphasis 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 District
Court. It provides that he shall approve a plan
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.’
decide, to the contrary. Nor, in doing so, did the majority
' itself make the findings required of the District Court
15. In've Youtie, 44 F2d 36 (CA 3, 1930); In ve Pilsener Brewmy
Co, 79 F2d 63, 68 (CA 9, 1935); Scherch, Richter Co v. Dysart, 123 F2d .
364, 369 (CA 8, 1941). This Court has said that other sections requiring
that the judge be “‘satished’’ before a a call for the exercise
of his “informed, independent j ". Case v. Los Angeles Lbr
Products Co, 308 US 106, 115 (1939); Comsolsdated Rock Products Cov.
Du Bors, 312 US $10, $20 (1941); Kelley v. Everglades Dramage District.
- 319 US 415, 418 (1943). ; |
fasts
‘
Mi
Ali
i
HAH
its
ine
| 16. to Institutional Investors
ou
Ph ee peel
V. Chicago M St P& PR Co, 318
§77(€) places
to
not
a different problem if the
which
Tensions
upon t.** * Our role on review is a limited one. It is
ght have appraised the factssomewhat
“We would have
perform the
364 (1942):
Court had failed io
reverse the Distrat Court that we mi
“differentiy.”
US 525,
District
=~
“ ae
bag oe
LF ap
a 8
y: “We
of
vw. a
ilk
17 ‘This parapheases and —— the ——— statement wn ins
tuthomal livestors V Chuvago M St P& PR Co, 418 US 523, 365 (1945)
re-
nderlying senior Clams in a manner
ent realizing the highest possible sale price
litate the debtor by reducing existing indebtedness
ee
uity to pay The statement has no application to a
+:
the security u
a
mt of the rights surrendered That was said regarding a
y designed to p
suffcrett that cach security holder in the order of hu
es from thit @hich 1s available for the satisfaction of hus claim the
forcing a sale «
equi
designed to
to. bring it within
495 (1946); Echer v. Western Pacific R Corp, 318 US 448 (1943),
fastatutiond Investors Vv. Chr. M St P & PR Co, 318 US 523 (1942);
Marme Harbor Propertces v. acturer's Trust Co; $17 US 78 (1942);
{| Comsplidated Rock Producti Co +. DuBois, 312 US 310 (1941); Case v.
Les Amgeles Lin Products Co, 308 US 106 (1939); Kansas City Terminal
R Co Vv. Central Untom Trust Co, 271 US 445 (1926); Northern Pacific
R Co v. Boyd, 228 US 482 (1913), )
oe Reconstruction Finance Corp v. Denver ERGWR Ce, 328 US
495, S17. (1946).
20. Ecker v. Western Pacific R Corp, 318 US 448, 483 (1943).
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
- 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
ee Se en r cred-
position” sections of the Act (Chapters XI, XI 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 ar and
equitable provision, and by the paragraph added to each of the
sections it 1s made clear that the rule of the Boyd and Los Angeles cases
Se ee oe ae ee Senate Report No.
1395 and House Report No. 2320, S2nd Congress, 2nd Session, patagraph
in each report
\
ae UNITED STATES.
COURT OF APPEALS
No. 14163
_
In the matter of
- FLORIDA EAST COAST RAILWAY COMPANY,
Debtor.
<~ ATLANTIC COAST LINE RAILROAD COMPANY,
Appellant,
va.
ST. JOE PAPER COMPANY. ET AL..
ch, Appellees, ©
ee ee
PETITION FOR REHEARING
To the United States Court of Appeals for the Fifth
Cirquit and the Judgcs Thereof:
Come now W. G. WELBON, E. N. CLAUGHTON
and A. W. CORBETT, as minority bondholders-appei--
lees, and pray for a rehearihg because in reversing the
judgment below and remanding the cause with direc-
tions to approve the plan, the Court overlooked and
failed to consider that:
Exhibit A, Page l
2
L F _
The rights of the minority bondholders in the reor-
ganization have been made to stand upon the equities
of the majority bondholders, and not upon a proper
independent determination that the plan is “fair and
equitable” asto them.
TU.
By its preoccupation with the questions of public
interest and valuation, this Court has failed to give
proper weight to the other factors that were ingredients
in the District Judge’s informed and independent deter-
mination that the plan was unfair and inequitable as
to the minority bondholders.
Il.
\ \ ’
The plan, which this Court has directed the District
Court to approve, is not authorized by the controlling
statute (§77(b) of the Bankruptcy Act.
IV.
If Congress, by enacting ‘77 of the Bankruptcy Act,
attempted to provide machinery whereby, under the
guise of reorganization, one wholly unrelated railroad
can be given the right to purchase another railroad at
an enforced and non-competitive sale; for a considera-
tion not even payable in cash, then Congress has enacted
an unconstitutional statute which, since it is void, does
not empower the District Court nor this Court to
approve any plan thereunder.
ws
Because this Court considered its decision on a prior
appeal to be the “law of the case” upon the funda-
mental questions of “forced merger” and “public inter-
est,” the two additional members of the Court on this
appeal have reached their opposite conclusions on these.
matters without having heard arguments thereon;
KFrhihit 4. Pane 2D
3
therefore a rehearing on these questions at least
should be granted by this Court.
VL.
sical £
This Court cannot ‘lawfully require the District
Court to approve a scheme or plan unnecessarily calling
for the complete liquidation or sale of the assets of the
debtor. Such a plan completely departs from the funda-
mental purpose of ‘77 of the Bankruptcy Act. This
_ purpose was stated by the Supreme Court in the case
_of Continental Illinois National Bank and Trust Co. v.
C.R.1. & P.R.Co., 204 US 648 (1935) at page 676 to be:
“But a proceeding under {77 is not an ordinary
proceeding in bankruptcy. It is a special proceedin
which s only to bring about a reorganization, i
a satisfactory plan to that end can be devised. And
to prevent the attainment of that object is to defeat
the very end the accomplishment of which was the
sole aim of the section, and thereby to render its
provisions futile.”
VII.
The Court also overlooked that the District. Court
cannot be required to approve the plan because it does
not conform to the “requirements of the law of the land
regarding the participation of the various classes of
creditors and stockholders” a condition precedent to
approval as required by the controlling statute ($77/e)
(1). of the Bankruptcy Act’.
' WH
The Court also overlooked that the Court cannot
require the District Court to approve the plan because
it has not previously been approved by the Commis-
sion “to be compatible with the public interest" in the.
sense contemplated by Congress in its use of the term
in $77(d)}. The Commission has merely decided this
question: “The issue-before us is whether the public
interest will be better served by continuation of the
Florida East Coast as a stub-end railroad, but under
Exhibit A. Page 3
4
the control of the duPont interests, or by its integration
into a large railroad system.” :
IX. |
This Court cannot’ lawfully require the District .
Court to approve a plan requiring the sale of the deb-
tor’s.railroad to a wholly unrelated railroad at a price
which does not measure the market price of the prop-
_ erty, but is merely a determination of the capitalization
value for reorganization purposes. ?
3 WHEREFORE, upon the foregoing grounds, it is
eo tata urged that this _— red a euetasittes be
- granted 2
sliced
- eh 5 so 4
Ali WALTON
916 Alfred I. duPont Building -
Miami 32, Florida
: : _, Attorney for W. G. Welbon,
. ) E.-N. Claughton and A. W.
ge : ; _ Corbett, Minority Bondholders-
: Appellees
WALTON, HUBBARD, ‘SCHROEDER, 7
LANTAFF & ATKINS -
- Of Counsel —
: CERTIFICATE OF COUNSEL
I certify that, in my opinion, the foregoing petition
is well founded in law and fact and that it is submitted
in asics faith. ;
a
Erhtbit A, Page 4 .
5
CERTIFIC ATE
‘This is to certify that copies of this petition hays
been served on opposing counsel on this the
|, day of February, 1953.
4 °
4
0 Dili. bl loan
*eneeeaeee#e#ee ® <i
te
=
_ ORDER DENYING REHEARING -
(Extract from the Minutes of March 2, 1953:
—_—
- In the Matter of
FLORIDA EAST C IDAST RAILWAY COMPANY,
Debtor, |
ATLANTIC COAST LINE RAILROAD COMPANY,
‘No. 14163,“ — le
ST. JOE PAPER COMPANY, ET AL.
It is ordered by the Court that the petition for re-
hearing filed in this cause be, and the same is hereby, —
denied. |
“Borah, Circuit Judge, dissents.”
= HC€ircuit Judge, dissents.”’
Erhtbit A, Page §
~
Gnited States Court of Appeals
3 FOR THE FIFTH CIRCUIT
a
I, OAKLEY: F. DODD, Clerk of the United States
Court of Appeais for the Fifth Circuit, do hereby certify
that the foregoing five pages, numbered from 1 to 5,
inclusive, covitain a.true copy of the PETITION OF W.
G. WE , E.N. CLAUGHTON and A: W. CORBETT,
as minori bondholders-appellees, FOR REHEARING,
and ORDER DENYING PETITION FOR REHEARING |
‘in the case of ATLANTIC COAST LINE RAILROAD
COMPANY, Appellant, No. 14163, versus ST. JOE
PAPER COMPANY, ET’AL., Appellees, as the same
remains upon the files and records of said saan States |
Court of ape
IN TESTIMONY | WHEREOF, {. heteunto gub-
scribe my name and affix the seal of said United:
States Court. of Appeals, at the City of New
Orleans, Louisiana, this 31st day of March,
A. D. 1955. ;
OaKLey F. Dopp, 5
Clerk, U. 8. Court of AP
for the Fifth Circuit.
(SEAL) ed
f : , .
\ a ef
¥ “,
' Exhibit A, Page 6
‘
j ; THE - |
‘United ae of Appeals
- Ne. 12821
j
ATLANTIC COAST LINE RAILROAD COMPANY,
ET AL.,
| Appellants,
versus é : |
ST. JOE PAPER COMPANY, ET AL., em
s ae Appell : a Vv \ ;
biaeS Seca’ ay wine (
Appeals fromi-the District Court of the _ States for
the Southern District of Florida.
°o
(January 17, 1950.) \ {
\ ~
\ ‘ :
Before HUTCHESON, HOLMES, and RUSSELL
Circuit J udges.
HUTCHESON, Circuit Judge: Entered, in the Florida
East Coast Railroad Company debtor proceeding, for the
reasons given in his accompanying opinicn,' and on the
; i
a ‘That ‘the provision of the plan for a forced’ merger with
Atlantic Coast Line, over the objection of an overwhelming majority
of the bondholders of the debtur, was not in accordance with statutory
re
+, Exhibit B, Page 1
&,, -
SER oe
°
2 A. C. L. R. Co., et al. v. St. Joe Paper Co., et al.
‘record made before the Interstate Commerce Commission,*
supplemented by additional testimony * taken before the
trial judge, the order appealed from: disapproved a plan *
of reorganization which had been, modified, adopted, and
approved by the Interstate Commerce Commission, and
certified by it to the court; and referred the proceedings
back to the commission for further effort to make a proper
_ plan.
provisions and, therefore, beyond the power of the Commission to pro-
pose and epprove.
(2) at if rene te thls and Gn} proposed in a lawful one,
the court should not approve it because it is clear oe esr
Scan el teeemaity famille thbeninn oe anl'uee ust eomae
f rs are are
obstructare, and the court ought not to, and would not, confirm it over
their objections, approval of it now would be vain. 3
(3) “That the plan is not fair and equitable and does not afford
due recognition to the rights of refunding bondholders. Re: Florida
East Coast, 81 Fed. Supp. 926.
| Reports and orders of the Interstate Commerce Commission, Flor-
ids East Coast Ry. Co. Reorganization, Finance Docket 13.170: April
. C. C. 423; Ang. 10, 1942, 252 I. C. C. 781; Jan. 8,
. C. 151-193; April 8, 1947, 267 I. C. C. 2960391; Mar.
7 1. C. C. 720-60; and the records of the Commission out of
er transfer, in for éash to be
Atlantic Coast Line and securities to be iesued by. the PE nom Bigg Bee
£
z
:
&
r
re)
re.
£
i
=
7
Participating Cumulative 4% Preferred we we Ca
Common Stock apne at = per share) .. —__6,006,00e-——
ee PE nee dep ceavedalen eaweaee $40,500,000
Erhibdit B, Page 2
°
\
A. C. L. R. Co., et al. v. St. Joe Paper Co, etal. 3
Appellants are the Coast Line Co., an unsecured creditor
and the proposer of the plan, who takes the laboring oar
in its defense, and its small but faithful ally, the Deposit
Committee.’ Here, by brief and oral argument, they in-
sist: that on the record made, none of the reasons given by
the trial judge are valid; that, in rejecting the plan, the
trial judge exceeded the authority conferred upon him
by statute; and that in the reasons ove he ne
_ erred.
Appellees, who have oan by briefs and oral argu- oe
ment, are: all of the bond holders* ( except those repre-
sented by the Deposit Committee and the owners of about
$8,000,000 in principal amount, who, except as the trustees
"under the mortgage securing their bonds may be said to-
represent’ them, have made no appearance); the mortgage
trustees; two railroad companies, the Southern Railway —
System Lines and Seaboard Airline Railroad Company;
and Railway Labor Executive Association.
"Making common cause aga.nst appellants, in support of
the particular reason or reasons given by the judge which
each espouses, all are equally insistent that, in disapprov-
ing the plan, the judge acted within the scope of his
authority and rightly, and that his order must, and should
be, affirmed.
‘Appellants citing the Western Pacific, the Milwaukee: |
_and the Denver cases,’ take an exceedingly small and dim
—_—_Fhis-ecommittee how repre: $572,400 prirci amount out
of the $45 neipal and $32 000 accrued defaulted interest.
Bond holders a ae
—~ Joe Pa eee $26,000,000
W. G. Welton, et al. cire. ...... 4,643,000
F. K. Conn, et al., ng hesasaee 1,500,000 “
L Interests cire. ........¢ ”
7 $18 mg. 448; 318 U. 8. 623; and 528 <6.
Erhibit B,- Page 3
4 A.C.L.R.Co, etal. v. St. Joe Paper Co., et al.
view of the powers and functions accorded to the trial
judge by Section 77(e) of the Bankruptcy Act, a very
large and generous one of the powers oi the commission,”
under Section 77(d). They take an equaily large and
- generous view of the powers of this court as an appellate
' court. Citing in support Sec. 24(a) of the Bankruptcy
Act and In re: Chicago, R. I. etc., 160 F(2), 942, they
invoke those powers to bring to a speedy end in this court,
by a judgment approving. the plan, a proceeding which,
in the commission and the courts, has been dragging its
- slow length along since 1941.
‘Appellees, on their part, invoking the samé authorities
relied on by appellants, and, in addition, the authorities
cited in the margin,® and- pointing to the clear and un-
ambiguous language of Sec. 77(e) of the Bankruptcy Act.
' take large and generous views of the powers of the trial
judge, and, quoting from the Milwaukee case, at p. 564,°
the Denver case, at p. 533,"° and the case of Comstock,
* , Benton v. Callaway, 165 F(2) 877; Insurance G v. Denver ‘
329 U. st 607; Comstock ¥ Group of Institutional Bmw My 163 F(2)
350, affirmed 336 U. S 211. ‘
“We have quite a FM ogee — if the District Court
e ~ ttled to opens «ihe functions such f hod arog here. nage ay
ut it can there was
trict Court satisfied itself that the inci Bye A as @ to
these facts were See 36 . Pp. 2 211- Since
rer of ie pages f eee, Set ae ae ol a
matics, an iy 3 or we are not orm
is a li Sted t is not it enough to ae ts cine ae ye She d
‘review is a lim a to reverse
‘that we might have a ae the facts mer erently. If there :
is warrant for rt, our task on reriew
i at Pa STOUT of Instit. ete. v. Chicago, Milweuke Bc P. & Pac.,
te “The grounds accepted by us in former sections of opinion a
sustaining, as of Jan. 1, ma tar f we ~
the Mee es of — ~
z reductions establish that for the act r sentiomenian on ty to foan
‘ee General bondholders, the
over the objection of the
treatment” of the dissenters was justified. 62 Ped. at ‘at 290. In
view of the district judges = Femiinity ‘with - the seorpantention this
| Erhidit B, Pave 4
er
Wee
A
&
;
Be §
A.C. L. R. Co., et al. v. St. Joe Paper Co,etal. 5
-
163 F(2) 350, at page 357," the dim and meager views of
our power to reverse him. Pointing to the limitatians im-
posed by Rule 52(a) upon our power of review, they insist
that, if, as ought not to be the case, we should not fully
agree with them, circumscribed and limited as our func-
tion is, it is our duty upon that record to affirm the find-
ing and order of the trial judge,that indeed, it is beyond
our power to do otherwise.
——
ie f .
They particularly insist that whatever may be saict- of -
the first two sited the trial judge. gave for nol «)»prov-
ing the plan, the third, his overall finding and decision,
that the plan was not fair and equitable, and did not give
due and just consideration to the claims of the bondholders,
is fully supported on the record and any other judgment
would do violence to both the letter and the spirit of ap-
plicable, constitutional and statutofy principles.
To support their varying views, appellants ind appellees
have labored mightily, producing together mpre than 1000
pages of briefs and citing and quoting many cases. The -
Coast Line contributed 511 pages, its small but earnest ally
13, while appellees have been responsible for 575 pages..
In addition they have submitted a printed record of 1000
finding has especial weight with us. Bee Rule 52, F.R.C. P. There
ae per — a aeoteate pe subsection (b) and =
other requirements o irst paragraph o rat paragraph o
subsection (e).” R. F. C. v. Denver, etc., 328 U. 8. 495.
1 “On this appeal the case is stated for the appellant in substantial
disregard of the findings of the trial court and practically as though |
the case was here to be tried this court de novo on the volumincus
evidence. This court must ine to assume that function. We may
court, who in this case had more than ordinary opportunity to ceatty
of the credibility of the witnesses, uniess such f " r
erroneous. Fed. Rules Civil. Procedure, rule sta).
follo section 723c; General Orders in Bankru Big 36 ‘ont
ot —e A. following Sec. 63.” Comstock v . Group, ete., 163
Exhibit B, Page 5
—
RT a ee
6 A.C.L.R.Co.,et al. v. St. Joe Paper Co., et al.
pages and the vast record of the proceedings before the
° commissior i 1. ;
ew
It might be supposed that, as presented to us, the case
would seem intricate and greatly complicated, and that
for us to set it out in its essence and make our determina-
tion upon it would require a long and wordy dpinion. The -
contrary is, however, true. What is material’in the case,
as it comes to and stands before us, and what we should
do and say about it, may be set down in comparatively
small compass. |
—_
Florida East Coast, the debtor, has a principal line be-
tween Jacksonville and Miami, and other branches -or
extensions. The railroad lines of the Atlantic Coast Line
include a double track main line between Richmond and
Jacksonvilie, and main lines extending from Jacksonville |
to Miami, Birmingham, and Atlanta. The Coast Line, long
before it began to view the debtor with a covetous eye |
and to go about to possess it, had close relations with the
Florida East Coast, whose main line from Jacksonville to
Miami is geographically an extension of the Coast Line.
Of the East Coast interchanges at Jacksonville, almost 100
percent of the passenger interchanges and about 50-percent
of the freight bapestcte tn are with the oe Line.
_lf. therefore, the plan, in addition to being acceptable
- fo Coast Line and to the majority of the Commission, were
acceptable to the bondholders, approval of it would be a
|. Matter of course, its consummation would be natural and
reasonable, and there would be no difficulty in law_or in
fact in the way of the proposed merger. 7
Erhibit B, Face 6
A. C. L. R. Co., et al. v. St. Joe Paper Co., et al. a
en ne a etm
oe ae
But the exact contrary is the case. Less than 2 percent
of the bondholders have appeared in favor of the plan,
the mortgage trustees for all of the bondholders vigorous-
ly oppose it, and all of the appearing bondholders violent-_
ly oppose it. In addition, the plan is opposed to the pro-
posed findings of the examiner, based upon his long and
carefully considered report,” is a complete reversal of
the unanimous finding and order of the commission of
January 8, 1945, and is opposed by five of the eleven com-
missioners and by the findings of the trial judge.
(4, then, the case, as it comes hers, presented the seers
nary picture of a plan for internal reorganization, con- *
sented to by some and opposed by others of the owners
of the property to be thus internally reorganized, a clear
case would have to be made against the trial judge's find-
ings, and we should hesitate long before disagreeing with
him.
- But this is not at all the picture the record presented.
The case we have here is that of one railroad company
coveting, and pressing to possess, a competing debtor rail-
road company, against the wishes of 98 percent of the .
equitable owners of the debtor and over. their violent ob-
3 jections, that consummation of the plan will result in de-
priving them of their property without just compensation.
tend that an internal-reorganization would better protect
~ their interests, while all of them insist that questions of
internal reorganization, as opposed to a forced merger,
aside, the amount the covetous one agrees to pay for the —.
forced expropriation is neither fair nor equitable.
— whew a narennteno ms ewe
1. Record, Vo. 8, pp. 784-847
ae
pananee B, Fage 7
a
ee
J ‘
\ Y °
ORE ah SO : 4
e
8 AC.LR.Co, etal. v. St. Joe Paper Co, et al.
_ Such a picture certainly suggested to the trial judge ~~
the necessity for a thorough understanding of the real
nature and purpose of the plan and its effects upon the
objecting bondholders, that is as to whether it is as fair
' and equitable to them as an internal reorganization
_ would be, and, therefore, really protects them. It sug-
gested, too, the necessity for a full understanding of the
_ pressures back of, and the reasons for, forcing such a plan
ever the objections of those whose property was being
taken for the benefit of the Coast Line. Indeed, when
the concern of the Congress, to protect those owning and
interested in the debtor, evidenced in the emphasis, in
Sec. 77(e), the “cram down” section, as appellants call it,
_ upon consulting with the creditors of the debtor and ob-
.- taining the acceptances of more‘than two-thirds, is con- :
‘sidered, it may be said that such understanding was de- . _
manded of him. When, too, the concern of the courts
with the interests of the. owners and creditors of the
debtor, evi ced by the “absolute priority” rule, the rule
of the case, 228 U. S. 482, is taken into consideration -
the conglusion 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 satis- .
fied before approving the plan, as fair and equitable, im-
posed upon the trial judge in this case a primary and most
exacting duty. |
This duty was, in n according is deta witha been
____tion_of _the-commission-on—that-issue—that-the- plan was
fair and equitable to the bondholders, to subject the pro-
ceedings to the closest scrutiny, to find out whether this
determination was lawfully and constitutionally arrived
Frhibdit B, Page 8
A.C. L.R.Co,, et al. v. St. Joe Paper Co, et al. 9
at; that is, whether it was arrived at with a clear vision of,
and an eye single to, that issue or, as appellees‘claim is _
the case, it was arrived at with a vision foreshortened by
too intense regard of, and preoccupation with, the question”
of which should control an St. Joe of ME Coasts,
a Os
He should do this, not to differ from, or take issue with,
the view that the majority, rather than the minority,
of the commission has rightly decided the interest
matter. He should do it to whether the majority
| of the commission has subordinated its determination, that
.
_the plan is fair and equitable, to, or weighted that deter- ~
mination with, considerations of its bearifg and effect
upon its finding that the property must be merged with
Coast Line. He should particularly . to ascertain
whether, as a result of this subordination ahd weighting, .
the determination of what is fair and, equitable to the
bondholders has been reached at a sacrifice of the private as
interests in order to give effect to the supposed dominant
public interest that Coast Line should /have the properties.
If, upon such scrutiny of the reco:
trial judge: that there was such
majority with its supposed dilemma, | Line or St. Joe,
or with any other interest or concern, except the one of
dealing justly and fairly with the bondholders of the
debtors; that it has prevented or occluded the clear view
it appeared to the
—__
reoccupation by the —
\
dl
—of them the taw requires the commission to have and take;
and that, as a result, the constitutional and legal rig
of the bondholders have been unfairly cut down to fit
them into the Coast Line public interest pattern the com-
¢
Exhibit B, Page 9
10' A.C. L.R. Co., et al. v. St. Joe Paper Co., et al.
mission: majority. has determined upon; he 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.
It is quite clear, too, that, in reviewing the findings 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 er-
roneous, these conclusions and the order based on them
should be sustained. __ oe >
Reviewing this record, therefore, in the light of these
principles, taking note of its tremendous overemphasis
on-and the preoccupation of, the commission * with the
struggle on the one hand of the St. Joe Paper Co., and
‘on the other, of Coast Line for control of the debtor, with
its subordination of the primary question of the legal
equitable rights of the bondholders as such, we-are
1
® In the third supplemental report, the commission majority stated:
“Control must be awarded here to the Coast Line or to the DuPont
Estate, for no other Proposal for disposition of the debtor's property
has been presented to us”. : ef
To the suggestion that, if there is to be no internal reorganization,
there should be a sale, the commission further stated: “In any plan
purporting to transfer control of the debtor to the Coast Line & pro-
vision permitting a judicial sale of the mortgaged property such as
permitted in Alton Railroad Co., Reorganization, 261 I. C. C. 44° °°
would defeat such a transfer since the Coast Line obviously could not
successfully compete in bidding with the debtor first refunding
bondholders, ala majority of whom desire to retain control”.
In addition, commission to support its finding that the — |
i
was fair to the bondholders continually referred to the fact whi
without. bearing on the issue that ;
. uite small price. |
‘The district judge pointed out that this was wholly immaterial
and cited Georgia, etc. v. Bankers Trust Co., 170 F(2) 738, in support.
Not at al} contesting the conclusion of the commission that in the public
interest St. Joe ought not to have control, he clearly pointed out the
error of the commission's assumption that an internal reo ization
could not be had without vesting control of the railroad in St. Joe.
Erhistt 8, Page 1o S
A.C. L. | R. Co., et al. v, St. Joe Paper Co., et al. 1l
———- ee ey aoe ne ee
left in no doubt that the trial judge was right, for these
reasons and for the other. reasons that he gave, in dis-
approving the plan as not fair and equitable and not af-
-fording 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
‘apprové the plan and referring the proceeding back to the
commission must be affirmed. —
In view, however, of the additional reasons the trial
judge assigned for disapproving the plan and of the fac*
that the matter will go back to the commission for further
proceedings, we think we should sav something of te
reasons.
With the first reason, as broadly put by the trial judge,
that, because the plan provided, over the objection of the
bondholders, for merging the debtor with Coast Line, with-
out havirig the properties put up for sale, it would not be
lawful under the statute, we cannot agree. It is true
that since agreement of at least two-thirds of those having
a legitimate interest ir the reorganization of the debtor is
made by the statute a matter of prime importance, the
opposition to a plan of a}l those interested in ‘the debtor
would normally make the plan prima facie suspect. In
- gsuch.a situation, unless there is a clear showing that the
_ Opposition is itself unjust and unfair, that is, based upon
considerations alien to the protection of the legiti imate
private interest of the holders, or there is clear and con-
vincing proof that the provisions of the plan are fair and
_ equitable and the opposition is unwarranted, such a plan
ought not to be pressed upon, it ought not to be approved
by, the trial a 4
Frhibit B, Page 11
=~
12 A.C.L.R.Co., et al: v. St. Joe Paper Co., et al.
We are in no doubt, however, that a plan providing for
what the trial judge broadly called a “forced merger”,
_ that is, a merger over the objection of the debtor and all
~ its creditors, might be lawfully certified to the court and
lawfully approved and confirmed by it. The trial judge,
while using language broader than the precise determina-
tion before him required, recognized that this was so,
in holding that the fact fgdind by the commission, that St.
Joe bought the bonds it holds with the desire and purpose
to use them to own, control, and run the debtor railroad,
and that the plan for merger with the Coast Line would
frustrate that desire and purpose, was not a reason for _—
refusing to approve the. plan. He particularly recognized
that if the evidence clearly established that the whole
opposition to the plan, instead of being based upon the
legitimate View that the merger with the Coast Line would
not be as favorable to the rights and interest of the bond-
holders as an internal reorganization would be, and’ that
the securitiés to be delivered to the owner under the
forced merger plan are not the substantial equivalents of
those they hold, was based upon such irrelevancies as de-
sire for control, these objections would not be valid ob-
jections and the plan should be approved and confirmed
over them.
The evidence establishes conclusively that this is not the
case with the objections here. Owners of something like
——— $16,606,000 1m amount of bonds are here | protesting the
plan as unfair to, them, none of them asking that control
of the debtor be given to St. Joe. Some of them are, in-
_ deed, insisting that an interna] reorganization would be
better for their interests than an outside merger. Alli,
Erhidit 8, Page 12
A.C. L. R. Co., et al. v. St Joe Paper Co., et al. 13
6 ee ee A ee ee
however, are insisting that the proposed plan will be a
- forced merger given to the Coast Line, at the expense of
depriving the bondholders of their fair and equitable
rights, properties worth far more than Coast Line is
being required under the plan to pay the bondholders for
them.
The commission has had these matters under considesa-
tion for now over a period of eight years, during which
period the debtor's properties and ¢ofdition have greatly
improved. In that period the commission has changed and
_—-yacillated, and vacillated and changed, and vacillated
again, and now the majority, for reasons. difficult to
follow, seems to have developed an idee fixe that the
only: thing the’ commission can-do in the premises is to
accept either the plan for Coast Line control or one for
St. Joe control. Unwilling control in St. Joe, and
apparently closing its cece solution, it seems
in desperation to have seized upon the Coast Line offer
as its only way out. | ;
We agree with the trial judge that upon the facts of
record and his findings, and in the light of this de-
termination of the commission, such a forced merger as
is how proposed is contrary to the statute.
‘In remanding the case, however, for further proceedings,
—>—we femand it for the purpose of working out a really fair
and equitable plan and without prejudice in doing so to
the due consideration of any fair and equitable plan for
bringing this matter to an end, including such a plan pro-
viding for a merger with, or sale-:to. the Coas* Line either
with or without the approval of the security holders.
°
Exhibit 8, Page 19 «.
44 A\CL Sen ih tet he ek
———ay
TA for consideration the other reason given
‘by the trial judge,.and so much complained of by-the ap-
pellant as spremature, that even if such a forced merger
_ were legal, he would not approve the plan, because it was
' perfectly clear: that the 66 2,3 jper cent consent required
for its confirmation could not be obtained; that their -ob-
jections were reasonable; .and that he ought not, and
would not, therefore, under the * “cram down” provision,
force a confirmation.
_, We agree with appellant: that normally the “cram down”
provision is not reached for consideration until after a
plan has been approved by the court and is up for con-
firmation by it; that when that. point is reached, each ob-
jection is examined not from the: standpoint’ of fairness
of the plan as a whole, but from that of its fairness as °
appled ‘o the particular objector; and that technically,
therefore, the trial judge, made an anticipatory ruling oe
a matter not then before him. In substance, though, we
agree with the trial judge, that since it appeared not mere-
ly that perhaps some of the required majorities could not
de obtained. but that there will certainly be almost
unanimous opposition from all categories, there was noth- |
ing seriously amiss in his a in see! anticipatorily as
he did. ee a
The Congress brigaded\ commissiot. and court in rail-
road reorgdhization proceedings, not because the Congress
has determined to paramount the public’ interest to. the
“point of taking the property of the debtor and of its
security holders without just compensation and by ad-
ministrativé fiat, but for quite contrary reasons. By a
Pe
A.C. L. R. Co., et al. v. St. Joe Paper Co.,et al. 15
¥
plan which combines the functions and efforts of commis-
- sion and court, the Congress went about to secure, not the
destruction or subordination of the private interests of
security holders of the debtor to the interest of the public
in its future control, but the protection of private and
public interest without sacrifice of each to the other. .
Assured, by employing the facilities and skills of the |
commission, of securing just and careful value appraise-"
ments and adequate consideration of the public interest, it
yet made’ sure that in pursuing the interests of the public,
the constitutional rights of the citizen would: not be in-
vaded or impaired. It did this by confiding final approval
to the courts,"* and requiring the court to be satisfied, be-
fore approving it, that the plan “is fair and equitable
and affords due recognition to the rights of each class of
creditors and stockholders”. |
It was to meet the exigencies of cases like the one pre- '
_ sented here that Congress enacted this law. In refusing. to
approve the plan and returning it to the commission for
further and more careful consideration—end . recognition
of. the rights and equities of the bondholders, the trial .
judge has determined the matter in accord with the in-
* tention of the Congress as\evidenced in the statute un@er
_which he acted. —
‘The order was right. {t is AFFIRMED.
14, “The supremacy of law ‘/demands that there shall ve oppertenity to
have some court decide whether an erroneous rule of law was applied;
and whether the proceeding in which facts were adjudicated was con- |
ducted regularly. . To that extent, the person asserting a right, what-
ever its source, should ‘be entitled to the inde dent judgment of a
od
> . court on the ultimate question of —o ity.” Justice Brandeis
concurring, St. Joseph's Stockyards v. U. S., 298 U. 8. 38, at page 84.
be
Exhibit 3, /Page 15
ee,
16 A.C.L.R.Co., et al. v. St. sno a
RUSSELL, Circuit Judge, Concurring:
I concur a the judgment of affirmance, and think that
in most respects the decision ably demonstrates the reasons
why this should be.’so. ‘However, since I am in complete
accord with the conclusions reached, and expressed in his
opinion, by the-very able and distingushed Circuit Judge
Sibley, who sat in the District Court as United States
Judge Designate, I can not accept such contrary views as
‘are expressed in the present opinion. :
7
omnes
t °
HOLMES, senee. Judge, dissenting:
I shall not ae to point out with particularity any |
- of the errors or imperfections that may be in the majority
opinion. My view of this case can be stated more con-
cisely by a discussion of the lower court's opinion, which
failed to defer fully to the findings of the Commission.
After stating that there seemed to be a fault in the Com-
mission's finding of equivalency, in value of the Coast Line
securities to the debtor's property, ‘the court below said:
“I have no right to make new valuations, but these con-
siderations further move me ‘to disapprove the plan as
not fair and equitable.” : .
“3
The disapproval of the plan for reasons: not within the
province of the court to consider was clearly erroneous; —
but the fundamental error. that infects the judgment under .
review, and necessitates its reversal, is the holding that
Section 77 does not permit a mergér such as is proposed,
and that this feature “ends this plan.” In the first place,
Erhibit &, Page 16 |
EMR GID A TR eit SR tes Ory owespemt (GY BA SHOM BATE Rea, Bdy
Sa WO ads
ps ten
\
niin US ea Srna s
Das Gh
A.C. L.R. Co, et al. v. St. Joe Paper Co., et al. 17
neither the statute nor the plan says anything about a
forced merger. The statute expressly provides that a
plan of reorganization may include a merger. This plan
contemplates, first, the voluntary consent of the railroad
not in reorganization and, second, the approval of the
plan by the-court having jurisdiction of every asset of
the debtor. The latter’s insolvency is such that the stock-
holders are not interested parties. The first-mortgage
bondholders are to be fully paid in cash, and there can be
no complaint in their behalf. The refunding bondholders
are the parties primarily interested; but they are not (as
the court below held) the-equitable owners of the prop-
erty. Under Section 77, as amended, they are merely
creditors ‘with a lien that is preserved in bankruptcy. .
The property has’ been dedicated to a public use, subject _
to well known rights of stockholders and creditors. It is
now in the custody of the bankruptcy court to be pro-
tected and nes under said section.
~Esilinaaes do not become pba or succeed to the .
latter’s rights “merely because the debt secured by the
lien so far exceeds the value of the property that nothing ©
will be left for stockholders.. The primary object of Sec-.
tion 77 is not the rehabilitation of a debtor that is hope:
lessly insolvent, but_the_protection-of-the priority rights
of lienors and the continuation of the railroad as a going
concern. Priority rights of lie snore may invokes 9: siren —
der of their liens in exchange for new securities of f equal.”
value. Under this section, it is for the Commission to”
prepare a plan that will insure against capitalization
which is incompatible with the public interest. The judi-
cial functions of the court are brigaded with ~ admihis- }
a
Erhidit B, Page 17
18 «=A.C.L.R.Co,, et al. v. St. Joe Paper Co., et al.
trative powers of the Commission to determine congres-
‘sional intent and to effectuate the legislative will. These
powers or functions are hot blended; they are. exercised -
cooperatively but not jointly. The court has- its limited
duties to perform, as does the Commission; but each acts
separately within its special sphere, and neither is per-
mitted to usurp the prerogatives of the other.
‘The Commission's finding that the plan’ is compatible
with the public interest is fully supported by substantial —
evidence. The court below did not hold that the plan
violated the absolute priority ‘tule, and neither does this
court; but it is plain that the learned trial judge was large-
ly influenced in his decision to reject the plan by the
A
opinion that it contemplated a merger not permitted by
law. This conviction colored his view of the entire case.
He said: “I do not think Congress interided to force a
merger undesired by the majority in amount of the af-
fected_parties by permitting a merger to be a part of a ©
plan. This conclusion makes it unnecessary to determine
whether the court’s power in banktuptcy could be ex-
tended to force a merger consistently with the Fifth \:
Amendment. It also ends this. plan.”
The judge sles concluded to disapprove the plan, even
if it were lawful, because (he said) it was testified under —
oath before him and seemed plain to him that it would be
rejected. almosf unanimously by the refunding bond-
holders. This ruling was premature, and was not war-
ranted on the supposition that he would not later confirm
the plan. Judicial discretion must be exercised at the time.
prescribed for the exercise thereof, and in the light of the
facts existing at the appropriate date. No judge can fore-
Erhibtt B, Page 18 se: vA
A-C. L. R. Co., et al. v. St. Joe Paper Co.,'et.al. 19
tell what his decision will be on a record that is not com-
| plete and that is to be:made up of facts concealed in the
‘womb of time. Such a decision in futuro would be un-
certain even if it could be known that the same, judge
would preside at a subsequent hearing; but when it is
impossible to foretell not only what the facts will be but
who will be the presiding judge, the prediction is rendered |
- doubly doubtful. This uncertainty as to the main element .
is extraordinary in the present case, because a member of |
the court of appeals was designated to hear it in the
district court, and-a district judge was designated to sit
in the case on appeal to this court. ‘When the same or an.
3 amended plan comes back from the Commission, a new
judge may be presiding in the district court, and on appeal
’ it may be heard before the court en banc. The circuit
judge below said that ordinarily his conclusion would be
premature but “the atmosphere” of the trial and the “feel-
ing manifested” satisfied him absolutely that there would
‘be no material change. In a matter of statutory procedure,
_ where nice distinctions are drawn between the judicial
functions of the court and the administrative powers of.
the Commission, it cannot be considered a waste of time
te follow strictly the provision which provides that the —
plan, if approved, shall then: be submitted by the Commis-
sion to the creditors of each class. There is no ‘provision’
of lew for the court or judge to.submit the plan to the
creditors or to give any consideration before the vote is
taken to how the°creditors will vote on it. The best rule
_ for any court, trial or appellate, is to decide the issues
- presented to it and to decide nothing more than is neces-
sary to dispose of the case. Dictum enenes oe ia and
forecasts discountenanced.
if
Exhibit B, Page 19
~ A.C. L.R. Co., et al. v. St. Joe Paper Co., et al.
Another misconception evidenced by the opinion of the
court below was that the rights of these creditors were
comparable to the rights of bondholders in a receivership
proceeding. The statement is made that’such bondholders
had the right to a decree of foreclosure and a judicial sale .
of the railroad property, accompanied by the right to bid
for the property if they wished. This statement is followed
_ by the assertion that in equity the property belongs to the
refunding bondholders who practically replace the stock-
holders as owners and naturally, on a reorganization, —
would receive the common stock pro rata. It is conceded
that each of the bondholders todk all of the rights of his
vendor, and that the debtor owes the full amount of
principal ard interest due.on each bond; but the bond-
holders are not entitled, as « matter of right, to a public
sale of the property or to take over and run.-the railroad.
They have the right to the fair value or equitable equiva-
- lent of the railroad’s property, tangible and intangible, but
the Commission is ‘the sole judge of such values, and its
findings. are binding on the court if supported by sub-
stantial evidence. The statute provides that, if it shall
be necessary to determine the value of any property for
any purpose, the Commission shall determine such value
and certify the same to the court in its report on the plan.
eS A. 205(e).
Finally, when a railroad corporation files a petition for
reorganization under said Section 77, it voluntarily sub-
- mits all of its assets and liabilities to the jurisdiction of.
the bankruptcy court; but it remains a legal ‘entity, and
dges not lose its corporate identity. Creditors do not be-
come’ stockholders, but remain creditors, with their liens
and a preserved. There is no applicable. con-
°
Seachtt-8,. Pepe 20...
A.C. L.R. Co, et al. v. St. Joe Paper Co., et al. 21
stitutional pronibition against impairing the obligations
of contracts. One of the very objects of the bankruptcy
proceedings is to impair the obligation of contracts within
_ the limits of the Fifth Amendment. The lower court refers
to the original rights of bondholders to a receivership and
a judicial: including the right to bid in the property
if they ; but, as we have noted, secured creditors in
bankruptcy hove ab tas Olin: nelle in railroad
reorganizations where the property in custody the court
is affected with a public interest. In:
the court may permit the trustee to. property thet
is mortgaged beyond its valiie, byt”Section 77 does not ._
contemplate any such thing with reference to railroad
property. In railroad reorganizations, creditors must. be:
_ protected to the extent of the value of the property covered.
by their lien, and absolute priorities: must be preserved;
but beyond that the public interest is the principal thing
to be considered; and, therefor's,.it is for the Commission, Pee
skilled in dealing with going railroads, to work out essen- |
tially business problems affecting them. The functions
of the court, in approving or rejecting a plan, are purely
judicial. The delegated power of the Commission in de-
vising and proposing the plan is legislative, executive, and—
quasi-judicial. The greatest tribute that can be paid to the
federal courts is that /they do not seek to extend their
‘ by - Cf. Rose on Federal Jurisdic-
(2nd Ed.), Section 16, + 21.
In Palmer v. Massachusetts, 308 U. S., p. 86, the court
said: “Until the amendment of. March 3, 1933, railroads
were outside the Bankruptcy Act. But the long history of
federal railroad receiverships, with the conflicts they fre-
quently engendered between yi Cone courts and the
\
x i =< 4
tf - nnaecpeooes
Exhibit 2, sit 21
22 A.C.L’R.Co., et al. v. St. Joe Paper Co., et al.
public, left an enduring conviction that a railroad was not
like an ordinary insolvent estate. Also an insolvent rail-
road, it was realized, required the oversight of agencies
specially charged with the public interest. represented by |
the transportation system. Indeed, when, in the depth of
the depression, legislation was deemed urgent to meet the
grave crisis confronting the railroads, there was a strong
sentiment in Congress to withdraw
' over vent railroads and lodge it with the Interstate
Commerce Commissioh. Congress stopped short of this
"remedy. But the whole scheme of Sec. 77 leaves no doubt
that Congress did not mean to grant to the district courts
Ahe same scope as to bankrupt roads that they may have
! i dealing with other bankrupt estates.”
The court further said that about one-fourth of the
railroad mileage of the country was in bankruptcy, which |
included lines in twenty-nine states, and ‘that it had
become “the settled social policy ‘both of the states and
the nation to entrust the type of public interest here
‘in question to expert administrative agencies because of
‘the notion,’ as Judge Learned Hand pointed out below,
‘that a judge is not quglified for such duties.’”
See also R. F.C. v. Denver & R. G. W. R. Co., 328 U. S.
495, wherein the plan was approved although a majority —
of the general mortgage bondholders voted against it.
rhibit 8, Page 22
en a a A ie lalla il
JUDGMENT
‘Extract from the Minutes of January 17, 1950.
ATLANTIC ODAST LINE RAILROAD |
COMPANY, ET AL.
No. 12821, versus.
ST. JOE PAPER COMPANY, ET AL.
This cause came on to be heard on the transcript of
the record from the “District Court of the United States
pedhnee Southern District of Florida, and was argued by
- On consideration whereof, It is now here ordered,
adjudged and decreed by this Court that the order of the
said District Court appealed from in this cause be, and
the same is hereby, affirmed;
\
It is further ordered, adjudged and decreed that the
appellants, Atlantic Coast Line Railroad Company, and
Others, be condemned, in solido, to pay the costs of this
cause in this Court; for which execution may be issued
out of the said District Court. ;
“Russell, Circuit Judge, concurs.”
“Holmes,.Circuit Judge, dissents.”
eeeeseone eee
Exhibit B, Page 23
United States Court of Appeals ~
FOR THE FiFTH CIRCUIT
a
I, “OAKLEY F. DODD, Cierk of the United States
urt of Appeals for the Fifth Circuit, do hereby certify
it the foregoing 23 pages, numbered from 1 to 23,
ive, contain a true Bony! of the OPINION AND
=
NY WHEREOF, I hinente sub-
me and affix the seal of said United
(SEAL)
Exhibit B, Page 24 a
.*
‘
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.