# Appendix — Brooks v. St. Louis-San Francisco Railway Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1946
- **Citation:** 328 U.S. 867

## Text

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SAPD ele WILL EIA ee PRED HOI BEY

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(2Q APR 15 1946

GRARLIS ELMORE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1945

Nos. 1108-111]

ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY,
Desror, LOLA BROOKS, Apmrnistratrix oF THE EstaTE
or F. 8S. Brooks, Deceasep, ET AL.,

Petitioners,
vs.

FORT SCOTT BONDHOLDERS’ COMMITTEE, BANK-
ERS TRUST COMPANY, TRUSTEE FOR THE KAN-
SAS CITY, FORT SCOTT & MEMPHIS R. CO., ET AL.

APPENDIX TO PETITIONS FOR WRITS OF CERTI-
ORARI TO THE UNITED STATES CIRCUIT COURT
OF APPEALS FOR THE EIGHTH CIRCUIT.

. Te en ae a eR LN en he RS HR

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INTERSTATE COMMERCE COMMISSION

ST. LOUIS-SAN FRANCISCO RAILWAY
COMPANY REORGANIZATION

SUBMISSION OF PLAN OF REORGANIZATION
PuRSUANT TO SECTION 77 OF THE
Bankruptcy Act, As AMENDED

FInaNcE Docket No. 10008

CONTENTS

PAGE
Plan of Reorganization approved by the Commission and Court 1

Additional Clauses from Commission’s order ............... 23

Reports of the Commission:

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WASHINGTON, D. C.

June, 1945

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12 sf. LOUIS-S. FP. RY. CO. REORGANIZATION

determined by deducting all fixed charges of the reorganized com-
pany and its wholly owned railway subsidiaries accruing during such
calendar year from the consolidated income of the reorganized com-
pany and its wholly owned subsidiaries available for fixed charges
for such calendar year (determined in accordance with the applicable
accounting rules, subject to the adjustments specified in the next
sueceeding paragraph). If any period for which available net income
is to be determined precedes the consummation date, the consolidated
railway operating revenues, and the consolidated income available for
fixed charges, to be used for the ascertainment of available net income
for such period shall be those of the bankruptcy trustees and their
wholly owned railway subsidiaries for such period.

Available net income shall be ascertained for each calendar year,
as the accounts shall be stated on the books of the reorganized com-
pany when its accounts are closed for such calendar year, without
adjustments, except that (1) no amounts shall be charged to operat-
ing expenses for retirements of nondepreciable property, (2) any
adjustment necessary to correct the income account for any prior year
shall be made by appropriate entries which may either be made in
the accounts of the current year and/or, in the discretion of the board
of directors of the reorganized company, and subject to the approval
of the Commission or such other governmental agency as may at the
time have jurisdiction over the accounts of the reorganized company,
may be made in whole or in part in the accounts of any subsequent
year or years, and any such debits or credits to adjust income in prior
years shall be treated as income items for the year in which entered
on the books, whether cleared through income or profit and loss
accounts and (3) if, in respect of any calendar year, the available net
income (ascertained in all cases after the adjustments provided in
this paragraph) is a deficit, the amount of such deficit shall be carried
forward and be deducted in determining available net income for the
sueceeding calendar year or calendar years until such deficit (or
accumulated or remaining deficits) be extinguished by earnings which,
in the absence of such deficit or deficits, would be available net income.

Available net income for each calendar year shall be applied on the
May 1 next following the end of such ealendar year to the following
purposes and in the following order:

(1) To provide for such appropriation for capital expenditures, not
exceeding the excess of (a) $500,000 or 1 percent of consolidated rail-
way operating revenues of the reorganized company and its wholly
owned railway subsidiaries for such calendar year, whichever shall be
greater, over (b) the special reserve fund balance as of the end of
such calendar year, as the board of directors may, by resolution
adopted by the affirmative vote of two-thirds of the entire board,
determine to be unavailable from other sources, and necessary to
provide for capital expenditures in such ealendar year or the next
succeeding calendar year which, in the opinion of the board of diree-
tors, are essential for the safe operation of the properties of the
reorganized company, or for the realization of customary standards
of efficiency or economy in the operation of such properties.

(2) To the payment of all sinking-fund installments payable for
any first-mortgage bonds, including the emergency-bond sinking fund,
if then payable, such payments to be made equally and ratably except

PLAN OF REORGANIZATION 13

to the extent that, as hereinabove provided, sinking funds for series
other than series A shall have been subordinated.

(3) To the payment of interest on the then outstanding second-
mortgage bonds (not including any thereof held in any sinking fund),
and any accumulations thereof. No interest need be paid if it would
amount to less than one-quarter of 1 percent. Any excess available
for such interest, but not paid because of the last preceding sentence,
shall be reserved and added to the income available for interest on
the second-mortgage bonds for the next sueceeding calendar year. In
case more than one series of seecond-mortgage bonds is outstanding,
and in any calendar year the amount available for the purposes speci-
fied in this subparagraph (3) is less than all interest (including un-
paid accumulated interest) owing on all such bonds, the amount
available shall be prorated among the several series in proportion to
the respective interest rates thereon until second-mortgage bonds
of each series shall have received an amount equal to 1 year’s interest
thereon, any then remaining balance to be prorated among the several
series in proportion to the balance owing thereon respectively.

(4) To the payment of all sinking-fund installments payable for
any second-mortgage bonds, such payments to be made equally and
ratably except to the extent that, as hereinabove provided, sinking
funds for series other than series A shall have been subordinated.

(5) To the payment of any interest required to be paid on second-
mortgage bonds pursuant to the provisions of the paragraph herein-
above set forth relative to compensation for any reduction in interest
payments on the second-mortgage bonds through utilization of sub-
paragraph (1) of this series of subparagraphs.

(6) To any proper corporate purpose, ineluding, if, when, and as
declared by the board of directors of the reorganized company, the
payment of dividends on the preferred stock and the common stock,
subject to the relative rights of the two classes of stock, and to the
provisions of the last paragraph hereinabove set forth relative to the
special reserve fund.

If the date of the new securities shall be other than January 1,
aceruals of sinking-fund installments payable on May 1 of the next
sueceeding calendar year shall be computed on a proportionate basis.

Dividends may be paid on stock of either class, subject to the rela-
tive rights of the two classes of stock and to the provisions hereof
for a special reserve fund, out of the income of any calendar year
prior to the close of such calendar year if, but only if, prior to the
declaration of such dividends, the board of directors shall have deter-
mined that the available net income for such year applicable for the
purposes specified in the foregoing subparagraphs (1), (2), (3), (4),
and (5) will be more than sufficient to pay the amounts payable out
of such available net income pursuant to said subparagraphs, and such
amounts shall have been deposited in trust for the purposes specified
in said subparagraphs.

Preferred stock.—The amount of the new preferred stock to be
originally authorized shall be fixed by the reorganization managers
without limitation by the amount of the initial issue and there shall be
issued upon reorganization an amount of preferred stock, series A,
sufficient to carry out the plan. Additional preferred stock of any

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PLAN OF REORGANIZATION 15

The certifieate of incorporation of the reorganized company shall
provide in substance that the reorganized company shall not, without
the vote or consent of the holders of at least two-thirds in par value
of the outstanding preferred stock, series A, (a) amend the certificate
of incorporation of the reorganized company or any certificate
amendatory thereof or supplemental thereto so as to alter or change
adversely the preterences and voting rights to which the holders of
preferred stock, series A, are entitled thereunder, (b) create any
additional stock ranking either as to assets or dividends in priority
to or on a parity with the preferred stock, or (¢) issue any of the
shares of preferred stock which shall be originally authorized for any
purpose other than to carry out the plan or to refund outstanding
obligations or to provide for expenditures chargeable to capital
account,

Holders of preferred stock shall be entitled to one vote a share on
all matters, except that in elections of directors, which shall be by
cumulative voting, each holder of stock of any class shall be entitled
to as many votes a share as the number of directors for which the
stock of such class has at the time the right to vote. Until regular
dividends at the full rate borne by the preferred stock shall have
been paid for 3 consecutive years on all outstanding preferred stock
and thereafter, so long as there shall be any accumulated dividends on
the preferred stoek which shall have remained unpaid for 12 months
after the close of the year in respect of whieh such dividends shall
have accumulated, the holders of the preferred stock, voting as a
class, shall be entitled to elect a majority of the directors of the
reorganized company and the holders of the common stock, voting
as a elass, shall be entitled to elect the remaining directors. If, after
the holders of the preferred stock shall have ceased to be entitled to
elect a majority of the board of directors, (a) the reorganized com-
pany shall fail for 3 consecutive calendar years to pay full dividends
on all preferred stock at the time outstanding or (b) accumulated
unpaid dividends on the preferred stock of any series shall amount to
10 pereent or more, the holders of the preferred stock shall again be
entitled to elect a majority of the board of directors until full current
dividends shall have been paid on the preferred stock for 3 econseeu-
tive years, and all dividends accumulated up to the end of the last
preceding calendar year shall have been paid. Holders of the pre-
ferred stock, voting as a class, shall have the right to elect not less
than two directors after default of the equivalent of six quarterly
dividends.

Subject to the foregoing provisions relative to preferred stock, the
certifieate of incorporation will permit the authorization and issuance
of additional preferred stock of sueh series and amounts, with such
par value and entitled to such dividends, voting rights, priority,
redemption, conversion, and other special privileges and restrictions
as the board of directors may determine in its diseretion.

Common stock—-The number of shares of common stock to be origi-
nally authorized shall be fixed by the reorganization managers with-
out limitation by the amount of the initial issue, and there shall be
issued upon reorganization a number of shares of common stock suffi-
cient to carry out the plan. All the common stock shall be without

*

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16 ST. LOUIS-S. F. RY. CO, REORGANIZATION

par value. The necessary number of shares of common stock shall he
reserved for conversion of the second-mortgage bonds, series A, and
the preferred stock, series A, to be issued under the plan.

Holders of common stoek shall be entitled to one vote a share on
all matters except that (@) directors shall be elected by cumulative
voting as aforesaid and (b) holders of preferred stock may be entitled
to elect stated proportions of the board of directors by separate
class vote as provided above.

So far as permitted by law, any vote or consent by the holders of
common stock authorizing the issuance of additional shares of stock
of any class or of securities convertible into stock of any class may
waive, on such terms and conditions, if any, as may be specified in
such vote or consent, the preemptive right of all the holders of
shares of common stock to subseribe to such additional shares or
securities.

TREATMENT OF EXISTING SECURITIES AND CLATMS

Holders of outstanding bonds of the several elasses shall receive,
respectively for each $1,000 principal amount thereof, cash and new
securities approximately in the amounts specified below (the amounts
of cash specified being herein ealled the eash allocations) :

New securities to be issued

Old securities Cash Common

allocations | First mort-} Income | Preferred ——

gage 4's 44's stoc! stated at

as

ACD. . ocnacenhiins sabte+=5s0d0useunse $61. 34 $733 | ee ee
Prior lien, series A... ..............--.-.--- 15. 36 219 71 $332 $333.8
Prior lien, er ee 25. 39 233 182 353 355.0
Consolidated, series A . 21.05 221 1m 174 174.6
Consolidated, Pectuledienccetiadeated 36. 22 243 174 191 191.9

The new securities may be issued in temporary form in the first
instance or interim certifieates may be issued therefor. Serip may be
issued and distributed in lieu of fractions of a bond or share of stock.
Sueh serip shall be nondividend bearing or non-interest-bearing and
nonvoting, but shall be exchangeable within 5 years after the eonsum
mation date for new securities (or interim certificates therefor) whey
presented in proper multiples upon terms and conditions approved,
by the reorganization managers.

The bank creditors or their transferees shall receive, respectively,
cash and new securities approximately in the amounts specified below,
being the cash and new securities allocable to the collateral held by
them, respectively :

PLAN OF REORGANIZATION V7

New securities to be issued
Cash alloca- rs Comenn
tions rst Income Preferred Seer ©

t iD no-par value

— we i}4's stock stated at

$50 a share
Chase National Bank ........ ..| $151, 526.37 |$1, 016, 590. 50 $727,929 | $799, 048. 50 $801, 140.00
Quaranty Trust Company. -... S56, 403,75 379, 687. 50 271, 875 298, 437. 50 299, 219.00
Bankers Trust Co 22, 637. 50 151, 875.00 108, 750 119, 375.00 119, 687. 50

Bank and Trust
—" ov 22, 637. 50 151, 875. 00. 108, 750 119, 375. 00 119, 687. 50
First ‘National Bank in StL Vouis. 22. 637. 50 181, 875.00 108, 750 119, 375.00 119, 687. 50
ercantile Commerce

Mvaet Co LebRAESALen SECEREGASERRS 22. 637.50 151, 875.00 108, 750 119, 375. 00 119, 687. 50

Nothing in the plan shall restrict the right of the court to order
distributions of available cash from time to time before the consumma-
tion date or shall limit the amount of any such distributions. All
such distributions shall be divided as follows: For each $1,000,000
of distribution, the following amounts shall be paid per $1,000 bond:
On the Fort Seott bonds, $10.01; on the prior-lien bonds, series ) to fix the compensation of trustees, depositaries, counsel
and others whose services they may employ in the execution of their
powers and of the voting trustees, which, together with their reason-
able expenses, including counsel fees, shall be paid by the reorganized
company; (¢) to incorporate the reorganized company (if it be deemed
necessary or desirable to form a new corporation) or to amend the
certificate of incorporation of the debtor, to supervise the transfer of
any properties to the reorganized company and to make agreements
and commitments for its account; (d@) to provide the method by which
creditors and other interested parties may participate in the plan; and
(e) to determine the form and provisions (so far as not otherwise
specifically provided in the plan) of the certificate of incorporation or
amendment thereto of the reorganized company, its bylaws, the new
bonds, and the mortgages under which the same shall be issued, the
voting-trust agreement and certificates, the stock certificates, scrip,
interim certificates, and any other instruments deemed by the reor.
ganization managers to be necessary or proper in connection with the
plan; (f) to make such minor adjustments in details of the plan as
they may deem advisable; and (g) to construe the plan. Any con-
struction of the plan approved by the reorganization managers on

TEN en ARNG BORO

PLAN OF REORGANIZATION 91

advice of counsel shall, subject to approval by the court, be conclusive.
With the approval of the court, the reorganization managers may make
such changes in the allotment of new securities as may be necessary
to avoid the issue of scrip in excessively small denominations. The
reorganization managers, however, shall exercise only such powers as
shall be necessary to carry out the plan in accordance with its provi-
sions, subject to the direction of the court, and the court shall approve
the form of the certificate of incorporation or amendments thereto,
bylaws, mortgages, bonds, coupons, stock certificates, voting-trust cer-
tificates, scrip, and interim certificates before they are put in use. The
reorganization managers may act by a majority of the reorganization
managers as from time to time constituted, at a meeting or in writing
without a meeting, may employ such agents, attorneys, and others
as they may deem desirable to carry out the plan, and may delegate
to others any power or discretion conferred upon them, and no re-
organization manager shall be liable for any action taken by him in
good faith or by any person employed by the reorganization managers,
except for his individual malfeasance or willful neglect. The mort-
vage trustees, transfer agents, and registrars of the new securities, and
such depositaries as may be necessary in connection with the distribu-
tion thereof, shall be appointed by the reorganization managers.

Nothing herein contained shall be construed as authorizing the re-
organization managers to solicit deposits of securities or authorizations
to represent security holders, except upon approval by the Commission
of the terms of such solicitation by further action pursuant to Section
77 (p) of the Bankruptcy Act, as amended.

Miscellaneous provisions of mortgages, et cetera—Each of the mort-
gages, certificates of incorporation, and other instruments herein pro-
vided for shall contain such provisions, in addition to those herein
specified (including, without limitation, provisions for releases of mort-
gaged property), as the reorganization managers may deem necessary
or proper, and as may be approved, where required hereby or by law,
by the Court.

In the event that the reorganized company shall be merged or eon-
solidated or unified with any other class 1 railroad, whether or not
a subsidiary of the reorganized company, then by vote or consent of
the holders of a majority in par value of the preferred stock and a
majority of the shares of common stock then outstanding, procedural
provision may be made for ascertaining available net income without
the maintenance of separate books of account, and such provision shall
be binding on all holders of stock of such classes.

The new first mortgage and the new second mortgage may contain
such provisions as the reorganization managers may approve either (1)
permitting the reorganized company, while it is not in default in the
performance of its obligations under said mortgages respectively and
during any period of grace therein specified, to use and dispose of, to
the same extent as if not subject to the lien of such mortgages respec-
tively, cash, temporary cash investments, tools, supplies, and other
current items or (2) excluding such property from the liens of said
mortgages.

Funds on deposit with mortgage trustees —Upon consummation of
the plan, all funds (except funds deposited with Old Colony Trust

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22 ST, LOUIS-S. F. RY. CO. REORGANIZATION

Company or its depositary for the payment of principal and interest
on the general-mortgage bonds and income-mortgage bonds of the
Kansas City, Memphis & Birmingham Railroad Company, and funds
deposited for payment, or funds or securities deposited as indemnity
in respect of the obligations referred to in the following paragraph)
on deposit with the trustees under mortgages on the property acquired
or to be acquired by the reorganized company (other than the mort-
gages created pursuant to the plan) and all collateral pledged under
such mortgages shall be surrendered to the reorganization managers for
delivery to the treasury of the reorganized company or for cancelation
as hereinbefore provided.

Payment of unpresented securities and coupons.—The bankruptcy
trustees or the reorganized company shall pay, upon presentation and
surrender, (1) all securities issued by the bankruptcy trustees or by
the debtor which shall have become due and payable prior to the con-
summation date, and shall not have been paid solely because of failure
of presentation for payment (including any of such securities issuable
in exchange for securities of St. Louis and San Francisco Railroad
Company not yet exchanged under the plan and agreement of reor-
ganization dated November 1, 1915), and any unpaid coupons appur-
tenant to any such securities, (2) $1,000, principal amount, trust-
mortgage 5-percent bond, due 1987, of St. Louis and San Francisco
Railway Company, and appurtenant coupons, (3) all coupons matured
prior to November 1, 1932 appurtenant to Fort Scott bonds, prior lien
bonds, and consolidated bonds ‘eéutstanding in the hands of the public
(excluding pledged bonds) and (4) all coupons or portions thereof that
the court shall, before consummation of the plan, have ordered to be
paid, whether before January 1, 1944, or, subject to the provisions
hereinabove set forth relative to cash distributions before the consum-
mation date, on or after January 1, 1944; provided, however, that each
such security or coupon (other than said trust bond of St. Louis and
San Franeiseo Railway Company and coupons appurtenant thereto)
shall be presented for payment within 6 years after the consummation
date, and all such securities or coupons (other than as aforesaid) not
presented for payment within such period shall become void, and all
funds then remaining on deposit for the payment thereof shall be paid
to the reorganized company.

Executing the plan by sales.—If so ordered by the court, the plan,
after it shali have been found fair and equitable, and shall have been
confirmed by the court, may be executed by a sale or sales, at not less
than fair upset prices to be fixed by the court, of all or any part of
the property of the debtor, on such conditions, including the extent
to which the sale may be free of liens or subject to prior liens or in-
terests, and in such manner, as the court may direct. Upon any such
sale or sales, the property and assets offered for sale may be purchased
for the benefit of the reorganized company by the reorganization man-
agers, and in that event there shall be applied on account of the pur-
chase price the distributive share of the proceeds of such sale of all
securities, the holders of which shall have assented to the plan, and
of the securities, though not assenting to the plan, of all classes the
holders of two-thirds of the voted claims in which shall have accepted
the plan. If the property of the debtor so offered for sale should be

PLAN OF REORGANIZATION 23

sold to others than the reorganization managers, the plan (other than
the foregoing provisions of this paragraph) shall be inoperative.

In the event of any such sale to the reorganization managers, the
reorganization managers may in their discretion sell all or any portion
of the new securities distributable under the plan in respect of se-
curities of any bondholder, if neither such bondholder nor two-thirds
of the voted claims in the class to which such bondholder belongs shall
have accepted the plan; provided, however, that any bondholder of a
class the holders of two-thirds of the voted claims in which shall not
have accepted the plan, who shall not himself have accepted the plan,
shall have the right, if he shall so notify the reorganization managers
within a period of 30 days after the confirmation of such sale, to assent
to the plan and receive the securities allocated to him under the plan
in lieu of his aliquot share of the proceeds of such sale. The proceeds
of such sale of securities, together with any other funds which, in the
judgment of the reorganization managers, are available among the
assets of the debtor's estate or of the reorganized company, may be used
to pay the portion of the purchase price payable in cash on any such
sale of properties of the debtor.

Upon any such sale, nonassenting creditors of any class the holders
of two-thirds of the voted claims in which shall not have accepted the
plan in accordance with the provisions of section 77, and/or the stock-
holders of either class shall be entitled to receive, in lieu of the securi-
ties, if any, otherwise issuable under the plan, their equitable propor-
tion of the proceeds of such sale, after deducting therefrom all expenses
of such sale and the amount which would be required to pay in full,
to all creditors whose claims equitably marshaled are prior in lien or
superior in equity to the claims of such nonassenting creditors or the
rights of such stockholders, the principal of their claims and all unpaid
interest accrued thereon to the date of such sale.

Effect of accepting the plan——Acceptance of the plan shall include
acceptance of the provisions of the new bonds, mortgages, stock cer-
tificates, certificate of incorporation or amendments thereto, voting-trust
certificates, and all instruments necessary or appropriate to the carry-
ing out of the plan, other than the orders of the court and the Com-
mission, to the same effect as though the terms of such instruments
were set forth in full herein.

Construction of plan—The construction of the plan by the court,
whether before or after the submission of the plan to creditors, shall
be final and conelusive. The court, whether before or after submission,
may cure any defect, supply any omission, or reconcile any inconsistency,
in such manner or to such extent as may be necessary or expedient in
order to carry out the plan effectively. ‘

The carrying out of the plan shall be as provided in the Bankruptcy
Act as at the time in effect.

Additional Clauses
from Commission’s Order of July 4, 1944

In addition to the provisions of the plan approved hereinbefore shown,
the Commission’s order approving the plan also ordered—

(1) That the authorization and approval herein granted by this Com-
mission are upon the condition that the journal entries covering the

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24 ST. LOUIS-S. F. RY. CO. REORGANIZATION

necessary accounting adjustments under the order will be submitted
to this Commission for approval before they are recorded on the books
of the reorganized company under the plan of reorganization herein
approved.

(2) That nothing herein contained shall be, or be construed as, a
grant of authority for the issue of any securities, assumption of obliga-
tions, transfer of any property, sale, consolidation, or merger of the
debtor’s properties, or pooling of traffic, pursuant to either the Bank-
ruptey Act or the Interstate Commerce Act, until further action by this
Commission upon confirmation of the plan by the court.

(3) That except as thus modified, the terms and conditions of said
prior orders of July 6 and November 16, 1940, shall be, and remain,
in full force and effect.

ORIGINAL REPORT OF COMMISSION 25

INTERSTATE COMMERCE COMMISSION

Finance Docket No. 10008

ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY
REORGANIZATION

Submitted November 20, 1939. Decided duly 6, 1940

Plan of reorganization for the St. Louis-San Franciseo Railway
Company, pursuant to section 77 of the Bankruptey
Act, as amended, approved.'

William V. Hodges, Jesse McDonald, Martin Jacobs, and Wiliam
V. Hodges, Jr., for debtor.

Henry B. Day, Albert Hale, Eph A, Karelsen, Frederick Baum,
Edwin S. S. Sunderland, Thomas O'G. FitzGibbon, George J. Miller,
Henry W. Anderson, George D, Gibson, Robert T. Swaine, Leonard
D. Adkins, Littleton Groom, Cassius M. Clay, Florence de Haas
Dembitz, Frederick E. Baukhages, LI, D. Willard, Jr., William J.
Kane, E. G. Buckland, Jack Louis Kraus, Il, Fitzhugh MeGrew,
Ripley L. Dana, Charles J. Winkler, Jr, Frederick M, Dearborn,
Jr. A. M. Lewis, Hovey C. Clark, Curtis Heath, M. Barratt Walker,
Oreidic W. Wood, Joseph M. Hartfield, Carl BE, Newton, George W.
Martin, A. A. Berle, Jr, James B. Alley, W. Meade Fletcher, Jr.,
Fred N. Oliver, John C. Donnally, DeCoursey Fales, Merrill M.
Manning, C. S. Bates, Haughton Bell, Sterling Pierson, Alfred H.
Meyers, Ross MeLeod, Victor House, J. Kemp Bartlett, Alfred N.
Heuston, Edward H. Stiefel, Albert L. Reed, and H. Vincent Smart
for interveners.

Chester 1. Long, Samuel W. Melntosh, Jerome J. Shuman, Lawrence
Cake, Harold J. Gallagher, and Alexander B. Royce for other interested
parties.

Revort oF THE CoMMISSION
Division 4, Comaissioners Porter, Mauarvir, AND MILLER
By Division 4:

Exceptions to the report proposed by the examiners were filed, aud
the case was argued orally before us.

1. GENERAL
A. NATURE OF PROCEEDINGS; HEARINGS; INTERVENERS

The St. Louis-San Franeiseo Railway Company, a Missouri cor-
poration, hereinafter called the debter, tor the purpese ol effecting
a reorganization under seetion 77 of the Bankruptey Act, as amended,

1 Prior reports, 207 I. C. C, 623, 221 L. C. C. 199 and 251, 224 1. C. C. 29, 228 1. 0.0.
73, and 233 I. C. C. 627 and 780.

IME eo. |

TERRIER Sete te ty

26 st. LOUIS-S. F. RY. CO. REORGANIZATION

in proceedings entitled “In the Matter of St. Louis-San Francisco
Railway Company, a Corporation, im Proceedings for the Keorgan-
ization of a Railroad, No. 7004—1’’, then and now pending in the
District Court of the United States for the Eastern District of
Missouri, Eastern Division, on November 24, 1937,? filed with this
Commission for its approval a modified plan of reorganization. A
hearing on this plan, pursuant to notice, was held by the Commis-
sion on February 8, 1938, and upon request of committees represent-
ing holders of bonds ot the Kansas City, Fort Scott & Memphis
Railway Company, hereinafter ealled the Fort Scott, and the debtor's
prior-lien and consolidated bonds, the hearing was adjourned to
May 3, 1938. The adjourned hearing was postponed from time to
time. On October 21, 1938, the committees, pursuant to authority
granted, filed a plan of reorganization with the Commission for its
approval. The three committees urged the same provisions in most,
but not in all, instances. Further hearings, pursuant to notice,
were held by the Commission on November 1, 2, and 8, 1938. The
committees’ plan was supplemented at the hearing and modified on
initial brief, complete agreement being finally reached by the pro-
ponents, such agreement being to the plan as an entirety, however,
and not necessarily to any single provision apart from the plan
as a whole. Further references herein to the committees’ plan are
to the plan in the form reached on initial brief. Plans generally
conforming to the plan proposed by the examiners were subsequently
filed by the committees, with their exceptions, showing the changes
urged in event of an approval in general outline of the provisions
of the examiners’ plan. References hereinafter to matters urged
by the committees at variance with the committees’ plan are to
matters thus urged conditionally in the conformed plans.

In addition to the committees which represented holders of the
Fort Seott refunding-mortgage bonds, holders of the debtor’s prior-
lien bonds, and holders of the debtor’s consolidated-mortgage bonds,
hereinafter designated, respectively, the Fort Seott committee, the
prior-lien committee, and the consolidated committee, the Reconstrue-
tion Finanee Corporation and the Railroad Credit Corporation, here-
inafter sometimes called, respectively, the Finance Corporation and
the Credit Corporation, the trustees of the three mortgages men-
tioned, the trustee of the general mortgage of the Kansas City,
Memphis & Birmingham Railroad Company, hereinafter called the
Birmingham, a number of holders and representatives of holders of
bonds issued under one of the several mortgages, and others inter-
vened in the proceeding before the Commission. Each of the three
protective committees for the bondholders represents in excess of 60

Ss

2 The debtor’s petition, stating that it was unable to meet its debts as they matured
and that it desired to effect a plan of reorganization under section 77 of the Bank-
ruptey Act, as amended, was filed with the court on May 16, 1933, the debtor having
been in receivership since November 1, 1932. On May 27, 1933, the court entered an

plan of readjustment and, pursuant to notice, hearings on the plan were held by the
Commission on July 18 and 19, 1933, and December 1, 1936, concluding on the latter
date. The Commission, division 4, in its report herein, 291 T. C. C. 199, decided Mareh
17, 1937, concluded that approval at that time of any plan of reorganization of the
debtor should be refused, without prejudice to continuation of the proceedings, and
entered an order to that effect.

eee, ee ee ee a es

ORIGINAL REPORT OF COMMISSION 27

percent of the part of the respective issues outstanding in the hands
of the public. Several of the interveners, though not filing plans,
submitted evidence, filed briefs, or were heard in oral argument. The
positions taken by such interveners will be stated hereinafter follow-
ing an outline of the plans submitted.

(Superseded matter is here omitted)

C. DESCRIPTION OF DEBTOR *S PROPERTY

The St. Louis-San Francisco lines comprise a system of railroads
in the States of Missouri, Kansas, Texas, Oklahoma, Arkansas, Ten-
nessee, Mississippi, Alabama, and Florida. Points served by the
system include St. Louis, Springfield, and Kansas City, Mo.; Colum-
bus and Wichita, Kans., Tulsa and Oklahoma City, Okla., Dallas,
Fort Worth, and Quanah, Tex., Fort Smith and Blytheville, Ark.,
Memphis, Tenn., Tupelo, Miss., Birmingham, Ala., and Pensacola,
Fla. As of December 31, 1936, the debtor owned 6,561.41 miles of
track, operated 6,788.08 miles, and jointly owned and used 36.65
miles. The mileage operated includes 19.41, 37.78, 103.19, 38.98, and
19.09 miles leased from the Birmingham Belt Railroad Company,
the Butler County Railroad Company, the Jonesboro, Lake City &
Eastern Railroad Company, the Miami Mineral Belt Railroad Com-
pany, and the St. Louis, Kennett & Southeastern Railroad Company,
respectively. The Birmingham Belt Railroad Company is an operat-
ing company, and the other four are lessors only. The securities of
all five are all owned by the debtor. System lines operated sepa-
rately are the Birmingham Belt Railroad Company, which, in addi-
tion to the tracks leased to the debtor, owned 24.99 miles of yard
tracks and sidings and operated 27.62 miles, and the following lines
in the State of Texas: Quanah, Aeme & Pacifie Railway Company,
owning 128.82 miles and operating 141.51 miles; and St. Louis, San
Francisco & Texas Railway Company, hereinafter called the Texas
company, owning 158.71 miles, operating 266.76 miles, and jointly
owning and using 0.22 mile. Included in the latter operated mileage
are 107.27 miles of the Gulf, Texas & Western Railway Company, a
nonoperating company, the properties of which were leased July 1,
1930, to the Texas company and the securities of which are all
owned by the debtor. The latter lessor company was granted a
certificate on June 16, 1939, permitting abandonment of its line.
Gulf, T. & W. Ry. Co. Abandonment, 253 1. C. C. 321. The debtor
formerly owned all the capital stock and first-mortgage bonds of
the Fort Worth & Rio Grande Railway Company, which owned
221.68 miles of main and branch line tracks in Texas. This prop-
erty, with the exception of terminals at Fort Worth and certain
cattle traps, was sold March 1, 1937, to the Atchison, Topeka &
Santa Fe Railway Company, pursuant to authority granted by
division 4 on December 31, 1936, in Fort Worth & R. G. Ry. Co. Con-
trol and Operation, 217 1. C. C. 659. The terminals and cattle traps
mentioned were sold to the Texas company.

As of December 31, 1936, the debtor thus owned direetly or con-
trolled through ownership of all securities a total of 7,199.65 miles of

track and operated a total of 7,266.84 miles, including 36.87 miles of

BS eS Prin Lathes oh ea AL Na i a. ce ae “ca

28 ST. LOUIS-S. FP. RY. CO. REORGANIZATION

track jointly owned and operated. This mileage does not inelude the
mileage of the Fort Worth & Rio Grande Railway Company. Of the
mileage owned and controlled, 5,242.08 miles were first main track and
139.65 were second main track. Since the date shown, we have issued
certificates permitting the abandonment of approximately 115 miles of
the debtor’s branch lines and connecting tracks. St. Lowis-S. FP. Ry.
Co. Abandonment, 221 I. C. C. 241, St. Lowis 8. W. Ry. Co. Abandon-
ment, 224 I. C. C. 639, St. Lowis-8. F. Ry. Co. Trustees Abandonment
of Operation, 228 I. C. C. 271, and St. Louis-S. F. Ry. Co. Trustees
Abandonment, 228 I. C. C. 795, 233 I. C. C. 665, and 236 I. C. C, 792.
On the other hand, approximately 13.8 miles of additional line were
acquired, St. Lowis-S. FP. Ry. Co. Trustees Purchase, 239 1. C. C. 165,
The debtor owns all the securities of the Arkansas Mining & Coal
Company, Friseo Construction Company, and Frisco Refrigerator
Line, and approximately 49 and 51 percent of the securities of the
Crawford County Mining Company and the New Mexico & Arizona
Land Company, respectively. All of these are active nonrailroad com-
panies. The debtor also owns all or the majority of the securities of
10 inactive railroad corporations,® and has an interest in 7 active
operating railroad terminal companies.* The debtor owns all the
outstanding securities, except directors’ qualifying shares, of its wholly
owned system lines. The debtor uses 12.3 miles of line and the St.
Louis, San Francisco & Texas 70.12 miles of line under trackage agree-
ments. The system is in good physical condition, and no funds will
be required for rehabilitation. There is no acerued depreciation or
deferred maintenance of way and structures, except $1,287,481 accrued
on the Arkansas & Memphis Railway Bridge & Terminal Company.

3 Kansas City & Memphis Railway & Bridge Company; Kansas City, Clinton &
Springfield Railway Company; Kansas City, Fort Scott & Memphis Railway Com.
; Kansas City, Memphis & Birmingham Railroad Company ; Metropolitan Rapid

t, Light & Power Company ; the Muscle Shoals, Birmingham & Pensacola Rail-

road ; Railway Construction & Improvement Company; Red River, Texas &
Southern way Company; Sapulpa & Oil Field Railroad; and the West Tulsa Belt
Railway Company. : ;

4 Birmingham Terminal Company, Kansas City Terminal Railway Company, Rock
Island-Frisco Terminal Railway Company, Terminal Railroad Association of St. Louis,
Tulsa Union De ee Union Terminal Company (Dallas, Tex.), and the
Wichita Union Terminal way Company.

5 These lines and the securities of each owned by the debtor are as follows:
St. Louis, San Francisco & Texas Railway Company first-mortgage 4-percent bonds
due January 1, 1930, but extended subject to demand by trustees of the prior-tien
mortgage of the debtor, $200,000, capital stock $975,000; Paris & Great Northern
Railroad Company first-mortgage 5-percent bonds due October 1, 1987, $339,000;
Blackwell, Enid & Texas Railway Company first-mortgage bonds due January 1,
1934, $173,000; Red River, Texas & Southern Railway Company first-mortgage 4-per-
cent bonds due March 1, 1933, $815,000, eapital stock $400,000; Gulf, Texas &
Western Railway Company first-mortgage 5-pereent bonds due November 1, 1939,
$2,000,000, capital stock $500,000; Quanah, Acme & Pacific Railway Company first-
mortgage @-percent bonds due October 1, 1939, $2,915,000, capital stock $150,000;
Butler County Railroad Company capital stock $200,000; Miami Mineral Belt Rail-
road Company capital stock $200,000 ; Jonesboro, Lake City & Eastern Railroad Com-
pany first-mortgage 5-percent bonds due September 1, 1925, $674,000, capital stock
$600,000; St. Louis, Kennett & Southeastern Railroad Company refunding and im-
provement mortgage 6-percent bonds due March 1, 1934, $150,000, capital stock
$300,000; Birmingham Belt Railroad Company first-mortgage 4-pereent bonds due
October 1, 1922, $982,000, capital stock $50,000; total, par value, $11,623,000; total,
book value, $12,550,525.

a ee ee ee eee ee
ORIGINAL REPORT OF COMMISSION 29

D. PRESENT CAPITALIZATION

The debtor's total capitalization as of December 31, 1937, was $391,-
634,843, comprising $114,711,526 of capital stock, $234,547,597 of
funded debt unmatured, and $42,375,720 of funded debt matured
unpaid. The long-term debt securities of the system companies out-
standing in the hands of the public as of August 31, 1938, were in
principal amount as follows:

St. Lounis-San Francisco Ry. Co. : ;
Equipment obligations ....... $ 7,331,000

Collateral-trust mortgage 5-percent bonds of 1887... 4,000
Prior-lien mortgage 4-percent bonds, series A, due
July 1, 1950 91,887,097
Prior-lien mortgage 5-percent bonds, series B, due
July 1, 1950 ........ : 25,561,500
Consolidated-mortgage 4%4-percent bonds, series A,
due Mar. 1, 1978 108,305,000
Consolidated-mortgage 6-pereent bonds, series B, due
June 1, 1936 10,000,000
Kansas City, Memphis & Birmingham R. R. Co. general-
mortgage 4-pereent bonds due Mar. 1, UB84..........000 3,323,390
Kansas City, Memphis & Birmingham R. R. Co. 5-percent
income bonds Aue Mar. 1, VIBE .........ccccccccneeerceesseeneeeenennes 3.182.780
Kansas City, Fort Scott & Memphis Ry. Co. refunding-
mortgage 4-percent bonds due Oct. 1, 186... eee 25,835,000
Total - 275,429,767

The short-term notes, obligations of the debtor, were as follows:

Loan from Mereantile-Commerce Bank & Trust Co., St.

Louie, Mo, de daly 2, BGS .....c.cccccecccseccscssssscenes $ 402.115
Loan from Guaranty Trust Co. New York, N. Y., due

Daly 1, TOD crcnccewennee . 1,042,894
Loan from First National Bank, St. Louis, Mo., due July

. “ 342,984
Loan from Bankers Trust Co., New York, N. Y., due July

I a cncivetsccreticecnieseneesieciepeatiinencrentnntirarennnincectiintiadscnmtentitin 422.811
Loan from Central Hanover Bank & Trust Co., New York,

N. V¥., Gee Sealy 2, BSB... ..ccccccsseseccssssereceseesessssseesnenensensons 433,469
Loan from Chase National Bank, New York, N. Y., due

SS. 3 ee 2,492,592

Loan from Railroad Credit Corporation, due Dee. 31, 1935 3,307 482
Loan from Reconstruction Finance Corporation, due on
NRE 6. cccintnsaitiniiiitiadnnninianwanions ; 5,190,000

I as nateenbidiiitiichiniabion 13,634,295

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30 ST. LOUIS-S. F. RY. CO, REORGANIZATION

The capital stock was as follows:
St. Louis-San Francisco Ry. Co. :

Preferred stock, 6-percent noncumulative? ..........008 $ 49,158,300
Common stock ws 65,543,226

Kansas City, Fort Scott & Memphis Ry. Co. preferred
stock, 4-percent noncumulative .......cccceeeeceeeereneereeerensenes 10,000
BURRS | tment siininilhiteiniheanAAANA RCIA 114,711,526

1 Preferred as to dividends, but not as to assets.

Interest is in arrears on all obligations except the equipment obliga-
tions, the Birmingham general-mortgage bonds and income bonds,
and the collateral-trust bonds of 1887. Interest matured and unpaid
on the Fort Seott bonds as of August 31, 1938, was $4,733,440; on
the prior-lien bonds, series A and B, $22,052,903 and $7,668,450, re.
spectively; on the consolidated bonds, series A and B, $29,242,350
and $3,600,000, respectively; and on the short-term notes $3,959,391;
a total of $71,256,534. A part of this interest has since been paid.

Guaranties outstanding other than in intrasystem account are for
securities of jointly controlled termimal companies.

E. PROPOSED PLANS OF REORGANIZATION

1. Capitalization and new securities—(a) Debtor’s plan.—Under
the debtor’s plan, the equipment-trust certificates totaling $7,331,000
as of August 31, 1938, and the Birmingham general-mortgage and
income bonds totaling $6,506,170, would be left undisturbed, except
that the maturity date of the bonds would be extended to Mareh 1,
1954. In exchange for the other securities of the debtor outstanding
in the hands of the public there would be newly created and presently
issued $86,720,000 of series-A first-mortgage bonds, $61,309,600 of
series-A income bonds, $50,487,800 of prior-preferred stock, 294,944
shares of 5-percent preferred stock without par value, and = 1,452,062
shares of common stock without par value. The capitalization pro-
posed under this plan, including no-par stock at $100 a share, approxi-
mates $387,055,170 as of August 31, 1938.

The new first-mortgage bonds would be secured by a first lien,
subject to the equipment-trust liens and liens of the Birmingham
general-mortgage and income bonds on all property of the reorgan-
ized company, and, subject to certain exceptions, on after-acquired
property. The series-A bonds would be dated January 1, 1938, would
bear interest at the rate of 334 percent per annum, payable semi-
annually, would be subject to redemption at any time prior to matur-
ity, and would mature December 31, 1978. The new first mortgage
would provide for the issue of additional bonds of other series to
an unlimited amount for various purposes and subject to various
restrictions.

The new income bonds would be secured by a lien upon all property
and assets which should at any time be subject to the new _ first
mortgage, subject only to the prior lien of the first mortgage and any
liens prior thereto. The series-A bonds would be dated January 1,

HOA RE A te TRENT

ORIGINAL REPORT OF COMMISSION 31

1938, would bear interest, noncumulative, at the rate of 4 percent
per annum, payable annually if earned, would be subject to redemp-
tion at any time prior to maturity, would be entitled to the benefit
of a sinking fund, and would mature December 31, 1988. The new
income mortgage would also provide for the issue of additional bonds
of other series to an unlimited amount for various purposes and
subject to various restrictions,

If in any calendar year the reorganized company should fail to
earn its fixed charges, such deficit would be added to the fixed charges
in the next succeeding year or years, so that no income would be
thereafter available for income bonds of any series until such deficit
should have been made up. Interest on all income bonds would be
payable in multiples of one-fourth of 1 percent. The indenture under
which the first-mortgage and income-mortgage bonds would — be
issued would contain provisions to avoid default in case any install-
ment of interest or sinking-fund payments should become due before
the plan is consummated.

The prior-preferred stock would have a par value of $100 a share
and would entitle the holder thereof to dividends at the rate of $5
a share per annum, cumulative in multiples of 25 cents a share to
the extent that net income should be available therefor and not paid,
before any dividends should be declared or paid on preferred or com-
mon stock. Each share would entitle the holder thereof to 1 vote.
The stock would be callable at $105 a share, together with all unpaid
dividends declared thereon, and in the event of dissolution would
be preferred over other classes of stock in the distribution of assets
to the extent of $100 a share plus unpaid dividends declared or accu-
mulated. In addition to the 504,878 shares required in reorganiza-
tion under the debtor’s plan, approximately 100,000 shares would
be available for issue for any corporate purposes.

The preferred and common stock would be without par value,
but would have a stated value of $100 a share, which could be changed
by the board of directors with the approval of the court. Dividends
on the preferred stock of $5 a share per annum would be cumulative
in multiples of 25 cents a share to the extent that net income is avail-
able therefor and not paid. Each share would entitle the holder
thereof to 1 vote. In the event of dissolution, the holder of each
share of this stock would be entitled to the same share in the assets of
the company as that to which a holder of common stock would be
entitled. The preferred stock would be callable at $100 a share,
together with all unpaid dividends declared or accumulated. Each
share of common stock would entitle the holder thereof to 1 vote. In
addition to the 294,944 shares of preferred stock required under the
plan, there would be approximately 100,000 shares available for issue
for any proper corporate purpose.

In addition to the 1,452,062 shares of common stock to be issued
under the plan, there would be approximately 200,000 shares avail-
able for issue for any proper purpose.

(b) Committees’ plan. — The plan of reorganization proposed by
the bondholders’ committees would leave undisturbed the equipment
obligations, which as of January 1, 1940, would amount to $5,874,000.
The plan contemplates the issue of $6,506,170 of new first-mortgage
series-A bonds, $71,714,623 of new first-mortgage series-B bonds,

pia rah ea

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f
b

32 ST. LOUIS-S. F. RY. CO. REORGANIZATION

$50,482,355 of new income-mortgage series-A bonds, $77,307,713 of
new preferred stock, 1,100,181 shares of new class-A common stock
without par value, and 614,938 shares of new class-B common stock
without par value. The total new capitalization would thus be
$383,396,761, including no-par stock at $100 a share.

The new first-mortgage bonds would be unlimited in authorized
amount, and would be secured by a first lien, subject to the liens
upon equipment, on all the property and assets of the reorganized
company and, subject to certain exceptions and limitations, on after-
acquired property. The series-\ bonds would be dated January 1,
1940, would bear interest at the rate of 4 percent per annum, payable
semiannually, or such other rate as would be necessary to give them
a market price, when the reorganization is consummated, approxi-
mately equal to their principal amount, would be subject to redemp-
tion at any time prior to maturity, would be convertible into a like
principal amount of series-B bonds, and would mature January 1,
1950. The series-B bonds would be dated January 1, 1940, would bear
interest at the rate of 4 percent per annum, would be subject to re-
demption at any time before maturity, and would mature January 1},
1980. In addition to the first-mortgage bonds to be issued in re-
organization, $5,000,000 ef series-B bonds would be placed in the
treasury of the reorganized company for sale or pledge to provide
for contingencies.

The new income-mortgage bonds would be unlimited in authorized
amount, and would be secured by a lien, subject only to the lien of the
first mortgage and liens prior thereto, upon all property at any time
subject to the lien of that mortgage. The series-A bonds would be
dated January 1, 1940, would bear interest, cumulative to a maximum
amount of 2214 percent, but not beyond, at the rate of 41% pereent per
annum, payable annually only out of available net income, after pay-
ment of fixed charges and deductions for capital fund and part one of
the emergeney-bond sinking fund, would be subject to redemption on
May 1 in any year prior to maturity, would be entitled to the benefit of
a sinking fund to be created out of available net income, would be
convertible into common stock, elass A, as at the time constituted, at
any time on or before January 1, 1945, at the rate of 15 shares for each
$1,090 of such bonds, and thereafter at the rate of 1214 shares fer each
$1,000, principal amount, of such bonds, and would mature January 1,
2015.

The preferred stock would have a par value of $100 a share and
would be preferred over other issues of stock in the distribution of
dividends and in ease of liquidation or reorganization in the distribu-
tion of assets to the extent of its par value and accrued and unpaid
accumulated dividends plus such premium as might be specified in the
stock certificates. Each share would entitle the holder to eumulative
voting in the election of directors and to one vote in all other matters,
and under certain circumstances, the holders of the preferred stock
voting as a class would be entitled to elect the majority of directors.

Preferred stock, series A, would be entitled to dividends at the rate
of $5 per annum, cumulative to the extent earned in excess of sinking-
fund and eapital-fund requirements in any calendar year, but not paid.
Aceumulation of preferred-stock dividends would not be reduced by

the capital fund or by sinking-fund requirements after all income-—

ee
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SF RT RN RN, FORO CONES RIES Hee PTE IL LE

ORIGINAL REPORT OF COMMISSION 33

mortgage bonds should cease to be outstanding. The stock would
be redeemable at any time and convertible, share for share, into com-
mon stock, class A, as at the time constituted. In addition to the
773,077 shares of preferred stock to be issued in the reorganization,
1,226,923 shares would be issuable, from time to time, with the consent
of the holders of the outstanding preferred stock.

The common stock, class A, would be entitled to dividends equal to
$5 a share in respect of each calendar year before any dividends were
paid on class B stock in respect of such year. After dividends of $5
a share on the class A common stock in respect of any year had been
paid or declared and set apart for payment, dividends up to but
not exceeding $5 a share might be declared and paid on the class B
common stock. After the dividend of $5 on the class B common stock
had been paid or declared and set apart for payment, additional divi-
dends, if any, would be paid equally, share for share, without distine-
tion between classes. Under certain circumstances, holders of class A
stock would be entitled to elect a majority of the directors. With
these exceptions, holders of both classes of common stock would rank
equally for all purposes and would be entitled to 1 vote a share on all
other matters. The total authorized issue of common stock, class A,
would be 2,700,000 shares, of which 1,530,312 would be reserved, so
long as required, to provide for the conversion of income-mortgage
bonds, series A, and preferred stock, series A. The total authorized
issue of common stock, class B, would be 650,000 shares.

2. Capital funds.—Under the debtor’s plan, the new first mortgage
would provide for the creation of a capital fund to which would
be credited, to the extent to which net earnings after fixed charges
should be available therefor, $500,000 each year until the fund should
amount to $5,000,000, and thereafter at any time when payments out
of this fund should reduce it below that figure. The fund would
be available in the discretion of the board of directors for improve-
ments, betterments, and equipment. The committees’ plan would
provide for the creation, if the board of directors should so deter-
mine, of a capital fund to be used, subject to certain limitations, for
various capital expenditures or to reimburse the reorganized com-
pany’s treasury for such expenditures, the amount to be set aside
in eapital fund out of such income of any calendar year not to
exceed 2 percent of the consolidated total railway operating revenues
of the reorganized company, less depreciation on roadway and strue-
tures charges against income in such year, plus the deficit in capital-
fund payments for the preceding year.

3. Allocation of new securities—(a) Debtor’s plan—Under the
debtor’s plan the holders of Fort Scott bonds would receive for each
$1,000 bond and acerued interest $650 in new first-mortgage bonds,
$350 in new ineome bonds, and 0.84 share of new common stock.
The holders of prior-lien series-A bonds would receive $300 in new
first-mortgage bonds, $200 in new income bonds, $250 in new prior-
preferred stock, and 1.98 shares of new common stock, for each
$1,000 bond and accrued interest. The holders of prior-lien series-B
bonds would receive $300 in new first-mortgage bonds, $200 in new
income bonds, $250 in new prior-preferred stock, and 2.2 shares
of new common stock, for each $1.090 bond and accrued interest.
The holders of consolidated series-A bonds would receive $250 in

Pat RECT ELS? Se Aas PBA

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PMT ET

LEKI OBA SDI CST ALOE FE

SPELT Le Fe

34 ST. LOUIS-S. F. RY. CO. REORGANIZATION

new first-mortgage bonds, $200 in new income bonds, $150 in new
prior-preferred stock, and 2.72 shares of new common stock, for
each $1,000 bond and acerued interest. The holders of consolidated
series-B bonds would receive $250 in new first-mortgage bonds, $200
in new income bonds, $150 in new prior-preferred stock, and 3.1
shares of new common stock, for each $1,000 bond and accrued
interest. The Finance Corporation would receive $2,076,000 in new
first-mortgage bonds, $2,076,000 in new income bonds, $1,038,000 in
new prior-preferred stock, and 6,588 shares of new common stock,
for principal and interest on its loans. The Credit Corporation
would receive $985,800 in new first-mortgage bonds, $985,800 in new
income bonds, $1,314,500 in new prior-preferred stock, and 1,566
shares of new common stock, for principal and interest on its loans.
The ereditor banks would receive $2,054,800 in new first-mortgage
bonds, $2,054,800 in new income bonds, $1,027,300 in new prior-
preferred stock, and 6,582 shares of new common stock, for their
loans and acerued interest. The holders of preferred stock would
receive 60 pereent in new preferred stock and 40 percent in new
common stock in exchange for the outstanding preferred stock. The
holders of common siock would receive share for share in new
common stock.

(b) Committees’ plan.—Under the committees’ plan the holders of
the Birmingham general-mortgage and income bonds, other than
bonds pledged, would receive $1,000, principal amount, in new first-
mortgage bonds, series A, for each $1,000 bonds and accrued in-
terest. Holders of Fort Seott refunding bonds would receive $700
in new first-mortgage bonds, series B, $470 of new income bonds,
and $100 of new preferred stock, for each $1,000 bond and accrued
interest. Holders of prior-lien bonds, series A, would receive $205
of new first-mortgage bonds, series B, $150 of new income bonds,
$365 of new preferred stock, and 5.8 shares of new common stock,
class A, for each $1,000 bond and accrued interest. Holders of
prior-lien bonds, series B, would receive $215 of new first-mortgage
bonds, series B, $160 of new income bonds, $385 of new preferred
stock, and 6.15 shares of new common stock, class A, for each $1,000
bond and accrued interest.

Holders of consolidated bonds, series A, would receive $215 of
new first-mortgage bonds, series B, $150 of new income bonds, $230
of new preferred stock, 3 shares of new common stock, elass A,
and 4.3 shares of new common stock, class B, for each $1,000 bond
and accrued interest. Holders of consolidated bonds, series B, would
receive $235 of new first-mortgage bonds, series B, $165 of new
ineome bonds, $250 of new preferred stock, 3.3 shares of new common ~
stock, class A, and 4.7 shares of new common stock, class B, for each
$1,000 bond and accrued interest.

The Reconstruction Finance Corporation would receive for the
loans and acerued interest on such loans the new securities issuable
in respect of the collateral pledged for such loans, namely, $1,724,180,
principal amount, of new first-mortgage bonds, series B, $1,210,675,
principal amount, of new income bonds, $1,872,630, par value, of new
preferred stock, about 24,907 shares of new common stock, class A,
and about 33,469 shares of new common stock, class B. The various
banks would similarly receive $1,937,810 of new first-mortgage bonds,

Ag IS RTA ear ENE Od sy ae F

ORIGINAL REPORT OF COMMISSION 35

series B, $1,360,590 of new ineome bonds, $2,061,500, par value, of
new preferred stock, about 27,212 shares of common stock, class A,
and about 38,756 shares of new common stock, class B.

Of new common stock, class B, 30,000 shares would be reserved
to distribute among the unsecured creditors and the Railroad Credit
Corporation. That corporation would receive about 29,250 shares
of new common stock, class B (taken at $125 a share), for its total
claim, less the debtor’s receivable share under the marshaling and
distributing fund; and other unsecured creditors would receive the
same class of stock at the same rate per share in the amount allowed
by the order or orders of the court.

4. Provisions for execution of plan.—(a) Debtor's plan.—lt is pro-
posed in the debtor’s plan that the present St. Louis-San Francisco
Railway Company be continued, with necessary changes of capital
structure effected by decree under section 77, as amended, or that a
hd corporation be organized for the purpose of carrying the plan into
effect.

Certain general unliquidated claims which accrued prior to the
filing of the bill in equity for the appointment of a receiver for
the debtor’s property are outstanding, and it is proposed in the
plan that the reorganized company agree to give in payment of
such of these claims as may be finally allowed 1 share of preferred
stock for each $100 of debt so allowed.

The reorganized company would assume the debtor’s obligations as
guarantor on the outstanding bonds of terminal companies and would
assume all executory contracts not rejected by the trustees of the
debtor prior to the consummation of the plan. Any claimant for
damages arising out of rejection of an executory contract by the trus-
tees, as proposed, would have the status of a general creditor.

All eosts of administration, allowances made by the court for ex-
penses incurred in connection with the proceedings and the prepara-
ticn and consummation of the plan, and other allowances made by the
court, would be paid in cash by the reorganized company, except
where the person entitled to such allowances should consent to dif-
ferent treatment.

(b) Commiitees’ plan.—Under the committees’ plan, claims not af-
fected by the plan comprise current liabilities of the debtor incurred
in the ordinary conduct of its business prior to the institution of the
reorganization proceeding, which are entitled to priority over one or
more of the mortgages of the debtor, and current liabilities and obli-
gations of the bankruptcy trustees. To the extent that such claims,
liabilities, and obligations are not paid pursuant to order of the court,
they would be paid in cash or assumed by the reorganized company.
The reorganized company would assume such contracts of the debtor
which are execuiory in whole or in part, including any executory
leases and liabilities under guaranties, as have been affirmed by the
bankruptcy, trustees and approved by the court, and also any executory
contracts made by the bankruptcy trustees with approval of the court
which, by their terms, do not terminate at the conclusion of the re-
organization proceeding.

Other provisions of the plans proposed will be considered later in
connection with the consideration of provisions of like purpose to be
incorporated in the approved plan.

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36 ST. LOUIS-S. F. RY. CO. REORGANIZATION

5. Objections to the plans of the parties.—The intervening Birming-
ham bondholders object to the treatment accorded their interests under
the committees’ plan because (1) they believe that such treatment
would seriously jeopardize the payment of future interest to holders
of those bonds; (2) it would reduce the rate of interest on the Birming-
ham income bonds from 5 to 4 percent; and (3) it would dilute the
security which safeguards the principal of the Birmingham bonds.
These Birmingham bondholders contend that they should be paid in
full in eash or the maturity date of these bonds should be extended
under the existing lien and interest rates, with provision for an ade-
quate sinking fund.

The Old Colony Trust Company, trustee under the general mort-
gage of the Kansas City, Memphis & Birmingham Railroad Com-
pany, intervened and objects to the debtor’s plan because it would
extend the maturity date of the Birmingham bonds to March 1, 1954,
at the same rates of interest, without specifically providing that the
reorganized company should assume these obligations, because it be-
lieves the period of extension would be unjustifiable in view of
the present strong priority position of these bonds, and because no
provision is made for a sinking fund in connection therewith. This
trustee also objects to the committees’ plan upon substantially the
same grounds as those referred to above in connection with the inter-
vening Birmingham bondholders’ position, and because the plan does
not provide that upon the failure of the issuer to pay the new first-
mortgage series-A bonds (to be issued in exchange for the outstanding
Birmingham bonds) at maturity, then the new first-mortgage series-B
bonds would become immediately due and payable. It is urged that
under any plan of reorganization the principal of, and any accrued
interest on, the Birmingham bonds should be paid in full in cash.

The Finance Corporation objects to both the debtor’s plan and the
committees’ plan, and contends that, because of the plan and agreement
of 1932 for readjustment of the debtor’s finances, and the agreements
of the debtor, and the assets and commitments of the bondholders, com-
mittees, and readjustment managers alleged to have been made in that
plan and agreement and in connection therewith, its loan amounting
to $5,190,000 and unpaid interest as of January 1, 1940, of $2,169,533
is entitled to priority over existing mortgages to the same extent that
priority would be aceorded to any new obligations of the receivers.

The Credit Corporation objects to both proposed plans and contends
that by reason of the afore-mentioned plan and agreement of 1932,
agreements of the debtor, and the assets and commitments of the others
mentioned, its loan of $3,307,432, principal amount, and unpaid interest
as of January 1, 1940, of $383,628 is entitled to a lien upon the prop-
erty of the debtor, subject only to the liens of the Birmingham and
the Fort Scott bonds, exclusive of pledged Fort Scott bonds, and prior
to the liens of the prior-lien and the consolidated bonds, including the
pledged Fort Scott bonds, at least to the extent that the holders of
the prior-lien and consolidated bonds assented to or became bound
thereby; a lien upon the distributive shares of the debtor under the
marshaling and distributing plan, 1931; and a second lien upon the
collateral pledged with the Finance Corporation.

The Central Hanover Bank & Trust Company and Daniel K. Catlin,
as trustees under the prior-lien mortgage, and the Chase National Bank

ME ADI Re Ri CAT TAI

ORIGINAL REPORT OF COMMISSION 34

of the City of New York and John A. Aid, as trustees under the
consolidated mortgage, interveners, support the committees’ plan of
reorganization.

The United States Fidelity & Guaranty Company intervened as
surety on appeal bonds of the debtor. It states that the debtor’s
plan makes no provisions for judgment claims arising therefrom and
requests that the plan of reorganization approved by the Commis-
sion provide that any such claims remaining unpaid upon final decree
be paid in cash or assumed by the reorganized company.

6. Conclusions as to certain features of plan—Under the provisions
of section 77 (d) of the Bankruptcy Act, as amended, the Commission
is required to render a report and order in which it shall approve a
plan, which may be different from any which has been proposed, that
will in its opinion meet with the requirements of subsections (b)®
and (e)* of the section, and will be compatible with the public

6 Subsection (b) of section 77 provides in part that a plan of reorganization
‘*(1) shall include provisions modifying or altering the rights of creditors generally,
or of any class of them, secured or unsecured, either through the issuance of new
securities of any character or otherwise; * * * (4) shall provide for fixed charges
(including fixed interest on funded debt, interest on unfunded debt, amortization of
discount-en funded debt, and rent for leased railroads) in such an amount that, after
due consideration of the probable prospective earnings of the property in light of its
earnings experience and all other relevant facts, there shall be adequate coverage of
such fixed charges by the probable earnings available for the payment thereof;
(5) shall provide adequate means for the execution of the plan * * *.’’

7 Subsection (e) of section 77 provides that the judge shall approve the plan
certified to the court by the Commission if satisfied, after hearing, and without hear-
ing if no objections are filed, ‘‘that: (1) It complies with the provisions of sub-
section (b), is fair and equitable, affords due recognition to the rights of each class
of creditors and stockholders, does not discriminate unfairly in favor of any class
of creditors or stockholders, and will conform to the requirements of the law of the
land regarding the participation of the various classes of 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 reasonable, are within such maximum limits as are fixed
by the Commission, and are within such maximum limits to be subject to the approval
of the judge; (3) the plan provides for the payment of all costs of administration
and all other allowances made or to be made by the judge,’’ except that allowances
for the actual and reasonable expenses (including reasonable attorney’s fees) in-
curred in connection with the proceedings and plan by parties in interest and by
reorganization managers and committees, or other representatives of creditors and
stockholders, and the actual and reasonable expenses incurred in connection with the
proceedings and plan and reasonable compensation for services in connection there-
with by trustees under indentures, depositaries, and such assistants as the Commission
with the approval of the judge may especially employ, may be paid in securities pro
vided for in the plan, if those entitled thereto will aceept such payment. Subsee-
tion (e) further provides that upon receipt of certification by the Commission of the
results of submission to creditors and stockholders, ‘‘the judge shall confirm the plan
if satisfied that it has been accepted by or on behalf of creditors of each class to
which submission is required under this subsection holding more than two-thirds in
amount of the total of the allowed claims of such class which have been reported in
said submission as voting on said plan, and by or on behalf of stockholders of each
class to which submission is required under this subsection holding more than two-
thirds of the stock of such class which has been reported in said submission as voting
on said plan; and that such acceptances have not been made or procured by any
means forbidden by law: Provided, That, if the plan has not been so accepted by
the creditors and stockholders, the judge may nevertheless confirm the plan if he is

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38 ST, LOUIS-S. F. RY. CO, REORGANIZATION

interest; or to render a report and order in which it shall refuse to
approve any plan. Each of the plans proposed appears to meet the
requirements of subsection (b) (1) and (5) in that they would in-
elude provisions for modifying and altering the rights of creditors
and would provide adequate means for the execution of the plan.
Each plan also appears to meet the requirements of subsection (e)
(3), and the proponents of each plan would no doubt in proper time
be able to meet the requirements of subsection (e) (2). There re-
mains to be determined whether any of these plans meets or some other
plan may meet, the requirements of subsection (b) (4) and subsection
(e) (1) and is compatible with the public interest.

Il. NEW CAPITALIZATION AND CHARGES

To meet the requirement of compatibility with the public interest,
the plan proposed should in our view provide a capitalization rep-
resented by securities with some prospects for yielding a return to
their holders, and having something more than mere speculative value.
To meet these requirements, as well as the requirements of subsection
(b) (4) of section 77, there must be adequate coverage of fixed charges
by the probable earnings available for the payment thereof.

A. ASSETS, CAPITALIZATION, TRAFFIC, REVENUES, ETC.

1. Book assets and valuation figures——The consolidated general
balance sheet of system companies as of December 31, 1937, shows
the following assets: Road and equipment $426,452,105, deposits in
lieu of mortgaged property sold $828,168, miscellaneous physical prop-
erty $677,903, investments in affiliated companies $1,409,906, and other
investments $11,531,386, a total of $440,899,468 of investments. Current
assets were $15,101,920, including $6,277,579 in cash and $5,813,381 in
material and supplies. Deferred assets were $229,438, and unadjusted
debits were $1,304,563. ‘Total assets were $457,535,389.

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46 ST. LOUIS-S. F. RY. CO. REORGANIZATION

Subject to claims for prior equities hereinafter discussed, the prior-
lien bonds, series A, B, and E, were secured by a direct first lien on
3,660.76 miles of the debtor’s road and 9,767 units of equipment, a
second lien on the equipment subject to equipment trusts, and a junior
lien on the property subject to the Fort Scott refunding-mortgage
and the Birmingham general-mortgage bonds and income bonds, the
last mentioned being subject to an intermediate lien of the consolidated
mortgage for $3,548,732. Exclusive of lands and rights, the original
cost of direct-first-lien property was $169,677,183 and the cost of re-
production less depreciation as of December 31, 1936, was $136,317,241.
The value of lands and rights was $14,793,611. Except as otherwise
noted, the prior-lien bonds were additionally secured by pledges of
all the bonds and stocks of the wholly owned system companies men-
tioned above.

The consolidated-mortgage bonds, series A and B, were seeured by
a direct lien on all property of the debtor, subject to liens of equipment
obligations and prior existing mortgages diseussed above, additionally
secured by pledges of securities totaling $87,428,650 in principal
amount and comprising $1,293,250 of prior-lien series-A 4-percent
bonds, $46,606,300 of prior-lien series-B 5-pereent bonds, $17,851,100
of prior-lien series-E 6-pereent bonds, and $21,678,000 of Fort Scott
refunding-mortgage 4-percent bonds, and further secured by the inter-
mediate lien for $3,548,732 on the Fort Scott properties prior to the
lien of the prior-lien mortgage.

The loans from the Mereantile-Commerce Bank & Trust Company
of St. Louis, First National Bank of St. Louis, Bankers Trust Com-
pany, and the Central Hanover Bank & Trust Company were each
collaterally secured by pledge of $625,000 of consolidated series-B
6-percent bonds. The loans from the Guaranty Trust Company
and the Chase National Bank were secured by pledges of $1,562,500
and $4,183,500 of consolidated series-B 6-percent bonds, respectively.
The loans from the Railroad Credit Corporation, amounting to
$3,307,432 in principal amount, were collaterally secured by pledge
of the debtor’s distributive share under the marshaling and distribut-
ing fund in the book amount of $195,055 as of October 1, 1938, and
by the debtor’s equity in all collateral deposited with the Finance
Corporation. The loans of $5,190,000 in principal amount from the
latter corporation were collaterally secured by pledge of securities
issued by the debtor totaling $7,500,000, comprising $218,000 of prior-
lien series-A 4-percent bonds, $28,000 of prior-lien series-B 5-percent
bonds, $1,561,000 of consolidated series-A 414-percent bonds, and
$5,693,000 of consolidated series-B 6-percent bonds. The two credi-
tors last named contend that they are additionally secured by special
equities.

In the determination of the proper distribution of the new securi-
ties, there are no disputed questions of lien to be decided, except those
raised by the Reconstruction Finance Corporation and the Railroad
Credit Corporation. These two institutions claim, in fact and effect.
equitable liens superior to the mortgages on most of the system
property, at least as against those holders of prior-lien and consoli-
dated-mortgage bonds who assented to the plan of readjustment of
1932, subsequently abandoned. They further contend that the bank

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ORIGINAL REPORT OF COMMISSION 47

loans are subordinated to their claims. These claims are hereinafter
diseussed.

The Old Colony Trust Company, trustee, holds $500, principal
amount, of Birmingham income bonds, and the debtor holds $2,000
of equipment-trust certificates, series BB, $154 of prior-lien series-A
bonds, and $19,000, principal amount, of Birmingham income bonds.

(b) Segregation of earnings.—There has been no segregation of
the system income account to determine the allocation of revenues
and expenses attributable to the portion of the road subject to the
Birmingham mortgage, it being conceded by the debtor and the
bondholders’ committees that the earnings of the line are sufficient
to warrant the issue of par for par of new fixed-interest securities
to holders of the outstanding bonds, and that a segregation study
of this line was unnecessary. Interest is being paid currently on
both issues of Birmingham bonds.

Under a formula prepared by the accounting officers of the debtor
with assistance from representatives of the bondholders’ committees,
segregation of income has been made as between lines covered by
the several liens of the Fort Scott mortgage, the debtor’s other
system lines north of the Red River, and the debtor’s system lines in
Texas. Under this formula, income available for interest in 1934,
1936, and 1937, assigned to the several divisions of the system was
as follows:

DLL DERI St ~ mG

Assigned to— 1934 1936 1937
PWNS WOUNR MOR. ys se hnacns (da bescnsuadaswen $1,271,725 | $2,875,686 | $2,095,898
Other lines north of Red Riverl.............. 2,066,459 3,780,565 2,353,196
All lines north of Red River. ................ 3,338,184 | 6,656,251 | 4,449,094
PEE 6 Sa Aka COkaA eOKEASE RS AAD SURO 2812,845 2755,608 2265,447
meet sn pocee Bocas RERENEEE LE ETE TEE 2,525,339 | 5,900,643 | 4,183,647

1 Prior-lien lines.
2 Deficit.

Of the amounts available for interest on all system lines, the Fort
Scott lines earned 50.3 percent thereof in 1934, 48.8 percent in 1936,
and 50.1 percent in 1937. Adjusting these ratios to exclude the Kansas
City, Clinton & Springfield Railway, abandoned in 1935, and the Fort
Worth & Rio Grande Railway, sold in 1937, the results are 44 percent
for 1934, 46.4 percent for 1936, and 49.4 percent for 1937, with a 3-year
weighted average of 47.55 percent.

(Obsolete matter is here omitted)

(d) U. 8S. Fidelity & Guaranty Company.—The question raised
by the United States Fidelity & Guaranty Company appears to be
solely one of classification of claims and, as such, a question for the
court and not the Commission. ’

(e) Undisturbed securities. — All plans of reorganization pre-
sented by the parties provide, and all the evidence indicates, that
the equipment obligations are very well secured and should be as-
sumed undisturbed as to terms by the reorganized company. This
is approved. In view of this provision, we find that the interests of

pcdiilia neha. 6

PP ee eee ee ee ee rm -
et ce eter” |

48 ST. LOUIS-S. F. RY. CO. REORGANIZATION

the holders of equipment obligations will not be materially and
adversely aifected by the plan.

: (Ubsolete matter is here omitted)

(b) Fort Scott, prior-lien, and consolidated-mortgage bonds, thi
Reconstruction Finance Corporation, and the Railroad Credit Cor-
poration.—In relation to the security provided by the 4,719 miles of
railroad owned by system companies on December 31, 1937, the two
Birmingham issues stand first and second among mortgage liens in
respect of 288 miles, the Fort Scott mortgage first in respect of
831 miles, and the prior-lien mortgage first in respect of 3,600 miles.
The Fort Scott mortgage has a lien next in order on the mileage sub-
ject to the two Birmingham issues; and this mileage is included in
the Fort Scott district. In the allocation of new securities it is neces-
sary to consider the relative earnings of the Fort Seott district and
the prior-lien district, income available for the payment of interest
produced by traffic moved on the Fort Seott distriet being a larger
proportion of the requirements of the bonds secured thereby than
is the ease with the prior-lien district. For this purpose, system
earnings and expenses for the years 1934, 1936, and 1937 were, as
hereinbefore indicated, analyzed and assigned to one or the other
of the two districts or divided between the two in accordance with
a formula based generally on proration according to mileage. The
formula has not been approved by any one of the three bondholders’
committees, but the results coincide with the basis adopted for allo-
cation of securities in their plans. The formula was prepared by the
accounting officers of the debtor with assistance from representatives
of the three committees.

The formula conforms in a general way and in most respects to
the one approved by the Commission, division 4, in New York, N. Hl.
& H. R. Co. Reorganization, 224 I. C. ©. 723, the principal points of
variance being that frejght revenues on traffic between districts are
allocated on a straight Paileage prorate with no terminal allowances.
and that 5 percent of valuation instead of 41% percent is used in
computing the credit for equipment used on one mortgage district
and subject to the lien of the other. Tests made indicated that the
application of terminal allowances was unnecessary, and would not
have altered the result importantly. The higher rate used for equip-
ment credits appears to be| justified by the large rentals received by
the debtor for use of its equipment on foreign lines, these rentals
being apportioned in the f rmula not on the basis of the ownership
of the equipment but on thie relative extent to which equipment was
used on each district.

The segregation studies show that, eliminating the Kansas City.
Clinton & Springfield Railway, abandoned in 1935, and the Fort
Worth & Rio Grande Railway, sold in 1937, the Fort Scott lines in
1934, 1936, and 1937 earned 47.55 percent of system income available
for payment of interest, and the prior-lien lines 52.45 percent. These
ratios are approved as a basis for the allocation between the two
districts of new fixed-interest securities under our plan of reorgani-
zation. Applying the ratios indicated, $1,426,556 of the permissible
fixed interest charges of $3,000,117 should be allocated to the Fort
Seott district and $1,573,561 to the prior-lien district.

Interest on the equipment obligations to be assumed by the re-
organized company, being a prior lien on property subject to the
prior-lien mortgage, is deductible in arriving at the share of income
assignable to holders of other claims secured by lien or priority on
the prior-lien district.

(Obsolete and superseded matter is here omitted)

Whether the unsecured creditors may share in the distribution of
the new securities depends upon the value of assets free of lien, if
any; and it appears that there are no free assets. After grants of
specific railroads and other properties in earlier granting clauses, the
eighth granting clause of the prior-lien mortgage conveys the follow-
ing:

Eighth: All other railroads, lines of railroad, extensions, branches and bridges,
lands, equipment, rolling stock, property rights, and generally all property, real
and personal, including stocks, bonds, obligations and indebtedness, rights, privileges
and franchises owned at the date of the delivery of this indenture or at any time

thereafter acquired by the railroad company and all tolls, revenues, earnings, income,
rents, issues and profits thereof.

The only qualification of this grant was for existing liens, and, in
the case of after-acquired property, for liens existing at the time of
acquisition. Accordingly, we find that the interests of unsecured
creditors, including such claims as are preferred over general credi-
tors but not over any of the mortgages, have no value and that all
of the new common stock should be allotted to the prior-lien bonds
outstanding and pledged.

(Superseded matter is here omitted)

(e) Conclusions as to certain contentions.—As has been shown, the
holders of neither the 4-percent nor the 5-pereent prior-lien bonds
will have their claims satisfied in full. Counsel for the Gans execu-
tors contends that accordingly the allocation of new securities as
between these two outstanding issues should be on the basis of prin-
cipal only and not principal plus interest, citing American Iron Co
v. Seaboard Air Line Ry. Co., 233 U. S. 261, wherein it is shown that
in ease funds are not sufficient to pay claims of equal dignity, the
distribution is made only on the basis of the principal of the debt.
However, the rule laid down in that case was not intended for appli-
cation where creditors have, as here, agreed among themselves on a
different basis of distribution. The District Court of the United
States for the Western District of New York said in In re Wickwire
Spencer Steel Co., 12 Fed. Supp. 528, 535:

The reason for the rule deferring payment of interest is apparent. Claims bearing
interest at unequal rates would receive unequal proportions on account of the differ-
ence in rates, where the company was insolvent. Since such an inequality would result
from operation of law rather than by agreement of parties, interest is suspended.

Here, there was an agreement of parties on this subject contained
in the prior-lien mortgage, which provides that in case of a sale of
the property under the powers of sale granted in the mortgage or
pursuant to judicial proceedings, and in case the proceeds of such
sale shall be insufficient to pay in full the whole amount due and
unpaid upon the bonds, such proeceds shall be applied to the pay-

“ORGINAL NEPORT OF COMMISSION er

CT PE

*
NOR Beh SAS

50 ST. LOUIS-S. F. RY. CO. REORGANIZATION

ment of the principal and interest of the bonds, without preference
or priority of principal over interest, or of interest over principal,
or of any installment of interest over any other installment of interest,
ratably to the aggregate of such principal and the accrued and unpaid
interest. The contentions of counsel are accordingly overruled.

Counsel for the Gans executors contends further that the pledges
of collateral security under the secured notes issued to the banks,
and also the pledge by the debtor under the consolidated mortgage of
other obligations of its own, were in violation of the constitution of
the State of the debtor’s incorporation, the State of Missouri, as
offending that provision thereof that no corporation shall issue stock
or bonds, except for money paid, labor done, or property actually
received, and all fictitious increases of stock or indebtedness shall
be void.

It is not shown that any of the pledged bonds, the validity of the
pledge of which is attacked, were issued prior to the enactment of
section 20a of the Interstate Commerce Act; and it is not alleged
that the debtor has failed to comply with any of the requirements
of section 20a in respect of such pledges. As to railroad security
issues authorized pursuant to such section, the applicable rule, stated
in paragraph 7 of section 20a, provides that the jurisdiction con-
ferred on this Commission by the section is exclusive and plenary,
and that a carrier may issue securities and assume obligations or
liabilities in accordance with the provision of the section without
securing approval other than as specified therein. Where brought
into question, the provisions of this paragraph and similar provisions
of other paragraphs of the Interstate Commerce Act have been con-
strued as setting aside or suspending, or as not limited by, the
operation of inconsistent State laws, or else as not open to collateral
attack. Minneapolis, St. P. & S. 8. M. Ry. Co. v. Wisconsin 2.
Comm., 197 N. W. 352, Venner v. Michigan Central R. Co., 271 U. 38.
127, New York Central Securities Co. v. United States, 287 U. S. 12,
Transit Comm. v. United States, 289 U. S. 121, and Texas v. United
States, 292 U. S. 522. The further contention of counsel is also
overruled.

The Gans executors likewise contend that the allocation of new
securities to the Fort Seott and prior-lien bondholders is inequitable
because it assigns too large a proporiton of the total to Fort Scott
bondholders in relation to the physical valuation of that property. We
find no merit in this contention. While it might be argued that if the
property were to be withdrawn from the system, the physical valua-
tion of the Fort Seott property would be insufficient to warrant the
total issue of new securities approved herein, in respect thereof, we
hold that the study of segregation of earnings affords a fair basis for
the distribution of the new securities, and that the total distributed is,
for reasons hereinbefore stated, reasonable. The net earnings
attributable to the Fort Scott district, in proportion to reproduction
value are over twice those of the prior-lien district.

The consolidated committee argues that there is clear authority for
the rule that junior creditors or stockholders are not debarred from
receiving securities of the same class as those allotted to senior eredi-
tors, even when the value of the assets is less than the amount of the
senior claim. In the absence of special circumstances, we hold the

ORIGINAL REPORT OF COMMISSION 5]

rule to be otherwise, where, as here, the senior creditors affected refuse
their consent and the junior creditors are not called upon to subscribe
any cash. In re A.C. Hotel Co., 93 Fed. (2d) 841, cited by the com-
mittee, a case providing for participation by junior creditors and
stockholders where the assets had a value less than the first-mortgage
indebtedness, was one in which 95 pereent of the holders of the first-
mortgage bonds, 90 percent of the holders of the second-mortgage
bonds, 81 percent of the unsecured creditors, and 100 percent of the
stockholders, who had filed their claims, had in writing approved the
plan. The contention of the consolidated committee and a similar
a of the trustee under the consolidated mortgage are over-
ruled.

Albert L. Reed, intervener, asserts that the properties supporting
the consolidated bonds have guaranteed both the principal and in-
terest of the pledged Fort Scott bonds, and contends that the consoli-
dated bondholders are therefore in the position of being their own
guarantors, and that they cannot legally insist on receiving anything
as a result of the pledged Fort Scott bonds until they have made good
their guaranty. Apparently, the only guarantor of the pledged Fort
Seott bonds is the debtor. While it is true that the debtor owns the
guaranteed pledged bonds, the intervener does not allege, nor does the
record show, that the outstanding Fort Scott bonds are guaranteed
by the debtor or anyone else.1! The pledges were all made more than
4 months prior to the filing of the petition in bankruptcy. It thus
does not appear that the holders of the outstanding Fort Scott bonds
can avail themselves of any guaranty, nor do we find any other reason
to conclude that any of the Fort Seott bonds are subordinated to any
of the others. The contentions of the intervener are overruled.

The debtor argues that no plan of reorganization which does not
represent a composition between the debtor and its creditors, or which
excludes the shareholders, is within the intent of the act. In view
of the express provisions of the second paragraph of subsection 77 (e),
the contention is not sustained. The debtor moved seasonably to strike
from the record the report of our Bureau of Valuation, or parts thereof,
on which we have based our findings as to the elements of physical
value of property, on the ground that its filing was not authorized by
the act and that it does not state facts as to cost of reproduction value
or accrued depreciation. The filing of the report in question was au-
thorized and directed by our order of March 29, 1938, pursuant to
subsection 77 (c) (11) of the act; and the report thus became by the
terms of the same subsection prima facie evidence of the facts therein
stated. Accordingly, the report, if in compliance with our order, is
not subject to being stricken from the record for failure, as alleged, to
state facts as to the cost of reproduction value or accrued depreciation.
We find that the report is in compliance with our order, and the motion
is overruled.

We have herein computed the claims of secured ereditors by add-
ing to the principal unpaid interest thereon to January 1, 1940. The
debtor contends, however, that the bankruptey rule is that in the pro

3 11 The debtor’s annual report to us (not of record) for the year 1927, the year
preceding our authorization of acquisition of the Fort Seott lines, 145 I. C. C. 110,
shows no such guaranty.

Qos

52 ST. LOUIS-S. F, RY. CO. REORGANIZATION

rata distribution of a bankrupt estate no interest shall accrue on
provable claims after the date of bankruptcy. We hold that the
debtor is in error as to the applicable rule so far as it affects secure:
creditors. Sexton v. Dreyfus, 219 U.S. 339; Louisville Bank v. Radford
295 U.S. 555, 597, footnote 30.

(Superseded and obsolete matter is here omitted.)

D. DESCRIPTION AND PROVISIONS OF NEW SECURITIES
(Obsolete matter is here omitted)

2. First and general mortgage bonds.—All fixed-interest bonds. is-
sued in reorganization, other than the two issues of divisional-mort-
gage bonds, should be first and general mortgage bonds. The lien
of these bonds should be the same as that proposed for the first-|
mortgage bonds provided in the committees’ plan, except that it)
would also be subject to the liens of the divisional mortgages. The

first and general mortgage should contain covenants permitting the :

extension of the divisional-mortgage bonds without change of lien.
The bonds issuable under the first and general mortgage should be
unlimited in authorized amount, of which $63,305,149 should be issued.
in reorganization, in exchange for outstanding securities, and an addi-
tional $5,000,000 should be issued to the treasury to provide for con-
tingencies as in the committees’ plan.

To promote the maintenance of a continued well-balanced capital.
structure, the first and general mortgage should provide for a sink-
ing fund requiring application to the retirement of bonds of 50.
percent of available net income of the next preceding calendar year,
when bonds under the mortgage, plus other funded debt bearing fixed
interest, shall exceed either (a) 40 percent of total capitalization or
(b) 55 percent of total capitalization exclusive of funded debt bearing,
contingent interest. Funded debt and capitalization should be defined)
for such purposes as including certain guaranties, capitalized rents,
and bonds authenticated and delivered, but not included in funded debt
as shown on the balance sheet.

To provide for further financing the first and general mortgage
bonds should be issuable from time to time in different series, subject to’
such limitations and restrictions as may be specified in the first and.
general mortgage, and to such conditions as may be imposed by the,
Commission or other analogous authority pursuant to provisions of
law, payable on such date or dates, in such denominations, bearing
interest at such rates, and containing such provisions in regard to the
redemption, conversion, taxes, place or places of payment, registration,
and sinking funds and such lawful provisions as to money or moneys
of payment, and having such other characteristics, as may be prescribed
by the board of directors of the reorganized company at the time of
issue, but with respect to the lien of the first and general mortgage all
equally secured. These provisions are the same as those contained in
the conformed plans.

The bonds of series A should be dated January 1, 1940, should mature
January 1, 1990, should bear fixed interest at the rate of 4 percent per
annum, payable semiannually, and should be redeemable at their prin-

~

ws,

ORIGINAL REPORT OF COMMISSION 53

cipal amount and accrued interest, plus a premium of 5 percent of their
principal amount if redeemed on or before December 31, 1945, 4, per-
cent if redeemed thereafter and on or before December 31, 1949, 4
percent if redeemed thereafter and on or before December 31, 1953,
34%, percent if redeemed thereafter and on or before December 31, 1957,
3 percent if redeemed thereafter and on or before December 31, 1961,
2% percent if redeemed thereafter and on or before December 31,
1965, 2 percent if redeemed thereafter and on or before December 31,
1969, 144 percent if redeemed thereafter and on or before December 31,
1973, 1 percent if redeemed thereafter and on or before December 31,
1977, and one-half of 1 percent if redeemed thereafter and on or before
December 31, 1981, and without any premium if redeemed on or after
January 1, 1982. These provisions, as to date, interest rate, maturity,
and redemption, are substantially the same as proposed by the three
bondholders’ committees, except that the committees urge a 40-year
term for the bonds instead of a 50-year term. We are not persuaded
by the committees’ argument that a 4-percent bond of 40-year maturity

/ would have a higher market price than a bond of 50-year maturity,

if the interest is reasonably assured of payment, as we are convinced
from the record that it is. If the 50-year term would reduce the
price of the bonds, the proper corrective would be to issue fewer bonds
in reorganization, and not to diminish the term,

While not proposed by the committees, we are of the view that be-
cause of the large amount of series-A bonds to be issued in reorganiza-
tion, a suitable sinking fund of about $200,000 a year should be pro-
vided out of net income available therefor, as defined in the order

/ entered herewith.

Provisions should be made for the authentication and issue from
time to time of first and refunding mortgage bonds in addition to those
authenticated and issued in the reorganization. Such bonds should
be issuable for the various corporate purposes and subject to the var-
ious limitations provided in the approved plan as shown in the order
entered herewith. The principal difference between the approved plan
and conformed plans is that the approved plan increases the restric-
tions in the use of bonds for the purchase of stock. It is believed
that this increase is necessary. The approved provisions are similar
to those adopted in Chicago & N. W. Ry. Co. Reorganization, 236
I. C. C. 575 and 239 I. C. C. 613.

The first and general mortgage of the committees’ conformed plans
would provide for the issue of $10,000,000 of emergeney bonds. The
first and general mortgage of the approved plan should contain such
a provision. It should also provide for a sinking fund for the retire-
ment of first and general mortgage bonds so long as any emergency
bonds are ouistanding, such provisions to be similar to those in the
first and refunding mortgage of the committees’ conformed plans for
a sinking fund while emergency bonds might be outstanding under
that mortgage. The differences are the result of providing sinking
funds on divisional-mortgage bonds in the approved plan not pro-
vided in the conformed plans, and differences in the provisions for
capital fund hereinafter discussed.

The committees’ plan and the committees’ conformed plans would
provide that no first and general mortgage bonds other than those

Tales Ta alg aise

*
2 SO har a RS OF ee a... sate

54 ST. LOUIS-S. F. RY. CO. REORGANIZATION

to be authenticated under the plan should be sold or pledged unless
the board of directors'® should have determined that it was imprac-
ticable to provide on favorable terms the amount of money ueeded by
the sale of income bonds, preferred stock, or common stock. Those
plans would also provide for limiting the amount of first-mortgage
bonds that might be held in the treasury and the amount of such bonds
that might be pledged at any one time over the principal amount of
indebtedness so secured. These provisions should be incorporated in
the approved plan. The first mortgage of the committees’ plan and
the first and general mortgage of the committees’ conformed plans
would also provide for the modification or alteration thereof in cer-
tain respects and of the rights and obligations of the reorganized com-
pany and the holders of the bonds thereunder at any time by the con-
current vote of not less than 6634 percent of the aggregate principal
amount of bonds outstanding. This provision should also be included
in the first and general mortgage of the approved plan, with a restric-
tion that changes of liens not provided for in the mortgage, or any
change not having the prior approval of this Commission, shall not
be made under this provision.

3. Second-mortgage bonds.—The new second-mortgage bonds should
constitute a lien next in order on all property subject to the lien of
the first and general mortgage. Subject to State laws and such limits
as may be specified in the mortgage, bonds should be issuable without
limit as to the aggregate principal amount, and having such character-
istics as may be specified by the board of directors with the requisite
approval of public regulatory authority, all equally secured. No in-
terest should be mandatorily payable on income-mortgage bonds issued
in reorganization (except at maturity or redemption) other than out
of available net income. The issue of fixed-interest bonds under the
second mortgage should operate to convert contingent interest into
fixed interest on all second-mortgage bonds bearing contingent inter-
est. The second mortgage should permit the extension of bonds of
prior lien. Such provisions are contained in the conformed plans, ex-
cept that those plans would not permit the issue of fixed-interest bonds.
flowever, provision for the use of fixed-interest second-mortgage bonds
in lieu of bonds of prior lien would appear to be to the advantage
of holders of both the junior and senior liens.

Second-mortgage bonds, series A, in the amount of $40,385,885 should
be issued in reorganization, dated January 1, 1940, maturing January
1, 2015, and bearing interest at 444 percent per annum, cumulative up
to a maximum amount of 18 percent, redeemable, and convertible
into common stock at any time on or before January 1, 1945, at the
rate of 30 shares for each $1,000, principal amount, of such bonds and
thereafter at the rate of 25 shares for each $1,000, principal amount, of
such bonds. These provisions are the same as the provisions of like
purpose contained in the conformed plans, except that in the con-
formed plans the conversion on or before January 1, 1945, would be at
the rate of 15 shares and thereafter at the rate of 12% shares. In view
of the limited accumulations of interest, a liberal conversion privilege
appears to be called for. .

13 These plans require action by a two-thirds vote. This is modified in the approved
plan to lessen danger of default.

‘ta ORIGINAL REPORT OF COMMISSION 5D

The second mortgage should provide for a sinking fund for series-A
bonds payable out of available net income of each year in an amount
equal to the sum of (a) one-half of 1 percent of the maximum princi-
pal amount of series-A bonds theretofore at any one time authenticated
and uncanceled, plus (b) interest on all second-mortgage bonds, series
A, then held in the sinking fund. The accruals of the sinking-fund
installments should not be cumulative. Such provisions are contained
in the conformed plans, appear reasonable, and are approved. _

Second-mortgage bonds in addition to those to be issued in reorgani-
zation should be issuable from time to time to refund outstanding
or redeem pledged second-mortgage bonds, except bonds issued for
equipment and bonds aequired by sinking funds, or, in lieu of first
and general mortgage bonds, for the purposes and subject to the re-
strietions stated for first and general mortgage bonds hereinabove, to
the extent that first and general mortgage bonds are not issued for
such purposes. These provisions are in substance contained in the
conformed plans.

The committees’ plan and the committees’ conformed plans would
provide that no second-mortgage bonds other than those to be authenti-
cated under the plan should be sold or pledged unless the board of
diveetors™ should have determined that it was impracticable to pro-
vide on favorable terms the amount of money needed by the sale of
preferred stock or common stock. Those plans would also provide
for limiting the amount of seeond-mortgage bonds that might be held
in the treasury and the amount of such bonds that might be pledged
at any one time over the principal amount of the indebtedness so
secured. These provisions should be incorporated in the approved
plan. The second mortgage of the committees’ plan and conformed
plans would also provide for modification or alteration thereof in
certain respects, and of the rights and obligations of the reorganized
company and the holders of bonds thereunder at any time, by the
concurrent vote of not less than 6624 percent of the aggregate principa!
umount of bonds outstanding. This provision, subject to approval by
this Commission of any modifieation proposed, should also be ineluded
in the second mortgage of the approved plan. In the event of any
unification of the properties of the reorganized company with the
properties of any other company, the modification thus authorized
might, under the conformed plans and the approved plan, include
provisions exeluding in whole or in part the earnings from such other
properties in determining available net income and providing for the
determination of such available net income without the maintenance
of separate aceounts.

(Obsolete and superseded matter is here omitted)

1. Preferred stock—There should be authorized 2,000,000) shares of
preferred stock, each of the par value of $100, of which 618,461.69
shares of series A should be issued in exchange in the reorganization
as above set forth. The additional preferred stock should be issuable
for the purposes, and subjeet to the restrictions, provided in the con-
formed plan, exeept that the consent of holders of two-thirds of the

14 These plans require action by a two-thirds vote. This is modified in the approved
plan to lessen danger of default.

56 ST. LOUIS-S. F. RY, CO. REORGANIZATION

series-A stock should not be necessary to permit issue of preferred
stock prior in lien to series-A stock, if the purpose of the issue is one
for which mortgage bonds might be issued. In liquidation, the pre-
ferred stock should be preferred as to assets to the extent of its par
value, accumulated dividends, and any premiums provided. Election
of directors should be by cumulative voting. The majority of the
board should be elected by the holders of the preferred stock until
regular dividends at the maximum rate borne by the preferred stock
shall have been paid for 3 successive years, and also at times thereafter
under circumstances specified in the order entered herewith. The
preferred stock, series ) be the deposit therefor of
eash equal to the principal amount to be issued except cash deposited in lieu of mort-
gaged property sold, and except cash for the capital fund; or (c) to provide for,
or to reimburse the new company for, not exceeding 75 percent of expenditures for
additions to, extending, or improving the mo estate made after December 31,
1939, but not more than 3 years prior to the date of such authentication (including

72 ST. LOUIS-S. FP. RY. CO. REORGANIZATION

expenditures fur the acquisition or construction of new railroad equipment, free from
other lien, but not including expenditures for the making of additions and better-
ments to equipment) which, under the accounting rules of the Commission or other
Federal regulatory bodies having jurisdiction in the premises, at the time in force,
are properly chargeable to capital account; provided, however, that * * * [the provisos
wil be the same as in the plan as approved by division 4).

(m) The following provision should be added, and provisions in-
consistent therewith eliminated:

The second mortgage shall provide for the payment on May 1 of each year while
any second-mortgage bonds, series A, are outstanding, of an installment of sinking
fund, if earned, as, and in the amount hereinafter specified. Such installment shall
be payable only out of available net income for the last pieceding calendar year that
remains after paying interest on outstanding second-mortgage bonds. The amount
of such installment shall equal (a) one-half of 1 percent of the maximum principal
amount of second-mortgage bonds, series A, theretofore at any one time authenticated
and uncanceled, plus (b) an amount equal to interest en all second-mortgage bonds,
series A, then held in the sinking fund, calculated at the rate, not to exceed 4% per-
cent, paid as current interest on outstanding bonds in respect of available net income
of the calendar year next preceding the said May 1.

2. _That, except as the plan shall be modified in accordance with
the foregoing, the said petitions for its modification should be denied.
An appropriate supplemental order will be issued.

Ler, Commissioner, concurring in part:

Approval of the claims of the Reconstruction Finance Corporation
and the Railroad Credit Corporation for special equities aceords these
claimants’ clear priority over the treatment to which they are entitled
by virtue of the collateral security held by them. Thus the rights of
the holders of bonds issued under the debtor’s prior lien and consoli-
dated mortgages are subordinated to such special equities, although
not all of the holders of such bonds agreed to the plan which is as-
signed as the basis for such treatment. Without doubt some of them
had no knowledge of the proposed arrangement.

I do not agree that under these circumstances the rights of holders
of such bonds should, without their consent, be so subordinated. In
all other respects I approve the report.

Comaussioners Mier, Roeers, and Jounxson did not participate
in the disposition of this case.

(The appendix to this report is here omitted)

|

REPORT OF COMMISSION ON FURTHER CONSIDERATION 73

INTERSTATE COMMERCE COMMISSION
Finance Docker No. 10008

ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY
REORGANIZATION

Submitted March 27, 1944. Decided July 4, 1944

Upon return by the court of jurisdiction for reconsideration, plan of
reorganization of the St. Louis-San Francisco Railway Company,
pursuant to section 77 of the Bankruptey Act, as amended, further
modified and approved.'

William V. Hodges for debtor.
Edwin S. S. Sunderland, Thomas O’G. Fitzgibbon, Judson C.

— MeLester, Jv. Henry W. Anderson, George D. Gibson, Robert T.
| Swaine, and Leonard D. Adkins for bondholders’ committees.

Fitzhugh McGrew, Alexander M. Lewis, and Orville W. Wood for
mortgage trustees.

A. L. Reed for self.

John E. Westerlund and Henry Oetjen for interested parties.

ReporT OF THE COMMISSION ON FURTHER CONSIDERATION

By THE COMMISSION :

By supplemental report and order herein of November 16, 1940,
242 1. C. C. 523, we approved a modified plan of reorganization for
the St. Louis-‘San Francisco Railway Company, debtor, pursuant to
the act of July 1, 1898, entitled *‘An Act to Establish a Uniform Sys-
tem of Bankruptey Throughout the United States,’’ as amended. The
plan as thus approved was certified, pursuant to subsection 77 (d) of
the act, together with a transcript of the proceedings before us and
a copy of the report and order approving a plan, to the court of jur-
isdiction, the District Court of the United States for the Eastern
District of Missouri, Eastern Division. The court having considered,

on the record made before us and the subsequent record made before

it, objections filed with it by parties in interest, to the modified plan,
directed the return of that plan to us by opinion and order dated July
25, 1942, for reconsideration pursuant to its conclusions stated in the
opinion, and in the light of the controlling opimion of the Supreme
Court should one be handed down in one of the other reorganization
proceedings dealing with matters similar to the objections of the
debtor in this proceeding.

Notices of appeal from the district court’s order of July 25, 1942,
were filed by the Reconstruction Finance Corporation and the Rail-
road Credit Corporation; and in a further order, that part of the
order of July 25, 1942, directing that the record of the court and all

1 For previous reports see 249 I. C. C. 195 and 252 I. C. C, 818.

qonapayte-enipocntaietepamehie peat |

secretes, coments Sreipee sprain

74 Sf. LOUVIS-S. F. RY. CO. REORGANIZATION

papers forwarded by the Commission to the court be returned to
the Commission, was stayed. The subject matter of the appeals was
thereafter compromised and the appeals were dismissed by the Cireuit
Court of Appeals for the Eighth Cireuit. On December 2, 1943, the
district court dissolved the stay of part of the order of July 25, 1942;
and directed that the plan, together with the record and papers, be
returned to the Commission to be reconsidered in accordance with the
opinion and order of July 25, 1942.

A hearing before the Commission has been held pursuant to the
eourt’s orders of July 25, 1942, and December 2, 1943; and briefs have
been filed.

The district court in its opinion and order of July 25, 1942, found
that the priorities given to the claims of the Reconstruction Finance
Corporation and the Railroad Credit Corporation in the plan previ-
ously approved by the Commission could not be sustained on the
ground that there were special equities arising in their favor out of
the lending of the money in 1932 and the character of its use. Pursuant
to order of the court of October 14, 19438, approving the settlement
above referred to, the debtor’s trustees purchased, for sums of cash
determined by negotiation and compromise, the total of these claims.
Provision was made in the order for subrogation, of those entitled,
to the liens and benefits of the collateral, to the end that their respec-
tive rights and interests may be fully protected in any marshalling
of the assets of the debtor corporation or in the distribution of any
securities that may be issued under any reorganization plan or other-
wise for or against the collateral or for the cash used in the aequisi-
tion thereof. The plan approved herein will conform to these re-
quirements.

The court also found that the claims on the 100 outstanding shares
of preferred stock of the Fort Scott company cannot properly be dis-
posed of in the manner we proposed. An additional proceeding before
the court for the purpose of establishing the rights of the holders is
found by the court to be required. The claim is a relatively small one,
which it appears can readily be disposed of in the manner found to be
appropriate by the court, by payment of all or part of it in eash, or
by an allotment of an amount of new securities which will not greatly
increase total capitalization beyond the approximate limits we shall
approve therefor. The plan herein approved will conform to the ruling
of the court.

The above are the only changes in the previously approved plan
required by order of the court. In addition, the court suggested that,
since the plan was to be referred back to the Commission for recon-
sideration, further consideration be given at the same time to (1) a
later effective date than January 1, 1940, (2) the objections of the
debtor as to new capitalization in the event of the Supreme Court’s
subsequently handing down an opinion dealing with them, (3) pro-
spective earnings, (4) unusual amounts expended for the upbuilding
and maintenance of the road during the time it was in receivership
and trusteeship, (5) allotment to the holders of Birmingham Bonds
of a new bond which could be sold on the market for par, and (6)
the setting forth in the new plan of appropriate machinery with refer-
ence to the reorganization managers and the naming of the first board

REPORT OF COMMISSION ON FURTHER CONSIDERATION 75

of directors, and if necessary provision for a voting trust. Consid-
eration of question (5) is no longer necessary since the Birmingham
bonds have been retired. The other questions will be hereinafter con-
sidered,

Proposed new plans.—The Brewster, Stedman, and Ecker commit-
tees representing respectively holders of Fort Scott, prior-lien, and
consolidated-mortgage bonds, filed jointly a new plan of reorganiza-
tion, proposed February 16, 1944, hereinafter called the bondholders’
plan. The corporate trustee of the Fort Scott bonds has no objection
to the bondholders’ plan and the corporate trustees of the prior-lien
and consolidated-mortgage bonds, respectively, consider the plan fair
and equitable to the holders of bonds for which they are trustees. The
only opposition to the bondholders’ plan, or any of its provisions,
was presented by the debtor, which filed a statement of proposed modi-
fications of the bondholders’ plan.

Except for matters of mere order or arrangement, the bondholders’
plan differs so little from the plan approved herein, and set forth at
length in the order entered herewith, that reference will be made in
this report only to those provisions in which it differs from the plan we
shall approve, and to those provisions which, although approved, appear
to require discussion.

The debtor’s proposed modifications are hereinafter discussed.

Present capitalization and secured claims.—Capitalization as of
December 31, 1943, was as follows 2

Equipment obligations, class 1 .............ccccceceeseessscsseesensneesees $ 2,986,000
III TO ro asc scsiahsneclshatinaidbanaseineadaauiidieael aansblen 1,000
i ___ etree r

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_0624%3A3. Public record. Not legal advice.