Opposition Brief — Harrison v. Fleming

INDEX.

PAGE

SraTEMENT 1

ARGUMENT 3

1. The technical question sought to be presented,

which the Petitioner calls an ‘‘important ques-

tion of Federal law’’, was decided by the Cir-

cuit Court of Appeals in accordance with the

decisions of this Court and those of other Cir-

cuit Courts of Appeals, and the contrary posi-

tion of the Preferred Stock Committee on that

question is plainly without merit 3

2. The Preferred Stock Committee has no stand-

ing to present the other questions which it

seeks to present, since they were not raised by

it in the Courts below, and such questions are

also without merit 7

ConcLusIon

12

ii

Crrartions.

PAGE

Case v. Los Angeles Lumber Products Co., Ltd., 308

U. 8.106 (1939) 10

In re Chicago, M., St. P. & P. R. Co., 145 F. (2d) 299

(C. C. A. 7th, 1944) ; cert. den. 324 U. S. 857 (1945) 6

Consolidated Rock Co. v. DuBots, 312 U. §. 510.......... ll

Continental Illinois National Bank & Trust Co. v.

Chicago, Rock Island & Pacific Ry. Co., 294 U. 8.

648 (1935) 12

Ecker v. Western Pacific R. Corp., 318 U. 8S. 448

ETI seabiidatanpetanioininndicieneiinnscueesniniopattes 10, 12

Group of Institutional Investors v. Chicago, Mil-

waukee, St. Paul & Pacific Railroad Co., 318 U. 8S.

a Rr 5, 6, 10, 12

In re New York, New Haven & Hartford R. Co., 147

F. (2d) 40 (C. C. A. 2d, 1945) ; cert. den. 325 U. S.

884 (1945) ............ 6

Northern Pacific Ry. v. Boyd, 228 U. 8. 482 (1913)...... 10

Palmer v. Massachusetts, 308 U. S. 79, 87 (1939)........ 6

Reconstruction Finance Corporation v. Denver &

R. G. W. R. Co., 66 S. Ct. 1282 (1946)...

Warren v. Palmer, 310 U. S. 132, 138 (1940) _........

Opinions BELow.

In re The Chicago, Rock Island and Pacific Railway

Company (N. D. Ill. E. D., May 14, 1945) (unre-

ported)

In re The Chicago, Rock Island and Pacific Railway

Company (C. C. A. 7th, May 23, 1946) (unreported)

Supreme Court of the GQnited States

Ocroser TERM, 1946.

In THE MaTTER

of

Tue Cuicago, Rock Isuanp anp Paciric Ralbway

CoMPANY,

Debtor.

Carter H. Harrison, Jr., et al., as a Protective No. 524

Committee for the Debtor’s Preferred Stock, aor

Petitioners,

vs.

JosepH B. Fuemrne and Aaron CoLnon, as Trustees

of The Chicago, Rock Is!and and Pacific Railway

Company, ¢? al.,

Respondents.

BRIEF OF RESPONDENTS:

. METROPOLITAN LIFE INSURANCE COMPANY, AS REMAINING

MEMBER OF THE FIRST AND REFUNDING GROUP,

TRUSTEES UNDER THE FIRST AND REFUNDING MORTGAGE,

TRUSTEE IN RESPECT OF THE SECURED 44%, % BONDS, SERIES

A,

. PROTECTIVE COMMITTEE FOR THE GENERAL MORTGAGE

BONDS,

. TRUSTEES UNDER THE GENERAL MORTGAGE,

. PROTECTIVE COMMITTEE FOR THE ROCK ISLAND, ARKAN-

SAS AND LOUISIANA RAILROAD COMPANY FIRST MORTGAGE

4%% BONDS,

. PROTECTIVE COMMITTEE FOR CHOCTAW, OKLAHOMA AND

GULF RAILROAD COMPANY CONSOLIDATED MORTGAGE 5%

BONDS AND CHOCTAW AND MEMPHIS RAILROAD COMPANY

FIRST MORTGAGE 5% BONDS,

IN OPPOSITION TO PETITION FOR WRIT OF

CERTIORARI BY PROTECTIVE COMMITTEE

FOR THE DEBTOR’S PREFERRED STOCK.

Statement.

The Protective Committee for The Chicago, Rock

Island and Pacific Railway Company 7% and 6% Preferred

ER EE lh

———

2

Stock has applied to this Court for a writ of certiorari to

review the order and decree of the United States Circuit

Court of Appeals for the Seventh Circuit, dated May 23,

1946, affirming a United States District Court order entered

June 15, 1945 approving a modified plan of reorganization

for the Rock Island System, certified by the Interstate Com-

merce Commission to the District Court on May 1, 1944,

We respectfully submit that the petition of the Pre-

ferred Stock Committee for certiorari should be denied:

(1) Because the technical question sought to be

presented, which the Petitioner calls (Petition, p. 6)

an ‘‘important question of Federal law’’, was decided

by the Circuit Court of Appeals in accordance with

the decisions of this Court and those of other Circuit

Courts of Appeals, and the contrary position of the

Preferred Stock Committee on that question is

plainly without merit; and

(2) Because the Preferred Stock Committee has

no standing to present the other questions which it

seeks to present, since such questions were not raised

in the Courts below. The position of the Preferred

Stock Committee on one such question is directly

contrary to the point made by that Committee in

both Courts below, and the position of the Preferred

Stock Committee on all such questions is without

merit.

3

Argument.

1. The technical question sought to be presented, which

the Petitioner calls an “important question of Federal law”,

was decided by the Circuit Court of Appeals in accordance

with the decisions of this Court and those of other Circuit

Courts of Appeals, and the contrary position of the Preferred

Stock Committee on that question is plainly without merit.

The Preferred Stock Committee did not contend below,

and does not contend here, that there is any equity in the

Debtor’s property for the Debtor’s stockholders (unless,

contrary to settled law, interest during the bankruptcy

proceedings on creditor’s claims were disallowed).*

Instead of presenting any point of substance which could

result in benefit to the stockholders of the Debtor, the Pre-

ferred Stock Committee urges a technical point of pro-

cedure before the Interstate Commerce Commission, with

the claim that this procedural point has not been settled

by this Court. In fact, throughout this proceeding the Pre-

ferred Stock Committee has followed the tactics of the

Debtor itself, in not claiming any equity for the stock but

urging technical procedural points which could not benefit

the stock but only delay the reorganization proceedings.

(Cf. Debtor’s petition for a writ of certiorari in the same

reorganization proceeding, filed August 19, 1946, and an-

swered by these respondents by brief dated September 9,

1946.)

The technical procedural contention of the Preferred

Stock Committee is that in a railroad reorganization under

Section 77 of the Bankruptcy Act the Interstate Commerce

* Any contention that interest on creditors’ claims is not entitled to the

same recognition as principal is directly contrary to the specific point made

by the Preferred Stock Committee in the Courts below, as hereinafter discussed

in Point 2 (p. 11 below).

rg

4

Commission is required by subsections (d) and (e) ‘‘to

proceed de novo’’ on a re-reference of a plan to the Com-

mission by the District Court for any correction (Petition,

pp. 10-11). .

By ‘‘to proceed de novo’’ the Preferred Stock Commit-

tee means that the Commission is to deal with the proceed-

ing as if it were just beginning and no plan had been pre-

sented by the Debtor or by other interests, no hearings held

by the Commission, no reports issued by the Commission

on a plan, and no review of the plan made by the District

Court. The Committee asserts that on a re-reference of

a plan the Commission must wait six months before holding

any hearings, during which time the Debtor is to be required

to file a new plan and other interests may file plans (Peti-

tion, p. 13). The only exception now conceded by the Pre-

ferred Stock Committee is that the Commission may take

into consideration evidence theretofore taken in the pro-

ceeding (Petition, p. 15).

In the present case the Rock Island plan was referred

back to the Commission by order of the District Court

entered June 25, 1943 (R., pp. 299-300).* The Commission

held a hearing on September 1, 1943 and received evidence

of the financial condition of the Debtor in the intervening

years since the Commission’s previous report, including

the year 1943. The Preferred Stock Committee refused to

offer any evidence at that hearing bnt merely filed a motion

that the proceeding be ‘‘de novo’’.** The Commission is-

* References so indicated are to the printed record on the Debtor’s petition

for a writ of certiorari (Docket No. 410, October Term, 1946) to review the

same decision of the Circuit Court of Appeals for the Seventh Circuit which is

sought to be reviewed in this proceeding.

** The implication of the Preferred Stock Committee that the Commission

refused to take any evidence offered by the Preferred Stock Committee is simply

contrary to fact. The record is clear that the Committee offered no evidence

when asked if it wished to do so by the Commission. The question and answer

were as follows (September 1, 1943 hearing, Tr., p. 4655) :

‘*Commissioner Porter (Interposing): You are going to ask per-

— . introduce testimony on these matters raised by this motion at

is time

5

sued its report on a new plan on January 3, 1944, and a

supplemental report on May 1, 1944, which reviewed the

operations of the Rock Island System since its previous re-

port to the District Court, made new findings regarding the

propriety of the capitalization of the System, and made

new allocations of securities and cash among the creditors

(R., pp. 245, 250). The claim of the Preferred Stock Com-

mittee that the Commission ignored the Rock Island earn-

ings for the years 1941, 1942 and 1943 (Petition, p. 15) is

flatly contradicted by the Commission’s report.*

Consequently, the ‘‘important”’ contention of the Pre-

ferred Stock Committee comes down to this narrow point,

that the Commission should not have held its hearings on

the re-reference of the plan until after December 25, 1943—

six months after the District Court’s order of June 25, 1943

returning the plan to the Commission—, instead of on Sep-

tember 1, 1943.

When the Milwaukee case was sent back by this Court

to the Commission because of a defect in the plan, this

Court did not require the Commission to start anew.

Group of Institutional Investors vy. Chicago, Milwaukee,

Mr. MeIntosh: Not today. It is a question of asking for an order

by the Commission, and no testimony to be offered. f course, the

purpose is in the end, that is the basis of the motion,’’

new reorganization capitalization, the Commission expressly considered the

earnings record of the Rock Island from 1921 on (R., pp. 139, 245, 250).

The Commission used the earnings of the various mortgage divisions derived

under the so-called ‘‘earnings and expense formula’’ for the period 1936-1937

only in determining the relative earning power of the various mortgage divi-

sions in a period of low earnings, and used this relative earnin power only

for the purpose of allocating among them new First Mortgage fonds, which

were the only new securities carrying a fixed charge which would have to be

met in years of —— as well as years of prosperity (R., p. 202 and p. 209,

onds were distributed at the higher level of approximately

$11,000,000 of earnings (R., p. 203 and p. 213, line 13); and the Preferred

Stock at the still higher level of over $17,000,000 of earnings (R., p. 203 and

p. 217, line 13), the two latter ievels of earnings being far in excess of the

1936-1937 average.

6

St. Paul & Pacific Railroad Co., 318 U. S. 523 (1943). The

Commission proceeded exactly as it did in the Rock Island

case, and the plan it then certified was approved by the

District Court. Appeals from such approval were dismissed

by the Circuit Court of Appeals and certiorari was denied

by this Court. In re Chicago, M., St. P. é P. R. Co., 145 F.

(2d) 299 (C. C. A. 7th, 1944) ; cert. den. 324 U. S. 857 (1945).

The same procedure was suggested by the Circuit Court

of Appeals for the Second Circuit in the New Haven case.

In re New York, New Haven & Hartford R. Co., 147 F. (2d)

40 (C. C. A. 2d, 1945) ; cert. den. 325 U. S. 884 (1945).

The procedure also conformed to what this Court has

said as to the Interstate Commerce Commission and the

courts working together to carry out Section 77. Palmer

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

310 U. S. 132, 138 (1940).

There is nothing in subsection (e) of Section 77 which

requires the Commission to blind itself to the fact that

there is before it, not a new proceeding, but an old proceed-

ing sent back to it. The subsection plainly says that the

Commission ‘‘shall proceed to a reconsideration of the

proceedings’’.

What the Preferred Stock Committee relies on for its

claim that on any re-reference to the Commission the pro-

ceeding should be stalled for six months for filing of new

plans, and thereafter should be delayed for many months,

if not years, for hearings on the new plans, is the provision

of Section 77(d) that after the judge has approved the

original petition in bankruptcy as properly filed, the debtor

shall file a plan of reorganization within six months. But

that plainly refers to a new proceeding. The judge is not

approving a petition in bankruptcy when he remits a plan

in an old proceeding to the Commission with a statement

|

7

of reasons why it should be corrected. The provision as

to what is to happen after the filing of the original petition

in bankruptcy, by its very terms, does not apply to what

is to happen after remission of a plan to the Commission.*

2. The Preferred Stock Committee has no standing to

present the other questions which it seeks to present, since

they were not raised by it in the Courts below, and such

questions are also without merit.

In a list of questions (Petition, pp. 7-8) the Preferred

Stock Committee seeks to raise questions in addition to

the so-called ‘‘important’’ question discussed above. In all,

six questions are listed. Questions Nos. 2 and 3 are the same

question already discussed. The other questions, which the

Preferred Stock Committee is now seeking to raise for the

first time in these proceedings, will be discussed in order.

(a) As to Question 1. The Committee seeks to raise the

question whether a District Court, in referring a plan of

reorganization back to the Commission under Section 77,

may limit the scope of the proceedings before the Com-

mission. This question was not raised in any form by the

Preferred Stock Committee in the District Court. (See

objections made by that Committee in the District Court,

attached as Appendix F to its Petition, pp. 67-74.) Nor

was sucu question presented to the Circuit Court of Appeals.

“The technical nature of the contention of the Preferred Stock Committee

plainly appears from its inequitable argument that even if the Commission

reached a correct conclusion after the reference back, its action must be set

aside because it reached that conclusion too soon. Its Petition states (p. 14):

‘It is immaterial that the Commission might have reached the same

conclusion that it did in its order dated 1, 1944, approving the

plan of reorganization as of January 1, 1944, had it on the re-reference

followed the specific directions in Subsection (d). The fact remains

that it did not follow the directions of law as are specificially provided

for in Subsection (d), Section 77 of the Bankruptey Act. The Inter-

state Commerce Commission was created by Act of Congress. It has

only such powers as are given to it by Acts of Congress, and Section 77

of the Bankruptcy Act, since it is mandatory, must be strictly adhered

to by the Commission in the exercise of its jurisdiction.’’

8

The Preferred Stock Committee in the first instance merely

adopted the Debtor’s statement of points on appeal to the

Cireuit Court of Appeals. Later the Committee received

permission to file a new statement of points in the Circuit

Court of Appeals, which it printed as Appendix A to its

brief in that Court (Additional Transcript of Record herein,

pp. 1-5). Neither the Debtor’s statement of points nor the

Committee’s new statement of points on appeal contained

the point now being made.

Even if the Committee had standing to make the point,

the point is completely without merit, because the order

of the District Court did not in any way limit the Com-

mission, but simply made suggestions to the Commission

regarding defects in the plan theretofore certified by the

Commission. The order referred the proceeding back to

the Commission ‘‘for further action in accordance with the

applicable provisions of Section 77 of the Bankruptcy Act”’

(R., p. 300).

(b) As to Question 4. The Committee seeks to present

the question whether the plan of reorganization approved

by the Commission, the District Court and the Circuit Court

of Appeals is ‘‘fair and equitable’’ and in the ‘‘public

interest’’, in view of the alleged conflict between the Con-

gress of the United States and the President on the one

side and the Interstate Commerce Commission on the other

as to the meaning of these words and the discretion thereby

given to the Commission. Here again is a point not made

in the District Court or in the Circuit Court of Appeals.

It therefore cannot be made in this Court.

The point, in effect, is that members of Congress, the

President, and members of the Interstate Commerce Com-

mission have made statements of their views regarding

public policy in connection with railroad reorganizations,

—

-

and that there may be some legislation some day changing

Section 77.° But this Court has plainly stated in the

Denver € Rio Grande case that courts must proceed with

dispatch under existing legislation, and cannot wait with

an eye to possible new legislation. Reconstruction Finance

Corporation v. Denver & R. G. W. R. Co., 66 8. Ct. 1282, 1291

* The Preferred Stock Committee states (Petition, p. 23) that the Commis-

sion knows that in the Rock Island case injustices have been done stock-

holders. There is not a line in Qunmitlenar Maha‘fie’s testimony before the

Senate Committee on Interstate Commerce quoted in the Committee’s petition

which would so indicate. On the con , Commissioner Mahaffie showed, in

his testimony before the same Senate ttee, that if the Rock Island

earnings from 1931 to 1944, inclusive, were applied to the new Rock Island

capitalization, such earnings would leave a very small return for the new com-

mon stock. The testimony was as follows:

‘*Mr, Mahaffie. This sheet that I have just handed you is an

analysis of the average earnings for the 15 years 1931 to 1944, inclusive,

available for the erred and common stock under the plans that the

Commission has approved.

You will note, taking the Rock Island, that for that 15 year period

it works out per common share at 56 cents on the average. For the

Denver it shows nothing. That property lacked a million of earning

anything on the average for its new preferred stock. The Missouri

Pacific System did better. It earned $2.5C a share, on its new common.

In that a average, you will note that the fat war years are

included. The The

The Chairman. The Rock Island would earn what?

Mr. Mahaffie. $2.29 per share for those 10 years, including the

excellent war years.

. a * . . .

**Senator Reed. If you took your original capitalization, how would

the common and preferred stock have fared?

Mr. Mahaffie. I haven’t figured that on the original italization,

but I think they would not have fared so well, beenene tle tock is

issued in most cases to the old bondholders. That is what the old bond-

holders are getting in satisfaction of a part of their claims as bond-

holders. Referring to the statement I made, that the Commission is

sometimes said to fix its capitalizations on the basis of depression

earnings; if you take the 10 years, 1932 to 1941, which are

depression, but 1941 was not a bad year, and 1936 was not a bad year.

Senator Reed. And 1937.

Mr. Mahaffie. 1937 wa: not bad. But in that 10-year period there

was a deficit on the Rock Island before there was anything available

for the stock, authorized in the approved » preferred and common,

of $2,551,634 a year. * * * I cite them [these figures] only for this

purpose, to show that the Commission does not base these plans on the

earnings of the depression years.’’ (Published Hearings on 8. 1253, of

Committee on Interstate Commerce, United States Senate, 79th Congress,

Second Session, pp. 526-7.)

——

10

(1946). Proposed amendments to Section 77 are perennial,

and probably will be perennial for years to come. No rail-

road would ever be reorganized if the courts and the Com-

mission should wait for the enactment of such legislation.

The Rock Island Section 77 reorganization proceeding has

already been pending over 13 years.

(c) As to Question 5. This question, as expressed, is

difficult to understand. Its purport seems to be that in

Section 77 proceedings the Commission must present a plan

which gives something to the stockholders as well as the

creditors, regardless of the value of the railroad system

involved. Here again is a point not raised by the Pre-

ferred Stock Committee in the District Court (see Appen-

dix F to Petition, pp. 67-74), or in the Cireuit Court of

Appeals (Additional Transcript of Record, pp. 1-5). The

Preferred Stock Committee itself concedes that its conten-

tion that the Commission is required to preserve the equity

of stockholders regardless of the value of the railroad prop-

erty is contrary to the decisions of this Court (Petition,

pp. 22, 29).

The point is, ef course, without merit, for if there is

insufficient value in the system to meet the creditors’ claims,

the stockholders cannot constitutionally be permitted to

participate. This is a doctrine established by a long line

of decisions in this Court. Northern Pacific Ry. v. Boyd,

228 U.S. 482 (1913) ; Case v. Los Angeles Lumber Products

Co., Ltd., 308 U. S. 106 (1939); Group of Institutional In-

vestors v. Chicago, Milwaukee, St. Paul & Pacific Railroad

Co., 318 U. S. 523 (1943) ; Ecker v. Western Pacific R. Corp.,

318 U. S. 448 (1943).

The deficiency claims of all creditors, that is, the claims

not satisfied by the valuation found by the Interstate Com-

merce Commission, total over $145,000,000, taking all the

new securities authorized by the Commission having a face

—_—

value at face value, and the new no-par value common stock

at $50 a share, the value which it was adjudicated to be worth

by the Commission and the District Court, their action

being affirmed by the Circuit Court of Appeals (R., pp.

259, 237-243, 252-254, 301-302). The creditors’ deficiency

claims are shown by the following table:

ll

. Defici

Claims jun toes amma ‘at $50

General Mortgage .............. $ 86,213,400 $ None

C. & M. First Mortgage... 5,286,000 None

First and Ref....................... 156,870,859(A) 57,606,900

Secured 4% 0... 59,021,174 18,569,382

Bie I i iiittecbinnnsiicieciceteiis 8,296,867 872,239

am ?P.66.C. 6 L.......... 27,495,118(A) 13,404,485

Of SE ee 16,362,500 5,922,916

is ee he licences 16,912,500 9,539,383

Convertible 4% .......... 47,697,440 39,293,262

General creditors .............. 500,000 369,614

Total ee - $424,655,858 $145,578,181

(A) Includes bonds, now outstanding, formerly pledged for bank loans.

(d) As to Question 6. This is a contention that inter-

est on creditors’ claims accrued during the bankruptcy

proceeding should be ignored in determining whether there

is any equity for stockholders.

Not only was this point not made by the Preferred

Stock Committee in the District Court or in the Circuit Court

of Appeals, but that Committee specifically contended to the

contrary. One objection in the District Court was: ‘The

Plan as modified is unfair and inequitable in that it does

not follow the rule of the Supreme Court of the United

States in Consolidated Rock Co. v. DuBois, 312 U. S. 510,

holding that interest on a claim has the same rank as the

principal of that claim in reorganization”? (Appendix F to

Petition, p. 68). The identical contention was made in

substantially the same words before the Circuit Court of

12 |

Appeals in the Preferred Stock Committee’s new state-

ment of points (Additional Transcript of Record, p. 4).

Furthermore, the Commission in giving recognition in

the Rock Island plan to unpaid interest accumulated on the

claims of secured creditors was merely following what it

had done in the Milwaukee and Western Pacific Section 77

plans, which were upheld on that specific point by this Court.

Group of Institutional Investors v. Chicago, Milwaukee,

St. Paul & Pacific Railroad Co., 318 U. S. 523 (1943) ; Ecker

v. Western Pacific R. Corp., 318 U. S. 448 (1943).

Conclusion.

The Preferred Stock Committee seeks to present no

question having any substance or merit.

Only one of the questions it seeks to raise here was

put forward in the Courts below. That one question is

the technical procedural point that if a plan is sent back

by the District Court to the Commission for any correction,

no matter how slight, the Commission must proceed ‘‘de

novo’’ and wait at least six months before even considering

whether to make the correction. That point has been made

by the Preferred Stock Committee below and is sought to

be made here only to obtain further delay in a proceeding

which this Court said eleven years ago should be con-

summated with all possible speed. Continental Illinois

National Bank & Trust Co. v. Chicago, Rock Island & Pacific

Ry. Co., 294 U. S. 648 (1935).

The petition of the Preferred Stock Committee for a

writ of certiorari should be denied.

Dated, November 1, 1946.

Respectfully submitted,

Wrixre Bussey,

Attorney for Metropolitan Life Insurance Com-

pany, as remaining member of the First and

Refunding Group,

31 Nassau Street, New York 5, N. Y.

13

ALEXANDER M. Lewis,

Attorney for Central Hanover Bank and Trust

Company and George 8S. Hovey, Trustees for

First and Refunding Mortgage 4% Bonds of

The Chicago, Rock Island and Pacific Rail-

Sanrorp H. E. FREUND,

Attorney for The National City Bank of New

York, Trustee for Secured 444% Bonds,

Series A, of .The Chicago, Rock Island and

Pacific Railway Company,

20 Exchange Place, New York 5, N. Y.

Epwarp W. Bourne,

Attorney for Protective Committee for Gen-

eral Mortgage 4% Bonds of The Chicago,

Rock Island and Pacific Railway Company,

120 Broadway, New York 5, N. Y.

Jesse E. Wan,

Attorney for Bankers Trust Company and

R. G. Page, Trustees for General Mortgage

4% Bonds of The Chicago, Rock Island and

Pacific Railway Company,

14 Wall Street, New York 5, N. Y.

Epwarp K. Hanon,

Attorney for Protective Committee for the

Holders of First Mortgage 414% Bonds of

The Rock Island, Arkansas and Louisiana

Railroad Company,

15 Broad Street, New York 5, N. Y.

DANIEL JAMEs,

Attorney for Protective Committee for Choc-

taw, Oklahoma and Gulf Railroad Company

Consolidated Mortgage 5% Gold Bonds, and

Choctaw and Memphis Railroad Company

First Mortgage 5% Gold Bonds,

63 Wall Street, New York i. & 4