Opposition Brief — Southern Pacific Co. v. Henwood

ef

COPY. ===" 1].

FEB 12 1947

_ IN THE

Supreme Court of the United-States ei

OCTOBER TERM, 1946

No. 879

SOUTHERN PACIFIC COMPANY,

a railroad corporation, Intervener, Petitioner

’

v.

BERRYMAN HENWOOD, as Trustee of St. Louis

Southwestern Railway Company Lines, et al.,

Respondents.

No. 909

WALTER E. MEYER, Intervener, sae

Petitioner,

v.

BERRYMAN HENWOOD, as Trustee of St. Louis

Southwestern Railway Company Lines, et al.,

Respondents.

No. 936

ST. LOUIS SOUTHWESTERN RAILWAY COMPANY,

a Corporation, Debtor. ae

: Petitioner,

v.

BERRYMAN HENWOOD, as Trustee of St. Louis

Southwestern Railway Company Lines, et al.,

Respondents.

BRIEF IN OPPOSITION TO PETITIONS FOR

WRITS OF CERTIORARI

DAVIS POLK WARDWELL SUNDERLAND & KIENDL,

15 Broad Street,

New York 5, N. Y.,

Attorneys for GUARANTY Trust Com-

PANY OF NEW YorK, as Trustee

under the Debtor’s First TERMINAL

AND UNIFYING MORTGAGE,

Respondent.

Epwin S. S. SUNDERLAND,

Witiiam D. Tucker, JR.,

Of Counsel.

Pee tonnetl

RD ccc ccccnsusne sevens éeecgecsesnaneans

Cee I ee os ican cic abies Sei Keboncekstees

INE 5 i.bn-d anh > 60.60% 450000 an be be Keren ene

Tue Property INVOLVED............sceccecccccece

STATEMENT OF THE CASE............ ec cecceccecees

Tue Puan OF REORGANIZATION...........000ceeeees

QUESTIONS PRESENTED ........... 0. ee eeeeeeceeeees

ARGUMENT:

Pornrt I The Petitioner’s allegations re-

garding changed conditions do not warrant a

return of the plan to the Commission..........

The Petitioner’s Theory of Solveney Of

Thee Dabber Ta CNS - «6 9:00 aioe os aioe casas

(a) The decrease in debt and increase in

current assets is for the benefit of the new

SUOMNENY MOMNOG noo cite nccnincsccinessessee

(b) The Commission’s permissible total

capitalization of $75,000,000 does not afford a

basis for determining a balance sheet solvency

(c) No changed conditions have resulted

from the cash distributions since the plan’s

effective date warranting review by this Court

Petitioners Have Made No Valid Showing

Of Changed Conditions With Respect To The

Debtor’s Earning Power...................

Pornt Il The special charges of petitioner

Meyer with respect to Southern Pacific’s illegal

control of the Debtor present no questions for

oo kf 8 ee ee ere ae

ESS EPO EE ES TLE CCE REE FE ALIA

ere TS

PAGE

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2

2

2

9

4

5

10

12

16

ii

TABLE OF CASES

PAGE

Ecker v. Western Pacific R. Corp., 318 U. 8. 448, 509 6,19

Group of Institutional Investors v. Chicago, Milwau-

kee, St. Paul & Pacific R. Co., 318 U. 8S. 523, 539,

DE naked acca ths dankchavk bh Lbesubotsoareces 6, 11

Insurance Group Committee et al. v. The Denver and

Rio Grande Western Railroad et al., 15 U. S. Law

SE I SS ck n aan eek ONC hES Ow dca dacs 12, 14,17

I. C. C. v. Jersey Cety, 322 U.S. 513.............00. 19

New York Central Securities Co. v. U. S., 287 U. 8S.

DE ch aeAddacndsAund aehPA wun Ack ees teens 19

Old Colony Bondholders v. New York, New Haven &

Hartford Railroad Company, C. C. H. Bankruptcy

Service, Par. 55,813 January 13, 1947............ 6

R. F. C. v. Denver & Rio Grande Western R. R. Co.,

90 L. Ed. 1134, 1146, 1148, 1724........... 6, 7, 8, 9, 10, 17

Rochester Telephone Corp. v. U. S., 307 U. 8. 125... 19

St. Louis S. W. Ry. Control, 180 I. C. C.175........ 20

Moody’s Railroads Service .............seesecees: 17

STaTuTEs

Bankruptcy Act (11 U.S. C. Sec. 47(c)):

DE clude cai ninbene ten etmn vs bee 2

in ena eehebketinh ne deeene cans 2

Judicial Code, as amended by the Act of February

13, 1935 (28 U. S. C. 347 (a)):

ED cacbecksweacchvadebkdkendesd ans 2

IN THE

Supreme Court of the United States

OCTOBER TERM, 1946

No. 879

SouTHeRN Pacrric Company, a railroad corporation,

Intervener,

- Petitioner,

BerzyMan Henwoop, as Trustee of St. Louis Southwestern

Railway Company Lines, et al.,

Respondents.

No. 909

Watter EK. Meyer, Intervener,

~ Petitioner,

BrerryMAN Henwoop, as Trustee of St. Louis Southwestern

Railway Company Lines, et al.,

Respondents.

No. 936

Sr. Louis SourHwestTern Rarway Company,

a Corporation, Debtor,

~. Petitioner,

BerryMan Henwoop, as Trustee of St. Louis Southwestern

Railway Company Lines, et al.,

Respondents.

BRIEF IN OPPOSITION TO PETITIONS FOR WRITS OF

CERTIORARI TO THE CIRCUIT COURT OF

APPEALS FOR THE 8TH CIRCUIT

The respondent, Guaranty Trust Company of New

York, Trustee under the Debtor’s First Terminal and Uni-

fying Mortgage, files this brief in support of its prayer

ee

2

that this Court deny the petitions of the Debtor, Southern

Pacific Company and Walter E. Meyer requesting this

Court to review the decision of the Circuit Court of Appeals

for the 8th Circuit affirming the District Court’s order

approving a plan of reorganization for the St. Louis

Southwestern Railway Company.

Opinions Below

District Court—53 F. Supp. 914 (R. 5183-5213)

Circuit Court of Appeals—152 F. (2d) 337 (R. 5559-5683)

jurisdicti

The petitioners invoke the jurisdiction of this Court

under Section 240(a) of the Judicial Code, as amended by

the Act of February 13, 1925 (28 U. S. C. 347(a)), and See-

tion 24(c) of the Bankruptcy Act (11 U. S. C. See. 47(¢)).

The Property Involved

The St. Louis Southwestern Railway system lines com-

prise a group of railroads operating with main lines and

branches from St. Louis, Missouri, and Memphis, Tennes-

see, to Shreveport, Louisiana, and points in Texas, the

principal termini in Texas being at Corsicana and Fort

Worth. The total road mileage operated by the system

when the reorganization proceedings commenced was 1,749

miles. The Commission has found that traffic on the

Debtor’s main line is ‘‘highly competitive’’, and that its

branch line traffic is ‘‘very light’? (R. 3502). The Debtor

must compete for traffic in the Southwest area with the

Missouri-Pacific, St. Louis-San Francisco, Missouri-Kansas-

Texas, and Kansas City Southern Railroads (R. 5581).

Statement of the Case

This proceeding was begun on December 12, 1935, when

the Debtor filed its petition under Section 77 of the Bank-

ruptcy Act. Similar petitions were filed by Debtor’s three

3

subsidiaries, St. Louis Southwestern Railway Company of

Texas, Central Arkansas and Eastern Railroad Company

and Stephenville North and South Texas Railway Company.

All objections to the Debtor’s petition were overruled, and

on January 3, 1936, one Trustee was appointed for the four

Debtors.

Hearings on the plans of reorganization filed by the

Debtor and others were begun March 16, 1937, and con-

cluded April 24, 1937. The Examiner’s Proposed Report

was issued February 7, 1938, and objections thereon were

argued before the Commission on May 16, 1938.

On January 10, 1939, the Commission reopened the

proceedings for the purpose of receiving further evidence

relating to the charges made by petitioner Meyer with re-

spect to the effect upon the Debtor’s earnings and assets of

Southern Pacific’s alleged diversion of traffic and failure to

solicit traffic preferentially (R. 500-501). Thereafter, hear-

ings were held for this sole purpose from May 5, 1939,

to May 27, 1939, and from September 18, 1939, to Septem-

ber 30, 1939 (R. 529). At these hearings a vast amount of

evidence, including hundreds of exhibits, was introduced

(R. 529-2680, 2681-3055). The extensive record made at

these hearings contained exhaustive studies of the earnings

history of the Debtor upon which the Commission founded

its finding as to the Debtor’s prospective earning power.

On June 30, 1941, the Commission issued its initial

Report and Order setting forth its plan of reorganization

for the Debtor (R. 3495-3735; 249 I. C. C. 5). 131 pages of

the Report are devoted to an elaborate consideration and

rejection of the Meyer charges (R. 3547-3678). The plan

reduced the Debtor’s total capitalization from approxi-

mately $107,000,000 to $75,000,000 and fixed charges from

approximately $3,400,000 to $1,500,000.

Petitions for modification of the plan were filed by

various interveners, and on March 9, 1942, the Commission

issued its Supplemental Report and Order, which modified

its original plan in certain relatively minor respects but

which reaffirmed the same so far as the present petitions

4

are concerned (R. 3736-3820; 252 I. C. C. 325). The modified

plan was certified by the Commission to the District Court

March 23, 1942 (R. 3494-3495).

From October 26, 1942, to November 5, 1942, hearings

were held before the late Judge Davis upon objections to

the certified plan at which additional evidence, including

data as to the vastly increased earnings of the preceding

two years, was presented (R. 4051-5136). The great bulk of

such additional evidence related to the charges made by

Walter E. Meyer against Southern Pacific (R. 4157-4199,

4202-4209, 4304-5136). Prior to the filing of briefs in sup-

port of the plan and objections thereto, Judge Davis died.

The case was then referred to Judge Moore (R. 5138) who

on April 23, 1943, entered an order directing a reargument

on May 31, 1943, upon the case as submitted before Judge

Davis, with all parties having the right to apply for leave

to present additional testimony (R. 5181-5183). On Febru-

ary 8, 1944, the District Court filed an opinion and entered

an order in which it rejected the contentions of the objectors

and approved the certified plan.

Appeals were taken in March, 1944, to the Circuit Court

of Appeals for the 8th Cireuit by Southern Pacific, Walter

E. Meyer, protective committees for the Stephenville and

Central Arkansas bonds, respectively, and the Debtor, but

due to the necessity of printing an inordinately voluminous

record, argument was delayed until April 6, 1945. The

Circuit Court handed down its decision August 26, 1946.

The Plar. of Reorganization

Since the primary complaint of petitioners is not as to

the terms of the Cominission’s plan of reorganization, but

as to its alleged obsoleie character, no elaborate discussion

of the terms of the plan is required. ic will suffice to say

that the Commission’s plan of reorganization for the Debtor

calls for a capitalization of approximately $75,000,000 and

fixed charges of approximately $1,500,000. The Debtor’s

5

capitalization at the time it went into reorganization was

$107,124,950, and fixed charges were, $3,379,341. (R. 3506,

3691)

Questions Presented

Only two questions are presented by the petitions for

writs of certiorari:

First, whether changed conditions have occurred which

were unanticipated by the Commission and which warrant

review by this Court.

Second, whether the Commission has given proper con-

sideration and disposition to petitioner Meyer’s special

charges of illegal control of the Debtor by Southern Pacific.

POINT I

The Petitioner’s allegations regarding changed condi-

tions do not warrant a return of the plan to the Commission.

In final analysis, the petitions for review by this Court

of the fairness of the Commission’s plan of reorganization

for the Debtor are based primarily on the theory of changed

conditions. This theory is rested upon two basic premises:

one, that the reduction in the Debtor’s defaulted interest

obligations and other indebtedness and the increase in its

current asset position has rendered the Debtor solvent; and

two, that the Debtor has shown an earning power unantici-

pated by the Commission. Respondents believe that the

first premise is contrary to the principles laid down by this

Court and that the second can not be sustained on the

meager additions to the record offered with the petitions,

being a mere assertion by the petitioners as opposed to the

expert judgment of the Commission.

The Petitioner’s Theory Of Solvency Of The Debtor Is Unsound

All three petitioners rely heavily upon an alleged solv-

ency of the Debtor in the bankruptcy sense resulting from

cash distributions directed by the District Court and from

—

6

an improvement in the current asset position of the Debtor.

As petitioner Southern Pacific states it: ‘‘The case for

the present solvency of the Debtor is presented upon the

basis of reduction in debt and improvement in current liquid

assets’’ (Petition p. 8). Respondents believe that the fal-

Jacies in the position of petitioners lie in their disregard of

the principles settled by this Court as to the effect of debt

reduction and increase in current assets after the effective

date of a plan, in their misconception of the significance of

the Commission’s proposed new total capitalization, and in

their failure to analyze the effect of cash distributions under

the plan.

(a) The decrease in debt and increase in current assets is for

the benefit of the new security holders.

The effective date of the plan of reorganization in these

proceedings is January 1, 1942. This Court has consistently

held that it is for the Commission alone to determine the

effective date of a plan of reorganization. R. F. C. v. Den-

ver € Rio Grande Western R. R. Co., 90 L. Ed. 1134, p. 1148;

Ecker v. Western Pacific R. Corp., 318 U. 8. 448, 509; Group

of Institutional Investors v. Chicago, Milwaukee, St. Paul

€ Pacific R. Co., 318 U.S. 523, 546. The practical reason for

this ruling was well stated by the Circuit Court of Appeals

for the Second Circuit in Old Colony Bondholders v. New

York, New Haven & Hartford Railroad Company, C. C. H.

Bankruptcy Service, Par. 55,813 January 13, 1947, where

the Court said (p. 58,527) :

«<* * * As a practical matter some closing time must

be set and it cannot be progressively postponed with-

out reopening the issues and making new findings,

with resulting new appeals. By the time these are

finished conditions may again have changed, so on

ad inifinitum. See Interstate Commerce Comm. v.

Jersey City, supra, * * *”’

Starting with this premise in the Denver case, this

Court laid down the principles with respect to the effect of

—

7

reduction in debt and increase in current assets in a reor-

ganization proceeding subsequent to the effective date

which, respondents submit, govern the issues petitioners

now seek to raise.

Petitioners’ primary argument of changed conditions is

founded on actual and assumed reductions of debt funded

in the plan resulting from cash distributions made since the

effective date of the plan. However, this same argument

was made before this Court in the Denver case and re-

jected. There the effective date of the plan was January 1,

1943. Among the obligations of the Debtor funded in the

plan as of that date were $2,758,330 of Rio Grande Junction

Bonds. In addition, the plan provided for the assumption

by the reorganized company of. $5,758,000 of equipment

obligations. Subsequent to the effective date the District

Court authorized the Trustees to purchase the Junction

Bonds and to pay off $1,218,000 of the equipment obliga-

tions. The capitalization of the new company was de-

creased proportionately. The Trustee for the most junior

secured creditors protested that their participation should

be increased by the amount of the debt reduction. The Cir-

cuit Court of Appeals for the Eighth Circuit accepted this

argument and returned the plan to the District Court. This

Court granted certiorari and reversed the Circuit Court on

this point, stating (90 L. Ed. p. 1724):

“«* * * When the reduction of senior capital txkes

place after the adoption of the plan by use of antici-

pated earnings or existing cash, there can be nv such

readjustment of junior participation because assets

in the balance sheet at the adoption of the plan and

subsequent earnings are, as we have pointed out, for

the benefit of the stockholders in the new company so

that through these common stock advantages these

new stockholders may be compensated for their loss

of payment in full in cash. * * *,”

So too in the instant case the reduction of debt after the

adoption of the plan is for the benefit of the new security

holders. As the table on page 9 of the petition of Southern

8

Pacific shows, precisely the same kind of debt reduction has

occurred, in part at least, in this case as in the Denver pro-

ceeding. Here guaranteed obligations, viz. the Texarkana

Union Station certificates, were purchased and a reduction

in equipment obligations effected. A secured obligation of

the Railroad Credit Corporation was also paid off, which

was contemplated and provided for in the plan. As this

Court held in the Denver case, the benefit of this action ac-

crues to the new security holders. In addition, in this pro-

ceeding funds sufficient to pay interest arrears on certain

senior securities, but not directed to be applied for that pur-

pose, were disbursed. But this does not affect the applica-

tion of the doctrine enunciated by this Court in the Denver

case to this proceeding. Under that doctrine if these pay-

ments also effected a reduction in debt after the effective

date such reduction must be for the benefit of the new se-

curity holders.

Furthermore, under an additional holding of this Court

in the Denver case, it appears plain that the cash from

which these payments were made belongs to the creditors

provided for under the plan, because it was acquired sub-

sequent to the plan’s effective date. In the Denver pro-

ceeding this Court stated (90 L. Ed. p. 1146):

‘‘There is another important factor, corollary to

stock ownership, to be noted in the Commission’s al-

location of these securities. This factor is that the

creditors who received common stock to make them

whole obtained with that common stock an interest

in all cash on hand or all cash that might be accumu-

lated. * * * Cash, material and supplies, as well as all

other assets and all liabilities of the debtor were rep-

resented by the securities. If there is more cash on

hand than needed, for taxes, expenses and proper im-

provements, it is at the disposal of the common stock-

holders. If money was used to pay indebtedness,

there would be a corresponding reduction in the capi-

tal structure. * * *’’ [Emphasis supplied].

9

The Circuit Court of Appeals in that case had said (150 F.

(2d) at p. 35):

‘< * * * we cannot disregard the fact that these huge

surpluses actually exist. Their existence is an ac-

complished fact. It is also obvious that surpluses

will continue to pile up for a reasonable time yet to

come. We think any plan which fails to take this into

account and which gives the Senior Bondholders their

claims in full by substantially delivering the road to

them, and gives them the surplus cash actually on

hand and further enables them to receive in addition

the excess war profits which are reasonably sure to

come, is inherently inequitable and unfair, so long as

there are classes of creditors whose claims are not

fully satisfied.’’

As to this holding, this Court stated (90 L. Ed. p. 1148) :

‘*Tn our judgment this holding is erroneous.

The effective date of the plan was fixed by the

Commission as January 1, 1943. This was in its

power. The allocation of the securities took into con-

sideration the interest of the secured claims to that

date. Any gain or any loss after that time was a

benefit or an injury to the new common stockholders

and then sometimes to security holders in positions

senior to them. Assuming that the courts, as courts

with equity powers in a bankruptcy matter, might set

aside a plan, fair and equitable when adopted by the

Commission, merely on account of subsequent changes

in economic conditions of the region or the nation, it

should not be done when the changes are of the kind

that were envisaged and considered by the Commis-

sion in its deliberations upon or explanations of the

plan’’ (Emphasis supplied).

The Commission in this case, as in the Denver reorgani-

zation, did envisage the factors upon which petitioners rely

in their claim of changed conditions. At the time of its

Supplemental Report in this proceeding the Commission

had before it the Trustee’s statements (which are filed

regularly with the Commission) showing earnings avail-

10

able for fixed charges for 1940 of $2,860,221 as compared

with $1,119,158 for 1939 and $7,495,940 for 1941 as compared

with both those earlier figures. The Trustee’s reports also

showed an increase in net current assets over those existing

when the petition was filed from a deficit of $23,771,707 to

an excess of current assets over current liabilities of

$8,010,813 as of December 31, 1941 (Debtor’s petition p. 9).

The Commission was fully aware of the certainty of further

increases resulting from war earnings. In the face of these

facts the Commission said:

‘<* * * the new securities, in the amounts in which

they will be exchanged for the securities and claims

of the old company, properly compensate the holders

of the old securities for the rights given up by them,

by the rights and shares of earnings accorded them in

the new company. * * * ’? (Emphasis supplied.)

R. 3776)

Thus, the Commission plainly contemplated in this pro-

ceeding, as in the Denver case, that a part of the compensa-

tion of creditors for their sacrifices consisted of participa-

tion in good earnings in prosperous years and an improve-

ment in the value of the securities issued them resulting

from increased assets. It follows, therefore, that the argu-

ments of the petitioners based upon an alleged increase of

assets are directed to matters which this Court has held lie

within the province of the Commission.

(b) The Commission’s permissible total capitalization of

$75,000,000 does not afford a basis for determining a

balance sheet solvency.

A fundamental error in the solvency argument of the

petitioners lies in their use of the figure of $75,000,000 as a

starting point in setting up a balance sheet of assets and

liabilities. The Commission’s valuation in the form of a

permissible capitalization was based not upon the value of

the Debtor’s various assets as of any specific date, but

rather upon an overall valuation for reorganization pur-

11

poses, which was arrived at after consideration of ‘‘all the

data of record’’ including ‘‘traffie and earnings to the latest

available date’’ and ‘‘also future prospects of traffic and

earnings’’ (R. 3741, 3774-75). Thus this valuation takes

into consideration the prospect of large wartime earnings

and the increase in the current asset position of the Debtor,

which the Commission was aware would ensue. The war

earnings for rail carriers were well known to the Commis-

sion by March 9, 1942, when it filed its Supplemental Re-

port, as shown by its pertinent references thereto in its

Annual Report for 1941, pp. 1-2, and the Commission took

these factors into account in making its determination of a

permissible capitalization. The permissible capitalization

fixed by the Commission rested upon its informed judgment,

taking into consideration estimated improved current asset

position and earning power. This capitalization cannot

be considered as an exact valuation of assets at any specific

date.

This Court has recognized that earning power is the

primary criterion in determining capitalization for reor-

ganization purposes rather than a balance sheet tabulation

of assets and liabilities (Milwaukee & Western Pacific cases,

supra). Whether or not junior securities are ‘‘without

value’? must depend primarily on earning power as this

Court ruled in the Milwaukee case 318 U.S. p. 539:

‘** * * it [was not] necessary for the Commission to

make a precise finding as to the value of the road

in order to eliminate the old stock from the plan. A

finding as to the precise extent of the deficiency is not

material or germane to the finding of ‘no value’

prescribed by § 77 (e). * * * The basie question in a

valuation for reorganization purposes is how much

the enterprise in all probability can earn.’’

The entire solvency argument of petitioners is based upon

their assumption that the Commission made a finding of

‘“‘the precise extent of the deficieney’’ when it fixed the new

CS re Te IEEE PT ETE IAI

12

capitalization. But the Commission only made an overall

valuation for reorganization purposes taking into considera-

tion the prospective earnings (R. 3741, 3774-75) and other

factors to which petitioners point as changed conditions

necessitating amendment of the plan. Thus it is inaccurate

to use the Commission’s permissible capitalization as a

starting point for a series of calculations intended to show

the Debtor’s present solvency through accumulation of as-

sets sufficient to make up the supposed deficiency. As this

Court stated in Insurance Group Committee et al. v. The

Denver and Rio Grande Western Ratlroad Company et al.

(15 U. S. Law Week, p. 4192, Feb. 3, 1947):

‘«When the Interstate Commerce Commission finds

the value of a railroad system by any means, the cor-

rectness of the result cannot be mathematically

proved or disproved. The difficulties of appraisal

are multiplied by the necessity of looking into the

future to estimate earnings. Earnings estimates are

made with allowance for changing economic con-

ditions.”’

(c) No changed conditions have resulted from the cash distri-

butions since the plan’s effective date warranting review

by this Court.

Under the terms of the plan, the District Court may

direct that cash distributions made to senior creditors after

the effective date shall be applied to the reduction in part of

their claims. Yet, even if the court so applies whatever

amount of the cash distributed since January 1, 1942, may

be necessary to reduce or eliminate the unpaid interest

claims of senior creditors and the amount of common stock

is increased as a result of payment of the Railroad Credit

Corporation loan, as provided in the plan, $1,584,709 of

creditors’ claims will receive no treatment under the plan:

13

Total permissible capitalization ............ $75,000,000

Deduct*: Equipment Trust Ob-

ligations paid off.... 216,000

Texarkana Union Sta-

tion certificates paid

OF kasevkabsasaces hs 315,000

Interest Paid prior to

effective date Funded

Under Plan ........ 400,000

931,000 931,000

74,069,000

First Mortgage 4s ............ 20,000,000

Grays Point Terminal 5s ...... 500,000

Shreveport Bridge 5s ......... 450,000

Second Mortgage 5s ........... 3,042,500

ks. eee 8,063,000

General and Refunding 5s...... #39,557,500

Stephenville 5s ............... ** 2,843,294

Central Arkansas 5s .......... ** 1,197,435

75,653,709

(d) 1,584,709

If $1,584,709 of creditor claims are still unprovided for

under the plan, there have plainly been no changed condi-

tions resulting from cash distributions which warrant review

of the plan by this Court.

*No provision is made in the plan for reallocation of these

amounts after payment of these obligations.

** Includes unpaid interest to 1/1/42 and after deducting salvage

money that has been distributed.

#Including Refunding Bonds pledged because Commission’s

plan treats such bonds as reduced to possession and accords holders

of pledged bonds same treatment as public holders of Refunding

Bonds.

(d) Deficiency. Even if securities released by payment of

Equipment Trust Certificates, Texarkana Union Station Certificates

and interest prior to January 1, 1942 are reallocated there would

still remain unsatisfied claims of over $600,000.

fe ee

14

The fact that the amount by which the creditors fail of

complete satisfaction in face amount of new securities is

now comparatively small, is of no consequence. Even if

each creditor could now receive the full face amount of his

claim in an equal face amount of new securities, it by no

means follows that he has been made whole or that such a

drastic unforeseen change in conditions has occurred neces-

sitating a return of the plan to the Commission. This Court’s

recent ruling in Insurance Group Committee et al. v. The

Denver and Rio Grande Western Railroad et al., 15 U. S.

Law Week 4189, p. 4191 places the burden upon the peti-

tioners to show that the new securities over-compensate the

creditors for their sacrifices in order to establish changed

conditions invalidating a plan:

‘<The Commission made no finding that the cash

value of the securities allocated to the senior creditors

paid them in full. To justify the change of posi-

tion of creditors from fully secured to partially

secured creditors were given opportunities to partici-

pate in profits through common stock ownership with

a chance at larger earnings than the Commission’s

forecast anticipated. We held the priority rule was

satisfied by this type of allocation. This was ex-

plained by our decision on the last review. Slip

opinion, supra, p. 15. The debtor has made no allega-

tion, either in this effort for re-examination or be-

fore, that the existing cash value of the securities

allotted any creditor has ever aggregated the amount

of the creditor’s claim against the debtor. We think

the absence of such an allegation, of itself, demon-

strates that the plan is not, because of excessive in-

terest, unfair to the debtor or those for whom it is

allowed to appear.

Until it can be contended with some show of

reasonableness that the creditors senior to the

creditors and stockholders whom the debtor repre-

sents here have received more in value than the face

of their claims, the debtor’s insistence on a re-ex-

amination of the plan is without substantial support.

See Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482;

Group of Investors v. Milwaukee R. Co., 318 U. S.

523, 541.’’

15

These petitioners have made no allegation and offer no

proof to show that the creditors provided for under the plan

have received more in value than the face of their claims.

There is, then, no warrant for a review of the plan by this

Court or a reconsideration of the plan by the Commission.

As a matter of record, the cash distributed to the credi-

tors has not materially aided the Debtor in so far as its

need for reorganization is concerned. As shown by the

Debtor’s balance sheet as of October 31, 1946, Appendix

B to Southern Pacific’s petition, it is still unable to meet its

matured and maturing debts. The Debtor’s matured prin-

cipal obligations are $25,064,394. In addition the Debtor

is obligated in the principal sum of $17,882,250 to Southern

Pacific, which sum is now due. Its matured unpaid interest

obligations are $3,247,284, excluding $1,443,540 interest in

default on Southern Pacifie’s claim. There is the further

obligation to pay current interest on the Debtor’s first mort-

gage bonds and its equipment obligations. The Debtor has

available to meet its matured and maturing debts, cash and

temporary cash investments of $22,989,923 and total current

assets of $32,545,847. Total current liabilities amount to

$10,455,343, leaving $22,090,504 net current assets to meet

matured and maturing obligations of $28,311,678 excluding

Southern Pacific’s matured claim of $19,325,790, principal

and interest. If this sum be included, the Debtor’s matured

obligations are $47,637,468. It cannot be said, then, that

the improved cash position of the Debtor and its debt retire-

ment has placed it in any position to fully meet its matured

or maturing obligations. It is, therefore, a proper subject

for reorganization and the fundamental consideration under

such circumstances in the formulation of a reorganization

plan is the Debtor’s prospective earning power. The Com-

mission has found that the Debtor’s normal earning power

is insufficient to warrant a capitalization which permits par-

ticipation by the equity or even full compensation of the

creditors. As we point out below, petitioners have com-

pletely failed to present substantial evidence which would

justify a finding that the Commission’s conclusion in this

respect was in error.

16

Even were the Debtor able and required to repay its in-

terest arrears only and be relieved of its obligation to pay

its matured principal debts, the problem for reorganization

purposes would still remain its ability to meet its obliga-

tions as they mature. The obligations which Debtor would

have to meet in fixed charges on its existing debt under its

present capital structure would amount to $3,008,634 annu-

ally as shown by the Debtor’s annual report for 1945. On

the basis of the property’s historical earnings record and all

other factors the Commission has found that the Debtor has

been and will be unable to meet such heavy fixed charges

apart from its maturing principal obligations. The peti-

tioners offer no reliable evidence to establish clear error in

this determination.

Petitioners Have Made No Valid Showing Of Changed Conditions

With Respect To The Debtor’s Earning Power

The petitioners’ second charge of inequity resulting

from changed conditions is founded upon an alleged error

in judgment on the part of the Commission in its determina-

tion of the prospective earning power of the Debtor. How-

ever, the only evidence cited in support of this claim is the

10 months earning statement of the Debtor for 1946, statis-

tics showing an increase of population in the southwest ter-

ritory, and a theoretical industrial expansion in that area.

On these tenuous factors alone petitioners contend that this

Court should set aside the considered judgment of the Com-

mission as to the Debtor’s normal earning power based upon

a review of all relevant data together with its vast exper-

ience and familiarity with such matters. This inadequate

record, consisting primarily of hopeful predictions by pe-

titioners, presents no valid reason for this Court to review

the determination of the Commission based upon its expert

judgment. The allegations relied upon here with respect to

the Debtor’s earnings and earning power were presented

to the Circuit Court as recently as October 22, 1946, when

that Court denied petitions for rehearing. The Circuit

ie

17

Court, sitting in and fully familiar with the alleged indus-

trial and population expansion in the territory served by

the Debtor, found nothing in the petitioners’ allegations

warranting a change in the Commission’s plan. As recently

as June 10, 1946, this Court considered and rejected almost

identical arguments in the Denver proceeding.* On the

basis of the proof offered in this proceeding they must like-

wise be rejected.

The petitioners rely almost entirely upon the ten months

earning statement of the Debtor to contradict the Commis-

sion’s determination as to the Debtor’s prospective earning

power. However, the figures themselves, while apparently

favorable, may not be relied upon implicitly unless there

is available the underlying data from which the

result is derived. It is impossible to tell what non-recurrent

income is contained in the ten months statement or to what

extent tax carry back credits or inadequate maintenance

provisions are responsible for the favorable statement.

Furthermore from other aspects the Debtor’s earnings

picture has not been as optimistic. The Cotton Belt re-

ported gross revenues for the full year of 1946 of $46.6

million representing a decline of 28% from 1945.** This

is a substantially larger decline than that recorded by St.

Louis-San Francisco, which showed a drop of only 17%, or

by Missouri-Pacific which showed a decline of but 20%, both

of which railroads are competitors of the Debtor. Clas;. I

railroads in general showed a decline of about 15%. ‘The

substantial decline in the Debtor’s earnings may be attrib-

uted to the phenomenal rate at which the company’s traffic

increased during war years, since the Debtor showed one of

the greatest percentages of increase of traffic among Class

* This ruling was reaffirmed February 3, 1947. Insurance Group

Committee et al. v. The Denver and Rio Grande Western Railroad

et al., 15 U. S. Law Week p. 4190.

** The source of the statistics cited herein is Moody’s Railroads

Service.

PN OTE

a . Pee a eS i ae

18

I railroads in the country for the war years. The peak

traffic year of 1944 was for the Debtor 386% above its

1935-39 average as compared with 281% for the Missouri-

Pacific, 270% for the St. Louis-San Francisco and 246%

for Class I railroads generally. An important factor to

bear in mind in reviewing the Debtor’s war time earnings

record is that during this period the Debtor’s traffic ‘‘re-

ceived from connecting lines’’ increased to 68% of its total

traffic as compared with approximately 52% for years just

prior to the war. There is plainly no certainty that the

Debtor will continue to receive the very substantial in-

crease in revenue from this form of traffic. Viewed in this

light it would be wholly unsound to question the expert

judgment of the Commission as to the Debtor’s normal earn-

ing power merely on the strength of a ten months earning

statement for 1946. Respondents submit that the petitioners

have made no adequate showing to warrant review by this

Court of the determinations of the three tribunals which

have passed upon the question.

POINT II

The special charges of petitioner Meyer with respect to

Southern Pacific’s alleged illegal control of the Debtor

present no questions for review by this Court.

Petitioner Meyer has renewed in his application to this

Court the arguments he has made throughout this proceed-

ing before the Commission (and subsequently before the

District Court and Circuit Court of Appeals) of injurious

control of the Debtor by Southern Pacific and other rail-

roads. Principally, his contentions are that an alleged di-

version of traflic from the Debtor and failure to solicit traffic

preferentially distorted the Debtor’s earnings record and,

therefore, rendered the Commission’s judgment of its pro-

spective earning power erroneous. As a corollary to this

—

19

charge petitioner Meyer maintains that Southern Pacific’s

claim against the Debtor should be subordinated because of

its breach of fiduciary duty to the Debtor. Nothing would be

gained by a detailed review of the evidence before the Com-

mission (or that introduced before the District Court) upon

which the Commissien rested its finding that Meyer’s

charges were without merit, which finding the District Court

and Circuit Court have affirmed. Respondents believe it

sufficient to point out that under the applicable decisions the

charges of petitioner Meyer are not a proper subject for

consideration by this Court.

In Rochester Telephone Corp. v. U. 8., 307 U. 8. 125, this

Court made the following statement of the basic rule of ad-

ministrative law:

**So long as there is warrant in the record for the

judgment of the expert body it must stand. * * * ‘The

judicial function is exhausted when there is found to

be a rational basis for the conclusions approved by

the administrative body.’ Mississippi Valley Barge

Line Co. v. United States, 292 U. S. 282, 286-287;

Swayne € Hoyt, Ltd. v. United States, 300 U. S. 297,

303, et seq.’’

(Quoted with approval in J. C. C. v. Jersey City,

322 U. S., page 513).

A like rule has been laid down in connection with railroad

reorganization proceedings under Section 77 where the

scope of judicial review of Commission findings upon certain

matters committed to its exclusive jurisdiction was defined

as limited to ascertaining the existence of material evidence

supporting the Commission’s ruling and the observance of

legal standards. Western Pacific case, supra, 318 U. S.

p. 473.

It is well settled that the control of one carrier by another

is a matter committed to the exclusive jurisdiction of the

Interstate Commerce Commission (New York Central

Securities Co. v. U. S., 287 U.S. 12, p. 26). The Commission

20

has given approval to the control of the Debtor by Southern

Pacific (St. Louis S. W. Ry. Control, 180 I. C. C. 175).

Under the doctrine of the foregoing cases, therefore, it

must follow that the propriety of the exercise of such con-

trol is a matter also committed to the exclusive jurisdicticn

of the Commission. And if it is found that its determina-

tion with respect thereto rests upon a sufficient record, com-

piled after opportunity for hearing has been given, the

area of permissible judicial review has been covered.

Plainly, the Commission’s rejection of the charges of

improper control in this case is founded upon an ample

record with full opportunity to be heard. Petitioner Meyer

introduced considerable evidence on the subject at the initial

Commission hearing in March and April, 1937 (R. 168-212).

From May 5th through May 27th and from September 18th

through 30th, 1939, the Commission held hearings solely to

hear evidence in connection with the Meyer charges. The

record compiled on this matter alone exceeded 2,500 pages

as well as hundreds of exhibits (R. 529-3055). That the

Commission painstakingly reviewed and weighed this evi-

dence is shown by its first report which, for the most part,

is devoted to a discussion of the Meyer charges (R. 3547-

3678). Meyer’s objections to the Commission’s findings

in that report were considered and again rejected by the

Commission in its supplemental report (R. 3742-3752).

When the plan was certified to the District Court Mr. Meyer

was permitted to adduce a formidable amount of additional

evidence in support of his charges (R. 4157-4199, 4202-4209,

4304-5166). Both the District Court and the Circuit Court .

of Appeals reviewed this vast record, found it more than

adequate and concluded that no evidence had been presented

demonstrating palpable error in the Commission’s findings.

On the basis of this ample record and opportunity to be

heard respondents believe that this Court’s settled decisions

preclude a review of the petitioner’s special charges. The

issues raised by Mr. Meyer ‘‘are matters requiring study

by experts on railroad affairs, involving as they do, expert

analysis of traffic movements, freight loadings, financial

21

statements and other data peculiarly within the compre-

hension of the I. C. C. . . . ’’ (District Court opinion, 53

F. Supp. p. 927). They are clearly, therefore, not proper

matters for consideration by this Court.

CONCLUSION

The petitions for certiorari should be denied.

Dated: February 10, 1947.

Respectfully submitted,

Epwin S. 8. SunpEer.anp,

Wu. D. Tucker Jp,

Attorneys for Guaranty Trust Com-

PANY oF New York,

as Trustee under the Debtors’ First Ter-

minal and Unifying Mortgage, Respondent