Opposition Brief — Atlantic Coast Line Railroad v. St. Joe Paper Co.

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JY Otice- supreme Cou

FILED

MAR11 1950 |

— CHARLES ELMORE CROP FY

“5

Supreme Court of the United States

Octoser Term, 1949.

No. 601

ATLANTIC COAST LINE RAILROAD COMPANY, et al.,

Petitioners,

ST. JOE PAPER COMPANY, et al.,

Respondents.

BRIEF OF RESPONDENTS THE LYNCH INTERESTS

IN OPPOSITION TO PETITION FOR

CERTIORARI.

Miuam, McIuvarng, Carroui & Outver & DoNNALLY,

WATTLEs, J Frep N. OLIVER,

Rosert R. Miriam, jp —_ P. Scort,

Greenleaf Building, 110 East 42nd Street,

Jacksonville, Florida, New York, N. Y.,

Attorneys for the Lynch Interests.

Dated, March 13, 1950.

——

Pandick Press, Inc., 22 Thames St., New York 6, N. Y., U. S. A.

INDEX.

Preliminary Statement ...

Opinions Below

Jurisdiction

Statement of the Case......

Question Presented

Argument:

I. Disapproval by the District Court of the plan

and affirmance of that disapproval by the Court

of Appeals raise no questions for review by

this Court

A. The District Court’s Disapproval of the

Plan Falls Well Within the Limits of

District Court Action Heretofore Fixed

by this Court

1. Price Paid for Bonds Erroneously

Relied Upon

2. Refusal to Take into Account Unifi-

cation Savings

3. Refusal to Take into Account Im-

provements in Property........................

4. Failure to Provide Compensation for

Enforced Cash Contributions .............

5. Failure to Provide Compensation for

Deprival of Rights to Debtor’s Earn-

ings in Prosperous Periodg..................

Il. The Petition fails to set forth sufficient reasons

6. Failure to Take into Account Changed

Conditions Resulting in Increased

Earning Capacity of Debtor.............. 12

This Court Has Upheld the District

Court’s Power to Review and Reject Plans 14

The Availability of the Power to Review

and Reject Plans Is Generally Accepted

in the Federal Courts 18

The Plan of the Commission Majority

Violated the Rule of Absolute Priority... 19

for granting writ 22

ConcLusIon 26

APPENDIX 27

iii

TaBLE oF CasEs.

PAGE

Comstock v. Group of Institutional Investors, 335

U. S. 211, 214 (1948) 6, 16, 17

Consolidated Rock Products Co. v. DuBois, 312 U. 8.

510 (1941) 20

Cromwell v. Sac County, 96 U.S. 51 7

Ecker v. Western Pacific R. R. Co., 318 U. 8. 448,

473 (1943) 14, 15, 18

Group of Institutional Investors v. Chicago, Mil-

waukee, St. Paul & Pacific R. Co., 318 U. S. 523

(1943) a 11, 12, 13, 15, 16, 18, 20

In re Boston & Providence R. Corp., 43 F. Supp. 327

(1942) pei ea RN 19

In re Boston & Providence R. Corp., 76 F. Supp. 185

(D. C. D. Mass. 1948) 19

In re Chicago, Rock Island and Pacific Ry. Co., 50 F.

Supp. 835 i 18

In re Denver & Rio Grande Western R. R. Co. (D. C

D. Colo. unreported 1940), and 38 F. Supp. 120

(1941) . 19

In re Louisiana & N. W. R. Co., 36 F. Supp. 636 (D. C.

S. D. N. Y. 1938)... 19

In re Missouri Pacific Railroad Company, C. C. A.

8th, unreported (1943) 19

In re New York, New Haven and Hartford R. R. Co.,

147 F. (2d) 40 (1945)...................... 18

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

54 F. Supp. 595. 18

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

unreported (D. C. D. Conn. 1941) 19

In re St. Louis-San Francisco Ry. Co., 46 F. Supp.

120 (D. C. E. D. Mo. 1942) 19

Insurance Group v. Denver and Rio Grande Western

R. R. Co., 329 U. 8. 607 20

In the Matter of Florida East Coast Railway Com-

pany, unreported, D. C. So. Dist. Fla. 1943 set out

at R. 690 19

’

;

sag

PAGE

Marcos v. Wilson Cyprus Co., 269 U. S. 82 (1925)... 6

Northern Pacific Railway Co. v. Boyd, 228 U. 8. 484

(1913) 19, 20

Page v. Arkansas Natural Gas Corp., 286 U. S. 269,

271 (1932) 6

Radio-Keith Orpheum Corporation (C.C.A. 2nd), 106

F. 2d 22 (Cert. den. 308 U. S. 622; rehearing denied

308 U. S. 622) 7

Reconstruction Finance Corporation v. Denver &@

R. G. W. R. Co., 328 U.S. 495, 512 (1946).................. 13

Schwabacher v. United States, 334 U. S. 182 (1948)... 8

Securities and Exchange Commission v. Central-

Illinois Securities Corp., 338 U.S. 96, 128 (1949).... 9,10

Security-First Nat. Bank of Los Angeles v. Rindge

Land & Navigation Co, (C.C.A. 9th), 85 F. 2d 557,

rehearing denied, 86 F'. (2d) 3 (Cert. den. 299 U. S.

613; rehearing denied 300 U. S. 686)........................

Southern Pacific v. Bogert, 250 U. S. 483 (1919)........

Standard Gas & Electric Co. v. Deep Rock Oil Co.

(C. C. A. 10th), 117 F. 2d 615 (Cert. den. 313

U. 8. 564) 7

Texas Hotel Securities ilies v. Waco Development

Co. (C.C.A. 5th), 87 F. 2d 395 (Cert. den. 300 U. S.

679, rehearing denied 301 U. 8S. 713, second motion

for rehearing denied 81 L. Ed. 1367)

Wade v. Chicago S. & St. L. R. Co., 149 U. S. 327........ 7

Williams Mfg. Co. v. United Shoe Machinery Cor-

poration, 316 U. S. 364, 367 (1942)... 6

TaBLe oF STATUTES.

49 Stat. 911, 11 U. S. C. Sec. 205 (Sec. 77(e) of the

Bankruptcy Act) 14

62 Stat. 162, 11 U. S. C. Sec. 208 (‘‘Mahaffie’’ Act)... 13, 25

IN THE

Supreme Court of the United States

Ocrosrr Tz, 1949.

No. 601.

Atiantic Coast Live Rarroap Company, ef al.,

Petitioners,

St. Joz Parzr Company, et al.,

Respondents.

BRIEF OF RESPONDENTS THE LYNCH

INTERESTS IN OPPOSITION TO

PETITION FOR CERTIORARI.

Preliminary Statement.

The Lynch interests, so-called in this proceeding, consist

of §. A. Lynch, S. A. Lynch Corporation and certain other

bondholders acting together for the protection of their in-

terests, as the owners of Refunding bonds of Florida East

Coast Railway Company, the debtor herein.

Both before the Interstate Commerce Commission and

the courts below, the Lynch interests have contended that

the plan of reorganization approved by a bare majority of

the Commission fails to provide fair and equitable treatment

for the Refunding bondholders, fails to afford due recog-

nition to their rights and fails to conform to legal stand-

ards in certain respects. Their contentions have been sus-

tained by both courts below.

Opinions Below.

The opinions in the Court of Appeals are not yet re-

ported, but are contained in the Record at pages 937 to 956.

The opinion of the District Court is reported at 81 F.

Supp. 926.

The reports of the Interstate Commerce Commission

are at 252 I. C. C. 423, 252 I. C. C. 731, 254 I. C. C. 865, 261

I. C. C. 151, 267 I. C. C. 295, and 267 I. C. C. 729.

Jurisdiction.

The jurisdiction of this Court is invoked by petitioners

under 28 U. S. C. §1254(1). Respondents respectfully sub-

mit that the jurisdiction so invoked should be refused in

accordance with rule 38 of this Court.

Statement of the Case.

This case is one of the last few Section 77 proceedings

remaining in the Federal courts. The debtor railroad has

a First Mortgage of $12,000,000, on which interest has been

currently paid throughout the proceeding; and a Refunding

Mortgage of $45,000,000 on which accumulated interest

totals about $35,000,000. It has at all times been generally

agreed that no equity remains for the stockholders.

Following institution of the Section 77 proceeding in

1941, the Interstate Commerce Commission held hearings

and certified a plan providing a new capital structure

aggregating from $35,000,000 to $41,000,000, based on

anticipated normal earnings of $1,268,000 annually.

The District Court on October 19, 1943 disapproved the

plan and referred it back to the Commission ‘‘to afford

the Commission an opportunity to re-examine the entire

situation in the light of the facts which have developed

since the former hearing’’ (R. 697).

—

The Commission held further hearings. No new earn-

ings studies were made. Instead, the Commission merely

adjusted its estimate of future annual earnings from

$1,268,000 to $1,500,000 in recognition of anticipated sav-

ings from part of a planned improvement program. On

this basis, it provided in its plan of January 8, 1945 for a

capital structure, after paying off the First Mortgage, of

$40,500,000, with no fixed interest bonds (as contrasted

with the potential $41,000,000 in the 1941 plau, of which

$14,000,000 to $20,000,000 was in fixed interest bonds).

At the same time the Commission rejected the first offer

of Atlantic Coast Line for the property. It pointed out

that since the securities proposed to be issued under

Atlantic Coast Line’s offer, even if taken at par, did not

satisfy the claim of the Refunding bondholders, the bond-

holders must be allowed the entire stock equity, with its

accompanying prospects of recoupment (261 I. C. C. at

192).

In the summer of 1945 representations were made to

the Commission to the effect, among others, that control by

St. Joe Paper Company, a holder of a majority of the Re-

funding bonds, would not be compatible with the public

interest. Atlantic Coast Line made a new proposal for

acquisition of the debtor’s properties. The Commission

reopened the proceedings and in late 1945 took extensive

testimony, in Washington and in Florida, principally upon

the question of desirability of Atlantic Coast Line control

as against St. Joe Paper Company.

This issue arose out of the fact that St. Joe Paper

Company, owned by the Alfred I. du Pont Estate, had

acquired over a majority of the Refunding bonds. At about

the same time members of the so-called Deposit Committee

sold substantially all of their holdings (R. 364). The

—

question was presented as to whether the du Pont Estate

had other conflicting interests, whether its trustees were

qualified to run a railroad, and whether the du Pont control

might not mean operation for the principal benefit of a

single private financial interest.

The trial examiner proposed a report which would have

affirmed the Commission’s 1945 plan, providing again for

independent reorganization, despite the Atlantic Coast Line

proposals. In April, 1947, the Commission, by a vote of

5 to 4, adopted the present plan, which was substantially

the 1945 proposal of Atlantic Coast Line, except that the

price it had proposed to pay in cash and securities was

raised by the Commission to equal a face amount of

$40,500,000, the value fixed for the properties, then and in

the 1945 plan (267 I. C. C. 295).

Following reargument, the Commission again split in

its position, 6 of the Commissioners favoring adoption of

the Atlantic Coast Line plan, while 5 of the Commissioners

voted against the plan (267 I. C. C. 729).

At the hearing before the District Court, the creditors

were united in their opposition to the plan’, except for the

Deposit Committee, which spoke for about 1.3% of the

Refunding bonds. The Lynch interests introduced substan- |

tial evidence through William A. Gordon, member of Cov-

erdale & Colpitts, bearing upon post-war conditions and

prospects (R. 227-288; Lynch Exs. 1-33). This evidence

was not controverted. Previously the Commission had de-

clined to reopen its record to receive such evidence of post-

war conditions (267 I. C. C. at 729).

* Since it is generally conceded that the First Mortgage bonds

would be paid off under any plan and that the stockholders would

get nothing under any plan, the Refunding bondholders are the only

security holders substantially affected.

——

The District Court concluded that the plan proceedings

should be referred back to the Commission (R. 466-481).

The Court of Appeals affirmed.

Petitioners assert in their petition that if review is

granted, they will ask this Court to remand the cause and

‘direct the entry of an order approving the plan’’.

Question Presented.

The only question presented is whether, under the facts

of this particular reorganization, the District Court acted

within the scope of its authority when it disapproved the

plan of reorganization put forward by the Interstate Com-

merce Commission. The Court of Appeals affirmed the

District Court and consequently held that the District

Court acted within the scope of its authority.

The first seven of the nine questions alleged by peti-

tioners to be presented are in effect different facets of the

central question above, although petitioners pose the ques-

tions upon the basis of certain assumptions not here valid.

The eighth and ninth questions asserted by petitioners, it

is submitted, are not here raised.

ARGUMENT.

Disapproval by the District Court of the plan and

affirmance of that disapproval by the Court of Appeals

raise no questions for review by this Court.

Before the District Court, Atlantic Coast Line took the

position that the court was in effect a mere rubber stamp

and could only approve the plan of a majority of the

Commission (R. 909). Before the Court of Appeals it mod-

Xe og

ified its position slightly and now, in its petition, it seem-

ingly retracts a little further. But in essence its position

is that the District Court had no discretion as to approval.

Petitioners’ position overlooks, however, the facts of

this case. It disregards, for example, (a) the errors of the

Commission, referred to below, (b) the fact that the Com-

mission split almost evenly, a bare majority approving the

plan, (c) that the District Court received a large volume

of evidence, in accordance with the statutory provisions,

that made plain the Commission’s disregard of statutory

standards, and (d) that the conclusion of the District Court

was affirmed by the Court of Appeals.

The petition attempts to find a lack of logic or con-

sistency in the opinions below, while disregarding the

pertinent facts to which appropriate legal principles must

be applied.

It is the firmly established policy of this Court that in

so far as the issues raised by petitioners involve questions

of fact upon which the two lower courts concur, they will

not be reviewed by this Court. ‘‘A seasoned and wise rule

of this Court makes concurrent findings of two courts below

final here in the absence of very exceptional showing of

error.’’ Comstock v. Group of Institutional Investors, 335

U. S. 211, 214 (1948) ; Page v. Arkansas Natural Gas Corp.,

286 U.S. 269, 271 (1932) ; Williams Mfg. Co. v. United Shoe

Machinery Corporation, 316 U. 8. 364, 367 (1942). To

similar effect, see Marcos v. Wilson Cyprus Co. 269 U. 8.

82 (1925) ; Southern Pacific v. Bogert, 250 U. 8. 483 (1919).

The District Court here heard the witnesses and examined

the exhibits; the Court of Appeals had the benefit of ex-

tended examination of the record, voluminous briefs, and

oral argument. They have united in condemning the

Commission’s plan. It is submitted therefore, that in

— — eee

accord with this established practice, the action in the

courts below with respect to matters of fact should not be

reviewed.

A. The District Court’s Disapproval of the Plan Falls

Well Within the Limits of District Court Action Here-

tofore Fixed by this Court.

The plan adopted by a bare majority of the Commission

contained a number of substantial errors and omissions,

any one of which, we submit, would have justified dis-

approval. It suffices to refer to those that can be briefly

presented :

1. Price Paid for Bonds Erroneously Relied Upon.

A majority of the Commission concluded that since the

value to be received by the Refunding bondholders equaled

certain estimates of the prices paid for those bonds (the

estimates having been made by counsel for Atlantic Coast

Line and not of record) that ‘‘the claim of the first and

refunding bondholders will under the approved plan be

adequately satisfied is obvious’’ (267 I. C. O. 738). This

departure from legal standards was pointed out by the

District Court (R. 478).*

Commissioner Mahaffie’s dissent emphasized this point

(267 I. C. C. at 746):

* The law is well settled. See, among others: Cromwell v. Sac

County, 96 U. S. 51; Wade v. Chicago S. & St. L. R. Co., 149 U. 8.

327 ; Standard Gas & Electric Co. v. Deep Rock Oil Co. (C. C. A.

10th), 117 F. 2d 615 (Cert. den. 313 U. 8. 564) ; Radio-Keith

Orpheum Corporation (C. C. A. 2nd), 106 F. 2d 22 (Cert. den.

308 U. S. 622; rehearing denied 308 U. S. 622) ; Security-First

Nat. Bank of Los Angeles v. Rindge Land & Navigation Co. (C. C.

A. 9th), 85 F. 2d 557, rehearing denied, 86 F. (2d) 3 (Cert. den.

299 U. 8. 613; rehearing denied 300 U. 8S. 686) ; Texas Hotel Securi-

ties Corp. v. Waco Development Co. (C. C. A. 5th), 87 F. 2d 395

(Cert. den. 300 U. S. 679, rehearing denied 301 U. S. 713, second

motion for rehearing denied 81 L. Ed. 1367).

‘‘This remarkable finding seems to be based on an

appendix attached to the summary of the argument

of counsel for the Coast Line. It is not of record in

this proceeding. And even if the facts stated in it

were proven they would not afford a valid basis for

the finding above set out.’’

The Commission’s employment of improper legal stand-

ards in this instance alone was sufficient to justify dis-

approval. Even in a case involving doubt as to the stand-

ards employed by the Commission, this Court has recently

directed a remand to the Commission, Schwabacher v.

United States, 334 U. S. 182 (1948).

2. Refusal to Take into Account Unification Savings.

A majority of the Commission found that savings in

expenses that would result from a unification of the debtor

with Atlantic Coast Line justified sale of the former’s prop-

erties to the latter and estimated those savings at ‘‘between

$350,000 and $1,000,000 per annum”’ (267 I. C. C. at 325).

However, despite the well established practice of crediting

each of the properties with one half of such savings (I. C. C.

Transcript, p. 2825), and the evidence that most of such

savings would be realized within five years, the Commission

refused to allow the debtor any credit therefor, totally

disregarding this factor in its valuation. If the unification

Savings are sufficiently significant and definite to call for a

forced merger, they are likewise sufficiently significant and

definite to require consideration in the valuation process.

This is here borne out by the fact that if the Commis-

sion’s estimate of unification savings were taken at the

median, or $675,000, an equal division between the debtor

and Atlantic Coast Line would add $337,000 to the debtor’s

annual earning power. Capitalizing this amount at 4%

a _

would add $8,400,000 to the value of the debtor and to its

sale price.

Under the rule of Securities and Exchange Commission

v. Central-Illinois Securities Corp., 338 U.S. 96, 128 (1949),

this is a ‘“‘particular question which arose in the valuation

process”’, analogous to the questions in the valuation proc-

ess therein reviewed by this Court. It is submitted that on

this single ground alone, the conclusion of the District

Court that the plan could not be approved was fully justi-

fied and wholly within the scope of his power.

3. Refusal to Take into Account Improvements in

Property.

In its earlier plan rejected by Judge Strum, the Com-

mission found, based upon 1940 conditions, a maximum

value of $41,000,000 and a minimum of $35,000,000. Since

1940, the excess of current assets over current liabilities

has increased $22,954,000, while cash spent for improve-

ments and bond acquisitions (which would otherwise still

be available as cash) has amounted to $17,471,000 or a total

of $40,425,000 (Lynch Exs. 1, 28, 29). Even after allowing

$12,000,000 to retire the First Mortgage bonds, this alone

almost equals the total cash value approved by the majority

of the Commission as the proposed sale price for all of the

assets of the debtor.

The excess of current assets over current liabilities

amounts to $25,000,000 (Lynch Ex. 28) of which $8,189,000

would be required to pay the remaining First Mortgage

bonds (allowing for $3,811,000 already purchased; Lynch

Ex. 29). In contrast, the Commission itself estimated a

value of only $30,892,500 for the entire price to be paid by

Atlantic Coast Line in securities and cash (267 I. C. CO. at

737). It will not do to say that excess cash under the plan

will go to the Refunding bondholders, since the Commission

ne arnt"

= ae ae

itself pointed out that all but about $1,300,000 (267 I. C. ©.

at 364) would be impounded for the benefit of Atlantic

Coast Line for future improvements, working capital, dis-

charge of prior lien and the like. Thus the Commission

either largely ignored net current assets or fixed a value

of only about $13,000,000 for the entire roadway, equip-

ment and other remaining tangible assets of the debtor.

On either basis, it is submitted that the Commission

clearly erred in the valuation process and failed to follow

proper legal standards, within the principle of Securities

and Exchange Commission v. Central-Illinois Securities

Corp., supra.

4. Failure to Provide Compensation for Enforced Cash

Contributions.

The plan of the Commission majority requires a large

cash reserve for completion of a capital improvement pro-

gram initiated when it was believed that the reorganized

company would come into the hands of the Refunding bond-

holders. However, the plan would require that such en-

forced cash contribution now be made for the benefit of

Atlantic Coast Line, who seeks to acquire. The Refunding

bondholders receive no compensation for this enforced cash

contribution. Even in adjusting its estimate of earning

power, the Commission refused to credit the savings from

the improvements, as estimated by the Trustees them-

selves.* These alone would have increased the normal year

estimate of earnings by $603,000, while the Commission in-

creased its estimate by only $232,000. In addition the

bondholders are required to make other cash contributions,

such as $500,000 for cash working capital for the benefit of

* Although the Commission erroneously attributed these esti-

mates to witness Kennedy (261 I. C. C. 161), they were actually

made by the Trustees, I. C. C. Transcript 1213-1214.

———

Atlantic Coast Line, for which no compensation whatever

is provided.

This failure of the majority of the Commission to pro-

vide ‘‘full compensatory treatment’’ required disapproval

by the District Court within the principle established by

this Court in Group of Institutional Investors v. Chicago,

Milwaukee, St. Paul & Pacific R. Co. 318 U. 8. 523 (1943),

and such disapproval was clearly within the power of the

District Court.

5. Failure to Provide Compensation for Deprival of

Rights to Debtor’s Earnings in Prosperous Periods.

The majority of the Commission verbally recognized

the necessity of compensation for loss of opportunity of the

Refunding bondholders to recoup past losses from future

operations of the debtor (267 I. C. C. 307, 374). But it gave

mere lip service. This plainly appears from the valuations

fixed by the Commission, $41,000,000 in the 1942 plan under

which the equity remained in the Refunding bondholders,

$40,500,000 in the present plan under which equity is turned

over to Atlantic Coast Line.

The Commission referred particularly to the participat-

ing feature by which the new preferred stock (given to

Refunding bondholders) would participate in all dividends

in excess of $4 per share on Atlantic Coast Line common

stock. Its reliance on this provision, however, overlooks

the fact that Atlantic Coast Line has not paid over $4

dividends on its common stock since 1931, that $4 was paid

in only three of those 17 years, during which the simple

average was $1.72. Taken together with the provision for

call of the preferred stock at par, this renders the partici-

pating character of the stock illusory.

It is submitted that reliance by the Commission major-

ity upon such an illusory basis for compensation consti-

tutes mere ‘‘lip service’ to the rule, contrary to the

principle established by this Court in Group of Institutional

Investors v. Chicago, Milwaukee, St. Paul & Pacific R. Co.,

318 U. S. 523 at 570.

6. Failure to Take into Account Changed Conditions

Resulting in Increased Earning Capacity of Debtor.

The Commission’s estimate of future income of the

debtor available for fixed charges after income taxes, based

upon evidence of pre-war conditions, was $1,500,000. It

refused to reopen the record to receive evidence of perma-

nently changed post-war conditions (267 I. C. C. at 729).

In contrast, the uncontroverted evidence before the District

Court showed that in the future normal year the debtor

could expect net income available for income taxes and fixed

charges of $2,850,000 (R. 263-264, Lynch Ex. 27). This

estimate was supported and buttressed by detailed show-

ings (Lynch Exs. 6 to 27, inclusive, etc), as well as by com-

parisons with other southern carriers which indicated the

relative superiority of the debtor (Lynch Exs. 2-5).

Since the record before the Commission was closed in

1945, it could not contain any evidence as to post-war condi-

tions. The entire evidence in 1945 was in turn based upon

traffic studies of the Trustees introduced at the 1941 hear-

ings and predicated upon pre-war conditions, namely 1940

and earlier depression years.

This is evidenced, for example, by the continued reliance

by the Commission upon its original estimate, based upon

1940 conditions, of annual operating income of $12,300,000

(261 I. C. C. at 159). In contrast, the postwar period shows

annual operating income for 1946 of $26,543,488, for 1947 of

$27,054,334 and 1948 of $28,653,000 (A. C. L. Kix. 17 and

1948 annual report).

——

The District Court said (R. 479):

“«*** IT am impressed that the evidence produced

before me, if it had been before the Commission,

might have produced a different result”’.

In the Milwaukee case, this Court said (318 U. 8. at

p. 542):

*‘As we have indicated in the Western P. R. Corp.

case the power of the District Court to receive addi-

tional evidence may aid it in determining whether

changed circumstances require that the plan be re-

ferred back to the Commission for reconsideration.’?

Again in Reconstruction Finance Corporation v. Denver

& R. G. W. R. Co., 328 U. S. 495, 512 (1946) it said:

‘Changes in economic conditions cannot effect

the powers of the reorganization agencies even

though such changes may require a reexamination

into the present fairness of the former exercise of

those pewers.’’

Congressional recognition of the necessity for consider-

ation of changed post-war conditions was embodied in the

Act of April 9, 1948 (11 U. S. OC. A. sec. 208). This Act

provides that as to any plan of reorganization under Section

77 approved by the Commission after that date, but not

finally confirmed, if the court on petition shall find

““* * * that changes, facts, or developments have

occurred since the approval of such plan by the Com-

mission which were not provided for in the plan and

which make it necessary or expedient, in the opinion

of the court, that the Commission reexamine and

reconsider and revise such plan in order to insure

that the plan consummated and put into effect shall

then, in the opinion of the court and the Commission,

be fair and equitable * * *”

the court shall return the plan to the Commission.

- cy

The type of changed conditions specifically referred to

in that Act include those as to which evidence was presented

to the District Court in this case, such as revenues, expenses,

net earnings, improvements to property and cash and net

current assets.

Although the provisions of this Act do not technically

apply to this case as it stood before the District Court, be-

cause of the accident that the Commission’s report was

rendered March 25, 1948, two weeks before the Act became

effective, the principles involved, we submit, should guide

the District Court in the exercise of its discretion.

B. This Court Has Upheld the District Court’s Power to

Review and Reject Plans.

Before a district judge can approve a plan, Section

77(e) requires that he be satisfied, among other things, that

the plan

(1) is fair and equitable;

(2) affords due recognition to the rights of each class

of creditors and stockholders;

(3) does not discriminate unfairly in favor of any class

of creditors or stockholders;

(4) will conform to the requirements of the law of the

land regarding the participation of the various

classes of creditors and stockholders.

In construing these statutory provisions as to its func-

tions the District Court, as well as the Court of Appeals,

followed the standards heretofore laid down by this Court.

In Ecker v. Western Pacific R. R. Co., 318 U. 8. 448, 473

(1943), this Court said that there is always open to the dis-

trict court ‘‘the question of whether in reaching the result,

the Commission has employed improper statutory stand-

Page

ards.’’ Also, ‘‘The district court may review to determine

whether the Commission has followed the statutory man-

dates of subsection (e).’’ Ibid, page 477. ‘‘Thus, while

judicial review does not involve an independent examination

into valuation, it does require that the Court shall be satis-

fied upon the record before the Commission, with such addi-

tional evidence as may be pertinent to the Commission’s

findings of value, that the statutory requirements have been

followed.’’ Ibid, page 477.

It is evident that this Court intended the district court

to examine carefully the Commission’s treatment of credi-

tors to determine whether the statutory mandates had been

followed. In the Western Pacific case this Court, at pages

485-487, carefully examined the allocation of new bonds to

the R. F. C. for its $10,000,000 of Trustees’ certificates,

noted the evidence before the district court that the new

bonds were worth less than the old certificates, noted that

the district court had made no finding on the point, and held

that there was no evidence to indicate that R. F. C. had

received more than its just deserts, as the objectors claimed.

This is even more apparent from Group of Institutional

Investors v. Chicago, Milwaukee, St. Paul & Pacific R. Co.,

318 U. S. 523 (1943), where this Court itself, in effect,

remanded the plan to the Commission after finding that

the treatment accorded the general mortgage bondholders

was not the equivalent of the rights surrendered, since it

did not include compensation for loss of seniority. The

Court said (p. 566):

‘‘Whether in a given case senior creditors have

been made whole or received ‘full compensatory

treatment’ rests in the informed judgment of the

Commission and the District Court on consideration

of all relevant facts. A decision on that issue involves

a consideration of the numerous investment features

es eee

of the old and new securities and a financial analysis

of many factors.’’ (Emphasis supplied.)

As to whether full compensatory treatment was accorded,

‘*The question in each case is one for the informed discre-

tion of the Commission and the District Court.’’ Ibid,

p. 564. And again this Court said that ‘‘the Commission

and the District Court should determine what the General

Mortgage bonds should receive’’ as compensatory treat-

ment. Ibid, p. 571.

In Comstock v. Group of Institutional Investors, 335

U. S. 211 (1948), the Court said (at p. 227):

‘In view of the functions cast upon the court in

such cases, we cannot say that it may not, in its dis-

cretion, consider objections on their merits even

though they have not been presented to the Commis-

sion. Some circumstances might be disclosed to

indicate a remand for their consideration by the

Commission. They might indicate that the courts

would withhold approval, not out of deference to the

objecting parties’ rights but because of the broad

responsibility laid upon the court for the equity and

fairness of the plan as a whole.’’

This Court has recognized that a finding as to whether

or not a plan of reorganization is fair and equitable involves

the exercise of discretion on the part of the district court.

As it said in Group of Institutional Investors v. Chicago,

Milwaukee, St. Paul and Pacific R. R. Co., 318 U. S.

523, 564:

‘‘Our role on review is a limited one. It is not

enough to reverse the District Court that we might

have appraised the facts somewhat differently. If

there is warrant for the action of the District Court,

our task on review is at an end.’’

ee ee

Again, in Comstock v. Group of Institutional Investors,

supra, the Court said (335 U. 8. at p. 228):

‘‘The court below evidently considered the circum-

stances of this case to warrant such inquiry into the

merits, and we do not inquire whether the discretion

was wisely exercised.’’

These latter two observations seem particularly per-

tinent here, where the action of the District Court has

received the approval of the Court of Appeals.

Moreover, it is not without significance that the Com-

mission approved the plan by a 6 to 5 vote. Itisa reasonable

inference that if the finality attributable to certain Com-

mission conclusions arises from its expertness, the fact that

the Commission was almost evenly divided would of itself

serve to cast considerable doubt upon the conclusions

reached in this instance. The proposed report of the trial

examiner was apparently in accord with the views of the

minority of the Commission.

In the lower courts, both the District Court and a

majority of the Court of Appeals have disapproved the

plan. Even the dissenting judge in the Court of Appeals

seemingly does not go so far as to say the plan should be

approved. He criticized the District Court for including

certain matters in his opinion, which, however, were not

the basis for affirmance. But the dissenting judge’s opinion

nowhere deals with the errors in the Commission’s reports

nor does he anywhere say that the plan requires approval.

The dissenting judge did state that the District Court

“failed to defer fully to the findings of the Commission.”’

His meaning is not clear. If he intended that the District

Court was bound by the Commission’s plan, it is submitted

that such a conception, while closely approaching that urged

by Atlantic Coast Line below, is clearly in conflict with the

a oan erreeeeetoneneee nate

decisions of this Court referred to above. In other respects

the dissenting opinion is vague as to what disposition

should be ultimately made of the plan.

C. The Availability of the Power to Review and Reject

Plans is Generally Accepted in the Federal Courts.

The Court of Appeals for the Second Circuit has re-

versed a district court for erroneously approving a plan

where the collateral of certain pledgees had been the subject

of erroneous valuations by the Commission, In re New York,

New Haven and Hartford R. R. Co., 147 F. (2d) 40 (1945).

Similarly, errors by the Commission, in matters com-

parable to those here involved, have been held to be suffi-

cient grounds for refusal to approve plans in decisions by

district courts rendered subsequent to the decisions of this

Court in the Western Pacific and Milwaukee cases. The

Connecticut District Court rejected the Commission’s plan

for reorganization of the New Haven for a second time in

1943, the grounds of disapproval including, among others,

the failure to compensate certain secured creditors ade-

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

54 F. Supp. 595. Likewise, the District Court for the

Northern District of Illinois, Eastern Division, disap-

proved a plan of the Commission in 1943 on the ground

that senior interests were not adequately compensated,

saying that whether or not the Commission had made a

specific finding of full compensatory treatment, ‘‘it remains

for the court to determine whether the Commission was

correct on this point’’, In re Chicago, Rock Island and

Pacific Ry. Co., 50 F. Supp. 835.

In addition, errors by the Commission have been

grounds for rejection of its plans by district courts in other

Section 77 proceedings. Significantly, these decisions have

involved at least six different district courts and no appeal

was prosecuted to an appellate court in any one of them.*

D. The Plan of the Commission Majority Violated the Rule

of Absolute Priority.

It is submitted that the Commission here violated the

principle established in Northern Pacific Railway Co. v.

Boyd, 228 U. S. 484 (1913).

There, a reorganization contract was made between

secured creditors and stockholders in which the property

was valued and capitalized at $345,000,000, and the stock-

holders allowed to participate in the new company organ-

ized for the purpose of acquiring the assets of the old

company. The contract was then consummated by a so-

called foreclosure sale at which the property was sold for

$61,500,000, which was less than the amount of the senior

creditors’ claims, thus ‘‘freezing out’? the unsecured credi-

tors. This Court held that the reorganization was fraudu-

lent and void as to unsecured creditors, because they had

been deprived of their rights in the company’s property,

which was ‘‘a trust fund for the payment of creditors’’,

228 U.S. at p. 504. If there was sufficient value to permit

the stockholders to participate, there must ipso facto have

been sufficient value for the unsecured creditors.

* See in addition to cases cited above: In the Matter of Florida

East Coast Railway Company, unreported, D. C. So. Dist. Fla. 1943

set out at R. 690; In re Louisiana & N. W. R. Co., 36 F. Supp. 636

(D. C. 8S. D. N. Y. 1938); In re Denver & Rio Grande Western

R. R. Co. (D. C. D. Colo. unreported 1940), and 38 F. Supp. 120

(1941) ; In re St. Louis-San Francisco Ry. Co., 46 F. Supp. 120

(D. C. E. D. Mo. 1942) ; In re New York, New Haven & Hartford

R. R. Co., unreported (D. C. D. Conn. 1941); In re Boston &

Providence R. Corp., 43 F. Supp. 327 (1942); In re Boston &

Providence R. Corp., 76 F. Supp. 185 (D. ©. D. Mass. 1948) ;

In re Missouri Pacific Railroad Company, C. C. A. 8th, unre-

ported (1943).

ie,

It is apparent that a majority of the Commission has

here proposed to do what was stricken down by this Court

in the Boyd case. It has proposed a distribution among

Florida East Coast security holders of an amount repre-

senting the equivalent of the $61,500,000 distribution in the

Boyd case that this Court held illegal.

As pointed out by the Commission minority, the major-

ity valued the debtor at $40,500,000 but awarded the bene-

ficial owners a payment with an admitted cash value of

only approximately $31,000,000 (267 I. C. C. at 737). The

difference was to become the profit of Atlantic Coast Line,

despite the fact that the Refunding bondholders had a

claim of approximately $80,000,000.

In Insurance Group v. Denver and Rio Grande Western

R. R. Co., 329 U. S. 607, this Court held that the face value

of new securities does not determine whether senior credi-

tors have been compensated. Unless the cash value of the

new securities equals the face amount of their claim, it

there said, the claim has not been satisfied.

The Commission minority pointed out this principle in

their dissent (267 I. C. C. at p. 391):

‘*Cash and securities as here provided which have

a value less than half the face amount of such claims

do not meet this test.’’

The application of the doctrine of absolute priority is

not inflexible. As this Court said in the Milwaukee case,

quoting with approval its language in Consolidated Rock

Products Co. v. DuBois, 312 U. 8. 510 (1941), the applica-

tion of the rule ‘‘will be dependent on the facts and re-

quirements of each case’’. In the same case this Court

pointed out the necessity of preventing the property of one

interest from being ‘‘subtly appropriated to pay the claims

of another while lip service is rendered the principles of

priority”. 318 U.S. at p. 570. (Emphasis added.)

Here, Atlantic Coast Line, as an offeror seeking to buy,

having an even more tenuous position in the proceeding

than a stockholder, asserts that it should be more favorably

treated than stockholders whose equity is gone and who

make a fresh cash contribution.

It seeks in effect, by acquisition of the properties at less

than the value found by the Commission, to become a dis-

tributee of the proceeds of the transaction, by acquisition

at a substantial profit, and in fact, to become the principal

beneficiary of the plan.

The Commission proposed to divest the Refunding bond-

holders of their lien for a total claim of approximately

$80,000,000 for principal and interest. In return, they

would receive a new lien to the extent only of $21,375,000,

on the selfsame property only, and the remainder of their

lien (whether the property be valued at $40,500,000 or

$80,000,000) is handed to the bondholders of Atlantic Coast

Line under their after-acquired property clauses. For this

lien divested from them, the Refunding bondholders are

given only stock of Atlantic Coast Line, inferior to the

claims of even unsecured creditors.

This is done, not in a situation involving ordinary

adjustments between mortgage divisions of the same sys-

tem, but in a situation involving an enforced surrender of

the properties and of the bondholders’ lien thereon to a

third-party stranger, under circumstances that clearly vio-

late the rule of absolute priority and result in a taking of

property of the Refunding bondholders without due process

of law.

The petition fails to set forth sufficient reasons for

granting the writ.

As we have already shown, the decision below is not in

conflict with applicable decisions of this Court, but is clearly

in harmony with them.

Likewise, it is evident that the decision below does not

present questions of public importance requiring review by

this Court. It merely affirms the conclusion by the District

Court that the Commission’s errors render the plan unfair

and inequitable.

For convenience we will consider the petitioners’ alleged

reasons for granting the writ in the order set forth by them.

Questions (1) and (2).

Question (1) assumes that statutory standards have been

followed, an assumption not warranted in the light of the

decision of the two courts below and the facts set forth

hereinabove. It further assumes that no question arises as

to the doctrine of absolute priority, although this was an

issue below, even before the Commission.

Question (2) assumes that, in concluding that the plan

was not fair and equitable, the two courts below applied

the terms in their colloquial sense, an assumption clearly

contrary to fact, as already shown.

However, disregarding the form of the questions, the

argument of petitioners, it is submitted, concerns itself with

form rather than substance. In dealing with the function

of the court, petitioners nowhere deal with the merits of

the plan. Their contention that the courts below applied

the test of ‘‘colloquial equity’’ is based wholly upon certain

comments in the opinions. These comments, however, have

little significance when read in the abstract. When taken

in connection with the facts of the case and the actual errors

involved, it is evident that both courts below clearly under-

stood their functions under the decisions of this Court.

Question (3).

Judge Hutcheson’s comment on the Commission’s pre-

occupation with the struggle for control of the debtor is

no conceivable basis for suggesting that he ‘undertook a

type of supervision over the discharge by the Commission

of its responsibilities which the Congress did not intend the

Courts to exercise’’ (petition, p. 25).

On the contrary, that comment is a very natural one,

expressing a conclusion that is inescapable, both from the

record as a whole and from a reading of the Commission’s

two reports before the Court.* There is no question but

that the Commission was faced with a grave problem as

to control, but that cannot be an excuse for disregarding

the rights of bondholders. This was in fact the very reason

for the 6-5 split in the Commission and the earlier 5-4 split.

Judge Hutcheson could hardly overlook the fact.

Question (4).

Petitioners here confuse the second and third bases for

the District Court’s disapproval. The second basis related

to disapproval by the bondholders, but it was not the ground

* Of the 113 pages in the two reports, over twice as much space

is devoted to the question of control as is devoted to all matters of

valuation, fairness of treatment and related questions. The evi-

dence at the reopened hearing, except for that of the Lynch

interests, was almost wholly devoted to the question of control.

M TT

for affirmance by the Court of Appeals. The latter affirmed

on the third basis, namely that the plan is unfair and

inequitable, which is the only point raised by petitioners.

The Court of Appeals did not place its decision upon the

fact of bondholder opposition to the plan. Consequently,

further discussion seems unnecessary.

Question (5).

This question relates solely to a mere dictum or observa-

tion of the District Court that the proposed merger ‘‘ought

to be a last resort.’’ It has nothing to do with the decision.

We submit that it affords no basis for review by this Court.

Questions (6), (7) and (8).

These questions relate to changed conditions. The

facts are these. Judge Strum’s order of October 19, 1943

disapproved the Commission’s 1942 plan based upon 1940

conditions and referred it back to the Commission ‘in

order to afford the Commission an opportunity to re-

examine the entire situation in the light of the facts which

have developed since the former hearing’’ (R. 697 ). Fol-

lowing the issuance of a new report early in 1945, the Com-

mission held further hearings later in that year, but in its

preoccupation with the question of control, gave no effect

to changed conditions. It again issued a plan based on

1940 conditions. It subsequently refused to reopen the

record, closed in 1945, in order to receive evidence of per-

manently changed post-war conditions; evidence that was

not available at the 1945 hearings. In this respect, we

charged in the courts below that the Commission’s conduct

has been arbitrary and capricious.

Section 3(a)(3) of the act of April 9, 1948, known as

the Mahaffie Act and relied upon by petitioners, has no

bearing on this point. As appears from the text and as

the Congressional history shows, that portion of the Act

has no effect on the power of the courts. It was designed

to give the Commission power to require a return of the

plan where it concluded that conditions required reconsider-

ation. It was evidently included in the Act because mem-

bers of the Commission had testified before the Senate

Committee on Interstate Commerce that if the Commission

had such power it would be able to reconsider plans in

appropriate cases. It is clear that the power granted to

the Commission did not diminish that of the courts and

was not intended to do so.*

Question (9).

A review by this Court of all of the objections to the

plan before the District Court and of the evidence relating

thereto, in order to arrive at a possible conclusion that the

District Court and Court of Appeals were wrong in every

respect as to the plan, would impose a terrific burden upon

this Court and represent a departure from principles here-

tofore adopted and set forth above. It is submitted that

the circumstances of this case do not justify any such con-

sequence.

* Senate Report No. 897, Committee on Interstate and Foreign

Commerce, 80th Cong. 2nd. Sess. to accompany H. R. 2298, at p. 7.

Conclusion.

For the foregoing reasons, we pray that the petition for

a writ of certiorari be denied.

Respectfully submitted,

Mrizam, McItvaine, Carrot & Ouiver & DonnaLLy,

Wartias, Frep N. Oxtiver,

Rosert R. Minam, Wu.uarp P. Scort,

Greenleaf Building, 110 East 42nd Street,

Jacksonville, Florida. New York, N. }

Attorneys for the Lynch Interests.

Dated, March 13, 1950.

Appendix.

Section 77(e) (11 U. 8. C. Sec. 205(e)), First Paragraph

and First Sentence of Second Paragraph.

(e) Upon the certification of a plan by the Commission

to the court, the court shall give due notice to all parties in

interest of the time within which such parties may file with

the court their objection to such plan, and such. parties

shall file, within such time as may be fixed in said notice,

detailed and specific objections in writing to the plan and

their claims for equitable treatment. The judge shall, after

notice in such manner as he may determine to the debtor,

its trustee or trustees, stockholders, creditors, and the Com-

mission, hear alll parties in interest in support of, and in

opposition to, smch objections to the plan and such claims

for equitable treatment.

After such hearing, and without any hearing if no ob-

jections are filedl, the judge shall approve the plan if sat-

isfied that: (1) It complies with the provisions of subsec-

tion (b) of this section, is fair and equitable, affords due

recognition to the rights of each class of creditors and stock-

holders, does not discriminate unfairly in favor of any class

of creditors or stockholders, and will conform to the re-

quirements of the law of the land regarding the participa-

tion 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 dlisclosed as 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 administ:ration and all other allowances made or to

be made by the judge, except that allowances provided for

in subsection (c)), paragraph (12) of this section, may be

paid in securities) provided for in the plan if those entitled

Reesene

thereto will accept such payment, and the judge is hereby

given power to approve the same.

If the judge shall not approve the plan, he shall file an

opinion, stating his conclusions and the reason therefor,

and he shall enter an order in which he may either dismiss

the proceedings or in his discretion and on motion of any

party in interest refer the proceedings back to the Com-

mission for further action, in which event he shall transmit

to the Commission a copy of any evidence received.

(8050)

TABLE OF CONTENTS

Opinions BELow

JURISDICTION

Tue First anp Rerunpinc Mortaace BonpHOLDERS AND

TRUSTEES

Tue Issues

ARGUMENT

Point I—The District Judge specifically recognized

and correctly stated his limited role in the evolu-

tion of a “Fair and Equitable” Plan

1. Reorganization History

2. Section 77

3. The Cases

Point I1—The District Judge was amply warranted

in returning the plan to the Commission for recon-

sideration of the treatment to be accorded the

Bondholders

1. The Standard of Valuation

a. The Debtor’s Properties

b. The Coast Line Securities to be Given in

Exchange

2. The Adequacy of Compensation

a. Quantitative Allocation

b. Qualitative Allocation

| 3. Changed Conditions

ConcLusion

Caan md

eran

TABLE OF CASES

: PAGE

Case v. Los Angeles Lumber Products Co., 308 U. S.

106 6

Chicago, Rock Island & Pacific Railway Company v.

Fleming, 157 F. (2d) 241 (C. A. 7), cert. den. 329

U. 8. 780 18

Comstock v. Group of Institutional Investors, 335 U. S.

211 4,9

Consolidated Rock Co. v. DuBois, 312 U. S. 510. 16

Continental Bonk v. Rock Island Ry. Co., 294 U.S. 648. 6

Ecker v. Western Pacific R. Corp., 318 U. S. 448__4, 8, 11, 15

Group of Institutional Investors v. Chicago, Milwaukee,

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

4, 5, 9, 13, 14, 16, 17, 18

Helvering v. Asphaltic Limestone Co., 315 U. S. 179... 2

Helvering v. Cement Investors, Inc., 316 U.S. 527... 2

In re Chicago, R. I. & P. Ry. Co., 50 F. Supp. 835

(D. C., Ill.) 15, 17

In re Denver & Rio Grande Western R. Co., 38 F. Supp.

106 (D. C., Colo.) 18

In re Denver & Rio Grande Western, R. Co., 150 F.

(2d) 28 (C. A. 10), rev. 328 U.S. 495. 18

In re Florida East Coast Railway Co., Unreported—

D. C., Fla.; see R. 690-697 18

In ve Lousiana & N. W. R. Co., 36 F. Supp. 636 (D. C.,

N. Y.) 18

In re Missouri Pacific R. Co., 50 F. Supp. 936 (D. C.,

Mo.) 16, 18

PAGE

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

F, (2d) 40 (C. A. 2), cert. den. 325 U. S. 884.16, 18

In re Schommer, 112 F. (2d) 311 (C. A. 7) ie oe

Insurance Group Committee v. Denver & R. G. W. R.

Co., 329 U. S. 607 15

Interstate Commerce Commission v. Louisville and

Nashville R.R. Co., 227 U.S. 88 10

Interstate Commerce Commission v. U:vion Pacific Rail-

road Co., 222 U. S. 541 9

N.L.R.B. v. Hearst Publications, 322 U. 8. 111... 10

National Surety Co. v. Coriell, 289 U.S. 426... 6

Old Colony Bondholders v. New York, N. H. & H. R.

Co., 161 F. (2d) 413 (C. A. 2), cert. den. 331 U.S. 858 12

Otis € Co. v. Securities and Exchange Commission, 323

U. S. 624 14

Palmer v. Massachusetts, 308 U. S. 79 8

Reconstruction Finance Corporation v. Denver and Rio

Grande Western R. Co., 328 U.S. 495 4,8

Schwabacher v. United States, 334 U. S. 182 14, 15

S.E.C. v. Central Illinois Securities Corporation, 338

U. S. 96 10

Shaw v. Railroad Co., 100 U. S. 605. 3

Standard Gas & Electric Co. v. Deep Rock Oil Corp.,

117 F. (2d) 615 (C. A. 10), cert. den. 313 U. 8. 564... 13

United States v. Barnes, 222 U.S. 513 6

Wade v. Chicago, Springfield, etc. Railroad, 149 U. S.

327 13

Pet EERE

‘

;

‘

mame emma

TABLE OF STATUTES

PAGE

5 U.S. C. A. $ 1009(e)—Federal Administrative Pro-

cedure Act (Section 10(e)) : 10

11 U. S. C. A. § 205 (Seetion 77). 2, 5, 6, 7, 8, 10

15 U. 8. C. A. §79—Publie Utility Holding Company

Act of 1935 (Section 24(a) ) 10

28 U. S. C. § 1254(1) 2

49 Stat. 912—Former Section 77B of the Bankruptcy

Act 6

62 Stat. 162—Mahaffie Act (Section lt |

TABLE OF RULES |

Rule 38(5) of Supreme Court Rules : 5

Supreme Court of the United States

OCTOBER TERM, 1949

No. 601

In the Matter

Fiorina East Coast Rarpway Company,

Debtor.

Attantic Coast Line Ratmroap Company and the Deposir

Committee for First and Refunding Mortgage 5% Bonds

of Florida East Coast Railway Company due 1974,

Petitioners,

St. Joz Parer Company, et al.,

Respondents.

BRIEF OF RESPONDENTS PRESIDENT AND DIRECTORS

OF THE MANHATTAN COMPANY AND J. BRYSON AIRD,

SUCCESSOR TRUSTEES OF THE FIRST AND REFUNDING

MORTGAGE BONDS IN OPPOSITION TO PETITION FOR

WRIT OF CERTIORARI

Petitioners, Atlantic Coast Line Railroad Company and

the Deposit Committee for First and Refunding Mortgage

5% Bonds of Florida East Coast Railway Company due

1974, have applied to this Court for a writ of certiorari

to review the order of the United States Court of Appeals

for the Fifth Cireuit, dated January 17, 1950, affirming

an order of the District Court for the Southern District

of Florida, dated January 22, 1949, which disapproved a

plan of reorganization of the Florida East Coast Railway

Company, a debtor in a Section 77 proceeding, which had

been certified by the Interstate Commerce Commission to

the District Court on April 5, 1948.

Opinions Below

The opinions of the Court of Appeals, not yet reported,

will be found in the Record at pages 937 to 956.

The opinion of the District Court is reported at 81 F.

Supp. 926.

The reports of the Interstate Commerce Commission

are reported at 252 I. C. C. 423, 731; 2541. C. ¢. 865; 261

I. C. C. 151; 267 I. C. C. 295, 729.

Jurisdiction

Petitioners invoke the jurisdiction of this Court under

28 U. S. C. § 1254(1).

The First and Refunding Mortgage

Bondholders and Trustees

The Debtor, Florida East Coast Railway Company, has

outstanding $45,000,000 principal amount of First and Re-

funding Mortgage 5% Bonds, with in excess of $32,000,000

of accrued defaulted interest. Since the First Mortgage

is to be paid in full (261 I. C. C. 170; 267 I. C. C. 383), the

unsecured creditors are provided for (267 I. C. C. 365-372),

and the stockholders do not claim a right to participate,

both Commission and Court found that the First and Re-

funding Bondholders form the only class having an interest

in the reorganization and are entitled to the entire equity

in the road (261 I. C. C. 173; 267 I. C. C. 304; R. 477). The

dissenting Circuit Judge’s criticism of this finding is not

borne out by the decisions of this Court in Helvering v.

Asphaltic Limestone Co., 315 U. S. 179, 184, and Helvering

v. Cement Investors, Inc., 316 U. S. 527, 532.

a ————

Of this class, $33,508,500 in amount of bonds are on

record in opposition to, and $572,400 in favor of, the present

lan.?

< The Mortgage Trustees, having been appointed in early

December, 1948, to succeed Chemical Bank & Trust Com-

pany and Howard B. Smith (R. 113-117), intervened in

the proceedings before the District Court (R. 124-127),

adopted the objections to the plan filed by their prede-

cessors (R. 125), and participated in the appeal.

Petitioners imply that the Trustees'are a mere mouth-

piece for the majority interests because they were ap-

pointed by the St. Joe Company, although obviously no

trustee could be appointed without that company’s consent;

because they refused to rely on statistical studies alone,

although the Commission itself had underscored the un-

reliability of hypothetical market values (267 I. C. C. at

355) ; and because they testified that “the Trustee is ordi-

narily persuaded, and should be, by a large majority of its

bondholders” (R. 379), although such is the accepted ap-

proach for a trustee to take (Shaw v. Railroad Co., 100

U. S. 605, 612; In re Schommer, 112 F. (2d) 311, 314

(C. A. 7)).

The overwhelming majority in the present case is com-

posed of four substantial bondholder groups, each with

diverse interests, but all united in opposition to this plan.

‘The record shows the bond holdings to be divided as follows:

Party Amount

St. Joe Paper Co. and duPont Trust $25,000,000 (R. 47 1)

W. G. Welbon, et al. 4,500,000 (R. 297-300)

F. K. Conn, et al. 1,008,500 (R. 106)

S. A. Lynch, et al. 3,000,000 (R. 472)

5% Deposit Committee 572,400 (R. 321)

$34,080,900

Remainder not of record 10,919,100

$45,000,000

- Te

—-

It is not the purpose of the Trustees to champion any one

of these groups, but rather, as the District Judge recog-

nized (R. 472), to speak in behalf of the $10,919,100 in

amount of bonds who otherwise have no voice in the pro-

ceedings.

There is no problem of reconciling divergent interests

as between the bondholders, large or small, because cer-

tain errors made by the Commission, of which the District

and Circuit Courts were well apprised, deprive the plan

of fairness and equity to any bondholder.

The Issues

The District Court's decision rests on three grounds—

illegality of a forced merger; opposition of an overwhelm-

ing majority of the bondholders; and unfairness and in-

equity of the plan. In the Court of Appeals, J udge Rus-

sell adopted all three grounds, Judge Holmes rejected all

three grounds, and Judge Hutcheson affirmed on the third

ground. Therefore, while reserving the right to argue

the first two grounds in Sapper: the plan should cer-

tiorari be granted, we confine ourselves in this brief to

the third ground involving fairness and equity, the only

ground before the Court on this petition.

The determination of fairness and equity involves mixed

questions of fact and law peculiar to the circumstances of

each reorganization. In a series of key decisions this Court

has carefully delimited the areas of administrative and

judicial action within which these questions of fairness

and equity are to be determined in each case.

Ecker v. Western Pacific R. Co., 318 U. S. 448;

Group of Institutional Investors vy. Chicago, Mil-

waukee, St. Paul d Pacific R. Co., 318 U. S. 523:

Reconstruction Finance Corporation v. Denver &

Rio Grande Western R. Co., 328 U. S. 495;

Comstock v. Group of Institutional Investors, 335

U. S. 211.

Having defined the limits and set the standards generally

applicable to all reorganizations, this Court has declined

to interfere in the particular reorganization with the legiti-

mate exercise of judgment and discretion within those

limits and in accordance with those standards.

“But we are not performing the functions of the

District Court under §77(e). Our role on review is a

limited one. It is not enough to reverse the District

Court that we might have appraised the facts some-

what differently. If there is warrant for the action of

the District Court, our task on review is at an end”

(Group of Institutional Investors v. Chicago, Milwau-

kee, St. Paul & Pacific R. Co., 318 U.S., supra, at 564).

The nine questions raised by petitioners at pages 3 to 5

of their brief simply play variations on one theme—lack

of power in, or its improper exercise by the District Court.

The questions are posed in terms of language taken from

the opinions below, rather than in terms of the single hold-

ing now before this Court. That holding is simply that

errors in the present plan render it unfair and inequitable

as it now stands and require reconsideration by the Com-

mission. Upon such a holding and under the decisions of

this Court, the issues are simply—

1. Whether the District Court recognized and respected

the limits set on his scope of action;

2. Whether there is warrant for action by the District

Court taken within those limits.

Upon the issues as thus restated and condensed, peti-

tioners have failed to show the necessity or usefulness of

review under Rule 38(5) of the Rules of this Court.

ARGUMENT

POINT I

The District Judge specifically recognized and cor.

rectly stated his limited role in the evolution of a

“fair and equitable” plan.

Petitioners would strip the District Judge of any inde-

pendent affirmative participation in the evolution of a “fair

and equitable” plan and would confine him solely to review

for errors of law and arbitrary action by the Commis-

sion. Judge Sibley, District Judge Designate, as affirmed

by Judges Hutcheson and Russell, rightly refused to accept

the role of a procedural figurehead for the pro forma ap-

proval and confirmation of a plan. Petitioners’ conten-

tions disregard reorganization history and the terms of

the statute, and misinterpret the opinions of this Court.

1. Reorganization History

Reference herein is made to the equity receivership

and reorganization simply to emphasize the critical role

of the judiciary in insuring a “fair and equitable” plan

prior to legislation on the subject. Section 77 was not

enacted in a vacuum and must be read in the light of its

background (see Continental Bank v. Rock Island Ry. Co.,

294 U. S. 648, 672). Accordingly, the “informed, inde-

pendent judgment” required in equity (National Surety

Co. v. Coriell, 289 U. S. 426, 436) and in Section 77B re-

organizations (Case v. Los Angeles Lumber Co., 308 U. 8S.

106, 115) should not be read out of Section 77 except where

required by the statutory language as shown below (see

United States v. Barnes, 222 U. S. 513, 520).

2. Section 77

The enactment of Section 77 took out of the hands of

bondholders’ committees and other private interests the

—7~—“~”™"

responsibility for perfecting a plan which protected

minority interests and provided a sound capital structure

in the public interest, and placed this responsibility in

the Commission. But Section 77 did not shift from the

Courts the ultimate responsibility that the plan be “fair

and equitable” and in fact incorporated in Section 77(e)

the very findings which the Courts had come to make in the

older equity reorganizations. Under that section, the

Judge must be “satisfied” in order to approve a plan that

“(1) It complies with the provisions of subsection

(b) of this section, 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 witli con-

form to the requirements of the law of the land regard-

ing the participation of the various classes of credi-

tors and stockholders.”

These ultimate findings the District Court must affirma-

tively and independently make upon the record before the

Commission and the additional evidence taken before him.

The scope of these findings has been limited only in the

two fields where the statutory scheme confers power on the

Commission alone. The first is the field of public interest.

Under Section 77(d) a plan may not be certified to the

Court unless it in the opinion of the Commission “will be

compatible with the public interest”. No such finding is

required of the Judge under Section 77(e). The second

is the field of valuation. At the end of Section 77(e) it is

provided that “if it shall be necessary to determine the

value of any property for any purpose under this section,

the Commission shall determine such value and certify the

same to the Court in its report on the plan”. On the other

hand, the Court is nowhere directed to redtetermine such

value.

While valuations and public interest are for the Com-

mission under the statute, the Court must still review

these elements, as it must review any administrative action,

for arbitrary or illegal findings.

3. The Cases

The two statutory limitations on the Judge’s scope of

review have been summed up by this Court in the case of

Reconstruction Finance Corporation v. Denver & Rio

Grande Western R. Co., 328 U. S. 495, as follows:

“The answer reached by Congress was that the ex-

perience and judgment of the Commission must be

relied upon for final determinations of value and of

matters affecting the public interest, subject to judicial

review to assure compliance with constitutional and

statutory requirements” (at p. 508).

It has long been held that “the judicial process in bank-

ruptcy proceedings under Section 77 is, as it were, brigaded

with the administrative process of the Commission”

(Palmer v. Massachusetts, 308 U. S. 79, 87), but peti-

tioners would limit the scope of review on all phases of

reorganization solely to the above narrow review of valua-

tion and public interest. The Courts have never so read

the statute. The quotation from the Denver case on pages

16 and 17 of petitioners’ brief follows directly the above

quotation from that case and refers solely to the Court’s

review of public interest and valuation.

In contrast, the leading case on the co-ordinate functions

of Court and Commission, Ecker v. Western Pacific R. Co.,

318 U. S. 448, confers on the District Court—

“definite responsibility in reorganization” (at p. 471);

finds that except for public interest and valuations—

“Upon the other findings of the Commission, the Dis-

trict Court exercised an independent judgment based

upon the record and the findings of the Commission

together with additional evidence produced before the

court by the parties” (at p. 467);

and specifically approves this exercise of the J udge’s func-

tions—

“In this case, we are of the view that the District

Court performed its required functions in accordance

with the requirements of the statute” (at p. 475).

And, as if this statement of the District Judge’s positive

functions were not enough, this Court in the case of Group

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

& Pacific R. Co., 318 U. S. 523, 568-571, remanded a plan to

have the District Court consider, along with the Commis-

sion, what a class of bondholders “should receive in addi-

tion to a face amount of inferior securities equal to the

face amount of their old ones, as equitable compensation,

for the loss of their senior rights” (at p. 571). Just such

a consideration was made by Judge Sibley in the case at

bar (R. 480) and yet is attacked by petitioner as beyond

his powers.

Finally, this Court has gone even further in the case of

Comstock v. Group of Institutional Investors, 335 U.S. 211,

in holding a District Court authorized to consider objec-

tions on their merits not even raised before the Commis-

sion, “because of the broad responsibility laid upon the

court for the equity and fairness of the plan as a whole”

(at p. 227).

The remaining cases cited by petitioners are not in con-

flict with those discussed above, and if they limit judicial

review at all, do so only as to valuations and public interest.

Any other interpretation would violate the plain terms of

the statute and render meaningless the affirmative findings

to be made under Section 77(e). For to give the Judge

power to review only for errors of law and lack of sup-

porting evidence is to give him no more than he already

has without statutory authority. That is to say, the law

has long been that Courts will always review the findings of

administrative agencies to determine whether there is

error of law or lack of substantial supporting evidence in

the record.

Interstate Commerce Commission v. Union Pacific

Railroad Co., 222 U. S. 541, 547-548;

cee eae TE

AEN ARORA OPE

Interstate Commerce Commission v. Louisville and

Nashville R. R. Co., 227 U. S. 88, 92;

N. L. R. B. v. Hearst Publications, 322 U. 8S. 111,

130-131.*

If this limited review were all that Congress intended,

it would have left the matter to the Courts under the above

doctrine, or stated the limitation expressly, as in Section

24(a) of the Public Utility Holding Company Act of 1935

(15 U. S. C. See. 79x, 49 Stat. 834):

“The findings of the Commission as to the facts, if

supported by substantial evidence, shall be conclusive.”

Review of the “fairness and equity” of a utility simplifi-

cation under Section 11(e) of the above Act was limited

by this specific Congressional directive in the case of

S. E.C. v.. Central Illinois Securities Corporation, 338 U. S.

96, cited by petitioners at page 19 of their brief as an au-

thority against the exercise of “colloquial” equity in a

railroad reorganization. The difference between the statu-

tory standards of review in the two cases is obvious. In

the one, the Court is merely a reviewing agency on the facts.

In the other, the Court must make affirmative findings of

its own on the question of fairness and equity, a mixed

question of fact and law. This Court itself noted in the

Central Illinois case the danger of citing precedents on

judicial review under one statute as precedents for judicial

review under another (338 U. S. at p. 122). Further, this

Court’s analogy in the Central Illinois case to review under

Section 77 is limited entirely to the proposition that Inter-

state Commerce Commission findings of valuation are final

if supported by substantial evidence.

Petitioners throughout refuse to recognize a distinction

between subsidiary determinations of fact as to valua-

tions of property and the ultimate finding of equitable

compensation based on those valuations. It is one thing

* See also the Federal Administrative Procedure Act, Sec. 10(e)

(1946) (5 U. S. C. Sec. 1009(e) ; 60 Stat. 243).

to say that the Judge shall defer to the Commission’s essen-

tially business evaluations of the worth of the Florida East

Coast Railway. It is another matter altogether to take

from the Judge his power and duty of independent review

of the question whether the plan based on that valuation

affords “fair and equitable” treatment to the bondholders,

just because the Commission says it does.

The function of the Commission is to formulate a plan

compatible with the public interest. The Judge’s function

is to insure that private interests are not unduly subordi-

nated in the process. The protection of private rights is

a traditional judicial prerogative which the Judge is well

qualified by experience to handle.

Under the statutory scheme and the cases construing

it, then, we submit that the District Judge correctly stated

his functions. In fact the following quotation from his

opinion will show how very close his analysis is to that

approved in the Western Pacific case (318 U. S., supra, at

pp. 467, 475):

“T think the statutory provisions are to be followed

as written, Commission and court each acting in the

sphere assigned” (R. 472).

“T conclude that the matter of compatability with

the public interest of a plan is left to the opinion of

the Commission and is not to be reviewed by the judge.

Also that certifications of value by the Commission

are in general final if the legal standards have been

observed. Both are within the peculiar expertness

of the Commission. An exception may exist if the

judge is investigating a question of Constitutional

right which transcends the statute, for such are always

judicial rather than administrative questions. And

on the matters about which the statute says the judge

must be satisfied in order to approve a plan or confirm

it over rejection, he has the right to make his inde-

pendent investigation and is not bound by the conclu-

sions of the Commission thereon. That the judge is

not restricted to the facts certified by the Commission

but may take additional evidence, is shown by the re-

quirement that if the matter is sent back to the Com-

mission a copy of the additional evidence shall be sent

to the Commission. What is fair and equitable and

what gives due recognition to the rights of each class

of creditors and stockholders, and what is the law of

the land, are matters of a judicial nature and within

the peculiar expertness of the courts. On them the

judge has the last word” (R. 474).

POINT II

The District J--dge was amply warranted in returning

the plan to the Commission for reconsideration of the

treatment to be accorded the Bondholders.

The opposition of the Mortgage Trustees to the present

plan is based upon major defects which fully warrant the

determination of the District Judge that the treatment

accorded the Bondholders was not fair and equitable and

ought to be reconsidered by the Commission:

1. The Standard of Valuation

The sale of the Florida East Coast Railway to the

Atlantic Coast Line presents other problems in valuation

than the mere recapitalization of a single railroad or the

simplification of structure in a complex railroad system.

a. THe Destor’s PROPERTIES

We question whether a capitalization of $40,500,000 made

purely on the basis of future earning power in the last plan

of internal reorganization (261 I. C. C. 151, 166) affords

by itself a fair standard of valuation when adopted in the

present merger plan (267 I. C. C. 295, 359) in which the

equity in the road is transferred to the Coast Line. The

importance of the underlying equity was recognized by

the District Judge (R. 477-478), and the differing standards

applicable upon the sale of that equity were recognized

by the Second Circuit in Old Colony Bondholders v. New

York, N. H. é H. R. Co., 161 F. (2d) 413, 420 (C. A. 2), cert.

den. 331 U. S. 858.

13)

b. THe Coast Line Securities TO BE GIVEN IN EXCHANGE

A bondholder is entitled to “a comparison of the new

securities allotted to him with the old securities which he

exchanges to determine whether the new are the equitable

equivalent of the old” (Group of Institutional Investors v.

Chicago, Milwaukee, St. Paul ¢ Pacific R. Co., 318 U. 8S.

523, 566). In an internal reorganization, the value of both

old and new securities is based on the earning power of

the underlying property. If, upon a sale, the value of

what the bondholders yield is to be based on future earn-

ing power, as has been done in the present case, then the

value of what they receive in return, the new Coast Line

securities, should also be based on future earning power.

But no estimate of Coast Line earning power has been

made (267 I. C. C. 295, 353-354).

The Commission has apparently valued the new securi-

ties simply on the basis of the Coast Line’s past operating

results (although its margin of profit admittedly rests

largely on dividends from Louisville and Nashville stock

which the Commission thought should be discounted (267

I. C. C. 295, 352) and upon certain statistical estimates of

prospective market values and annual returns found in

an appendix to a Coast Line brief (267 I. C. C. 729, 736-

737, 740). In order to justify such a cursory comparison

of values, the Commission as much as said that whatever

the worth of Atlantic Coast Line securities, most of the

bondholders were bound to make a profit because of the

depreciated price at which they had bought their bonds

(267 I. C. C. 729, 736-738). The District Judge ruled out

this finding as an improper criterion of equitable equiva-

lence (R. 478) and the correctness of his ruling is long

established law. See, e.g., Wade v. Chicago, Springfield,

etc., Railroad, 149 U. S. 327, 343-344; Standard Gas € Elec-

tric Co. v. Deep Rock Oil Corp., 117 F. (2d) 615, 619 (C. A.

10), cert. den. 313 U. S. 564.

We submit, then, that the bondholders are entitled to

reconsideration of the plan, even if no other objection is

valid, to have the Commission test and ascertain the value

of the compensation offered by the same standard used to

value the property which they are compelled to give up.

2. The Adequacy of Compensation

Assuming that the capitalization of $40,500,000 is a fair

sale price, we question whether the allocation to the bond-

holders of $40,500,000 in face value of cash and inferior

securities of the Coast Line affords “full compensatory

treatment” (Otis € Co. v. Securities and Exchange Com-

mission, 323 U. S. 624, 634, ftn. 14) or “the full economic

equivalent of what they presently hold” (Schwabacher vy.

U. S., 334 U. S. 182, 199). We fail to see how the Bond-

holders have received better treatment in this plan than

the General Mortgage Bondholders received in the Mil-

waukee plan which was remanded to the Commission by

this Court on the ground that:

“Since junior interests are participating in the plan,

the Commission and the District Court should deter.

mine what the General Mortgage bonds should receive

in addition to a face amount of inferior securities equal

to the face amount of their old ones, as equitable com-

pensation, qualitative or quantitative, for the loss of

their senior rights” (Group of Investors v. Milwaukee

R. Co., 318 U. S. 523, 571).

Petitioners argue that no junior interests are involved

because they limit the application of the absolute priority

rule to the classes of security holders in an internal re-

organization, thereby excluding the Atlantic Coast Line.

This is a technical argument deserving the technical an-

swer that the Coast Line is a junior interest; it is an un-

secured creditor. The answer of substance is, however,

as made by the Dissenting Commissioners (267 I. C. C.

295, 390-391), that the Coast Line is a stranger to the pro-

ceedings who will without justification reap the benefits

of any inadequate allocation of new securities to the Bond-

holders.

a. QUANTITATIVE ALLOCATION

Even if $40,500,000 could be called the fair value upon a

sale to Coast Line of that which is available for the satis-

faction of the Bondholders’ claims, the proposed allocation

of cash and new securities is admittedly worth much less

(267 I. C. C. 729, 737). The difference goes to the Coast

Line in violation of the principle behind, if not the literal

terms of, the absolute priority rule. This was the opinion

of the dissenting Commissioners (267 I. C. C. 295, 390-391;

267 I. C. C. 729, 745-746) and of the District Judge (R. 479-

480).

Moreover, the discrimination against senior lienholders

in favor of a junior claimant by offering securities equal

only in face value to the lienholders’ claim is the very

defect which led the District Court to disapprove the plan

in the case of In re Chicago, R. I. & P. Ry. Co., 50 F. Supp.

835, 856 (D. C., Ill.), and the principle involved is approved

by this Court in Insurance Group Committee v. Denver &

R. G. W. R. Co., 329 U. S. 607, 618, and in Schwabacher v.

U. S., 334 U. S. 182, 199.

b. Quauitative ALLOCATION

Even if the proposed allocation of cash and securities

could be held to give the Bondholders “the equitable equiva-

lent” in quantity of that which is available for the satis-

faction of their claim, it fails to recognize and compen-

sate for the quality of the rights which they are forced

to surrender. “The important element is the allocation

of the securities so as to preserve to creditors the ad-

vantages of their respective priorities” (Ecker v. Western

R Co., 318 U. S. 448, 483).

Giving lip service at least to the right of the Refunding

Bondholders to recoup as equity owners of an independent

debtor their losses from future earnings, the Commission

allocated two shares of redeemable preferred stock to each

bond with participation rights as to dividends in excess

of $4 per share on Atlantic Coast Line common stock (267

I. C. C. 376, 753). The District Court ruled the preferred

stock to be illusory compensation since it could be redeemed

if good years ever made the participating provision worth-

while (R. 480).

This ruling on the inadequacy of compensation for loss

of equity rights is identical in scope with this Court’s ruling

on the loss of seniority rights in Group of Investors v. Mil-

waukee R. Co., 318 U.S. 523, 571. (See also Consolidated

Rock Co. v. DuBois, 312 U. S. 510, 529).

3. Changed Conditions

Before the District Court, the Lynch Interests intro-

duced evidence of changed conditions enhancing the earning

capacity of the debtor (Lynch Exs. 1-32). This carefully

prepared material was presented by a qualified railroad

expert (R. 227-230) whose cross-examination by counsel

for the Atlantic Coast Line and redirect examination only

served to emphasize the abundance of new material which

had not been presented to the Commission (R. 275-279, 283,

286, 287).

The District Judge ruled:

“I am impressed that evidence produced before me,

if it had been before the Commission, might have pro-

duced a different result” (R. 479).

Such a ruling falls squarely within the authority of the

precedents :

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

518, 542;

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

F. (2d) 40, 46 (C. A. 2), cert. den. 325 U. S. 884;

In re Missouri Pac. R. Co., 50 F. Supp. 936, 943.

There can be no question of interference with the Com-

mission. The Judge merely determines on the basis of the

record before him whether there is enough new material

to render reconsideration by the Commission desirable. If

there is evidence in the record to support his determina-

tion, this Court has been reluctant to interfere with his

informed discretion (Group of Investors v. Milwaukee R.

Co., 318 U. S. 523, 564).

At page 31 of their brief, petitioners imply from our

failure to have recourse to Section 3(a)(3) of the Mahaffie

Act a fear of presenting the evidence of changed conditions

to the Commission. They forget that our purpose in oppos-

ing certiorari is solely to return the plan to the Commis-

sion at once for further consideration.

POINT III

Conclusion

Petitioners seek review of that part of the action of a

District Judge which has been approved by a Court of

Appeals. The District Judge made three rulings, each of

which is sufficient by itself to sustain his order. The first

two were, for the purpose of a petition for certiorari, elimi-

nated by the Court of Appeals, leaving for consideration

by this Court the one ruling on the fairness and equity of

the plan.

That ruling the District Judge made only after explicit

limitation of his functions (R. 474) within the framework

of review approved by this Court (supra, pp. 8-9) and

only after careful consideration of the record made before

him and the Commission. His determination to return the

plan for reconsideration of the treatment accorded the

Bondholders finds full precedent in the action of other

District Judges reviewing plans.

See, e.g.:

In re Chicago, Rock Island and Pacific Ry. Co., 50

F’. Supp. 835, 856 (D. C., Ill.) (failure of proposed

new securities to give full compensation for first

lien claim) ;

In re Missouri Pacific Railroad Company, 50 F.

Supp. 936, 943 (D. C., Mo.) (changed conditions

and failure of Commission to consider compensa-

tion for loss of preferred position) ;

In re Denver & Rio Grande Western R. R., 38 F.

Supp. 106, 120 (D. C., Colo.) (insufficient distribu-

tion to prior lien bonds, inter alia) ;

In re Louisiana & N. W. R. Co., 36 F. Supp. 636

(D. C., N. Y.) (failure to provide income bonds as

part of new capitalization) ;

In re Florida East Coast Railway Co. ( unreported—

D. C., Fla.; see R. 690-697) (unallocated wartime

earnings).

The Court of Appeals for the Fifth Circuit, finding war-

rant in the record below for the District Judge’s decision

and finding compliance with the statutory standards of

Section 77(e), properly refused to interfere with the legiti-

mate exercise of his discretion (R. 945) in determining

the fairness and equity of the plan. For similar action in

other circuits, see, e.g.:

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

147 F. (2d) 40, 47 (C. A. 2), cert. den. 325 U. S.

In re Denver & R. G. W. R. Co., 150 F. (2d) 28, 36

(C. A. 10), rev. on other grounds 328 U. S. 495;

Chicago, R. I. and P. Ry. Co. v. Fleming, 157 F. (2d)

241, 244 (C. A. 7), cert. den. 329 U. S. 780.

The decision of the District Court, as affirmed by the

Court of Appeals, does not force petitioner Atlantic Coast

Line out of the reorganization nor require petitioner 5%

Deposit Committee to sacrifice a single right of its Bond-

holders. The petition for certiorari reveals no miscarriage

of justice, and, since it cannot be said that the District

Judge overreached his powers or abused his discretion,

presents no suitable question for review by this Court.

Group of Institutional Investors v. Chicago, Mil-

waukee, St. Paul & Pacific R. Co., 318 U. S. 523,

564.

We pray, therefore, that a writ of certiorari be denied.

Respectfully submitted,

ApPLeToN, Rice & Perrin,

63 Wall Street,

New York 5, N. Y.

Bepett & BeEpe 1,

315 Guaranty Life Building, .

Jacksonville, Florida.

Curton S. THomson,

CuEsTER BEDELL,

Rosert M. McCutxocs,

GerHaRD R. GeruHarp,

CuarLes N. Scuenck, III,

of Counsel.

Dated: March 10, 1950.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.