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

INDEX

Page

Summary of Proceedings 2

Summary of Argument 12

Argument 12

Appendix A 30

CITATIONS

Atlantic Coast Line R. Co. Purchase,

261 1. C. C. 820 5

Case v. Los Angeles Lumber Products Co.,

308 U. S. 106 (at page 114) 22

Comstock v. Group of Investors, 335 U.S. 211 23

Denver and Rio Grande Reorganization,

328 U. S. 495 (at page 509) 15, 25

Ecker v. Western Pacific R. Co.,

318 U. S. 448 1, 15, 19, 20, 23, 26

Geddes v. Anaconda Copper Mining Co.,

254 U. S. 590. 28

Harduval v. Merchants & Mechanics Trust and ;

and Savings Bank

(1920) 240 Ala. 187, 86 So. 52 15

Institutional Investors v. Chicago, etc. R. Co.,

(Milwaukee case) 318 U. S. 523.0. 1, 15, 20, 22, 23, 24, 28

In re Loewer’s Gambrinus Brewery Co.

(C.C.A.N.Y. 1948) 167 F. (2d) 318 7

In re Michigan Ohio Building Corp.

(C.C.A, Ill. 1941) 117 F. (2d) 191, 193 12

In re Schwartz, 89 F. (2d) 172 14

In re Chicago, R. 1. & Pac. Ry. Co.

D.C. Ill. 1943) 50 F. Supp. 835 24

Northern Pacific R. v. Boyd, 228 U. S. 482 14

Palmer v. Mass., 308 U. S. 79 (at page 87) 22

Piedmont & Northern Railway Proceedings

(1928) 138 I1.C.C. 363 8

Public Service Comm. v. Brashear Lines,

306 U. S. 204 14

Securities and Exchange Comm. v. Central

Illinois Sec. Corp.

69 S. Ct. 1377 26

Spangelo v. North Dakota Ry. Co.

(C.C.A.N.D. 1921) 276 F. 26 15

—

IN THE

Supreme Court of the United States

OCTOBER TERM, 1949

| Ra

Aruantic Coast Line Rattroap Company and the Deposit

Committee for First and Refunding Mortgage 5% Bonds

of Florida East Coast Railway Company due 1974,

Petitioners.

vs.

S Re JOE PAPER Com PANY, ET AL.

, >

Respondents.

On Petition For a Writ of Certiorari to The United States

Court of Appeals for the Fifth Circuit.

BRIEF FOR THE RESPONDENT

St. Joe Paper Company, in Opposition

This petition seeks to vacate an order entered by the

District Court for the Southern District of Florida (81 F.

Supp., 926) and upheld by the Fifth Circuit Court of Ap-

peals, (Unreported as yet), by which a plan of reorganiza-

tion of the Florida East Coast Railway Company under

Section 77, proposed and submitted by the Interstate Com-

merce Commission, was disapproved.

In brief, the Petitioners assert that the District Court’s

opinion proceeded upon an unwarranted application of

the powers of the Court over a plan of reorganization cer-

tified to the Court by the Interstate Commerce Commis-

sion in proceedings under Section 77. They aver that such

application conflicts with the decisions of this Court in

Ecker v. Western Pacific R. Co., 318 U. S. 448, and Insti-

tutional Investors v. Chicago etc., R. Co., 318 U. S. 523.

—¥

The background of the proceedings, giving rise to this

controversy, covers a long period of time and is not easily

summarized.

2

SUMMARY OF PROCEEDINGS

(a) Description of the Debtor and its financial situa-

tion.

The debtor in reorganization, Florida East Coast Rail-

way Company, owns and operates a railroad running from

Jacksonville to Miami, both in Florida. It has always

been independently owned and independently operated. Its

line is double-tracked, has been recently re-railed and is

in excellent condition. Its rolling stock is modern in every

respect. Its management is experienced and capable. Such

railroad, all parties concede, has been efficiently operated

and has rendered adequate and satisfactory service under

its independent management. Operating through one of

the most populous areas of the United States, it has but

one rail competitor, the Seaboard Air Line Railway Com-

pany. At its terminus in Jacksonville, it connects with the

Atlantic Coast Line Railroad, the Southern Railway and

the Seaboard.’

The financial setup of the debtor is comparatively simple.

Ahead of its common stock are but two mortgage debts.

The first—in the amount of $12,000,000—is embraced in an

issue of four and one-half percent mortgage bonds; the

second represents an issue of $45,000,000 five percent mort-

gage bonds. There is no controversy over priority of liens

between the two bond issues. The first mortgage debt has

i 1The Commission said in discussing the efficiency of operations of the

| debtor and that likely under the disapproved merger (R., Vol. I, p. 321):

“As to the promotion of efficiency of transportation services generally by

reason of improvements in the physical properties of the two carriers, the

record does not furnish a basis for a conclusion that it would be materially

affected whether the debtor’s properties are operated independently or as a

part of the Coast Line.”

At page 322, Vol. I, R., the Commission quotes counsel for the Coast Line

to this effect:

“Mr. Bourne (principal counsel for the Coast Line): We do not take the

position, and have never taken the position, that the Florida East Coast is

not an efficiently operated railroad today for an independent railroad. Our

position is that a single-line operation of the two roads would be in the pub-

lic interest.”

See, also, R., Vol. I, pp. 425-6 and 321.

4

]

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3

never been in default. Interest on the second mortgage

debt went into default in the early thirties. Unpaid in-

terest on such debt now amounts to about $35,000,000. See

Appendix A, R., Vol. III, p. 660.

(b) Institution of receivership and reorganization

proceedings of the debtor.

Shortly after initial default on the second mortgage

debt, the railroad was placed in receivership. This receiver-

ship continued until 1941, when the present proceeding in

bankruptcy was filed under Section 77 in the Federal Court

for the Southern District of Florida. See Note 1, R., Vol.

III, p. 529.

(c) Proceedings before the Interstate Commerce

Commission.

Immediately upon the filing of this bankruptcy proceed-

ing, a Deposit Committee for the First and Refunding five

percent bonds, composed primarily of representatives of

New York banks and national insurance companies, sub-

mitted a plan of reorganization of the debtor, which, in

turn, was referred to the Interstate Commerce Commis-

sion for consideration. R., Vol. III, pp. 529-30, Vol. II,

p. 321. This plan assumed that the permissible capitaliza-

tion of the debtor was less than the amount of the two

mortgage debts and that the real owners of the equity in

the debtor were the First and Refunding bondholders. R.,

Vol. III, pp. 539-42. While such plan was under considera-

tion by the Commission, the so-called duPont interests,

represented here by the respondent, St. Joe Paper Com-

pany, submitted an alternative plan of reorganization,

under which the first mortgage debt would have been un-

disturbed, the second mortgage creditors would have re-

ceived for their interest new bonds and common stock of

the reorganized debtor, and additional common stock would

have been sold at par for cash to the duPont interests to

secure new money to finance the needed improvements of

the debtor’s road. This additional common stock, to be

sold for cash under the alternative plan, would have

amounted to about fifty percent of the outstanding equity

capital of the debtor. R., Vol. III, pp. 543-8.

a

This alternative plan of the duPont interests was vigor-

ously assailed by the five percent committee because it

would have involuntarily transferred control of the debtor

from the First and Refunding bondholders—who were, it

contended, the real owners of the equity in the debtor—to

the duPont interests in violation of the constitutional and

equitable rights of such bondholders. R., Vol. I, p. 439.

Vol. III, pp. 550-1. In its First Report in this proceeding

(filed April 6, 1942), the Interstate Commerce Commis-

sion unanimously upheld this position of the Committee

that it would be alike illegal and inequitable to divest the

First and Refunding bondholders of their right of control

and their equity and disapproved the alternative plan.

R., Vol. III, pp. 564, 578. Under the plan approved by the

Commission at this time, the valuation or ‘‘permissible

capitalization’’ of the debtor was fixed at approximately

$37,000,000. R., Vol. III, p. 576. The first mortgage debt

was not to be disturbed, though provision was made for

the issuance of $6,000,000 additional fixed interest first

mortgage bonds to finance improvements of debtor’s line

or a total of authorized fixed interest debt of $18,000,000.

R., Vol. III, pp. 589-92. The First and Refunding bond-

holders were to receive all remaining capitalization, di-

vided into income bonds and common stock. All unsecured

indebtedness of and the stock in the debtor were found

worthless. This plan, which recognized and gave effest to

the ownership of the equity in the debtor by the First and

Refunding bondholders, was certified to the District Court

for approval.’

At this point in the proceeding, the duPont interests

purchased from the banks and insurance companies, whose

representatives composed the five percent committee, their

bonds and thereby became the owner of a majority of the

First and Refunding bonds. R., Vol. I, pp. 152-3. Since that

time, the Committee has claimed the right to represent an

insignificant number of bonds, the owners of which appar-

ently are not readily available or had refused to follow

rH a cn eR

?In this Report, the Commission said that “we find that, within the recom-

mended permissible capitalization and annual charges, the first and refunding

mortgage bond-holders are entitled to the —. ba 3 in ge ‘Sggetty remain-

: ing after satisfaction of prior indebtedness.” R., Vol. III,

tt

a — en

5

the Committee’s recommendation that they sell their bonds

to the duPont interests. R., Vol. II, pp. 353-4.

Before this first plan of reorganization was submitted

to the District Court, there was a substantial improvement

in the financial condition of the debtor. The Court accord-

ingly disapproved the plan and remanded the proceed-

ings to the Commission. R., Vol. I, pp. 151-2. :

When the Commission resumed its hearings upon this

recommital, all parties agreed—including the Safe Deposit

Trust Company which owns control of the Atlantic Coast

Line—that duPont control was in the public interest. See

R., Vol. I, pp. 153-4, 185, 347, 372; Atlantic Coast Line R.

Co. Purchase, 261 I. C. C. 820. The only plan considered

was one which provided for (1) the use of most of the ;

available cash, accumulated from earnings of the debtor,

to pay off in full the first mortgage debt and to defray

about $8,000,000 in improvements, and (2) the distribu-

tion of the permissible capitalization of the debtor, con-

sisting of bonded debt and stock of the reorganized debtor

among the First and Refunding bondholders, whose debt

exceeded considerably the ‘‘permissible capitalization’’ of

the debtor. R., Vol I, p. 173. After the hearings on this

new plan of reorganization had been concluded, S. A.

Lynch, the owner of certain First and Refunding bonds—

following negotiations with the Coast Line—filed a peti-

tion to reopen the hearing in order to permit the filing of

an alternative plan under which control of the debtor

would pass to the Coast Line. It was to permit the filing

of a supporting brief to this petition of Lynch that the

Coast Line was allowed to intervene. R., Vol. III, p. 747.

Under this alternative plan, the debtor would have issued

certain bonds and preferred stocks, all of which would

have been received and held by the First and Refunding

bondholders, and $6,000,000 par value common stock, of

which the bondholders would have been obligated to sell

$3,600,000—that is, control of the equity—to the Coast Line

for cash at par. R., Vol. I, pp. 187-93. This was much the

same proposal submitted by the duPont interests at the :

time of the consideration of the first plan of reorganiza- :

tion. '

| By

Again, this new attempt to take from the First and Re-

funding bondholders the control and ownership of the

debtor was promptly rebuffed by the Commission, which

said in its unanimaus opinion (R., Vol. I, pp. 191-2):

‘“‘The proponents of the Lynch plan contend that the

sale at a price of $100 per share of 60 percent of the

common stock allotted to the first and refunding

bondholders would represent the full value of the

stock based on the total capitalization provided for

in the plan and that the owners of the stock there-

fore would receive full compensation for the sur-

render of their shares and would have no legal right

to complain. We are not convinced by this argu-

ment. All the securities to be issued under the plan

taken at par will fall far short of satisfying the

amount of the claim of the first and refunding bond-

holders. If, in the view of such bondholders, the pros-

pects of future earnings or the control value are

such that the stock later may have a market value

in excess of par, and they desire to hold the stock

to realize the higher price, they should be at liberty

to do so, as they would not be reimbursed in full on

their claim by accepting $100 per share for stock

representing a part of their share of the debtor’s

estate.’’

It will be noted that thus, in two separate and unani-

mous opinions—one entered in 1942 and the other in 1945—

the Commission had found that it was both illegal and in-

equitable to transfer involuntarily—even for a considera-

tion—the railroad away from the First and Refunding

bondholders, that such bondholders were entitled to own

and control the railroad and that they had the legal and

equitable right to receive, without dilution through forced

sale to any other interests, all future enhancement and

appreciation in the value of the property.

After the filing of this Second Report of the Commis-

sion, the Coast Line, discarding Mr. Lynch and flanked

by Senator Pepper appearing as ‘‘Senator from Florida,”’

filed petitions with the Commission, asking that the pro-

ceedings be reopened to permit the consideration of a pro-

—

7

posal to transfer the debtor to another carrier, obviously

the Coast Line. After an oral hearing, at which Senator

Pepper and representatives of the Coast Line were heard,

the proceedings were reopened. R., Vol. I, pp. 295, 729;

Vol. III, pp. 776-8.

In preparing for the reopened hearings, the Coast Line

purchased two unsecured debts held by the Flagler Estate,

which in its prior reports the Commission had found worth-

less.’ These claims were acquired by the Coast Line ad-

mittedly to give it standing to propose in its own behalf

a plan of reorganization for the debtor. R., Vol. I, pp.

147-9. Accordingly, when the hearings were reopened, the

Coast Line in its new role of an unsecured creditor of

the debtor submitted a new plan of reorganization under

which the debtor would be ‘‘merged’’ with the Coast Line.

Such merger, it was asserted, would achieve substantial

savings for both debtor and the Coast Line, estimated at

about $1,000,000 per year; and it was this claim of sav-

ings through unification that was urged principally on

behalf of the ‘‘merger’’.

This Coast Line plan of ‘‘merger’’ was bitterly op-

posed by (1) all the bondholders of the debtor appearing

before the Commission and representing upwards of eighty

percent of the outstanding First and Refunding bond-

holders, (2) the Railway Labor executives, (3) all con-

necting ard competing rail carriers other than the Coast

Line itself and (4) practically all the shippers to be served.

The supporters of the merger were, of course, the Coast

Line itself, Senator Pepper who appeared not as shipper,

owner of bonds or representative of labor, but under the

title of ‘‘Senator from Florida’’, and the moribund five

*The Commission said in this particular (R., Vol. I, p. 299):

“On October 18, 1945, shortly prior to the date upon which the Coast Line

presented its plan, and about 3 weeks prior to the commencement of the re-

opened hearings, the Coast Line procured assignment to it of two claims on

open account against the debtor, totalling $1,900.000, these claims being pre-

viously filed by Florida Coast Car Ferry Company and by the trustees under

the will of Mary Flagler Bingham.”

See, also, R., Vol. III, p. 747.

The Flagler Estate was the owner of all the common stock of the debtor.

The validity of the unsecured debts of the debtor, acquired by its sole stock-

holder—especially as against other creditors—is open to serious doubt. In re

Loewer’s Gambrinus Brewery Co. (C.C.A.N.Y. 1948) 167 F., (2nd) 318.

ag

can emg E IIT LN EE

——

8

percent committee, whose members had sold either for

themselves or their own institutions all their bonds sey-

eral years before and who were so disinterested that they

have now only an ‘‘acting secretary.’’ R., Vol. I, p. 352.

In connection with the hearings on this ‘‘merger’’ pro-

posal, it was for the first time suggested in this proceeding

that duPont or St. Joe Paper control of the debtor was

against the public interest. R., Vol. I, p. 308. This sug-

gestion did not come from shippers; it was not raised by

the competitor carrier, the Seaboard; it was not charged

by a bondholder. It was introduced by the Coast Line,

which now sought to acquire the property away from its

equitable owners, and by Senator Pepper. After a full

hearing, the Examiner for the Commission, who took the

testimony and observed the demeanor of the witnesses,

filed his Report, reaffirming the previous determinations

made unanimously by the Commission, including the de-

termination that duPont control of the debtor was in the

public interest.. Among other things, he found (R., Vol.

III, pp 797-8) :

‘‘The Commission should find and conclude that the

Coast Line has not shown that its proposals for

satisfaction of the claim of the debtor’s first and

refunding bondholders are fair and equitable and

afford due recognition of the rights which they would

*This claim of incompatible public interest against duPont control was so

tenuous that two previous unanimous decisions of the Commission had found

duPont control actually in the public interest. Unlike the Piedmont & Northern

ora ore (1928) 138 I.C.C. 363, referred to by the appellants at p. 10 of

their brief, the objector is not the debtor’s competitor, the Seaboard. In fact,

the Seaboard sees improper monopoly extended in transferring the debtor to

the Coast Line, thereby giving the latter complete control of the debtor’s inter-

change at Jacksonville. Seaboard objects to Coast Line control; it welcomes

duPont control. This is quite different from the Piedmont & Northern case,

as we have said. See R., Vol. III, pp. 786-90. Moreover, the dominating stock-

holder of the Coast Line had previously taken the position in this proceeding

that duPont control of the debtor was in the public interest. The suggestion

that duPont estate owned a paper mill, together with a telephone line and

small service railroad, located some three hundred miles from debtor's line

hardly fits into the concept of the “commodities clause.” It is true the du-

Pont estate owns control of three banks located in cities served by the debtor’s

railroad and has two or three office buildings. This is a far cry from the

situation required under the “commodities clause.” Basically, the Coast Line

rested its claim of incompatible public interest on the ground that the duPont

Estate is a charitable trust which should not own control of a railroad. This

argument overlooks the fact that the Coast Line itself is controlled by the

Walters trust, which largely is a charitable trust. Such an argument would

disqualify both duPont and Coast Line control.

waa

9

be required to surrender, including the right to con-

trol and manage the reorganized company. While

the Coast Line has stated that it will be prepared

to give immediate consideration to any modification

of the Coast Line plan or any other plan which the

Commission may approve and which will provide for

unification of the debtor with the Coast Line, the

situation here involved as disclosed by the evidence,

would not justify proposal by the Commission of a

modified Coast Line plan which would have the effect

of depriving the debtor’s bondholders of their right

to control the reorganized property and at the same

time speculation as to whether its terms would be ac-

cepted by the Coast Line, such acceptance, being a

necessary condition for the plan becoming effective.

Particularly is this true if the Commission should

find, as recommended herein, that a merger of the

Coast Line with the debtor is not required in the pub-

lic interest.’’

Upon exceptions to the Examiner’s Report, the Com-

mission, though adopting practically all the Examiner’s

statements of facts, reversed his findings based upon such

statements and, in a sharply divided five to four opinion,

found that a so-called ‘‘internal reorganization’’ of the

debtor was impractical and approved, with some modifi-

cations, the Coast Line’s proposed merger. Under this

proposed merger, the debtor’s equitable owners were to

receive the permissible capitalization of the debtor (which

was still fixed at $40,500,000),’ in securities of the merged

road of a par value of $36,375,000 and $4,125,000 cash.

On the other hand, the Coast Line was to receive the

*The "permissible capitalization” authorized in this Third Report was most

conservative. It will be recalled that in the First Report, the “permissible

capitalization” was fixed roughly at $37,000,000. At that time the debtor had

no real working capital and no funds to finance the railroad’s rehabilitation.

When this Third Report was filed, the debtor had spent millions on the im-

provement of its properties and still had a cash fund of $22,000,000—or cash

of considerably more than one-half the previous “permissible capitalization.”

Despite this large amount of cash and substantial improvements in proper-

ties—one of which alone, it was estimated, would increase the debtors’ normal

earnings several hundreds of thousands of dollars yearly—the Commission in-

creased the permissible capitalization of debtor but $3,500,000. Such conserva-

tive capitalization of debtor makes clearer the error of the Commission in re-

fusing to examine the capitalization of the Coast Line in connection with its

proposed “merger.”

a

10

debtor’s railroad free of lien, about $9,000,000 rehabilita-

tion fund and $3,100,000 in supplies and working capital.

There was no valuation of the Coast Line’s properties

made and no estimate of the Coast Line’s normal earning

capacity (which was the basis by which the debtor’s per-

missible capitalization was fixed), and no attempt to make

a fair allocation between the Coast Line’s and debtor’s

owners of the equities in the merged properties. No pro-

vision for sharing by the debtor’s bondholders in the an-

ticipated unification savings by the debtor’s bondholders

was made. All real chance of such bondholders for any

appreciation lay in their relatively insignificant owner-

ship of Coast Line common stock, to be receved under the

merger plan. R., Vol. I, pp. 295-391.

This Third Report of the Commission was reaffirmed

upon rehearing—again in a sharply divided six-to-five re-

port, wherein the Commission held (R., Vol. I, pp. 729-59) :

(1) That the proposed plan of reorganization was

valid and authorized,

(2) That there was provided in the plan ‘‘ Adequacy

of satisfaction of claims of first and refunding

bondholders’’ because

(a) The ‘‘probab!e market value of the securities

to be issued in the reorganization’’ was equal

to or slightly more than the current market

value of the defaulted First and Refunding

bondholders ;

(b) Since many of the First and Refunding bond-

holders purchased their bonds at substantial

discounts and will ‘‘reap substantial profits,”’

‘*that the claim will under the approved plan

be adequately satisfied is obvious.”’

The pithy dissenting opinion is printed as an appendix

hereto.

(d) Hearing on current certified plan of reorgani-

zation of debtor.

This ‘‘merger’’ plan of reorganization was certified by

the Commission to the District Court, before which the

debtor’s reorganization was pending. Seasonable objec-

11

tions to the ‘‘merger’’ as a plan of reorganization were

filed. Such objections came on for hearing before Honorable

Samuel H. Sibley, as District Judge Designate, on January

10, 1949. Considerable testimony was offered in support of

and in opposition to the fairness and equity of the proposed

merger. A new plan of reorganization was proposed by

St. Joe Paper Company, the fairness of which was be-

yond question. New evidence was submitted.

(e) Decision of the District Court disapproving

certified plan.

Upon the basis of the record made before it, as well

as the record certified by the Commission, the District

Court disapproved the certified plan of reorganization

upon three grounds:

(1) That the certified plan was illegal;

(2) That the plan was unfair and inequitable and did

not afford due recognition to the rights of the

bondholders.

(3) That the bondholders of the debtor should not be

coerced into acceptance of the certified plan under

the ‘‘cram-down’’ provisions of Section 77.

(f) Decision of the Circuit Court of Appeals af-

firming the decision of the District Court dis-

approving the certified plan.

Upon appeal by the Coast Line and the 5 per cent Com-

mittee, the decision of the District Court was upheld. The

prevailing opinions of Judges Hutcheson and Russell con-

curred in sustaining the District Court’s decision upon the

grounds that such District Court had properly reviewed

the certified plan for fairness and equity and that such

Court’s conclusion that the certified plan was unfair and

inequitable, and did not afford due recognition to the

rights of the bondholders was not clearly in error. In

fact, Judges Hutcheson and Russell went farther and

stated the categorical opinion that the certified plan was

unfair and inequitable and did not afford due recognition

of the rights of the bondholders, and joined the District

Court in remanding the proceedings to the Commission

;

i

t

;

12

to formulate a fair and equitable plan of reorganization,

just to the bondholders of the debtor.

By their petition to this Court, the petitioners seek to

review and reverse those conclusions. It should be ob-

served that this petition joins the Coast Line and its

‘*faithful ally’’, the five percent committee as petitioners.

SUMMARY OF ARGUMENT

So far as this petition is concerned, and at this junc-

ture of the proceedings, the only issues involved center

upon the right of the Petitioners to appeal and upon

whether the District Court had the power to review the

certified plan in the manner and to the extent expressly

provided by subsection (e) of Section 77 in order to de-

termine whether such plan ‘‘is fair and equitable, affords

due recognition to the rights of each class of creditors and

stockholders, and will conform to the requirements of the

law of the land regarding the participation of the various

classes of creditors and stockholders.’’

It is the position of this respondent that the Petitioners

have no appealable interest and that the District Court

had the power expressly given him by the statute to re-

view the fairness and equity of the certified plan. Either

fact is sufficient to deny the Petition.

ARGUMENT

A. The Petitioners have no appealable interest in the

proceedings.

The right of either the Committee or the Coast Line to

appeal was seriously assailed in the Circuit Court. That

Court chose to pass over such question and to decide the

cause on the merits. The right of the Petitioners to ap-

peal remains in dispute on this petition and is denied by

this respondent.

It is settled that ‘‘a party has an appealable interest

only when his property may be diminished, his burdens

increased or his rights detrimentally affected by the order

sought to be reviewed by the appeal.’’ In re Michigan-

13

Ohio Building Corp. (C.C.A. Ill. 1941) 117 F. (2d) 191,

193.

So far as the petitioner Committee is concerned, it

avers in its petition that ‘‘its sole interest’’ in this appeal

is to obtain the best possible treatment for the bondhold-

ers in whom it is interested. Page 6 of the Petition. But

the ‘‘sole basis for the affirmance’’ of the District Court

by the Court of Appeals was, as the Petition affirmatively

says, its conclusion ‘‘that the Plan was not fair and equit-

able to the bondholders (of the Florida East Coast Rail-

way Company) and does not afford due recognition to

the rights of refunding bondholders.’’ Page 15 of the Peti-

tion. The Circuit Court upheld the District Court’s re-

mand of the proceedings to the Commission in order that

‘‘better treatment’? might be accorded bondholders (in-

cluding those in whom the Committee asserts its interest)

through the formulation of a new plan which Judge Hutche-

son said, would be ‘‘really fair and equitable.’’

The effect of the order appealed from is thus to require

the Commission to prepare a new plan of reorganization

that will be more favorable to bondholders than the instant

certified plan. How can the Committee—if it is genuinely

interested in bondholders,—be aggrieved by such an

Order?

It is significant that the Committee, which busies it-

self so about this appeal, has never consulted its cestuis

que trustent, solicited their approval for its action or ob-

tained a specific authorization for its action in appealing,

by its own admission. And the members of the Committee

own no bonds of their own.

The only justification for its right of appeal, stated

by the Committee in the Petition, is that it ‘‘believes it

(the certified plan) to be the best available for the many

bondholders it represents.’’ Page 6 of the Petition. The

Committee does not assert that the certified plan, disap-

proved by the District and Circuit Courts, is the most

favorable plan for bondholders that can be formulated or

devised by the Commission. It limits itself to the claim

that the certified plan is simply the ‘‘best available’’ (i.e.,

is the better of the two proposed before the Commission).

. a

To sum up, the Committee has no right of appeal be-

cause the result of the-orders appealed from will be ‘‘bet-

ter treatment’’ for bondholders. It cannot be aggrieved

because its bondholders will not have any of their rights

diminished; such rights can only be improved. The Com-

mittee is actually seeking to appeal from a favorable de-

cree. See Public Service Comm. v. Brashear Lines, 306

U. S. 204; In re Schwartz, 89 F. (2d) 172. Nor is the Com-

mittee authorized to file this Petition by any of those who

as bondholders have any interest in this proceeding. Ac-

cordingly, the ‘‘small but faithful ally’’ of the Coast Line

can sustain no right of appeal.

The Coast Line is equally without an appealable in-

terest in this proceeding. On page 1 of the Petition, the

Coast Line states its appealable interest in its status as

the beneficiary of the proposed merger under the certified

plan and as ‘‘an unsecured creditor of Florida East Coast

Railway Company.’’ Heretofore in this appeal the Coast

Line has endeavored to gloss over its character of ‘‘un-

secured creditor’’ in order to escape the scope of Northern

Pacific R. Co. v. Boyd, 228 U. 8. 482. To establish an ap-

pealable interest, however, it proclaims itself ‘‘an un-

secured creditor.’’

But, under the certified plan, the rights of unsecured

creditors are not affected. See R., Vol. I, pp. 365-72 and

744. Their rights attach only to certain disputed assets.

The certified plan did not determine finally whether the

assets were available for unsecured creditors. That is-

sue was left for litigation, which has now been terminated.

Whether the certified plan is approved or disapproved

cannot affect this issue and the Coast Line cannot be

aggrieved as an unsecured creditor by the disapproval of

the certified plan, which makes no provision for unsecured

creditors.

Nor has the Coast Line any standing as one of the

parties to the merger contemplated by the certified plan.

The Coast Line is not a bondholder; it is one who seeks

to acquire the debtor on its own terms. It has submit-

ted an offer in the form of a proposed merger. That offer

has been recommended to the Court in the certified plan.

a ————

15

As Judge Sibley significantly remarked, ‘‘The very ag-

gressiveness of the Coast Line in proposing and defend-

ing this plan indicates that Coast Line in proposing and

defending their plan indicates that Coast Line thinks it

is getting a bargain; that what it gets is not the mere

equivalent of what it pays, but much more.’’ R., Vol. II,

p. —.

It has several times revised its offer to extend more

favorable terms to the bondholders. During the hearing

before the Examiner upon the Coast Line’s proposed plan,

the Coast Line modified its plan by offering to pay $3,-

000,000 in cash. After the Commission required addi-

tions to this, the Coast Line eagerly increased its offer.

It is an eager bidder, whose bid, upon consideration by

the Court, has been rejected by the Court. It has no right

of appeal from such rejection. Harduval v. Merchants &

Mechanics’ Trust and Savings Bank (1920), 240 Ala. 187,

86 So. 52; Spangelo v. North Dakota Ry. Co. (C.C.A.N.D.,

1921), 276 F. 26.

a

B. Theory of petition is that District Court was without

power to review the unfairness of the plan.

If, however, the right of the petitioner to appeal be

assumed arguendo, the Petition herein is without merit.

The theory upon which the Petitioners ask this Court

to review the decisions of the lower Courts is, basically,

that those Courts erroneously held the same view ‘‘as that

held by those who, prior to the decisions of this Court in

the Western Pacific and Milwaukee cases, asserted that

under Section 77 the Commission and the Court had co-

ordinate jurisdiction to determine whether a plan was

fair’’ (Brief, p. 21) and that such erroneous opinions

‘‘will not only substantially veto this Court’s opinions in

the Western Pacific, Milwaukee and Denver cases so far

as the Fifth Circuit is concerned, but that they will cause

confusion and uncertainty in other Circuits.’’ Brief, p. 22.

The Petitioners contend by their petition that the func-

tion of the District Court, in reviewing a certified plan of

reorganization under Section 77, is strictly limited to de-

_——

16

termining whether the Interstate Commerce Commission

‘‘had failed to follow the statutory mandates or lacked

material evidence to support its conclusions.’’ Brief, pp.

21, 26. Beyond that function, the District Court, it is con-

tended by the Petitioners, is vested under the statute with

no authority to consider or pass on the fairness and equity

of a plan of reorganization certified to it by the Interstate

Commerce Commission and, most particularly, it is not

permitted to exercise any ‘‘independent judgment’’ there-

on. In short, the Court has no greater power over the

certified plan of reorganization than the Circuit Court

of Appeals has over decisions of the National Labor Re-

lations Board, according to this argument of the Petition-

ers.

This attack by the Petitioners upon the right of the

District Court to review the certified plan for unfairness

and inequity presents the sole and exclusive basis for the

grant of the writ sought. That was, as we have seen, the

ground upon which the majority of the Circuit Court of

Appeals concurred in upholding the District Court. If the

District Court and the Cireuit Court were correct in dis-

approving such plan on that ground, it is useless to con-

sider the other and additional reasons assigned by the

District Court for its disapproval. Those other and ad- |

ditional grounds could be availed of by the appellees upon |

appeal solely to sustain the decision of the District Court. |

But whether correct or not, they will not support an

application by the Petitioners for certiorari, for the de-

cision of the lower Courts could be adequately sustained

upon the ground asserted by the majority of the Circuit

Court of Appeals. The petition herein must stand or fall

upon the Petitioners’ challenge to the authority of the

District Court to disapprove the certified plan for unfair-

ness and inequity, on the record.

The proper application of the ‘‘cram-down’’ provision |

of Section 77 and the relevancy of the Old Colony case to |

the legality of the certified plan, are accordingly beyond

the proper scope of this application and can only become

pertinent if the Petitioners have stated a ground for the |

writ sought on the basis of their contention that the Dis-

—7_—

17

trict Court improperly considered the fairness of the cer-

tified plan.

C. The Dictrict Court has authority to review a plan of

reorganization under Section 77 for fairness and equity.

It were well at the outset of this discussion to set apart

the powers of the District Court under Section 77 over

determinations of valuation and public interest by the

Commission from those dealing with the general fairness

and equity of the certified plan. Subsection (e) of Sec-

tion 77 confers on the District Court no authority to re-

view generally valuations and issues of public interest

resolved by the Commission in reorganization proceed-

ings. The rule urged by the Petitioners applies to such

judgments of the Commission Those determinations by

the Commission, it is settled, «re binding upon the Court

if arrived at in accordance with the statutory standards

and upon substantial evidence. So much the District

Court in this cause clearly recognized. At the very out-

set of his opinion Judge Sibley said (R., Vol. II, pp. 474

dD):

‘‘T have no function to review the matter of com-

patibility with the public interest of the plan, or the

valuation of the property involved unless on the

question of unconstitutional taking of it; but I should

independently consider those matters which the statute

requires me to be satisfied about.”’

It may be helpful, also, to ascertain the accepted defi-

nition of valuation within the contemplation of the fore-

going rule. In its Fourth Report in this proceeding, the

Commission said: ‘‘Value for reorganization purposes,

physical value, and market value, are each entirely dif-

ferent, and we can concern ourselves only with the first’’

(italics added). R., Vol. I, p. 736. The term ‘‘value for

reorganization purposes’’ which the Commission has said

was the only valuation made by it and with which it could

be solely concerned in this proceeding, was given this

fixed meaning by the Commission: ‘‘In any reorganization

‘value for reorganization purposes’ simply means ‘maxi-

. rT

mum permissible capitalization’ ’’. R., Vol. I, p. 735. Ac-

cordingly, the ‘‘maximum permissible capitalization’’ of

the debtor and the public interest involved in debtor’s oper-

ations are reviewable by the District Court only for ob-

servance of legal standards and for substantial evidence.

But, unlike its provisions with respect to permissible

capitalization and public interest, Section 77 is not silent

upon the power of the District Court over the fairness

and equity of the certified plan. On the contrary, it speaks

out with both clarity and directness in what Judge Hutche-

son so aptly described as ‘‘plain and unambiguous langu-

age.’’ The Petitioners themselves conceded in their brief

filed in the Circuit Court in this case that the District Court

had full power to review the fairness of a certified re-

organization plan under the plain language of the statute,

for the Coast Line argued at page 173 of its brief in that

Court that the District Judge had erred in ‘‘concluding

that the statutory provisions (giving the District Court

authority to review the fairness of the plan) were to be

followed as written.”’

This admission that the plain language of the statute

vests the District Court with authority to review the fair-

ness of the certified plan is demanded by the unqualified

words of subsection (e) of Section 77. This subsection

requires the District Court, preliminary to approval of

the certified plan, to satisfy itself that the certified plan

‘‘is fair and equitable, affords due recognition to the

rights of each class of creditors and stockholders and

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 partici-

pation of the various classes of creditors and stockhold-

ers.’’ No support for the appellants’ argument is thus to

be found in the statute itself. On the contrary, the statute

contradicts their argument. So much they admit for, in

fact, their argument rests, as we have seen, largely upon

the contention that the statute has been construed and is

to be construed in contradiction of its plain import.

Actually, the Interstate Commerce Commission assumes

for itself none of the broad powers asserted for it by the

a —

19

Petitioners and seemingly recognizes that the District

Court has the authority to review the fairness and equity

of a certified plan of reorganization under Section 77.

The dissenting opinion filed in connection with the Fourth

Report of the Commission herein was written by Com-

missioner Mahaffie, for years the head of the Finance Di-

vision of the Commission, who, along with Commissioner

Eastman, sponsored the enactment of the railroad re-

organization statutes (often spoken of as the ‘‘Mahaffie

Acts’’). In that dissenting opinion, filed on behalf of five

members of the Commission, Commissioner Mahaffie said

(R., Vol. I, p. 747): ‘*It should be remembered that the

‘fair and equitable’ finding is required to be made not

only by us but also by the court.’’ Beyond question, this

quotation shows that Commissioner Mahaffie and those

commissioners joining with him recognized that the Dis-

trict Court had full ‘‘concurrent’’ power to review the

certified plan for fairness and equity, and had the right to

exercise an independent judgment on such issues. To that

statement by Commissioner Mahaffie, the majority opinion

of the Commission took no exception. It seems fair to as-

sume then that it accepted Commissioner Mahaffie’s con-

struction of the District Court’s power.

Nor can the appellants justify their proposed construc-

tion of the statute by reference to the legislative history.

The legislative history of Section 77, as it deals with the

respective functions of the Commission and the Courts

in reviewing plans of reorganization thereunder, was care-

fully detailed by Mr. Justice Reed in his able opinion in

Ecker v. Western Pacific Ry. Co., 318 U. S. 448, at pages

469 to 475, inclusive. Preleminarily, he marked out the re-

strictions under the District Court’s jurisdiction over the

Commission’s determinations of permissible capitalization

and public interest. He then passed on to the District

Court’s power under the language of subsection (e) to re-

view the equity of a certified plan. After referring to the

failure of the House in its 1933 version of Section 77 to

include a provision for judicial review of the fairness and

equity of plans of reorganization, Mr. Justice Reed empha-

sized the subsequent Senate amendment endowing the

ee

20

Courts with a ‘‘concurrent’’ right with the Commission

to review independently the fairness and equity of the

plan of reorganization, saying (p. 470):

‘These amendments giving concurrent power to the

Court were adopted by the Senate and accepted by

the House and the bill became the Act of March 3,

1933, 47 Stat. 1475.’’ (Italics added.)

Mr. Justice Reed then turned to the amendments of

1935 and put the matter thus (p. 471):

‘“While the most important amendment was to furnish

means to avoid the obstruction of dissatisfied classes

of creditors or stockholders by making a fair and

equitable plan effective over dissenters, the require-

ments of coordinated action by Commission and Court

was retained.’’

This legislative history, so painstakingly reviewed by

Mr. Justice Reed, shows that it was the plain purpose of

the Congress that the District Court should have the

power of independent review of the fairness and equity

of the certified plan under Section 77.

Nor do the decisions in the Western Pacific (318 U. S.

448) or the Milwaukee cases (318 U. S. 523), upon which

the appellants wholly rely, violate this legislative history

or the ‘‘clear and unambiguous language’’ of the statute

or Commissioner Mahaffie’s administrative interpretation

with respect to the power of the District Court to review

the fairness of the certified plan.

In the Western Pacific case, the District Court, after

remarking on the limited right of review exercised by the

District Court in that reorganization over the ‘‘permis-

sible capitalization’’ of the debtor and over public in-

terest fixed by the Commission, said (p. 467, 318 U. S.):

“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.’’ (Italics added.)

eee

21

The action of the District Court in exercising in that

ease ‘‘an independent judgment upon all’’ findings of

the Commission other than those of valuation and public

interest was thus approved by this Court in the Western

Pacific case, as shown by the quoted sentence. The Western

Pacific case represents an unqualified approval of the

right of the District Court to review independently the

conclusions of the Commission on the fairness of a certi-

fied plan of reorganization. That was just what the lower

Courts did in this case. It cannot, then, be said fairly that

the decisions of the lower Courts in this case ‘‘veto’’ or

violate the conclusions reached by the Court in the Western

Pacific case.

That the decisions of the District Court in this case

conformed with the rule announced in the Western Pacific

case is similarly established by reference to the District

Court’s opinion in the Western Pacific case, which was ap-

proved by the Supreme Court. There the District Court

summed up the respective functions of Court and Com-

mission in these words (34 F. Supp. 493 at p. 504):

‘‘The two issues of (1) amount and character of

capitalization and (2) distribution of new securities are

closely related. The determination of the amount and

character of the capitalization (a legislative function

affecting the public interest) is exclusively within the

province of the Commission. The only qualification,

if any, is that the Court shall independently determine

whether, in the exercise of its jurisdiction, the Com-

mission has acted fairly, within the bounds of the

Constitution and not arbitrarily. The determination

of the questions relating to the distribution of the new

securities, including legal’ priorities and allocations,

involves private rights and is a judicial function, with-

in the province of the court. . . . While the decision

of the Commission in the premises is advisory only,

it was of inestimable value to the Court in enabling

it to see the whole picture and arrive at a decision.”’

To summarize, this District Court decision, which was

upheld by this Court, held that the permissible capitaliza-

ton of the debtor, and the public interest, were within

~ aan

22

the special province of the Commission, to be reviewed

by the Court for want of material evidence or failure to

observe the statutory standards, but in all other fields,

such as the equitable equivalence of the securities offered,—

in short, the balancing of all ‘‘private rights’’ along lines

of fairness and equity in the allocation of securities,—the

findings of the Commission are ‘‘only advisory’’ to the

Court, which should and will exercise its independent judg-

ment.

The Milwaukee case with equal clearness supports the

conclusion reached by Judge Sibley on his jurisdiction to

exercise an ‘‘independent judgment”’’ on the fairness and

equity of the certified plan. In that case, Mr. Justice

Douglas, after an extensive independent review of the

adequacy of the treatment of the general mortgage bond-

holders—in large part, one of the basic issues presented

to Judge Sibley in this case—, remanded the cause to the

District Court, saying (p. 571, 318 U. S.):

‘*The Commission and the District Court should de-

termine what the general mortgage bonds should re-

ceive in addition to a face amount of inferior securi-

ties equal to the face amount of their old ones, as

equitable compensation, qualitative or quantitative,

for the loss of their senior rights.’’ (Italics added.)

In determining the adequacy of a creditor’s treatment,

‘*equitable equivalence’’ and like questions, it will be noted

that the Court ‘‘brigaded’’ (Palmer v. Mass., 308 U. S.

79 at p. 87) the Commission and District Court, treating

them as having ‘‘concurrent’’ and ‘‘coordinate’’ jurisdic-

tion, charged, each obedient to its own procedure and in

accord with its own judgment, to pass on the issue. Cer-

tainly this language from the Milwaukee case does not

indicate that the role of the Court under Section 77 in

dealing with the fairness and equity of a certified plan is

that of a ‘‘rubber stamp’’ any more than it is that of ‘‘a

ministerial register of the vote of the several classes of

security holders’’ under old Section 77b. See Case v. Los

Angeles Lumber Products Co., 308 U. 8. 106 at p. 114. It

clearly shows that the District Court is expected to exer-

23

cise an ‘‘independent judgment’’ on the fairness and

equity of the certified plan.

The Petitioners, in their brief, quote from Mr. Justice

Douglas’ opinion in this Milwaukee case. P. 17, Petition-

ers’ Brief. The point of such quotation for their argu-

ment is not clear. If the purpose was to throw light on

the judicial functions in railroad reorganization, it is

singular that Petitioners omitted the succeeding sentences

which dealt specifically with this question. To fill out the

quotation, Mr. Justice Douglas said at pages 565-6, 318

U. S.:

‘It is sufficient that each security holder in the

order of his priority receives from that which is avail-

able for the satisfaction of his claim the equitable

equivalent of the rights surrendered. That requires 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. But that determination cannot be made by the

use of any mathematical formula. Whether in a given

case senior creditors have been made whole or re-

ceived ‘full compensatory treatment’ rests in the in-

formed judgment of the Commission and the District

Court on consideration of all relevant facts.’’ (Italics

added. )

The Milwaukee case as the above quotation so clearly

shows, contemplates that the Court, equally with the Com-

mission, shall exercise an independent and coordinate juris-

diction to determine the fairness and equity of the certi-

fied plan and to determine whether bondholders have re-

ceived ‘‘full compensatory treatment.’’ The decisions of

the lower Courts in this proceeding followed with exacti-

tude that rule.

That this construction of the Western Pacific and Mil-

waukee cases, which we have outlined, is the proper one

seems settled by the language of this Court in Comstock

v. Group of Investors, 335 U. S., 211, where Mr. Justice

Jackson, speaking for a majority of the Court, said (pp.

226-7) :

‘‘We think that, in the reorganization proceedings,

ay

24

the courts may entertain on their merits objections

to a plan even if made by one who might be barred

from asserting a cause of action in his own behalf,

if the subject-matter of the objections is such that it

goes beyond the objector’s individual interests and

affects the fairness and equity of the plan....

‘‘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 Commission. Some

circumstances might be disclosed to indicate a remand

for their consideration by the Commission. Th

might indicate that the courts would withhold ap-

proval, not out of deference to the objecting parties’

rights but because of the broad responsibilities laid

upon the court for the equity and fairness of the plan

as a whole.’’

Re Chicago, R. I. & Pac. Ry. Co. (D. C. IL, 1943) 50 F.

Supp. 835, represents an application of the rules enumer-

ated in the Western Pacific and Milwaukee cases on the

respective powers of Commission and Court. Leading

counsel for the Coast Line represented the Protective Com-

mittee for the general mortgage bonds of the debtor in

that case. He vigorously assailed the Commission’s find-

ing that the bondholders represented by him were receiv-

ing ‘‘full satisfaction’’ under the certified plan. See page

855, 50 F. Supp. He asked the Court, in the exercise of

its independent judgment, ‘‘to determine whether the senior

issue has received ‘full compensatory treatment’.’’ Page

856, 50 F. Supp. And the Court accepted counsel’s con-

struction of its powers, observing, ‘‘ Assuming this state-

ment to be a specific finding of full satisfaction, or full

compensatory treatment, it remains for the court to de-

termine whether the Commission was correct on this point.’’

Page 856, 50 F. Supp.

And the Court proceeded to find that there was not

‘full satisfaction,’’ ‘‘equitable equivalence,’’ ‘‘full com-

pensatory treatment,’’ because, while the senior creditors

were given securities of the par value of their full debt

with interest, the actual value of such securities was less

25

than the full amount of their debt with interest and junior

creditors could not accordingly take. Page 856, 50 F. Supp.

In reality, the Petitioners acted, during the proceed-

ings before the District Court, upon the assumption that

the District Court was charged with an independent re-

sponsibility for the fairness and equity of the certified plan.

They did not assume that the District Court was precluded

from inquiring into such fairness by the conclusions of the

Commission. They called as a witness before the District

Judge, Mr. Stott, a statistical employee of J. P. Morgan

& Company, filling in as the ‘‘acting Secretary’’ of the

petitioner Committee. Mr. Stott restated the estimate of

income return from the securities to be distributed among

the debtor’s bondholders under the certified plan incorp-

orated in the report of the Commission and, on the basis

of such estimates, gave his reasons for concluding that

the certified plan was fair and equitable. If the District

Court had no right to review the fairness and equity of

the certified plan, why did the petitioners call Mr. Stott

as a witness and offer his testimony on the fairness of

such plan?

And, as Judge Sibley sagely remarked, for that mat-

ter, why would the Act permit the District Court to re-

ceive such evidence as that of Mr. Stott, if that Act did

not intend that the District Court should review the fair-

ness of the plan?

Counsel for the Petitioners seeks to gather authority for

their position from this single sentence, detached from

its context, in the first opinion in the Denver and Rio Grande

Reorganization, 328 U. S. 495 at p. 509:

**‘To the courts, Congress confided the power to

review the plan to determine whether the Commission

has followed the statutory mandates of subsection (e)

318 U. S. at page 477, 63 S. Ct. page 709, 87 L. Ed.

892, and whether the Commission had material evi-

dence to support its conclusions. 318 U. S. at page 477,

concurring opinion at page 512, 63 S. Ct. at page 709,

concurring opinion at 725, 87 L. Ed. 892.’’

This quoted language, as the citation set forth therein

evidences, dealt with the Court’s power in connection with

26

the valuation, i.e, permissible capitalization, of the

debtor’s property. Page 477 of 318 U. S., to which the quoted

excerpt refers, is restricted to a discussion of the review-

ability of the valuation of the debtor made by the Commis-

sion. In fact, it is headed, ‘‘Method of Valuation.’’ The

Court’s discussion of the respective powers of Commis-

sion and Courts, on the other hand, appears on pages 471-4

of the cited opinion. This quotation is without applica-

tion to the District Court’s power to review a plan for

fairness and equity; it is limited to the problem of valua-

tion or permissible capitalization.

Petitioners, also, would bulwark their argument with

Securities and Exchange Commission v. Central Illinois

Securities Corp., 69 S. Ct. 1377. It must be noted that the

issue of reviewability of administrative determinations

under the Public Utility Holding Company Act of 1935

in this case turned upon the clear conflict between the

scope of judicial review provided in the case of voluntary

plans submitted by the holding company and that auth-

orized for plans imposed by the Commission. In the latter

case the reviewing court was bound by all factual findings

by the Commission, if supported by material evidence; in

the former case no such limit on judicial power was ex-

pressly included in the statute. The determination made

by the Commission, around which the appeal revolved,

dealt with valuations. The lower Court set aside such

valuations, assuming that since this was a plan submitted

by the holding company, it had the power to reverse the

Commission conclusions for ‘‘colloquial equities.’’

What the Court held was that the two provisions for

review under the Act—both the one covering voluntary and

involuntary plans—were to be harmonized and that both

reviews should be subject to the same limitations, a ruling

which meant that the valuations made by the Commission,

if supported by material evidence, were binding upon the

reviewing court. Such a ruling the Court held was not an

unusual conclusion and instanced, in support of such

statement, the rule in the Western Pacific case, saying

(Page 1393, 69 S. Ct.):

‘*The Commission’s findings as to valuation, which

—_—_—_—_—

27

are based upon judgment and prediction, as well as

upon ‘facts’, like the valuation findings of the Interstate

Commerce Commission in reorganization under 877 of

the Bankruptcy Act, Ecker v. Western Pacific R. R.

Corp., supra, are not subject to reexamination by the

court unless they are not supported by substantial evi-

dence or were not arrived at ‘in accordance with legal

standards’.’’

And the language of the Court on ‘‘colloquial equities’’

is (p. 1406, 69 S. Ct.):

‘*In deciding the case on the assumption that ‘the

inquiry is one of relative rights based on colloquial

equity’ and that the Otis case accorded participation

to security holders in accordance with the standard

of colloquial equity, the District Court erred insofar

as by ‘colloquial equity’ it meant considerations which

do not bear upon the investment or going-concern value

the preferred would have absent the liquidation com-

pelled by the Act.’’

It is clear from the foregoing that the Court did not

disapprove of ‘‘colloquial equities’’ generally; it disap-

proved as irrelevant to the particular inquiry the specific

‘‘colloquial equities’’ envisaged by the lower Courts. This

ease dealt with a problem of statutory construction; it

was not concerned with the broad range of judicial power

imposed by subsection (e) of Section 77.

To summarize the conclusions of the cases reviewed,

the powers of Commission and Court, in reviewing plans

of reorganization under Section 77, are:

(1) In the fields of public interest and valuation, the

Commission acts independently of the Courts, which

have power only to review as to such determinations

for failure to follow legal standards and for absence

of material evidence. As the Court said at page 473,

318 U. S.: ‘None of the findings required of the judge

under subsection (e) relate specifically to valuation,’’

and we may add, public interest.

(2) In all other fields, including the broad equity and

fairness of the plan as a whole, the Courts have, by

28

express delegation under subsection (e) of the Act,

‘‘coordinate’’ and ‘‘concurrent’’ jurisdiction with the

Commission, though, ‘‘As to these,’’ the powers of

the Court ‘‘are negative. It may veto the plan in its

entirety but may improve it only by suggestion. It

becomes a necessary and important factor in railroad

reorganization. These reorganizations may be attained

only through properly coordinated action between the

Commission and the Court.’’ 318 U. S. 474-5.

It follows from the foregoing rules that the District

Court had both the power and the duty to determine the

fairness and equity of the certified plan and whether such

plan afforded due recognition to the rights of the bond-

holders. It had before it concededly an ample record on

which to base such determinations. It so determined the

issues adversely to the certified plan. Its decision was both

approved and reaffirmed upon appeal to the Circuit Court,

which held that the certified plan was not fair and equitable

and did not afford due recognition to the rights of the

bondholders. Such determination, so upheld by the Circuit

Court, should not be disturbed by this Court. In the Mil-

waukee Case (318 U. S. 523 at p. 564) Mr. Justice Douglas

said:

‘*But we are not performing the functions of the Dis-

trict Court under S. 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.’’

This issue of the fairness and equity of the certified

plan is one of fact. Such issue has been resolved by un-

equivocal concurrent findings of fact by the two lower

Courts. That concurrent determination will not ordinarily

be disturbed. As this Court said in Geddes v. Anaconda

Copper Mining Co. 254 U. S. 590:

‘*With this conclusion we agree, applying the settled

rule of this Court that in suits in equity concurrent

findings by two courts on a question of fact will be

29

accepted unless it be clear that their conclusion is

erroneous.”’

The Petitioners do not argue that the District Court

did not have a factual basis for its determination; it rested

its petition upon the legal ground that the District Court

was without power to review the fairness and equity of the

certified plan. It is thus conceded that there is warrant

in the record for the District Court’s determination. Ac-

cordingly, to use the language of Mr. Justice Douglas, the

task of this Court ‘‘on review is at an end’’ and the peti-

tions should be denied.

Respectfully submitted,

James F. Byrnes,

Gites J. Parrerson,

DonaLp RvussELL,

Attorneys for Respondent,

St. Joe Paper Company.

March, 1950.

30

APPENDIX A

The dissenting opinion as to the Fourth Report of the

Interstate Commerce Commission is as follows (R., Vol. I,

pp. 745-7):

‘Here the Atlantic Coast Line is an applicant seek-

ing to acquire the railroad property being reorganized.

It is certainly in no more favored position than would

be the holder of a junior claim or a stockholder. The

creditors under the plan now approved receive much

less ‘in value than the face of their claims.’ The re-

port relies on the theory that the creditors are entitled

to receive only the equivalent of the face amount of re-

organization securities as fixed by us, which equivalent

may be, and in this instance is, very much less in market

value than either the face of the claims or the value of

the property for reorganization purposes as found by

this Commission. The latter figure is $40,500,000. This

is based on the Commission’s estimate of normal future

earnings and is sometimes described as the capitalizable

value of the property. The effect of the finding is that

securities of that total amount may properly be issued

in the reorganization. The report attributes to the Coast

Line securities to be paid for the property a value of

approximately $31,000,000. The question presented is

whether the persons who normally would be entitled to

receive the $40,500,000 of securities found by us to be

properly issuable, and the resulting control of the prop-

erty, may be required to give up that control and to

accept instead Atlantic Coast Line securities having a

value much less than that amount. On this point the

holding of the Supreme Court in the Boyd case, supra,

is of interest:

‘If the value of the road justified the issuance of

stock in exchange for old shares, the creditors were

entitled to the benefit of that value, whether it was

present or prospective, for dividends or only for

purposes of control. In either event it was a right

of property out of which the creditors were entitled

to be paid before the sotckholders could retain it for

any purpose whatever.’ (Page 508.)

31

The Boyd principle is the authoritative test of what

is fair and equitable. It is difficult to see how it can be

subordinated, as seems to be done in the report, to the

Commission’s finding of what is required by the public

interest. It should be remembered that the ‘fair and

equitable’ finding is required to be made not only by us

but also by the Court. Apparently to buttress the public

interest finding the report adopts a novel theory as to

what treatment legally satisfies a prior claim. After

discussing at some length the prices paid by some of

the security holders for some of their holdings and their

possible profits on such holdings, the conclusion is

reached that ‘the preponderance of the creditors, instead

of suffering losses, will reap substantial profits.’ It is

then found ‘That the claim of the First and Refunding

bondholders will, under the approved plan, be adequate-

ly satisfied is obvious.’ 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.’’ (Italics added.)