Petition for Writ of Certiorari — Bondholders v. Leigh R. Powell, Jr.

ee al

Supreme Court of the United States

October Term, 1951

BONDHOLDERS, INC., Peririoner,

versus

LEGH R. POWELL, JR., and HENRY W. ANDERSON,

as Recetvers or SEABOARD AIR LINE RAILWAY

COMPANY, and SEABOARD AIR LINE RAIL-

ROAD COMPANY, Responvents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

To the Honorable The Supreme Court of the United States:

Petitioner, Bondholders, Inc., prays that a writ of cer-

tiorari issue to review the judgment of the United States

Court of Appeals for the Fourth Circuit, entered in the

above-entitled case on June 1, 1951.

OPINIONS BELOW

The order of the Distriet Court (R. 1) is not reported.

The opinion of the Court of Appeals for the Fourth Cir-

euit (R. 275) is reported in 190 F. (2d) 74.

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2 BONDHOLDERS, INC., PETITIONER, v.

JURISDICTION

The judgment of the Court of Appeals was entered

on June 1, 1951 (R. 287). A petition for rehearing filed on

June 30, 1951 (R. 288) was denied on July 11, 1951 (R.

292). The jurisdiction of this Court is invoked under 28

U.S. C., see. 1254 (1).

QUESTIONS PRESENTED

1. Whether the receivership court has the right to treat

a reorganization plan in equity as though it were a reor-

ganization plan under the Bankruptcy statutes, making it

inflexible after the date of consummation, and therefore re-

fusing distribution of any part of unexpected additional

assets coming into the hands of the receivers to creditors

not included in distribution of securities in the original

plan of reorganization?

2. Whether proceeds from sale of additional assets ac-

quired by debtor railroad while operating in equity receiv-

ership should be distributed to unsatisfied creditors on a

basis consistent with the Plan of Reorganization, where

such assets were not sold in the original judicial sale con-

summating the eit pamesiansl but were reserved for the

receivership estate?

3. Whether in a railroad reorganization in equity,

when an erroneous estimate of future earnings produces

insufficient capitalization to include in satisfaction of

claims certain creditors holding junior bonds, unexpected

earnings of the debtor, expressly reserved for future dis-

tribution by the Court, may be distributed solely to senior

bondholders whose claims have already been satisfied by

receipt of new securities determined to be the ‘‘equitable

equivalent’’ of the rights surrendered?

—E7_7_

LeGH R. PowELL, JR., et al., RESPONDENTS 3

STATEMENT

The Seaboard Air Line Railway Company (hereinaf-

ter referred to as the Old Company) was placed in equity

receivership on December 23, 1930, in the District Courts

of the United States for the Eastern District of Virginia

and the Southern District of Florida, and was operated in

receivership until July 31, 1946, when substantially all its

properties were delivered after judicial sale to the newly

organized Seaboard Air Line Railroad Company (herein-

after referred to as the New Company), which has since

operated the railroad.

The corporate structure of the Old Company was ex-

ceedingly complicated and adverse economic conditions

prevented adoption of a practical reorganization plan until

a special master was appointed in 1939. Finally, on July

20, 1943, his report with proposed plan was submitted, and

approved with modifications on December 10, 1943; Guar-

anty Trust Co. v. Seaboard Air Line Ry. Co., 53 F. Supp.

672, affirmed, Badenhausen v. Guaranty Trust Co., 4 Cir.,

145 F. (2d) 40.

The reorganization presented two main questions “* (1)

what could be a proper reduced capitalization for the re-

organized company, and (2) what allocation of the new

securities should be made among the numerous classes of

secured ereditors.’’ (53 F. Supp. at p. 677.)

The capitalization of the New Company was fixed at

$185,000,000.00 divided into general mortgage bonds, in-

come mortgage bonds, preferred stock and common stock.

In addition the New Company assumed payment of $11,-

870,000.00 of Receiver’s Certificates, making a total ecapi-

talization of $196,870,000.00. That figure was arrived at by

estimating the probable future earnings of the several lines

comprising the railroad system, and was not based on the

value of the mortgaged property. The probable future earn-

me a

4 BONDHOLDERS, INC., PETITIONER, v.

ings were predicted in 1948 at sufficient to cover fixed an-

nual charges of $6,808,500.00 (53 F. Supp. at p. 679). That

capitalization was subsequently approved by the Interstate

Commerce Commission (257 I. C. C. 683, 257 1. C. C. 837)

but not without comment that the capitalization was actu-

ally less than the cash value of the railroad property. (257

I. C. C. 696).

Contemporaneously the allocation of the securities of

the New Company to the creditors of the Old Company

was determined. There were ten underlying mortgages upon

divisional lines of the system, and four general system

mortgages, as well as receiver’s obligations and other se-

cured debts.’ Those highest in priority secured by mort-

gages on the most profitable and valuable lines were fully

paid. Securities were allocated to the others in accordance

with formulas based on respective segregated earnings,

3 freight business and value of plant of the separate divi-

: sions. In conformity with the expressions of this Court in

: the cases of Ecker v. Western Pac. R. Corp., 318 U.S.

4 448, 63S. Ct. 692, 87 L. Ed. 892; and Group of Inst. In

) -vestors v. Chicago, M. St. P. & P. R. Co., 318 U. 8. 523,

: 63 S. Ct. 727, 87 L. Hd. 959 (hereinafter referred to as the

Milwaukee case), both the special master and the District

Court adhered to the prineiple that ‘‘a prior lien must be

fully and fairly compensated in value in what is received

therefor in new securities before subordinate liens can

participate’’ (53 F. Supp. 681). When the face value of a

claim was equalled by the par value of new securities allo-

cated to it, that claim was considered satisfied for the pur-

pose of passing to the next claim; and the District Court

modified the special master’s proposed plan in those in-

stances where it seemed that ‘‘excessive amounts of par

:

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' The total secured indebtedness of the Seaboard, principal and inter-

est, in the hands of the public at the time the plan was approved was

$340,251,484.64 (53 F. Supp. 677).

Phew ictharcueniie rin ca corne tions.

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LeGH R. POWELL, JR., et al., RESPONDENTS 5

value of new securities’? had been allocated to senior liens

(53 F. Supp. at p. 689). When all securities had been al-

located in accordance with the plan some 47% of the

general system mortgage known as the Refunding mortgage

was unsatisfied by par value of new securities, and there

were no securities left to apply to the general mortgage

known as the Adjustment mortgage, which constituted a

lien immediately junior to the Refunding mortgage (53 F.

Supp. at p. 680). The reason for this was the insufficient

base of estimated annual income on which an insufficient

amount of new securities were predicated. Unsecured

claims and preferred and common stockholders were like-

wise eliminated from participation in the new securities.

To consummate the equity reorganization a judicial

sale of the railroad properties was necessary. In order to

provide a proportionate cash payment for creditors who

refused to accept new securities, further hearings were

held in 1945 and a cash value or upset price for the whole

railroad property was fixed at $52,000,000.00. The cash

share to be distributed to each lien was determined there-

from, Guaranty Trust Co. v. Seaboard Air Line Ry. Co., 60

F. Supp. 607. In recognition of the insufficient estimate of

future annual income and the resulting insufficiency of new

securities, the decree on that sale reserved for future dis-

tribution all income earned between the date of that sale

and such date as delivery might be made. (R. 188.) To com-

plete the mechanics of consummating the reorganization,

the creditors’ Reorganization Committee entered into a

Reorganization Agreement with the New Company on May

25, 1945, wherein the Committee agreed to purchase the

railroad for the new company at the foreclosure sale and

to transfer to the new company all property purchased by

the Committee; to bid at all sales and to pay the purchase

price as far as possible by the use of deposited bonds, de-

ee peat

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6 BoNnDHOLDERS, INC., PETITIONER, v.

posited with the Committee by the holders under the vari-

ous mortgages. The New Company agreed to pay the

balance of the purchase price if any were needed, to assume

certain liabilities of the insolvent, and to issue to the Re-

organization Committee the new securities to be distributed

under the plan. The sale was held May 51, 1945, and the

properties transferred on July 31, 1946, the New Company

then beginning operation. The new securities were delivered

to the creditors’ Reorganization Committee for distribution.

The receivership was not terminated, however, and the

present controversy arose out of two subsequent judicial

sales and transfers of assets to the New Company.

On March 28, 1947, Order 442A of the District Court

directed the sale and transfer by the receivers to the Re-

organization Committee, and through it to the New Com-

pany, of assets in the sum of $10,045,270.66, consisting of

the earnings of the receivers in the operation of the Sea-

hoard at their own risk between May 31, 1945, when the

foreclosure sale took place, and July 31, 1946, when the

settlement between the Old Company and the New Company

took place in accordance with the plan. (R. 251.)

On October 25, 1950, Order 451A in sr’ scantially

identical terms directed the sale and transfer of assets in

the sum of $6,338,838.77, consisting of tax refunds resulting

from carrying back losses in 1947 and 1950 on excess profits

taxes paid by the receivers in 1943 and 1944. (R. 11.) All

assets coming into the hands of the receivers after the

original sale date had been specifically reserved to the

receivership for the benefit of creditors. (R. 188.) 60 F.

Supp. at p. 616.)

Meanwhile time had proved the originally predicted

earning power of the railroad was grossly underestimated

by the master, the district court and the Court of Appeals.

Instead of $7,000,000.00 the annual earnings have averaged

P

i al

Lecu R. Power, Jr., et al., RESPONDENTS 7

$17,954,608.00 since 1941 and have never fallen under $10,-

357,631.00. (1947.)

Bondholders, Inc., a corporation whose stockholders

are holders of a majority of the remaining outstanding

bonds issued under the general system mortgage known as

the Adjustment mortgage, made objection (in accordance

with Notice Order 450) (R. 48) to the final sale and trans-

fer under Order 451A, this $6,000,000.00 being all remain-

ing assets in the hands of the receivers except a sum

reserved for payment of final costs. (R. 3.) The grounds

for the objection were: (1) no real consideration was being

paid by the New Company for the fund to be transferred

to it, (2) no further satisfaction was to be paid to creditors

either in accordance with the plan or in any other manner,

and (3) time had proved the Adjustment mortgage was

inequitably eliminated from participation in the new se-

curities in 1945 and should receive some payment from

final assets which had been reserved for creditors. (R. 50.)

The proposed Order 451A, as in the case of Order

442A where $10,000,000.00 was transferred, provided that

the $6,000,000.00 in cash assets was to be ‘‘paid’’ for by

the use of deposited bonds held by the Reorganization

Committee as far as possible, any excess to be paid by the

New Company. The New Company also agreed to assume

future adjudicated liabilities of the receivers declared pay-

able by order of the court. (R. 30.) Your petitioner’s ob-

jections were overruled (R. 79) and Order 451A signed

October 25, 1950.

The Court of Appeals for the Fourth Cireuit affirmed

the judgment of the District Court, filing its opinion on

June 1, 1951. Its conclusions with reference to the objec-

tions made may be summarized as follows:

1. The $16,000,000.00 in funds transferred under

Orders 442A and 451A were paid for ‘‘by crediting the

BAM NM at a Sal aRE AA ad as rane renvareememmamas

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& BONDHOLDERS, INC., PETITIONER, v.

amount of the purchase upon the unpaid indebtedness of

the Old Company represented by bonds on deposit with the

Reorganization Committee and bonds in the hands of bond-

holders entitled to participate in the Plan who had failed

to deposit their securities.’”

2. To afford any portion of payment to claims not

satisfied in the original distribution under the Plan would

require a substantial modification of the Plan, which should

not be done unless there is a showing of substantial in-

justice.

3. Holders of Adjustment bonds have not pursued

their rights unceasingly throughout the years of litigation

and cannot now complain; specifically since the Adjustment

mortgage trustee did not participate in the receivership

litigation, and no appeal was taken by appellant from Order

442A, under which the first $10,000,000.00 of additional

assets was transferred.

SPECIFICATION OF ERRORS TO BE URGED

The Court of Appeals erred:

1. In holding that ‘‘ecrediting’’ purchase price on de-

posited bonds for which cash and new securities had already

been issued was a sufficient consideration for the funds

transferred, although no additional satisfaction is to be

furnished creditors.

2190 F. (2d) 74, 78. ‘In each instance payment for the assets trans-

ferred was made by crediting the amount of the purchase price upon

the unpaid indebtedness of the Old Company represented by bonds on

deposit with the Reorganization Committee and bonds in the hands of

bondholders entitled to participate in the Plan who had failed to deposit

their securities. Appropriate amount representing the distributive share

of each bond was endorsed on the deposited bonds or added to the

amount to be paid in cash by the New Company to the non-assenting

bondholders upon the final consummation of the Plan. In other words,

the transfer of these assets was made and the purchase price was paid

in the same way that the sale of the railroad property was made under

the decree of foreclosure; and the share of the participating bond-

holders in the assets of the debtor was correspondingly increased.”

a

LeGH R. PowELL, Jr., ef al., RESPONDENTS 9

2. In holding that bonds deposited, and for which cash

and new securities have been issued of a par value equal

to the face value of such claims, are not satisfied and may

continue to be re-used for further ‘‘purchase’’ of debtor’s

assets without additional distribution to creditors.

3. In failing to require respondents to continue to ap-

ply to all creditors the equitable rule of satisfaction set

up in the Plan, such that when each senior claim is satisfied

by allocation of securities equalling the claim at par then

satisfaction should be extended to the next most senior lien

in order of priority.

4. In failing to require uniform treatment of all credi-

tors on a basis consistent with the Plan, so that creditors

should continue to be satisfied and receive distribution of

the proceeds of the successive sales of the debtor’s assets.

5. In holding that in a receivership proceeding in

equity a claimant whose claim has been treated through-

out, and which has been the subject of consideration, argu-

ment, and previous appeals, and which has not been

previously satisfied because of insufficient assets, is barred

from participation in new assets as they subsequently be-

come available for payment of debts.

6. In holding that payment of wholly unsatisfied claims

as new assets become available will require modification of

the reorganization Plan.

7. In holding that bonds deposited in return for cash

and new securities remain of force as against the debtor :

so as to prevent distribution of additional assets to other

unsatisfied creditors.

8. In failing to recognize that the vast earnings of the

New Company exceed the predicted earnings by such a wide

margin that petitioner and other creditors were inequitably

excluded from participation in new securities or cash pay-

ment, and in failing to require the receivership court to

10 BONDHOLDERS, INC., PETITIONER, v.

direct distribution of the remaining assets of the debtor

Old Company to previously unsatisfied creditors on a fair

and equitable basis.

9. In failing to make any provisions whatever for

the payment of unsatisfied lien creditors, including peti-

tioner, although large sums reserved at the first sale to

the receivers for the creditors are available for part pay-

ment.

10. In holding that setting up of new ‘‘distributive

share’’ allowances for dissenting bondholders, who have

not yet deposited their bonds but who may ask for the

securities or cash distributive share reserved for them,

constitutes any real consideration for the transfer of $6,-

000,000.00 of the debtor’s assets.

11. In holding, in effect, that a bookkeeping transaction

whereby credits are given on old bonds long since sur-

rendered in exchange for new securities, and setting up a

cash reserve of $300,000.00 to pay distributive shares for

dissenters who may come in at this late date in the re-

organization, constitutes adequate consideration in equity

for the transfer of $6,000,000.00 of the debtor’s assets.

12. In holding that some $22,500,000.00 in Adjustment

bonds, called in by the old Seaboard in exchange for other

securities more than 20 years ago, constitute an asset in

the hands of the new Seaboard.

13. In failing to distinguish clearly between payment

of claims and satisfaction of claims in equity, thereby ap-

plying a rule of equitable satisfaction to claims upon the

original foreclosure sale, but requiring full payment of

claims in the second and third sales of debtor’s property.

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14. In treating a reorganization plan in equity as

though it were a reorganization plan under the Bankruptcy

statutes, making it inflexible after the date of consummation

and thereafter refusing distribution of any part of unex-

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LecH R. PowELL, JR., et al., RESPONDENTS 11

pected additional assets coming into the hands of the re-

ceivers to creditors not included in distribution of securities

in the original plan of reorganization.

15. In holding that cash payment from additional as-

sets, in part payment of previously unsatisfied bonds, will

upset or disturb in any manner a plan of reorganization

executed more than five years ago.

16. In affirming the order of the District Court, Order

451A.

REASONS FOR GRANTING THE WRIT

1. This petition to the Supreme Court represents the

last opportunity that this Court, or any other, shall have

to mitigate what time has proved was a monumental in-

equity in the reorganization of the Seaboard Air Line Rail-

way Company. More than $100,000,000.00 in claims against

the old Seaboard remain unsatisfied in any degree at this

date. Yet since the consummation of the reorganization

plan in 1946 and the issuance of cash and securities to ered-

itors allowed to participate, more than $10,000,000.00 of

additional assets have been passed to the new Seaboard

without consideration or any further satisfaction of ered-

itors; and Order 451A of the District Court, appealed from

and affirmed by the Court of Appeals, transfers from the

receivers an additional $6,000,000.00, the final fund that will

ever be available for payment of unsatisfied creditors. This

transfer is equally without consideration or any further

satisfaction of unsatisfied creditors.

The senior unsatisfied claim is that of the general sys-

tem mortgage known as the Adjustment mortgage, totaling

some $5,000,900.00 principal and interest still outstanding

and in the hands of the public. The majority of the outstand-

ing bonds still in existence issued under that mortgage are

held by Petitioner, whose 29 individual stockholders formed

the Petitioner corporation to act in their behalf.

} no AED LE BN PETE BIE See? AB _ Ie

12 BONDHOLDERS, INC., PETITIONER, v.

Petitioner has been unable to find another instance in

any major reorganization of a carrier or public utility

where a bona fide secured creditor was wholly excluded

from participation in the new company, unless paid in cash.

The exclusion of the Adjustment mortgage was explained

on the ground that the prospective earnings available for

fixed charges of the new Seaboard would be only about $7,-

000,000.00 annually, and could not support a capitalization

broad enough to include this junior secured claim. Through-

out the years representatives of the Adjustment claim have

consistently asserted the position that the earning predic-

tion was too low,’ although an inactive Trustee forced the

protection of the Adjustment mortgage claim upon indi-

vidual bondholders. However justifiable the prediction of

a $7,000,000.00 ‘annual income might have been in 1945, the

actual new Seaboard income has averaged $14,000,000.00

* * * twice the prediction, while the income of both old

and new Seaboard over the ten years 1941-51 averaged

more than $17,000,000.00. Comparatively junior creditors

who thought they were surrendering their claims in re-

turn for stock with a predicted market value of 10 to 15

(58 F. Supp. 681, 60 F. Supp. 613) today find their stock

at 65. Indeed they find themselves the owners of a $400,-

000,000.00 railroad rapidly paying out its mortgage debt;

while their compatriot holders of Adjustment bonds, with

a mortgage over the same original assets, have nothing.

Nevertheless, to that company by the device of a bookkeep-

ing ‘‘sale’’ Petitioner sees the last $6,000,000.00 of the

debtor’s assets pass, with no further satisfaction offered

to creditors,’ and in the very wake of a previous transfer

of $10,000,000.00 under Order 442A.

3 See, Guaranty Trust Co. v. Seaboard Air Line Ry. Co., 53 F. Supp.

672; Badenhausen v. Guaranty Trust Co. of N. Y., 4 Cir., 145 F. (2d)

40; Blackford v. Powell, 4 Cir., 141 F. (2d) 302.

‘For Judge Learned Hand’s cogent evaluation of such “sales” see,

In re Lake’s Laundry, 2 Cir., 79 F. (2d) 326.

LEGH R. POWELL, JRk., ef al., RESPONDENTS 13

2. The result of the holding below is contrary to the

rule established by this Court in the Milwaukee case:

‘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 received ‘full

compensatory treatment’ rests in the informed judg-

ment of the Commission and the District Court on

consideration of all relevant facts. (318 U. S. 523, at

| p. 565. Emphasis supplied.)

\ On the original foreclosure sale, this rule was followed

by the courts who saw to it that the ‘‘equitable equivalent”’

was furnished to each secured creditor for the claims sur-

rendered. Securities were allotted on the basis of the earn-

ing value of the property covered by the mortgage, then

when the face value of a claim was equalled by the par value

of new securities allotted to it (with common stock at

$100), that claim was considered satisfied for the purpose

of passing to the next claim. (R. 123.) Because of the too-

low capitalization, the Adjustment mortgage was not

reached. Some 53% of the face value of the claim of the

Refunding mortgage, immediately senior to the Adjust-

ment mortgage and on the same properties, was satisfied.

Its actual satisfaction for all purposes of equity, however,

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was complete, for the Refunding holders surrendered up

their bonds to be ‘feaneelled’* and accepted the new se-

5 Group of Inst. Investors v. Chicago, M. St. P. & P. R. Co., 318

U. S. 523, 63 S. Ct. 727, 87 L. Ed. 959.

A eA Te Na RE REIT BENT VR ANE AM OLE ST

14 BONDHOLDERS, INC., PETITIONER, v.

curities, even though they represented only 53% of thei

¢laim at par."

Order 451A, however, contains no recognition of the

equitable satisfaction of those claims which participated

in the new securities. As in the case of Order 442A, the

debtor’s funds are to be passed in an apparently ‘legal’

manner, for in legal contemplation the Reorganization Com.

mittee was the holder of the old bonds deposited with it by

thousands of individual bondholders. The consideration in

the ‘‘sale’’ is provided by the Reorganization Committee

merely crediting against the face value of those old bonds

the **purchase price’? of the debtor’s assets. (R. 26.) But

to allow the Committee in an equity proceeding to ‘‘pur-

chase’’ assets specifically reserved for the receivership (R.

188) by using bonds which have already been satisfied by

receipt of their ‘‘equitable equivalent’’ in new securities,

is to fly directly in the face of the rule of the Milwaukee

case.’ If a given claim was satisfied in the original sale and

distribution of securities, so as to permit passing to the

next claim in order of priority, then such claim is satis-

fied for all purposes in equity in this receivership. The rea-

soning of the Court below (R. 282, 285) that Petitioner can-

not be offered any satisfaction because the Refunding mort-

gage immediately senior to the Adjustment mortgage has

not been paid in full, simply does not meet the require-

ments of equity, nor the rule set out by this Court in the

6 On the consummation of the plan and issue and distribution of the

new securities as provided in the plan, ‘the existing capital stock,

mortgage bonds, notes and debentures of Subsidiaries affected by the

plan * * * shall be relinquished and surrendered to the Reorgani-

zation Committee and cancelled and the respective mortgages or other

evidences of indebtedness shall be released of record and cancelled.”

Plan of Reorganization. See also Deposit Agreement, Sec. 18 (R. 161).

7 See also, Ecker v. Western Pac. R. Corp., 318 U. S. 448, 63 S. Ct.

692, 87 L. Ed. 892; Insurance Group Committee v. Denver & R. G. W.

R. Co., 329 U. S. 607, 67 S. Ct. 583, 91 L. Ed. 951; Northern Pacific

R. Co. v. Boyd, 228 U. S. 482, 33 S. Ct. 554, 57 L. Ed. 931; Reconstruc-

tion Finance Corporation v. Denver & R. G. W. R. Co., 328 U. S. 495,

66 S. Ct. 1282, 1384, 90 L. Ed. 1400.

LEGH R. POWELL, JR., et al., RESPONDENTS 15

Milwaukee case. The mortgages ahead of the Refundings

were not paid in full either; but they were ‘‘satisfied’’ with

new securities and the Refunding mortgage was reached

in the distribution. (R. 123-4.) The same rule must continue

to apply on this third ‘‘sale’’ of assets, and some satisfac-

tion be afforded to the Adjustment mortgage. If there re-

mained any equity in the Refunding mortgage after the

first sale, that equity was most certainly wiped out by its

use in the ‘‘purchase’’ of $10,000,000.00 in assets under

Order 442A. That equity is the only conceivable purchasing

power which remained in the hands of the Reorganization

Committee after the original foreclosure sale, when all the

new Seaboard securities were issued and distributed.

This is an equity receivership. The decisions of the

courts below treat this equity proceeding as though it were

a plan under Chapter X of the Bankruptcy Act, or old

Section 77, which became fixed and inflexible on the con-

summation date in 1946. In an equity receivership no cred-

itor’s right to participate is barred while there are assets

to pay him. The reorganization proceeded in conformity

with the Milwaukee case through the original foreclosure

sale, and consummation of the plan; but on the second and

third sales it departed therefrom, with the result that al-

ready-satisfied stockholders of the new Seaboard are to

be unjustly enriched at the expense of fellow creditors of

the old Seaboard. Some of these creditors may receive at

least part satisfaction if the rule of the Milwaukee case

is uniformly applied.

3. The result of the decisions below is to perpetuate an

error of the past. Neither the District Court nor the Court

of Appeals made recognition of the fact that the 1943 un-

derestimate of the new Seaboard earnings and the result-

ing low capitalization worked a great inequity upon Pe-

titioner and other unsatisfied creditors, although admitting

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16 BONDHOLDERS, INC., PETITIONER, v.

earnings ‘‘exceedec) expectations’’. (R. 285.) Recognition

of this inequity would necessarily require furnishing some

sort of satisfaction to the Adjustment claim from present

funds. Petitioner believes this Court, in its supervisory ea-

pacity, should give judicial recognition to that inequity.

Krom an eighteen-page opinion the Court of Appeals

quoted a one-sentence comment on this point, although

discussion of it comprised the great bulk of Petitioner's

oral and printed argument.

4. The faith of the general public in bond issues of

public companies, carriers, and utilities, requires that this

issue be heard by the Supreme Court.

These bonds, first issued in 1909 to mature in 1949 with

$25,000,000.00 eventually sold, and secured by the same

properties securing the Refunding issue, are in a true sense

representative of all bonds that may be caught up in re-

organizations. Their elimination from participation in the

new company was a very serious affair. Elimination from

participation in an additional $16,000,000.00 of additional

assets seems almost unjustifiable to the public holder. Sta-

bility of the very system of bond financing requires protec-

tion for the bond investor and payment from the security

8 “With regard to the contention that the present large System earn-

ing justified some recognition of the Adjustment 5’s, it is sufficient to

say that there is certainly no evidence before the court from which it

can be found that the Adjustment 5’s have a legal or equitable claim

to any accumulated income as there is not a sufficient amount thereof

to satisfy the claim of the Refunding 4’s, and indeed no mortgage

foreclosure proceeding asking impounding of income has been filed by

the trustee of the Adjustment 5’s.” (R. 279) (53 F. Supp. 681).

As on several points in the opinion, the Court here adhered to the

legal theory that the Refunding claim has a remaining unpaid cash

value, without reference to its value in equity after its surrender in

return for new securities. The free interchanging of the words “paid”

and “satisfied” makes for obscurity throughout. (R. 285.) The comment

concerning impounding of income is an aside, of course, and furnishes no

illumination. The income of the old Seaboard has been impounded for

all creditors by the Courts since 1930. Several of the mortgages which

were satisfied in the plan were not foreclosed. The lien of the Adjust-

ment mortgage is identical in all respects to the Refunding, being only

immediately junior. (R. 104.)

LEGH R. PowELL, Jr., et al., RESPONDENTS 17

available for satisfaction of the bond. All other secured

claims in this reorganization, and in any reorganization

of this type that Petitioner has found, have received some

satisfaction or payment.

The holders of the Seaboard First & Consolidated

Mortgage bonds, executed and first issued in 1915, and

junior to the Adjustment mortgage, probably received more

satisfaction out-of-proportion to the priority of their lien

than any other creditors. While that mortgage was a first

lien on only 408 miles of track, some $65,000,000.00 of the

Refunding 4’s were deposited as collateral with its Trus-

tee. The result was that it claimed a larger portion of com-

mon stock of the new Seaboard than any other bond, yet

the common stock has proved the most valuable issue be-

cause of the low capitalization of the new company.

It is difficult to reconcile the inequity which allows the

Adjustment bondholder, standing between the Refunding

holders and the First & Consolidated holders, to receive no

stock, while they received some 56% of all common stock.

Then he sees an additional $16,000,000.00 go to swell the

value of that stock, while a small part of that would equi-

tably satisfy his claim. This is the view of the matter which

the public sees, and the public interest in the protection of

investments is a compelling reason why the writ should be

granted.

5. The interests of Adjustment bondholders and other

creditors not permitted to participate in the original dis-

tribution of securities have not been adequately safe-

guarded in this reorganization. While millions of dollars

were being spent in costs and fees, including the costs of

various protective committees,’ the Adjustment mortgage

®See the critical comment of the Interstate Commerce Commission

concerning “excessive” fees and reorganization costs, 261 I. C. C. 723;

and the lengthy opinion of the District Court on that matter, Guaranty

Trust Co. v. Seaboard Air Line Ry. Co., 68 F. Supp. 304.

18 BONDHOLDERS, INC., PETITIONER, v.

trustee was inactive (R. 169) and various individual bond-

holders were forced to support the Adjustment claim, it

having only sporadic representation."”© This has worked a

double inequity upon Petitioner, as evidenced by the com-

ments of the Court of Appeals in its opinion below (R.

279); although the Court admitted its power in equity to

remedy the situation. (R. 286.)

Petitioner believes that the courts below, motivated by

an entirely earnest desire to see this lengthy litigation ter-

minated, have erred in holding that to offer satisfaction to

Petitioner in any form will ‘‘upset’’ or require modifica-

tion of the plan of reorganization, and will delay its con-

summation. (R. 78, 80, 282.)

Petitioner has not asked to have any securities issued

to Adjustment holders at this late date, or for any modi-

fication of the plan. The plan has, in fact, been executed

for all practical purposes since 1946, when the securities

were issued and the new Seaboard began operation. Few,

if any, bondholders depositing late have demanded cash

distributive shares, because of the higher value of the new

securities since the beginning; and only $300,000.00 cash re-

serve has been set up to pay possible late dissenters. (R.

66.) There will be little or no actual distribution to any

creditors, satisfied or unsatisfied. The transfer of $6,000,-

000.00 in assets to the new Seaboard is a bookkeeping trans-

action, whereby credits are charged back to old deposited

bonds (R. 6.) There will be no new consideration passed

by the new Seaboard, but merely a swelling of its treasury

by $6,000,000.00. Under Order 442A, more than $10,000,-

000.00 has already been passed, with no distribution to ered-

itors of any category (R. 250, 254).

10 The District Court gives a summary of the Adjustment 5’s repre-

sentation during the reorganization at 53 F. Supp. 672, 680. Blackford

v. Powell, 4 Cir., 141 F. (2d) 302, was also an abortive attempt at

appeal by individual holders.

| ema

LeEGH R. POWELL, JR., et al., RESPONDENTS 19

Because of the apparent stigma borne by any who

proposed modification of the plan, on this occasion the Pe-

titioner offered several simple methods whereby the Ad-

justment claim may be partly satisfied by a cash payment

to holders, in a proportion similar to cash distributive

shares offered to holders of similar lens. (R. 282.) Such

payment from the cash fund transferred can affect in no

way the plan, which has long since been executed. It can-

not be said that those who participated in the securities

issued under the plan relied upon the additional $10,000,-

000.00 and $6,000,000.00 funds from the receivership, which

did not come into the receivers’ hands until 1947 and 1950."

The Respondents did not even work out the new distribu-

tive shares based on these funds until after the ‘‘sale’’

under Order 451 (R. 67); and little, if any, of the small

fund reserved for dissenters will ever be paid out. (R. 67.)

The new Seaboard has specifically contracted with the

reorganization committee to pay any part of the purchase

price of the $6,000,000.00 fund ‘‘not payable by the use of

deposited bonds’? (R. 5, 30), and provision for satisfaction

of the Adjustment 5’s will not delay the closing of the re-

ceivership, nor affect distribution of remaining securities

to late depositers who may come in.

In a record as voluminous as that of this railroad re-

organization, it is all too easy to find justification for the

elimination of individual claims. Where the representation

of a claim has not been continuous throughout, the omis-

sion of many protective procedural steps is unavoidable.

Following execution of the plan of reorganization in 1946,

11 An important feature of both receivers’ applications 442 and 451

is the admission in each that the new assets there dealt with had “not

heretofore been sold or disposed of, and which under the provisions of

paragraph 18.14 of the Final Decree is to be dealt with as the Courts

may direct.” (Application 442, par. II; Application 451, Introd. par.)

(R. 237, R. 10.)

—

20 BONDHOLDERS, INC., PETITIONER, v.

all protective representation for minority creditors appar-

rently disappeared.

In the present litigation concerning Order 451A, Pe-

titioner found itself an outsider, being required to prove

that receivership funds should not go to previously satis-

fied creditors. The burden should have been upon the new

Seaboard, which was the ‘‘purchaser’’, to prove its right

to receive the large fund from the receivers while paying

no new consideration, nor making further satisfaction to

creditors.

In such circumstances, Petitioner believes it all the

more incumbent upon the courts that they exercise their

admitted powers in equity to safeguard the interests of

minority creditors, and that this Court should exercise its

supervisory power to that end.

CONCLUSION

For the foregoing reasons, this petition for a writ of

certiorari should be granted.

Respectfully submitted,

: FRANK B. GARY, JR.,

‘ Columbia, S. C.,

3 AUBREY R. BOWLES, JR.,

: Richmond, Va.,

3 PAUL A. COOPER,

: Columbia, S. C.,

FRANK K. SLOAN,

5 Columbia, S. C.,

, Attorneys for Petitioner.

i October 8, 1951.

ie Se Me Uc ea,

_ eer ae a rae ae i

NOV 27 1951

Supreme Court of the Anited States:

No. 413

BONDHOLDERS, INC.,

Petitioner,

vs.

LEGH R. POWELL, Jr. and HENRY W. ANDERSON,

as Receivers of SEABOARD AIR LINE RAILWAY

COMPANY, and SEABOARD AIR LINE RAILROAD

COMPANY,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FOURTH CIRCUIT.

BRIEF OF RESPONDENTS IN OPPOSITION.

James B. McDonovueu, JR.,

Seaboard Air Line Railroad

Building,

Norfolk, Virginia,

Counsel for Respondents.

Haroutp J. GALLAGHER,

15 Broad Street,

New York, N. Y.,

Lreonarp D. ADKINS,

15 Broad Street,

New York, N. Y.,

W. R. C. Cocke,

Citizens Bank Building,

Norfolk, Virginia,

Of Counsel.

, an anee

INDEX.

Opinions BrELow

JURISDICTION ....----.

QuESTIONS PRESENTED ...........

STATEMENT OF THE CASE..............-.

Preliminary Statement

Previous adjudications of the status of the

Adjustment Bonds .........

The status of the Petitioner and of the Adjust-

ment Bonds held by it............... is

Statements and contentions of the Petitioner........

I on os sine corccnauticbamniins

The petition does not present any basis for

granting certiorari .......................--

There is no merit in Petitioner’s contentions......

I i eeiicincnnct

TaBLE oF Cases AND AUTHORITIES CITED.

CasEs.

Badenhausen v. Guaranty Trust Company of New

York, 145 F. 2d 40 (1944), 323 U. S. 797 (1945)......

Badenhausen v. Glazebrook, 148 F. 2d 450 (1945),

326 U. S. 733 (1945)

Blackford v. Powell, 151 F. 2d 392 (1945), 327 U.S.

778 (1946) Si ee

Bondholders, Inc. v. Powell, 190 F. 2d 74 (1951)........

Guaranty Trust Company of New York v. Seaboard

Air Line Railway Company, 53 F. Supp. 672 (1943)

Guaranty Trust Co. v. Seaboard Air Line Railway

ig, ew MPG FO I iss rcitcitiiiecickcosntarsntenecsnmiinsicinesine

Seaboard Air Line Railway Receivership, 261 I. C. C.

fern

OrHeR AUTHORITIES.

36 Amer. Jur. Mortgages, Sections 287 et seq.............

AE EY OPIN, FAL ROME EOE LEM SEEM i

PAGE

IN THE

Supreme Court of the Anited States

No. 413

BonpHo.pers, Inc.,

Petitioner,

vs.

Leocu R. Powett, Jr. and Henry W. Anverson, as Receivers

of SeaBoarp Amr Line Rartway Company, and SEaBoaRD

Ar Line Ramroap Company,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FOURTH CIRCUIT.

BRIEF OF RESPONDENTS IN OPPOSITION.

Opinions Below.

There was no reported opinion by the District Court.

The order of the District Court which the Petitioner sought

to have reversed by the Court of Appeals for the Fourth

Circuit was an order numbered Order No. 451 A, filed

October 26, 1950 (R. 1) in the constituent and consolidated

proceedings in which receivers (hereinafter called the

Seaboard Receivers) had been appointed for Seaboard Air

Line Railway Company (hereinafter called the Old Com-

pany).

we ee

2

Order No. 451 A is entitled and was entered in both the

United States District Court for the Eastern District of

Virginia and in the United States District Court for the

Southern District of Florida (the ancillary receivership

Court), in which those proceedings (hereinafter referred

to as the receivership proceedings) were pending (R. 1-10).

The appeal to the Court of Appeals for the Fourth

Circuit was from Order No. 451 A as entered in the United

States District Court for the Eastern District of Virginia

(hereinafter called the Virginia Court) (R. 275). Although

there was no opinion by the Virginia Court, except Order

No. 451 A itself, the views of the Virginia Court with

respect to the contentions of the Petitioner are set forth in

the transcript of the proceedings before that Court, upon

which Order No. 451 A was entered (R. 54-81).

The Opinion of the Court of Appeals for the Fourth

Circuit (R. 275) is reported as Bondholders, Inc. v. Powell,

et al., 190 F. 2d 74 (June 1, 1951).

Jurisdiction.

Petitioner seeks to have the judgment of the Court of

Appeals for the Fourth Circuit reviewed by this Court by

writ of certiorari pursuant to 28 U.S. C. 1254 (1).

Questions Presented.

None of the ‘‘Questions Presented’’, as stated in the

Petition for Writ of Certiorari (P. 2), is in fact involved

in these proceedings, as will appear from our statement of

the case. Even if those questions, or any of them, were

involved, they would form no basis for granting the Petition.

The only question here presented is whether the

Virginia Court, in entering Order No. 451 A providing

3

for the sale of certain property remaining in the hands

of the Seaboard Receivers (consisting largely of refunds

of Federal income taxes for prior years when the rail-—

road was operated by the Seaboard Receivers) and the =

distribution of the proceeds of such sale was proceeding in ©

accordance with the legal and equitable rights of the bond-

holders of the Old Company and with the earlier decisions =

in the receivership proceedings. The Respondents will 4

show that that question must be answered in the affirmative

and that, in any event, nothing is presented that warrants —

a review by this Court.

STATEMENT OF THE CASE.

Preliminary Statement.

The Seaboard reorganization was carried out through

receivership proceedings in equity. A Reorganization Plan

(R. 139) providing for the distribution of new securities

among the holders of a large number of different bond

issues was approved by the Reorganization Courts (the

Virginia Court and the United States District Court for

the Southern District of Florida) in 1943 (R. 129). That

Plan excluded the Adjustment Mortgage 5% Bonds due

October 1, 1949 of the Old Company (hereinafter called the

Adjustment Bonds), and the stock of the Old Company.

The Adjustment Bonds were secured by a lien on all the

property subject to the Seaboard Air Line Railway Refund-

ing Mortgage (hereinafter called the Refunding Mortgage),

junior to the lien of the Refunding Mortgage, but were not |

secured by any other lien.

A Final Decree of Foreclosure and Sale (hereinafter

called the Final Decree) was entered in the receivership

proceedings in 1945 (R. 164). It directed the sale of all the

property of the Old Company (with certain exceptions) and

4

the distribution of the proceeds of sale among the bonds

secured by mortgage liens on the property sold (R. 183).

The Final Decree found that all the property sold was sub-

ject to the lien of one or more of the mortgages (R. 179).

The mortgagees under all of the mortgages foreclosed by

the Final Decree (other than the Adjustment Mortgage)

had impounded the income from the respective mortgaged

properties (R. 120-121). There were no proceedings for

foreclosure of the Adjustment Mortgage and no order

impounding income in its favor was taken by the mort-

gagee. Decrees pro confesso were taken against the Trustee ?

under the Adjustment Mortgage (R. 169-173).

The total claim of the bonds outstanding under the

Refunding Mortgage (hereinafter called the Refunding

Bonds) at the date of the Final Decree was approximately

$168,000,000 (R. 182). The amount allocated to the Refund-

ing Bonds (including such pledged bonds) out of the pro-

ceeds of the sale pursuant to the Final Decree was about

$21,500,000, leaving a deficiency of more than $146,000,000.

The major exceptions from the property sold pursuant

to the Final Decree were (a) earnings of the property

between the date of sale and the date of delivery to the

purchaser (R. 188-191) and (b) certain claims for refund

of taxes (R. 195). The earnings were excluded because

of income tax problems in connection therewith. The tax

claims were excluded because of doubt whether they could )

be effectively assigned.

In 1947 (after the consummation of the reorganization)

the Reorganization Courts entered Order No. 442 A (R. 258),

which provided for the sale of property in the hands of the

Seaboard Receivers representing earnings from the opera-

tion by the Seaboard Receivers of the property sold pur-

suant to the Final Decree between the date of sale and the

date of delivery. The proceeds of that sale were approxi-

Sie Oe BOR Sa SRR Be

see LE PN ORT APRA PSL Mw

mately $10,000,000, and Order No. 442 A directed that those

proceeds be distributed among the bonds secured by the

foreclosed mortgages in the same proportions as the pro-

ceeds of sale of the property sold pursuant to the Final

Decree (Par. 7, R. 254). No appeal was taken from Order

No. 442 A and it is now res judicata. The Petition dis-

cusses it as if it were still open to attack. There is no

difference between the questions decided by Order No. 442 A

and the questions decided by Order No. 451 A, which is the

subject of this litigation.

Order No. 451 A (to which the Petition relates) dis-

posed of property representing proceeds of tax refund

claims amounting to about $6,000,000. The purchase price

of that property was ordered distributed among the bonds

secured by the foreclosed mortgages in the same propor-

tions as the proceeds of sale of the property sold pursuant

to the Final Decree and to Order No. 442 A (Par. 9, R. 6).

The total amount distributable to the Refunding Bonds

out of the proceeds of sale of the property sold pursuant

to the Final Decree and the property sold pursuant to

Orders Nos. 442 A and 451 A was only about $28,000,000 (or

about $330 per $1,000 bond), as against a claim of more

than $168,000,000.

All of the property sold pursuant to the Final Decree

and to Orders Nos. 442 A and 451 A was purchased by the

Reorganization Committee, and by it transferred to the

New Company pursuant to the Reorganization Agreement

referred to below.

The reorganization was consummated in 1946. Under

the Reorganization Plan bonds and stocks were allotted to

the Refunding Bonds. The total face amount of the securi-

ties so allotted (taking common stock without par value

at $100 per share) was $90,000,000 tess than the aggre-

SAPS ERD E DREMEL i Se RAS To ee

oP IES ape

UU SS RA REA TRC OAS PUES REO AE EEE BRE EON a5

vn

6

gate claim of the Refunding Bonds.* In spite of the

‘‘unexpected earnings’’ stressed in the Petition, the pre-

ferred and common stock allocated to the Refunding Bonds

has never sold as high as $100 per share, so that the market

value of the securities allotted to them was less than their

claim by an amount substantially in excess of $90,000,000.

The bonds of the various issues deposited under the

Reorganization Plan were deposited with the Reorganiza-

tion Committee appointed by the Courts under a Deposit

Agreement which provided (R. 159):

‘‘All Deposited Securities shall remain in full

force and effect for all purposes, and shall not be

deemed to have been merged, satisfied, released or

discharged, and no right or lien shall be deemed

released or waived in respect of any such securities,

and any judgment upon any claims (including claims

and judgments for deficiencies), and all liens and

equities, shall remain unimpaired and may be

enforced by the Committee and its successors or

assigns until paid or satisfied in full, or expressly

released * * *.’’

Accordingly, the Deposited Securities were entitled to

receive any additional property to which they might become

entitled subsequent to the first sale under foreclosure. The

Reorganization Agreement between the Reorganization

Committee and the New Company, dated May 25, 1945,

specifically obligated the Reorganization Committee to bid,

using the Deposited Securities, not only for the property

* The figure of $90,000,000 is based on Appendix E to the order

of the Interstate Commerce Commission in Finance Docket No.

14,500 approving the issue of securities pursuant to the Reorgani-

zation Plan, Seaboard Air Line Railway Company Receivership, 261

I. C. C. 689, 732 (1946). The total principal amount of Refunding

Bonds dealt with under the Reorganization Plan was $85,265,000,

including Refunding Bonds pledged under another mortgage which

were treated in the same way as Refunding Bonds not so pledged.

ree)

ae

iS

offered for sale pursuant to the Final Decree but also

for any property ‘‘ * * * which may be offered for sale

at any sale pursuant to any supplemental or other

decree which may hereafter be entered providing for the

sale of such property’’ (R. 200). In consideration of that

obligation and of the further agreement of the Reorganiza-

tion Committee to transfer or cause to be transferred to

the New Company all of the property acquired at such

sales, the New Company agreed to issue to the Reorganiza-

tion Committee, or as it might direct, all of the securities

of the New Company issuable in accordance with the Plan

(R. 200), which were distributed to depositors.

This proceeding arose upon the ‘‘ Answer and Objection

to Application No. 451’’ (R. 50), filed by counsel on behalf

of Bondholders, Inc., a South Carolina corporation, as the

owner and holder of certain of the Adjustment Bonds (R.

50). Bondholders, Inc., is attempting to relitigate the ques-

tion of the status of the Adjustment Bonds in relation to the

other bond issues dealt with in the reorganization. That

question has already been conclusively settled against the

contentions of the Adjustment Bonds.

Previous Adjudications of the Status of the

_ Adjustment Bonds.

The Adjustment Bonds wee judicially determined to

have no value, and not to bz entitled to participate in the

Reorganization Plan, in the three proceedings referred to

below, in each of which certiorari has been denied by this

Court. There were two general appeals from the order

approving the Reorganization Plan in which the status of

the Adjustment Bonds was adjudicated, and a separate

proceeding on behalf of the Adjustment Bonds alone.

8

The Reorganization Plan was approved by orders of

the Reorganization Courts entered in December, 1943, in

the receivership proceedings that had been pending since

December 23, 1930 (R. 129-138, 141).

The Virginia Court, in approving the Reorganization

Plan, handed down a carefully considered opinion, written

by the same judge who signed Order No. 451 A, which is

reported as Guaranty Trust Company of New York v. Sea-

board Air Line Railway Company, et al., 53 F. Supp. 672

(December 15, 1943), in which he held that the Adjustment

Bonds had no value and were not entitled to participation

in the Reorganization Plan (53 F’. Supp. 672, at page 680).

The Reorganization Plan was attacked (although not

by the holders of the Adjustment Bonds) in an appeal from

the Virginia Court’s order approving the Reorganization

Plan, in which that order was affirmed in all respects with

an opinion by the Fourth Circuit Court of Appeals reported

as Badenhausen v. Guaranty Trust Co. of New York,

145 F. 2d 40 (August 2, 1944), and certiorari was denied by

this Court on January 8, 1945 (Badenhausen, et al. v.

Guaranty Trust Company, et al., 323 U.S. 797).

A similar appeal had been taken in the Fifth Circuit

from the order of the Florida Court approving and ratify-

ing the Reorganization Plan. That order was likewise

affirmed in all respects with an opinion by the Fifth Circuit

Court of Appeals reported as Badenhausen, et al. v. Glaze-

brook, et al., 148 F. 2d 450 (April 10, 1945), and certiorari

was denied by this Court on October 8, 1945 (Badenhausen,

et al. v. Glazebrook, et al., 326 U.S. 733).

On February 9, 1945, one H. J. Blackford, as the holder

of certain Adjustment Bonds, filed a petition in the Virginia

Court, joined in by other holders of such bonds, alleging

that some provision should have been made for the holders

te set

PATEL SEP GLERE IL LEAT CLL SB AN La RAD A RR RAR ET ASA OIE

9

of the Adjustment Bonds because of the alleged priority

of the lien of the Adjustment Mortgage over the lien of

the Consolidated Mortgage (one of the mortgages securing

ponds participating in the Reorganization Plan), and also

claiming the right to receive certain moneys paid to paying

agents prior to the receivership.

The Virginia Court considered the Blackford petition

on the merits, even though noting that it had been improp-

erly filed, and found that the petitioner and other inter-

vening holders of Adjustment Bonds were barred and

concluded from relief (R. 196), ‘‘(a) by the previous pro-

ceedings, adjudications and decrees * * * impounding all

‘neome of Seaboard Air Line Railway Company and of the

Receivers for the benefit of * * * various mortgages prior

and paramount in lien to the lien of the Adjustment Mort-

gage; (b) by the decree of this Court dated December 10,

1943 * * * which adjudicated that the claims of holders

of Adjustment Bonds have no value and are not entitled to

participate in the distribution of capital securities or other

assets of the new Company, or otherwise in the assets of

the new Company or the earnings or income therefrom;

and (ce) by laches and delay in the assertion of the alleged

rights claimed by them.”’

An appeal from the order denying and dismissing the

Blackford petition was taken to the Court of Appeals for

the Fourth Circuit where that order was affirmed in a

per curiam opinion reported as Blackford v. Powell, 151 F.

29d 392 (October 11, 1945), and certiorari was denied by

this Court on February 4, 1946 (Blackford v. Powell, 327

U. S. 778). In the Petition for Certiorari herein, no

mention is made of the fact that certiorari was denied by

this Court, although the case is referred to in a footnote

on page 12 and in another footnote on page 18. In each

Sn ere

To Ree asap UNC EEA BR ROY SENN PF LEAKS SOLD [is POOL RAT ARE LC

case (and in the index) the citation is erroneously given as

141 F, 2d 302.

In the per curiam opinion of the Fourth Circuit Court

of Appeals in the Blackford case it is said (151 F. 2d 392,

at page 395):

‘‘The conclusive answer to the appeal, however,

is the patent fact that it is an attempt to set aside

the plan of reorganization formulated after years of

careful investigation and approved by the District

Court and by this court on appeal. No satisfactory

excuse or explanation for so extraordinary an effort

has been or can be made.’’

These proceedings and the Petition for Certiorari herein

are a belated renewal of the same attempt.

The Status of the Petitioner and of the Adjustment

Bonds Held by it.

At the hearing before the Virginia Court upon the entry

of Order No. 451 A it was brought out by questions from the

court that this Petitioner, Bondholders, Inc., was incorpo-

rated in the year 1950 (R. 74) and that it acquired its

Adjustment Bonds in that year (R. 73), at which the court

asked counsel for the Petitioner if he was serious in what

he was asking (R. 73). The question was very natural,

for five years earlier, on October 11, 1945, the Court of

Appeals for the Fourth Circuit, with respect to the Adjust-

ment Bonds involved in the Blackford appeal, had said

(151 F. 2d 392, at p. 395):

‘*Appellant Blackford’s bonds were acquired on

December 19, 1944, after the decision of this court,

and Simpson’s bonds were acquired by him partly

before and partly after the Decree of the District

Court on December 10, 1943, and none of the appel-

11

lants or other holders of the bonds took any action

against the plan after that decree until February 9,

1945 when the petition now under consideration was

filed. The laches of the appellants has been so gross

that they are entitled to no further consideration by

the Court.”’

Statements and Contentions of the Petitioner.

It would be impracticable, within a reasonable compass,

to analyze and answer in detail all of the statements and

contentions of the Petitioner that are unsupportable and

erroneous, and upon which its claim is based, but we

are compelled to mention certain of them in this restatement

of the facts. The effort of the Petitioner to reopen the

reorganization on the ground that there have been ‘‘unex-

pected earnings’’ (Pet. 2) is without merit, and needs no

elaboration. If subsequent earnings, whether larger or

smaller than those anticipated, could equitably require or

justify the reopening of railroad reorganizations more

than five years after they have been consummated, no reor-

ganization would ever come to an end. Moreover, as pointed

out above, the ‘“ynexpected earnings’’ have not been large

enough to make the securities of the New Company worth

enough to satisfy fully the claims of the bonds senior to

the Adjustment Bonds.

The petition refers several times to Order No. 442 A,

which was the order entered in 1947 covering the sale of

the proceeds of the earnings of the property between the

sale date and the delivery date (see p. 4, above) as if that

order were still open to attack. No appeal was taken from

that order and, as stated above, it has now become res

adjudicata. The $10,000,000 proceeds of the property sold

pursuant to that order are not involved in any way in the

current proceeding. The Adjustment Bonds never had and

;

spas ce eae |

7

never could have any interest in that property, since

neither the Trustee under the Adjustment Mortgage nor

any holders of the Adjustment Bonds ever instituted any

proceedings to foreclose the mortgage or to establish any

lien on income. It is well settled that a mortgage creates no

lien on earnings or income until the mortgagee takes some

effective action to take possession of such earnings and

income, by impounding or otherwise. 36 Amer. Jur. Mort-

gage Secs. 287 et seq. Evenif an order impounding income }

had been secured, the Adjustment Bonds would still have

had no interest in those earnings, since they were inade-

quate to satisfy the claims of the prior mortgages.

Petitioner repeats many times that all of the bonds dealt

with in the Reorganization Plan have already been ‘‘equi-

tably satisfied.’’ We have shown that that is not true as

to the Refunding Bonds (the issue next senior to the

Adjustment Bonds), because even the face value of the new

securities which holders of those bonds received under the

Reorganization Plan was about $90,000,000 less than the

amount of their claim. The Petition admits (p. 13) that

the face value of new securities allotted to the Refunding

Bonds was only about 53% of their claim. The same situ-

ation exists in respect of some of the other bond issues

dealt with under the Reorganization Plan.

Apparently the Petitioner intends to argue that prior

bond issues must be deemed to have been ‘‘equitably satis-

fied’’ because issues junior thereto received some securities.

However, the Seaboard finant@ial structure was such that

each bond issue (except the Adjustment Bonds) was secured

(a) by a first lien on certain property and, in some cases,

(b) by a junior lien on other property and (ce) by pledge of

bonds issued under another mortgage. The allocations in

the Plan were, in most cases, made in respect of the first lien

property and in respect of the bonds so pledged, not in

13

respect of property on which a particular mortgage might

have a junior lien (see Bondholders, Inc. v. Powell, 190 F.

2d 74, footnote 1, p. 79; R. 282).

In any event no claim of ‘‘equitable satisfaction’ on the

ground suggested can be made in respect of the Refunding

Bonds, since no issue junior to the Refunding Bonds

received any securities under the Plan.

Petitioner seeks to escape the conclusive bar to its con-

tentions resulting from the large unsatisfied balance of the

claim of the Refunding Bonds by taking the position that

that claim no longer exists because the Refunding Bonds

deposited under the Reorganization Plan have been can-

celled. As we have pointed out on page 6 above, the

deposited securities were not cancelled, but were specifically

kept alive, and are entitled to share in the proceeds of sale

of the mortgaged properties. The Reorganization Com-

mittee was obligated to use those deposited securities to

acquire for the New Company the properties sold pursuant

to Orders Nos. 442 A and 451 A (R. 201).

The statement on page 5 of the Petition, that the

reservation of income after sale was because of the recog-

nized inadequacy of the estimated future earnings and the

distributions under the Reorganization Plan, is wholly

without foundation. The Courts were fully aware of the

scope and effect of that reservation, and it was specifically

taken into account in the determination of the upset price

under the Final Decree (See Guaranty Trust Co. v. Sea-

board Air Line Ry. Co., 60 F. Supp. 607, at page 616).

The $6,000,000 worth of property that was sold pursu-

ant to Order No. 451 A consisted almost entirely of

amounts allowed by the United States as refunds in respect

of Federal Income and Excess Profits taxes referable to

the years 1943 and 1944, prior to the sale under foreclosure

(R. 11). The entire amount, therefore, represented refunds

Dh REE Des!

14

in respect of income and earnings of the years 1943 and 1944,

all of which had been impounded for the benefit of the mort-

gages senior to the Adjustment Mortgage. The Reorgan-

ization Courts were fully aware of the existence of the tax

refund claims when the upset prices under the Final Decree

were determined (R. 185).

ARGUMENT.

The Petition Does Not Present Any Basis for

Granting Certiorari.

Even on the Petitioner’s statement of the questions

presented by the petition there is nothing in the petition

to justify the issue of a writ of certiorari, because none of

the questions stated is a question of public or general

interest or raises any conflict with any of the decisions of

this Court or of any Court of Appeals.

Moreover, as we have also pointed out above, the ques-

tion of the right of the Adjustment Bonds to participate

in the reorganization was conclusively and finally deter-

mined against them many years ago. Certainly a bond-

holder acquiring bonds in 1950 is in no position to try

to reopen those decisions at this time.

There Is No Merit in Petitioner’s Contentions.

As we have shown by our statement of facts above, there

could be no merit in Petitioner’s contentions even if the

questions which Petitioner seeks to raise had not already

been finally and conclusively determined.

Petitioner claims, in substance, that, because (as the

Petitioner says) the Reorganization Plan has turned out

Sees Teta

pagan

15

to have been unduly harsh in excluding the Adjustment

Bonds, the helders of those bonds are entitled to have the

Courts disregard the prior lien of the Refunding Bonds

(and other senior issues) on the property sold pursuant to

Order No. 451 A, and give that property to the Adjustment

Bonds.

That argument would be a complete non sequitur, even

if the premise were sound. Any inequity in the Reorgan-

ization Plan due to events after the consummation of the

Reorganization Plan, even if it could be corrected in any

way more than five years after consummation, could not

be corrected by taking property from unsatisfied senior

bond issues for the benefit of junior issues. Moreover, as

our statement of facts clearly shows, the Reorganization

Plan was not, when approved, and is not, even in the light

of subsequent events, unfair in excluding the Adjustment

Bonds.

The conclusive answer to the Petitioner’s claim is that

(a) the Refunding Bonds had a lien on the property sold

pursuant to Order No. 451 A prior to any lien which

the Adjustment Bonds could possibly have had thereon and

(b) the Refunding Bonds have a large unsatisfied claim,

even after applying thereon the proceeds of sale of said

property.

It is respectfully submitted that both Order No. 442 A

of March 28, 1947 (R. 385), which is now res adjudicata,

and Order No. 451 A of October 20, 1950 (R. 1), which the

Petitioner now seeks to have reviewed by this Court, were

strictly in accordance with law, and with the orders and

decrees of the Reorganization Courts and the decisions in

respect thereto, and that Order No. 451 A involves no ques-

tion which should be considered by this Court.

16

Conclusion.

For the foregoing reasons it is respectfully submitted

that the petition for a writ of certiorari should be denied.

Dated, November 23, 1951.

Respectfully submitted,

James B. McDonoveu, JR.,

Seaboard Air Line Railroad

Building,

Norfolk, Virginia,

Counsel for Respondents.

Haroip J. GALLAGHER,

15 Broad Street,

New York, N. Y. °

Lronarp D. Apxkrns,

15 Broad Street,

New York, N. Y.

W. R. C. Cocke,

Citizens Bank Building,

Norfolk, Virginia,

Of Counsel.