Opposition Brief — Chemical Bank & Trust Co. v. Group of Institutional Investors

IN THE

Supreme Court of the United States

Octosper Term 1951

Nos. 524, 525, 526, 527 and 528

a ee

CuemicaL Banx & Trust Company, as Trustee under the

Indenture dated as of December 1, 1926 securing Missouri

Pacific Secured Serial Bonds; ALLEGHANY CORPORATION;

Missouri Paciric RarLroap Company 514% Srcurep SERIAL

BonpHoLvers CoMMITTEE; JoHN V. Farwe t, III, et al.,

Independent Directors of the Missouri Pacific Railroad

Company; and Missourr Pactric Rattroap Company,

Petitioners,

v.

Group or LNsTITUTIONAL INvEsToRS HoLpING First AND

RerunpiInG MortcGace 5% Bonps or Missourt Paciric Rait-

roAD CoMPANy, et al.,

Respondents.

——E ae

BRIEF IN OPPOSITION TO PETITIONS FOR WRITS OF

CERTIORARI TO THE COURT OF APPEALS FOR THE

EIGHTH CIRCUIT

This brief is filed in opposition to the petitions in the

above entitled causes for writs of certiorari to review the

judgment of the Court of Appeals for the Eighth Circuit

affirming the order of the United States District Court for

the Eastern Judicial District of Missouri, Eastern Division,

approving the Plan.

2

Opinions Below

Court of Appeals—State of Texas v. Group of Insti-

tutional Investors, et al., 191 F. 2d 265 (8th Cir.

1951); (Tr. 14-36).

District Court—/n re Missouri Pacific R. Co., 93 F.

Supp. 832 (K.D. Mo. 1950); (R. 915-945).

Commission—Missourit Pacific Railroad Company

Reorganization, 275 I.C.C. 59, 203 (1949); (Vol.

LII, pp. 28461-28760).

Jurisdiction

All of the petitioners invoke the jurisdiction of this

Court under Section 1254 of the Judicial Code (28

U.S.C.A. $1254). Some of the petitioners also rely on

Section 24¢ of the Bankruptey Act (11 U.S.C.A. $47;

Serial Trustee’s Petition, p. 5, Alleghany Petition, p. 3,

Debtor’s Petition, p. 2). The motion of the Independent

Directors contains no citation to any statute or decision

which indicates that the jurisdiction of this Court ean be

invoked by such a motion.

Preliminary Statement

The petitions contain a brief summary of the history

of these proceedings. These summary statements serve to

emphasize an outstanding fact. On March 31st of this

year these proceedings will have been pending for nineteen

years. During this long period the creditors in this reor-

ganization have been enjoined from enforcing their claims.

Junior creditors holding claims of approximately

$120,000,000 in principal amount have received no interest

whatever on their claims since the inception of these

proceedings. With a single important exception—the

New Orleans First Mortgage bondholders—the senior

ereditors whose claims are dealt with in the Plan have

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received interest during these proceedings at an average

rate far below the rates of interest to be borne by the new

securities allocated to them under the Plan. This situation

has prevailed notwithstanding the high level of earnings

during the war years, which the petitioners emphasize.

Such a situation certainly was not foreseen by this Court

when it rendered the first of its important decisions con-

struing Section 77. Continental Illinois National Bank

é Trust Co. v. Chicago, Rock Island & Pacific Railway

Company, 294 U. S. 648 (1935). It is inconceivable that

Congress should have intended such a result. This long

delay ought not to be ignored in considering the argu-

ments which urge this Court to postpone consideration

of the petitions or to adopt a construction of Section 208

which would prevent this Court from settling promptly

the questions which the petitioners say are of sufficient

importance to merit review by this Court. (See Point I,

p. 8, infra; Independent Directors Pet., pp. 31-32, Debt-

or’s Pet., pp. 2-3, 26-33.)

A. The Petitioners

The petitioners* may he conveniently classified as

follows:

(i) Those who object to the treatment of the New Or-

leans capital stock—the Serial Trustee and the Serial Com-

mittee (Causes Nos. 524 and 526);

(ii) Those who object to the treatment of the Missouri

Pacifie equity—Alleghany and the Debtor, which is control-

led by Alleghany through ownership of a large block of

common stock (Vol. LII, p. 28480; Causes Nos. 525 and

* Other petitions for certiorari in this proceeding were filed by the

State of Texas (Cause No. 416) and Morris, et al. (Cause No. 415)

in November 1951. This Court denied these petitions on January 2

and 28, 1952, respectively.

4

528). The Independent Directors fall into this group also

(Cause No. 527).*

The Plan deals with thirteen classes of creditors.t Rep-

resentatives of only one of these classes, holders of the

Serial Bonds, have filed petitions seeking review of the

judgment below (Causes Nos. 415, 524 and 526). The Court

below correctly stated: ‘‘None of the preceding plans of

reorganization received such general measure of accep-

tance by creditors’’ (Tr. 18; In re Missouri Pacific R. Co.,

50 F. Supp. 936, 943 (E.D. Mo. 1943); Wright v. Group of

Institutional Investors, 163 F. 2d 1022 (8th Cir., 1947)).

But as the Court below noted, ‘‘It is unlikely that all the

other creditors are entirely satisfied with [the Plan] as

the claims of only one of the classes, the New Orleans

First Mortgage Bonds, are to be satisfied in full in cash

or its equivalent. All the rest must submit to substantial

adjustments’”’ (Tr. 18). Appendix A, page 33, infra, indi-

cates how far short the Plan falls of providing satisfaction

of the claims of System creditors in a realistic sense.

B. The questions presented by the petitions

The principal contentions of the petitioners are that

(i) all proceedings for approval of the Plan are sus-

pended by the provisions of Section 208(a)(5) because of

the pendency of the proceeding before the Commission

under Section 208(a)(1)** (Independent Directors Pet.,

pp. 9-10 and Motion, pp. 25-32; Debtor’s Pet., pp. 26-33).

* However, these dissident directors, being a minority, do not speak

for the Debtor. Nor do they have any authority under Section 77(p)

to represent security holders of any class. As a minority of directors,

they have no interest in this reorganization which is entitled to the

protection of the courts or the Commission. Section 77(e) required

the District Court to hear only “parties in interest”.

¢ Exclusive of holders of Cairo and Thebes Railroad Company 4%

First Mortgage Bonds (all of which were acquired by the Trustee on

December 1, 1950) and equipment obligations.

** The pertinent provisions of Section 208 are set forth in Appendix

C (p. 38, infra).

PETER IIE EA PRIN ENG te Ta i AB A OETA hate

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(ii) the findings of the Commission as to earning power,

value and capitalization are not supported by the weight

of the evidence (Alleghany Pet., pp. 30-38; Serial Trustee

Pet., p. 10; Serial Committee Pet., pp. 5-12: Independent

Directors Pet., pp. 16-18, 20-23; Debtor’s Pet., pp. 13-24,

37-43). Certain of the petitioners assert that the Commis-

sion’s action in making these findings was abitrary and

failed to conform with legal standards. Others assert

that the District Court and the Court below were casual

in their review of the Commission’s findings. However,

their petitions reveal only a disagreement with the Com-

mission as to the weight of the evidence.

(iii) the consolidation provided for in the Plan is not

authorized by Section 77 (Independent Directors Pet., pp.

10-13; Serial Committee Pet., pp. 18-19).

(iv) the Commission unlawfully limited the capitaliza-

tion of the New Orleans by physical value factors (Serial

Trustee Pet., pp. 6-11).

(v) the Commission failed to comply with the require-

ments of Section 208(b) in disposing of surplus cash

(Independent Directors Pet., pp. 18-20).

(vi) certain provisions of the Plan relating to the elee-

tion of the first board of directors are unlawful (Inde-

pendent Directors Pet., pp. 14-16).

This Court, in the Western Pacific, Milwaukee and

Denver cases* supplied important and necessary interpre-

tations of Section 77. At the time of these decisions a

large part of the railroad mileage of the United States

* Ecker v. Western Pacific R. Corp., 318 U. S. 448 (1943) ; Group

of Institutional Investors v. C hicago, Milwaukee, Si. Pau! & Pacific

R. Co., 318 U. S. 523 (1943) ; R.F.C. v. Denver & R.G. W.R. Co.,

328 U.S. 495 (1946).

WP) een eee *

| iit acai devi

6

was in the hands of trustees and receivers. The clarifi-

eation of Section 77 which the above cited decisions fur-

nished greatly facilitated the return of the properties of

the major roads in bankruptey and receivership to their

owners. The Missouri Pacific System is the only im-

portant exception.t

Each of the prior plans in this reorganization has heen

hotly contested by numerous parties. Almost every con-

ceivable objection to those plans was raised. Both the

District Court and the Commission have devoted a great

deal of thoughtful consideration to the probleis of this

reorganization. The opinions of the District Court and

the reports of the Commission reveal an understanding of

and adherence to the requirements of Section 77 and the

principles laid down in the above cited decisions of this

Court.* The return of the two prior plans to the Commis-

sion for reconsideration and revision indicates an anxious

desire on the part of the Court below, the District Cou

and the Commission to protect the private rights «

security holders as fully as is consistent with the publ

interest and to insure that no creditor or stockholder shall

+ At the end of 1943 the operated steam railroad mileage in receiver-

ship and trusteeship was 64,887. At the end of 1950 this mileage had

been reduced to 12,223, of which 9,793 miles, or more than 75%, was

operated by the Trustee of the debtors comprising the Missouri Pacific

System (58th and 65th Annual Reports of the Interstate Commerce

Commission—1944, 1951—-App. E).

* The two prior opinions of the District Court are reported in 39 F.

Supp. 436 (E.D. Mo. 1941) and 64 F. Supp. 64 (E.D. Mo. 1945)

[1941 R. 2328; 1946 R. 1080]. The opinion of the District Court

returning the 1940 Plan is reported in 50 F. Supp. 936 (E.D. Mo.

1943) [1946 R. pp. 111-124]. The prior reports of the Commission

are reported in 239 I.C.C. 7 (1940) and 257 I.C.C. 479 (1944) [1941

R. pp. 295-473; 1946 R. pp. 646-853]. In 1947, prior to the enact-

ment of Section 208, the Court below requested the views of the Com-

mission as to the advisability of returning the 1944 Plan in the light

of changed conditions. Following the Commission’s recommendation,

it returned the plan to the Commission. Wright v. Group of Institu-

tional Investors, 163 F. 2d 1022 (8th Cir. 1947) [R. 1].

7

forfeit anything of value. This record is entirely incon-

sistent with the charges of arbitrary action by the Commis-

sion and casual review by the District Court* and the

Court below.

None of the questions presented by the petitioners are

comparable in importance with the type of question dealt

with in the three decisions of this Court above cited. In

large part the questions presented by the petitions have to

do with the application of the principles laid down in those

decisions to the particular facts of this case. Indeed some

of the petitioners by their emphasis on physical values and

book values seek indirectly to obtain a modification of the

rule which makes earning power the primary test of value.

Other questions are presented for the purpose of obtaining

another trial of the facts. These are not the type of ques-

tions which this Court will consider.

* Judge Moore, by whose order the Plan was approved, has had a

wide experience in Section 77 reorganizations. In addition to the

Missouri Pacific he also supervised administration of the Frisco and

Cotton Belt estates. In re St. Louis-San Francisco Ry. Co., 59 F.

Supp. 417 (E. D. Mo. 1945), aff'd sub nom. Brooks v. St. Louis-San

Francisco Ry. Co., 153 F. 2d 312 (8th Cir., 1946); Jn re St. Louis

Southwestern Ry. Co., 53 F. Supp. 914 (E. D. Mo. 1944), aff'd with

modification, sub nom. St. Louis Southwestern Ry. Co. v. Henwood,

157 I. 2d 337 (8th Cir., 1946) cert. den. 330 U. S. 836 (1949). The

Frisco plan was confirmed on November 15, 1945 (see Jn re St.

Louis-San Francisco Ry. Co., 68 F. Supp. 921 (E. D. Mo. 1946).

In cooperation with the Commission, Judge Moore dismissed the

Cotton Belt proceedings upon completion of an arrangement with

creditors which avoided the need for reorganization. Moody's Man-

ual of Investments, Railroads, 1951, p. 886; St. Louis Southwestern

Railway Company Securities, 267 1.C.C. 392 (1947).

ARGUMENT

POINT |

The contention that proceedings for approval of the

Plan are suspended because of the pendency of the

Section 208(a)(1) proceeding does not present a ques-

tion which merits review by this Court.

The Debtor and the Independent Directors assert that

all proceedings relating to the Plan in this reorganization

are suspended because of the pendency of the Section

208(a)(1) proceeding before the Commission (Debtor’s

Pet., pp. 26-33; Independent Directors Pet., p. 9; Indepen-

dent Directors Motion, pp. 25-32).

The Independent Directors have sought to raise the

issue by annexing to their petition a motion asking this

Court to vacate the judgment below because it was entered

after the filing of the Section 208(a)(1) petition (Inde-

pendent Directors Motion, pp. 25-32). In the alternative

their motion requests that consideration of all petitions

for certiorari be deferred pending disposition by the

- Commission of the Section 208(a)(1) proceeding. This

motion is apparently intended to avoid the requirements

of the certiorari procedure. If the construction of Section

208(a)(5) involves a question which merits the consider-

ation of this Court, it can be dealt with by granting cer-

tiorari for the specific purpose of deciding that question.

We contend that the wording and history of Section 208

plainly negatives the contentions of the Debtor and the

Independent Directors and that aecordingly the entry of

the judgment below was not in conflict with Section 208.

There is no important question for this Court’s con-

sideration.

PLEIN EE SRNODE OV EAL OE ILE ION, LEE ITLL LIE ITIE BILE SLO IIR LORE SNE ttl

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Section 208(a)(5) provides as follows:

**(5) each petition filed under the provisions of

paragraph (1) or paragraph (3) of this subsec-

tion (a) shall be filed with the court before which

is pending the plan which is the subject of the peti-

tion and such petition shall be referred by the

court to the Commission. Upon the filing of such

petition with the court all further proceedings for

confirmation of the plan shall be suspended pend-

ing disposition of the petition by the Commission

and certification of its action thereon to the court.’’

It is evident from the language of the Senate Committee

report*-on this legislation that the basic purpose of Sec-

tion 208 is to give the Commission an opportunity to

review a plan in the light of changed conditions prior to

final confirmation.

The time limitations governing the filing of a petition

| under Section 208(a)(1) are explicitly tied in with the

| confirmation procedure of Section 77. Thus Section

208(a)(1) permits the filing of a petition by any party

at any time more than 18 months after the Commission’s

approval of a plan

‘*but before any order confirming the plan shall

have been entered, or, such an order having been

entered, if an appeal from said order is pending

on said date in a circuit court of appeals or the

matter is pending in the Supreme Court on a

petition to review any order of a cireuit court of

appeals dealing with said order of confirmation or

the time within which to make such appeal or to

file such petition has not expired * * *.’? (Emphasis

supplied.)

Suinilar language relating to confirmation is contained in

Section 208(a)(2) and (3).

* The text of Senate Report 897, in so far as pertinent to the argu-

ment of this brief, is set forth in Appendix B (p. 34, infra).

. IEEE 4 ‘ SEED SOA See

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In the first three paragraphs of Section 208(a) the

terms ‘‘order confirming’’, ‘‘order of confirmation’’ and

‘‘confirmation’’ are used seven times and in each instance

there can be no doubt that Congress was referring to

confirmation or an order of confirmation in the sense in

which it is used in Section 77(e). The use of the term

‘fapproval’’ on four oceasions and ‘‘consummated’’ on

three other occasions in Section 208(a) leaves little room

for doubt that Congress was perfectly well aware of the

separate and distinct procedures for approval and con-

firmation laid down in Section 77(e) and of the established

terminology employed in railroad reorganizations.

There is no reason for supposing that in using the

phrase ‘‘ proceedings for confirmation of the plan’’ in Sec-

tion 208(a)(5), Congress meant anything other than the

usual proceedings directly related to confirmation in its

strict sense.* Section 208 was enacted as a part of Public

Law 478 (approved April 9, 1948) and constituted Section

3 thereof. Section 2 thereof (commonly called the ‘‘ Mahaf-

_ fie Act’’+) permits a carrier in reorganization under Sec-

tion 77, with the permission of the District Court, to file

a ‘*Mahaffie Act’? plan with the Commission. Section 2

provides that ‘‘upon granting of such permission, such

proceeding [under Section 77] so far as it relates to a

plan of reorganization, shall be suspended * * *.,”?

(Emphasis supplied.) Plainly, Congress knew how to

phrase a provision which would suspend all proceedings

relating to a plan when it so intended. In Section 208

Congress intended only to stay the hand of the court in

exercising its function of confirmation. The procedures

developed and the language used in Section 208 precisely

effect that intention.

* Legal terms in a statute are presumed to have been used in their

legal sense. 2 Sutherland, Statutory Construction, pp. 438-39 (3rd

ed., 1943), and cases there cited.

+ Interstate Commerce Act, Sec. 20b (49 U.S.C.A. §20b).

LEE E EERE EI EASES. IRE LL MOOIE SE AE i OE LE SE SEIS LP SLE SIE, 8s OIE EEE ODE PAIN FRE

_—_

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The issues sought to be raised in this Court involve

approval of the Plan, not confirmation.* There can be

no ‘‘collision’’ between this Court’s action in approval

proceedings and the Commission’s actions under Section

208. If certiorari is granted, it will be to determine an

important question of law arising out of the record which

was before the Commission when it certified the Plan and

the record in the District Court in the proceedings

for approval of the Plan. The function of approval is

assigned by Section 77(e) to the courts. None of the

issues raised in the approval proceedings is or can prop-

erly be before the Commission in the Section 208(a) (1)

proceedings.

The function of the Commission in the Section 208(a) (1)

proceeding is to appraise events which have transpired

since its certification of the Plan in order to determine

whether reexamination or revision of the Plan is necessary.

If the Commission finds that reexamination and revi-

sion are unnecessary, any action taken by this Court on

the petitions will be neither ‘‘unseemly’’ nor a ‘‘waste

of time and energies’’ of the Court—indeed the progress

of the Plan toward consummation will in that event be

materially expedited. If the Commission finds that the

Plan should be reexamined and revised, it should have

the benefit of this Court’s determination of any issue

which merits review for its guidance in the subsequent

Section 208(b) proceeding. For example, each of the

* After entry of the approval order, the Plan was submitted to

security holders for acceptance or rejection pursuant to Section 77.

The Plan was rejected by only three of the 17 classes to which it was

submitted, viz., the Missouri Pacific preferred stockholders (Class 2),

the holders of the New Orleans publicly-held capital stock (Class 3)

and the Serial bondholders (Class 19). Rejection of the Plan by these

classes rendered it necessary for the District Court to reexamine the

Plan. Confirmation hearings were held in June 1951 and briefs filed.

Those proceedings, being “for confirmation’’, are suspended pending

determination of the Section 208 proceeding.

ete BELL LEG EOS A GE RAED AIO DERE RE LLG TASTIER IT La ROT A ED

12

plans heretofore issued in this reorganization has provided

for consolidation of the debtors. It is urged that this

provision is unlawful. The courts below have held that

the Commission has power to authorize a consolidation

under Section 77 (R. 937-39; Tr. 21-25). In view of the

Commission’s repeated findings that such consolidation

is in the public interest, there can be no real doubt that

any new or modified plan which the Commission may

hereafter approve, if the Plan is returned, will provide

for consolidation. Thus, if this Court is of the opinion

that an important question is presented by this conten-

tion (or any of the other contentions of the petitioners),

any future deliberations of the Commission and the Dis-

trict Court will be substantially aided, not hindered, by

the grant of the writ and prompt determination of the

issue.

To us it seems obvious that the Debtor and the Inde-

pendent Directors are urging a strained construction of

the plain language of Section 208 which is inconsistent

with the intention of Congress and which would convert

that legislation into an instrument to hinder and delay

creditors. It is most unlikely that any of the lower

Federal courts will adopt such an interpretation of this

legislation should the question ever again arise. Thus

there is no need for a pronouncement of this Court on

the matter. It would also seem prudent to permit the

Commission and the lower Federal courts to acquire some

experience in the administration of this new law before

this Court undertakes to interpret it. Such experience

should be of invaluable aid to this Court.

PLY MSE RE LM ER RCP ERE AUN EAR

RPA PIN SOE RS ES. SME NRE Er apt TER

. ad a Bob

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POINT II

The findings of the Commission as to maximum

permissible capitalization should not be reviewed by

this Court.

This Court will not grant certiorari ‘‘merely to review the

evidence or inferences drawn from it’? (General Pictures

Co. v. Electric Co., 304 U. S. 175, 178 (1938), United States

v. O’Donnell, 303 U. S. 501, 508 (1938) ): nor will it disturb

the concurrent findings of the courts below unless they

are shown to be ‘‘clearly erroneous’’. Faulkner vy. Gibbs,

338 U.S. 267, 268 (1949), Williams Co. v. Shoe Machinery

Corp., 316 U. S. 364, 367 (1942), Allen v. Trust Company,

326 U. S. 630, 636 (1946), Robertson and Kirkham, Juris-

diction of the Supreme Court of the United States (1951),

pp. 657-59. The ‘‘two court’? rule operates as well upon

consideration of applications for certiorari as in the deci-

sion of eases on the merits. Robertson and Kirkham,

Jurisdiction of the Supreme Court of the United States

(1951), pp. 659-661."

Some of the petitioners pay lip service to the rules which

control court review of the findings of the Commission

concerning matters which are affected with the public

interest (e.g., Alleghany Pet., p. 29, question 1). But upon

analysis it will be found that the questions which the

petitioners raise as to the findings pertain only to the —

weight of the evidence. The Missouri Pacific equity inter-

ests question the Commission’s findings as to maximum

permissible capitalization of the System and component

debtors. It is asserted that in determining capitalization

the Commission gave undue weight to past earnings,

*The Court of Appeals decisions cited on pages 36-37 of the

Alleghany Petition are, of course, not in conflict with the “two court”

rule.

aa rr a a eer

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improperly computed physical values and generally

ignored evidence of the improved condition of the System

and of the area it serves. These parties emphasize the

high earnings of the System since 1941, the substantial

increase in physical values and other favorable facts

which the record discloses. They overlook the opinions

of this Court which suggest caution in the use of statistics

which reflect transitory conditions such as war. Milwaukee

ease, 318 U. S. 523, 542-544; Western Pacific ease, 318

U. S. 448, 506-509. They completely ignore the adverse

factors which have affected railroads since 1945, such as

the growing losses of rail traffic to competitive forms of

transportation and the spiralling cost of labor and

materials.

Of necessity the determination of capitalization and

earning power requires the weighing of many complex

factors. It involves knowledge of the national transporta-

tion economy, of traffic sources and potentialities, of the

effect of economic developments on railroad traffie and

revenues, and of trends in earnings and costs of operation.

It involves an attempt to foresee the future. It vitally

concerns the public interest. The appraisal of these factors

has been entrusted to the Commission and, if legal stand-

ards are followed, its findings are given conclusory effect

by Congress and this Court. Section 77: Ecker v. Western

Pacific R. Corp., 318 U. S. 448, 468-77 (1943); Group of

Institutional Investors v. Chicago, Milwaukee, St. P. &

P. R. Co., 318 U. 8. 523, 538-42 (1943).

The wisdom of committing this determination to an

expert administrative agency, equipped to deal with the

mass of evidence that inevitably accompanies a railroad

reorganization, cannot be doubted. At the time of issuance

of the Plan, this proceeding had been pending for over

16 years. The Commission and the District Court had

dealt with testimony, exhibits, orders, financial statements

15

and otier pertinent data comprehending thousands of

printed pages of record.*

The petitioners invite this Court to review this enormous

record and, in effect, ‘‘to try the case de novo.’’ Such an

invitation is ordinarily declined. Timken Roller Bearing

Co. v. U. 8., 341 U.S. 593, 596-7 (1951). It should be in

this case. None of the three principal contentions of the

Missouri Pacific equity interests demonstrates error in the

Commission’s findings.

1. The contention that the Commission, in making its

findings as to earning power, relied on a “depression fore-

cast” and ignored war earnings and recent favorable

developments.

Alleghany complains that the forecast of earnings made

by the Commission was ‘‘preponderantly based’’ on the

so-called ‘‘normal year’’ forecast of the Trustee which was

‘prepared and presented to the Commission in the depth

of the world’s worst depression’’. It is argued that the

Commission ignored the changes in the fundamental

character of the Systeim’s traffic, changes in economic con-

ditions, economic improvements in the Southwest and ‘‘all

the other undisputed evidence in the record as to the pres-

ent and probable future increased earning capacity of the

System’’ (Alleghany Pet., pp. 14-24, 34-35; see also Inde-

pendent Directors Pet., pp. 16-18 and Debtor’s Pet., pp.

16-24, 37-41). It is claimed that the Commission in 1948

* The printed record before this Court constitutes over 4500 pages

of testimony, reports, orders and exhibits. The printed record in the

District Court (only a fraction of which is included in the printed

record before this Court) immediately prior to the issuance of the

Plan consisted of over 28,000 pages of petitions and orders dealing

with the administration of the debtors’ estates, reports and financial

statements of the debtors. The printed record in the District Court

is transmitted to, and forms part of the record before, the Commis-

sion. Hundreds of additional pages of testimony bearing on develop-

ments since 1949 are now under consideration by the Commission

in the pending Section 208 (a)(1) proceeding.

LET OS ETE! IT MIE PTE NTE GAARA ET 5 IED PL ID RENE ORR

16

merely revised the Trustee’s ‘‘normal year’’ forecast to

reflect expected increases in citrus and chemical traffic, and

in so doing ‘‘arbitrarily’’ reduced Mr. Neff’s estimate by

over $1,000,000 (Alleghany Pet., pp. 18, 23, 34; Debtor’s

Pet., pp. 37-38). The Comission has specifically stated

that its ‘‘determinations of a normal year’s earnings for

each of the three principal debtors and for the system

are not the result of mere additions of prospective earn-

ings from citrous and chemical traffic to the trustee’s

normal-year forecasts’’ (Vol. LI, p. 28655). In arriv-

ing at its forecast of normal year earnings, the Commis-

sion considered the earnings data for the five-year period

(1937-1941) immediately preceding the entry of the United

States into World War II and the seven-year period (1942-

1948) which includes the war years and the three years

immediately following the war (Vol. LII, pp. 28541-28542).

It also considered extensive testimony and exhibits regard-

ing recent developments in the Southwestern territory,

including the chemical and citrus growth, increases in popu-

lation in the System territory, increases in income pay-

ments, wages and salaries and other statistics which tend

to indicate that the Southwestern territory has had a

greater proportion of growth in business and agricultural

activity than the rest of the United States (Vol. LI, pp.

28534-28541, 28655, 28667; Tr. 33-4). The Commission con-

cluded that the average annual yolume of traffic and oper-

ating revenues in the future will be larger than the average

for the five or ten vears immediately preceding the war.

The Commission commented:

‘However, in that event, the cost of labor and ima-

terials will also be on a higher level. So far as

recent experience indicates, these costs have repre-

sented a considerably greater proportionate in-

crease than have the revenues. The resulting earn-

ings available for interest have not been commen-

surate with the increased traffic veiume. In the

zt SILI gas oer ages atten _

OPN LON EAT BRET LR Te Nee SE SRI DNR RN ENR eR Se ee

17

event of a business depression (‘industrial contrac-

tion’) both operating revenues and costs will doubt-

less suffer a serious decline but past experience has

shown that the traffic volume and revenues will de-

crease in a greater degree proportionally than will

expenses’’ (Vol. LII, p. 28542).

The District Court, having considered the entire rec-

ord, found that the Commission’s findings and conclu-

sions were supported by the evidence (R. 949, 919).

The charge that the Plan is based on a ‘‘depression

formula’’ for earnings is controverted by the record. In

1940 the Commission’s estimate of the System’s normal

year earnings at about $22,000,000 was substantially in

excess of actual System earnings during the 1930’s. Only

in the first two years of that period did System earnings

equal or exceed $22,000,000 (1941 R. Vol. II, pp. 331-335;

Vol. LIT, p. 28542). The Commission’s forecast of

$25,450,000 exceeds by over $14,000,000 the average annual

earnings for the period 1932-1940. It is $10,000,000 in

excess of the highest annual earnings in that period. The

new capitalization cannot be serviced adequately with

income available for interest of $25,450,000. Such earn-

ings will provide nothing for the new common stock,

Class B, and will amount to less than 5% on the capi-

talization represented by the new common stock, Class

A.* As the inflation of prices continues, an increasing pro-

portion of earnings will be required for replacement of

plant and equipment. Only in periods of relatively high

* Under the Plan the total annual charges through the dividend on

the new preferred stock will amount to $21,362,252, exclusive of capital

expenditures fund and sinking funds (R. 28638). Out of the normal

year earnings of $25,450,000, there will remain, after payment of the

preferred stock dividend, $4,087,252. Sinking fund requirements of

the Plan and the need for substantial expenditures for replacements

and improvements will prevent the distribution by way of dividends

of a large portion, if not all, of this balance of earnings in the normal

year.

ae OCR E LE RE MIE LIT TE EB OS PII eA ABS EK ISSR NR ea a

18

earnings can the holders of new Class A and Class B com-

mon stocks expect to receive dividends. It is plain that

the new capitalization was not predicated on earnings of

the 1930’s.

2. The contention that the Commission failed to accord

proper weight to improvements.

Alleghany and the Debtor urge that the vast improve-

ments in System properties, especially the dieselization

program, have been accorded insufficient recognition (Alle-

ghany Pet., pp. 13-14, 17-18; Debtor’s Pet., pp. 20-22).

They emphasize the dollar amount of expenditures for

additions and betterments, but fail to show that increased

earnings will result.

It is apparent from the Commission repurts that the

Commission was fully aware of the improvements that had

been and were being made in the physical plant of the

System and of the economies of operation to be realized

therefrom. The Commission found that the probable

normal year income deternined by it ‘‘sufficiently reflects

any economies of operation resulting from improvements

made to the debtor’s properties since 1944’’ (Vol. LII,

pp. 28545, 28542-45, 28555, 28511, 28667).

Prior to the issuance of the Plan in December, 1949, the

Commission also had before it the petitions filed, and

orders entered, in the District Court in the years 1948

and 1949 reflecting the further progress of the Trustee’s

program for dieselization and other extensive additions

and betterments.

The mere statement of the dollar expenditures for

improvements gives this Court no basis for appraising

their effect on earning power.* <A considerable portion of

* As the Commission has stated, railroad property “must be properly

maintained and replacement spending does not necessarily result in

increased net earnings. Such expenditures are often required to pre-

serve earnings, particularly in view of competitive conditions” (Vol.

LII, p. 28545).

IETS NA BES RAR LL A RST IT IER LOIS SOREN. TAB: SE NTO PRONE IE EH CO ENS Y areee me ceanereet ee

19

such expenditures is required for necessary replacements

to insure effective and safe operation.* Substantial

amounts have gone into the extensive program of dieseli-

zation. That has been a vital necessity to maintain the

competitive position of the System. Spiralling costs of

labor and materials have added millions of dollars to the

cost of improvements. A very substantial proportion of

the cost of improvements is not reflected in increased

earning power. ‘This is clearly an area in which the

expert judgment of the Commission is required.

3. The contention that reproduction cost was improp-

erly computed.

Among the elements of value considered by the Com-

mission was reproduction cost (Vol. LI, pp. 23510-13;

28553; 28667-68)**.

Alleghany and the Debtor urge that the Commission

should have adopted a multiplier of 227 (or more) in com-

* Alleghany specifically refers to “installation of heavier rails,

shorter and permanent steel bridges and creosoted ties and bridge

material and grade reductions” (Alleghany Pet., p. 14). In the

Denver case this Court took note of the fact that “Railroads, even in

reorganizations, must make additions to take care of public needs or to

lower operating costs” (328 U. S., at p. 515).

** Alleghany offers the unique suggestion that (alsent a showing

that a railroad has had an opportunity through fair rates to earn a

proper return) its value for reorganization cannot be fixed at less than

its reproduction cost less depreciation. (Alleghany Pet., pp. 38-46).

Not a single reorganization case is cited in direct support of this

contention. This Court has thoroughly discussed the proper basis for

determining reorganization value and has distinguished value for rate

making purposes from reorganization value. (\Jilzeuukee case, 318

U.S. at pp. 539-40; H’estern Pacific case, 318 U.S. at pp. 482-3.)

Even if value for rate making purposes were controlling, Alleghany has

failed to demonstrate error. The notion that rates must yield a fair

return on reproduction cost has been repudiated by this Court. Federal

Power Commission v. Hope Natural Gas Co., 320 U. S. 591 (1944) ;

Federal Power Commission v. Pipeline Co., 315 U. S. 575 (1942) ;

See also Robert L. Hale “Utility Regulation In The Light Of The

Hope Natural Gas Case”, 44 Col. L. Rev. 488, 496 (1944) ; Robert

Swaine “A Decade of Railroad Reorganization under Section 77 of the

Federal Bankruptcy Act”, 56 Harv. L. Rev. 1193, 1196 (1943).

. NS 8 tye on -

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20

puting reproduction cost (Alleghany Pet., pp. 8-11, 33-34;

Debtor’s Pet., pp. 41-42). This was the ‘‘spot’’ multiplier

for 1946 (Vol. LII, p. 28668), based on the then current

actual costs of construction (R. 156-7). The multiplier of

175 used by the Commission is a ‘‘ period price multiplier’’,

which reflects construction cost trends (Vol. LII, pp. 28510-

11, 28668; R. 468-69).

The Commission was of the opinion that the use of a

‘‘spot multiplier’’ is not ‘‘proper in determining capital-

ization’’ in reorganization (Vol. LII, pp. 28667-68; see

also R. 921).”

Alleghany’s contention merely indicates a disagreement

with the Commission and the Bureau of Valuation as to

the weight to be given to current construction costs in

determining reorganization value (Tr. 30). This is a field

in which the Commission’s conclusions are binding. Alle-

ghany has failed to show that, in reaching its conclusions,

the Commission has disregarded legal standards.**

In general, the petitioners have emphasized all the

favorable factors which may influence earnings, partic-

ularly as reflected in the high earnings during and since

World War LI. In the Milwaukee case this Court indi-

cated that war earnings are an unreliable criterion of

* This position is quite understandable. As appears from the

Alleghany petition (p. 8), the weighted average cost index for the

Southwestern area (Region VIII) has equalled 227 in only 4 years in

the 35-year period 1915-1949. Indeed the multiplier of 175 used by

the Commission has been equalled in only 12 years during that period,

four of which were in the inflated 1920s and the remainder of which

were in the World War II and the post-war period.

** If there is any substance to the argument (Alleghany Pet., pp.

10-11) that the Commission in Ex parte 175 (Increased Freight

Rates, 1951, 281 1.C.C. 557 (1951)) has belatedly recognized the

inadequacy of its valuation figures, the Commission will have an

opportunity to reconsider in the light of changed conditions its valu-

ation of the debtors’ properties in the pending Section 208 proceeding.

The Bureau of Valuation filed a new valuation report in those pro-

ceedings in November, 1951.

21

earning capacity (318 U. S. at p. 543). In this case, in

Rutland Railroad Company Reorganization, 267 1.C.C.

153 (1947) and in its Sixth Supplemental Report in the

Florida East Coast Railway Company Reorganization

(decided October 25, 1951), the Commission has properly

expressed its doubts that the high earnings in the post-

: war years are a fair guide to probable future earnings

: (Vol. LU, pp. 28560, 28534). The Commission, unlike

; the appellants, recognized the adverse as well as the

favorable factors which may influence earnings. The

increasing competition from other forms of transporta-

; tion,t increasing costs of operation and the vulnerability

: of the System to floods and frosts have been considered

by the Commission (Vol. LII, pp. 28560, 28655; 1946 R.

Vol. Il, p. 712; 1941 R. Vol. IIT, pp. 807-815, 1101; Vol.

*% IV, pp. 1494-5). These, together with the past perform-

ance of the System,* have been weighed against all of

the favorable factors to which the petitioners refer.

: The record ainply supports the Commission’s conelu-

sions with respect to the earning capacity and the capital-

ization of the System and its constituent debtors (Vol.

LIT, pp. 28501-64, 28656-68; R. 919; Tr. 25-27). The

arguments of the petitioners merely indicate disagreement

as to the weight te be accorded to certain factors and the

conclusions to be drawn from the evidence as a whole

(Tr. 30). This is an entirely insufficient reason for this

Court to review the findings of the Commission or of the

Courts below.

ne See ae =.

+R. 845-47; In its recent Annual Reports, the Commission has

stressed the diversion of traffic from rail to competitive forms of

i transportation (Sixty-Third Annual Report, pp. 3-4; Sixty-Fourth

; Annual Report, pp. 1-3, 20; Sixty-Fifth Annual Report, pp. 2-4).

é * 1941 R. Vol. IT, p. 333; Vol. LIT, p. 28542: See p. 17, supra.

Sols RT bln ee

SSAA? rage pr ncaeees

22

POINT Ill

In considering the petitions this Court should ignore

the evidence as to changed conditions which was sub-

mitted to the Commission in the Section 208(a) (1)

proceedings and to the District Court in the hearings

on confirmation.

Not only do Alleghany and the Debtor invite this Court

to review the findings of the Commission and the District

Court on the extensive record before this Court—they

also ask this Court to test those findings in the light of

evidence which was not before the Commission when it

certified the Plan or before the District Court in the

approval proceedings. Alleghany, the Debtor, the Inde-

pendent Directors and the Serial Committee rely exten-

sively on evidence introduced at the confirmation hear-

ings (held in June 1951) and at the Commission hearings

in the pending Section 208(a)(1) proceeding (Alleghany

Pet., pp. 3-29; Independent Directors Pet., pp. 20-23;

Debtor’s Pet., pp. 24, 39-40, 47-58; Serial Committee Pet.,

pp. 5, 7, 9, 11). The necessity for this Court to test a

plan for changed conditions* in an approval proceeding

has been eliminated by the procedures established by

Section 208. Indeed it is wrong to ask this Court to

appraise such evidence in the absence of any supporting

record and without the benefit of the findings of the

Commission or the District Court. The futility of at-

tempting to draw any conclusions from these references

to evidence introduced at the Section 208 and confirma-

tion hearings may he readily demonstrated:

1. Certain of the petitioners emphasize that

reported System earnings available for interest in

1950 were $45,595,589, or approximately $5,000,000

* Ecker v. Western Pacific R. Corp., 318 U. S. 448, 506-509 (1943).

Tar LP SELIM EE ELS TOOLS FGI Le RL TPE IN RIEL ERE OR 3 ER

23

in excess of comparable earnings in 1948 (Alleghany

Pet., pp. 16, 35; Debtor’s Pet., p. 40; Independent

Directors Pet., p. 21). At the recent Commission

hearings evidence was introduced indicating that

reported 1950 earnings contained a large item of

non-recurring income attributable to prior years.

There was also evidence tending to show that earn-

ings have heen declining since 1948.

2. Alleghany emphasizes testimony (introduced

at the confirmation hearings) that annual savings

in operating expenses of approximately $13,000,000

will result in 1951 from the Trustee’s program of

dieselization (Alleghany Pet., p. 34). Other evi-

dence introduced at these hearings plainly demon-

strated that savings from dieselization effected in

the period 1948-1951 are more than offset by

increases in wages and the cost of materials in that

same period.

3. The Debtor seeks to demonstrate the improved

earning power of the System by quoting at length

from the testimony of T. C. Davis (Debtor’s Pet.,

Appendix B, pp. 47-58). The figures contained in

this testimony were accepted subject to verification.

None of the cross-examination of this witness bear-

ing upon his experience and qualifications is printed

in the Debtor’s petition. This Court does not have

the benefit of the Commission’s appraisal of this

witness’ testimony. Such testimony has no place in

a petition before this Court.

In offering the foregoing examples we do not seek to

demonstrate in this Court that there have been no changes

in conditions since 1949. That is an issue now pending

for determination before the Commission. The examples

are merely offered to show that in the absence of the

RI EMP TS tS RII BR ORE ERE EL ING iy IE FTP EN ERTS RTC IIRL He Tn UE aR ete PEROT XE pea oes ;

24

record of proceedings in the confirmation and Section

208 proceedings, this Court cannot possibly evaluate and

should not consider any part of the evidence introduced in

those proceedings which is relied upon by the petitioners.

It was the intention of Congress in enacting Section

208(a)(1) that before final confirmation the courts might

have the Commission’s expert appraisal of changes, facts

and developments occurring after certification of the plan.

Thereby this Court was to a large extent relieved of the

difficult task of weighing the effect of such changes. This

Court will not now attempt to pass judgment on the issue

of changed conditions which is before the Commission in

the Section 208(a)(1) proceeding and before the District

_ Court in the confirmation proceeding.

POINT IV

The contention that the consolidation proposed in

the Plan is unlawful does not present an important

question. No conflict of decisions is presented.

The Independent Directors and the Serial Committee

contend that the Commission lacked power under Section

77 to provide for the consolidation of the debtors into a

single reorganized company.

The authorities are perfectly clear that the Commission

may provide for such consolidation. In re Chicago, Rock

Island & Pacific Ry. Co., 168 F. 2d 587 (7th Cir., 1948),

cert. den. sub nom. Texas v. Brown, 335 U. S. 855 (1948);

In re Florida East Coast Railway Company, 81 F. Supp.

926 (S. D. Fla. 1949), aff’d sub nom. Atlantic Coast Line

R. Co. v. St. Joe Paper Co., 179 F. 2d 538 (5th Cir., 1950),

eert. den. 339 U. S. 929 (1950); see also Callaway v.

Benton, 336 U. S. 1382 (1949); and see Tr. 24 and cases

25

there cited. No decision cited by the Independent Direc-

tors is in conflict with these cases.

‘The report of a Congressional committee in 1946 (R.

1075-76; Independent Directors Pet., p. 11) eriticizing the

construction placed on Section 77(f) by the Commission

and the courts in this and other proceedings, leads to a

conclusion opposite to that drawn by the Independent

Directors. The fact that the matter was called to the

attention of Congress and that it failed to act on the

suggestions of the Congressional committee indicates that

Congress is quite satisfied with the interpretation which

the Commission and the courts have placed upon Section

77(f). Keystone Mining Co. v. Gray, 120 F. 2d 1 (3rd

Cir., 1941).

No party representing creditors or stockholders (other

than the Serial Committee) complains of the consolidation.

The Serial Committee represents only a fraction of the

Serial Bonds. Neither Morris, et al. (Cause No. 415), nor

the Serial Trustee (Cause No. 524), both of whom rep-

resent the interests of Serial bondholders, seeks to raise

the issue. Obviously no question of general importance

is presented.

POINT V

The contention that the Commission unlawfully

limited the capitalization of the New Orleans by phys-

ical value factors does not present an important

question.

The Serial Trustee contends that the Commission arbi-

trarily limited the valuation of the New Orleans by phys-

ical factors in disregard of its earnings. This argument

is substantially the same as the argument advanced by

REF SEED RET VV EGR LS LTV Bie TN SE prairie 4 . AREH IAHR Ip aE Sy

|

26

Morris, e¢ al. in their Petition 415 which has heretofore

been considered and denied by this Court. This Court

is respectfully referred to Point I of the joint brief of the

Group, the General Mortgage Committee and the Con-

vertible Trustee in opposition to Petition 415.

Alleghany and the Debtor contend that the Commission

has dealt inconsistently with physical factors of the Mis-

souri Pacific and the New Orleans. They urge that phys-

ical values have been permitted to limit capitalization and

value in the case of the New Orleans, and have been given

insufficient weight in valuing the Missouri Pacific (Alle- |

ghany Pet., pp. 46-48; Debtor’s Pet., p. 20). As we have

shown in Point I of our opposing brief in Cause No. 415,

physical values did not operate to limit the value of the

New Orleans. With respect to the Missouri Pacific, earn-

ing power clearly would not support a capitalization based |

on reproduction cost.

POINT VI

The contentions concerning the provision of the

Plan dealing with the selection of the first Board |

of Directors present no important question.

The Independent Directors complain of the pre-edure

for designation of the initial Board of Directors -« the

reorganized company (Independent Directors Pet., pp.

14-16). Much of their statement concerning this subject

is mere assertion without reference to the record.

Section U of the Plan permits certain of the mortgage

trustees and bondholders’ representatives to designate

the initial Board of Directors, one-third of whom shall

serve for one year, one-third for two years and the re-

maining one-third for three years. The classification and

LLIN PLIST SAE S IRE COLELLO ELIE ERIE GLE SNOT SLES NOTRE I ty et Ce

. . P as TES ee See

27

tenure of the first Board is determined by the reor-

ganization managers subject to court approval. Seven

members of the initial Board must be residents of the

territory served by the System, and all must be approved

by the District Court (Vol. LII, pp. 28603-12, 28676-79,

28753-54).

Section 77(b)(5) provides that a plan of reorganization

“‘shall provide adequate means for the execution of the

plan * * *’’ which may include any appropriate ‘‘pro-

visions not inconsistent with this section.’ Section U

was included in the Plan in recognition of the desirability

of insuring ‘‘a degree of stability of management in the

early years of the reorganized company’’ (Vol. LII, p.

28611). The Independent Directors cite no authority for

their contention that such provision is unlawful. They

fail utterly to demonstrate that the fairness of the Plan

is in any way affected.

The Commission ‘has experience in’ the matter of

etarting the new companies off when reorganized’’ (Tr.

39) and the periods of the initial directorships ‘‘are very

short in the life expectancy of the new company’’ (Tr. 36).

It is clearly in the public interest that the reorganized

company shall be assured of a stable management in the

period immediately following consummation of the Plan.

The determination of how such stability can be insured

is a matter for the judgment of the Commission and the

District Court. The requirement that all initial Directors

must be approved by the District Court constitutes ade-

quate protection against improper selections (Tr. 36).

The Independent Directors have failed to show an

abuse of discretion by the Commission or to demonstrate

the importance of the question they seek to raise. Nor

have they shown that they represent any parties who will

be entitled to vote the new common or preferred stock.

_ ——e ELSI TTL PTDL PRIETO TE SENIN TBR SRG ta

28

A showing that rights personal to a petitioner are injured

or in danger of injury is jurisdictional. Tyler v. Judges

of the Court of Registration, 179 U. S. 405, 406-7 (1900) ;

Robertson and Kirkham, Jurisdiction of the Supreme

Court of the United States (1951), Sec. 297, 298 and cases

therein cited.

POINT VII

The contention that the Commission has made im-

proper use of the cash balances of the debtors presents

no important question.

The contentions of the Independent Directors with

respect to the use of surplus cash are stated in such

general terms that it is difficult to understand what their

specific objections to the Plan are. We infer from the

statements made at pages 18-20 of their petition that the

‘*new reorganization principle’’ which they find in Section

208(b) makes it mandatory for the Commission to include

in a plan specific provision for the retirement of debt at

a discount with surplus cash.

They point to the substantial cash balances of Missouri

Pacific and the System at the end of 1948 and imply that

all such amounts in excess of ‘‘liberal working funds’’

were available for purchase of debt at a discount (Inde-

pendent Directors Pet., p. 18).

Section 208(b) does not establish any ‘‘new reorganiza-

tion principle’’ with respect to the use of surplus cash.

The portion of Section 208(b) quoted by the Independent

Directors enumerates some of the factors which the Com-

mission is to consider if a plan is returned at the conclu-

sion of a Section 208(a) proceeding. There is not a

word in Section 208(b) that requires the Commission to

make provision in a plan for retirement of debt at a dis-

count.

LE PUNT RI ASE PLES INI NY AORN AIRE RN Pie RET NCR ROOM REICH ———

29

The Commission was fully aware of the proceedings in

Congress which resulted in this legislation,* and of the

changes, facts and developments emphasized in Section

208(b), when its Fourth and Fifth Supplemental Reports

were issued. It gave extensive consideration to the debt

reduction, including substantial purchases of System debt

at a discount, which had been accomplished since the issu-

ance of the 1944 Plan (Vol. LI, pp. 28471-77, 28576).

This is reflected in the improved treatment of security

holders provided in the Plan. Its discussion of cash

reserves and cash requirements of the System (Vol. LII,

pp. 28521-26; 28575-80), to which the Independent Diree-

tors fail to refer, makes clear the equitable reasons for

the allocation of cash to seniors and the necessity of

maintaining cash balances for working capital, reserves

and Plan requirements. The District Court found that

the Plan made proper use of available cash (R. 942; See

also Tr. 35).

The arguinent of the Independent Directors is based

on a misapprehension of Section 208(b), of the provisions

of the Plan and of the facts in the record. Plainly, no

important question is presented.**

* Section 208 became law on April 9, 1948, more than twenty

months prior to the certification of the Plan. Section A of the Plan

permits tne Trustee to continue his debt retirement program, includ-

ing the purchase of System obligations at a discount (Vol. LIT, pp.

28689-91 ).

** Likewise the assertions of Alleghany and the Serial Committee

as to increases since December 31, 1947 in the value of investments,

in net quick assets, in net worth, and other book values, present no

question for this Court to consider. (Alleghany Pet., p. 13; Serial

Committee Pet., pp. 5-6, 8-9.) They are not based on facts of record

before this Court and no attempt has been made to correlate the

claimed increases with earning power. The last paragraph of Sec-

tion 77(e) deals with the valuation of “property used in railroad

operation”. Nothing in that paragraph required the Commission to

base its valuation of the properties on book values.

SPER ENS EG is RTT DF, He TRO IE ety HNL ATINET RG RON ek he SOR a EY

30

CONCLUSION

The petitions should be denied for the reason that

they fail to present a conflict of decisions or an impor-

tant question which should be reviewed by this Court.

The motion of the Independent Directors (i) in so far

as it requests that the judgment of the Court below be

set aside, should be denied because it fails to comply

with Section 1254 of the Judicial Code (28 U.S.C.A.

§1254) and because the entry of the judgment of the

Court below was not enjoined by Section 208(a) (5)

and (ii) in so far as it requests postponement of con-

sideration of the petitions, should be denied because

no useful purpose would be served thereby and because

such a postponement could result in a further long

delay of these proceedings.

Respectfully submitted,

CHarLes W. McConaueuy,

Morris D. Crawrorp, JR.,

Attorneys for Group of Institutional Investors

Holding First and Refunding Mortgage 5%

Bonds of Missouri Pacific Railroad Company.

CADWALADER, WICKERSHAM & TaFt,

14 Wall Street,

New York 5, N. Y.,

Of Counsel.

Sanroxp H. KE. Freunp,

Attorney for Protective Committee for the

Holders of General Mortgage Bonds of Mis-

sourt Pacific Railroad Company.

SHEARMAN & STERLING & Wricat,

20 Exchange Place,

New York 5, N. Y.,

Of Couwnsel.

SOP MLNS MART VINE EM PILE RTM HEN REALE T AMES EIE ESRI A TORE ANTE BE AS DYES EEN RE Tt rel a ORE

31

Wiiuiam P. Parmer,

Pur KE. Greee,

Attorneys for Bankers Trust Company, Succes-

sor Trustee under Missouri Pacific Railroad

Company Twentuy-Year 5 W% Convertible

Gold Bonds Indenture.

Root, BALLANTINE, Haran,

Bususy & PaLMrr,

31 Nassau Street,

New York 5, N. Y.,

Of Counsel.

Dated: February 15, 1952.

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34

APPENDIX B

Kixtracts from Senate Report No. 897 accompanying

H. R. 2298, 80th Congress, 2nd Session, 1948:

‘HXPLANATION OF BiLL BY PARAGRAPHS

* ” *

‘Section 3, also a Senate amendinent, consists of two

subsections, the former of which is divided into 5 para-

graphs. These will be considered ad seriatim.

‘‘Paragraph 3a (1) provides, in the case of plans of

reorganization hereatter approved by the Commission in

section 77 proceedings, that 18 months after the Commis-

sion has either certified a plan to a court or had disposed

of a like petition filed under this paragraph, any party

affected may file a petition and as a result it shall be the

duty of the Commission to report to the court any changes,

facts, or developments which have taken place since the

approval of the plan and which make it necessary or ex-

pedient for the Commission to examine or revise the plan.

It should be emphasized, however, that such a petition

cannot be entertained in those cases where an order con-

firming the plan has been entered, unless an appeal from

such an order is pending in the cireuit court of appeals,

or the matter is pending in the Supreme Court on a peti-

tion to review any order of a lower court dealing with the

order of confirmation, or the time to make such an appeal

or file such a petition has not expired. These same safe-

guards are also contained in subsequent paragraphs to

make certain that orderly court procedures cannot be dis-

placed or interfered with.

‘‘In the opinion of the committee, the need for this type

of reexamination and reconsideration is of the greatest

importance where bankruptcy proceedings are pending

+

Ee RE SN CAT A Raho a NS LO RIOT Pe

35

for many years, as they generally are in most railroad

eases. Evidence before the committee confirms the fact

that the financial condition of railroads in reorganization

proceedings changes considerably in the long periods

which elapse from the time the Commission approves

a plan until it is finally confirmed. There is no require-

ment here that the plan be changed or altered; that lies

within the discretion of the Commission. But Commission

representatives have testified that under existing section

77 procedures, it has no authority to volunteer advice to

the court that relevant facts and conditions which affect

the fairness or equitability of a reorganization plan have

changed. Witnesses representing some railroads and some

security holders have testified that this has resulted, in

many cases, in the consummation of some reorganizations

which have failed to render equity to certain classes of

security holders who had no remedy or recourse at law.

The committee believes that the law should be clarified

and the duty of the Commission made plain. This para-

graph, and the succeeding paragraphs of this section, are

intended to remedy this lack of liaison between courts and

the Commission.

‘Paragraph 3a (2) is substantially similar to the para-

graph above, but permits the court, instead of the Commis-

sion, to receive a petition and give consideration to

whether changes, facts, or developments have occurred

which make it necessary or expedient for the Commission

to reexamine, revise, or reconsider a plan. If the court

so finds, it may return the plan to the Commission for such

revision. ‘The same safeguards contained in paragraph

(1) to prevent improper action in those cases which have

achieved a legal status beyond which changes should not

be entertained are included in this paragraph.

36

‘‘Paragraph 3a (3) is a parallel provision to the two pre-

ceding paragraphs and merely provides that in certain

reorganization cases still pending the Commission must

report to the court any changes, facts, or developments

which have taken place since December 31, 1939, and which

were not provided for in the plan it approved. Again, the

safeguards contained in the two preceding paragraphs to

prevent disruption of legal proceedings already too far

advanced are included in this paragraph.

Paragraph 3a (4) is merely a procedural provision to

insure that if a plan is returned to the Commission in ac-

cordance with the provisions of section 3 of the bill, all of

the proceedings will he governed by subsection (d) of sec-

tion 77 of the Bankrutey Act, as amended.

‘*Paragraph 3a (5) is also a procedural provision to

make certain that petitions alleging new facts or develop-

ments must be filed with the court and referred to the

Commission. Such action apprises the court of the legal

action taken under the new law and suspends further

action by the court involving confirmation of the old

reorganization plan. The court, of course, retains custody

of the property and of the case pending action and report

by the Commission.

‘‘Subsection (b) of this section provides for a public

hearing in the event a plan is returned to the Commission.

It spells out the factors that the Commission must evaluate

and on which parties will offer evidence in reconsideration

of a plan. ‘The Commission, after such hearing and con-

sideration, may modify or refuse to modify the plan. If

the former, it certifies the modified plan to the court and

proceedings continue on the modified plan under section

77 as they did on the original plan. If the Commission

refuses to modify, it also transmits its order and the

transcript for court consideration. If the court finds the

37

Commission’s refusal to modify the plan is based on suf-

ficient findings and is supported by the record, the original

section 77 proceedings shall continue as if the plan had

never been returned to the Commission. If, however, the

court does not so find, it shall return the plan to the Com-

mission for further consideration, after which the Com-

mission shall again certify the plan to the court. The

entire procedure here is consistent with the authority and

dignity of a court considering hankruptey cases in which

equity is required to be done. It places upon the court

the authority to determine whether the facts support the

Commission’s decision and to that degree places a check

upon arbitrary and capricious action by administrative

bodies. The committee does not intend that the plan shall

become a foothal! between the Commission and the courts;

it believes that while courts will give due weight to the

facts as ascertained by the Commission, the Commission

will also respect the judgment of the courts, particularly

in view of the fact that in these cases the court has custody

of the property and is intimately familiar with the per-

tinent facts.”’

38

APPENDIX C

Section 3 of Public Law 478, Approved April 9, 1948

(62 Stat. 167; 11 U.S.C.A. §208), referred to in the

foregoing brief as “Section 208”.

**See. 3(a) Notwithstanding any other provision of law—

‘*(1) with respect to any plan of reorganization or modi-

fied plan of reorganization approved by the Interstate

Commerce Commission under the provisions of section 77

of the Bankruptcy Act, as amended, subsequent to the effec-

tive date of this Act, it shall be the duty of the Commis-

sion, upon petition of any party to the proceeding filed at

any time more than eighteen months after certification by

the Commission to the court of the plan or of an order

disposing of a like petition, but before any order con-

firming the plan shall have been entered, or, such an order

having been entered, if an appeal from said order is pend-

ing on said date in a circuit court of appeals or the matter

is pending in the Supreme Court on a petition to review

any order of a circuit court of appeals dealing with said

order of confirmation or the time within which to make

such appeal or to file such petition has not expired, to

report to the court in which consideration of such plan is

then pending, any changes, facts, or developments which

have occurred since the approval of such plan by the Com-

mission, which were not provided for in the plan, and

which in the opinion of the Commission make it necessary

or expedient for the Commission to reexamine or recon-

sider and, if necessary, to revise such plan in order to

insure that such plan, if consummated and put into effect,

shall then, in the opinion of the Commission, be fair and

equitable and in the public interest and compatible with

the provisions of this section and section 77 of the Bank-

39

ruptey Act, as amended. Upon the filing of any such re-

port by the Commission with the court, the court shall

remand the plan to the Commission for such reexamina-

tion, reconsideration, and possible revision;

‘*(2) if, with respect to any plan of reorganization or

modified plan of reorganization approved by the Com-

mission subsequent to the effective date of this Act, the

court before which such plan is then pending, for approval

or confirmation, no order of confirmation having been

entered, or, such an order having been entered, if an

appeal from said order is pending on said date in a circuit

court of appeals or the matter is pending in the Supreme

Court on a petition to review any order of a cireuit court

of appeals dealing with said order of confirmation or the

time within which to make such appeal or to file such

petition has not expired, upon petition of any party to the

proceeding and either with or without a hearing, shall

find that changes, facts, or developments have occurred

since the approval of such plan by the Commission which

were not provided for in the plan and which make it nec-

essary or expedient, in the opinion of the court, that the

Commission reexamine and reconsider and revise such

plan in order to insure that the plan [if] consummated and

put into effect shall then, in the opinion of the court and

the Commission, be fair and equitable and in the public

interest and compatible with the provisions of this section,

and section 77 of the Bankruptcy Act, as amended, the

court shall return the plan to the Commission for such re-

examination, reconsideration and possible revision:

‘*(3) with respect to any plan of reorganization or modi-

fied plan of reorganization which, on the date of enact-

ment of this Act, is before any district court for approval

or confirmation, no order of confirmation having heen

40

entered, or, such order having been entered, if an appeal

from said order is pending in a circuit court of appeals

or the matter is pending in the Supreme Court on a

petition to review any order of a circuit court of appeals

dealing with said order of confirmation or the time within

which to make such an appeal or to file such petition has

not expired, it shall be the duty of the Commission, upon

petition of any party to the proceeding, to report to such

court any changes, facts, or developments which have oc-

curred since December 31, 1939, which were not provided

for in the plan and which, in the opinion of the Commis-

sion, make it necessary or expedient for the Commission

to reexamine or reconsider and, if necessary, to revise

such plan in order to insure that if consummated and put

into effect, such plan shall then, in the opinion of the Com-

mission, be fair and equitable and in the public interest

and compatible with the provisions of this section and sec-

tion 77 of the Bankruptey Act, as amended. Upon the

filing of any such report by the Commission with the court.

the court shall remand the plan to the Commission for

such reexamination, reconsideration, and possible revision:

**(4) in the event of the return of a plan to the Com-

mission pursuant to the provisions of this subsection (a),

the proceedings with respect thereto shall be governed by

the provisions of subsection (d) of section 77 of the Bank-

ruptey Act, as amended;

**(5) each petition filed under the provisions of para-

graph (1) or paragraph (3) of this subsection (a) shall

be filed with the court before which is pending the plan

which is the subject of the petition and such petition shall

be referred by the court to the Commission. Upon the

filing of such petition with the court all further proceed-

ings for confirmation of the plan shall be suspended pend-

4]

ing disposition of the petition by the Commission and

certification of its action thereon to the court.

‘“*(b) As to any plan so returned to the Commission by

the court, the Commission, upon further hearing at which

all parties may appear and submit evidence as to prospec-

tive earning power and other relevant facts, and upon

consideration of all changes, facts, and developments

which have occurred since the date of approval of the plan

by the Commission (or which have occurred since Decem-

ber 31, 1939, in the case of plans which on the date of

enactment of this Act were pending before, but had not

been confirmed by, the court by order which shall have

become final), including, without limitation, for such

period total railway operating revenues, operating

expenses and other charges, net earnings, the full effect

of amortization deductions on earnings of past and future

years, improvements to property, the effect of released

collateral through past or future payments of loans, cash

and net current assets, retirements and purchases of debt,

including retirements and purchases at a discount that

have been made or that can reasonably be made, adjust-

ment and reduction of interest rates on outstanding debt

that may be made, shall, in a supplemental report and

order, modify, or refuse to modify, any plan which it has

approved, stating the reasons for such modification or

for its refusal to modify the plan. The Commission, if it

modifies the plan, shall certify the modified plan to the

court, together with a transcript of the proceeding before

it and a copy of its report and order approving the modi-

fied plan. Thereafter procecdings upon the plan shall be

governed by the provisions of subsection (e) of section

77 of the Bankruptey Act, as amended, and of this section.

If the Commission refuses to modify the plan, it shall

42

transmit to the court a copy of its report and order,

together with a transcript of the proceedings before it.

Thereafter, if the court shall find that the refusal of the

Commission to modify the plan is based on sufficient find-

ings and is supported by the record, the proceeding upon

the plan shall continue as if the plan had not been returned

to the Commission; otherwise the court shall return the

plan to the Commission for further consideration. Upon

such consideration, the Commission shall again certify

the plan to the court with such modifications, if any, as

it may find necessary, and thereafter further proceedings

upon the plan shall be as provided in said subsection (e)

and in this section.”’

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