# Opposition Brief — Chemical Bank & Trust Co. v. Group of Institutional Investors > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386417_1095%3A15 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1952 - **Citation:** 343 U.S. 982 ## Text 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 SANCRR MEE MERLE LIES ERLE EIS LEIEL ELLIS ORE LBM LLL NE PD = nee ~ — -_ 7 ee i 7-7" 3 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 eo ee 5 (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 9 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 10 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 _—_ 11 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 — 13 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 14 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.*