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In re Chicago

December 4, 1941


Appeals from the District Court of the United States for the Northern District of Illinois, Eastern Division; Michael L. Igoe, Judge.

Author: Evans

Before EVANS and KERNER, Circuit Judges, and LINDLEY, District Judge.

EVANS, Circuit Judge.

These numerous appeals, save one, present attacks on a proposed plan of reorganization of the Chicago, Milwaukee, St. Paul and Pacific Railroad, hereinafter called the Debtor. Errors are assigned, which may be divided into two groups, legal and factual. Both the I.C.C. and the District Court have approved the proposed plan of reorganization. As yet, however, the plan has not been submitted to the creditors.

All parties seemingly agree that there must be a reorganization of the Debtor. The crux of the criticisms of the different groups of bondholders, represented by the various appellants, is that the old mortgage bondholders are not given enough securities in the new company, and to meet this objection, it is argued there must be a larger mortgage indebtedness placed on the new company. Larger mortgages will permit of distribution of more bonds to the present bondholders. The fact that they will be of less value is ignored.

At the bottom of all the criticisms of the new plan is the appraisal of old securities, and the allocation of the new securities to such old security holders. The legal questions are raised to prevent the present plan from being approved and made effective, in case we are satisfied that the plan is fair and equitable.

Generally speaking, the objection bondholders contend that their securities were undervalued in the reorganization and that some other mortgage on another section of the property, was overvalued.

Because the factual and legal questions are so interrelated, it is necessary to make a somewhat lengthy statement of facts, even though abbreviated because of the full and complete story found in the report of the I.C.C., 239 I.C.C. 485, and 240 I.C.C. 257, and in the decision of Judge Igoe of the District Court in 36 F.Supp. 193.

The Debtor is a large railroad system, operating 9,906 miles of solely owned track, through twelve states. It has several sections, each being the basis of a separate mortgage indebtedness. Chief among these sections are the western half (from Mobridge, South Dakota, to the Pacific Ocean) acquired in 1909; the eastern half (the main part of the road); the Gary line, which joined Debtor in 1922; the Milwaukee and Northern, acquired in '93; and the Terre Haute, included by virtue of a 999 year lease, executed July 1, 1922.

Debtor was born of the Federal equity receivership of the former Chicago, Milwaukee & St. Paul Railroad, which terminated in January, 1928. There, as here, the mortgage trustees and groups of bondholders, demanded new securities in amounts similar to those outstanding, the load of which the predecessor debtor could not carry.

The creditors there took a position which ignored the long view future of the Debtor, ignored its public obligation character and sought a reorganization which served only the demands of the hour, which were met at the sacrifice of the future.

The court, unfortunately, was helpless. So was the I.C.C., which protestingly approved the plan which the narrow-visioned mortgage trustees and their advisers, set up. The present proceedings are the direct result of the ill-advised 1928 plan of reorganization. The road was forced to seek the aid of Section 77 of the Railroad Reorganization Bankruptcy Act, 11 U.S.C.A. ยง 205, shortly arter it was made available.

Debtor submitted, with its petition, a plan, which was moratorium in nature. The doors of the I.C.C. were open and the Commission ready and anxious to go forward with its reorganization work, but no effort was made by any of the groups of investors, nor by the debtor, to formulate a reorganization plan until many months had passed. The situation seemed hopeless. Finally, the Institutional Investors, one of the Groups here interested, submitted a plan. It represented much thought and study. Its plan was a forerunner to a more complete one submitted by the I.C.C. Hearings were had and closed, only to be reopened and further hearings had. Modifications of the I.C.C. plan were made, and it, as modified, was finally approved by the I.C.C. It was later presented to the District Court, counsel were heard for and against the plan, and finally the court approved it. These appeals followed.

The facts are complicated and, in the hope that they might be more clearly and concisely presented, we have tabulated some of them in the form of a chart herewith set forth.


We are dealing with facts and the facts are figures.

It is at once apparent that the Commission was confronted by a stupendous task. Its determination to recapitalize Debtor on a system-wide security basis increased the difficulties. The recapitalization of the Debtor at a much lower figure (appellants call it a "drastic cut") indicates a candid, realistic approach, but it was certain to arouse opposition.

It was this cut in the capitalization of the new debtor which is the real basis of the attacks on the plan. It has awakened much of the dissatisfaction to the plan. Isolated bondholders, of groups of holders of different issues, join in the assault. The basis of all criticisms, however, is the same. Each bondholder places a higher value upon his own security than did the Commission. Each likewise places a lower value upon the securities held by other and different bondholders, than did the Commission. Each gives a value to the new securities lower than the value of the bonds he is asked to surrender. The new bonds are described as ephemeral, worthless, or of conjectural value. In attempting to ascertain the value of their own security, they look at the value placed upon other securities and out of their prejudices, draw harsh conclusions. They convince themselves that there is favoritism in the apportionment of the new securities.

One to losses incurred on sections other than those covered by the mortgages of the complaining bondholders. Another group stresses reproduction cost of its division. Still another group asks us to ignore original cost, mileage, business produced, etc., and concentrate our attention on earnings. There is but one consistency in the position of all the dissatisfied groups. Each will be satisfied if its percentage of the new securities be increased, and the percentage allotted to other bondholder groups is reduced.Each holds in reserve a big stick (legal objections), which it wields threateningly, if a different and better allotment (which means larger bond issues under the new plan) is not made.

This chart, which tells its own story, shows that there are six divisions (eastern, western, Terre Haute, Gary, Milwaukee & Northern, and Bellingham), each of which is covered by a first lien bond issue and several junior mortgages.

It also shows the Debtor's capital structure to be as follows: 1,174,060 shares, of no par value, common stock, and $119,307,300 of 5% preferred stock, represented by 1,193,073 shares. Under the new plan this stock is wiped out. Nothing was allowed to the holders of either common or preferred stock. The I.C.C. found that the Debtor's assets were not equal to the aggregate of its secured and unsecured debts.

The secured obligations were:

Debtor's First and Refunding Mortgage of $9,866,000, of which $8,923,000 (all the outstanding) is pledged to secure the R.F.C. and other Government loans. This lien plays a negligible part in the controversy althorgh the lien covers a large part of the Debtor's property. It is a first lien on the western lines, a second lien on the eastern lines, and a second lien upon other branches. No challenge of the plan is made so far as it affects this mortgage.

Another mortgage is known as the 5's of '75, a fifty year mortgage of which $106,395,096 is outstanding. Accrued interest to December, 1938, was $20,835,706. Save for thesmall Firist nd Refunding Mortgage, it is a first lien on the western division.

Another issue is known as the Adjustment Bonds of which $182,873,693 are outstanding. The accrued interest thereon is approximately $80,000,000. This issue grew out of the 1928 equity receivership. This mortgage is just behind the Fifty Year Mortgage, and a third, fourth, and fifth mortgage on the property on which the 5's of '75 are a second, third, and fourth lien.

The so-called General Mortgage is an issue of $150,000,000 and is a first lien on the eastern half of the road. It also is a lien on much equipment. This mortgage secures five series of notes. The rate of interest varies from 3 1/2 to 4 3/4%. Approximately $137,788,000 is held by the public, while a small amount secures loans by the Government. This mortgage covers the most valuable part of the entire system and its treatment in the reorganization is the subject of serious attack.

The Gary Mortgage covers 82.85 miles of track in Illinois. $5,798,000 was originally issued, of which $98,000 has been cancelled. Of the amount outstanding $3,000,000 is in the hands of the public, and $2,700,000 is pledged under the First and Refunding Mortgage heretofore referred to. This division is called a coal-carrying line.

Two other mortgages are known as the Milwaukee and Northern Company issues, the First Mortgage and the Consolidated Mortgage. Of the former $2,117,000 are in the hands of the public, and of the latter, $5,072,000 are in the public's hands. $38,000 and $20,000 of these issues ...

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