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In re Chicago & N. W. Ry. Co.

February 9, 1942


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Evans

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

EVANS, Circuit Judge.

These eighteen appeals*fn1 arise out of the reorganization proceedings of the Chicago & North Western Railway Company, instituted pursuant to Section 77 of the Bankruptcy Act, 11 U.S.C.A. ยง 205. The Interstate Commerce Commission's plan of reorganization has been accepted, with one exception, by more than two-thirds of the creditors, of each of the groups, who voted on the reorganization plan, and it has been confirmed by the District Court, after full hearing. We have the benefit of the District Court's findings and opinion, In re Chicago & N.W. Ry. Co., D.C., 35 F.Supp. 230, and an elaborate and informative report by the Examiner of the I.C.C., as will as a complete discussion and ultimate findings by the Commission.*fn2 The appeals are chiefly from the trial court's orders of approval and confirmation of the plan of reorganization.

The Debtor operates in nine states, over 8,290.533 miles first main track and 13,047.127 of all tracks.*fn3 A subsidiary of the Debtor, the Chicago, St. Paul, Minneapolis & Omaha Railway Company, owns 1,577.171 miles of first main track and 2,438.047 miles of all tracks. It is operated and renders reports separately from Debtor but its lines complement those of Debtor.

The Debtor's obligations, generally, comprehended seven divisional mortgages, two system mortgages, R.F.C., R.C.C., and bank loans, equipment trust obligations, and other miscellaneous indebtedness.

To give a succinct idea of the basic facts of this reorganization and the Debtor's financial structure, this chart is appended:




The following is a brief description of the securities involved in this reorganization:

Milwaukee & State Line bonds, 3 1/2% bonds of 1941, $2,500,000, a lien on 51 miles of double track main freight line between Chicago and Milwaukee, original cost of which was $3,870,817, and reproduction value of $3,574,820.

Manitowoc, Green Bay & North Western Ry., first mortgage, 3 1/2% bonds of 1941, amounting to $3,750,000, a first lien on 113.5 miles of railroad in Wisconsin; original cost, $4,673,102, reproduction cost $4,278,949.

St. Paul Eastern Grand Trunk Railway first mortgage, 4 1/2% bonds of 1947, amounting to $1,120,000, first lien on 56.1 miles of track in Wisconsin, original cost, $1,212,352, reproduction cost, $1,161,111.

Milwaukee, Sparta & North Western first mortgage, 4% bonds of 1947, amounting to $15,000,000, are a first lien on 177.3 miles of track in Wisconsin; original cost of $15,405,431, and cost of reproduction new, $15,348,864.

DesPlaines Valley Railway first mortgage, 4 1/2% bonds of 1947, amounting to $2,500,000, are a first lien on 19.7 miles of double track, and some equipment; the original cost was $2,921,237, and the cost of reproduction new, $2,884,955.

St. Louis, Peoria & North Western Ry. first mortgage, 5% bonds of 1945, amounting to $10,000,000, a first lien on 112 miles of track and equipment; the original cost was $10,787,269, and reproduction cost, $9,803,745.

Sioux City & Pacific Rd. first mortgage, 3 1/2% bonds matured 1936, amounting to $4,000,000, are a first lien on 118.2 miles of road, costing $4,932,716, and reproduction cost of $5,960,031.

The general mortgage bonds (varying from 3 1/2 to 5%), amounting to $132,011,500 outstanding, and $23,896,000 pledged (total of $155,907,500) a first lien on 4,876.1 miles of road and equipment. The origianl cost was $326,335,801, and the cost of reproduction, $359,264,801.

The First and Refunding Mortgage (4 1/2-5%, 2037) amounting to $47,822,000 outstanding, and $65,615,000 pledged (total of $113,437,000) a first lien on 2,749.8 miles of road, and some equipment. The original cost was $103,806,572, and the cost of reproduction was $100,935,498.

Equipment obligations of $14,973,000 are outstanding, and an additional $117,000 pledged, and are first liens on equipment costing $63,414,791.

Serial Collateral Notes, 4%, to Public Works Administration, amounting to $1,360,000, secured by $1,350,000 first mortgage bonds, and $50,000 capital stock of the Escanaba Co.

The 15-yr., 6 1/2% bonds, matured in 1936, amounting to $14,775,000, secured by pledge of $17,730,000 of general mortgage 5% series E bonds of 1987.

The R.F.C. notes, maturing in 1936, amounting to $14,947,200, are secured by $101,813,800 principal amount of various debtor and other securities.Other notes to the R.F.C. which matured in 1935 and 1936 amounted to $27,302,933.

Bank Notes, 5%, matured in 1936, amounting to $4,439,690, were secured by $18,193,000 of principal amount of Debtor's securities.

Railroad Credit Corporation notes, maturing in 1935 and 1936, amounting to $653,681, were secured by $7,021,000 principal amount of Debtor's securities.

Twenty-Year convertible 4 3/4% Series A, bonds of 1949, amounting to $72,335,000, issued in 1929.

The preferred stock of Debtor, amounting to $22,395,000, and the common stock, amounting to $158,440,300.

The financial structure of Debtor is vexatiously involved. Its obligations, including interest, total $615,742,758.*fn4 (Unpaid interest to January 1, 1939, amounted to $59,156,409 - of which $1,160,916 has since been paid.) Its cost of reproduction new, less depreciation, plus land values, is $676,793,588. A valuation, based on earnings (including earnings of the Chicago, St. Paul, Minneapolis & Omaha Ry. Co.) capialized at five percent, for the period 1926-1930, is $508,969,360; for the period 1931-1935, it is $159,324,640. The I.C.C. believed (and so found) the earnings for the normal prospective year to be $14,625,000.

The confirmed plan of reorganization provided for a $450,000,000 capital structure comprehending:

$117,000,000 fixed interest debt

105,000,000 contingent interest debt

107,000,000 preferred stock

121,000,000 common stock.

This would result in $3,382,079 fixed interest charges and $9,046,324 contingent interest charges - an annual total of $12,428,403. The I.C.C. held*fn5 there was no equity for the present common and preferred stockholders.

In brief, the confirmed plan of capital structure provides for: (1) undisturbed status of P.W.A. and Equipment obligations; (2) new divisional mortgages for the "Des Plaines" and "Sioux City" lines, at 100% and accrued interest, but the interest rate of the former to be decreased from 4 1/2 to 4% and of the latter to be increased from 3 1/2 to 4%; (3) issuance of new First and General Mortgage 4% bonds on the system with 2 1/2% fixed and 1 1/2% contingent commutated interest, and the issuance of a Second Mortgage Convertible 4 1/2% income bonds; (4) issuance of new preferred and common stock.

These securities - the new general mortgage, the second mortgage, the preferred and common stock, were apportioned in varying percentages to the respective security holders.

There are three vital, determinative questions (and numerous less important questions) presented by this appeal.

(a) The finding, and the sufficiency of the evidence to support it, that the common and preferred stock of the old company are without value.

(b) The sufficiency of the evidence to support the finding that the estimated future normal income of the Debtor will not exceed $14,625,000 and will not support a capitalization, on reorganization, in excess of $450,000,000.

(c) The effect of the favorable vote of the creditors upon the objections advanced by mortgage trustees and others to the plan, and the alleged failure of the Commission to make necessary specific findings of values, which are required by the opinion in the case of Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 61 S. Ct. 675, 85 L. Ed. 982.

Other questions, but not so sharply pronounced in this case, as in the recent case of Chicago, Milwaukee & St. Paul Ry. reorganization, In re Chicago, M., St. P. & P.R. Co., 7 Cir., 124 F.2d 754, decided December 4, 1941, are: (a) The attacks on the fairness of the allocation of the securities among the various groups of lien holders. (b) The alleged preference shown the R.F.C. in the plan of reorganization. (c) The position of the so-called State Line bonds,*fn6 and the finding of the District Court as to the fairness of the plan as to these bondholders. (d) A consideration of the wisdom of selling the assets back of this mortgage.

In our approach to the approval (or rejection) of the plan which the I.C.C. has submitted, and which bears evidence of much study and thoughtful consideration of a mass of facts and figures, by this body, which is peculiarly well qualified to analyze and digest said statistics, we have assumed to occupy the role of guardian and umpire. We act as umpire or arbitrator so far as the sharply conflicting claims of different groups of bondholders are concerned. And we assume to act as guardians or trustees for the thousands of small security holders who, because their claims are small, could not be expected or required to go to Washington to present their claims, and protect them before the I.C.C., against the urge of groups which, before the I.C.C. and now before this Court, have insistently advanced and pressed their arguments in favor of larger allowances to their group members and smaller and less desired allocations to others.

It is unfortunate that this court may not have the benefit of advice of counsel appointed by it and representing all the interested parties, - the secured and unsecured creditors, the stockholders, andt he public. As the law stands, counsel are limited in the scope of their employment.

True, we have had the advantage of helpful briefs by attorneys representing a large group of holders of bonds of different kinds, who have taken a broader view than could be expected from one who was employed to press the claims of a single group only. We are duly appreciative of this assistance. For, in a case where the assets are fixed in amount and not sufficient to pay all the secured creditors in full, the urge for a greater allowance to one must, necessarily, be at the expense of the allowance to another. In other words the sum of all claims - a, b, c, d, e, and f, etc., is X. Inasmuch as X is a fixed and unchangeable quantity, we cannot increase the amount represented by "a" without reducing the amount represented by one or more of the other elements, b, c, d, e or f. It thus becomes apparent that before beginning our study of the details of the plan, we must ascertain and fix the amount represented by X. Dispute over it is at the bottom of all other conflicts.

Common and Preferred Stock.In as much as the outstanding obligations exceed $450,000,000, it follows that there is no equity for the holders of the old stock.

Unless the $450,000,000 figure can be raised, the common and preferred stockholders must be eliminated.

Vulnerability of the Commission's figures msut be limited to its finding that the probable income for the future normal year is $14,625,000. The importance of this link in the Commission's finding seems to be fully appreciated by that body, for we have been benefited with compliations of charts and earnings which run the gamut of possibilites.

The following statement is made, of the earnings of the company for 1930-1940 -

1930 $22,837,630

1931 7,614,983

1932 2,384,574

1933 9,412,771

1934 8,356,854

1935 5,524,417

1936 9,060,616

1937 153,007 (deficit)

1938 1,053,247

1939 7,701,603

1940 11,675,027

Likewise, we have the earnings from 1913 to 1923, weich are:

1913 $20,382,666

1914 19,108,281

1915 19,393,742

1916 27,714,458

1917 ...

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