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In re Chicago

October 31, 1944

IN RE CHICAGO, M., ST.P. & P.R.CO.


In the matter of Chicago, Milwaukee, St. Paul & Pacific Railroad Company, debtor. From an order of the District Court approving the modified plan of reorganization for the debtor, as certified by the Interstate Commerce Commission, the debtor and certain junior creditors and their representatives appeal, and senior creditors filed a motion to docket and dismiss the appeals.

Author: Major

Before EVANS, MAJOR, and KERNER, Circuit Judges.

MAJOR, Circuit Judge.

We have for decision a motion to docket and dismiss certain appeals filed herein July 29, 1944, from an order entered by the District Court June 30, 1944, approving the modified Plan of Reorganization for the debtor railroad corporation, as certified by the Interstate Commerce Commission in its third supplemental report and order dated April 10, 1944. The reorganization proceeding was instituted by the debtor on June 29, 1935, under § 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, and in the interim has been much litigated before the Commission and the courts. The Plan originally promulgated by the Commission was approved by the District Court October 21, 1940 (36 F.Supp. 193). From that approval, numerous parties appealed to this court, where the Plan was in part reversed and in part affirmed (7 Cir., 124 F.2d 754). Our decision was reviewed by the Supreme Court, which by its opinion of March 15, 1943 (Group of Institutional Investors et al. v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 318 U.S. 523, 63 S. Ct. 727, 87 L. Ed. 959), reversed in part and affirmed in part the judgment of this court and remanded the proceeding to the District Court for action in conformity with its opinion.

The history of the Plan, together with the numerous objections which have been made to its validity, thus being so voluminously recorded, there is no occasion for any statement or discussion further than that required to dispose of the instant motion. The appeals are by the debtor and certain junior creditors and their representatives.*fn1 The motion to docket and dismiss is by the Group of Institutional Investors and the Mutual Savings Bank Group, referred to as senior creditors. In connection with the motion is presented a "short record," which includes the order of the Commission and the opinion and decree of the District Court (from which the appeals were taken), approving the modified Plan.*fn2

Appellants have filed their several answers to the motion to dismiss, attacking the validity of the Plan in numerous respects. The basis of appellees' contention in support of the motion is that the Commission and the court acted in conformity with the opinion and mandate of the Supreme Court, and, having so acted, no reviewable question is presented. In this connection, it is urged that numerous matters sought to be raised have heretofore been decided either by the opinion of the Supreme Court or by the opinion of this court. If appellees' position in this respect be sound, it would seem to follow that the appeals should be dismissed. We do not understand that the creditor appellants take issue with this premise, but they contend that changes were made in the Plan beyond the scope of the Supreme Court's ruling. It may be that the primary question raised by the debtor is in a different category, although we think such difference is more fanciful than real, as we shall hereinafter point out. We also note that a question is raised as to the right of the court to change the Plan so as to provide for approval of the voting trustees by the court rather than by the Commission.

This brings us to a consideration of the Supreme Court's opinion. Without entering a detailed discussion of that opinion, it is sufficient to state our conviction that every feature, except two, of this complicated Reorganization Plan was approved by the Supreme Court and all controversy with reference thereto definitely laid to rest. After discussion and decision of the many objections raised, the court (page 568 of 318 U.S., page 750 of 63 S. Ct., 87 L. Ed. 959) stated: "There are, however, two objections made by the General Mortgage bonds (senior creditors) which we think have merit.The first of these relates to the dispute as to the so-called 'pieces of lines east.' * * * The second of these objections is that the General Mortgage bonds are to receive under the plan only a face amount of inferior securities equal to the face amount of their claims." The court proceeds to discuss and decide these two objections favorably to the senior creditors. The opinion then concludes: "We have considered all other objections to the plan and find them without merit. But for the exceptions we have noted, we conclude that the District Court was justified in approving the plan * * * ." Thus it will be noted that, but for the two objections decided in favor of the senior creditors, every feature of the Plan was approved, not only those specifically discussed and decided but "all other objections" as well.

The first objection related to the allocation of liens and the District Court was directed (page 569 of 318 U.S., page 751 of 63 S. Ct., 87 L. Ed. 959) to resolve the dispute. This was done by the District Court and approved by the Commission. No question is now raised as to the propriety of the court's action in this respect.

The court (commencing on page 569 of 318 U.S., on page 751 of 63 S. Ct., 87 L. Ed. 959) discusses the merits of the second objection and concludes, in conformity with its previous decisions, that senior creditors, where junior creditors are permitted to participate in the Plan, are entitled to be compensated for their senior rights. The court held that the senior creditors were not accorded such treatment in the instant proceeding. Then follows the language which constitutes the real heart of the instant controversy. On page 571 of 318 U.S., on page 752 of 63 S. Ct., 87 L. Ed. 959, the court stated: "But neither the Commission nor the District Court considered the problem. As we have indicated, the question whether senior creditors have received 'full compensatory treatment' rests in the informed judgment of the Commission and the Court. A decision on that issue involves a consideration of the numerous investment features of the old and new securities and a financial analysis of many factors. Our task is ended if there is evidence to support that informed judgment. We are not equipped to exercise it in the first instance. Nor is it our function. * * * Our conclusion on the point is that, since junior interests are participating in the plan, the Commission and the District Court should determine what the General Mortgage bonds should receive in addition to a face amount of inferior securities equal to the face amount of their old ones, as equitable compensation, qualitative or quantitative, for the loss of their senior rights."

When the proceeding found its way back to the Commission, a large amount of cash had accumulated from the operation of debtor's railroad system, and the Commission ordered the distribution of some $52,000,000 of this cash to senior creditors as compensation for the loss of senior rights which had become merged in the Plan. To do this, it was thought necessary to change the effective date of the Plan from January 1, 1939 to January 1, 1944, and such change was effected. As we understand, the senior creditors were entitled to contract interest only to the effective date of the Plan, and the cash distribution directed would be the substantial equivalent of the contract rate during the five year period created by changing the effective date. The action of the Commission in this respect was approved by the District Court.

No contention is made but that the action of the Commission, approved by the court, is supported by evidence. The essential attack upon the Commission's order is that it was without authority to change the effective date of the Plan because not within the purview of the remandment. This involves a construction of the Supreme Court's direction to the Commission and the District Court. We know of no reason why a decision in this respect cannot be made now as well as at some future date. In other words, we are unable to perceive how any further light could be shed upon this controversy by permitting the appeals to stand.

Of course, it is true no doubt, as argued by the junior creditors, that they will be injured by the payments directed to be made to the senior creditors. It appears, however, that the same argument could be made against any provision for compensating such creditors. At any rate, we know of no way by which senior creditors could be awarded additional compensation without adversely affecting other creditors. When in a proceeding of this character the financial position of one group is enhanced, it necessarily must be at the expense of some other group. We are of the view that the Commission acted not only within the authority but under the direction of the Supreme Court. Certainly it was clothed with the implied authority to do that which was directed. The method it employed to comply with such direction was the changing of the effective date of the Plan.

In this connection, it is interesting and perhaps pertinent to note that § 77, sub. l, rather plainly provides that the date of filing of the debtor's petition shall be the effective date of the Plan. However, in Ecker et al. v. Western Pacific Railroad Corp. et al., 318 U.S. 448, page 510, 63 S. Ct. 692, page 724, 87 L. Ed. 892, the court, in response to a challenge that the Commission was without power to fix some other date, stated: "But we are of the opinion that the provisions of subsection (b) are sufficiently broad to empower the Commission to select the date for the institution of the reorganization." In the instant case, the Supreme Court held to the same effect (page 546 of 318 U.S. 523, page 740 of 63 S. Ct. 727, 87 L. Ed. 959). The court was content with deciding that the Commission had the power, without discussion as to the reason for its action, and we think it may be strongly implied that the court recognized the exercise of such power as final. The court having held, notwithstanding the statutory provision referred to, that the Commission was empowered to fix an effective date, it would seem to follow that the Commission was empowered in the instant case to change the date to such time as in its judgment was necessary to meet with and carry out its directions from the court. We are inclined to the view that no reviewable question is presented, but whether so or not, we are certain that we would be compelled to hold that the Commission was empowered to make the change.

Certain other questions are raised as to other minor changes made by the Commission, necessitated by the provision adopted for compensating senior creditors. We think they need not be discussed. They fall within the same category as the Commission's change in the effective date of the Plan, and what we ...


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