Before MAJOR, KERNER, and MINTON, Circuit Judges.
This proceeding, culminating in a plan of reorganization of The Chicago, Rock Island & Pacific Railway Company under § 77 of the Bankruptcy Act, as amended. 11 U.S.C.A. § 205, was commenced on June 7, 1933. The plan was approved by the Interstate Commerce Commission on May 1, 1944, and approved by the trial judge on June 15, 1945. On appeal this court examined the plan pursuant to the statute, endorsed the Commission's method of valuation, and affirmed the order approving the plan on May 23, 1946 (157 F.2d 241). Under the plan all creditors are provided for in varying degrees. The plan provides a capitalization of $356,117,327, based on the Commission's determination of the earning power of the property, past, present and future.This capital structure is divided into first mortgage bonds, second mortgage income bonds, preferred stock having a par value of $100 per share, and 1,522,672 shares of no par value common stock.
The record discloses that while the proceeding was pending in this court, the District Court directed the Interstate Commerce Commission to submit the plan for acceptance or rejection to eleven classes of creditors. February 26, 1946, the Commission certified to the court that the plan had been accepted by nine classes of creditors and rejected by the holders of the Little Rock and Hot Springs Western Railroad Company First Mortgage Bonds and the holders of the Convertible Bonds. The Convertible bondholders are an unsecured creditor group and under the plan they receive four shares of stock for each $1,000 bond. Of the nine classes who voted for the plan, one, the holders of the Peoria Railway Terminal Company First Mortgage Bonds, would not have the principal amount or character of their securities changed - the plan provides only for an extension of the maturity and a reduction of the interest rate. The Choctaw & Memphis First Mortgage Bonds are wholly satisfied. The holders of the General Mortgage Bonds would receive new bonds and stock, satisfying their claims in full. The other six classes would receive new bonds and stock which, if the new no par value common stock be treated as worth $50 a share, would fail to satisfy their claims by almost $106,000,000. Under the plan, out of a total issue of 1,522,672 shares of the common stock, 160,078 shares are allotted to the holders of the Convertible Bonds. The result was to provide for the holders of these bonds a 10.68% interest in the equity of the reorganized company, and if the plan is consummated, the Convertible bondholders will participate in any larger earnings than the Commission's forecast anticipated.
Objections to confirmation of the plan were filed, and the objectors moved for reexamination of the plan in the light of changed circumstances since the plan's approval by the Commission on May 1, 1944. The claimed changed conditions were (a) accumulation of cash, (b) elimination of creditors, (c) increased earnings and improvement in the asset position, and (d) reduction in equipment debt. Hearings were had on the objections pursuant to subsection section e of § 77 of the Bankruptcy Act, and the court found that the plan did not make adequate provision for fair and equitable treatment of the claims of the holders of the Convertible Bonds; that their rejection of the plan was reasonably justified; and that the plan does not conform to the requirements of subsection e of § 77 of the Act. In the order he directed that the plan be not confirmed and that "the case be referred back to the Interstate Commerce Commission * * * for further proceedings * * * in accordance with the opinion*fn1 of this court * * *, including the consideration of modifications of the Plan or the proposal of new plans." It is this order that appellants seek to reverse.
The question is whether the plan should have been confirmed.
Before we proceed to discuss the question involved we note that appellees have moved that the appeals be dismissed on the ground that the order refusing to confirm the plan adjudicated no rights of the parties. Section 24, sub. a, of the Chandler Act, 11 U.S.C.A. § 47, sub. a, gives the Circuit Courts of Appeals appellate jurisdiction from courts of bankruptcy "in proceedings in bankruptcy, either interlocutory or final * * *." We agree with appellants that the development, approval, confirmation, and consummation of a plan of reorganization are not mere steps of an ordinary law suit, and whether we consider the order interlocutory or final, the fact remains that the order was one of substance, entered in a proceeding in bankruptcy which this court has power to dispose of on the merits; hence the motion must be, and it is, denied.
Appellees contend that the evidence presented to the court justified a remanding of the plan.
On the other hand, appellants make the point that the court's approval of the plan established as a matter of law that the plan was "fair and equitable" at the time the Commission approved it, and they contend that a rejection would not be reasonably justified unless the dissenters had a valid reason for their vote.
We have been told that in examining these contentions we must approach the problem in accordance with our reviewing authority under § 77 of the Bankruptcy Act. Reconstruction Finance Corp. v. Denver & R.G.W.R. Co., 328 U.S. 495, 66 S. Ct. 1282, 1384. Subsection (e) provides, in part, as follows:
"Upon receipt of such certification, the judge shall confirm the plan if satisfied that it has been accepted by or on behalf of creditors of each class to which submission is required under this subsection * * * Provided, That, if the plan has not been so accepted by the creditors and stockholders, the judge may nevertheless confirm the plan if he is satisfied and finds, after hearing, that is makes adequate provision for fair and equitable treatment for the interests or claims of those rejecting it; that such rejection is not reasonably justified in the light of the respective rights and interests of those rejecting it and all the relevant facts; and that the plan conforms to the requirements of clauses (1) to (3), inclusive, of the first paragraph of this subsection (e): * * * If the judge shall not confirm the plan, he shall file an opinion, with a statement of his conclusions and his reasons therefor, and enter an order in which he shall either dismiss the proceedings, or, in his discretion and on the motion of any party in interest, refer the case back to the Commission for further proceedings, including the consideration of modifications of the plan or the proposal of new plans."
Under this statute a rejection would not be reasonably justified unless the rejectors have a valid reason for rejecting the plan. If there is a rejection, the court will reexamine the plan, but if the plan is found to be fair and equitable to the dissenters, they cannot use the elements making the plan fair and equitable as the basis of their rejections. Reconstruction Finance Corp. v. Denver & R.G.W.R. Co., supra, 328 U.S. 534, 66 S. Ct. 1303. Thus it is clear that the court's discretion is not unlimited, but is circumscribed, and until the statute is satisfied, no discretion is vested in the court.
With these observations in mind, we proceed to an examination of the evidence presented by the objectors, which, of course, must be considered in connection with the entire record of these proceedings.
Accumulation of Cash. On June 1, 1946, there were cash and cash equivalents in the debtor's treasury in the sum of $77,563,059, but net cash of only $10,997,108. The principal reasons for the difference is that $33,886,514 has been allocated to accrued taxes, cash reserve and working capital; $1,142,000 to debt reduction; $57,521 to current interest charges; ...