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GROUP OF INVESTORS V. MILWAUKEE R. CO., 318 U. S. 523 (1943)
U.S. Supreme Court
Group of Investors v. Milwaukee R. Co., 318 U.S. 523 (1943)
Group of Institutional Investors v.
Chicago, Milwaukee, St. Paul & Pacific Railroad Co.
Argued October 14, 15, 1942
Decided March 15, 1943
318 U.S. 523
Upon review of a judgment of the Circuit Court of Appeals which reversed an order of the District Court approving a plan, certified to it by the Interstate Commerce Commission, for reorganization of the Chicago, Milwaukee, St. Paul & Pacific Railroad Company under § 77 of the Bankruptcy Act, held:
1. The Commission's conclusion that the equity of holders of the debtor's preferred and common stock was without value, and that
they were therefore not entitled to participate in the reorganization, was sustained by the reasons and supporting data set forth in the Commission's report on the plan. P. 318 U. S. 536.
(a) The Commission is not required by the Act to formalize in findings the extensive data on which it relied in the exercise of its expert informed judgment. P. 318 U. S. 539.
(b) Nor was the Commission required to make a precise finding as to the value of the company's properties in order to eliminate the old stock from the plan. P. 318 U. S. 539.
(c) A finding as to the precise extent of the deficiency is not material or germane to the finding of "no value" prescribed by § 77(e). P. 318 U. S. 539.
(d) If it is established that there is no reasonable probability that the earning power of the road will be sufficient to pay prior claims of interest and principal and leave some surplus for the service of the stock, then the inclusion of the stock would violate the full priority rule, incorporated in § 77 by the phrase "fair and equitable." P. 318 U. S. 541.
2. The criteria employed by the Commission for determining the permissible capitalization of the reorganized company were in accord with the Act. P. 318 U. S. 539.
(a) Earning power is the primary criterion of value in reorganization proceedings under § 77. P. 318 U. S. 540.
(b) The limited extent to which § 77(e) provides that reproduction cost, original cost, and actual investment may be considered indicates that these factors are relevant, as in § 77B, only so far as they bear on earning power. P. 318 U. S. 541.
3. The evidence of changed circumstances since the Commission's approval of the plan was insufficient to require the District Court to return the plan to the Commission for reconsideration. P. 318 U. S. 543.
Earning power in war years is not a reliable criterion for the indefinite future. P. 318 U. S. 543.
4. The contention that the ratio of debt to stock in the reorganized company results in unfairness to junior interests is unsupported. P. 318 U. S. 544.
(a) The nature of the capital structure, as well as the amount of the capitalization, is for the determination of the Commission in its formulation of a plan which will be "compatible with the public interest." P. 318 U. S. 544.
(b) Questions of the ratio of debt to stock, the amount of fixed, as distinguished from contingent, interest, and the kind of capital structure which a particular company needs to survive the vicissitudes
of the business cycle, are by the Act reserved for the expert judgment of the Commission, which the courts must respect. P. 318 U. S. 545.
5. There is no justification in this case for further delay in effectuating the reorganization. P. 318 U. S. 545.
6. The effective date of a plan of reorganization under § 77 need not be the date of the filing of the petition. P. 318 U. S. 546.
Section 77 does not preclude the accrual of interest on secured claims after the date of the filing of the petition for reorganization.
7. The proposed modifications of the lease of the Terre Haute properties, with the alternative of rejection of the lease in the event of failure of acceptance of the modifications, were valid. P. 318 U. S. 549.
(a) The provisions of § 77 authorize the Commission (and the District Court), in approving a plan of reorganization, to condition acceptance of a lease on terms which are necessary or appropriate to keep the fixed charges within proper limits or to do equity between claims which arise under the lease and other claims against the debtor. P. 318 U. S. 550.
(b) The determination of the Commission and the District Court as to whether a lease should be rejected, or, if not, on what terms it should be accepted, ought not to be set aside upon review, except on a clear showing that the limits of discretion have been exceeded. P. 318 U. S. 551.
(c) The provision of the plan that the Terre Haute lease shall be rejected as of the date the District Court determines that the Terre Haute bondholders have not consented to the making of a new lease at a reduced rental is valid. P. 318 U. S. 551.
(d) In the event of rejection of the lease pursuant to a plan of reorganization, operation subsequent to the commencement of the proceedings and prior to the rejection need not be for the account of the lessor. P. 318 U. S. 552.
(e) When a lease is rejected pursuant to a plan, § 77(c)(6) may not be so applied as to give the lessor or its creditors a disproportionate claim against the estate. P. 318 U. S. 555.
8. The findings and conclusions of the Commission and the District Court with respect to the allocation of new securities to the holders of General Mortgage bonds, were adequate and proper. P. 318 U. S. 555.
(a) That system mortgages should be substituted for divisional ones was a determination which was peculiarly within the province of the Commission to make. P. 318 U. S. 558.
(b) The treatment of the General Mortgage bonds was not inequitable as compared with that accorded the 50-year bonds. P. 318 U. S. 562.
(c) The Commission and the District Court had before them sufficient data from which to determine the allocation of new securities as between holders of the General Mortgage bonds and holders of the 50-year bonds, and it cannot be said that an incorrect rule of law was applied in concluding that the plan was fair and equitable as between these two classes of bondholders. P. 318 U. S. 562.
(d) The determination by the Commission and the District Court that, so far as the holders of the General Mortgage and 50-year bonds were concerned, the requirements of the full priority rule were complied with is supported by the evidence. P. 318 U. S. 563.
(e) The treatment of the General Mortgage bonds, as compared with the Milwaukee & Northern First Mortgage bonds and Consolidated Mortgage bonds, was fair and equitable. P. 318 U. S. 563.
9. In order to give "full compensatory treatment" to senior claimants and to appropriate to the payment of their claims the "full value" of the property, it is not essential that a dollar valuation be made of each old security and of each new security. P. 318 U. S. 564.
(a) A requirement that dollar values be placed on what each security holder surrenders and on what he receives would create an illusion of certainty where none exists, and would place an impracticable burden on the whole reorganization process. P. 318 U. S. 565.
(b) It is sufficient that each security holder, in the order of his priority, receives from that which is available for the satisfaction of his claim the equitable equivalent of the rights surrendered. P. 318 U. S. 565.
(c) Whether, in a given case, senior creditors have been made whole or received "full compensatory treatment" rests in the informed judgment of the Commission and the District Court on consideration of all relevant facts. P. 318 U. S. 566.
10. The provision in the plan of reorganization for an additions and betterments fund was proper. P. 318 U. S. 566.
11. The contention of the General Mortgage bondholders that, by reason of the after-acquired property clause in their mortgage, they have a first lien on so-called "pieces of lines east," the earnings from which were credited by the Commission to the 50-year bonds -- a claim made in both courts below but not determined -- should be resolved by the District Court. P. 318 U. S. 568.
(a) The objection cannot be treated as de minimis. Nor can it be concluded that the objection has been waived, or that the claim is frivolous. P. 318 U. S. 568.
(b) The determination of what assets are subject to the payment of the respective claims has a direct bearing on the fairness of the plan as between two groups of bondholders. P. 318 U. S. 569.
12. 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. P. 318 U. S. 569.
13. The claims of the 50-year bonds as well as those of the General Mortgage bonds require that findings be made in respect of the matters referred to in paragraphs 11 and 12, supra, and final approval of the plan as it affects both groups is dependent thereon. P. 318 U. S. 571.
14. Whether earnings segregation, severance, or contributed traffic studies should be made is for the Commission initially to determine. This Court is unable to say that such studies are indispensable in this case. P. 318 U. S. 572.
15. The Commission's conclusion that no allowance should be made in the plan for interest on the Adjustment bonds subsequent to the date of the filing of the petition was justified. P. 318 U. S. 573.
124 F.2d 754 reversed in part.
Certiorari, 316 U.S. 659, to review the reversal of an order of the District Court, 36 F.Supp. 193, approving a plan formulated in proceedings under § 77 of the Bankruptcy Act for reorganization of the Chicago, Milwaukee, St. Paul & Pacific Railroad Company.
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