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decided: March 15, 1943.



Stone, Roberts, Black, Reed, Frankfurter, Douglas, Murphy; Jackson and Rutledge took no part in the consideration or decision of this case.

Author: Reed

[ 318 U.S. Page 452]

 MR. JUSTICE REED delivered the opinion of the Court.

Petitioners seek review of a decree of the Circuit Court of Appeals in the reorganization of the Western Pacific Railroad Company under § 77 of the Bankruptcy Act. That decree reversed the order of the District Court which had approved the plan for reorganization certified to it by the Interstate Commerce Commission.*fn1

The petitions for certiorari ask adjudication of questions which are important in the field of railroad reorganization. They involve the respective function of Commission and court, the method of valuation of railroad property by the Commission, the legality of the exclusion of stockholders and certain creditors from participation in the estate, a more favorable participation of a Reconstruction Finance Corporation claim because of new money furnished for the plan, allocation of securities

[ 318 U.S. Page 453]

     among claimants, priorities of liens created by different mortgages and subsidiary issues. Heretofore this Court has not passed upon them. For their determination we granted certiorari. 316 U.S. 654.

The debtor railroad company filed its petition in the District Court for the Northern District of California on August 2, 1935, alleging its inability to pay and discharge its indebtedness as it matured and praying for reorganization under § 77. The petition was approved as properly filed, trustees were appointed, their appointment ratified, 207 I. C. C. 793, and the appropriate steps taken to bring the plan of reorganization before the Commission for consideration. Public hearings were held by the Commission at which other plans for reorganization were filed, one by a group of bondholders known as the Institutional Bondholders Committee and one by the A. C. James Company, a secured creditor of the debtor which also was financially interested in the treatment accorded the preferred and common stock of the debtor. After full consideration of the problems of the debtor's reorganization and after the development of a plan deemed in accordance with § 77, the Commission certified its plan to the District Court on September 28, 1939.

The Commission's conclusions and orders were reached upon exceptions to the report of its Bureau of Finance. Its plan was the outgrowth of a study of the financial condition and economic situation of the debtor, viewed in the setting of the public interest in a national transportation system. The competing claims of the various classes of creditors and stockholders were appraised in the light of the requirements of the Act that they be accorded fair and equitable treatment. There is little if any dispute concerning the primary facts from which factual or legal inferences are to be drawn.

The debtor is a California corporation with its principal operating office in San Francisco. It carries on an interstate railroad business between the States of California,

[ 318 U.S. Page 454]

     Nevada and Utah.*fn2 For an understanding of this opinion the obligations of the debtor as of January 1, 1939, the

[ 318 U.S. Page 455]

     date proposed for the beginning of the operation of the plan, may be stated as follows:

Total claim

Accrued in- including

Claim or Interest Principal of terest at con- interest at

claim or tract rate to contract rate

interest effective date to effective

of plan date of plan


by Reconstruction Finance

Corporation) $10,000,000.00 $$10,000,000.00

Equipment obligations 2,750,050.00 94,202.00 2,844,252.00

First Mortgage 5% Bonds 49,290,100.00 13,143,776.66 62,433,876.66

Reconstruct ion Finance

Corporation Collateral

Notes (secured by $10,750,000

General and Refunding Mort-

gage bonds and other

collateral*fn* ) 2,963,000.00 899,869.98 3,862,869.98

The Railroad Credit Corpor-

ation Collateral Notes

(secured by $4,000,000 Gener-

al and Refunding Mortgage

bonds and other collateral 2,445,609.88 145,314.23 2,590,924.11

*fn* )

A. C. James Co. Collateral

Notes (secured by $4,249,500

General and Refunding Mort-

gage bonds) 4,999,800.00 1,249,950.00 6,249,750.00

Total secured debt $72,448,559.88$15,533,112.87$87,981,672.75

Unsecured Claims 5,818,791.00

Preferred Stock 28,300,000.00

Common Stock 47,500,000.00


Payment of this indebtedness was secured by liens, collateral or priority, as follows:

The trustees' certificates of $10,000,000 are secured by a lien on the entire estate and priority over all claims beyond reorganization expenses.

[ 318 U.S. Page 456]

     The equipment obligations of $2,750,050 are secured by rolling stock, acquired free of the liens of mortgages, through direct liens or trust arrangements. No one disputes the sound character of any of these securities. They are given priority over the fixed obligations of the reorganized company.

Subject to the trustees' certificates and equipment obligations, the first mortgage 5% bonds of $62,433,876.66, face and interest to the effective date of the plan, are secured by prior liens on all valuable property of the debtor, except (1) money, accounts, operating balances and cash items, and (2) certain assets, referred to in the next paragraph, upon which the general and refunding bonds have a first lien, deemed by the Commission to be of value sufficient to support $732,010 of new income mortgage bonds and new preferred stock of $1,147,955 par. The total face and assumed value of the securities authorized by the plan, as evidence of the entire value of the system, is $84,000,000 plus. See p. 481, infra. This paragraph reflects our conclusions as to priorities of the liens of the respective mortgages later discussed. See Priorities of Conflicting Liens, p. 489, infra.

The later general and refunding mortgage bonds, $18,999,500 in face amount, are secured by a first lien on properties determined by the Commission to be of a value and earning power sufficient to support issues of new income bonds and participating preferred stock of $732,010 and $1,147,955, respectively. See 233 I. C. C. 414 et seq. They are further secured, subject to the prior rights and other exceptions of the obligations listed in the preceding paragraphs, by a lien on all valuable property of the debtor. All of this series which were issued are pledged to secure the collateral notes in the amounts indicated in the preceding table.

By reason of an arrangement with the Reconstruction Finance Corporation, detailed later in the section of this

[ 318 U.S. Page 457]

     opinion headed Allocation of Securities, B, p. 485, infra, the distribution of securities to creditors did not reflect absolutely their priority position. The collateral notes owned by the R. F. C. were treated in the distribution of securities on the same basis as were the claims of old First bondholders. The result is summarized by the table on page 461 and footnotes 5 and 6.

By stipulation of the parties, the record shows that the value of the property of the debtor and its subsidiaries, "as found by the Interstate Commerce Commission under Section 19 (a) of the Interstate Commerce Act, with additions and betterments, new lines and extensions, subsequent to date of valuation, plus non-operating properties," was $150,907,623.49 as of December 31, 1938. It is further stipulated that there is no deferred maintenance in the debtor's properties. "Its facilities and equipment are sufficient to handle expeditiously and efficiently all traffic reasonably to be anticipated in the immediate future." The value of the debtor's system, with equipment depreciated, was $144,978,559 as of December 31, 1938.

There is agreement as to the amount of system earnings available for interest for 1922 to 1939, inclusive. The amounts follow:*fn3

Adjusted Consolidated Earnings Available for Interest

1922 $2,404,890

1923 3,412,234

1924 3,241,823

1925 4,557,798

1926 4,868,390

1927 3,470,861

1928 $4,376,972

1929 3,718,436

1930 2,381,529

1931 (deficit) 220,494

1932 283,912

1933 474,365

1934 $1,396,353

1935 1,377,026

1936 1,901,423

1937 1,077,407

1938 225,431

1939 1,519,916

It is to be borne in mind that while these figures represent net income of the system, as shown by its combined income account, adjusted as indicated, factors other than

[ 318 U.S. Page 458]

     the net income result were placed before and weighed by the Commission and the District Court. Of course the fluctuating operating revenues for the periods from freight, passenger, mail, express, victualing and miscellaneous were considered, as well as the corresponding labor, power, tax, rental and miscellaneous expenses. Operating ratio percentages for the various years are available in the evidence.

The stipulated operating revenues of the debtor's system for the years 1922-1938 and the first nine months of 1939 are as follows:

1922 $12,736,564

1923 14,414,812

1924 14,669,313

1925 15,898,548

1926 17,951,468

1927 18,306,675

1928 $19,421,851

1929 20,096,557

1930 18,819,062

1931 14,852,938

1932 12,251,071

1933 12,202,489

1934 $13,779,238

1935 14,407,458

1936 16,547,344

1937 17,918,485

1938 16,057,451


(1st 9 mths.) 12,836,985

Furthermore, the record shows the favorable effect upon the system's gross operating revenue of the extension of its lines into Northern California. This new construction, known as the Northern California Extension, was put into operation in 1932 and contributed the following gross ...

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