Full opinion text
BARNES, District Judge. On December 19, 1939, there was filed in the office of the clerk of this court a copy of a report and order of the Interstate Commerce Commission, dated December 12, 1939, approving a plan of reorganization of Chicago and North Western Railway Company and, on April 8,-1940, there was filed in the office of the clerk of this court a supplemental report and order of the Commission, dated April 2, 1940, modifying the said plan of reorganization and approving said plan as modified. On April 15,' 1940, this court made an order fixing the time within which objections to the plan, as approved by the Interstate Commerce Commission, might be filed and also fixing the time within which claims for administrative expenses might be filed and setting June 24, 1940, as the date for the hearing on the plan and on the claims for administrative expenses. On June 24, 25, 26 and 27 and July 22, 23, and 24, 1940, a hearing was held by this court on the plan of reorganization theretofore approved and reported by the Interstate Commerce Commission. The hearing on claims for administrative expenses was continued to July 22, 1940, for the reason that the maximum limits of allowances for administrative expenses had not been fixed by the Interstate Commerce Commission, and on July 24, 1940, the hearing on claims for administrative expenses was continued to September 7, 1940, for the reason that the report of the Commission on administrative expenses had not yet been filed in this court and counsel had not had opportunity to examine the report. On July 26, 1940, there was filed in the office of the clerk of this court a report and order of the Interstate Commerce Commission, dated July 23, 1940, fixing the maximum limits of allowances for administrative expenses. On September 7, 1940, a hearing was had in this court on the claims for administrative expenses. The report of the Interstate Commerce Commission, dated December 12, 1939, was-concurred in by Commissioner Eastman, Chairman, and Commissioners Aitchison, Porter, Lee, Mahaffie, Rogers and All-dredge. Commissioner Splawn in a separate report expressed his dissatisfaction with the amount of the capitalization approved and said that the estimate of future earnings is over-optimistic, so much so that the common stock provided for by the plan will have only a speculative value. Commissioner Miller dissented and said that the capitalization of the new company should be at least $100,000,000 more than that allowed, that this increased capitalization should be issued to present equity holders in no par value common stock, that such stock would be of little, if any, value while the company is operated in competí-' tion with other railroads but would be of substantial value when the railroads are consolidated, that consolidations are necessary, and that charges and dividend requirements prior to the common stock have been set too high. Commissioners Caskie and Patterson did not participate in the disposition of the case. The supplemental report of the Interstate Commerce Commission, dated April 2, 1940, was concurred in by Commissioner Eastman, Chairman, and Commissioners Aitchison, Porter, Lee, Mahaffie, Splawn, Rogers and Alldredge. Commissioner Miller stated that he concurred in the conclusions reached in the report except as to the total capitalization allowed and referred to his dissent from the prior report. Commissioner Patterson did not participate in the disposition of the case. A statement, showing in tabular form the distribution of new securities and a summary of the plan, which is attached to the report of the Interstate Commerce Commission dated April 2, 1940, as Appendix 1, is hereto attached and marked “Exhibit A.” There are certain parties before the court who ask for the approval of the plan. The Life Insurance Group Committee and the Mutual Savings Bank Group Committee, who together represent $122,801,000 or 38.-1% of $322,485,000 principal amount of certain issues of the debtor, Reconstruction Finance Corporation, that has a claim of $49,000,000 approximately, the Committee representing 2 year collateral notes of the debtor aggregating $5,000,000 approximately, United States Trust Company of New York as trustee under the debtor’s General Mortgage of 1987 under which $132,000,000 approximately of bonds are outstanding, Guaranty Trust Company of New York as trustee under the First Mortgage of Des Plaines Valley Railway Company under which $2,500,000 bonds assumed by the debtor are outstanding, and the New York Trust Company as trustee under the First Mortgage of Sioux City and Pacific Railroad Company, under which $4,000,000 of bonds assumed by the debtor are outstanding, do not object to the plan-and on the contrary ask for its approval. Béfore taking up the objections that have been filed to the plan of reorganization as reported by the Interstate Commerce Commission it will be well to consider the charter of the court’s powers on a hearing such as has been had in this proceeding. That charter is found in the statute, Section 77 subs, b and e of the Bankruptcy Act, as amended, 11 U.S.C.A. § 205, subs, b, e, and in the opinions of the Supreme Court of the United States. The statute is as follows : “(b) A plan of reorganization within the meaning of this section (1) shall include provisions modifying or altering the rights of creditors generally, or of any class of them, secured or unsecured, either through the issuance of new securities of any character or otherwise; (2) may include provisions modifying or altering the rights of stockholders generally, or of any class of them, either through the issuance of new securities of any character, or otherwise; (3) may include, for the purpose of preserving such interests of creditors and stockholders as are not otherwise provided for, provisions for the issuance to any such creditor or stockholder of options or warrants to receive, or to subscribe for, securities of the reorganized company in such amounts and upon such terms and conditions as may be set forth in the plan; (4) shall provide for fixed charges (including fixed interest on funded debt, interest on unfunded debt, amortization of discount on funded debt, and rent for leased railroads) in such an amount that, after due consideration of the probable prospective earnings of the property in light of its earnings experience and all other relevant facts, there shall be adequate coverage of such fixed charges by the probable earnings available for the payment thereof; (5) shall provide adequate means for the execution of the plan, which may include the transfer of any interest in or control of all or any part of the property of • the debtor to another corporation or corporations, the merger or consolidation of the debtor with another corporation or corporations, the retention of all or any part of the property by the debtor, the sale of all or any part of the property of the debtor either subject to or free from any lien at not less than a fair upset price, the distribution of all or any assets, or the proceeds derived from the sale thereof, among those having an interest therein, the satisfaction or modification of any liens, indentures, or other similar interests, the curing or waiver of defaults, the extension of maturity dates of outstanding securities, the reduction in principal and/or rate of interest and alteration of other terms of such securities, the amendment of the charter of the debtor, and/or the issuance of securities of either the debtor or any such other corporation or corporations for cash, or in exchange for existing securities, or in satisfaction of claims or rights or for other appropriate purposes; and may deal with all or any part of the property of the debtor; may reject contracts of the debtor which are executory in whole or in part, including unexpired leases; and may include any other appropriate provisions not inconsistent with this section. ‡ ‡ “(e) Upon the certification of a plan by the Commission to the court, the court shall give due notice to all parties in 'interest of the time within which such parties may file with the court their objections to such plan, and such parties shall file, within such time as may be fixed in said notice, detailed and specific objections in writing to the plan and their claims for equitable treatment. The judge shall, after notice in such manner as he may determine to the debtor, its trustee or trustees, stockholders, creditors, and the Commission, hear all parties in interest in support of, and in opposition to, such objections to the plan and such claims for equitable treatment. After such hearing, and without any hearing if no objections are filed, the judge shall approve the plan if satisfied that: (1) It complies with the provisions of subsection (b) of this section, is fair and equitable, affords due recognition to the rights of each class of creditors and stockholders, does not discriminate unfairly in favor of any class of creditors or stockholders, and will conform to the requirements of the law of the land regarding the participation of the various classes of creditors and stockholders; (2) the approximate amounts to be paid by the debtor, or by any corporation or corporations acquiring the debtor’s assets, for expenses and fees incident to the reorganization, have been fully disclosed so far as they can be ascertained at the date of such hearing, are reasonable, are within such maximum limits as are fixed by the Commission, and are within such maximum limits to be subject to the approval of the judge; (3) the plan provides for the payment of all costs of administration and all other allowances made or to be made by the judge, except that allowances provided for in subsection (c), paragraph (12) of this section, may be paid in securities provided for in the plan if those entitled thereto will accept such payment, and the judge is hereby given power to approve the same. “If the judge shall not approve the plan, he shall file an opinion, stating his conclusions and the reason therefor, and he shall enter an order in which he may either dismiss the proceedings, or in his discretion and on motion of any party in interest refer the proceedings back to the Commission for further action, in which event he shall transmit to the Commission a copy of any evidence received. If the proceedings are referred back to the Commission, it shall proceed to a reconsideration of the proceedings under the provisions of subsection (d) of this section. If the judge shall approve the plan, he shall file an opinion, stating his conclusions and the reasons therefor, and enter an order to that effect, and shall send a certified copy of such opinion and order to the Commission. * * * * * “If it shall be necessary to determine the value of any property for any purpose under this section, the Commission shall determine such value and certify the same to the court in its report on the plan. The value of.any property used in railroad operation shall be determined on a basis which will give due consideration to ths earning power of the property, past, present, and prospective, and all other relevant facts. In determining such value only such effect shall be given to the present cost of reproduction new and less depreciation and original cost of the property, and the actual investment therein, as may be required under the law of the land, in light of its earning power and all other relevant facts.” In Warren v. Palmer, 310 U.S. 132, 60 S.Ct. 865, 867, 84 L.Ed. 1118, the Supreme Court said: “The judicial functions of the bankruptcy- court and the administrative functions of the Commission work cooperatively in reorganizations.” And in Palmer v. Massachusetts, 308 U.S. 79, 60 S.Ct. 34, 38, 84 L.Ed. 93, the Supreme Court said: “The judicial process in bankruptcy proceedings under § 77 [11 U.S.C.A. § 205] is, as it were, brigaded with the administrative process of the Commission. From the requirement of ratification by the Commission of the trustees appointed by the Court to the Commission’s approval c5f the court’s (sic) plan of reorganization the authority of the court is intertwined with that of the Commission.” The Supreme Court has not yet determined the precise effect which should be given, on a hearing by the court on a plan of reorganization, to the findings and conclusions of the Commission. Considerable attention was given by counsel to that question on the hearing. The court, acting on the assumption that it is well to consider and decide only those questions that are necessary to be decided, will refrain from considering or deciding that question unless or until it finds itself in disagreement with the Commission. The Objections of the Sparta, State Line and Peoria Trustees. Bank of New York, as trustee (hereinafter called the “Sparta Mortgage Trustee”) under the First Mortgage, dated March 1, 1912, of Milwaukee, Sparta and North Western Railway Company, submits the following objections to the plan of reorganization — (1) The distribution of system mortgage bonds and stocks, as proposed in the plan, is not fair and equitable to the holders of Sparta bonds in that: (a) The proposed distribution of bonds and stocks to the holders of Sparta-bonds is based solely on the severance studies without giving any weight whatsoever to the segregation studies; (b) The segregation studies should have been taken as the principal basis for determining the relative value of the Sparta line to the Chicago and North Western Railway Company system; (c) Not only was no weight given to the segregation studies in determining the proposed distribution of new securities to the holders of the Sparta bonds but the very fact that the Sparta’s segregation earnings were favorable resulted to the disadvantage of its bondholders, since the “excess” segregation earnings (over and above the Sparta’s so-called “severance value”) were credited to the General Mortgage; (d) The “severance value” of the Sparta was treated as the measure of its relative earning power (expressed as a ratio)i whereas such “severance value,” which purports to represent the net cost to the Chicago and North Western Railway Company system if the Sparta were abandoned should have been expressed as an absolute dollar amount; (e) The exhibits introduced by the debtor at the hearings before the Commission as to the “severance value” of the Sparta, should have been accepted as more accurate than the exhibits and testimony introduced by the Life Insurance and Savings Bank Group Committees; (f) The Sparta’s “severance value” should have been increased by an allowance for interest at 5% per annum on the estimated cost of grade separation at Madison and Janesville, Wisconsin; (g) In determining the Sparta’s “severance value” certain intangible elements, not expressible in annual dollar amounts, should have been taken into consideration; (2) The plan is based on the findings and conclusions of the Commission set forth in its Supplemental Report of April 2, 1940, and such findings and conclusions with respect to the Sparta Mortgage Trustee’s petition for modification cannot be supported. Irving Trust Company as the Successor Trustee (hereinafter referred to as the “State Line Trustee”) under the First Mortgage of Milwaukee and State Line Railway Company, dated January 2, 1906, objected to the plan of reorganization upon the following grounds: (1) The plan is not fair and equitable, and does not afford due recognition to the rights of the holders of State Line bonds, and discriminates unfairly in favor of the holders of other securities of the debtor which are junior in lien upon the property covered by the State Line Mortgage to the bonds issued under said State Line Mortgage; (2) In that it does not leave the lien of the State Line Mortgage undisturbed (State Line Trustee would not object to the extension upon proper terms of the maturity of the State Line bonds), and in that it provides for the release of said mortgage and the substitution of a lien upon the general system properties in common with holders of substantially all the other classes of bonds of the debtor; (3) In that it allocates only 27.3% in new fixed-interest bonds to holders of State Line bonds, together with 39% in new income bonds and 33.7% in new preferred stock; (4) The plan does not give decisive weight to the segregation studies, and fails to give any weight to such segregation studies; (5) In that it allocates new securities to holders of State Line bonds on the basis of severance studies; (6) The plan fails to give any weight to the earnings which have been derived from the mortgaged property as actually operated since the date of filing of the debtor’s petition for reorganization; (7) The plan fails to provide for the issuance to the holders of State Line bonds of new fixed-interest bonds yielding an amount per year at least equal to the estimated yearly out-of-pocket expense which the system would have to bear in the event of severance. State Line Trustee asserts that the holders of State Line bonds are entitled (1) to receive the full benefit of the earnings which have been derived from the operation of the mortgaged property during the pendency of the proceedings, and (2) in recognition of their lien on such earnings and on the State Line property, to be paid their past-due interest in cash and receive fixed-interest bonds having the same principal amount and the same security and bearing at least the same rate of interest (3%%) as their present bonds. Chemical Bank & Trust Company (hereinafter referred to as the “Peoria Trustee”) as the successor trustee under the First Mortgage of St. Louis, Peoria and North Western Railway Company dated July 1, 1913, filed the following objections to the plan of reorganization — -(1) The plan does not conform to the requirements of Section 77 of the Bankruptcy Act as amended because: (a) it is not fair and equitable; (b) it does not afford due recognition to the rights of the holders of Peoria bonds; (c) it discriminates unfairly against the holders of Peoria bonds and in favor of other classes of creditors; (d) it will not conform to the requirements of the law of the land regarding the participation of the various classes of creditors; (2) The allocation of new securities to the holders of Peoria bonds proposed in the plan is erroneous because in making it: (a) no weight was given to the actual earnings of the Peoria lines; (b) no weight was given to the results of the segregation studies of the Peoria lines; (c) the results of the severance studies of the Peoria lines were adopted as the sole basis for the allocation of new securities to the holders of Peoria bonds; (d) fixed interest securities were not allocated to the holders of Peoria bonds to the full extent of their value as evidenced by the results of the severance studies of the Peoria lines; (e) the difference between the results of the segregation studies and the results of the severance studies of the Peoria lines were credited to the First and Refunding Mortgage to the detriment of the Peoria bondholders; (f) the income of- the Peoria lines, as to which the Peoria Trustee filed an impounding petition, was not given due recognition; (3) The rate used in the segregation studies as a credit to the Peoria lines for the hauling of company coal was fixed at three mills per ton per mile, although the Peoria lines were entitled to a much higher credit for this service; (4) The Commission made incorrect findings of fact and findings of fact not supported by any evidence. The Peoria Trustee urges that the plan of reorganization be amended in the following manner: (1) by allocating securities to the Peoria bondholders on the basis of the actual earnings of the Peoria lines as reflected in the segregation studies of such lines revised so as to credit the Peoria lines with a fair rate for hauling company coal; (2) by allocating fixed interest’ securities to the Peoria bondholders to the extent, if any, that the results of the severance studies of the Peoria lines are used in the allocation of securities to the Peoria bondholders; (3) by taking into consideration in the allocation of fixed interest securities to the Peoria bondholders the income of the Peoria lines, as to which the Peoria Trustee filed an impounding petition. As a basis for the allocation of securities the Commission had and the court has before it “extensive studies along the three lines of approach, namely, segregation of earnings, severance value, and contributive income value.” A segregation study measures the earnings of each mortgage line considered as a part of the system and on the basis of the traffic as it actually moves, without any consideration of the control of the traffic and the strategic position of the individual mortgage lines. In such a study revenues not local to an individual mortgage line are divided on-the basis of as close an approximation as possible to the divisions which would normally be applied if the individual mortgage lines were separate railroads working cooperatively in the movement of the traffic. Expenses are allocated directly as far as possible, and on an approved basis of distribution where direct allocation is not obtainable. A severance study measures the reduction of or damage to the system’s net earnings which would be brought about by the severance of the line of an individual mortgage. Under the severance theory it is assumed that the individual mortgage line would be operated either independently or as a part of a competing railroad system. In such studies estimates are made of the probable diversion of traffic from the balance of the system, which involve a determination of competitive traffic originated or terminated on the severance line which could be diverted by it to competing routes, and the resulting loss in system earnings. In instances where the severance line handles bridge traffic, it is necessary to estimate the increased cost of rerouting such traffic over an alternate route, in order to ascertain what savings in costs accrue to the system by reason of the existence of the bridge line. When a particular mortgage line serves as a bridge route for through traffic and also originates and terminates some traffic on its own line, both of the factors described are involved in the final determination of severance value. A contributive income study determines the benefit derived by the system from the traffic originating or terminating on each mortgage line. Contributive income studies are less important than severance studies because the latter reflect the amount of earnings which could be diverted from the system by the individual lines while the contributive income includes also traffic which, in any event, would be routed over other system lines. The Sparta, State Line and Peoria lines are primarily bridge or cut-off lines and each has only a small amount of originating or terminating traffic. The Sparta and State Line lines were built for the purpose of reducing operating costs by diverting traffic from existing routes to the new bridge routes. The Peoria line was constructed primarily to handle company coal. The contributive income study is not a fair measure of the earning power of the three lines since no one of the three originates or terminates any substantial volume of traffic. Neither was the segregation study a fair measure of the earning power of the three lines. It reflecte'd the earnings on traffic as it actually moved and ignored the fact that the control of such traffic was not in the hands of the bridge line over which it happened, for system convenience, to move. The value of a bridge line to a system is that which it saves the system in providing a more economical route. A severance study measures that value. For this reason the severance study was adopted by the Commission and is adopted by the court as the measure of value of the three lines in question. The Sparta Trustee objects that “the very fact that the Sparta’s segregation earnings were favorable resulted to the disadvantage of its bondholders, since the ‘excess’ segregation earnings (over the Sparta’s so-called • ‘severance value’) were credited to the general mortgage.” The assumption that since the segregation study ■showed relatively large earnings by the Sparta line the Sparta bondholders were disadvantaged is without foundation. We have seen that since the Sparta line is a bridge line, which does not originate or terminate traffic, the only fair measure of its value to the system is a severance study. Accordingly, the showing of a segregation study on the line is of no disadvantage or advantage to any one, it is simply of no significance. From the viewpoint from which we are now considering the matter the only elements of significance to Sparta bondholders are (1) the severance value of the Sparta line, i. e., its value to the system, and (2) system earnings. The larger the severance value and the larger system earnings the better off Sparta bondholders will be. Under no circumstances can they be advantaged by low system earnings. The Peoria Trustee makes the same objection in somewhat different language but the answer is the same. The Sparta Trustee objects that if severance value is to be used as a basis for allocation to the Sparta bondholders, then new fixed interest bonds should be allocated to an extent which will capitalize the dollar severance value. This objection cannot be sustained. Everyone recognizes that all of the earnings of the system cannot be capitalized in fixed interest bearing securities. It is imperative that the total earnings be capitalized partly in interest-bearing securities and partly in stock and reasonable that they be capitalized partly in fixed interest-bearing securities, partly in contingent interest-bearing securities, partly in preferred stock and partly in common stock, and it is both reasonable and fair that that part of the earnings ascribable to the Sparta line be capitalized in like manner. . Like objections by the State Line Trustee and the Peoria Trustee are overruled for the same reason. The Sparta Trustee objects because the Commission in arriving at the 1936 earnings for the Sparta line took the mean between the figures of different groups of experts, because the Commission in arriving at the severance value of the Sparta line did not allow interest on the estimated cost of grade separation at Madison and Janesville, Wisconsin, and did not allow for the absence of important grade crossings on the Sparta lifle which are found on the alternate route via Madison. This advantage the Sparta Trustee in its brief admitted not to be expressible in exact dollar amount. To the court, it seems reasonable and fair to adopt a mean between differing experts and the possibility of grade separations at Madison and Janesville being required seems to be a remote possibility only and neither the Commission nor the court can be expected to assign value to a supposed advantage that the claimant cannot value in dollars. Referring to the State Line Trustee’s objections that the plan fails to give any weight to the earnings of the mortgaged property as actually operated since the date of filing of the debtor’s petition, the court cannot see why the past earnings of a bridge line should be measured by a different yard stick than the future earnings. The plan uses the same yard stick for both — a severance study — and correctly capitalizes earnings past and-future on that basis. The court reaches a like conclusion on a like objection of the Peoria Trustee. The Peoria Trustee’s objection that the rate of three mills per ton mile for hauling company coal’ used in the segregation studies is too low will be overruled for two reasons. First, the severance study and not the segregation study was used as the measure of the value of the Peoria line to the system, so the rate for hauling company coal used in the segregation study is of only academic interest, and, second, the Commission having found the rate fair the court would not be disposed to differ from that conclusion. The objections of the Sparta, State Line and Peoria Trustees must be overruled. Objections of City Bank Farmers Trust Company, as Trustee under the First and Refunding Mortgage of the Debtor. City Bank Farmers Trust Company, as trustee under the First and Refunding Mortgage dated May 1, 1920, of the debtor objects to the plan of reorganization as follows: 1. The provision proposed in the plan for satisfaction of the claim of Reconstruction Finance Corporation, in so far as the same relates to the First and Refunding Bonds of the debtor presently pledged as security for such claim is unfair and inequitable to the holders of the First and Refunding Bonds outstanding in the hands of the public in that the plan in this rqspect fails to conform to the equitable principles which require (A) that where one creditor, by virtue of a lien or interest, can resort to two funds, and another creditor to one of them only, the former must seek satisfaction out of that fund which the latter cannot touch, and (B) that if the prior creditor resorts to the doubly charged fund the subsequent creditor will be subrogated to his rights. In .elaboration of this point the objector says that the plan fails to conform to the equitable principles referred to in that (a) it permits the return to the reorganized company of the securities to be pledged as security for the $25,000,000 note upon payment of the principal and interest due thereon and fails to require the marshaling of securities as between the Reconstruction Finance Corporation and the public 'holders of First and Refunding Bonds and the application of the entire value of such separate security held by Reconstruction Finance Corporation to satisfaction of its claim before permitting recourse by Reconstruction Finance Corporation to the common fund or security represented by the property subject to the First and Refunding Mortgage and (b) the plan makes no provision whereby the public holders of First and Refunding Bonds may have recourse by way of subrogation to the securities proposed to be pledged for the $25,000,000 note and to the new securities to be issued outright to the Reconstruction Finance Corporation upon payment in full of the indebtedness due to the Reconstruction Finance Corporation, nor does it make any. provision, as an alternative to such provision for subrogation, which will enable the reorganized company upon payment of such indebtedness to Reconstruction Finance Corporation to recapture and retire said $58,000,000 of new securities and thus eliminate the dilution, amounting to over $34,000,000, of the new securities of the same classes to be received by the public holders of First and Refunding Bonds. 2. If the provision made in the plan for the Reconstruction Finance Corporation is not modified so as to conform to the equitable principles referred to, the plan is unfair and inequitable and discriminates unfairly against the holders of the publicly held 'First and Refunding Bonds and in favor of the unsecured creditors of the debtor, including the holders of $72,335,-000 Twenty Year Convertible 4%% Bonds due 1949, and in this respect does not conform to the requirements of the law of the land as announced by the United States Supreme Court in Northern Pacific Railway Co. v. Boyd, 228 U.S. 482, 33 S.Ct. SS4, 57 L.Ed. 931; Kansas City Terminal Ry. Co. v. Central Union Trust Co., 271 U.S. 445, 46 S.Ct. 549, 70 L.Ed. 1028, and Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. In elaboration of this second point the-objector says that the Commission’s approval and adoption of its plan constitutes a determination by it that payment of approximately $24,000,000 of the indebtedness due to Reconstruction Finance Corporation requires the delivery to it outright of over $58,000,000 of the new First and General Mortgage Bonds, Second Mortgage Income Bonds, Preferred Stock and Common Stock of the reorganized company specified in the plan; that such determination necessarily establishes that such new securities are not in the aggregate worth for the purpose of effecting such payment over 40% of the par amount thereof (taking the common stock as of a par value of $100 per share); that notwithstanding such determination the Commission proposes to satisfy and discharge the claim of the public holders of $47,822,000 First and Refunding Bonds by issuance to them of new securities of the same classes and in substantially the same proportions as between classes, to an aggregate amount (taking the common stock at $100 per share) equal to the aggregate amount of the indebtedness represented by said First and Refunding Bonds as of December 31, 1938; that the claim of the holders of these bonds is therefore to be provided for only to the extent of approximately 40% of the amount thereof; that until such claim has been fully satisfied the law of the land does not permit the unsecured creditors of the debtor, including the holders of the Convertible Bonds due 1.949, to participate in the assets of the debtor, substantially all of which are subject to the lien of the First and Refunding Mortgage, or in the securities of the reorganized company to be issued to acquire' such assets, except to the extent that such creditors contribute in money or in money’s worth to the reorganized company a reasonable equivalent for the new common stock proposed to be issued to them; and that since the plan requires no contribution from such unsecured creditors of the debtor they must be excluded from participation in the plan. 3. The record of the proceedings before the Commission does not contain sufficient evidence to sustain a finding by this court that the plan is, as to the holders of the publicly held First and Refunding Bonds, fair and equitable. 4. The plan is unfair and inequitable to the public holders of First and Refunding Bonds in that it deprives said holders of the voting power on the new preferred stock and common stock proposed to be issued to them by requiring such stock to be deposited under a voting trust for ten years and failing to provide representation for said holders on said voting trust, notwithstanding the plan provides for such representation for the unsecured creditors of the debtor in respect of the new common stock proposed to be issued to them. What seems to the court to be the best answers to objections numbered 1 and 2 of the First and Refunding Mortgage Trustee (which answers the court adopts) were phrased by counsel somewhat as follows : The effect of a pledge of bonds to secure a note of the same obligor is to give the pledgee the same proportionate interest in the security for such pledged bonds (up to the total debt for which such bonds are pledged) as he would have if he owned the pledged bonds. Merrill v. Nat. Bank of Jacksonville, 1899, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640; Mississippi Valley Trust Co. v. Ry. Steel Spring Co., 8 Cir., 1919, 258 F. 346; Butterfield v. Woodman, 1 Cir., 1915, 223 F. 956; Am. Brake Shoe & F. Co. v. N. Y. Rys., D.C. S.D.N.Y.1921, 277 F. 261, 282. The Reconstruction Finance Corporation is entitled, as a matter of law, to receive outright the new securities issuable in respect of its system collateral unless it receives for its debt cash or new securities substantially equivalent to cash, or unless it consents to accept a different treatment. The effect of a pledge of bonds to secure a note of the same obligor is to give the pledgee the power to issue the pledged bonds, thereby increasing the pledgor’s debts, by foreclosure of the pledge. The plan is in effect a foreclosure, resulting in (a) Reconstruction Finance Corporation receiving the $1,976,000, principal amount, of pledged General Mortgage Bonds and the $47,676,000, principal amount, of pledged First and Refunding Mortgage Bonds, and (b) such bonds becoming outstanding bonds. Reconstruction Finance Corporation, therefore, stands on the same footing in respect of such bonds as do the holders of other outstanding General Mortgage Bonds and First and Refunding Mortgage Bonds. The First and Refunding Mortgage Trustee in its Objection No. 1 overlooks this legal incident of the pledge, and its contention that the plan is unduly favorable to Reconstruction Finance Corporation is without merit. In support of its Objection No. 2 counsel for the First and Refunding Mortgage Trustee argues in substance (a) that since securities having a face value of over $58,000,000 are to be delivered to the Reconstruction Finance Corporation in payment of approximately $24,000,000 of indebtedness, it is necessarily established that such new securities are not worth more than 40% of their face value and (b) that accordingly the claim of holders of outstanding First and Refunding Bonds (who receive similar securities) is not provided for to an extent sufficient to permit the issue of any securities to junior unsecured creditors within the rule of the Boyd case. The treatment of the Reconstruction Finance Corporation proves nothing whatsoever as to the value of the new securities except that the Commission believes that the new securities allotted to the Reconstruction Finance Corporation could not be liquidated for an amount in excess of the Reconstruction Finance Corporation claim. This fact is established by the market prices of the outstanding bonds. All that the treatment of the Reconstruction Finance Corporation proves is that the Commission could not find a way to pay off the Reconstruction Finance Corporation in cash or to provide, within a sound capital structure, the required amount of new securities of a type which would reasonably satisfy the Reconstruction Finance Corporation’s right to receive money or money’s worth. In this case it is not clear whether the First and Refunding Mortgage Bonds are fully secured. It is clear that there are some unmortgaged assets in which unsecured creditors are entitled to participate pari passu with any unsecured portion of the claims of mortgage bondholders. Under the plan holders of First and Refunding Mortgage Bonds receive preferred securities (bonds and preferred stock) for about 59% of their total claim, and receive common stock at $100 per share for the entire balance of their claim. Unsecured creditors receive common stock at about $190 per share for their entire claims. The value of the security fo.r the First and Refunding Bonds must be (a) greater than (b) equal to or (c) less than the amount of the bondholders’ claim. If it is equal to or greater than the claim, the bonds have no need to resort to the unmortgaged assets, and unsecured creditors would have the sole right to the unmortgaged assets which might well be represented by senior securities rather than by common stock. If on the other hand the First and Refunding Mortgage Bonds are only partially secured, it would seem that in respect of the unsecured portion of their claim they could receive common stock only on the same basis as the unsecured creditors. What has actually happened is that the Commission has attempted to make and has made an equitable adjustment of these conflicting rights by allotting to the First and Refunding Mortgage Bonds common stock at an average price of $100 per share both for any excess of the amount of their mortgage security over the amounts of bonds and preferred stock allotted to them and for their interest in unmortgaged assets, and by commuting the rights of unsecured creditors in the unmortgaged assets into common stock on the basis of $190 per share. Questions of this type are not susceptible of exact mathematical determination, and all that the Commission and the courts can do is to make an equitable distribution of available new securities “measured by the existing circumstances.” There is no evidence in the record that the distribution approved by the Commission is not fair and equitable in the circumstances, and in the absence of such evidence Objection No. 2 of the First and Refunding Mortgage Trustee should be overruled. Referring to the First and Refunding Mortgage Trustee’s Objection No. 3 that the record does not contain sufficient evidence to sustain a finding that the plan is, as to the holders of First and Refunding Bonds, fair and equitable, the court finds that a similar objection was made to the plan before the Commission and was answered by the Commission as follows: “The trustee does not allege that further data were asked for by it and refused. The entire record is convincing that a fair allocation of the new securities has been made based primarily on the earnmgs of the several mortgage lines, although complete proof that all doubtful questions of liens were correctly determined has not been presented, and certain approximations have been resorted to in lieu of a strict determination of questions of liens on equipment.” The court agrees with this statement of the Commission. It is observed that in respect of voting trustees the plan provides: “The voting trustees shall be five in number, one to be designated by the life insurance committee, intervener herein, one to be designated by the savings bank committee, intervener herein, one to be designated by the joint action of the aforesaid life insurance committee and the aforesaid savings bank committee, one to Be designated by the Reconstruction Finance Corporation, and one to be designated by the general creditors of the debtor and the holders of the 20-year convertible 4-per-cent, series A, bonds of 1949 acting together, and as a single class. The trustee designated by the Reconstruction Finance Corporation shall be succeeded by one designated by the joint action of the two committees when and if the Reconstruction Finance Corporation shall cease to be a creditor of the company before termination of the trust. Otherwise, the right to designate a trustee shall include the right to designate his successor.” It is observed 'that the life insurance committee and the savings bank committee will designate three, and after the Reconstruction Finance Corporation ceases to be a creditor of the reorganized company, four, of the five voting trustees. These two committees together represent the owners of $14,994,000 or 31.4% of the $47,822,000 First and Refunding Bonds outstanding. The interests of the holders of this 31.4% of the First and Refunding Bonds are no different from the interests of the holders of the remaining 68.6%. So that it cannot be said that any holders of First and Refunding Bonds are not represented on the voting trust, and Objection No. 4 of the First and Refunding Mortgage- Trustee must be overruled. Furthermore, in considering the proper place for the lodgment of the power of appointment of voting trustees the purposes of the voting trust must be considered. A principal purpose is to prevent the divorcement of management from actual ownership during the period immediately after reorganization when stocks, which in the absence of a voting trust would designate and control the management, can be expected to have only a speculative value. A voting trust, whose trustees are appointed by those having the interest of the enterprise at heart, can prevent speculators, who might acquire a majority of the stock for a relatively small sum of money, from managing the enterprise for their own selfish ends. The court finds that the power of appointment of the voting trustees is lodged in proper hands. The Motion of the Debtor to Refer the Case to the Commission to Determine and Certify Values of Debtor’s Properties and Objections to the Plan of the Debtor, of the Committee for Holders of Common Stock, of the Committee for Holders of Preferred Stock and of Harry W. Harrison, a Preferred Stockholder. When, on June 24, 1940, this matter came on to be heard on the objections of various parties in interest to the plan of reorganization certified to this court by the Interstate Commerce Commission, the debtor presented a motion that this matter be referred to the Interstate Commerce Commission because of the alleged failure of the Commission to determine and certify values of debtor’s properties. The debt- or has filed an objection to the plan on the same ground. The position of the debtor is that that portion of Section 77, sub. e of the Bankruptcy Act, as amended, which reads as follows: “If it shall be necessary to determine the value of any property for any purpose under this section, the Commission shall determine such value and certify the same to the court in its report on the plan” requires that the Commission determine the value of the property of the debtor, that this section is particularly applicable since the plan proposes to cut off the rights of stockholders, that the Commission has not determined the value of the property of the debtor, and that the court must send the matter back to the Commission for a determination and certification of value. There are at least two reasons why the debtor’s motion must be denied. The statute contains no mandatory direction to determine the value of any or all 'of the debtor’s property. It merely directs the manner of determination if it shall be necessary to determine the value of any property. The matter had been pending in this court and before the Commission for almost five years and a plan of reorganization had been certified to this court by the Commission before the motion now under consideration was made and during the major portion of those five years a plan or plans of reorganization was or were pending before the Commission. The debtor did not at any time prior to June 8, 1940, apply to this court for an order requesting the Interstate Commerce Commission to make a determination of value, and the record does not show that the debtor, at any time, either while the plan was pending before the Commission or later, applied to the Commission for a determination of value. It is true that learned counsel who presently represents the debtor was not in the matter but the debtor and a committee of preferred stockholders and a committee of common stockholders were each represented by capable and experienced counsel and were active before the Commission. The conclusion is inescapable that the debtor and Committees of Preferred and Common Stockholders thought either that the Commission was making and "later had made a sufficient determination of value or that a determination of value was unnecessary or would not be helpful to their interest. There is generally a time for everything, and the time for making a determination of value, other than that which has been made, is long since past, especially when counsel for the debtor tells us, as he did at the hearing, that he does not know what use we would make of a finding by the Commission of the cost of reproduction new of the properties of the debtor less depreciation. Furthermore, the Commission has made and in its reports accompanying the plan has certified all such findings of value as are necessary for the purposes of this proceeding. Particularly the Commission has found and certified that the common and preferred stocks of the debtor have no value. This is certainly a finding in substance that the assets of the debtor are of a value not in excess of the aggregate of its liabilities other than its capital stock liabilities. The principal findings in respect of value made by the Commission have two purposes, for determining total capitalization of the reorganized company and for determining the rights of parties to participate. These findings are found in the following language in the Commission’s report: “Taking into account the reproduction value of the property and the favorable past earnings, as well as the unfavorable recent and prospective earnings, it would appear that the total capitalization at reorganization proposed by the group committees, $449,505,000 is approximately the amount that should be approved. The debtor’s proposal of $470,767,288 appears somewhat too high. The group committees propose that 54.9 percent of the total capitalization be in the form of debt. In view of the experience of the debtor in this reorganization it would appear safer for the debt to be held to somewhat less than 50 percent of total capitalization. “Income available for interest, as shown by the books of account, as adjusted by the group committees, and as adjusted by our Bureau of Accounts, but in the latter case eliminating the adjustments for the Railroad Retirement Act and the Social Security Act, was as follows: Year Books Committees Bureau of Accounts 1931 $10,390,649 $7,651,282 $6,100,644 1932 5,665,558 2,804,517 1,789,463 1933 9,401,214 9,488,898 7,384,853 1934 8.485.752 8,489,823 6,360,791 1935 5,887,990 5,524,417 1936 7.024.752 9,060,616 1937 1,620,068 “The book figures are for the Chicago & North Western Railway Company, except in the case of 1937, which is a system figure; the committee figures are for the Chicago & North Western Railway Company and the Omaha combined, after deducting for Omaha equipment-trust interest; and the Bureau of Accounts figures are for the Chicago & North Western Railway Company. The book figures are the least reflective of earning power because wholly unadjusted; the committees fail to adjust for certain improper accounting; while our Bureau of Accounts in making transfers from profit and loss to income account in each instance confined the adjustment to one year’s accounts. If the omitted adjustments for improper accounting were applied to the group committees’ figures, the result would show income available for interest of $7,-614,983 for 1931, $2,384,574 for 1932, $9,-412,771 for 1933, and $8,356,854 for 1934. These amounts would probably justify the fixed-interest charges of the committees’ plan amounting to $5,605,000, since the deficiency of 1932 was made up in 1933 and 1934 with an adequate margin for minimum additions and betterments; but the record of earnings since 1936 has been so unsatisfactory that it appears that the reorganized company should not undertake immediately upon reorganization fixed charges much in excess of $3,400,000. “It is believed that this amount may be safely undertaken at that time and that the fixed charges proposed by the debtor, $2,612,390, are unnecessarily low. “The operating economies expected to result from the proposed rehabilitation and improvement program appear to offer sufficient promise that, after a time, fixed charges of about $4,600,000 may be safely undertaken; although not immediately upon reorganization. The plan of reorganization should, therefore, in justice to the holders of present senior securities, provide for increasing fixed charges to about the latter amount when and if a sustained period of improved earnings is reached.. This may be accomplished by issuing securities in reorganization bearing 4 percent interest, of which 2% percent may be fixed and 1% percent contingent for the time being upon earnings and to become fixed when and if. a stabilized level of earnings warranting it is reached. It should be provided that the commutation shall take effect when the commutable interest shall have been earned and have been payable for 3 successive years. “From a consideration of the entire record, including the elements of value referred to, the earnings and prospective earnings, and especially the impairment in earning power of the properties, we conclude and find that the capitalization and fixed and contingent charges of the reorganized Chicago & North Western Railway Company, immediately upon reorganization, including the bonds and stock proposed by the group committees for a rehabilitation and improvement program, it being assumed that bonds to finance this program can be sold at 4 percent interest rate, should be approximately as follows, no-par-value common stock being included in the total at $100 a share: Fixed-interest debt.........$117,000,000 Contingent-interest debt.... 105,000,000 Preferred stock............ 107,000,000 Common stock............. 121,000,000 Total capitalization.... 450,000,000 Fixed-interest charges...... 3,381,590 Contingent-interest charges 5,985,585 Total interest charges.. 9,367,175” “These amounts are exclusive of the securities of the Omaha and the Oshkosh to remain outstanding in the hands of the public in the total amount of $2,313,067. Of the $5,985,585 of contingent interest charges, $1,260,585 should be commutable into a fixed charge on the terms above stated. The rehabilitation and improvement program should not be made a part of the plan of reorganization, but left to the discretion of the directors of the reorganized company. The bonds and stocks proposed by the group committees to finance it should, however, be issued and held in the treasury at reorganization. Hí H* H* Hí “The permissible capitalization is thus insufficient to provide for satisfaction of all creditors’ claims in full. From a consideration of the entire record, including the elements of value referred to, the earnings and prospective earnings, and especially the impairment in earning power of the properties, we conclude and find that this result cannot be avoided, and that the equities of both classes of stockholders have no value. From 1931 through 1938, the earnings have been, and contemplated earnings will be, wholly insufficient to pay interest stipulated for the outstanding bonds and other indebtedness. sfc H< H< Hi ' ^ Hi H« “The capitalization of the reorganized company which we approve, is thus as follows, including securities reserved for a. rehabilitation and improvement program: Equipment obligations.......$ 11,678,000" P. W. A. loan, 4%.......... 1,020,000 Sioux City divisional mtge. bonds, 4%................ 4,000,000' Des Plaines divisional mtge. bonds, 4%................ 2,500,000 Notes to R. C. C. 4% (approximate) .............. 663,000 Notes to banks 2%% and (approximate)...... 3,296,000 Notes to R. F. C. 2%% and 1 y2%.................... 25,000,000 First and general mtge. bonds, 2%% and %%---- 55,762,556 First and general mtge. bonds, 4%............... 13,100,000 Second mtge. convertible income bonds 4%%........ 105,058,904 Preferred stock, 5%........ 106,996,076 Common stock (no par included at $100 a share) ... 120,899,773 Total .............. 449,974,309' “Fixed interest charges will amount to $3,382,079 and contingent interest charges to $5,988,529. This is on the assumption that the $13,100,000 of bonds reserved to finance a rehabilitation and improvement program may be sold on a 4-percent basis. It shall be provided that if necessary to insure sale this rate may be increased to 6 percent in the discretion of' the board of directors of the reorganized company. Of the contingent charges, $1,-260,878 will be conmutable on the terms heretofore stated.” These findings are in the opinion of the court sufficient for the purposes of this proceeding. For the reasons which have been discussed, the motion of the debtor to refer this matter back to the Commission for a determination and certification of value must be denied and its objection to the plan because of the Commission’s alleged failure to determine and certify value must be overruled. The debtor has filed nineteen objections to the plan of reorganization as certified by the Interstate Commerce Commission, the Committee for Holders of Common Stock has filed four objections, some of which have several aspects, and the Committee for Holders of Preferred Stock and Harry W. Harrison, a preferred stockholder, have each filed thirteen objections. At the hearing on objections to the plan which began on June 24, 1940, and continued for four days, the debtor not only introduced evidence in support of its objections to the plan but asked for and was granted additional time to assemble and present evidence. Accordingly, a further hearing on objections to the plan began on July 22, 1940, and continued three days, at which hearing the debtor introduced further evidence. All of this evidence, as well as the evidence produced before the Commission and certified to the court, has been considered. The court will not state the objections but will state its conclusions in respect of each thereof as briefly as possible. The court finds no warrant in the evidence for disapproving the Commission’s limiting of the capitalization of the new company to $449,974,309, or for increasing the capitalization to $705,153,992 or to any sum in excess of $449,974,309. Neither does the court find warrant in the evidence for disapproving the finding of the Commission that the equities of preferred and common stockholders have no value. On the contrary that finding is overwhelmingly supported by the evidence and the court is forced to conclude as did the Commission that stockholders should not participate in the allocation of securities. The evidence before the Commission and the court and the limitation of capitalization made necessary by such evidence requires that there be allocated to holders of 4%% Convertible bonds of 1949, Series A, of the debtor in the aggregate amount of $86,651,302 (principal and interest) in satisfaction of their debt, $45,-860,390 in no par common stock of the new company at the price of $100 per share. The court finds no warrant in the evidence for disapproving the increase from 3%% to °4% in the interest to be paid by the new company to holders of Sioux City & Pacific Railroad 3%% bonds outstanding in the principal amount of $4,000,000. Neither does the court find warrant in the evidence for disapproving the allowance of 4% rather than 3% on the new divisional mortgage bonds to be issued in exchange for $2,500,000 principal amount of DesPlaines Valley Railway Company first mortgage 4%% bonds. The notes of the debtor held by the Reconstruction Finance Corporation provide for interest at 5% and 6%. While it may be true that 4% would be a reasonable rate of interest, the court’s attention has not been called to evidence which would warrant the court in reducing the interest to that rate without the consent of the claimant. The plan does not contemplate that interest on the old notes held by the Reconstruction Finance Corporation shall be allowed for the period after the effective date of the plan. The amount of the Reconstruction Finance Corporation’s debt is $49,-184,904. In satisfaction of $25,000,000 of this debt the Commission allotted a note of that amount secured by the following securities now pledged with the Reconstruction Finance Corporation: $ 2,000,000 capital stock of Superior Coal Company. $ 1,520,000 capital stock of Indiana Harbor Belt R. R. Co. $ 945,800 capital stock of Sioux City Bridge Co. $ 104,000 Debtor’s Equipment Trust Certificates of Series Y. $ 128,000 Equipment Trust Certificates of Chicago St. Paul Minneapolis & Omaha Rwy. Co. of Series I. $45,186,000 Chicago, St. Paul, Minneapolis & Omaha Rwy. Co. First Mortgage Bonds,— which collateral will hereinafter be referred to as “system collateral.” The following securities also now pledged with the Reconstruction Finance Corporation: $ 2,085,000 Preferred Stock of Union Pacific R. R. Co. $ 100,000 N. Y. Central & H. R. R. R. Co. Refunding and Improvement Bonds due October 1, 2013. $ 64,000 N. Y. Central R. R. Co. Consolidated Bonds due 1998,— which securities will hereinafter be referred to as “non-system collateral” are to be delivered outright to the Reconstruction Finance Corporation' in satisfaction of its debt to the extent of the market value of said securities, which market value is said to be approximately $1,600,000. Accordingly the amount of the Reconstruction Finance Corporation debt to be satisfied 100% is $26,600,000 approximately. This leaves a ba