Full opinion text
IGOE, District Judge. History of the Proceeding. The Chicago, Milwaukee, St. Paul and Pacific Railroad Company, the debtor in this proceeding, is a railroad corporation organized under the laws of the State of Wisconsin and is the successor in interest of Chicago, Milwaukee & St. Paul Railway Company, reorganization of which, pursuant to receivership proceedings, was concluded in 1928. The debtor filed its petition with this court on June 29, 1935, stating that it was unable to meet its debts as they matured and that it desired to effect a plan of reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. The court approved the petition as properly filed and authorized the debtor to continue in the possession and control of its properties and assets. Thereafter, the court by order of October 17, 1935, appointed Henry A. Scandrett, Walter J. Cummings and George I. Haight trustees of the property of the debtor. Following the ratification of their appointment by the Interstate Commerce Commission and their qualification, the trustees so appointed took possession of the property and assets of the debtor on January 1, 1936, and since said time have continued in the possession and control of the same and the operation thereof. The debtor filed with its petition a plan of reorganization dated July 1, 1935. Said plan was also filed with the Interstate Commerce Commission and, after due notice, hearings thereon were held by the Commission on August 5-7, 1935, June 16, and September 20, 1937. At the hearings in August, 1935, the debtor presented certain amendments to its plan. The Interstate Commerce Commission, on September 24, 1937, entered its order reopening the proceedings for further hearings, which order provided that any plan to be considered at said hearings should be filed on or before January 10, 1938. On said date a plan was filed by a group of institutional investors, holders of securities of the debt- or and other corporations involved in these proceedings, in an aggregate amount of $81,731,200. That plan was amended on January 24, 1938, by a modified plan filed by the same group. Certain modifications to that plan were proposed by the debtor on February 1, 1938. Pursuant to notice, further hearings began before the Commission, upon that plan and other plans theretofore filed, on the first day of February, 1938, the hearing continuing until February 4, 1938. Hearing was resumed on March 21, 1938, and continued through March 22, 1938, on which date hearings were finally closed. In addition to the debtor and the institutional investors, various parties and intervenors participated in the hearings had before the Commission, including mortgage trustees, committees, groups and individuals. The names and interests of those' participating are shown in the report of the Commission to which reference is hereinafter made. Briefs were filed by various parties and intervenors. On November 5, 1938, the Commission’s Examiner issued a proposed report as to a plan of reorganization for the debtor’s property. Thereafter, exceptions to the proposed report and briefs in support thereof, and later, briefs in reply thereto, were filed by various parties and intervenors. Oral arguments were held before the entire Commission on April 12, 1939. Subsequent to the hearings and the issuance of the Examiner’s report, a protective committee for the holders of preferred stock filed a petition requesting that the proceeding be reopened for the filing of a plan based upon a proposed consolidation of the debtor’s properties with those of the Chicago and North Western Railway Company. A similar petition was filed in the North Western proceedings by a protective committee for the holders of common stock of that company. After hearing oral arguments on the questions involved, Division 4 of the Commission denied both petitions on January 19, 1939. The Commission filed and issued its report and order on February 12, 1940, approving a plan of reorganization for the debtor. Thereafter various petitions for modification of the plan so approved were filed on behalf of numerous parties and intervenors and on June 4, 1940, the Commission filed and issued a supplemental report and order wherein, after consideration of the matters presented in the various petitions for modification of the plan initially approved, the Commission modified the plan in certain respects and in its supplemental order of June 4, 1940, revoked and superseded the prior order of February 12, 1940, and set out and approved a modified plan of reorganization of the debtor. Said reports and orders were duly certified to this court. On April 26, 1940, the court made an order requiring all claims against the debt- or’s estate for the allowance of expenses or compensation for ■ services incurred or rendered up to May 15, 1940, in connection with the reorganization proceedings, or plan to be filed on or before May. 31, 1940, and directing that notice be given. Notice was given as required in said order and thereafter various claims were filed and a hearing was had thereon before the Commission’s Examiner at Brooklyn, New; York, on July 15-19, 1940, and the Commission, on October 2, 1940, made its report fixing maximum limits for allowances to’be made with reference to the claims filed, which report was duly certified to this court. On June 21, 1940, the court made an order fixing September 4, 1940, as the date for hearing all objections to the modified plan of reorganization as set out in the Commission’s supplemental order of June 4, 1940, and all claims for equitable treatment as well as all claims for allowances of expenses or fees incident to the reorganization proceedings and the plan and requiring all objections to said plan and claims for equitable treatment to be filed on or before the first day of August, 1940,, and briefs in support thereof to be filed on or before the 20th day of August, 1940, and directing notice to be given. Notice was given as required by the order and various objections and claims for equitable treatment, all of which will be hereinafter dealt with, were filed. The hearing upon the plan was begun on September 4, 1940, and was concluded on September 13, 1940, on which date the matter was continued until October 21, 1940, for consideration of allowances for fees and expenses, the maximum allowances not having been fixed by the Commission. It was agreed by all parties in interest that the matter of said allowances should be submitted to the court upon the record made before the Commission’s Examiner, without the taking of further testimony. The Commission having filed its report fixing maximum limits for allowances as above recited, the said modified plan as well as allowances to be made for the period covered" by the respective claims thus come before the court for consideration. Description of Property. The debtor’s property embraces a system of railroad extending from Chicago to Seattle, Tacoma and other Puget Sound points with lines extending to Kansas City, Missouri, Omaha, Nebraska, Rapid City, South Dakota, Fargo, North Dakota, Champion and Ontonagon, Michigan, Oglesby, Illinois, Westport, Indiana, and other points. As shown by the 1939 Annual Report to Stockholders, the system includes 9,739.07 miles of solely owned road, 170.91 miles of jointly owned road, 332.68 miles of leased lines and 659.25 miles operated under trackage rights, making a total of 10,901.91 miles of road; also, additional main tracks aggregating 1,224.10 miles and yard tracks and sidings aggregating 4,186.38 miles, making a grand total for all tracks of 16,312.39 miles, together with rolling stock, equipment, terminals and other facilities and properties. The lines east of Mobridge, South Dakota, are commonly referred to as the eastern lines and those west of that point are known as the western lines. These latter lines were opened for through traffic in 1909, and include a small amount of line formerly owned by the Bellingham Bay & British Columbia Railroad Company extending from Bellingham to Glacier, with branches to Lynden and Kulshan, in the State of Washington. The eastern lines include the lines formerly owned by the Milwaukee and Northern Railway Company extending from North Milwaukee, Wisconsin, through Green Bay, Wisconsin, with a branch to Appleton, to Champion and Ontonagon, Michigan, via Channing, and a branch to Menominee, Michigan, referred to in these proceedings as the northern lines. They include also the line formerly owned by the Chicago, Milwaukee & Gary Railway Company extending from Delmar to Joliet, from Aurora to Kirkland, and from Camp Grant to Rockford, all in the State of Illinois, and referred to in these proceedings as the Gary, and the Terre Haute lines, hereinafter described. The leased lines are owned by Chicago, Terre Haute & Southeastern Railway Company, extend from Chicago Heights, Illinois, to Westport, Sullivan and Oolitic, Indiana, and include the lines formerly owned by the Bedford Belt Railway Company and the Southern Indiana Railway Company. Those lines are collectively referred to in these proceedings as the Terre Haute and are leased to the debtor for a term of 999 years from July 1, 1921, the rental reserved being a sum equal to the corporate expenses of the lessor, not exceeding $12,000 per year, taxes, sums owing by the lessor under leases and trackage agreements and an amount equal to the interest on the bonds outstanding, or to be issued by the lessor pursuant to the terms of the lease, against the Terre Haute property. The lessee further agreed to assume the payment of the principal of said bonds. The lease contains a provision that at the end of its term, or upon earlier termination, the lessee shall surrender the leased property to the lessor in good order and condition, ordinary wear and tear excepted, with such additions, alterations, betterments, improvements and extensions as shall have been made thereto, frfee and clear of all liens and encumbrances except those created by the lessor prior to the date of the lease or subsequently thereto pursuant to the provisions thereof, and upon payment by the lessor to the lessee of the then existing fair value of all such additions, alterations, betterments and improvements, including rolling stock and equipment, and extensions, the cost of which shall not be represented by any then outstanding bond or other evidence of indebtedness made or issued by the lessor and secured by a lien upon the leased property, and the entire amount expended by the lessee, but without interest thereon, under the terms of the lease to pay off and discharge the principal of all or any of the bonds of the lessor, or of obligations representing any extension or extensions, renewal or renewals or any refunding or refundings of the whole or any part of said bonds, provided that the lessor shall not, in so doing, be required to pay any sum in excess of the then existing fair value of the leased property. According to the Report of the Bureau of Valuation, of the Interstate Commerce Commission, on the elements of value of the system, as of December 31, 1935, the cost of reproduction of the system, exclusive of the Terre Haute, less depreciation, together with the value of lands and rights and the allowance for working capital, was $632,327,582 and the corresponding figure for the Terre Haute was $20,680,114. Outstanding Obligations. The existing mortgages constituting liens upon the property of the debtor are fully set forth in Exhibit No. 73 before the Interstate Commerce Commission but for the purposes of this discussion the following statements will suffice: The Milwaukee and Northern Railroad Company first mortgage is a first lien upon the northern lines between North Milwaukee and Green Bay, Wisconsin. There are outstanding under it bonds in the hands of the public in the aggregate principal amount of $2,117,000 and $38,000, principal amount, owned by the debtor and pledged under the first and refunding mortgage of the debtor. The Milwaukee and Northern Railroad Company consolidated mortgage is a second mortgage upon the same lines upon which the Milwaukee and Northern Railroad Company first mortgage is a first mortgage and is a first mortgage upon the portion of the northern lines extending from Green Bay, Wisconsin, northward. There are outstanding under it bonds in the hands of the public in the aggregate principal amount of $5,072,000 and $20,000, principal amount, owned by the debtor and likewise pledged under debtor’s first and refunding mortgage. The Chicago, Milwaukee and Gary Railway Company first mortgage is a first lien upon the Gary line. There are outstanding under it bonds in the hands of the public in the aggregate principal amount of $3,000,000 and $2,700,000, principal amount, owned by the debtor and pledged under debtor’s first and refunding mortgage. The Bellingham Bay and British Columbia Railroad Company first mortgage is a first lien upon the Bellingham Bay and British Columbia Railroad above described and secures bonds in the aggregate principal amount of $301,000, all of which are owned by the debtor and pledged as part security for loan from Reconstruction Finance Corporation to the debtor. Four mortgages, in addition to the mortgages of the debtor hereinafter referred to, affect the Terre Haute properties. The Bedford Belt Railway Company first mortgage is a first lien upon the portion of the Terre Haute lines extending from Bedford to Oolitic, Indiana, a distance of 4.66 miles. Under that mortgage there are outstanding in the hands of the public bonds in the aggregate principal amount of $250,000 and $100,000, principal amount, pledged with the trustee of Chicago, Terre Haute and Southeastern Railway Company first and refunding mortgage. The Southern Indiana Railway Company first mortgage is a first lien upon the portion of the Terre Haute Lines extending from the Illinois-Indiana State Line, near West Dana, to Belt Junction and from Terre Haute to Westport, together with certain branch lines, and a second lien upon the line covered by the first lien of The Bedford Belt Railway Company. Under that mortgage there are outstanding in the hands of the public bonds in the aggregate principal amount of $7,287,000. The Chicago, Terre Haute and Southeastern Railway Company first and refunding mortgage is a first lien upon the portion of the Terre Haute lines extending from Chicago Heights to the Illinois-Indiana State Line, a second lien upon the properties subject to the first lien of the Southern Indiana Railway Company first mortgage, and a third lien upon the property subject to the first lien of The Bedford Belt Railway Company first mortgage. There are outstanding under the Chicago, Terre Haute and Southeastern Railway Company first and refunding mortgage in the hands of the public bonds in the aggregate principal amount of $8,056,000 and $1,515,000, principal amount, owned by the debtor and pledged under debtor’s first and refunding mortgage, and $2,000, principal amount, held in the treasury of the issuing company. The Chicago, Terre Haute and Southeastern Railway Company income mortgage covers the same property as the Chicago, Terre Haute and Southeastern Railway Company first and refunding mortgage but is junior to that mortgage and to the Southern Indiana Railway Company first mortgage and the Bedford Belt Railway Company first mortgage. There are outstanding under this mortgage bonds in the hands of the public in the aggregate principal amount of $6,336,-000 and $164,000, principal amount, are held in the treasury of the Chicago, Terre Haute & Southeastern Railway Company. The Chicago, Milwaukee & St. Paul Railway Company general mortgage was left undisturbed by the reorganization of 1928 and is a first lien upon the eastern lines with the exception of the northern lines, the Gary and the Terre Haute and except also that the status of certain separate lines referred to in the record as seventeen pieces of lines east is in dispute as to whether or not the lien of the general mortgage or of debtor’s first and refunding mortgage is prior. There are outstanding under the general mortgage bonds in the hands of the public in the aggregate principal amount of $138,788,000 and $11,-212,000, principal amount, owned by the debtor and pledged with the Reconstruction Finance Corporation as security for loans to the debtor. Subject to the Bellingham Bay and British Columbia Railroad Company first mortgage, above referred to, the debtor’s first and refunding mortgage is a first lien upon the western lines and is also a second lien upon the lines oil which the general mortgage is a first lien and a lien upon the northern lines and the Gary junior to Milwaukee and Northern Railroad Company first mortgage, Milwaukee and Northern Railroad Company consolidated mortgage and Chicago, Milwaukee and Gary Railway Company first mortgage, and is likewise a lien upon the Terre Haute lease. There were issued under debtor’s first and refunding mortgage bonds in the aggregate principal amount of $9,866,000, all of which are owned by the debtor and of which $8,-665,000, principal amount, are pledged as collateral for a loan to the debtor from Reconstruction Finance Corporation, $258,000, principal amount, were pledged with the trustee under equipment trust, Series M, and $943,000, principal amount, are held in the treasury of the trust estate. Debtor’s fifty year mortgage due February 1, 1975, covers the same property as is covered by the debtor’s first and refunding mortgage and is junior in lien to that mortgage. There were issued thereunder bonds in the aggregate principal amount of $106,-395,096, all of which are outstanding in the hands of the public with the exception of $426,317, principal amount as of June 30, 1935, held for issue of securities not yet presented for exchange under the reorganization of 1928. Debtor’s convertible adjustment mortgage covers the same property as is covered by the first and refunding mortgage and the fifty year mortgage and is junior as to lien to both of those mortgages. There were issued under debtor’s convertible adjustment mortgage $182,873,693, principal amount, of bonds, of which amount all are outstanding in the hands of the public except $152,487, principal amount, as of June 30, 1935, which are held for exchange for securities not presented under the plan of reorganization of 1928. In addition to the bonds, there were outstanding as shown by the Revised Appendix attached to the supplemental report of the Interstate Commerce Commission of June 4, 1940, equipment obligations in the principal amount $33,322,999. This amount as of August 15, 1940, as shown by Exhibit No. 7 introduced at the hearing before this court, was reduced to $32,654,649. In addition, loans from the Reconstruction Finance Corporation, as shown in said appendix, amounted to $12,920,463, which amount the records in this proceeding indicate has been reduced by the amount of $290,000, paid in January, 1940. In addition, said appendix shows an outstanding note of the trustees to Continental Illinois National Bank and Trust Company of Chicago amounting to $1,184,000. The record does not show the extent to which this has been paid. Reports of the master filed and approved by this court show unsecured claims to date allowed in the total amount of $747,319.89, and claims given priorities amounting to $55,468.39. In addition, there is outstanding preferred stock of the debtor in the principal amount of $119,307,300 and 1,174,060 shares of common stock of no par value. Capitalization and Fixed Charges Approved by Commission. A tabulated statement, showing the existing obligations and stock of the debtor and the distribution of new securities under the plan approved and giving a summary of the plan, is attached to the supplemental report of the Commission dated June 4, 1940, and is designated as Revised Appendix. A copy thereof is attached hereto, marked “Exhibit A”, and made a part hereof. This exhibit does not reflect payments, adjustments and charges made subsequent to its preparation which have been referred to in the foregoing discussion. A correction has been made in the exhibit in order to set out correctly the designation of the last two series of general mortgage bonds as “Series E” and “Series F” instead of “Series D” and “Series E” which latter designation was erroneous since there is no “Series D” outstanding. The exhibit likewise does not include obligations represented by guaranties of and assumption of liability with reference to certain terminal and other bonds of companies other than the debtor. These are referred to in the Commission’s report and discussion concerning them is not essential to a determination of the matter in hand. After a consideration of the record, which covers over 1600 pages of evidence and includes 219 exhibits, and having before it evidence in respect to all proper elements as to'value, valuation reports prepared by the Bureau of Valuation, evidence as to book value, past and present earnings of the property, estimates of future earnings presented by the debtor and others and various other basic information bearing upon the question of future earnings, the Commission states that, considering the past and prospective earnings of the debt- or and all other relevant facts and the public interest, it is of the opinion and finds that the total capitalization of the new company should not exceed approximately $108,780,470 of fixed interest debt, $115,-257,480 of contingent interest debt, $111,-347,846 of preferred stock, par value $100, and 2,131,475% shares of common stock having no par value. The maximum capitalization so fixed by the Commission was arrived at by including $15,350,300, principal amount, of Terre Haute bonds, being the portion representing fixed interest as treated under the plan, and $6,578,700, principal amount, of Terre Haute bonds, being the portion representing contingent interest as treated under the plan. Taking the common stock at $100 per share, the total maximum capitalization approved by the Commission is $548,533,321. The total fixed interest debt requires an annual charge of $4,269,654. The plan provides a mandatory additions and betterments fund in an annual amount of $2,500,000, cumulative for one year. Annual contingent interest charges amount to $5,219,480. The annual sinking fund requirement is approximately $543,394. The total charges ahead of dividends under the plan amount to $12,532,528 and an additional discretionary additions and betterments fund is to be provided out of available net income remaining after the payment in full of contingent interest on the general mortgage series “A” bonds of the new company and the contingent interest on the Terre Haute bonds, it being provided that the total amount so set aside for an income period shall not exceed $5,000,000 or 4 per cent, of railway operating revenues, whichever amount is greater, less any amount applied out of the reserve and retirement fund for the income period for capital expenditures other than payments of equipment obligations and payments on account of new equipment. If the maximum discretionary additions and betterments fund is provided, there would be an additional $2,500,000 ahead of dividends. Those Supporting and Objecting to Plan. The plan so approved by the Commission is supported by the group of institutional investors, the Mutual Savings Bank group, the Reconstruction Finance Corporation and the trustee under the Milwaukee and Northern Railroad Company mortgages upon the terms stated at the hearings. Counsel for the trustees also stated that, with certain corrections which could be made within the framework of the plan, the trustees felt that the plan, in the light of their knowledge of and experience in the operation of the property, was feasible. Objections to the plan were filed by the debtor, the protective committee for preferred stockholders, the trustee under the general mortgage, the trustees of Princeton University and other holders of general mortgage bonds, the trustees under the fifty year mortgage and .the protective committee for holders of fifty year mortgage bonds, the trustees under debtor’s convertible adjustment mortgage, Israel Abrams and others, holders of adjustment mortgage bonds, the independent committee for the protection of bondholders, Imperial Trust Company and others, holders of Milwaukee and Northern Consolidated Mortgage bonds, Anglo-Continentale Treuhand, A. G., holders of Milwaukee and Northern first mortgage and consolidated mortgage bonds, trustees under the Gary mortgage and by various Terre Haute interests, including the Chicago, Terre Haute & Southeastern Railway Company, a committee for the protection of holders of Terre Haute bonds, Terre Haute income mortgage bondholders’ committee, Massachusetts Mutual Life Insurance Company and other holders of Terre Haute bonds, Union Labor Life Insurance Company, also a holder of'Terre Haute bonds, and the trustees under the several Terre Haute mortgages. Objections requesting, certain changes in the plan with reference to certain claims were filed by the Pennsylvania Railroad Company and the New York Central Railroad Company and an objection was also filed on behalf of Ida E. Herschensohn and Herbert L. Herschensohn requesting preferred treatment for personal injury claims. Full hearing, both orally and by brief, was granted to all objectors. The questions raised by the objections, insofar as necessary for a determination of the matter under consideration, will be considered in the discussion which follows. Function of Commission and Court. Subsection b of Section 77 provides: “(b) A plan of reorganization within the meaning of this section (1) shall include provisions mo'difying 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 süch 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.” After a plan is approved and certified by the Commission to the court and a hearing had thereon, as provided in the statute, the following provision in subsection e of Section 77 states the prerequisites to approval by the court: “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.” It is apparent that it was intended by the law that the bankruptcy court and the ‘Interstate Commerce Commission should co-operate to the end that a fair and equitable plan of reorganization might be provided. ' Such purpose has been declared in a recent decision of the Supreme Court of the United States in Warren v. Palmer, 310 U.S. 132, 60 S.Ct. 865, 84 L.Ed. 1118. That court has not yet determined just what weight should be given by the court to the findings, and conclusions of the Commission. Clearly, the court has power to correct errors of law into which the Commission may have fallen and to set aside findings of fact which are not supported by the record or conclusions which violate constitutional rights. On the other hand, the initial determination of the questions bearing upon the soundness and reasonableness of a plan of reorganization is the responsibility of the Commission which is peculiarly fitted for the consideration of such questions and its findings and conclusions, made and reached after extended hearings and exhaustive study, as in this case, should be given great weight. In these cases, the amount and character of the capitalization of the reorganized company, the fixed charges, and the distribution of new securities are all questions of prime importance, and their determination affects the public interest. With these principles in mind, let us consider the objections which have been presented to this plan. Objections of Debtor. The debtor objects, first of all, to the effective date of the plan, claiming that under the law the effective date must be the date when these proceedings were initiated and that interest accruing since that date should not be added in determining the amounts of claims of any creditors. The plan, for the purpose of treatment, includes interest to the effective date, January 1, 1939, in the case of all mortgage claimants except the holders of adjustment mortgage bonds as to whom interest is included to June 29, 1935. ' ' There has been a recent change of counsel for the debtor, but it should be noted that the debtor, in its proposed modifications of the plan of the institutional group, approved January 1, 1939, as the effective date. The practice followed by the Commission in this case.is similar to that followed in other reorganization cases which have come before it and it would seem that to date back the plan in the manner suggested would require a disregard by the Commission of the factual situation existing at the time the provisions of the plan were determined upon. Not only is'there no requirement in Section 77 that the effective date be coincident with the date of filing of the petition, but subsection e permits the inference that it was contemplated that the effective date should be the date to which the findings of the Commission relate. That subsection, in dealing with the exclusion of stockholders, states, as one of the prerequisites for such exclusion, that the Commission shall have found, and the judge shall have affirmed the finding, that at the time of the finding, the equity of the stockholders has no value. Moreover, such proposed relation back and the consequent disallowance of interest are contrary to the uniform rule applying in insolvency proceedings generally that, in the case of secured creditors, unpaid interest accruing during the proceedings must be included in the claim. Ticonic National Bank v. Sprague, 303 U.S. 406, 58 S.Ct. 612, 82 L.Ed. 926; In re Barclay Park Corporation, 2 Cir., 90 F.2d 595; Coder v. Arts, 213 U.S. 223, 29 S.Ct. 436, 53 L.Ed. 772, 16 Ann.Cas. 1008. The principle was approved by Judge Woodward in the proceeding under Section 77 of the Chicago Great Western Railroad Company, D. C., 29 F.Supp. 149, 161, and by Judge Barnes in the recent proceedings of In re Chicago & North Western Railway Company, D. C., 35 F.Supp. 230. The Commission, in fixing the effective date and in the treatment of interest accruals, it is believed proceeded in the manner contemplated by the act and in accordance with the law applicable in such proceedings. The debtor further contends that the plan is unfair and invalid because of its failure to give recognition to the stockholders. In this contention the debtor is supported by the committee for the preferred stockholders. It is contended that in order to determine whether. or not there is an equity for the stockholders, there must be a valuation of the property and it is claimed that there has been no such valuation. It should be noted that valuation is not made mandatory by the statute. Subsection e requires the Commission to determine value if it shall be necessary. Notwithstanding the fact that this proceeding has been pending for several years and there have been various hearings before the Commission and the several parties and intervenors have been represented by counsel eminent in practice of this character, no one appears to have suggested that any specific finding of value should be. made or that any elements affecting value, other than those produced, should be considered by the Commission. Moreover, the Commission has in its reports made all findings as to value which would appear to be necessary for the purposes of this proceeding. Ini the first place, it has fixed a maximum permissible capitalization of $548,533,321 as contrasted with an existing .debt, inclusive of interest to January 1, 1939, in excess of $626,000,-000. The fixing of this maximum capitalization necessarily involves a conclusion by the Commission that there is no equity for the stockholders. In addition to this, the Commission makes the following specific finding: “There is no evidence whatever to indicate that a recovery of the earning power of 1928-1929 is reasonably probable, and we regard it as a remote possibility only which may not be utilized to support a finding that the debtor’s stockholders have an equity. In view of the. earnings situation it would be improper to give controlling weight to the fact that the indicated reproduction- cost value of the property exceeds the amount of the debt. We find that the equity of the holders of the debtor’s preferred stock and its common stock has no valúe, and the holders of claims in. classes 24 and 25, therefore, are not entitled to participate in this plan.” Counsel seem to .labor under the impression that value for the purpose of these proceedings means only physical value as represented by original cost or reproduction cost with proper adjustment for depreciation, additions and betterments. Such elements were, of course, considered by the Commission as shown by its report but those elements are not to be exclusively considered and the value with.which we are concerned is not merely physical value or. value for rate-making purposes, but value in terms of furnishing support for a sound and workable financial structure. But in whatever sense the term value is employed, there is adequate evidence in this record to show that thorough consideration was given to all elements -of value and that the conclusion of the Commission was reached in the light of such consideration. Contrary to the contention of the -debtor, the Commission was charged with the duty, not only of determining the amount of fixed interest debt of the new company, but also the contingent interest debt and it was in the public interest that the contingent interest debt be such that, as stated by the Commission, the total debt should bear a proper relation to the total capitalization and such as to make the payment of contingent interest a probability and of dividends a reasonable prospect, at least on the preferred stock. The record shows that no dividends have been paid upon the stock of the debtor or its predecessor since 1917. Even in the ten-year period ending with 1930, which included the peak years of 1928' and 1929, income available for interest fell far short of the amount needed to service the funded debt which was less -than on January 1, 1939, the effective date of the plan. This condition has been brought about not entirely by the financial depression but has been contributed to by many factors such as increased costs, taxes, wages, competition in other forms of transportation and the like. In no year since 1930 has the income available for interest been equal to the amount required under the proposed plan to meet charges ahead of dividends. The objectors do not dispute any of the facts embodied in the elements considered by the Commission in reaching its conclusions but the contention is made that the outlook for the future is bright and the prospect for increased earnings promising and this situation, it is claimed, justifies a finding of some value for the equity owners. An expert was called who voiced this view and expressed at some length his opinion as to future earnings. That witness expressed the view that the debtor’s properties were efficiently operated and were in good physical condition and that he felt, in the light of the present tendencies, that it was not too much to expect that a time might be reached, some time in the future, when the railroad might earn a sufficient amount to have available for the payment of interest $20,300,000. That time was referred to as the future normal year but the witness was unwilling even to venture a guess when such time might arrive. Moreover, if such an amount were earned and available for the payment of interest, the capitalization of this amount at 4 per cent, would produce slightly over $500,000,000 which is a less amount than the permissible capitalization fixed by the Commission. Under the plan approved by the Commission, if $20,300,000 were available for the payment of interest, there would only be enough to pay ^dividends on the new preferred stock and none on the new common, assuming the additional amount for additions and betterments contemplated by the plan were authorized by the board of directors, and the preferred stock under the plan represents the interests of present bondholders. If applied to the existing indebtedness, including unpaid accrued interest to January 1, 1939, such an amount would fall short by some $9,000,000 of paying interest at the average existing rate carried by the obligations of the debtor. The debtor also appears. to agree with the view expressed by the trustee under the general mortgage that the provision for the mandatory additions and betterments fund of $2,500,000 should be eliminated. This question will be more fully discussed in connection with the objections of the general mortgage trustee but it is noted that earlier in the proceedings the debtor was a strong advocate for an adequate additions and betterments fund, insisting that it should be maintained at a minimum of $5,-000,000 with a mandatory annual payment of $2,500,000 and an additional discretionary payment sufficient to bring the total up to $5,000,000 or 4 per cent, of total revenues. The debtor has filed, since the close of the hearing before the court, a so-called closing .argument in which there is set forth what amounts to a proposed plan of reorganization. At the time of the hearing before the court counsel for the debtor offered in evidence what was referred to as an outline .of a proposed capitalization, but upon objection it was excluded. It does not appear whether or not the proposed plan is the same as the material submitted at the hearing, but, in any event, no such plan was submitted to the Commission, and, of course, is not before the court for consideration. Insofar as it may be used as argument on behalf of the debtor’s position, it appears to add nothing new to the argument heretofore analyzed.- The Commission points out that the fixed interest .charges under the capitalization provided In the plan, amounting to $4,269,-654, together with the mandatory additions and betterments fund of $2,500,000, making a total of $6,769,654, would be covered about 1.16 times by the average earnings of the period from 1931 to 1935 and 1.18 times for the period from 1932 to 1936. It is pointed out that in the years 1932, 1935, and 1938 such an amount was not earned and the Commission concludes that “between the clear demands of a conservative policy in the present reorganization and the claims and rights of first lien bondholders, we conclude that the limitation of fixed charges of the system at approximately $4,269,654 a year is reasonable and proper.” The court feels that the Commission, in determining the maximum permissible capitalization and fixed charges which the debtor could reasonably be expected to meet, and in concluding that the present stocks of the debtor are without value, gave adequate consideration to all elements which should be considered in determining such questions and that the Commission’s conclusions as to those matters are sound. The same should be said as to- the effective date and the inclusion, in the case of fixed interest bonds, of interest- accruing up to that date. Having considered the matter of capitalization and fixed charges, the remaining questions relate in the main to distribution. All agree that the equipment obligations of the debtor should remain undisturbed and be assumed by the new company. As to the loans from the Reconstruction Finance Corporation, it is not questioned that the value of the assets pledged to secure these loans far exceeds the amount due and, the loans being fully secured, no one objects to the treatment accorded these obligations, namely: the issuance of first mortgage bonds for 100 per cent, of the balance due after applying in reduction of the loans the cash on deposit in the hands of the trustees under debtor’s first and refunding mortgage bonds which are pledged to secure the loans. The Terre Haute Objections. Of prime importance in considering the fixed and contingent obligations of the new company is the question presented by the Terre Haute. The Terre Haute lines have already been described. As shown by the report, the reproduction value less depreciation was $20,680,114 as of December 31, 1935. The bonds outstanding in the hands of the public against the properties aggregate $21,929,000, principal amount, exclusive of $1,515,000, principal amount, owned by the debtor. Under the lease, to which reference has already been made, the debtor, by way of rental, is required to pay interest on the Terre Haute bonds representing an annual amount of $1,023,580. The obligation to pay interest, so far as the income bonds of the Terre Haute are concerned, is represented by an endorsement upon the bonds, which endorsement, however, specifically refers to the lease and makes it clear that the interest so paid represents a portion of the rental. The obligation to pay interest on the bonds other than the income bonds is found in the lease itself. In addition, the lease provides that the debtor shall pay the principal of the Terre Haute bonds, but attention has already been called to the provision that, at the end of the term, the lessor, in order to repossess itself of the leased property, is required to repay the principal sums so paid by the lessee. The stock of the Terre Haute consists of 41,729.95 shares of which the debtor owns 40,470.95 shares, or approximately 97 per cent. It is apparent that the interest of the Terre Haute, as such, is essentially a bondholders’ interest. If the principal and interest of the' Terre Haute bonds are paid, then the interest of that company terminates. The Terre Haute is not in bankruptcy and the Commission concluded that its financial structure and the rights of its creditors were not subject to the Commission’s jurisdiction and that the Terre Haute bondholders were not such creditors of the debtor as to be bound by a confirmed plan of reorganization which divested them of their existing liens upon the Terre Haute properties. The Commission recognized that it was desirable that the operation of the Terre Haute properties by the debtor continue but concluded that, in view of the maximum limits set forth in the plan as to capitalization and fixed charges, it was necessary to make certain modifications in the Terre Haute lease and the obligations of the debtor thereunder. The plan provides that there shall be submitted to the Terre Haute bondholders certain provisions which include a proposal to extend their bonds, waive equipment vacancies and reduce the rate of interest on all of their issues, except the Southern Indiana Railway Company first mortgage bonds, from 5 per cent, to 4^4 per cent., the interest on the Southern Indiana bonds to be increased from 4 per cent to 4% per cent., all interest to be fixed to the extent of 2.75 per cent, and contingent upon system earnings as to 1.5 per cent. A new lease is proposed embodying these modifications. The plan provides that if these provisions are not accepted by substantially all of the Terre Haute bondholders, the existing lease shall be rejected as of the date of the determination by the court that the provisions have not been accepted, without prejudice to either the negotiation of a new lease or a consolidation of the Terre Haute properties with those of the new company on terms subject to the Commission’s approval. The plan contemplates that the claim for damages resulting from the rejection of the lease shall constitute an unsecured claim against the debtor to be satisfied under the plan by the issuance of common stock in accordance with the plan. The Terre Haute lease was made in 1921. The principal advantage to the debtor resulted from the fact that it made available to the debtor a coal supply for a large portion of its eastern lines. The exhibits introduced in evidence before the Commission and before the court showing an allocation of earnings to the Terre Haute lines upon the basis followed by the accountants in the preparation of the exhibits, disclose that the earnings so allocated to these lines are, and for some years have been, substantially in excess of the rental required to be paid in the form of interest on the outstanding bonds. This is true whether the exhibits are made up upon the basis of allowing tariff rates or out-of-pocket costs for the hauling of company coal, though, of course, the use of tariff rates shows substantially greater earnings. The Terre Haute interests contend that the plan is inequitable and unfair because the relationship between the debtor and the Terre Haute is an arm’s length relationship of lessor and lessee, the lease is profitable to the lessor and there is no reason for requiring the Terre Haute to make any sacrifice for the purpose of helping out the deficiency in earnings of the debtor. It should be stated that' their principal objection is to any reduction or modification in the interest rate. No serious objection was voiced to the extension of bonds or to the waiver of equipment deficiencies. As to the latter, their position is easily understandable in the light of the fact that the equity in the property is owned' by the debtor and there is little probability of its return to the lessor at the end of the period. They also question the right of the Commission or the court to provide in the plan for the disaffirmance of a profitable lease, the contention being that the right to dis-affirm runs only to those obligations which constitute a burden upon the debtor. It is further contended that if said provisions are not accepted by the Terre Haute interests, and it is asserted by them that they will not be accepted, and the lease is disaffirmed, then the disaffirmance will relate to the time of the filing pi the petition in these proceedings and the trustees will be required to account for the earnings since said date which they assert would amount to several million dollars for which no provision is made in the plan. Finally they claim that the Terre Haute bondholders will become creditors if the lease is disaffirmed and as such will be entitled to participate in the voting upon the plan, and that it follows that, if the lease is to be rejected, definite decision to that effect must be made prior to the referendum upon the plan for, otherwise, those injured by the rejection will be deprived of the right to vote their resulting claims -upon the question of acceptance or rejection of the plan, thereby rendering the vote invalid. It should be stated that the Terre Haute situation presents a troublesome question but, after all, the Commission and the court are faced with the duty of passing upon the reasonableness and fairness of a plan from the standpoint of all parties In interest and the public, and while they may not have jurisdiction to deal directly' with the interests of the Terre Haute bondholders, they do have not only the right, but the duty, in the formulation of such plan, to deal with the property of the ■debtor, including its rights as lessee, or otherwise. The evidence introduced shows that the value of the Terre Haute lease to the Debt- or results in the main from two things. First, the provision of an available coal supply, already referred to, and, second, the fact that the demand for a large supply of railroad coal from mines located upon the Terre Haute lines makes it possible to keep those mines open and enables them to produce coal to be marketed commercially, thus providing substantial .tonnage moving over debtor lines to Chicago and points north. Revenue from such tonnage and the allowance made in the computations of earnings for the transportation of Company coal constitute the bulk of the earnings shown for the Terre Haute lines. There is also a substantial amount derived from the longer haul by the debtor of property moving to and from -eastern lines by reason of the fact that the points of interchange under debtor operation can be located upon the Terre Haute line east of Chicago thus increasing the haul of the debtor lines. This item •of revenue results wholly from the fact that the Terre Haute is operated by the debtor and the other two items, which are the big items, likewise result from the fact that the rest of the debtor system is maintained as a going railroad using coal obtained on the Terre Haute line • and transporting from those- mines, which’ it helps to keep open, commercial coal'to various points on its eastern lines. The accounting methods used in allocating earnings to the Terre Haute do not reflect or attempt to measure the contribution of the rest of the debtor system to the Terre Haute properties. The report of the Commission, referred to at the hearing, in Investigation of Chicago, Milwaukee & St. Paul Railway Company, 131 I.C.C. 615, points out that prior to the operation of the Terre Haute properties by the debtor, or its predecessor, the Terre Haute was not earning its interest on its income bonds and its property is referred to in that report as a distress property. It is claimed that the rapid increase in the use of diesel power will materially decrease the earnings of the Terre Haute in the future in that the amount of coal used in the operation of the debtor will be greatly reduced. Some evidence was introduced directed to this point. There was also evidence indicating additional switching charges in a substantial amount would result if the Terre Haute property were operated independently from the debtor property. It is clear from the record that from the standpoint of the Terre Haute, some arrangement for its operation by the debtor is extremely desirable. With a limitation upon the fixed interest debt as set forth in the plan, the Commission found that, after making provision for the equipment obligations and the Reconstruction Finance Corporation loans and providing for the Milwaukee and Northern bonds, as to none of which is it contended that too favorable treatment is given, the amount of fixed interest obligations remaining for distribution was such that if the Terre Haute bonds -were left wholly undisturbed, they would constitute 27 per cent of the total amount of new fixed interest debt, exclusive' of equipment obligations, and there would not be left for general mortgage bondholders fixed interest bonds in more than double the amount of the existing Terre Haute bonds, whereas, the mileage represented by the general mortgage is eighteen times that of the Terre Haute and the valuation, seventeen times. When this is considered in -the light of the fact that the profitable character of the Terre Haute is dependent upon the continued operation of the rest of the system, it would seem neither to be unfair nor ' unreasonable nor inequitable that- the Terre Haute bondholders be requested to make some sacrifice in order to maintain the continued operation of both properties upon a basis reasonably assured by prospective earnings. All interests seem to feel there is reasonable prospect that the new company will earn both the fixed and' contingent charges as provided in the plan. If that happens, then the making of 1.5 per cent of interest contingent upon earnings to the same extent, as provided with regard to the payment of interest on general mortgage, series “A” bonds, will not represent a sacrifice except to the extent of three-fourths of 1 per cent in the case of the Bedford Belt Railway Company and the Chicago, Terre Haute & Southeastern Railway Company bonds. This sacrifice does not seem to be an unreasonable or inequitable one in the light of the advantage to be obtained from having the entire system 'placed upon a financial structure which can be adequately supported. The Commission had only so much cloth with which to make a suit. It would hardly have been justified in using so much of the material to make the vest that enough would not be left to provide a coat and trousers. The Terre Haute interests have suggested that the proposal of the plan is'in the nature of a threat. This hardly seems fair to the Commission which has frankly and fully stated the facts making it necessary to follow the course which was followed in preparing the plan. The Commission was faced with a difficult problem. It adopted this course, as stated in its supplemental report, as a “necessary step in order that the processes of the reorganization of the Milwaukee may not be thwarted”. The objectors rely strongly upon the showing made as to the profitable character of the Terre Haute lease. This showing, however, is entirely one of operating results based upon certain accounting methods. The report indicates that the Commission felt that in determining whether or not the lease was profitable, consideration must be given to factors other than current operating results. Many such factors are present in this case. For example, the early maturity of the Terre Haute bonds, the substantial equipment vacancies, the possibility of exhaustion of the available coal supply, the possible substitution of diesel power and other considerations which are important in determining the real character of the lease. From still another point of view, a lease shown to be profitable under the method of accounting followed might in fact constitute á burden upon the lessee. Suppose, for example, the result of the operation of the Milwaukee System were such that the total amount earned and available for payment of Terre Haute rental and interest on its own obligations was only $1,000,000 per annum which is less than the rental provided under the Terre Haute lease. To require the continuance of this lease would mean that the entire Milwaukee System of 11,000 miles would have to be operated for the sole purpose of paying rent on less than 400 miles of line. This thought is well expressed in the Commission’s report. In any event, Section 77 provides, without any qualification, the plans of reorganization may provide for the rejection of unexpired leases and executory contracts. The objectors call attention to the rule prevailing in equity receiverships that a receiver is allowed a period within which to determine whether or not he shall affirm or disaffirm existing leases and that his action relates back to the date of the institution of the proceedings. Reliance is placed upon American Brake Shoe & Foundry Company v. New York Railways, 2 Cir., 282 F. 523, and other similar cases and upon the case of Palmer v. Palmer, 2 Cir., 104 F.2d 161, which arose out of the New Haven reorganization. Examination of the authorities discloses that this rule is one designed for the protection of the receiver or the trustee. It is based on the theory that it is proper that he should have a reasonable time in which to elect to affirm or disaffirm and if he does elect to disaffirm, he should not be required to pay the rental fixed to the date of disaffirmance. As a rule, the leases which are dis-affirmed are those which are unprofitable and the cases in which the principle is announced are cases in which the earnings were less than the rental provided. The authorities seem to recognize that in a given situation there may be special equities which will afford a basis for a different result. This suggestion is made in Pennsylvania Steel Company v. New York City Railway Company, 2 Cir., 198 F. 721, and Pennsylvania Steel Company v. New York City Railway Company, 2 Cir., 225 F. 734, and the principle is approved in Westinghouse Electric Mfg. Co. v. Brooklyn Rapid Transit Co., 2 Cir., 6 F.2d 547, relied upon by the objectors. Subdivision b of Section 77 provides that the plan of reorganization may reject unexpired leases and further provides that the adoption of an unexpired lease by the trustees of the debtor shall not preclude a rejection of such lease in the plan. Subdivision c (6) of Section 77 provides that after a lease is rejected and if the lessee, with the approval of the judge, shall elect no longer to operate the leased line, it shall be the duty of the lesso