Full opinion text
HINCKS, District Judge. The New Capital Structure and the Stock Equities. In this plan, like that previously certified to the court, the Interstate Commerce Commission proposes that the total capitalization of the New Haven shall be fixed at $365,000,000. The plan, however, contemplates that the capital structure may be expended to include the new securities required to fill out the purchase price of the Old Colony and the Boston & Providence. It is not disputed that the claims of creditors, secured and unsecured, amount in the aggregate to upwards of $378,000,000. It follows that if the capitalization proposed be approved, the equity of existing stockholders, preferred ($49,036,700) and common ($157,118,600), is without value. And the Commission has so found. The cases of Ecker v. Western Pacific R. Corp., 318 U.S. 448, 63 S.Ct. 692, and Institutional Investors v. Chicago, Milwaukee, St. P. & P. R. Co., 318 U.S. 523, 63 S.Ct. 727, hold that under Section 77, Bankr.Act, 11 U.S.C.A. § 205, it is the function of the Commission, not of the court, to fix the total capitalization of the reorganized railroad and to make all determinations of value upon which the new capitalization must depend. In so doing the Commission need state only its ultimate conclusion: “To require it to go further and formalize in findings the numerous data on which it relied in the exercise of its expert, informed judgment would be to alter the statutory scheme.” Milwaukee case, 318 U.S. at page 539, 63 S.Ct. at page 737. The task of the court is not to reexamine the Commission’s finding of fact but merely to make sure that it is supported by “material evidence”, and is “in accordance with legal standards.” Western Pacific case, 318 U.S. at page 473, 63 S.Ct. at page 707. And the requirement of the Act that stockholders shall be excluded only if the Commission’s finding that the stock is without value shall be “affirmed” by the judge, means not that “an independent appraisal of the valuation which ordained their elimination” is required of the judge but only that he shall make an independent examination to ascertain whether there is “legal objection to the Commission’s use of its own valuation to determine whether particular claimants are entitled to participate” as, for example, when the priority or validity of claims are in controversy. Western Pacific case, 318 U.S. at page 479, 63 S.Ct. at page 710. I turn, therefore, to consider, first, whether the Commission’s finding is in accordance with legal standards. I suppose the “legal standards” within the purview of independent examination by the judge include the methods of procedure used by the Commission in the development of the plan which it has proposed. But there are here no objections to the proposed capitalization based upon procedural grounds. Nor can I detect at any stage of the proceedings before the Commission any deviation from the procedural requirements of the Act. In successive hearings those now objecting were given full opportunity to present evidence and to be heard. I find no violation of any legal standard of procedure. Nor does it appear that the Commission’s conclusion conflicts with any legal standard in the field of the substantive law. The Supreme Court cases cited make it abundantly plain that for purposes of fixing the capitalization of a reorganized railroad, its earning power is' the dominant factor. And the Commission states (pg. 9767) that it has indeed taken, into account “past and present earnings and prospects for the future.” ' To be sure the Commission also states that its conclusion was reached after “taking into account * * * other pertinent factors discussed” in its several' successive reports (pg. 9767) and “the improved cash position of the debtor’s estate and the reductions in secured obligations” (pg. 10,-131). Doubtless this reference .included the physical valuation of the debtor’s estate (except for its rights in the New York and Harlem) and of the debtor’s capitalizable assets which indeed received discussion in the Commission’s reports (pgs. 7930 et seq., 9762). But the reports of the Commission give no more clue as to whether its ultimate finding of value — $365,000,-000 for the entire system minus Old Colony and Boston & Providence — was based solely on the earnings factor or whether the effect of the earnings factor was somewhat modified by the impact of what the Commission called “other pertinent factors.” But this inherent uncertainty as to the precise factors upon which the ultimate finding was based is not fatal. I construe neither the Act nor the Supreme Court cases expounding the Act to mean that factors other than earnings may not lawfully be used to modify the conclusion which would be based solely on a consideration of earnings. The Commission pointed out (pg. 9765) that earnings (a term which I here use as shorthand for income available for fixed charges) for the “prospective year” (meaning average earnings as estimated in 1937 for the next five years (Exhibits 16-17)), that the average earnings in the period 1927-1938, and that the average earnings in the period 1927-1941, all if capitalized at 5% would produce a total less than $365,000,000, — the figure which earnings of $18,250,000 if similarly capitalized would produce. If the Commission concluded that, for the future, average earnings as great as $18,250,000 could not reasonably be expected, but revised upward the result indicated by a lower level of earnings to reflect the greater value of the estate on the basis of a physical valuation, the modification was in a direction favorable to present stockholders and leaves them no ground to complain that they were injured by the application of an illegal standard or method of valuation. If, instead, the Commission found (although it does not say so) that future earnings might reasonably be expected at the rate of $18,250,000 annually, the capitalization proposed was consistent with a valuation based solely on earnings in strict conformity to the policy approved in the Supreme Court cases cited. And the report of the Commission contains no finding that earnings in excess of $18,250,000 might be expected for the indefinite future. Thus whether the capitalization was based upon earnings alone, or whether a result based on earnings was modified by “other pertinent factors”, the contention that the stockholders were prejudiced by a failure to comply with legal standards is not substantiated. On analysis, the objections interposed will be seen to attack not so much the legal standard of the valuation as the exercise of the fact-finding function whereby the tendencies of a multitude of subordinate facts are assembled, correlated, weighed, and eventually merged and translated into the ultimate conclusion as to what total amount of securities consistently with the public interest the reorganized enterprise may properly be left to support. But as observed above, under the Supreme Court decisions this is a function confided exclusively to the Commission. In the field of fact, the only function of the court is to ascertain whether there is “material evidence” to support the Commission’s conclusion. I address myself now to that limited task. The record contains evidence of past earnings in the period 1927-1941, and as the Commission observed (pg. 9756) the average annual earnings for this period amounted only to $16,229,053, which if capitalized at 5% would produce a total of less than $325,000,000. It was for the Commission in the exercise of its fact-finding function to determine from all the other relevant evidence whether future earnings greater or less than an annual average of $16,000,000 might reasonably be expected. That a much higher level existed from 1927 through 1931 (pg. 7937) certainly tended to show that levels in excess of $16,000,000 might be expected in the future. And the Commission’s report showed (pg. 9764) that it had noted opinion testimony, based on future estimated conditions in New England, tending to corroborate that evidence. On the other hand, recent experience in the period from 1932 through 1940 pointed to the hazard of lower levels, at least upon the termination of war-time activities. And traffic trends unfavorable to New Haven traffic were given thoughtful consideration (pg. 7934 et seq.). In a record replete with evidence tending toward such widely separated conclusions, the only limits on the exercise of the fact-finding power are correspondingly wide. And where, as here, the conclusion reached lies well within those limits, it cannot be said that the conclusion is not supported by material evidence. In the Western Pacific case 318 U.S. at page 477, 63 S.Ct. at page 709, a similar conclusion upon a similar record was upheld in respect to bonds of the Central California Tractor Company. These general observations must control my rulings but their impact upon the specific objections raised by and in behalf of stockholders deserves brief discussion. It is objected that the Commission’s failure to appraise the value of the debtor’s perpetual rights in the New York & Harlem Railroad which give it access to the Grand Central Terminal in New York City was an error of law effective to vitiate its finding of no value in the stock equities. But as pointed out above, the Commission may have based its proposed capitalization upon earnings only. If so, the value of the debtor’s rights to this physical asset is immaterial. And even if the Commission felt that ■ the value of certain physical assets had a stimulating effect on earning capacity and hence was relevant, for present purposes, it might properly have concluded that the value of this particular asset was suitably reflected in á capitalization based upon system earnings derived, in part, from the use of that asset. In any event, the report makes it plain that the possible relevance of the item had consideration (pg. 9766). And as was suggested in an opposing brief, in such a situation it would add nothing .of substance for the Commission laboriously to ascertain the physical value asserted and then disregard it — as it properly should if it felt that earnings attributable thereto were sufficiently reflected in the proposed capitalization. Cf. Milwaukee case, 318 U.S. at page 541, 63 S.Ct. at page 738. It is objected that the Commission’s action in certain respects is arbitrary and inconsistent with positions taken in its earlier reports in these proceedings. As to this, it is only necessary to observe that it is the present task of the court not to justify a plan previously certified but no longer pending but only to determine whether the valuations inherent in the plan now before the court conform to legal standards and are supported by material evidence. The Commission, like any fact-finding tribunal, has an inherent power to reconsider and adjust its conclusions until they have become .incorporated into a final decree. Objection is made that the proposed capitalization fails suitably to reflect the higher earnings of the last two years. Although the last hearing at which evidence was taken by the Commission closed in February, 1942, this plan was not certified by the Commission until July, 1943. And the accompanying report shows that the Commission was advised of the contemporary trend in traffic levels and earnings and indeed took into account a statement of the Trustees which showed that net railway operating revenue for 1942 (on the basis of ten months of actual operations) almost doubled that for 1941. The Commission noted that these increased earnings had exceeded its earlier estimate, but expressed the opinion that “the economic conditions which made them possible” were not “of such a permanent character as to warrant increasing the total capitalization” (pg. 10132). Under the general principles discussed above this was a conclusion for the judgment of the Commission, and is not subject to reexamination by the court. In this connection, an attempt is made to differentiate the case here from those recently under consideration by the Supreme Court on the ground that the financial condition of the New Haven, its dividend-paying history, its earnings for the period immediately preceding the depression, its capacity in the last two years to pay off defaulted interest and the post-war traffic possibilities of the territory which it serves, all are factors pointing to a continuation of present high earnings to an extent not existing in the particular cases considered by the Supreme Court. But these are differences not of principle but only of degree. Here, just as in the other cases, the factors now stressed lie in the fact-finding field which is reserved to the Commission. The Commission decided that the economic conditions prevailing in a time of war, which produced the unexpected increase in 1942 earnings, were not of sufficient permanence to be treated as factors of valuation for purposes of capitalization. Thereafter, to be sure, the court admitted further evidence showing the system earnings through June, 1943. But in support of objections to the plan filed with the court, no evidence was received or offered from which it might be found that the economic conditions which produced the increased earnings of 1943 are indeed permanent. It follows that the objecting stockholders have not “carried the burden which they properly have of showing that subsequent events make necessary a rejection of the Commission’s plan.” Milwaukee case, 318 U.S. at page 544, 63 S.Ct. at page 740. And as already pointed out, it was for the Commission, not the court, to predict the post-war earnings. The Commission has found that the New Haven, whose rails are so largely paralleled by improved highways, is peculiarly vulnerable to competition' with transportation by highway, especially for its passenger traffic (page 7935 et seq.). That the volume of present traffic on the rails has been greatly stimulated by the restricted use of gasoline and the restricted supply of rubber, is obvious. The time when these restrictions will end and the effect of their removal on railroad earnings like the other relevant factors are matters for evaluation by the Commission, not requiring an independent appraisal by the court. It is suggested in behalf of stockholders that the court before approving a plan which eliminates stockholders should continue the proceedings for the time necessary to determine, presumably by actual experience, the duration of earnings attributable to economic conditions found to be temporary. But such a course subjects creditors to undeserved hardship. In any event, the course proposed is inconsistent with expedition in reorganization which is a chief objective of Section 77. Milwaukee case, 318 U.S. at page 545, 63 S.Ct. 727. The debtors suggest that I return the plan to the Commission with a recommendation that the present stock equities be found to have value and that warrants be issued to existing stockholders. But the Commission has already found that after the claims of secured creditors have been satisfied by the substitution of securities of equivalent value, the remaining equity in the entire estate will be insufficient to provide full compensation to unsecured creditors. And the explicit finding of no value in the existing stock equities is a necessary corollary. Under the circumstances, it would be officious for me to make a recommendation on a subject matter which Congress has exclusively reserved to the Commission. Having ascertained, after careful consideration of all pending objections, that the finding of values inherent in the total capitalization proposed and the finding of no value in the stock equities are supported by material evidence and are in accordance with legal standards, under the recent Supreme Court decisions I take it to be my duty, without further inquiry and without need to form any independent conclusion as to the merits of these broad issues, to approve and affirm. The Housatonic Issue. The plan proposes that the holders of these bonds, outstanding in the amount of $2,819,000, shall receive 100% of their claims, principal plus any accrued interest, in new fixed interest bonds. A protective committee of the bondholders objects to this treatment claiming that the bonds should either be paid in cash or should be left undisturbed possibly with their interest rate reduced from 5% to 4%. These bonds by their terms matured in 1937 but in view of their current earnings interest thereon as it accrued has been paid by the trustees. The extended maturity date of the new fixed-interest bonds, A. D. 2003, and their lower interest rate plainly are features less favorable. And, as the Commission noted (pg. 9772), on the basis of the average adjusted segregated earnings (for the period 1933-38) the rate of earnings on the property to be covered by the new mortgage was somewhat less than that of the Housatonics. On the other hand, the new bonds will constitute a first lien on the greater part of the system including its main lines under a mortgage which will be the backbone of a capital structure designed to withstand the impact of future stresses, whereas the Housatonic mortgage covers but a branch connection and is an appendage on a capital structure, the insufficiency of which has already been demonstrated by hard experience. And, as the Commission has pointed out, the new bonds are buttressed by a sinking fund and a capital fund, and by reason of the vastly greater size of the issue may be expected to enjoy greater marketability. After weighing these contrasted features, the Commission found that “the new fixed-interest bonds have elements .of value which compensate for any comparatively unfavorable features and constitute a fair and equitable equivalent for the Housatonic bonds.” As I construe the recent Supreme Court cases referred to above, this finding is binding on the court. The underlying facts were such as to furnish support either for the conclusion reached or for the conclusion contended for,. The conclusion adopted Was the product of the experienced judgment of the Commission. Certainly the subject matter was one of valuation: the direct issue was the equivalence between the new securities and the old. And in the Western Pacific case, 318 U.S. 472, 63 S.Ct. 707, the court said: “The function of valuation thus left to the Commission is the determination of the worth of the property valued, whether stated in dollars, in securities or otherwise. * * * Judicial reexamination was not considered desirable. None of the findings required of the judge under subsection e relate specifically to valuation. Congress apparently intended to leave the determination of valuation ‘of any property for any purpose under this section’ to the Commission. The language chosen leaves to the Commission, we think, the determination of value without the necessity of re-examination by the court, when that determination is reached with material evidence to support the conclusion and in accordance with legal standards.” Here, as already observed, there is indeed supporting evidence, and plainly there is nothing to suggest that the Commission’s judgment was tainted by the use of improper standards of valuation. Counsel for the Committee refer me to Mr. Swaine’s article in the Harvard Law Review for June, 1943, wherein it is suggested that the language of the Milwaukee opinion contains an implied qualification of the unqualified language of Mr. Justice Reed in the Western Pacific case, quoted above. For in the Milwaukee opinion Mr. Justice Douglas seems to stress the fact that the Commission and the District Court (In re Chicago, M. & St. P. R. Co,., 36 F.Supp. 193) were satisfied that they had adequate data, etc.; that the Commission and the Court did not apply an incorrect rule of law; and that the question was one for the informed discretion of the Commission and the District Court. And stress is laid upon the language of Mr. Justice Douglas in the Milwaukee case when he said: “We would have quite a different problem if the District Court had failed to perform the functions which § 77, sub. e, places upon it. But it cannot be said that there was any such failure here. The District Court satisfied itself that the principles of priority as applied to these facts were respected. See 36 F.Supp. pages 202, 203, 211, 212. Since such a determination rests in the realm of judgment rather than mathematics, there is an área for disagreement. But we are not performing the functions of the District Court under § 77, sub. e. Our role on review is a limited one. It is not enough to reverse the District Court that we might have appraised the facts somewhat differently.” But Mr,. Douglas assented in the Western Pacific case and in the Milwaukee case said : “We need not stop to discuss the respective functions of the Commission and the District Court in respect to plans of reorganization under § 77. That matter has been fully explored in the Western Pacific case [318 U.S. 448, 63 S.Ct. 692], Against the background of the conclusions there reached, we come to the various objections to the plan.” And if on this point it had been intended in the Milwaukee opinion to qualify the rule enunciated in the Western Pacific case, the dissent of Mr. Justice Roberts and the expressed limitation upon the dissent of Mr. Justice Frankfurter in the Western Pacific case, would have been unnecessary. I conclude, therefore, that when Mr. Justice Douglas, in the Milwaukee case, spoke broadly of the functions of the Commission and the District Court, his expression was elliptical. He was referring, I think, to the fact-finding and valuation functions of the Commission and the function of the court in respect to legal questions, all as delineated in the Western Pacific case. And when the Justice in the passage quoted above was discussing whether the full priority rule of the Boyd case, Northern Pacific R. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931, had been satisfied by the plan there under consideration, he observed that the District Court had “satisfied itself that the principles of priority as applied to these facts were respected.” He then referred to the opinion of the District Court [36 F.Supp. 211], where the Judge said, speaking of priorities, that the plan “observes the rules of law concerning the priority rights” * * * and “would seem to be in accord with sound principle and should have judicial approval.” The Justice thus emphasized the function of the court in passing upon the principles (the, law) applicable to' the facts. And when he went on to say “it is not enough to reverse the District Court that we might have appraised the facts somewhat differently”, he meant only that when a determination of the facts “rested in the realm of judgment,” if the District Court having accepted the determination of fact made by the Commission applied the proper principles of law, it would not be reversed merely because the Supreme Court “might have appraised the facts somewhat differently” from the Conumission. And so here, having myself ascertained that the Commission’s finding is supported by evidence and appears to be in accord with legal standards, I consider myself duty-bound to accept its finding of equivalence between the Housatonic bonds and the new bonds. Upon that authentic premise I can say that I am satisfied that this feature of the plan is fair and equitable. The Secured Sixes and the Bank Group. The six banks included in this group of objectors are The Chase National, The First National of Boston, The Irving Trust, The National 'Shawmut, The Second National of Boston and The Union Trust Company of Springfield, each of which is the holder of a note issued by the debtor and now overdue secured by a block of the debtor’s First and Refunding bonds, each such block having a face value considerably in excess of the note secured thereby. The “Secured Sixes” are an issue of 6% Gold Bonds due April 1, 1940, secured by a block of the debtor’s First and Refunding bonds held by the Irving Trust Company as Trustee under a Collateral Trust Agreement for the security of the “Secured Sixes” outstanding, the aggregate face value of the pledged First and Refunding bonds substantially exceeding in amount the aggregate face value of the Secured Sixes outstanding. Since each of the banks in this group and also each holder of the Secured Sixes is a creditor whose claim is now overdue and is secured by a block of First and Refunding bonds having an aggregate face value in excess of the claim secured thereby, their objections to the plan are substantially similar. Under the provision of the plan as orginally formulated, it was proposed to discharge the claims of the First and Refunding bondholders by the allocation of new securities having an aggregate facq value equal to the amount of their respective claims (principal plus interest). Of these new securities, 20% in face value were to be in fixed interest bonds, 40% in income bonds and 40% in preferred stock. This basic treatment of the First and Refunding bondholders has been retained in all subsequent modifications of the plan proposed by the Commission and its fairness and propriety are not now challenged by these objectants or by any other parties. Finding the treatment supported by material evidence and in accord with pertinent legal standards, I can approve this treatment. But if all the First and Refunding bonds held as collateral by these objectants were to be so treated, each such pledgee because of the amount of its coverage would receive new securities having an aggregate face value substantially exceeding the amount of his claim. To obviate the undesirable impact of such a result upon the new capital structure, the Commission proposed that these objectants should each be given securities having an aggregate face value no greater than the amount of its claim. And to compensate for the inferior quantitative treatment thus accorded, the Commission sought a qualitative treatment which should be correspondingly superior. Broadly, the method adopted contemplated an allotment to these objectants of a higher percentage of the higher-grade securities (fixed interest and income bonds) than the 20%-40% allocation of these securities to other First and Refunding bondholders, their allotment to include none of the preferred stock which was allocated to said bondholders. And the problem was to find a treatment for these objectants which would give them new securities having (a) as much value as the securities allotted to other First and Refunding bondholders (subject to a ceiling hereinafter discussed) and (b) an aggregate face value not in excess of their respective claims (principal plus interest). For this problem the solution proposed by the Commission is as follows: it established the ratio between the face value (principal without any accrued interest) of the collateral held by each objectant and the principal amount of its claim. For the Secured Sixes (collateral $23,000,000, and claim as of December 31, 1941, $15,-302,600) this ratio was 1.5 to 1. For the Chase National (collateral $8,200,000 and note of $4,750,000) this ratio was about 1.73. Since 20% in fixed interest bonds were allocated to other Refunding bondholders, to these objectants a tentative allotment was made which was 20% times the ratios obtained as just described. (This product I will hereafter refer to as a “factor”, in contra-distinction from the ratio just described). Thus for the Secured Sixes the allotment of fixed interest bonds was determined by applying a factor of 30% to the total amount of the collateral (principal plus interest); for the Chase National the controlling factor was 35'%. This allotment was then coupled with an allotment of income bonds in an amount equal to the difference, if any, between the principal amount of the claim (principal plus interest) and the total amount of fixed interest bonds allotted as just described. Thus, it will be observed, the ratio used for each objectant was the ratio between principal (face) of collateral without interest and the principal of the debt (without interest). The factor, on the other hand, was applied to the collateral on the basis of principal plus interest. The allotment just described I have called a tentative allotment because of the ceiling which the Commission imposed upon the amount of fixed interest bonds which each collateral note-holder, including the Secured Sixes, might receive if the method of allocation were given literal application. For the plan provides that no one of these collateral note-holders shall receive fixed interest bonds exceeding in face value the amount of its claim (principal plus interest) : if under the tentative allotment a Bank would receive more, its actual allotment is reduced to bonds whose face value equals the amount of its claim and any excess in the tentative allotment is diverted to other secured creditors. To illustrate: The Commission finds that (as of June 30, 1943, pg. 10149) the factor applicable to the Second National Bank of Boston is 49%. But the collateral of this pledgee as of that date amounted to $1,121,-250. If the factor of 49% were applied to that figure this pledgee would be entitled to $549,412.50 in fixed interest bonds. But under the pending plan this pledgee was allotted only $399,834 in fixed interest bonds (and no income bonds or preferred stock) because the principal amount of its claim plus accrued interest as of June 30, 1943 was only $399,834. Thus it is plain that the attenuated treatment proposed cannot be justified on the theory that the bonds which the pledgee will receive are the equivalent of its collateral. Yet under fundamental principles, a pledgee whose note is overdue is entitled, at least to the extent of his claim, to the equivalent of his collateral. And if his collateral has a money’s worth as great as his claim he is entitled to payment in full either in cash or in securities having a money’s worth or dollar value at least equal to his claim. Thus the treatment proposed for the Banks can only be justified on the theory that the new fixed interest bonds will have an actual value in money equal to the amount of the claim. But no finding to that effect, express or implied, can I find anywhere in the successive reports of the Commission. The witness Davis testified that after a seasoning period of several months in his opinion the fixed interest bonds would be worth 90, the income bonds 40, and the preferred stock 20. This opinion, to be sure, is but the product of the witness’ experienced judgment. It is not binding on the Commission whose experienced judgment as to complex questions of fact is entitled to free play under the Act. Conceivably the Commission might accord to the new securities a more generous dollar valuation than Davis. I doubt, however, whether it would go so far as to find that the new fixed interest bonds, in terms of money’s worth, will have a value fully equal to their face at the time of their issue or even after an initial seasoning period. In any event, the Commission has not so found as yet, and unless and until it does so find I cannot approve this feature of the plan. This conclusion does not conflict with my ruling, as applied for example to the Housatonic bonds, that new securities, if the evidence warrants, may be found to have a value equivalent to the old securities surrendered even in the absence of evidence ascribing a dollar value to the new securities. Such a ruling does not necessarily import that the new securities, even the new fixed-interest bonds, will be worth their face in dollar value on their issuance. The equivalence between the old and the new does not import that each in the aggregate is worth its face in dollar value; it means only that if the new issue be worth less than face the old securities also are found to suffer from a corresponding discount. And so to determine the equivalence between a new bond and an old one it is not essential to find and ascribe a dollar value to the new. The method under which the original distribution to these pledgees was made also fails to conform to legal standards in another fundamental particular. For after the allotment of fixed interest bonds was determined by the use of the factor as described above, the method rounds out the treatment of the pledgee by an allotment of income bonds in an amount equal to the difference, if any, between the amount of the claim and the amount of the fixed interest bonds already allotted. In thus relating the treatment not to the value of the claim as determined by the underlying collateral but, instead, to the amount of the claim, a limitation is introduced which is without relevance on the question of value and is likely to distort results obtained by the application of factors which are truly relevant on that issue. This defect is similar to another to which I now come. The plan proposed by the Third Supplemental Report of October 6, 1942, treating these objectants by the method described above, called for a total distribution of fixed interest bonds in the amount of $91,t 492,387, of income bonds in the amount of $86,112,710 and preferred stock in the amount of $48,443,572. The face value of these securities in the aggregate was equal to the face value of secured claims including accrued interest as well as principal. But after that order was published, the arrearages in defaulted interest were substantially reduced by payments made under order of court out of the current earnings of the system. As a result of these interest payments the aggregate amount of the secured claims has been reduced and if new securities were now to be used on the same basis for the discharge of the old securities there would be needed only $84,-893,097 in fixed interest bonds, $74,431,820 in income bonds, and $66,723,752 in preferred stock. This would produce a capital structure in which the bonded indebtedness was less than that which in the judgment of the Commission the enterprise could reasonably be expected to support. Thus a block of $6,599,290 in fixed interest bonds and $11,680,890 in income bonds became available to sweeten the treatment previously proposed for all mortgage creditors who had not already received an allotment of fixed interest bonds equal to the amount of their claims. The pending plan proposes that this block of bonds be distributed to all secured creditors not already awarded the full value of their claims in the new fixed-interest bonds, ratably in proportion to the amount of their claims. New Haven creditors all agree that these excess securities should be distributed to such creditors but objection is made to this basis of the distribution. This objection I must sustain. The treatment frankly bases the distribution on the amount, not the value, of the respective claims, and on this account is not in accord with legal standards. Necessarily, the method used must have an arbitrary and discriminatory effect. Surely a creditor whose security is the same in quantity and quality as that.of his neighbor is not entitled to a more generous allotment of bonds because his claim is greater. If, as the pending plan assumes, the Air Line issue was fairly treated when allotted under the Third Supplemental Report — before these interest payments had been made— about $1,300,000 in income bonds and the same amount in preferred stock, it will get more than its fair share of this secondary distribution if it now receives, as is proposed, upwards of $170,000 in fixed-interest bonds, $2,800,000 in income bonds and $1,-900,000 in preferred stock. Indeed, under this method if the Bank of Manhattan Company had happened to have a single $1,000 First and Refunding bond.amongst its collateral, instead of being relegated to the position of an unsecured creditor, it would have received something like $50,000 in fixed interest bonds out of this secondary distribution. I doubt whether these conclusions require that the plan be returned to the Commission. I incline to believe that the necessary correction can be accomplished within the framework of the plan in complete conformity with all the valid findings of the Commission. To this end this opinion may serve as a suggestion to the New Haven Trustees that they forthwith file a petition for authority to pay the claims of these pledgee banks in cash if they feel that they can demonstrate to the court that such a present disposition of these claims would be in the best interests of the estate. If such a petition were promptly filed and granted, the securities allocated to the banks under the present plan would then become available to augment the available “excess” securities resulting from prior interest payments as described above, for distribution to all secured creditors whose claims otherwise would have been fully paid neither in cash nor in fixed interest bonds as the fair equivalent of their existing securities. This distribution can be accomplished in conformity with the finding of the Commission that basically the so-called 20-40-40 treatment is a fair treatment for First and Refunding bondholders. The distribution can also be .shaped to preserve the same relationships in treatment between the bond issues affected as have already been approved by the Commission without resort to equations of equivalence not supported by the Commission’s findings or to methods which I have found not in conformity with legal standards. These relationships can be established by mathematical computations based solely upon findings of the values of the several issues already made by the Commission and which indeed constitute the foundation of the very plan now under consideration. Whether the Trustees will feel that they can properly support any petition for a present payment in cash of the claim of the Secured Sixes I have considerable doubt. If they feel that they can do so, I will entertain such a petition and rule as the merit of the petition shall require. But even if no order is entered for the present payment of the Secured Sixes a proper disposition of their claim can be found free from the difficulties inherent in the treatment proposed by the plan. Thus in a decree correcting and approving the plan might be included a provision effective to keep the claim of the Secured Sixes alive for the six months’ period succeeding the distribution of the new securities under the plan, coupled with a provision that for their existing collateral there shall be substituted with their trustee the new securities which the Commission has found to be the equivalent of First and Refunding bonds. As a result of these provisions the claim with its attached pledge would be kept alive and at any time before the extended maturity date the reorganized debtor would have an option either to redeem the pledged collateral by payment in full in cash or to suffer a default on the claim and forfeit the collateral. By the time the extended maturity date arrives it can safely he assumed that a market will have been developed for the new securities; by then they will have been listed and seasoned. Thus, data will be readily available to the reorganized debtor on the basis of which it can determine whether to redeem or to forfeit. If the decision shall be to redeem, the collateral will be covered into the treasury of the reorganized company where it will be available for future financing. If, however, the decision shall be to default and forfeit, the Secured Sixes will have liberty through their trustee to prove the value of their collateral, by actual liquidation thereof if the trustee shall deem that course advisable, and to claim as unsecured creditors for any deficiency thus established. To establish the value of the collateral at a time when market value shall have been settled by contemporaneous transactions publicized by the records of established markets will be a task comparatively simple. Nor will it be necessary, I think, to reserve any common stock for the satisfaction of any deficiency claim thus established. For by that time all the factors which will control the determination of the amount of common stock allocable to such a deficiency claim will already have been established. And the value of the common stock also will be apparent from the then current market. As a result, the decree herein may properly provide that the deficiency should be discharged by payment not in common stock but by the cash equivalent. It is plainly apparent, I think, that the amount of cash required for such a purpose will not be large enough to raise any serious problem of financing. The detail to perfect such a disposition will of course be incorporated into the decree herein which will later be brought on for hearing. Meanwhile a view of the situation in perspective discloses that the treatment proposed in the Fourth Supplemental Order of the Commission harks back to an earlier period of the reorganization when the cash resources of the estate were so limited that it was considered necessary to find some means to discharge the claims of these objectants by payment in new securities. To find a proper treatment for these claims on such a basis which should also be compatible with the limitations considered necessary upon the overall capital structure and upon the various classes of securities included therein gave rise to a problem of wellnigh insuperable difficulty. Even yet no wholly satisfactory solution for this problem has come from any source. Indeed, a genuine solution will apparently require additional findings as to the relative values of the new secfirities and perhaps of their dollar values. The procedure and treatment which I have outlined makes it unnecessary to make such findings or even to find a solution. Under it such difficulties as are not completely by-passed will largely disappear. In order that the effect of the corrections necessitated by all my rulings in this opinion may be plainly understood, there will be appended to this opinion a statement, designated Appendix X, which will be comparable to Appendix A to the Fourth Supplemental Report. It is drawn on the hypothesis that each of the Bank Group, expanded to include the State Street Trust Company, will be paid in full in cash: otherwise, as to the Secured Sixes. The Under-Secured Banks. Three banks, the Merchants National of Boston, the Rhode Island Hospital National, and the Bank of the Manhattan Company, are accorded treatment in the pending plan in accordance with my opinion of December 8, 1941 wherein I disposed of their contentions adversely. All three banks now renew their contentions as previously made and overruled. The Merchants has submitted its contentions on the briefs previously submitted, and the other two after making oral argument have filed supplemental briefs. After careful study of the transcript of the oral arguments and the supplemental briefs, and after a reexamination of the cases cited therein, I still adhere to the views expressed and the rulings noted in my earlier opinion, the section of which dealing with this subject matter may be deemed a part hereof. However, the rulings expressed above upon objections not raised to the plan previously certified to the court, require some modification of the treatment of these banks. Broadly viewed, they will be entitled to substantially the same treatment as the Secured Sixes (assuming, of course, that the Secured Sixes shall not be paid in full in cash). This treatment also will be shown in Appendix X. And it will be noted that a corresponding correction should also be reflected in the treatment provided for the National Rockland of Boston. The comparatively slight variation of this treatment accorded to the Merchants National of Boston is required by the earlier decision of the Circuit Court of Appeals which was predicated, I think, upon a conclusion that the Merchants’ collateral was not a New Haven secwrity. The foregoing, I believe, disposes of all objections filed which relate to the reorganization of the New Haven system exclusive of the Old Colony and the Boston & Providence. I therefore pass to a consideration of the problems involved in the proposed acquisition of these leased lines — ■ problems which heretofore have proved intractable in spite of the mass of litigation and the volume of study and negotiation which has for many years been lavishly devoted to the search for a solution. The Old Colony. Purchase Price. The plan provides that the New Haven shall acquire the assets of the Old Colony subject to conditions which will be disT cussed later at a price as follows: Securities Fixed interest bonds of reorganized New Haven $3,289,600.00 Income bonds of reorganized New Haven 2,467,200.00 Cash, for unpaid reorganization expenses (as allowed up to January 1, 1941, $140,218.48) upwards of 140,218.48 Cash, Current liabilities, Debtor (None known) Cash, Current liabilities, Trustees: Boston Terminal Bond interest (through 1943, adjusted to accomplish reductions contemplated in the plan) 425,104.00 Cash, Boston Terminal taxes (through 1943 with interest) 1.266.470.00 Cash, Taxes and interest on Old Colony (Exhibit 272, brought down to December 31, 1943) 2.422.222.00 Release of lien claim: Through 1937, $ 7,240,772.00 1938 3,379,777.00 1939 650,066.00 $11,270,615.00 1940 Cr. $ 45,252.00 1941 “ 1,073,330.00 1942 “ 2,361,446.00 1943 (figures not available) .00 —3,480,028.00 7,790,587.00 Total, in securities (face value), cash and lien $17,801,401.48 It will be observed that the price now proposed appears to be precisely that recommended in the Joint Report, the antecedent history of which is as follows. At the hearing on the earlier plan when fundamental differences appeared and were vigorously pressed between numerous New Haven and Old Colony interests and the Commonwealth of Massachusetts, I suggested informally the formation of a “compromise committee” including a representative of New Haven interests, a representative of Old Colony interests, the Assistant Attorney General of Massachusetts who was then representing the Commonwealth in these proceedings, and a member of the trustees’ staff, to confer together in an effort to devise provisions for the treatment of Old Colony which might be expected to win the support of all concerned. And when I disapproved the provisions for the treatment of Old Colony contained in the earlier plan, I appended to my opinion the report of this Committee, recommending that it be given appropriate consideration in the formulation of a new plan. The “compromise” report thus appended to my opinion contained no specific suggestion as to an appropriate purchase price, the members of the Committee indicating a reluctance, if not unwillingness, to negotiate the recommendation of a purchase price for inclusion amongst their other proposals for the treatment of the Old Colony, without some official intimation that their general method of approach to the problem was such that the suggestion of a purchase price consistent therewith might prove helpful. And so it was not until after the Examiner of the Interstate Commerce Commission, who was presiding over the hearings on the plan, ordered that the record be held open to permit of the introduction of a negotiated proposal for a purchase price, that negotiations to that end were actually undertaken. The negotiations were conducted by a-representative of the Insurance Group having a large and diversified interest in the numerous bond issues of the New Haven, by a representative of the Mutual Savings Group which had a large interest in the bonds of the Old Colony, and by counsel for the principal debtor. When these negotiations had been completed the purchase price which emerged, together with a comprehensive outline of the factors upon which it was based, was added to the content of the report of the so-called Compromise Committee, thus producing the so-called “Joint Report” which was submitted to the Commission pursuant to the ruling of the Examiner made as aforesaid. It must be noted that this report did not purport to have any binding effect on any party. On the contrary, the original report of the Compromise Committee expressly stated that it should not be deemed to bind the interests of those whose representatives participated in its preparation. And similarly, it was expressly stated in the Joint Report that in the negotiations “the positions taken by the parties were upon the understanding that all rights were reserved in connection therewith and that such agreement as might be reached would be for the sole purpose of the negotiations”. But as the Joint Report states, the price thus negotiated was “formally approved and accepted” by the Insurance Group, the Mutual Savings Group, the Old Colony Plan Committee and the New Haven Plan Committee. In its report the Commission reviewed the Joint Report at great length, and found that the purchase price proposed in the Joint Report “is fair and equitable, and, in our opinion, conforms to the principles which the court in its opinion1 indicated governed.” And the order of the Commission now pending before the court contains provision for the purchase of Old Colony assets at apparently the same price and upon substantially the same terms as were recommended in the Joint Report. (The modification of terms other than the purchase price will be discussed later.) It will thus be observed that although in its report the Commission occasionally refers to the Joint Report as a “compromise agreement”, the Commission treated it not at all as an agreement having any binding effect. Its report expressly noted (pg. 9795) that “the Protective Committee for Bonds of the Old Colony and a Group of Old Colony stockholders, oppose the adoption of the Joint Report on the general ground that its suggested purchase price was inadequate.” And, as the report of the Commission further shows, other features of the Joint Report were opposed by the Commonwealth of Massachusetts. But notwithstanding these objections the Commission approved the report and adopted the recommendations of the report as its own considered, official conclusions, as evidenced by its Third Supplemental Report and Order of August 6, 1942, which was substantially confirmed in its Fourth Supplemental Report and Order dated July 13, 1943, which is now pending before the court. The proposed purchase price is now opposed " not only by the Protective Committee of Old Colony bondholders but also by the Mutual Savings Bank Group and the Old Colony Plan Committee which had, as shown above, participated in its evolution. The plan for the reorganization of the Old Colony, which has thus emerged, proposes a purchase price to be paid by the New Haven of three components, cash, reorganization securities and release of its prior lien claim against the Old Colony. This prior lien claim represented the net loss sustained by the New Haven trustees in their operation of Old Colony lines for the account of the Old Colony. Through 1939 these losses aggregated upwards of $11,000,000. However, in 1940 the tide had turned (for how long, the evidence doesn’t show) and at the time when the Joint Report was negotiated, and even by the time the Commission certified the plan to the court in July, 1943, figures were available to show that operations of the Old Colony had resulted in earnings of $45,000 for 1940, and earnings of over a million dollars in 1941. The earnings for these two years were of course used by the authors of the Joint Report, as indeed they were used in the accounts of the New Haven trustees, to reduce the amount of the New Haven claim. But apparently because it was recognized that the purchase could not be consummated at least until December 31, 1943, for purposes of the negotiations it was necessary to consider how the claim would be affected by operations in 1942 and 1943. The figures for these years being not then available the authors of the Joint Report, with the aid of advice from experts familiar with these proceedings whose advice heretofore has proved sound, agreed to proceed upon the basis of estimates for the earnings for 1942 in the amount of $225,000 and for 1943 in the amount of $346,000. It should be noted that both the New Haven and the Old Colony representatives participating in the negotiations accepted these estimates. And there is nothing in its reports to suggest that the Commission as well did not accept these estimates. It was not until after the Commission had certified its plan to the court in July, 1943, that the segregated figures for Old Colony operations in 1942, from which alone the results of its operation could be ascertained, became available. These figures for 1942 showed earnings of $1,579,822.25-as against the estimate of $225,000 for that year. The segregation figures for 1943 still are not available, except for the month of January which shows a substantial increase in Old Colony earnings over January, 1942. And it seems not to be disputed that when available the figures for 1943 will be at least as favorable to Old Colony as those for 1942. And so Old Colony representatives now contend that the purchase price should be increased to reflect the result of operations through 1943. They point out that the prior lien as a component of the purchase price was based upon an estimate adopted by all parties to the negotiations which has now by actual experience proved grossly out of line and insist that an error of such dimensions ought in justice and equity to be corrected now while there is still opportunity for correction. They point out that they are not seeking to capitalize war earnings; instead they are merely claiming, wholly in accord with the basic theory on which the negotiations were conducted, that the New Haven which is seeking to use its prior lien claim, as a component of the purchase price to pay for the Old Colony at some time subsequent to December 31, 1943, should be limited to a claim against which all earnings of the property, at least prior to December 31, 1943, have been credited, — just as such earnings are currently being credited on the books of the Trustees. Otherwise, they say, Old Colony will be holden twice to pay the same claim. This line of argument I think sound. It is, I think, impervious to the counterattack which I will now discuss. In opposing the correction now sought New Haven interests insist that a consummation of the plan as proposed will not result in a double payment of any portion of the New Haven lien claim. For, they say, notwithstanding the belated increase in Old Colony earnings “the price which it (New Haven) is to pay and the property received are not changed.” This, I think, is not true. The principal medium which the New Haven is using to accomplish the páyment is its lien claim. If'its claim, as a result of Old Colony earnings, is materially" reduced, the New Haven will be paying less than the Commission proposed; unless appropriate adjustment is made for the reduction. It is urged that the price “expressed in securities of the reorganized New Haven was the result of a series of adjustments.'” But the issue now raised has immediate incidence not upon that portion of the price which was expressed in securities but upon the portion which was expressed in terms of the lien claim. And the basic theory of the method of valuation used is such that so much of the consideration as shall not consist of cash and release of lien claim shall consist of new securities. Provision was not made for adjustments on account of subsequent fluctuations in the amount of the lien claim resulting from earnings only because, apparently, it was thought that the generally accepted estimate of $571,000 for such earnings made provision for adjustment unnecessary. It is said that the author^ of the Joint Report “agreed upon the price, knowing of possible fluctuations in earnings.” But all the authors could do was to agree to recommend. What they intended is not now decisive. On the issue of a valuation, such as is now involved, the opinion of the judge is not controlling. The vital question is one relating to the conclusions of the Commission. Is the price which it proposed now consistent with its stated reasons ? I think not. For the Commission’s report makes it plain (pgs. 9790, 9791, 9794) that the price it proposed was on the basis of December 31, 1943. To be sure, it also accepted the estimate that the 1942 and 1943 earnings would amount to only $571,000. But in so doing it recognized that, under the particular method of valuation, which it adopted for the solution of this particular and peculiar problem, in principle all earnings up to December 31, 1943, should be included. At the time, those earnings could only be estimated and the Commission believed, as well it might under the evidence, that the estimate — endorsed as it was by opposing parties and experts— would accomplish substantial justice. But now that subsequent experience has demonstrated that the estimate has gone awry, I have confidence that the Commission while there is yet time would wish to have the plan corrected to conform with established results. I shall proceed on that basis. I cannot agree, however, with Old Colony contentions that the excess of earnings over estimate should be paid to them in cash. The cash representing the earnings was collected by the New Haven trustees charged with the duty of operating Old Colony lines for the account of Old Colony, and upon its receipt Old Colony was entitled to an appropriate credit, not to cash. The resulting reduction in the prior lien should b.e reflected not in the cash component of the consideration but rather in the component consisting of new securities. To translate the reduction into cash, would in effect accord to this secured obligation of the Old Colony, notwithstanding its recurrent deficits in recent years, a greater worth and dignity than the Commission has accorded to any of the creditors of the New Haven secured by mortgage on property far more productive. Such treatment would be inconsistent with the fundamental scheme of the plan. But what basis have we upon which to translate the reduction in the lien claim into an appropriate treatment in securities ? If the plan had been consummated on December 31, 1942, the following treatment might have been prescribed. The earnings for 1942 were $1,579,822.25 (pg. 10520). But the price fixed by the Commission was on the assumption that the 1942 earnings would be only $225,000. The problem is to translate the difference between these two figures, $1,354,822.25, into new securities which may fairly be substituted in the purchase price for the equivalent amount of prior lien. Under the basic mechanics of the plan the new securities must have a face value of $1,354,822.25. Not a single secured creditor unhappily involved in these proceedings will receive under the plan new securities having a face value greater than the amount of his claim: and none, I think, will receive less (in face value). But by what class or classes of securities shall this requirement be satisfied? As to this it will be noted that in the plan the Commission proposed that so much of the purchase price as exceeded the cash and prior lien should be payable in $3,289,600 of fixed interest bonds, and $2,467,200 of income bonds. Thus our problem for 1942 might be solved by allocating to Old Colony an additional block of new securities having an aggregate face value of $1,354,822.-25 divided between fixed-interest bonds and income bonds in the ratio of 3,289,600 to 2,467,200. This, if the mathematics is correct, would amount to $774,184 in fixed-interest bonds and $580,638 in