Full opinion text
LEIBELL, District Judge. There are two matters before me for decision, both of which represent long strides towards the goal of these proceedings, the reorganization of Associated Gas and Electric Company (Ageco) and Associated Gas and Electric Corporation (Agecorp). One matter brings up for review the Special Master’s report on a proposed compromise of what has become known as the Recap Litigation and of certain claims in the CDC (Convertible Debenture Certificates) proceeding; the other presents for Court approval, pursuant to Chapter X of the Bankruptcy Act, 11 U.S. C.A. § SOI et seq., a joint plan for the reorganization of the Debtors. The distribution of securities provided for in the Plan is in precise accordance with the terms of the Compromise. The Securities and Exchange Commission has approved the Plan as fair, equitable and feasible, subject to certain conditions. Of necessity, therefore, the Commission has also approved the substance of the Compromise. I agree with its conclusions. In the Recap Litigation the Trustee of Ageco, a committee for the Ageco Fixed Interest Debentures (FIDs) and certain of the FID holders themselves laid claim to certain assets held by Agecorp and to a first lien thereon, or to at least an equal pro rata participation therein with the holders of Agecorp’s securities consisting of Agecorp 8s of 40, Agecorp 73s and Agecorp 78s. These assets, in the main were formerly properties of Ageco. The claims were opposed by the Agecorp Trustees and by Committees and indenture trustees for Agecorp security holders. The Recap Litigation takes its name from a “Plan of Debt Rearrangement and Recapitalization” (commonly referred to. as the Recap Plan) which the Hopson management proposed to the security holders of Ageco in May of 1933. The questions presented in the Recap Litigation involve not only the legality of the Recap Plan, Agecorp’s title to its principal assets and the respective rights of Ageco security holders and of Agecorp’s 73s and 78s in and to those assets, but also the claimed priority of the Agecorp 8% Gold Bonds due 1940 (8s of 40), issued in March 1932. Under the Recap Plan the holders of Ageco fixed interested debentures (FIDs), then aggregating $265,000,000, were offered three optional exchanges for their holdings: (a) Under Option 1, Agecorp Convertible Debentures due 1973 could be obtained in half the principal amount, and bearing the same fixed interest rate, as the Ageco debentures exchanged; (b) Under Option 2, Agecorp Income Debentures due 1978 could be obtained in the same principal amount as the Ageco debentures exchanged but bearing a lower interest rate payable only if earned; or (c) Under Option 3, Ageco Sinking Fund Income Debentures due 1983 could be obtained in the same principal amount, and with the same interest rate as the Ageco debentures exchanged. Interest on the SFIDs was payable unconditionally only so long as any Ageco debentures were not deposited under the Recap Plan, and so long as interest on' the latter was paid or provided for. After all the Ageco debentures were deposited, interest on the SFIDs was payable only out of “available net income” as therein defined. The Recap Plan provided that no more than $50,000,000 principal amount of Age-corp 73s would be issued under Option 1, and that the option could be closed as soon as $100,000,000 of Ageco Debentures had been deposited thereunder. Option 1 was declared closed January 17, 1934; but holders of the 73s were given the right to convert their 73s into twice their principal amount of 78s, at any time between June 15, 1935 and June 15, 1945. Option 2 of the Recap Plan was declared closed April 7, 1936 but the plan provided that it could be reopened at any time. On November 1, 1936, Option 3 was modified by substituting the SFIDs due 1986 for the SFIDs due 1983. These securities were substantially identical, except that the SFIDs due 1986 bore a higher rate of interest than the 1983s under certain specified conditions. There are presently outstanding in the hands of the public about $8,000,000 of Agecorp 8s of 40; $24,000,000 of the Age-corp 73s (issued under Option 1 of the Recap Plan) ; $134,000,000 of Agecorp 78s (issued under Option 2 of the Recap Plan or in exchange for 73s) ; $59,000,000 of un-exchanged Ageco FIDs; $8,000,000 of Ageco SFIDs (issued under Option 3 of the Recap Plan) ; and some $140,000,000 in par or stated value of other securities of Ageco. A compromise of the rival claims of Ageco and Agecorp security holders to the former Ageco properties which are now held by Agecorp, was recommended by the Trustees of both debtor estates. The Special Master, former Judge Frederick E. Crane of the New York Court of Appeals, who was also Special Master in the Recap Litigation, has reported in favor of the Compromise. The Compromise would grant parity to the Ageco FIDs with the Age-corp 73s and 78s, in the assets now held by Agecorp, and would allow in addition a so-called “differential,” in favor of the 73s and 78s, for “lost interest” and for an assumed advantageous litigating position. The Master found (Findings of. Fact Nos. 3 and 4) that the assets held by Agecorp as of May 1, 1943, did not exceed $125,000,000 in value and that if the existing capitalization and asset positions of Agecorp were recognized none of the security holders of Ageco would be entitled to share in the Agecorp assets. But the Master also found that there were sound reasons to support the Ageco creditors’ attack on both Age-corp’s capitalization and its asset position and he approved the Compromise. I adopt the report of the Special Master with some slight modifications of several Findings, and I approve the Compromise, upon the express condition that a Plan of Reorganization incorporating the Compromise is accepted by the participating security holders and confirmed by the Courts. Under the Compromise, the Agecorp 8% Bonds due 1940 (the 8s of 40) are given a priority in the surviving company, and are rated in the Compromise at 102.56 for each old $100.00 bond, together with interest on each old $100.00 bond, at 4% from July 10, 1943 to the effective date of the Plan of Reorganization. The Compromise does not specify how the priority of the 8s of 40 shall be represented in the surviving company. This I believe was a prudent provision and left some leeway for those who were to draft a Plan of Reorganization to provide for the 8s of 40 a priority that would fit into the Plan as a whole. The terms of participation in the assets accorded the holders of 8s of 40 under the Plan of Reorganization provide that the new debentures to be issued to the 8s of 40 shall contain certain conversion rights. This will make them acceptable to the 8s of 40 Committee, who objected to the treatment accorded them under the Compromise proposal. So the Committee of the 8s of 40, while opposing the Compromise arrangement, are satisfied with the provisions of the Plan of Reorganization and support the Plan. I see no conflict between the Compromise and the Plan in respect to the 8s of 40. The Plan of Reorganization in addition to giving effect to the Compromise, contains other provisions in conformity with the Bankruptcy Act and the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79 et seq. It has been recognized that a plan of reorganization may adjust competing claims to priority in certain assets of the debtor in the possession of the Court. In Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 130, 60 S.Ct. 1, 14, 84 L.Ed. 110, Mr. Justice Douglas wrote: “There frequently will be situations involving conflicting claims to specific assets which may in the discretion of the court, be more wisely settled by compromise rather than by litigation. Thus, ambiguities in the wording of two indentures may make plausible the claim of one class of creditors to an exclusive or prior right to certain assets as against the other class in spite of the fact that the latter’s claim flows from a first mortgage. Close questions of interpretations of after-acquired property clauses in mortgages, preferences in stock certificates, divisional mortgages and the like will give rise to honest doubts as to which security holders have first claim to certain assets. Settlement of such conflicting claims to the res in the possession of the court is a normal part of the process of reorganization. In sanctioning such settlements the court is not bowing to nuisance claims; it is administering the proceedings in an economical and practical manner.” A Plan of Reorganization, under former § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, which embodied a compromise of a claim was before the United States Supreme Court in Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669. See, also, Consolidated Rock Products Co. v. DuBois, 312 U.S. 510, 523, 61 S.Ct. 675, 85 L.Ed. 982; Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., 318 U.S. 523, 565, 63 S.Ct. 727, 87 L.Ed. 959. A reference to the history of the two debtor corporations, the proceedings for their reorganization and some of the litigation therein, seems appropriate at this point, before discussing the issues presented by the Special Master’s report on the Compromise of the Recap Litigation, and the provisions of the joint Plan of Reorganization which has been approved by the Securities and Exchange Commission. On January 10, 1940, the above named debtors, Ageco and Agecorp, filed voluntary petitions for their reorganization under Chapter X of the Bankruptcy Act in the United States District Court for the Northern District of New York. In its petition Ageco admitted its inability to pay its fixed charges, maturing interest, current expenses and taxes. Agecorp admitted its inability to pay its $8,000,000 of 8% bonds, which would mature on March 15, 1940, and its inability to pay interest from time to time on its outstanding debentures, which included about $25,000,000 due in 1973 and about $144,000,000 due in 1978. Orders approving the voluntary petitions for reorganization were signed January 10, 1940. The proceedings were transferred to this Southern District of New York to suit the convenience of creditors and parties, early in February 1940. On March 2, 1940, I appointed Walter H. Poliak, Trustee of Ageco, and Denis J. Driscoll and Willard L. Thorp, Trustees of Agecorp. On October 2, 1940, Mr. Poliak died. On October 16, 1940, I named his counsel, Stanley Clarke, as Trustee of Ageco. The voluntary petition of the debtor Agecorp filed January 10, 1940, gives some idea of the size of the “Associated System” (see par. 4) : “The nature of the business of the Debtor is that of a public utility holding company. It is a registered holding company under the Public Utility Holding Company Act of 1935 (hereinafter referred to as the ‘Holding Company Act’). “The Debtor is the direct and only direct subsidiary of the Associated Company, which is also a registered holding company under said Act. The Associated Company owns 100% of the outstanding capital stock of the Debtor consisting of 671,000 shares of Common Stock, and also $73,419,797.27 principal amount (as of September 30, 1939) of debentures and notes receivable (hereinafter more particularly described) of the Debtor. Said shares of stock, debentures and notes receivable are carried on the balance sheet of the Associated Company at an aggregate of $364,061,442.27 as of September 30, 1939. They constitute substantially all of the assets of the Associated Company. “The Debtor has seven direct subsidiaries, four of which are also registered holding companies, namely General Gas & Electric Corporation, Associated Electric Company, NY PA NJ Utilities Company, all of which are corporations of the State of Delaware, and Northeastern Water Companies, Inc., a corporation of the State of New York. The remaining three direct subsidiaries of the Debtor, which are not registered holding companies, are Associated Utilities Corporation, The United Coach Company and The Associated Corporation, all corporations of the State of Delaware. “In addition to its said seven direct subsidiaries, the Debtor has indirect subsidiaries, consisting approximately of (as of November 30, 1939) seventy public utility companies (as the term ‘public utility company’ is defined in the Holding Company Act), forty-two water companies, fifteen transportation companies, two ice companies and twenty-six miscellaneous companies. “The subsidiaries of the Debtor render service, in territory having a population estimated to be in excess of 7,000,000, to approximately 1,762,000 customers in more than 6,200 communities. The consolidated gross operating revenues of the Debtor and its subsidiaries for the twelve months ended September 30, 1939, amounted to $133,674,-409.49. Over 76% (viz., 76.89%) of such revenues were derived from operating properties located in the Middle Atlantic States, namely, New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia and West Virginia.” The Ageco corporate balance sheet annexed to the petition for reorganization stated the assets of the debtor, as of September 30, 1939, at approximately $372,-000,000, consisting for the most part of its investment in Agecorp. Its obligations to creditors (including approximately $50,-000,000 of obligations convertible into stock at Ageco’s option) aggregated approximately $140,000,000. The value of its capital and surplus was stated to be about $232,000,000. The Agecorp corporate balance sheet attached to its petition for reorganization stated the assets of Agecorp as of September 30, 1939, at $445,000,000 of which $437,-000,000 represented investments in subsidiary companies. Its publicly held securities were shown as $178,129,605 — and miscellaneous obligations as approximately $11,000,000. The balance of its capitalization was listed as held by Ageco. The Recap Litigation. In the administration of the two estates it soon developed that the book value of Agecorp’s interest in various subsidiaries was greatly over-stated and that it was considerably less than the total of Age-corp’s long term debt. Upwards of $59,000,000 of Ageco FIDs had not made the exchange under the Recap Plan. The Committee of unexchanged FIDs and the Trustee of Ageco asserted that the Hopson Recapitalization Plan of May 1933 was based on transactions that were in violation of the terms of the indentures under which the Ageco FID debentures had been issued; that the Recap Plan was the result of transactions between two corporations subject to the control of one man Hopson; that all of the directors of Agecorp were also directors of Ageco and were under Hopson’s domination ; and that the Recap Plan was a fraud which, together with the transactions leading up to it, should be undone by the exercise of this Court’s equitable powers. The Ageco Trustee, the General Committee of Ageco FIDs and certain debenture holders set forth their claims to the Agecorp assets in petitions filed in the Age-corp Chapter X proceeding, to which the Agecorp Trustees and Committees of Age-corp security holders made answer and objection. The proceeding became known as the Recap Litigation. The issues were referred to the Hon. Frederick E. Crane, as Special Master on July 26, 1941. The Recap Litigation “sought adjudication of the following matters, among others: “(a) The right, title, lien, and interest of the Ageco Trustee in and to the assets held by the Agecorp Trustees. “(b) The right of some or all of the unsubordinated security holders and other creditors of Ageco to share in the Agecorp assets on a parity, or better than equally, with some or all of the Agecorp security holders and other creditors.” About the middle of September, 1942, the hearings before the Special Master had been completed; 12,000 pages of testimony had been taken in 133 sessions and over 700 exhibits had been offered or received in evidence. Compromise of the Recap Litigation. While the hearings in the Recap Litigation were proceeding before Judge Crane in May of 1942, a committee was named by the various classes of Ageco and Agecorp security holders to see if a fair compromise of the Recap Litigation could be devised. The members of the committee were Stanley Clarke, Trustee of Ageco, and Willard L. Thorp, one of the Trustees of Agecorp. Mr. Yohalem, the counsel for the Securities and Exchange Commission, sat in as an unofficial observer at the request of the trustees. The terms of a proposed Compromise of the Recap Litigation and related issues were submitted by the trustee-committee in November 1942. The question of the fairness of the proposed Compromise was also referred to Judge Crane, as Special Master, on November 13, 1942. Copies of the proposed Compromise Agreement, and notice of the hearings to be held thereon, were mailed to all known security holders of Ageco and Agecorp. Extended hearings on the Compromise were held by the Special Master, and on September 3, 1943, he filed his report herein, with findings of fact and conclusions of law. He approved the proposed Compromise as fair and equitable. As he states in Finding No. 13 “The proposed compromise encompasses all the controversies involved in the Recap Litigation and the issues in the CDC Litigation relating to the holders of CDCs and Original Holders of COs and Preferred Stocks.” It also affords participation for persons who establish their right to be treated as unsubordinated creditors of either the Ageco or Agecorp estate. Their claims in a comparatively small amount, were referred by me to a Referee in Bankruptcy for determination in June 1943. The Special Master’s report on the proposed Compromise came on for a hearing before me on October 8, 1943, and it was then urged that I should postpone a consideration of the Report until the Securities and Exchange Commission had passed upon a joint Plan of Reorganization of Ageco and Agecorp, which had been filed with the Commission on June 14, 1943 under Section 11 (subd. f) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k(f). The latter section provides that “in any such proceeding (i. e. in a court of the United States, whether under this section or otherwise) a reorganization plan for a registered holding company or any subsidiary company thereof shall not become effective unless such plan shall have been approved by the Commission after opportunity for hearing prior to its submission to the court.” Both Ageco and Agecorp were registered public utility holding companies. The proposed Compromise of the Recap Litigation was the backbone of the joint Plan of Reorganization of Ageco and Agecorp. In an opinion filed November 22,1943 (In re Associated Gas & Electric Co., D.C., 53 F.Supp. 118, 124) I expressed the view “that the most expeditious and sensible procedure for the Court to follow would be to have the questions relating to the approval of the plan of compromise and the approval of the plan of reorganization argued and briefed by counsel at one and the same time, and that the Court then determine the issues thus presented.” I have made mention above of still another proceeding herein involving claims of certain security holders of Ageco, which were alleged to be subordinate to the fixed interest bonds of Ageco. This group of claims included those based on Ageco convertible debenture certificates, Ageco convertible obligations, and Ageco interest and non-interest bearing scrip. The branch of the litigation involving those claims became known as the CDC litigation. On October 27, 1942, I signed an order appointing Judge Crane, Special Master to pass upon those claims also. In the Master’s report on the Compromise he refers to those securities in Finding No. 5 as follows: “Ageco also has outstanding $3,808,477 principal amount of Convertible Debenture Certificates (hereinafter referred to as ‘CDCs’); and an estimated $20,000,000 principal amount of Convertible Obligations Due 2002 and an estimated 17,500 shares of Preferred Stock and Preference Stock (hereinafter collectively referred to as ‘Original Holders of COs and Preferred Stocks’), held in each instance by persons who originally obtained their securities on exchanges for CDCs, or by persons who are the personal representatives, legatees, distributees, or statutory succéssors of such original holders.” The Special Master rendered his report on the CDC litigation on March 30, 1943. It is incorporated by reference in Finding No. 10 of his report on the Compromise of the Recap Litigation. In an opinion filed July 30, 1943 (In re Associated Gas & Electric Co., D.C., 53 F. Supp. 107) I approved the Special Master’s report on the CDC litigation in so far as it related to Securities that would not participate in the assets distributable under the proposed Compromise of the Recap Litigation. As to the other securities in the CDC litigation, which would participate in the assets under the proposed Compromise of the Recap Litigation, I took no action, because I felt that to do so “might upset the fundamental basis of the settlement, which recognizes that there are two sides to the questions presented.” Certain of the security holders who would not participate under the plan of compromise and who were declared subordinate to the fixed interest debentures of Ageco, took an appeal to the Circuit Court of Appeals, Second Circuit, and that Court approved the ruling made in respect to the excluded securities. It suggested in a dictum that certain original holders of scrip who still retained their scrip might be in the same position as the original holders of COABs, taken in exchange for CDCs. Elias v. Clarke, as Trustee of Ageco, et al., 2 Cir., 143 F.2d 640. The Trustees stated at the hearings before me that the claims of these original scrip holders were considered at the time the terms of the proposed compromise were being drafted and that for good and sufficient reasons they were granted no participation. I have accordingly made a supplemental finding of fact, No. 13A, to be added to the Special Master’s findings as follows: “13A. In arriving at the provisions to be made in the Recap Compromise for Original Holders of COs, the Ageco Trustee and the Agecorp Trustees gave consideration to the fact that some of those Original Holders still retain the unsubordinat-ed scrip and the subordinated IB and NIB Scrip issued as interest on their COs, while others have parted with some or all of such scrip. The Trustees decided that, on both legal and practical grounds, all Original Holders of COs should be treated on the same basis even though some of them no longer hold all the scrip they had received. The Trustees again considered this question after the Special Master had filed his report in the CDC Litigation, and adhered to their original conclusion. Further consideration was given to the matter after the Circuit Court of Appeals handed down its decision in Elias v. Clarke, 2 Cir., 143 F.2d 640, and the Trustees concluded that no change should be made in the provisions of either the Recap Compromise or the Plan, relating to Original Holders of COs.” Joint Plan of Reorganization for Ageco and Agecorp. The Trustees of Ageco and Agecorp submitted to the Securities and Exchange Commission on June 14, 1943, a Plan of Reorganization for both debtors. A number of hearings were had before one of the Commission’s examiners. The entire record made before Judge Crane in the Recap Litigation was received by the Examiner. He also received evidence as to the value of the assets of Ageco and Agecorp. Later the issues presented were argued before the entire Commission and after due deliberation the Commission filed its findings and opinion. The Commission entered an order, dated April 14, 1944, approving the Plan of Reorganization for Ageco and Agecorp submitted by the Trustees, with certain minor amendments and subject to certain specified terms and conditions. The opinion of the Commission covers 60 pages. Annexed to it are schedules and financial statements, one of which, Exhibit B, sets forth the “Outstanding Securities and Liabilities of Ageco and Agecorp as at March 31, 1943, and Proposed Distribution of New Common Stock of Surviving Company.” Other schedules state the assets and earnings of various subsidiaries in the Associated System. The Commission found the Plan of Reorganization to be fair, equitable and feasible. The entire record before the Commission has been certified to this Court for use at the Court’s hearings on the Plan of Reorganization. Through a notice dated May 1st, 1944, the security holders and creditors of Ageco and Agecorp were informed that the Securities and Exchange Commission had approved the Plan of Reorganization, a copy of which was annexed to the notice, and that a hearing on the question of approving the Plan would be held by this District Court on June 12, 1944. Section 174 of the Bankruptcy Act, 11 U.S.C.A. § 574. In a letter to the security holders, the Trustees referred to the Recap Litigation and explained that the Plan of Reorganization is based on a proposed compromise of that litigation. I quote the following from the trustees’ letter: “The assets of Agecorp are substantially all the assets to which the creditors of both Ageco and Agecorp must look. Agecorp’s assets consist, for the most part, of stock and other investments in subholding companies, the most important of which are NY PA NJ Utilities Company, Associated Electric Company, and General Gas & Electric Corporation. These companies in turn are not operating companies; their assets consist chiefly of securities of subsidiary operating utility companies. The three subholding companies and their subsidiary companies have large amounts of indebtedness and preferred stock outstanding in the hands of the public. The interest of Ageco and Agecorp in their subsidiary companies, being chiefly a common stock interest, is generally subordinate to this outstanding indebtedness and preferred stock. “The assets that are available for creditors of Ageco and Agecorp thus consist principally of junior securities and other investments. In the opinion of the Trustees these assets are worth substantially less than the amount required to satisfy the claims of the holders of Debentures and other senior indebtedness of Ageco and Agecorp, which amount to approximately $250,000,000. Since these claims have priority, nothing will be left for holders of stock and other securities that are subordinate to general creditors.” The Plan of Reorganization of Ageco and Agecorp is summarized in the notice as follows: “Summary of the Plan. “The Plan provides that the assets of Ageco and Agecorp will be taken over by one Surviving Company. “The securities of the Surviving Company, estimated to be outstanding on the consummation of the Plan, will be as follows: New Senior Debt — 5 year bank loan... $7,500,000 New Debentures 4%%, 10 year.......... 7,400,000 New Common Stock..................... 7,500,000 shs. “The New Senior Debt will be issued for cash necessary to be used in connection with the Plan and the Nypanj Reconstruction Program (see page 4), and for the payment of tax claims, expenses and other nonrecurring costs (including cash adjustments on retirement of Agecorp 8% Bonds due 1940), and allowances to be made by the Court. “Holders of Agecorp’s 8% Bonds due 1940 will receive New Debentures in the amounts provided in the Plan (see page 7). These New Debentures will be junior to the $7,500,000 New Senior Debt but senior to the New Common Stock. They will bear interest at 4J4% per annum and mature in 10 years. These New Debentures will be convertible, at the holders’ option only, into New Common Stock of the Surviving Company. The conversion rate, expressed in the Plan, is reasonably geared to the probable initial market value of the New Common Stock The Trustees believe that these New Debentures will be worth at least par. “All other participating creditors of Age-co and Agecorp will receive New Common Stock of the Surviving Company in the amounts set forth in the Plan (see page 7). The value of the New Common Stock is, of course, a difficult thing to estimate. However, subject to the $7,500,000 New Senior Debt (which will bring in a corresponding amount of cash), the $7,400,000 of New Debentures and minor amounts of current liabilities, the New Common Stock will represent the entire value of all the assets of the Estates. “The creditors who will receive New Common Stock, in the amounts set forth in the Plan (see page 7), are the holders of the following securities and claims: “Agecorp: “Debentuies due 1973 and 1978. “Ageco: “Debentures due 1948, 1949, 1950, 1958, 1965, 1968, 1977, 1983 and 1986. “Convertible Investment Certificates extended to 1943, 5%% and 6%. “Convertible Debenture Certificates, Series A to E, Series B and C (Manila), Series B of 1929 and 1931 Series. “Convertible Debenture Obligations, Series F. • “Convertible Obligations, due 2002, Series A and B, 6%, 6%%, 7%, provided such Convertible Obligation was acquired by the present holder in exchange for an Ageco Convertible Debenture Certificate or Convertible Debenture Obligation. "Preferred Stock ($6, $6.50, $7 Dividend Series) and $6 Cumulative Preference Stock, provided such Preferred Stock or Preference Stock was acquired by the present holder in exchange for an Ageco Convertible Debenture Certificate or Convertible Debenture Obligation. “Ageco and Agecorp: “General claims to the extent allowed by the Court, including non-security claims, fraud claims, and claims on securities matured before January 10, 1940 to the extent they have rot been paid, such as interest coupons and checks payable before January 10, 1940, Ageco Scrip due 1937 or 1938, and Ageco Convertible Investment Certificates due 1938. “Holders of the following Ageco securities get nothing under the Plan: “Convertible Obligations, due' 2002, Series A and B, unless such Convertible Obligation was acquired by the present holder in exchange for an Ageco Convertible Debenture Certificate or Convertible Debenture Obligation. “Convertible Obligations without fixed maturity. “Preferred Stock and Preference Stock, all series, unless such Preferred Stock or Preference Stock was acquired by the present holder in exchange for an Ageco Convertible Debenture Certificate or Convertible Debenture Obligation. “Interest Bearing and Non-Interest Bearing Scrip, due 1941, 1942, 1944 and 1947. “Convertible Certificates. “Common Stock. “Class A Stock. “Class B Stock. “Stock Purchase Warrants. “The reason these securities got nothing under the Plan is that they are all subordinate to general creditors and, as believed by the Trustees and found by the Securities and Exchange Commission, the value of the assets of the Estates is far below the amount that would be needed to satisfy the claims of the general creditors.” The principal amount of Ageco and Age-corp securities, outstanding as of March 31, 1943 (excluding certain securities which are treasury holdings or held by wholly owned subsidiaries of Agecorp in which there is no public interest, and holdings under an escrow agreement of May 15, 1933, and certain holdings of debt held by Ageco and Agecorp, and securities to be surrendered under the UESCO agreement) were listed by the Securities and Exchange Commission on page 21 of its opinion as follows: Principal Amount Outstanding March 31, Agecorp: 1943 8% Eight Year Bonds (8*s of '40)........$ 8,037,510 Convertible Debentures (73's)........... 24,244,765 Income Debentures (78’s)................ 134,598,755 Total Agecorp securities ............$166,881,030 Ageco: Fixed Interest Debentures (FIDs)......$ 58,853,831 Income Debentures due 1983............. 12,000 Sinking Fund Income Debentures (SFIDs) due 1983 ....................... 1,217,630 Sinking Fund Income Debentures (SFIDs) due 1986 ....................... 6,049,410 Convertible Obligations due 2002 (COs).. 42,089,844 Scrip matured or maturing after 1/10/40 10,199,781 Total Ageco debt securities..........$118,422,496 Preferred Stocks (at liquidating preferences) ................................. $ 49,282,423 Preference Stocks (at liquidating preferences) ................................. 76,926,830 Class A Stock ($1 par)................... 4,437,354 Class B Stock ($1 par).................... 607,953 Common Stock ($1 par).................. 1,085,549 Total Ageco stocks ...................$132,310,109 Total Ageco securities .......*....... $250,762,605 Total Agecorp and Ageco securities $417,643,635 [The outstanding Agecorp convertible debentures of 1973, in the sum of $24,244,-765, under the Compromise and the Plan of Reorganization, would be rated at double that principal amount, because they were originally Ageco FIDs in twice their present amount.] The Special Master summarized the proposed Compromise in Finding No. 14, as follows: “14. Under the proposed compromise, the claims of holders of 8s of ’40 are settled by the allowance to them of claims, in the amounts set forth in paragraph I of Appendix A, which are to have priority over the claims allowed to other security holders and creditors of Ageco and Age-corp covered by the compromise. The claims of the other security holders of Ageco and Agecorp are settled by the allowance of claims, in the amounts set forth in paragraph II of Appendix A, which bear the following average percentage ratios to the claims allowed to holders of Ageco Debentures, taking the latter at 100%: Percentage Security Ratio 73s ........................................... 257.6% 78s ........................................... 117.6% Ageco Debentures .......................... 100.0% 5% Income Debentures due 1983............. 100.0% SFIDs of ’S3 ................................ 79.6% SFIDs of ’86 ................................. 76.7% CDCs ........................................ 40.4% Original Holders of COs and Preferred Stocks ..................................... 20.2% “The claims allowed to the holders of the various series within each class of securities, vary to some extent because of the different dates at which interest was last paid on the securities and the different interest rates which the securities bear.” In paragraphs 6 to 8 of Article II of the joint Plan of Reorganization, the percentage ratios for the participating securities are set forth in terms of shares of new common stock of the surviving or resulting corporation. The capitalization of the Surviving Corporation is described in Article I, paragraph 3 of the joint Plan of Reorganization: “3. Capitalization of the Surviving Company. The capitalization of the Surviving Company shall he as follows: Estimated to be Outstanding on Consummation Authorized of the Plan New Senior Debt.... $ 8,000,000 $7,500,000 New Debentures ____$ 8,000,000 $7,400,000 New Common Stock $5 Par Value....... 10,000,000 shs. 7,500,000 shs.* ♦Shares estimated to be distributable as hereinafter set forth to holders of Participating Securities and General Claims but not including shares which may become distributable to The Chase National Bank of the City of New York or upon conversion of New Debentures.” The new senior debt, the new debentures and the new common stock are explained in paragraph 4 of Article I: “The New Senior Debt will be represented by a bank loan, to mature in five years, and to be amortized over said five-year period in approximately equal annual instalments. The New Senior Debt may be secured or unsecured. If the New Senior Debt is secured by a pledge of collateral, there will be appropriate provisions whereby a portion or portions of said collateral may be released from the pledge (a) on a sale by the Surviving Company of such portion of the collateral and application of the proceeds toward payment of the New Senior Debt, or (b) upon reduction of the New Senior Debt from time to time, provided that the sound value of the remaining collateral, as previously agreed upon, bears an agreed ratio to the unpaid balance of the New Senior Debt, or (c) upon the assumption by any other company of an appropriate portion of said New Senior Debt.” “The New Debentures (the terms and conditions of which are summarized in Exhibit A annexed hereto) shall be subordinate both as to principal and interest to not to exceed $15,000,000 principal amount of senior debt (including but not limited to the New Senior Debt). They shall not be secured by any pledge of collateral. The New Debentures shall be dated as of the effective date of the Plan and shall mature ten years after such date. They shall bear interest at the rate of 4%% per annum, payable semi-annually. Provisions respecting convertibility into Common Stock at the holder’s option and provisions respecting the terms upon which the New Debentures may be called for redemption are summarized in Exhibit A annexed hereto.” “The New Common Stock shall have a par value of Five Dollars ($5) per share and shall be entitled to one vote per share for all purposes, with the privilege of cumulative voting for the election of directors. Application will be made to list the New Common Stock on a national securities exchange.” “The excess of the book value of the assets of the Surviving Company as determined by the Board of Directors, over its liabilities and capital stock, shall be credited to capital surplus.” The Special Master’s Report on the Compromise of the Recap Litigation and of Certain Claims in the CDC Proceeding. In reviewing the Master’s report approving the Compromise and in considering the provisions of the joint Plan of Reorganization for both debtors, already approved by the Securities and Exchange Commission, I must pass upon the basic question of the fairness of the Compromise, since the Plan gives effect to the Compromise. A determination of the fairness of the Compromise, in turn calls for the consideration of two main controversial questions — (1) Should the Ageco FIDs share equally, as to principal, with the Agecorp 73s and 78s in the assets standing in the name of Agecorp ? (2) Does the differential (17.6% for the 78s and 57.6% for the 73s) adequately compensate the present holders of Agecorp 73s and 78s for the so-called “lost interest”, that is the difference between the interest paid on an Agecorp 73 or 78 on the one hand compared with what the Ageco FIDs received by way of interest? It seems appropriate at this point to refer to Findings of Fact of the Master, and several Findings of the Securities and Exchange Commission, which show the corporate history of the debtors and their wholly-owned subholding companies, the intercorporate dealings of Ageco and Age-corp, and their dealings through the medium of subholding companies of the Associated System. This will develop the transactions that preceded and led up to the submission by the Hopson management of the plan for the recapitalization of Age-co in May 1933. Almost $6,000,000 was spent in an attempt to persuade or frighten the Ageco FID holders into exercising one of the options of the Plan, under which they would become security holders of Age-corp at half their principal amount with fixed interest (Agecorp 73s), or at their old principal amount but on an income-if-earned basis (Agecorp 78s). Ageco was incorporated in New York on March 19, 1906. It was a comparatively small public utility holding company with gross consolidated assets in 1922 of $7,000,-000. Between March 14, 1922 and April 1923 Howard C. Hopson and John I. Mange acquired all of Ageco’s outstanding shares of voting stock. Hopson and Mange held and exercised voting control of Ageco until January 10, 1940. Mange was the operating executive. Hopson controlled the financial and accounting policies of Ageco and its. subsidiaries throughout. He controlled their Boards of Directors and held their undated signed resignations. Hopson’s employees kept the minute books; some of the minutes were spurious. They also kept the books of account (irregularly maintained). Entries were changed and reinstated as Hopson directed; one item was changed 13 times. Alleged contracts for stock subscriptions of Ageco in subsidiaries, disappeared and reappeared as the occasion required. There were no corporate resolutions authorizing the transfer of the bulk of Ageco assets to AUICorp. The officers of Ageco and Agecorp were selected by Hopson and were paid through checks of Hopson “service companies” which furnished the corporations in the Associated System with “auditing, corporate, security, transfer, tax consultant and other services.” For these services Hopson’s personally-owned service companies were paid large sums by the companies in the Associated System, giving him and his family a profit in excess of $6,500,000 in the period of 1922 to 1938. In 1922 Ageco controlled relatively few subsidiaries. In 1929 it controlled about 200 subsidiaries. The more subsidiaries in the Associated System, the more work for the Hopson service companies and the greater his personal profits. At December 31, 1929, the gross book value of the consolidated assets of the corporations in the Associated System ha,d increased to $900,-491,542, largely as a result of the acquisition of voting stocks and other securities of other public utility holding company systems and of various operating utility companies. Of course, many of the operating companies had their own debt structures. In Finding of Fact No. 25, the Special Master explains how this expansion took place. “25. The expansion of the Associated System was financed in large part by funds realized from the issuance of Ageco securities, or by exchanges of Ageco securities for securities of other holding company systems and operating companies. Part of the increase in the consolidated assets of Ageco and its subsidiaries was financed through the issuance of securities by subholding and operating companies in the Associated System.” The different classes of Ageco fixed interest debentures and the amounts outstanding at various dates are listed in Finding of Fact No. 26. They totaled $232,-000,000 on December 31, 1931; $261,000,-000 on December 31, 1932 and $265,000,000; on May 15, 1933. Ageco FIDs Issued After March 31, 1932. It appears from the Special Master’s-Finding No. 26 that between December 31, 1931 and May 15, 1933 the amount of Age-co FIDs outstanding increased from 232’ million to 265 million dollars. At the request of the attorney for the Committee of Agecorp 73s, the Trustees ascertained from Ageco’s records that there had been an increase of $25,603,660 in Ageco FIDs outstanding between March 31, 1932, and April-30, 1933. I thought the record should show, the purposes and the consideration for'' which these additional FIDs had been issued, in view of the contention of the attorneys for the Trustees and the 'attorney for the Committee of FIDs that about 95% of the increase represented exchanges of Ageco FIDs for other stocks and securities-of system companies or of Ageco. The-Trustees accordingly prepared two schedules (Exs. 33 and 33A) which, together with the testimony of a former Ageco accountant, definitely accounted for $23,531,-220 of these FIDs. Similar information as-to the remaining $2,072,440 could not readily be obtained. I have made an additional Finding No. 26A to supplement the Special Master’s Finding No. 26. The-sales and exchanges referred to therein! were made through Associated Corporation, a wholly-owned subsidiary of Ageco, which in effect was Ageco’s agent in these transactions. One startling item on Exhibit 33 (cash sales of the FIDs during that period), shows that $1,110,400 principal amount of FIDs was issued for $332,902.78 in cash, at about 30{5 on the dollar. This probably represented FIDs acquired by Associated; Corporation and resold at the above figure. It shows the value the management itself placed upon Ageco FIDs during part of that period. At the time the Recap Plan was offered May 15, 1933 the market price of the FIDs was down to about 19. Pursuant to calls made by the Ageco management in February 1932, some $2,-351,610 of FID 5s of 1965 and 5s of 1968 were issued on and after the call date, June 30, 1932, for 76,647.54 $1.60 Interest Bearing Allotment Certificates (Ibacs); and by a further call made January 23, 1932 $7,096,560 of FID 5s of 1965 and 5s of 1968 were issued for 57,191.5958 $8 Ibacs on and after the call date of June 30, 1932. A comparatively small amount of cash accompanied these exchanges. Further, $8,325,000 of FID 4%s of 1958 and $3,202,000 of FID 4s of 1983 were issued in exchange for $11,527,000 of Eastern Utilities Investing Corporation 5s of 1954. The EUIs were part of an issue ■sold in March 1929, of which Ageco had received the cash proceeds, giving EUICorp various Associated System securities. Between March 31, 1932 and May 15, 1933 EUI’s assets were principally Preferred and Preference Stocks and COABs of Ageco, which had little or no value. The ■option extended ■ the holders of EUIs to make the exchange for Ageco FIDs was, of course, readily accepted, even though the FIDs themselves were quoted at a comparatively low figure. It was better to own an Ageco FID than an EUI debenture. These exchanges of Ageco FIDs for other Ageco and Associated System securities also appear to have been a preliminary step to the Recap Plan, which was to be offered to the FIDs. Transfer of Ageco's Properties to Agecorp. As Ageco acquired the shares of various holding companies and utility operating companies, the stock certificates were issued and kept in the name of a nominee, generally Day & Co., a Hopson controlled partnership. The ownership of the acquired stocks was entered on the books of such subholding companies as Hopson designated, and was transferred from one company to another as he directed. There gradually developed several principal wholly-owned subholding companies in the Associated System. These were — Associated Utilities Investing Corporation (AUICorp), Associated Properties, Inc. (Aprops), Associated General Electric Corporation (Associated General) and the New York Electric Company. AUICorp was incorporated in Delaware June 7, 1922. It became Agecorp by a change of name February 25, 1932. Aprops was incorporated in Delaware on March 24, 1926. Its capital stock was owned by AUICorp until May 18, 1926, when it was transferred to Ageco. In March 1932 Aprops was merged into Agecorp. The capital stock of AUICorp (and Agecorp) has at all times been owned by Ageco. Associated' General was incorporated in Delaware August 13, 1927 as Associated Gas and Electric Company of Delaware. Its name was changed to Associated General Electric Corporation September 14, 1929. Its capital stock was owned by AUICorp until September 1929 when it was transferred to Ageco and was owned by Ageco to March 1931. In March 1931 all of the assets of Associated General were transferred to AUICorp which company then assumed all of the liabilities of Associated General. The Special Master found: “33. At all times from 1922 on, Ageco’s assets consisted principally of voting stocks, other securities, and accounts and notes receivable, of subsidiary and affiliated holding companies. When securities of other holding company systems or operating companies were purchased, the practice was generally followed of vesting ownership at the ■ time of acquisition in AUICorp, Aprops, Associated General Electric Corporation, or some other subholding company. Transfer of securities of subsidiary companies were frequently made from Age-co to subholding companies and from one subholding company to another. * * * ” “37. The vesting of ownership of securities in subholding companies, including AUICorp, Aprops, and Associated General Electric Corporation, was reflected on the books of account of Ageco and its subsidiaries by the recordation of open account transactions between Ageco and these companies. Advances to Aprops were carried on the books of Ageco as an account receivable through February, 1927, and as subscriptions to common stock of Aprops from that date through November, 1930. Advances to AUICorp were carried on the books of Ageco as an account receivable through January, 1928 and, from that date through November, 1930, as subscriptions to common stock of AUICorp. Advances to Associated General Electric Corporation were carried on the books of Ageco as an account receivable from February, 1929 through May, 1929, and from that date through November, 1930, as subscriptions to the common stock of Associated General Electric Corporation. None of these companies had sufficient authorized stock, during these periods, to fill these subscriptions. These subscription accounts were originally placed on the books of account pursuant to instructions from Hopson.” The various wholly-owned subholding companies, on whose books the stocks purchased by Ageco were entered as owned by the subholding companies, were only “corporate pockets” of Ageco. The purchased properties were really owned by Ageco and had been acquired with Ageco funds or by the issuance of Ageco debentures and other securities. The Special Master found that “It was Hopson’s policy to conceal from the public, in so far as possible, the precise location in the System of its investments.” (Last sentence of Finding No. 34.) The manner in which Ageco received “payment” for the assets which it put into these various corporate pockets, was also a matter of Hopson’s orders and he changed the form of the credit as he saw fit. The Special Master’s Findings of Fact Nos. 44 to 47 illustrate this: “44. At November 30, 1929, the investments, accounts receivable, and notes receivable of Ageco totalled $557,823,149. Of this amount, $469,517,429 was represented by Ageco’s investment, principally in the form of common stock and subscriptions thereto, in AUICorp, Aprops, Associated General Electric Corporation, and New York Electric Company (another subholding company). The investment in AUICorp consisted of $80,433,671 in common stock and subscriptions thereto, and $59,831 in an account receivable. “45. As at December, 1929, according to its books of account, Ageco transferred its investment in New York Electric Company to AUICorp and received, in consideration for the transfer, $191,934,141 in subscriptions to the common stock of AUICorp, an amount equal to that at which the investment in New York Electric Company was then carried on the books of Ageco. There is an unresolved issue of fact, on which the evidence is in conflict, as to whether this transaction took place in December, 1929, or at some later time before April, 1930. “46. As at December 31, 1929, and during 1930, securities of Metropolitan Edison Company, New Jersey Power and Light Company, and Northern Pennsylvania Power Company, three of the major operating companies in the Associated System, were transferred to Metropolitan Edison Corporation, a subsidiary of AUICorp, by the subholding companies which had previously held the securities. These transactions resulted in an increase of $127,-999,610 in Ageco’s subscriptions to the common stock of AUICorp. “47. In December, 1930, according to its books of account, Ageco’s subscriptions to the common stock of Aprops, AUICorp, and Associated General Electric Corporation were cancelled, and replaced by open accounts receivable in the same amounts, as follows: AUICorp ................................... $378,520,533 Aprops ..................................... 82,151,322 Associated General Electric Corporation 58,192,760 Total ...................................$518,864,615” Further manipulations of the Ageco investments are recited in the Master’s Findings Nos. 49 to 52, and No. 54: “49. In March, 1931, Associated General Electric Corporation transferred all of its assets to AUICorp, and AUICorp assumed all of the liabilities of Associated General -Electric Corporation. The transfer was approved by the nominee referred to in Finding of Fact 35, [i.e. Day & Co.] which was the stockholder of record of Associated General Electric Corporation. As a result of this transaction, Ageco’s open account receivable from AUICorp was increased by $59,821,792. “50. In September, 1931, Ageco transferred certain miscellaneous investments to AUICorp and, in consideration for the transfer, its open account receivable from AUICorp was increased by $55,463,370. “51. On February 25, 1932 AUICorp changed its name to Agecorp. “52. On March 21, 1932, Aprops was merged into Agecorp. The merger was approved by the nominee referred to in Finding of Fact 35, which was the stockholder of record of Aprops and Agecorp. As a result of this transaction, Ageco’s investment in Agecorp was increased by $90,-278,053.” “54. At March 31, 1932, Ageco’s assets were carried on its books at $690,183,059. By virtue of the transactions described in Findings of Fact 45, 46, 49, 50, and 52, and other transactions of lesser magnitude, $675,134,345 of the total assets of Ageco was represented by its investment in Agecorp.” Covenants of the Ageco FID Indentures. • The Ageco fixed interest debentures had been issued under indentures which contained certain covenants. The Master’s Findings of Fact No. 27, 28 and 29 refer to and quote these covenants: "27. All of the indentures under which the Ageco Debentures were issued, with the exception of the 5%'% Convertible Debentures Due 1977 and the Convertible Investment Certificates contained negative pledge covenants, and covenants relating to the conveyance of substantially all of the assets of Ageco as an entirety (hereinafter jointly referred to as ‘restrictive covenants’). The indenture under which the 5%% Convertible Debentures Due 1977 were issued, and the Convertible Investment Certificates, contained only the latter covenant. The Convertible Investment Certificates were convertible by their terms into 5% Consolidated Refunding Debentures Due 1968. “28. The negative pledge covenants in the various series of Ageco Debentures were not identical, but they were substantially similar. The following covenant contained in the indenture covering 4%’% Convertible Debentures Due 1949, is typi- “‘Article III. “ ‘Certain Covenants of the Company. “ ‘Section 7. Except in the case of purchase money mortgages and liens, and except in the case of pledges in the usual course of business as security for temporary loans maturing not more than one year from their date of issue or indemnity for terms not exceeding one year, the Company will not mortgage or pledge any of its property without by such mortgage or pledge securing the due and punctual payment of the principal of and the interest upon the debentures issued and outstanding under this Indenture, ratably with any and all obligations secured by such mortgage or pledge.’ “29. The covenants in the various series of Ageco Debentures relating to the conveyance of substantially all the assets of Ageco as an entirety, were not identical, but they were substantially similar. The following covenant contained in the indenture covering the 5%!% Convertible Debentures Due 1977, is typical: "‘Article XII. “ ‘Consolidation, Merger and Conveyance. “ ‘Section 1. Nothing in this Indenture shall prevent any consolidation or merger of the Company with or into, or any conveyances (subject to all provisions hereof and of any and all indentures supplemental hereto) of substantially all the properties of the Company as an entirety, to any other corporation lawfully entitled to acquire the same, or successive consolidations, mergers or conveyances to which the Company or its successor or successors shall be a party or parties; provided, however, that no such consolidation, merger or conveyance shall impair any of the rights and powers of the Trustee of of the holders and registered owners of debentures outstanding hereunder; and provided further that upon any such consolidation, merger or conveyance, the due and punctual payment of the principal and interest of all debentures issued hereunder at the time outstanding, according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Indenture, and of any and all indentures supplemental hereto, shall, by an indenture supplemental hereto, executed and delivered to the Trustee, be expressly assumed by the successor corporation formed by or resulting from any such merger or consolidation, or to which any such conveyance shall have been made. “ ‘Section 2. Every successor corporation formed by or resulting from any such consolidation or merger, or to which a conveyance shall have been made as aforesaid, upon executing an indenture supplemental hereto as provided in Section 1 of this Article XII, in form satisfactory to the Trustee, and upon delivering or causing to be delivered to the Trustee appropriate proofs of such consolidation, merger or conveyance, shall succeed to and be substituted for the Company for all purposes of this Indenture; but no such consolidation, merger or conveyance shall destroy or impair the rights of the holders and registered owners of debentures to con-. vert the same into Class A Stock and Common Stock of the Company upon the terms and conditions provided in Article VI hereof, unless the covenants of the Company contained in Section 7 of Article VI hereof shall be complied with. “ ‘The Trustee may receive the certificate of any counsel selected by it (who may be of counsel to the Company) as conclusive evidence that any such indenture complies with the foregoing conditions and provisions of this Section 2. “ ‘Section 3. The Trustee shall be under no duty to see that any such successor corporation shall assume the payment of the debentures hereunder and the performance of the covenants and conditions hereof, except as a condition precedent to the vesting in such successor corporation of any of the rights and powers conferred on the Company by this Indenture. “ ‘Section 4. The Company covenants and agrees that no consolidation or merger, nor any conveyance of substantially all of the properties of the Company as an entirety to which the Company or any successor corporation shall be a party, shall be made or effected, unless the terms, covenants and conditions contained in this Article shall have been complied with and observed by the Company and/or the successor corporation, as the case may be.’ ” Violations of Covenants of the Ageco FID Indentures. The Trustee of Ageco and the Ageco FIDs assert that the transactions by which stocks of utility companies, acquired by Ageco and issued in the name of its nominee, Day & Co., were vested in various Ageco wholly-owned subholding companies and finally concentrated in Agecorp in 1931 and early 1932, violated the FID indenture covenants against the conveyance of substantially all the assets of Ageco as an entirety. They argue that the various steps by which Agecorp finally became possessed of all Ageco’s properties brought about the same result as the transfer of all the Ageco properties in a single transaction. The very thing that the covenant was designed to prevent, was accomplished by the Hopson management in a series of transactions, and Ageco’s properties became Agecorp’s without Agecorp assuming the payment of the Ageco FIDs. True, Ageco was not legally consolidated with or merged into Agecorp, because that would have nullified the real purpose of the conveyances. But if we consider the substance and not the form, the conclusion is inescapable that the conveyance of all' Ageco’s properties to Agecorp through a series of transactions, without the transferee assuming the obligations of Ageco-to the FIDs, violated the covenant of the Ageco FID indentures. As the Special Master put it: “We must ever keep in mind that we are dealing with realities. Creditors are no