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Commission, in fixing its plans, did not foresee it; likewise, no one can foresee what traffic there will be for the railroads after hostilities have ceased. There will, of course, be a reduction in the wartime traffic, but, unless we are to concedé that we are willing to get along with a much less adequate transportation system, and unless we are to admit that our efforts at readjustment after the war will be a failure, then we must insist that the owners of these securities now being confiscated should share in the prosperity which has come as a result of the war and in that which necessarily will follow in rebuilding the Nation's industries.
THE PURPOSE OF THE BILL
The primary purpose of the bill is to insure that the courts shall make an independent judicial review of each plan and of the evidence upon which the plan is based. Under the existing statute, the Commission is required to certify to the court a transcript of its proceedings; and the court is required to notify all parties and, if objections are filed, to have a hearing. The effect of the proposed amendments is to require the judge to make an independent judicial determination of the facts found by the Commission, and not to hold that the adminstrative finding of the Commission is beyond judicial review. With this object in mind, the bill provides that the judge shall not only be satisfied that the plan complies with the provisions of subsection (b) as in the present statute, but must also be satisfied that it complies with the provisions of subsection (d), which the Supreme Court held was not within the province of judicial review. This will add nothing to the requirements of the present statute as to the hearing and the scope of the evidence; it will merely direct the courts to exercise the traditional right of review, and to give the parties and the public the benefit thereof.
Second, and as a means of insuring that the Interstate Commerce Commission shall be guided by some standard in determining the permissible capitalization of the reorganized company, the bill provides that the existing total capitalization shall not be reduced below the lower of either the investment in the property or the physical valuation as previously determined by the Commission under section 194. Naturally, if the existing capitalization exceeds the investment, it should be susceptible of reduction, if the Commission finds it is not supported by earning power; or, if the existing capitalization exceeds the physical valuation found by the Commission, it should be susceptible of reduction, unless in that event the Commission deems the earning power sufficient to support it. But where the existing capitalization represents actual investment in the property, or where it is not in excess of the value determined by the Commission under the mandate of law, then it should not be disturbed.
If the transportation system of the country is to be adequately financed, investment in railroad securities must be kept attractive for private investors. It is folly to expect investors to finance new railroads by purchasing stocks or junior securities which may be arbitrarily eliminated. Twenty-four years ago in Congress the question of railroad credit was discussed by Mr. Rayburn, of Texas, who, in advocating the enactment of section 20a of the Transportation Act of 1920, stated (Congressional Record, 66th Cong., 1st sess., vol. 58, pt. 8, p. 8376):
Of course, the credit of the railroads has been destroyed. But if we write into the law of the land a statute to the effect that before a railroad can issue new securities, before it can put them on the market, it must come before the properly constituted governmental agency, lay the full facts of its financial situation before that body, tell that body what it intends to do with the money derived from the sale of the issue of securities, and after it has received the approval of that regulating body and it goes out and puts those securities on the market, then the Interstate Commerce Commission by this law is empowered at any time to call it to account and have it tell to that regulating body that it expended the money, the proceeds of the sale of securities, for the purposes for which it had made the application. Then we shall have railroad securities that will stand for value in the markets of this country and in the markets of all the world.
It is under this section 20a that the Commission has authorized the issue of some $20,000,000,000 of securities, plus some 20,000,000 shares of capital stock without par value (I. C. C. Activities, 18871937, p. 168). Section 20a of the act requires in every case that the Commission certify that the proposed issue of securities is compatible with the public interest. It is ironical that many of the securities which the Commission is now wiping out in reorganizations under its determinations of permissible capitalization are securities which, directly or indirectly, have been approved by the Commission under section 20a. Many instances have been cited to us which it is no! necessary to repeat here.
The important thing is that the Commission in determining tota capitalization has no standard to guide it. It must make an estimate of future earning power. In the very nature of things, it cannot foresee with any degree of accuracy what the future warning power will be. As Commissioner Miller said in one case (242 I. C. C. 475). “We are not omniscient and cannot foresee the future."
Another reason why the Commission's estimates of earning power are unsatisfactory as a means of determining value is that the earning power of the carriers generally is within the control of the Commission. Under our scheme of regulation, it is the Commission's duty so to regulate the rate structure that there will be a fair return on the value (as determined under sec. 19a) of the property devoted to public use (act, sec. 15a). It is that provision which justifies an investor in investing his funds in railway capitalization. To say that because the Commission has failed, for whatever reason, to obtain this result, the investor should be destroyed, is certainly not due process of law and cannot conceivably benefit railway credit.
In order to carry out the policy, however, of having fixed interest charges reduced, the bill contains a proviso in section 1 (ii) that, if the existing capitalization is in excess of the value of the debtor's property as certified by the Commission under subsection (e)--that is, of what the Commission terms "capitalizable value”—the excess shall be represented by no-par stock issued at the rate of one share for each $100 of such excess. The purpose of this is to afford to the existing stockholders and junior security holders a continued interest in the property. This no-par common stock will still represent actual investment in the property and will still represent a value which the Commission itself has determined under section 19a. It will in no sense be a speculative medium. In bad years, it will pay no dividends; in the good years it should reap the benefit of prosperity at least sufficient to compensate for what the investor has lost in the bad years. As the matter stands now, the investor has suffered through the bad years, and when prosperity has returned the procedure under section 77-originally designed as an act for the relief of debtors-has taken his investment and turned it over to his creditors.
In this connection, the bill contains an additional provision which may be quite helpful. It requires the Commission to name one of its members to confer with the parties in interest and to endeavor to act as a mediator to reconcile their differences. It is thought that this provision will avoid much controversy and consequently shorten the proceedings.
EFFECT ON PENDING REORGANIZATIONS
The bill is made to apply to all reorganization proceedings now pending, except where the property dealt with by the plan has been transferred to a new corporation or retained by the debtor pursuant to the plan, or where the plan has been voted on and accepted by the requisite percentage of creditors of each class prior to the effective date of this amendment.
It is not believed that the provisions of the bill will result in any delay in the pending cases. If it did so result, however, that would not be an objection to correcting a wrong. All of the facts in all of the pending cases are already of record. No long-drawn-out investigation in any case would be necessary to enable the court to pass judicially upon the Commission's determination of earning power. The standards by which the new capitalization is to be measured, that is, the actual investment and the 19a valuations, are 10a lily accessible from the files of the Commission, and in most cases have been introduced into the records already before the courts. While the Commission's valuations under section 19a are by statute made only prima facie evidence (sec. 19a (i)), and may be contested in court when improperly made (United States v. Los Angeles & Salt Lake RR. Co., 273 Ù. S. 299) 19a valuations do not involve any conflict as to the facts, all of which are matters of record. The controversy would relate only to principles, or the evaluation of evidence.
We conclude, therefore, that the enactment of this portion of tho bill would not tend to delay the progress of pending plans. Delay, however, would be preferable to confiscation.
The committee has held protracted hearings on H. R. 2857 (78th Cong.) for which the present bill is a substitute embodying amendments made as a result of those hearings, and has reached the conclusion that the consummation of the reorganization plans as now framed would be & severe blow to railroad credit and make it well-nigh impossible for any but the richest railroads to obtain new capital on attractive terms.
Certainly the present prices of railroad stocks, which are discouragingly low in spite of very high earnings, indicate that no now financing can be done through the medium of common stock until something has been accomplished toward the restoration of railroad credit. Particularly is this true in the case of the reorganized railroads whose preferred and common stocks are being traded in on a when-issued basis at far below par, generally around 35 to 40 for new preferred stocks, and 15 to 20 for new common stocks. This in itself is a commentary on the public regard in which railroad stocks are held. Just emerging from reorganizations after years of careful consideration by the Commission and in a time of rare prosperity, the natural expectation would be that all of the new securities would bring par. As it is now, the only way for the reorganized roads to finance their necessary capital requirements, which we are advised will be heavy after the war, is to issue first mortgage bonds to provide funds, and this will lead back to the evils which section 77 was designed to prevent. The current prices of the new junior securities about to be issued under the Commission's plan indicate that future investment therein has been discouraged by what has happened to the present holders of existing issues. We believe this bill will go far toward curing this situation, and, therefore, recommend its passage.
CHANGES IN EXISTING LAW
In compliance with clause 2a of rule XIIl of the Rules of the House of Representatives, changes in existing law made by the bill are shown as follows (existing law in which no change is proposed is shown in roman, Dew matter is printed in italic, and existing law proposed to be omitted is enclosed in black brackets): SEC. 77.
(b) A plan of reorganization within the meaning of this section (1) shall include provisions modifying or altering the rights of creditors generally. or of any class of them, secured or unsecured, either through the ssuance of new securities of any character or otherwise; (2) may include provisions modifying or altering the rights of stockholders generally, or of any class of them, either through the issuance of new securities of any character, or other. wise; (3) may include, for the purpose of preserving such interests of creditors and stockholders as are not otherwise provided for, provisions for the issuance to any such creditor or stockholder of options or warrants to receive, or to subscribe for securities of the reorganized company in such amounts and upon such terms and conditions as may be set forth in the plan; (4) shall provide for fixed charges (including fixed interest on funded debt, interest on unfunded debt, amortization of discount on funded debt, and rent for leased railroads) in such an amount that, after due consideration of the probable prospective earnings of the property in light of its earnings experience and all other relevant facts, there shall be adequate coverage of such fixed charges by the probable earnings available for the payment thereof; (5) shall provide adequate means for the execution of the plan, which may include the transfer of any interest in or control of all or any part of the property of the debtor to another corporation or corporations, the merger or consolidation of the debtor with another corporation or corporations, the retention of all or any part of the property by the debtor, the sale of all or any part of the property of the debtor either subject to or free from any lien at not less than a fair upset price, the distribution of all or any assets, or the proceeds derived from the sale thereof, among those having an interest therein, the satisfaction or modification of any liens, indentures, or other similar interests, the curing or waiver of defauits, the extension of maturity dates of outstanding securities, the reduction in principal and/or rate of interest and alteration of other terms of such securities, the amendment of the charter of the debtor, and/or the issuance of securities of either the debtor or any such other corporation or corporations for cash, or in exchange for existing securities, or in satisfaction of claims or rights or for other appropriate purposes; and may deal with all or any part of the property of the debtor; may reject contracts of the debtor which are executory in whole or in part including unexpired leases; and may include any other appropriate provisions not inconsistent with this section.
The adoption of an executory contract or unexpired lease by the trustee or trustees of a debtor shall not preclude a rejection of such contract or lease in a plan of reorganization approved hereunder, and any claim resulting from such rejection shall not have priority over any other claims against the debtor because such contract or lease had been previously adopted. The term “securities” shall include evidences of indebtedness either secured or unsecured, bonds, stock, certificates of beneficial interest therein, certificates of beneficial interest in property, options, and warrants to receive, or to subscribe for, securities. The term "stockholders” shall include the holders of voting-trust certificates. The term "creditors" shall include, for all purposes of this section all holders of claims of whatever character against the debtor or its property, whether or not such claims would otherwise constitute provable claims under this Act, including the holder of a claim under a contract executory in whole or in part including an unexpired lease.
The term "claims” includes debts, whether liquidated or unliquidated, securities other than stock and option warrants to subscribe to stock), liens, or other interests of whatever character. For all purposes of this section unsecured claims, which would have been entitled to priority if a receiver in equity of the property of the debtor had been appointed by a Federal court on the day of the approval of the petition, shall be entitled to such priority and the holders of such claims shall be treated as a separate class or classes of creditors. In case an executory contract or unexpired lease of property shall be rejected, or shall not have been adopted by a trustee appointed under this section, or shall have been rejected by a receiver in equity in a proceeding pending prior to the institution of a proceeding under this section, or shall be rejected by any plan, any person injured by such nonadoption or rejection shall for all purposes of this section be deemed to be a creditor of the debtor to the extent of the actual damage or injury determined in accordance with principles obtaining in equity proceedings. The provisions of section 60 of this Act shall apply to a proceeding under this section. For all purposes of this section any creditor or stockholder may act in person or by an attorney at law or by a duly authorized agent or committee subject to the provisions of subsection (p) hereof. The running of all statutes of limitation shall be suspended during the pendency of a proceeding under this section.
The capitalization of the reorganized company shall not be less than the capitalizailon existing on the date on which the debtor's petition to the court was approved as properly filed, with such adjustment therein as may result from the 188ue or retirement of securities during the reorganization proceedings: Provided. That such existing capitalization does not exceed either
"(1) the actual investment in the debtor's properties, OT "(11) the valuation found by the Commission under section 19 (a) of the Act, plus expenditures for additions and betterments less retirements since the date of such vcluation, whichever is the lower: And provided further, That any part of such capitalization in excess of the value of all of the debtor's property as certified by the Commission pursuan lo subsection (e) shall be represented by shares of slock without par value of the reorganized company at the rate of one share of such stock for each $100 of such exce88."
"(d) The debtor, after a petition is filed as provided in subsection (a), shall file & plan of reorganization within six months of the entry of the order by the judge approving the petition as properly filed, or if heretofore approved, then within six months of the effective date of this Act, and not thereafter unless such time is extended by the judge from time to time for cause shown, no single extension at any one time to be for more than six months. Such plan shall also be filed with the Commission at the same time. Such plans may likewise be filed at any time before, or with the consent of the Commission during, the hearings hereinafter provided for, by the trustee or trustees, or by or on behalf of the creditors being not less than 10 per centum in amount of any class of creditors, or by or on bebalf of any class of stock holders being not less than 10 per centum in amount of any such class, or with the consent of the Commission by any party in interest. After the filing of such a plan, the Commission(,) shall name one of its members to confer with the parties in interest and to endeavor as a mediator to reconcile diferences which may exist belween them and unless such plan shall be considered by it to be prima facie impracticable, shall
, after due notice to all stockholders and ereditors given in such manner as it shall determine, hold public hearings (,) at which opportunity shall be given to any interested party to be heard, and following which the Commission shall render å report and order in which it shall approve a plan, which may be different from any which has been proposed, that will in its opinion meet with the requirements of subsections (b) and (e) of this section, and will be compatible with the public interest; or it shall render a report and order in which it shall refuse to approve any plan. lo such report the Commisnion shall state fully the reasons for its conclusions.
The Commission may thereafter, upon petition for good cause shown tiled within sixty days of the date of its order, and upon further hearings if the Commission shall deem necessary, in a supplemental report and order modify any plan which it has approved, stating the reasons for such modification. The Coinmission, if it approves a plan, shall thereupon certify the plan to the court together