The debtor proposed a different plan. If you want to know what that plan is I will give it to you, but it is all shown in the Commission's report, and that will save time.

As I say, there was a deficit in these earnings under any formula until the war earnings brought them up and created a considerable credit.

I have cited the decisions of the United States Supreme Court in the two cases of the Hoboken Railway Co. and the Texas Mexican Railway Co. holding that not only does the Interstate Commerce Commission have the power to refuse to permit a lessee to reject a lease, but to refuse to permit a lessor to repossess its own property if the Commission finds that it is in the public interest, and that the Commission will fix the basis of the rental.

Now, I might say further that the plan proposed by the examiner is for a lease of the G. F. & A. to the new Seaboard Co. for a term of 21 years at a rental to be fixed by the Commission on hearings.

Senator REED. Well, we are not concerned with the details of these things, Mr. Cocke.

Mr. COCKE. I understand that. I am just trying to give you a picture.

Senator REED. Let me suggest to you here that we make this suggestion to everybody who wants some property excluded from the operation of the bill if passed. You have prepared and presented an amendment that would accomplish that.

Mr. COCKE. Yes, I have proposed an amendment which, so far as I know, would not cut across the situation of any other property. And it would not involve complications as to any other property.

That is found on page 12 of my statement, and as stated before, reads as follows:

Provided, however, That this section shall not apply to any such proceeding if the owners or holders on May 1, 1947, of all of the stock entitled on that date to vote for the election of directors of such carrier had acquired all of such stock within 7 years prior to the date of the enactment of this act.

That is proposed to go at the end of section 20c (1) of the amendments intended to be proposed by Senators Reed and Myers to S. 249. Mr. Chairman, I only want to say a very few more words.

We feel very strongly that it is not the purpose of this bill and should not be the effect of this bill to encourage or permit heavy speculative profits.

I take it that this bill was designed to protect the equities to the extent that they exist of those who invested their properties and their moneys in these properties in good faith, and relying on the credit of the railroad to give them a sound investment.

Here $1,000,000 of the first preferred stock was bought, as an obviously speculative investment for $5,000 and although I have no quarrel with the profit motive, these gentlemen are endeavoring to capitalize this to this extent: that only recently with the Seaboard reorganization committee which was still functioning in the clean-up process, it received a proposal to sell this $1,000,000 of first preferred stock in exchange for $25,000 of Seaboard no par common, which Seaboard common at the present price of Seaboard common is approximately $15 a share, and that would produce an approximate profit to this $5,000 investment of $375,000.

Have you any questions?

Senator REED. Does that conclude your statement, Mr. Cocke? Mr. COCKE. Yes, sir. I am very much obliged to you for your courtesy.

Senator REED. Yes, sir. Thank you very much.

Mr. COCKE. Thank you, Senator.

Senator REED. The subcommittee will recess until 10 o'clock tomorrow morning.

(Thereupon, at 11:45 a. m., an adjournment was taken until Thursday, May 29, 1947, at 10 a. m.)

MODIFICATION OF RAILROAD FINANCIAL STRUCTURE

THURSDAY, MAY 29, 1947

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON

INTERSTATE AND FOREIGN COMMERCE,
Washington, D. C.,

The subcommittee met at 10 a. m., pursuant to adjournment, in the committee room of the Committee on Interstate and Foreign Commerce, Capitol, Senator Clyde M. Reed (chairman of the subcommittee) presiding.

Present: Senator Reed.

Senator REED. The subcommittee will come to order, please.

We will first hear from Mr. O'Connell, of the Susquehanna & Western Railroad.

STATEMENT OF J. HARLIN O'CONNELL, REPRESENTING GENERAL MORTGAGE BONDHOLDERS, NEW YORK, SUSQUEHANNA & WESTERN RAILROAD CO., 120 BROADWAY, NEW YORK, N. Y. Mr. O'CONNELL. I appear for and represent a group of general mortgage bondholders of the New York, Susquehanna & Western Railroad Co., hereinafter sometimes called the Susquehanna, now in reorganization under section 77 of the Bankruptcy Act and the New York Trust Co. as substituted trustee under the Susquehanna general mortgage.

The general mortgage is the junior mortgage of the Susquehanna and the general mortgage bonds are widely distributed and are held by individual investors. So far as I know few, if any, of these bonds are held by institutions. Furthermore, the general mortgage bondholders in my group acquired practically all of their bonds prior to the commencement of the reorganization proceeding in June 1937. There are approximately $2,550,000 par value of general mortgage bonds outstanding.

Under the plan of reorganization approved by the Interstate Commerce Commission and now before the United States District Court for the District of New Jersey for its approval, each holder of a $1,000 general mortgage bond will receive approximately one-half share of preferred stock and nine and a fraction shares of common stock of the reorganized company. The plan of reorganization is approved by the general mortgage bondholders and, in fact, no objections to the plan have been filed by any parties to the reorganization proceeding. S. 249, as it now reads, would apply to the Susquehanna. I do not oppose the purposes intended to be accomplished by S. 249, but I am here to point out to the committee that it would not be in the public interests to include the Susquehanna within the provisions of this

bill and to suggest that the bill be amended to exclude the Susquehanna from its effects. This is the same position which I took on the hearings before this committee at the second session of the Seventyninth Congress on S. 1253.

The Susquehanna has outstanding 129,608.30 shares of common stock of the par value of $100 per share and 129,958.4 shares of 6percent cumulative preferred stock of the par value of $100 per share. Each share, whether common or preferred, is entitled to one vote. The Erie Railroad Co. owns 127,801.7324 shares of common stock and 129,552.44 shares of preferred stock. It, therefore, appears that only 1,806.5676 shares of common stock and 405.96 shares of preferred stock are owned by the public. These public holdings represent approximately .014 percent of the common stock and .003 percent of the preferred stock. Public holdings of the preferred and common stock of the Susquehanna are, therefore, infinitesimal.

Under the bill, as now drawn, control of the Susquehanna would be returned theoretically to the Erie, but under the provisions of subparagraph (c) at pages 20-1 of the proposed amendments to the bill, the Erie would be unable to vote its stock and actual control of the road would then pass to unknown and, perhaps, nonexistent stockholders owning .014 percent of the common stock and .003 percent of the preferred stock. This, of course, would be an absurd result and certainly would not be in the public interests.

The Erie acquired control of the Susquehanna through J. P. Morgan & Co., about 40 or 50 years ago. Undoubtedly its primary purpose was to acquire control of the Susquehanna's valuable coal terminal at Edgewater, and the line of road from Little Ferry through the Palisades to Edgewater and the connecting line of road then about to be constructed along the west bank of the Hudson, which now serves a number of important industrial plants. When the Susquehanna filed its petition for reorganization in June 1937, the road was in a deplorable condition, mainly because the Erie had exercised its control in its own interests and not in the interests of the Susquehanna. None of the operating contracts and agreements between the Susquehanna and the Erie had been independently negotiated. The same officers acted for both and every officer and director of the Susquehanna, with possibly one exception, was an officer and director of the Erie.

Furthermore, Erie had acquired an 85-percent interest in the Erie Terminal Railroad Co., which owned the line of road along the west bank of the Hudson serving many important industrial plants, in spite of the fact that this line of road had been purchased and constructed entirely with Susquehanna money.

Furthermore, by juggling accounts and by reason of the unfair operating contracts and agreements above referred to the Erie had accumulated an alleged claim against the Susquehanna in the amount of approximately $7,000,000 at the time the Susquehanna's petition for reorganization was filed.

By virtue of this claim the Erie attempted to continue its control of the Susquehanna and in the plan of reorganization as originally filed nominally by the Susquehanna as the debtor, but actually by the Erie, the latter would have obtained approximately 43 percent of the common stock of the reorganized company. However, by virtue of a mortgage lien proceeding, which was initiated by me as attorney

for the general mortgage bondholders, it was held that the Susquehanna mortgages were all liens against the valuable terminal properties at Edgewater thus making it impossible for the Erie, as a general creditor, to obtain anything more than a very nominal amount of stock in the reorganized company.

Thereafter the trustee of the Susquehanna was able to settle the entire claim of the Erie for $250,000 and as a part of this settlement the Susquehanna's trustee recaptured the important and valuable line of road along the west bank of the Hudson. Susquehanna's trustee also renegotiated the operating contracts and agreements with the Erie to the benefit of the Susquehanna and its security holders.

I think it is fair to say that for many years the Susquehanna had been mulct by the Erie.

The Interstate Commerce Commission has held that the common and preferred stock of the Susquehanna has no value and under the plan of reorganization no securities of the reorganized company are allocated to the preferred and common stockholders. The Erie has filed no objections to the plan and its time to do so has expired. It has, therefore, accepted the finding of the Commission that the preferred and common stock held by it is valueless.

The present trustee of the Susquehanna, Mr. Henry K. Norton, and the prior trustees have done an outstanding piece of work in operating the Susquehanna for the past 10 years. At the time the petition for reorganization was filed the Susquehanna had practically no equipment. It has been completely Dieselized, and we have one. of the finest commuting services from Paterson, N. J., to Susquehanna Transfer and thence by bus to New York. At the time the trustee was appointed the Susquehanna's passenger traffic was in a deplorable condition. Passenger cars were of the most obsolete type conceivable; the road was in terrible condition and had no independent operating staff. The trustee built up his own operating staff and the administrative expenses of the trustee's office have actually been less during reorganization than they were when the Erie was in control.

Should the Erie again obtain control it would not be long before all of the good work which has been done by the trustee, as outlined above, would be thrown out of the window.

In this connection, may I point out that citizens of Paterson, N. J., arose in arms when they learned that H. R. 3237 would apply to the Susquehanna and might eventually result in the Erie again obtaining control.

When I testified at the hearings before this committee at the second session of the Seventy-ninth Congress on S. 1253, the then chairman of the committee, Senator Wheeler, interrupted my testimony to remark:

I can assure you we did not draft the bill for the purpose of turning your road back to the Erie.

I, therefore, suggest the following amendment to the bill which is the same amendment which I have already suggested to H. R. 3237:

The provisions hereof shall not apply if no objections to a plan of reorganization certified to the court by the Interstate Commerce Commission shall have been filed by any stockholder of the debtor within the time limited by law or the order of the court.

I want to make it clear that I do not appear in opposition to the principles which are intended to be covered by the pending bill, S.