Mr. NOBLE. Section 77?

Senator REED. Yes.

Mr NOBLE. I cannot say I think it is.

Senator REED. Of course, the New Haven did have, prior to operation in 1946, what you might call windfall earnings. Frank as everybody knows, Senator Wheeler, who was in the Senate up tɩ this year, former chairman of this committee, and I were interested and attracted to this matter because of these very large earnings which were windfalls, of course. We had no thought of their being used as any basis for a permanent capitalization in the future.

We did, however, then have, and I have yet, very decided views to the effect that all the security owners and equity holders, if they could be included, should have some participation in those increased earnings. That is just unthinkable to me that they should be totally disregarded. That is really what we had thought.

Mr. NOBLE. Yes.

Senator REED. As an illustration, here was the St. Louis-Southwestern Railroad. You perhaps are aware of this.

The District Court of St. Louis, the Eastern District of Missouri, approved the petition of the trustee of St. Louis Southwestern and the company itself to be removed or released from trusteeship. It

did that this week.

There is a road continuing to be held in custody of the court where the earnings had accrued to a point where it could meet all of its accrued bonds or debt, and pay up all of its accrued interest, pay all the bonds that had matured; and the court, I am glad to say, in that case recognized the situation and granted the petition of the trustee.

Mr. NOBLE. Terminating the trusteeship.

Senator REED. In other words, the St. Louis Southwestern was undoubtedly insolvent when it went into trusteeship.

Mr. NOBLE. Yes.

Senator REED. Earnings increased and put them in a position. where they could meet all of their obligations.

Mr. NOBLE. Yes.

Senator REED. The court then recognized that. If the Interstate Commerce Commission approves of the proposal to readjust its indebtedness, it will be relieved. It would be on its own. To some extent, that was present in every other railroad in the United States. There is another case that I know of. It is the New Orleans, Texas & Mexico. It is unthinkable that the junior security holders, and in some cases perhaps the equity holders, preferred and common stock, were not given any recognition in these increased earnings. That is why we are dealing with this problem now.

Mr. NOBLE. Yes. Well, I think that of course that my experience. has been limited. My first-hand experience has been limited to the New Haven Railroad, and particularly to a rather small part of the system. That is, to the Boston & Providence.

But I do feel that leased lines of these railroad systems, as a general group, and the security holders, have been at a terrific disadvantage under section 77. It was not their fault that the system went into bankruptcy, we will say, in 1933 or 1935. It may not have been anybody's fault, but it certainly could not be blamed on the leased line.

They find themselves, all of a sudden, faced with a machinery that may have been or may not have been intended to work in that way, but it certainly has operated to take the value right out of their properties.

Senator REED. I had in mind to remark, Mr. Noble, while you were talking about the relationship of the Boston & Providence and the Old Colony people to the New Haven, that the New Haven Railroad through court orders was disproving that old adage, “You cannot eat your cake and have it too."

Mr. NOBLE. I think it was pretty nearly disproved, from our experience.

Senator REED. From your experience I would say the New Haven was proving that you could eat your cake and have it also.

Mr. NOBLE. It was an extraordinary coincidence that in spite of all these requests sought under this formula that had been used to justify the rejection of that lease, that at the very same time the New Haven plan contemplated a reacquisition of the property with a singularly low price.

Now, the difference between the position of the bonded and the leased line is simply this: In the case of the segment of the New Haven system or any other system subject simply to the lien of the bond issue, if there are indicated losses on that line, the lack of earnings shown by the formula is used merely to determine the cost of the reogranization securities.

If the segment covered be a particular lien and is earning its share, 11⁄2 times, it is determined that the segment shall receive new fixedinterest bonds.

If they just break even and earn 100 percent, then we will say that they receive 50 percent of the face amount of their claim of the fixedinterest bonds, and the rest in junior securities.

If they show a loss they have income bonds and stock.

But if you are leased line, the principal amount of your loss is subtracted from the value of your property. It only takes a few years with these losses piling up against you, which have been subtracted from the value of your property, until you have reached a point where the lessee says:

"I will take over your entire property for the amount of my claim. Your property is worth $23,000,000. We have $23,000,000 worth of losses over the last ten years. Thank you. We will take your property and give you a full discharge of all claims."

That is why I am here today, to explain to the committee how that is possible under section 77.

Senator REED. I was very greatly disappointed when President Truman vetoed the bill we passed last year, although it was not a perfect bill. We had to reconcile some conflicting views on both sides of the Capitol. We learn that we have to do that here.

You probably know this in a general way, but on February 3, I made an appointment to see President Truman, and Representative Hobbs and Representative Chauncey Reed accompanied me.

I referred in our conversation with the President to the fact that we were disappointed, and we noted his memorandum of disapproval, and we discussed that. I then told him that we proposed to make another effort this year to get legislation which we thought was highly desirable in the interest of just and fair play, with which he agreed.

I said that we would be happy if he would have his legislative assistants indicate to us in some form what kind of a bill would meet the objections which were made in his disapproval last year, and this bill today was worked out in conjunction with the President's legislative assistants, which gives us reason to hope or believe that if it passes this time in this form, the President will approve it.

Now, what we are doing with the amendments here that Senator Myers and myself have prepared and offered as an addition to S. 249, which is the original Mahaffie bill, is different from the House situation where they have got the Mahaffie bill.

Mr. NOBLE. Yes.

Senator REED. In one case, that is, they have the total bill, such as we passed last year, altered in the Judiciary Committee. That was written to meet the President's objections.

Have you any suggestions now on the amendments? If you do, we will give them very earnest consideration. Do you have any suggestions to make? Do you think it desirable to pass this legislation?

Mr. NOBLE. Yes, sir; I feel it is desirable.

I have some amendments I would like to discuss.

Considering now the first amendment that I am proposing I invite your attention to the proposed section 20c (1) of the Interstate Commerce Act as set forth at line 16 of page 2 through line 9 of page 3 of the subcommittee print.

This language makes the amount of income available for fixed charges as reported to the Interstate Commerce Commission the sole factor determining whether or not a carrier now in reorganization comes within the provisions of the bill. In the event that the carrier in question is a part of a system which files its report of income on a joint or consolidated basis, it appears that the existence of system earnings over the requisite period of time is the determining factor, and not the existence or amount of earnings of the particular segment of the system.

In the case of the Boston & Providence the operation of its properties since rejection of its lease have been continued by the New Haven trustees under orders of the District Court of Connecticut. The amount if its earnings has been a matter of serious contention throughout the New Haven and Boston & Providence proceedings. The reports filed by the Boston & Providence trustees with the Commission contain no operating figures, but merely recite the fact that operations have been conducted by the New Haven trustees and that the results of these operations have been the subject of litigation which is still pending. The reports filed with the Commission by the New Haven trustees, on the other hand, are consolidated reports and the income account (No. 300 1) includes the net railway operating income of the Boston & Providence, the Old Colony, and certain other former leased lines. Thus if the Boston & Providence is to come within the scope of the bill it must be on the basis of this consolidated or joint report by the New Haven trustees of the carriers operated by them.

The difficulty lies in the fact that the Boston & Providence technically is no longer a part of the New Haven system, whereas the bill provides that the income available for fixed charges, on a joint or consolidated basis, shall be "of the carriers in the system of which such carrier is a part . . .". It might be held that the Boston &

Providence being no longer a part of the New Haven system, even though its income is reported jointly with that of the New Haven, does not come within this definition and therefore would not qualify for relief under the bill.

Perhaps the simplest way to correct this difficulty would be to insert after the word "part" in line 3 of page 3 of the subcommittee print the following:

or has been a part prior to the rejection of its lease in the reorganization proceedings of its lessee.

It is, of course, of first importance that we know with certainty whether or not this bill, if it shall become law, is to apply to our property. The provisions of the statute are mandatory. Under subparagraph (11) of the bill at pages 21 and 22 of the subcommittee print a special meeting of stockholders for the election of directors must be held within 60 days after the effective date of the act. This would leave little, if any, time for a final judicial determination in the event that the applicablity of the statute to a particular carrier were to be challenged by any interested parties. I therefore suggest that the provisions that I have referred to in the proposed section 20c of the Interstate Commerce Act be clarified, either by insertion of the language that I have suggested in line 3 of page 3 or by the addition of other appropriate language to make clear that a carrier which is in reorganization as a result of having been cast out of a larger system which is in reorganization, but which is continuing voluntarily or involuntarily to be operated as a part of a larger system, should have the benefits of the statute to the extent that the system is entitled to such benefits.

The second amendment that I wish to propose raises another technical point. The proposed bill refers in several places to carriers which have filed petitions under section 77 of the Bankruptcy Act. It makes no reference to cases in which a petition could have been filed by a creditor under the involuntary procedure provided in section 77. Such was the case with the Boston & Providence which was put into reorganization upon the petition of a creditor.

I suggest the following corrections with page references to the subcommittee print: At page 5, line 12, change "by" to "with respect to". At page 12, line 3, strike out "carrier filed its"; at line 4, insert after "approved)" the following "with respect to the carrier was filed". Page 20, line 24, strike out "which filed" and substitute "with respect to which" and add at the end of the line "has been filed".

I would now like to discuss the third amendment which deals with the problem of accounting between former lessors and their lessees for the operation of the properties subsequent to the rejection of the lease. Before taking up the specific language of the amendment let me explain the accounting problem that we, representing the Boston & Providence Railroad Corp., have been faced with. Here is the situation which confronted the Boston & Providence at the inception of the reorganization proceeding of the New Haven and Old Colony. The New Haven Railroad went into bankruptcy in October of 1935, and trustees were appointed of its property. Under the so-called relation-back doctrine, which had grown up in equity receivership proceedings, the New Haven-Old Colony trustees were entitled to operate the Boston & Providence properties under the lease for a reasonable period of time without committing themselves or their

estate either to adopt or reject the lease. If the lease shall subsequently be adopted or affirmed, their operation is deemed to have been pursuant to the lease, the lessor receives its rent, and the operation is said to have been for the account of the lessee's estate. On the other hand, if the lease is subsequently rejected or disaffirmed, this disaffirmance is said to "relate back" to the date of the filing of the petition in reorganization of the lessee. Under these circumstances the lessor is not entitled to rent for the use of its property, but is held to be chargeable with the results of such operation. Thus, if the operation has been profitable, the former lessor is credited with such profits. If, on the other hand, it has not been profitable, the former lessor's estate is held to be chargeable with such deficits. This rule is of course subject to general equitable considerations in particular

cases.

In the Boston & Providence case the Boston & Providence properties were operated in this provisional manner by the New Haven and Old Colony trustees, from October of 1935 to July of 1938. During this period rent, stipulated in the lease, was paid to the Boston & Providence and the property continued to be operated by the New Haven trustees under order of the Connecticut court.

Within less than a week after the Boston & Providence lease was rejected, and some 2 weeks before the Boston & Providence was petitioned into bankruptcy, the New Haven and Old Colony trustees had filed a petition in the district court of Connecticut, seeking the adjudication of alleged operating deficits of approximately $4,000,000 against the Boston & Providence estate on the basis of the application of the "relation back" doctrine including the recovery of all rent paid for the period subsequent to June 4, 1936.

You will, I am sure, appreciate the difficulties with which the Boston & Providence board of directors and subsequently its trustees were faced in this situation. The road, having been operated as an integral segment of the New Haven system for upward of 50 years, had lost much of its character as a separate operating entity. Thus, many of its old facilities which would be necessary for independent operation had been replaced by larger or more specialized facilities for system use. As an example, its old locomotive shops in Roxbury have been given up and the building converted to an automobile storage warehouse. Its repair shops in Readville, Mass., on the other hand, have been enlarged and developed into a system car-repair shop large enough to maintain the bulk of the New Haven system freight and passenger cars.

Another example is the South Station in Boston. This building is owned by the Boston Terminal Co. and was originally intended to be used jointly by the New Haven system and the Boston & Albany Railroad. It is a monumental structure of questionable value other than as a major terminal for a large railroad system; $15,155,000 of bonds are outstanding, secured by mortgages on the terminal property. For purposes of the New Haven reorganization and accounting, all of the New Haven's share, 70 percent of the total, of expenses relating to this station, including bond interest and city of Boston taxes, have been charged by the New Haven trustees against the Boston & Providence and the Old Colony Railroads, the two former leased lines of the New Haven, and prior liens asserted against their estates.

Although rolling stock and equipment of an 1888 value exceeding $1,000,000 was turned over by the Boston & Providence to the Old