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I appreciate the opportunity which has been afforded to comment on Mr. Scott's letter. Yours very truly,

FREDERICK G. HAMLEY,

General Solicitor.

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INTERSTATE COMMERCE COMMISSION,

Washington, D. C., April 22, 1948. Hon. Earl C. MICHENER, Chairman, Committee on the Judiciary,

House of Representatives, Washington D. C. DEAR CHAIRMAN MICHENER: Your letter of April 5, 1948, addressed to the Chairman of the Commission and requesting a report and comment on H. R. 6012, introduced by Representative Case of New Jersey, to amend section 77 of the Bankruptcy Act, has been referred to our legislative committee. After careful consideration by that committee I am authorized to submit the following comments in its behalf:

Subdivision (b) of section 77 in general sets out the requirements of the statute as to what a plan for the reorganization of a railroad may and shall include and specifically states that the plan shall provide adequate means for its execution including a rather long list of provisions which may be included, ending with the following: "and may include any other appropriate provisions not inconsistent with this section."

H. R. 6012 would amend the act by adding at the end of subdivision (b) the following:

"Provided, however, That such plan of reorganization shall not affect the existing authority of any State or State regulatory agency relating to services, operations, or rates.

The second sentence of subdivision (f) of section 77 is as follows:

"Upon confirmation of the plan, the debtor and any other corporation or corporations organized or to be organized for the purpose of carrying out the plan; shall have full power and authority to, and shall put into effect and carry out the plan and the orders of the judges relating thereto,

the laws of any State or the decision or order of any State authority to the contrary notwithstanding."

The proposed bill provides for insertion after the word "authority" near the end of the above provision of the following: “other than those relating to service, operations or rates.” Thus, the proposed amendment would have the effect of prohibiting inclusion in a plan of reorganization of any provision affecting the existing authority of any State or State regulatory agency relating to service, operations, or rates.

In considering the effect of this proposal, it appears that in at least two respects, it would impose important limitations upon the powers heretofore asserted by the Commission and the courts under the Bankruptcy Act. These involve plan provisions for termination of passenger operations under specified conditions, and for merger with a corporation chartered in another State, of a railroad corporation operating in a State which imposes certain restricting regulatory provisions upon railroads owning or operating property in the State but not chartered under the laws of the State.

There are two outstanding examples of the first-mentioned situation. In the New York, New Haven & Hartford Railroad Co. reorganization, the Commission approved a plan which provided for acquisition by the reorganized New Haven of the property of the Old Colony Railroad Co. In view of the enormous deficits experienced by the latter company, principally as a result of the high costs of terminal operation in Boston, the plan provided for termination of the Old Colony passenger service, when the losses from such services exceeded a critical figure specified in the plan. The critical figure having been exceeded in the time specified, the New Haven recently served notice on State authorities that it would terminate much of the Old Colony passenger service on October 1, 1948. Such plan provision, of course, required modification of the Old Colony and New Haven charters.

The other case of this character arises in the Central Railroad Co. of New Jersey reorganization, in which a plan was filed containing somewhat similar provisions to those in the New Haven case. Hearings have not been concluded in this proceeding, and no decision has been made by the Commission. The text of these provisions of the plan is attached hereto as appendix A.

The best example of merger of a railroad contrary to State law occurred in the plan approved in the Chicago, Rock Island & Pacific Railway Co. reorganization,

which provided for merger of the Chicago, Rock Island & Gulf Railway Co., a Texas corporation, and a wholly owned subsidiary of the Rock Island, with the latter. Besides the constitutional prohibition of the State of Texas against ownership and maintenance in the State of railroad property by a corporation not chartered in the State, the State has numerous statutory regulations requiring railroads operating in the State, among other things, to maintain general offices in the State and further to maintain machine shops and roundhouses at such places as they may have contracted to locate them.i The Rock Island situation is now before the United States Circuit Court of Appeals, Seventh Circuit, upon appeal by the State of Texas from the order of the United States District Court consummating the plan.

Inclusion in a plan of reorganization of provision for termination of passenger traffic operation clearly is an extension of the Commission's powers beyond the accepted interpretation of its powers under the Interstate Commerce Act. The inclusion of such a provision in a plan is the outgrowth of a decision of the United States Supreme Court denying that the United States district courts have jurisdiction to override State laws and regulatory powers in railroad bankruptcy proceedings, but indicating that the Commission could do so in a plan of reorganization.

In general, where the record in any case before the Commission discloses such huge losses from a particular type of service that the carrier's ability successfully to continue operation is threatened, it would seem that progress toward reorganization in such case would be appreciably delayed by lack of the power to provide for termination of such service. In fact it is not improbable that the Commission's power to promulgate any plan would be adversely affected. Such power has been carefully protected by the courts. It is clearly contrary to the doctrine which accords national bankruptcy powers to the Congress, to permit observance of the interests of a particular State to unduly delay the processes designed for the general public benefit.

From the standpoint of the possible effect upon the power to merge or consolidate properties, the proposed bill seems even less desirable. The Commission now has the power, under the Interstate Commerce Act, to approve the lease and operation of railroads located and incorporated in the State of Texas.5 And the United States Supreme Court recently upheld the Interstate Commerce Commission in its authorization under section 5 of the Interstate Commerce Act of the acquisition and operation by a Virginia corporation of railroad lines in South Carolina, holding that the Virginia corporation was not subject to penalties under a South Carolina statute forbidding such ownership and operation and requiring railroad lines within that State to be owned and operated by South Carolina corporations. These powers are conferred upon the Commission for the purpose of insuring adequate transportation facilities and to avoid wasteful restrictions upon their use, and the decisions of the courts and the Commission have been directed to a prevention of improper burdens upon interstate commerce through such restrictions. It seems undesirable that such powers be restricted by the provisions of the Bankruptcy Act.

There is a possibility that it was not intended that the proposed bill should affect the restrictions discussed in the last preceding paragraph. But it is believed that the text of the proposal may be interpreted so as to impose such restrictions, and as the question of the powers of the Commission and the courts in this respect are controversial, it is desirable that the text of any such amendment be clear enough to permit no such interpretation unless so intended.

The majority of the Committee recommend that the bill be not passed. Commissioner Splawn does not concur in the unqualified recommendation that the bill not pass. Respectfully submitted.

WALTER M. W. SPLAWN, Chairman, Legislative Committee.

CHARLES D. MAHAFFIE.

John L. ROGERS. 1 Subdivision (m) of sec. 77 specifically protects such situations by the following language: "No reorganization effected under this act and no order of the court or Commission in connection therewith shall relieve any carrier from the obligation of any final judgment of any Federal or State court rendered prior to January 1, 1929, against such carrier or against one of its predecessors in title, requiring the maintenance of offices, shops, and roundhouses at any place, where such judgment was rendered on account of the making of a valid contract or contracts by such carrier or one of its predecessors in title."

. Stute of Teras v. Edward E. Brown et al., No. 9510.
3 Public Convenience Application of Kansas City Southern Ry., 94 I. C. C. 691.
- Palmer v. Commonwealth of Massachusetts (308 U. S. 79).
5 Teras v. United States (292 U. S. 522).
Seaboard Air Line Railroad Co. v. Daniel (Feb. 16, 1948), V. . Supreme Court.

PLAN OF REORGANIZATION PRESENTED BY THE INSTITUTIONAL GROUP, THE

WATTERS COMMITTEE, AND THE BROOKS COMMITTEE OF THE CENTRAL RAILROAD Co. OF NEW JERSEY

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ARTICLE III. CHARTER LIMITATION ON PASSENGER SERVICE The charter of the New Jersey Company shall be amended, or deemed to be amended, and its franchises and statutory obligations shall be amended or superseded, or deemed to be amended or superseded, so that the New Jersey Company will be under no obligation to operate suburban passenger service 1 except on 8 contractual basis, as hereinafter provided, embodied in a contractual agreement in the form of a stipulation by the New Jersey Company filed with the Court.

The contractual basis upon which the New Jersey Company will provide suburban passenger service on its lines shall be as follows: If during any 24 months' period following consummation of the plan the operation of suburban passenger service on the lines of the New Jersey Company shall result in a net out-of-pocket loss, as hereinafter defined, in excess of $1,000,000, then the New Jersey Company may discontinue such portion of the suburban passenger service on its lines and make such rearrangements in said service, including the elimination of stops, the closing of passenger stations, and changes in the type and character of service afforded, as may be necessary to reduce such loss to an amount not in excess of $500,000 annually. For the purposes of the foregoing, net out-of-pocket loss shall be deemed to mean the excess of out-of-pocket costs of suburban passenger service over suburban passenger revenues, determined in accordance with Interstate Commerce Commission, Bureau of Transport Economics and Statistics, Formula Providing for a Comparison of Railway Revenues with Expenses for Suburban and Commutation Services, Statement No. 441, designated Rail-Commutation, 10-43, as revised December 15, 1943.

The New Jersey Company shall keep monthly figures in accordance with the application of Rail-Commutation, 10-43, as the basis for determining whether and to what extent the out-of-pocket costs of suburban passenger service exceed the revenues from such service.

If the Public Utilities Commission of the State of New Jersey shall deem the State or the public aggrieved by a discontinuance or rearrangement of suburban passenger service on the lines of the New Jersey Company and claim that the computations are inaccurate, the Public Utilities Commission of the State of New Jersey may apply to the Interstate Commerce Commission for the auditing of such computations, and the determination of the Interstate Commerce Commission with respect thereto shall be final.

(H. R. 6657, 80th Cong., 2d sess.) A BILL To amend section 77 of the Act entitled "An Act to establish a uniform system of bankruptes

throughout the United States," approved July 1, 1898, and Acts amendatory thereof and supplementary thereto

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That subsections (b) and (f) of section 77 of the Act entitled “An Act to establish a uniform system of bankruptcy throughout the United States”, approved July 1, 1898, as amended (U. S. C., 1946 edition, title 11, sec. 205 (b)), be, and are hereby, amended to read as follows:

“(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 issuance 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 otherwise; (3) may include, for the purpose 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

1 As used herein, the term "suburban passenger service" means all passenger service, including commuter service, to and from suburban points, which are deemed to include, for purposes of the plan, all points within 66 miles of Jersey City.

of

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 defaults, 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: Provided, however, That such plan of reorganization shall not affect the existing authority of any State or State regulatory agency relating to service, operations or rates. This proviso shall not be construed as restricting any of the powers of the Interstate Commerce Commission under the Interstate Commerce Act."

"'(f) Upon confirmation by the judge, the provisions of the plan and of the order of confirmation shall, subject to the right of judicial review, be binding upon the debtor, all stockholders thereof, including those who have not, as well as those who have, accepted it, and all creditors secured or unsecured, whether or not adversely affected by the plan, and whether or not their claims shall have been filed, and, if filed, whether or not approved, including creditors who have not, as well as those who have, accepted it. Upon confirmation of the plan, the debtor and any other corporation or corporations organized or to be organized for the purpose of carrying out the plan, shall have full power and authority to, and shall put into effect and carry out the plan and the orders of the judge relative thereto, under and subject to the supervision and the control of the judge, the laws of any State or the decision or order of any State authority to the contrary notwithstanding: Provided, however, That such plan of reorganization shall not affect the existing authority of any State or State regulatory agency relating to service, operations or rates. This proviso shall not be construed as restricting any of the powers of the Interstate Commerce Commission under the Interstate Commerce Act. The property dealt with by the plan, when transferred and conveyed to the debtor or to the other corporation or corporations provided for by the plan, or when retained by the debtor pursuant to the plan, shall be free and clear of all claims of the debtor, its stockholders and creditors, and the debtor shall be discharged from its debts and liabilities, except such as may consistently with the provisions of the plan be reserved in the order confirming the plan or directing such transfer and conveyance or retention, and the judge may require the trustee or trustees appointed hereunder, the debtor, any mortgagee, the trustee of any obligation of the debtor, and all other proper and necessary parties, to make any such transfer or conveyance, and may require the debtor to join in any such transfer or conveyance made by the trustee or trustees. Upon the termination of the proceedings a final decree shall be entered discharging the trustee or trustees, and making such provisions as may be equitable, by way of injunction or otherwise, and closing the case. Upon confirmation of a plan the Commission shall, without further proceedings, grant authority for the issue of any securities, assumption of obligations, transfer of any property, sale, consolidation or merger of the debtor's property, or pooling of traffic, to the extent contemplated by the plan and not inconsistent with the provisions and purposes of the Interstate Commerce Act as now or hereafter amended. The provisions of title I and of section 5 of the Securities Act of 1933, as amended, shall not apply to the issuance, sale, or exchange of any of the following securities, which securities and transactions therein shall, for the purposes of said Securities Act, be treated as if they were specifically mentioned in sections 3 and 4 of the said Securities Act, respectively: (1) Ail securities issued pursuant to any plan of reorganization confirmed by the judge in accordance with the provisions of this section; (2) all securities issued pursuant to such plan for the purpose of raising money for working capital and other purposes of such plan; (3) all securities issued by the debtor or by the trustee or trustees pursuant to subdivision (c), clause (3) of this section; (4) all certificates oi deposit representing securities of, or claims against, the debtor, with the exception of such certificates of deposit as are issued by committees not subject to subsection (p) hereof. The provisions of subdivision (a) of section (14) of the Securities Exchange Act of 1934 shall not be applicable with respect to any action or matter which is within the provisions of subsection (p) hereof."

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