Senator REED. Now, we will hear this morning, Mr. Aaron Colnon, a trustee of the Chicago, Rock Island & Pacific Railway Co.

It is a new experience, as a member of this committee, to hear a trustee of a railroad come in and advocate legislation of this kind. This is the first experience of this kind we have had.

There is another thing, Mr. Colnon, that goes a little beyond your prepared and printed statement, which will be distributed."

You made an effort, if I correctly understand the situation, to have the I. C. C. plan returned to the Interstate Commerce Commission for further scrutiny. That is the procedure that this committee has been earnestly urging.

That is the thing that Mr. Harry Hagerty, representing the Metropolitan Life Insurance Co., advocated before this committee last year. Mr. Hagerty's language is in the record, saying that these plans should go back to the Interstate Commerce Commission for scrutiny. I understand that, in your case, the Metropolitan Life Insurance Co. was one of the objectors.

I want you to develop more fully than you have in your prepared statement your experience in that respect. That goes to the very heart of this whole thing.

We have been trying to get further consideration, and we had a good deal of support for it in the hearings last year, including that of Mr. Hagerty of the Metropolitan Life Insurance Co.

That is what should have been done.

Now, you speak for one railroad where the trustee has made an effort to have that done. I would like to have, and the committee would like to have, in the course of your discussion, a full explanation of that. We would like to have you develop all of the facts, because it is important.

In the case of the St. Louis Southwestern, as you may know, instead of sending the ICC plan back to the Commission, they are asking to be relieved entirely from any further consideration under the section 77 of the Bankruptcy Act.

Now, Mr. Colnon, will you please proceed with your statement.

STATEMENT OF AARON COLNON, A TRUSTEE OF THE CHICAGO, ROCK ISLAND, PACIFIC RAILWAY CO., DEBTOR, OF CHICAGO, ILL.; ACCOMPANIED BY W. P. WALPOLE, ASSISTANT TO THE TRUSTEE AND CHIEF EXECUTIVE OFFICER

Mr. COLNON. Gentlemen, I welcome this opportunity to appear before you, and I want to urge with all of the power at my command, the passage of this Senate bill 249.

Senator REED. With the amendments?

Mr. COLNON. With the amendments, of course.

In my opinion, it is the only hope, because there is only a very remote hope in our Supreme Court that justice can be done to literally hundreds of millions of dollars' worth of security owners.

Now, I have followed all of these railroad reorganizations but, of course, barely touching on most of them.

With the Rock Island, on the contrary, I have been a trustee 4 years this month. During that 4 years, I have conscientiously and industriously gone into every side of the financial picture of this road. I feel I know it inside out, and I feel that in this case there is no call

whatsoever for wiping out in full the preferred and common stockholders, and to a large extent, the convertible bondholders, when, as I will attempt to develop for you, everybody can be made whole.

I see it with such crystal clarity, that I wish I had the command of words and the eloquence to preach this from the housetops, and tell everybody, because when I went in 4 years ago, I had the feeling that you gentlemen in Congress had given us section 77 to work under, that things should be reorganized under section 77, and that there was sufficient power.

I think Congress so intended. But the constructions that have been placed upon section 77 through the years by the various courts, and principally the Supreme Court, have made section 77 a vehicle for doing the grossest injustice to the junior security holders and the stockholders.

The difficulty that Senator Reed touched upon this morning of getting the Interstate Commerce Commission to take a look at these plans that they have put out is well exemplified in the case of the Rock Island.

Senator MYERS. The plans that the trustees have gotten out?

Mr. COLNON. No; the plans that the Interstate Commerce Commission has put out.

Senator MYERS. The Commission, itself?

Mr. COLNON. Yes.

This plan that has been ordered confirmed by the circuit court of appeals in our district in Illinois over the express disaffirmance of the plan by the district court, when he referred it back to the Commission, is a plan that was formulated in 1940. In December of 1940, it was, based on an earning formula gotten up for the years 1936 and 1937. The plan is horribly antiquated.

I am not blaming the Commission for that, because they have not had a chance to really look at the thing and go into it thoroughly, such as the district court ordered last June.

The Commission was prompt. Following your proceedings here, Senator, where they stated they were anxious to look at these plans. again, when the district court refused to confirm this plan, they promptly set a date for a hearing on the plan.

Senator REED. Do you remember what that date was, Mr. Colnon? Mr. COLNON. The date it set?

Senator Reed. Yes.

Mr. COLNON. It runs in my mind that it was September of last year, September 28.

Mr. WALPOLE. The latter part of September 1946.

Mr. COLNON. Very close to the end of September 1946. Do not hold me to that.

Senator REED. When did the district court first make that reference or order?

Mr. COLNON. June 28, 1946. It refused to confirm the plan and referred it back to the Commission.

Senator REED. That refreshes my memory, I remember talking to Commissioner Mahaffie last year after the district court in Chicago had refused to confirm the plan and ordered it back to the Commission, and asking what the Commission proposed to do, and he said, "If it comes back here, we are going to set it down promptly for a hearing."

Mr. COLNON. There is no question. But what happened?
Senator REED. That is what we want to find out.

Mr. COLNON. The Metropolitan Life Insurance Co., represented by Mr. Willkie Bushby, the general mortgage bondholders committee represented by Mr. Bourne, all the divisional committees that represented the first mortgage on certain divisions of the line, all apealed to the circuit court, and I will later on charge that that was, an attempt to prove to you that it was, under the leadership of the Metropolitan Life Insurance Co. and that they were all following that lead. Senator REED. Well, it is a fact fairly well known to us in the way of general knowledge that the Metropolitan is very active in these matters. Mr. Hagerty has frequently appeared before our committee, and was a witness before our committee more than once in the original proceedings on this legislation.

Mr. COLNON. Yes.

Senator REED. And I remember very distinctly the day Mr. Hagerty made the statement that he thought these plans ought to go back to the Commission. He was appearing officially for the Metro

politan Life Insurance Co.

Mr. COLNON. I have that, Senator, in my prepared statement. I have submitted it from the record of your hearings last year.

Senator REED. I was here that day and I remember distinctly that Mr. Hagerty made that statement.

Mr. COLNON. And yet strangely at variance with that statement is his instruction to his attorney as to what to do when it did go back to the Commission.

Senator REED. I was very hopeful, Mr. Colnon, from the beginning for such a procedure and I urged it more strongly than any other member of the committee. My purpose and thought was that the action that would be the quickest would be to send these back to the Interstate Commerce Commission for review and report. I even went so far as to suggest to the Commission that they suggest that to the courts.

Mr. COLNON. I remember that.

Senator REED. The Commission did not want to do that, since there was no authority, they said, under the law. Senator Wheeler and myself, both, assured the Commission that if they made such a request and the courts did not do it and the Commission needed more legal authority, we would put a bill through as quickly as we could to give them that authority.

I have talked to some of the courts, and the circuit courts, and they tell me that they think there would be no difficulty in the courts returning these plans to the Commission if the Commission had made. a request.

I am particularly interested in the Rock Island case, because it involves a court that did send one of these plans back.

Mr. COLNON. That is right.

Senator REED. Now, will you proceed.

Mr. COLNON. I think, Senator, every word you said is gospel truth. If the Commission could only look at these things, they are just as aware as you and me that the time between 1941 and the present has produced vast changes, not only in the Rock Island, but in every other system.

But I say to you, if something is not done, like this Senate bill that is proposed, with its amendments, what have you got?

Time is running against us. If, at this session of Congress, a law is not passed, gentlemen, you can forget all about any law in 1948, because the water will be all over the dam, and there will be no law to talk about.

You have mentioned certain railroads. There are only three of the big systems left: The Rock Island, the New Haven, the Missouri Pacific.

And, as I say, practically all of these things go through the courts, and they will either be wound up and out of the way, or through completely before you reconvene in January, or at least they will be so far gone that they are beyond help.

Now, to go on with this, it may strike you, Senator, as a little odd that I, as a trustee of a railroad, who, under the terms of this bill, is going to be removed from a job in 4 months, if it becomes a law, should be here.

Senator REED. That is what would happen.

Mr. COLNON. Yes; that I should be here supporting this legislation. I go back to a statement that you just made. I would infinitely prefer to carry this out under section 77 if it could be done. But I have come to the conclusion that it is impossible of achievement under that section 77, and I will give you a little history later on as to why I feel so.

Now, in explaining why I am here urging this bill, this road has been in trusteeship almost 14 years. It will be next month.

In 1943, ex-Governor Lowden, of Illinois, who was a trustee of the Rock Island, died, and Judge Igoe of the District Court of Illinois, appointed me as successor trustee. At that time, he told me, "Here, you have been in a lot of reorganization work. I would like you to get into this thing thoroughly. Ten years have elapsed in which we have had nothing achieved in the way of reorganization except a mass of litigation."

And he said, "In the plan that is presently being formulated and that is up for me to pass on, I have the very distinct feeling that not creditors, but the junior the senior creditors and the stockholders, are being more drastically treated than is necessary."

"Now," he said, "I wish you would look into it. See if you cannot retire debt. Do something that will strengthen this picture and give the little fellows that have not attorneys able to look after them, as have the senior creditors, a run for their money."

That, Senator, for 4 years, I have done. It has been the guiding light that has ruled me in the path I have set in carrying this out. But look at what we are up against. We are still dealing with a 1940 plan. It has had a few trimmings, but on every reference back to the Commission, the Commission has limited in its hearings, bearings on a new plan, simply certain factors that came up very limited, and expressly prohibited submission by any one of a full plan that would change this original formulation of theirs.

Senator REED. You say the Commission prohibited that?
Mr. COLNON. Yes; prohibited.

The hearings were limited distinctly to two, three, or four small points, but nothing going to the heart of the whole capital structure of the plan.

Senator REED. When were those hearings held? 1944, was it? Mr. COLNON. Before the Commission?

Senator REED. Yes.

Mr. COLNON. There were a number. The first one that I attended of what I call the auxiliary hearings, for lack of a better word, was one in September of 1943.

Mr. WALPOLE. That was the last one, I think.

Mr. COLNON. That was the last one that was held.

Mr. WALPOLE. Yes.

Mr. COLNON. And the only one which occurred during my trusteeship. There had been one, I think, Mr. Walpole, in 1942.

Mr. WALPOLE. Yes; one in 1942 and possibly two in 1941. September 1943 was the last hearing.

Mr. COLNON. And look at what has transpired since then.

Senator REED. If I can break in on you for a moment, Mr. Colnon, this committee devoted a whole lot of time to the problem in 1945, the latter part of 1945 and the first half of 1946, and this committee made some extensive reports. There is Senate Report 925 and Senate Report 1170. That is the best judgment that we could form.

And it is only an estimate or a judgment. It was that the changed conditions caused by the larger earnings due to the war period had drastically changed the entire picture. Not for a moment do I want to suggest to you remotely that such earnings be used as a permanent basis for a capital structure for the future, but there had come into the possession of all these railroads, not only the Rock Island but all of the rest of these railroads, very large sums of money that would be available to go further down the line to the junior security owners, and in some cases, the stockholders, and those sums in the case of the Rock Island were estimated to be, say, $20,000,000 or $25,000,000. In the St. Louis Southwestern, which, incidentally, is trying this week to have its bankruptcy proceeding discontinued, we thought it was about $60,000,000, perhaps, and in the Rock Island it was somewhat less.

Mr. COLNON. There is no question there.

Senator REED. And perhaps $80,000,000 or something of that kind in the New Haven.

In addition, this committee felt, last year, on the basis of the hearings up to that time, that perhaps there were some of those railroads included in the New Haven proceeding that were being pretty harshly dealt with by the trustees, but that is another matter.

We are going to hear the New England folks fully, and the St. Louis Southwestern people, and the others, Friday and next week.

I mention this to show the efforts this committee has made to find some basis on which we could do justice to these people who are being almost robbed. I hate to use that term, but they are having their money taken away from them unnecessarily.

Mr. COLNON. That is right.

Senator REED. And the securities really are being forfeited unnecessarily. That is one of the objections the President made in his veto last year, and I thought it was well taken.

Mr. COLNON. I do, too.

Senator REED. Go ahead, Mr. Colnon. I am quite familiar with your whole background.

Mr. COLNON. I so see.