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 mulet 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. 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.

249. I merely appear here to show to the committee, as I think I can, that it is not in the public interest to include the Susquehanna in the provisions of the bill.

That is the same position that I took about a year ago in connection with the prior bill when Senator Wheeler was chairman of the committee, and at that time, after I had stated the facts with respect to the Susquehanna, Senator Wheeler interrupted me, and he remarked: I can assure you that we did not draft the bill for the purpose of turning your road back to the Erie.

The effect of the passage of this bill, without excluding its applica tion to the Susquehanna, would be to return eventual control of the Susquehanna to the Erie Railroad Co.

The Erie owns ninety-nine and a fraction percent of all the outstanding common and preferred stock of the Susquehanna. The public holdings of these stocks is indicated by .014 percent of the common stock and .003 of the preferred stock, so that the public holdings are infinitesimal, and it is probable that whoever does hold those small fractions has either disappeared or cannot be found.

Under the bill as now drawn, and I refer particularly to subparagraph (c) of page 20-1 of the proposed amendments, the Erie, if control were returned to the stockholders, would be unable to vote its stock because the acquisition of that stock had never been approved by the Interstate Commerce Commission, and therefore actual control of the road would pass to unknown and perhaps nonexistent stockholders owning these infinitesimal percentages.

Furthermore, another thing, we do not feel that it is in the public interest to return the Susquehanna to the eventual control of the Erie.

The Erie acquired control of the Susquehanna through J. P. Morgan & Co. about 40 or 50 years ago, and it is my opinion that such control was acquired in order to obtain specific control of the Susquehanna's important tidewater coal terminal at Edgewater, the Erie being a coal road, and also to obtain control of a connecting line of road along the west bank of the Hudson, which now serves a number of important industrial plants.

The record of the control by the Erie during all those years and up to the time the Susquehanna filed its petition for reorganization in June of 1937, is certainly deplorable.

Senator REED. How are you getting along now with the operation of the road?

Mr. O'CONNELL. Getting along very well. Everybody is satisfied. My bondholders are the junior security of the road. We will obtain under the plan of reorganization approximately one-half a share of preferred stock and nine and a fraction shares of common stock for each $1,000 bond. We will eventually control the road in the event or reorganization.

Senator REED. What is the status of your plan?

Mr. O'CONNELL. The plan has been approved by the Interstate Commerce Commission and certified to the district court. It is now before the district court for approval.

The hearings on the application to approve the plan of reorganization have been delayed at Judge Smith's request, because of pending litigation between the New York, Susquehanna & Western and the New York Central with respect to certain operating contracts on the terminal properties along the west bank of the Hudson.