at low cost and presumably for securities having a prior lien on earnings be given fair treatment. No sane lender will continue to invest in an industry where his rights can be sacrificed for those who are supposed to take the risks. Should any carrier to which paragraph (1) of section 20c would be applicable effect an adjustment under the bill it would be highly improbable that it could finance its future requirements through the issue of stock, and its costs of financing through the issue of other securities would probably be high. It would be in constant danger of financial difficulties, and in trying to avoid such difficulties would probably neglect the maintenance of its properties, reduce its force of employees, and permit its service to deteriorate, thus perpetuating the very evils which the bill, as stated in the preamble, is intended to correct. 7. The bill, if amended as proposed, would be unworkable. The scheme for permitting the old stockholders of the debtor corporations to which section 20c of the bill applies to salvage some part of their equity is unworkable. Proceedings for alteration or modification of the obligations of a debtor are to be set in motion by the debtor which must file its application not later than 18 months after the enactment of the bill, or such longer period as the Commission may approve. There is apparently no penalty for the debtor's failure or refusal to institute proceedings. The Commission may formulate a plan of its own, but it can do this only upon the lapse of a certain time after the filing of the debtor's application. There is no provision for any such filing by the creditors or for dismissal of the proceeding if no one files. Under the provisions of subsection (g) of section 77 creditors may succeed in having the proceedings under that section dismissed, but when they do so the debtor is automatically restored to possession of the properties free from supervision by the courts, and the creditors, to protect their interest, must immediately institute new proceedings under section 77 or seek relief in an equity receivership proceeding. If the plan submitted by the debtor is not accepted by the required percentage of creditors and is of such a character that the Commission is unable to approve it and to force it upon the creditors under paragraph (8) of section 20c, the Commission may then proceed under the provisions of paragraph (9) of the section to formulate a plan of its own and force it upon dissenting creditors. To formulate and force such a plan on dissenting creditors the Commission must find that it is in the best interest of the carrier, of each class of its stockholders, and of each class of obligations affected by the alteration or modification for which the plan provides and that the plan is not adverse to the interests of holders of any other class of the carrier's securities or the interest of any creditors of the carrier not affected by the proposed modification or alteration. Under the provisions of section 20f of the bill involuntary elimination or forfeiture of any part of the lawful claims of holders of obligations of any carrier or any part of the stock of any carrier is forbidden, provided that no involuntary elimination or forfeiture shall be deemed to occur if such claims are lawfully satisfied by substitution of securities or otherwise under the provisions of the bill. In other words, it would seem that no plan which would reduce the interest of the stockholders can be approved. Other provisions of the bill which would make it extremely difficult, if not impossible, to administer are those contained in paragraph (10) of section 20c of the bill. Under these provisions interest on obligations of a carrier at the contract rate ceases to accrue as of the date the carrier filed its petition under section 77 of the Bankruptcy Act, and only such consideration or recognition shall be given to the allowance of compensation in the nature of interest on such obligations during the period subsequent to such filing as equity and the law of the land may require "having due regard to the earnings or deficits in earnings fairly applicable to the properties of the carrier upon which liens may exist to secure the payment of any such obligations, the rates of interest paid or incurred on comparable obligations of carriers not in bankruptcy or receivership proceedings, the amount and trend of rediscount rates of the Federal Reserve bank in the applicable district or districts, and all other relevant facts." In fixing the rate or rates of interest to be allowed on the principal of the carrier's obligations, the Commission, in order to comply with the principles of equity and the law of the land, would have to consider the fact that the part of the obligations represented by such interest can as a rule not be paid in cash, but must be provided for in securities that will have a market value far below their principal amount, which would represent the part of the carrier's liability for interest on its obligations. This would make it practically impossible for the Commission to determine the amount of interest that should be paid to accord equitable treatment to the carrier's creditors. It is our view that this provision would lead to protracted litigation and would greatly delay reorganization or adjustment of the carrier's capital structure. If the Congress is of the view that interest rates on outstanding obligations of carriers in process of reorganization under section 77 of the Bankruptcy Act should be reduced during the pendency of the proceedings under that section, it would be preferable to fix a set rate or rates at which interest should be allowed, taking into consideration the fact that during the proceedings interest has been paid on but a very small portion of the obligations of the carriers in process of reorganization, and the further fact that much of the interest cannot be paid in cash, but must be paid in securities which I will command a market value of only a fraction of their par value. For a plan to be in the best interest of each class of affected obligations it would have to be better than, or at least as good as, a plan under which the holders of the obligations would be given fair and equitable treatment. It would not be in the best interest of the creditors for them to take any less than they could obtain under such a plan, Thus it appears that the position of the stockholders must be maintained and that claims of the creditors must be satisfied. These objectives cannot be reconciled in cases where reorganization value is less than the amount of creditors' claims, since no plan may be approved that is not in the public interest, and since the public interest requires that the amount and classification of the new capitalization be realistically related to prospective earning "Nothing in sections 20b or 20c is intended or shall be construed so as to authorize the involuntary elimination or forfeiture of (a) any part of the lawful claims of the holders of obligations of any carrier, or (b) of the stock of any carrier: Provided, That no involuntary elimination or forfeiture shall be deemed to occur if such claims are lawfully satisfied by the substitution of securities or otherwise under the provisions of section 20b." The test of what is lawful treatment of the prior claims of a creditor is stated by the Supreme Court in Insurance Group Committee v. Denver & R. G. W. R. Co. (67 S. Ct. 583), decided February 3, 1947, as follows: "Until it can be contended with some show of reasonableness that the creditors senior to the creditors and stockholders whom the debtor represents here have received more in value than the face of their claims, the debtor's insistence on a reexamination of the plan is without substantial support. See Northern Pacific Ry. Co. v. Boyd (228 U. S. 482); Group of Investors v. Milwaukee R. Co. (318 U. S. 523, 541)." It thus appears that such claims may be "lawfully satisfied" only if the securities substituted have a value equal to their face amount. 10. Amendment of the bill as proposed is unnecessary.-The Commission has been criticized for not modifying its plans because of changes in conditions since it approved the plans. Under the provisions of section 77 the function of the Commission so far as the provisions of a plan are concerned are at an end once it certifies the plan to the court unless the court returns the plan to the Commission for further consideration and modification. If it is thought desirable that further consideration be given to the provisions of plans because of changed conditions since the plans were certified to the court, arrangement for such further consideration could easily be made by a simple amendment to section 77 requiring that the court return the plans to the Commission for further consideration in the light of changed conditions. Such an amendment could require that the Commission give consideration to all factors it is required to consider under section 20c of the bill. The machinery of reorganization provided for under section 77 would remain as it is, and the time required for reexamination and modification of approved plans would be far less than the time to work out any acceptable plan of adjustment under the bill. The property would be restored quickly to private management and capital structures would be such that the need for further reorganization would be remote. In lieu of section 20c and other sections proposed as amendments to the bill an amendment could be made to section 77 by adding at the end of subsection (f) thereof a paragraph somewhat as follows: "Upon petition of any party to the proceeding and upon request of the Commission at any time before the property dealt with by the plan is transferred and conveyed to the debtor or to the other corporation or corporations provided for by the plan, the judge shall return the plan to the Commission for such further modification as may be required because of changes, facts, and developments since 1940. The Commission, upon further hearing, if deemed necessary, and upon consideration of all such changes, facts, and developments since 1940, including, without limitation, for such period total railway operating revenues, operating expenses and other charges, net earnings, the full effect of amortization deductions on earnings of past and future years, improvements to the property, the effect of the released collateral through past or future payment of loans, cash and net current assets, retirements and purchases of debt, including retirements and purchases at a discount that have been made or that can reasonably be made, adjustment and reduction of interest rates on outstanding debt that may be made, shall, in a supplemental report and order modify, or refuse to modify, any plan which it has approved, stating the reasons for such modification or for its refusal to modify the plan. The Commission, if it modifies the plan, shall certify the modified plan to the court together with a transcript of the proceeding before it and a copy of its report and order approving the modified plan. Thereafter proceedings upon the plan shall be governed by the provisions of subsection (e) and of this subsection. If the Commission refused to modify the plan, it shall transmit to the court a copy of its report and order, together with a transcript of the proceeding before it. Thereafter, if the judge shall find that the refusal of the Commission to modify the plan is based on sufficient findings and is supported by the record, the proceeding upon the plan shall continue as if the plan had not been returned to the Commission; otherwise the judge shall return the plan to the Commission for further consideration and modification in accordance with his opinion and thereafter further proceedings upon the plan shall be as provided in subsection (e) and in this section." If the bill is to be amended as proposed, certain modifications should be made in the amendments for the purpose of clarification and so that the objectives of the bill, as set forth in the preamble, may have a greater chance to be attained. The provisions of section 20b (2) as to the percentages of obligations assenting to an alteration or modification as a condition to the Commission's approval thereof should not be amended. Paragraph (2) of section 20c should be amended by limiting the time within which proceedings by carriers subject to paragraph (1) may be instituted under the bill to 12 months or such longer period as the Commission may approve. Paragraph (3) of section 20c of the bill should be amended to provide that the provisions of paragraph (12) of subsection (c) of section 77 of the Bankruptcy Act shall apply to proceedings under the bill. Paragraph (11) of section 20c should be amended to provide for resumption of proceedings under section 77 of the Bankruptcy Act, if proceedings are not instituted under the bill within the time specified in paragraph (2) of section 20c. The provisions of paragraph (10) of section 20c of the bill should be modified so as to provide that any interest allowed shall be paid in cash or its equivalent. The provisions of section 20d of the bill are not very clear. They are evidently intended to prohibit voting trusts. As worded, the section might be construed to prohibit stockholders delegating their right to vote by proxy, thus requiring them to attend all stockholders' meetings in person, if they are to to vote their stock. Even with these modifications, we recommend that S. 249 as amended be not passed. Respectfully submitted. Hon. WALLACE H. WHITE, Jr., WALTER M. W. SPLAWN, Chairman, Legislative Committee. CHARLES D. MAHAFFIE. JOHN L. ROGERS. INTERSTATE COMMERCE COMMISSION, Chairman, Committee on Interstate and Foreign Commerce, MY DEAR CHAIRMAN WHITE: Your letter of March 11, 1947, addressed to the Chairman of the Commission, enclosing a copy of a letter received by you from the Securities and Exchange Commission, suggesting an amendment to S. 249, "To amend the Interstate Commerce Act, as amended, and for other purposes", on which you request comment, has been referred to our Legislative Committee. The Legislative Committee has reviewed the report submitted by the Securities and Exchange Commission and has authorized me to advise you that it considers the amendment to S. 249 therein proposed to be important and desirable, and recommends that such amendment be adopted. Very truly yours, WALTER M. W. SPLAWN, Chairman, Legislative Committee. CHARLES D. MAHAFFIE. JOHN L. ROGERS. SECURITIES AND EXCHANGE COMMISSION, Re S. 249. Hon. WALLACE H. WHITE, Jr., Chairman, Committee on Interstate Commerce, United States Senate, Washington, D. C. DEAR SENATOR WHITE: Mr. Jarrett, at your direction, has sent us a copy of S. 249 and informed us that any comments we might have on this measure would be welcomed. Since the proposed legislation is addressed to the special problems of railroad finance, affects solely the jurisdiction of the Interstate Commerce Commission, and, we understand, represents the recommendation of that Commission, the Securities and Exchange Commission's comment is limited to a technical problem of draftsmanship in connection with exempting from the Securities Act of 1933 certain types of securities which would be passed on by the Interstate Commerce Commission. We have assumed that it is desired to accord such exemption. Paragraph (2) of the proposed section 20b provides that where an "alteration or modification involves an issuance of securities," the Interstate Commerce Commission shall make "the findings required by paragraph (2) of section 20a" of the Interstate Commerce Act. This would appear to exempt such securities from the registrations of the Securities Act of 1933, section 3 (a) (6) of which confers an exemption upon securities issued by a common or contract carrier "the issuance of which is subject to the provisions of section 20a of the Interstate Commerce Act." Since paragraph (2) of section 20a is the substantive part of that section, setting forth the standards that control the issuance of railroad securities, the requirement of findings thereunder in the proposed section 20b is, we think, sufficient to confer an exemption from the registration provisions of the Securities Act of 1933 upon securities issued by a carrier. On the other hand, there is nothing in the bill which would exempt from the registration provisions of the Securities Act of 1933 certificates of deposit which might be issued by committees participating in section 20 (b) proceedings. In proceedings under section 77 of the Bankruptcy Act, solicitations by committees and the issuance of certificates of deposit by such committees are within the regulatory jurisdiction of the Interstate Commerce Commission (sec. 77 (p)), and certificates of deposit are expressly exempted from the registration provisions of the Securities Act of 1933 (sec. 77 (f)). We assume that in section 20 (b) proceedings similar control over certificates of deposit by the Interstate Commerce Commission is intended in view of the jurisdiction which would be vested in that Commission to determine the "correctness and sufficiency" of "all letters, circulars, advertisements, and other communications," etc., to be used "in soliciting the assents or the opposition" of security holders, as conferred by paragraph (2) of section 20 (b), together with its general rule-making powers under paragraph (10) of section 20b. Accordingly, as in the case of section 77 proceedings express exemption from the registration provisions of the Securities Act of 1933 would seem appropriate. Consequently, we suggest that S. 249 might be amended as follows: "Any issuance of securities under this section which shall be found by the Commission to comply with the requirements of paragraph (2) of section 20a shall be deemed to be an issuance which is subject to the provisions of section 20 (a) within the meaning of section 3 (a) (6) of the Securities Act of 1933, as amended. Section 5 of said Securities Act shall not apply to the issuance, sale or exchange of certificates of deposit representing securities of, or claims against, any carrier which are issued by committees in proceedings under this section, and said certificates of deposit and transactions therein shall, for the purposes of said Securities Act, be deemed to be added to those exempted by Sections 3 and 4, respectively, of said Securities Act." Apart from its application to certificates of deposit, this suggested amendment, which could take the form of an addition to paragraph (9) of the proposed section 20b, would remove any possible doubt as to the exemption status of securities issued by carriers in section 20b proceedings. We have noted the language of the present exemption in paragraph (9) with respect to solicitations, and find that it accords with a recommendation we made to the last Congress in connection with S. 1253. We are advised by the Bureau of the Budget that the views expressed in this letter are not at variance with the program of the President. The opportunity afforded to us to comment on this legislation is very much appreciated. Sincerely yours, ADDITIONAL STATEMENTS SUBMITTED PROTECTIVE COMMITTEE FOR THE CHICAGO, HON. CLYDE M. REED, United States Senator, Washington, D. C. DEAR SENATOR REED. Mr. J. Hamilton Cheston, Chairman of the above Committee referred to me for reply your letter of May 20, 1947 addressed to Institutional Bondholders' Committees or Groups of The Chicago, Rock Island and Pacific Railway Co. and other railroads. I accordingly wrote Bankers Trust Co., the Committee's Depositary, as per the enclosed copy, and received a reply, dated May 26, 1947, a copy of which is enclosed together with the original of each of the two lists. You will note that Bankers Trust Co. made separate lists of the insurance company holdings and the savings bank holdings. Bankers Trust Co. evidently construed that part of your letter of May 20 which calls for "the previous and present maximum amount of such bonds owned by institutions represented by your committee or group" as referring to those institutions now represented by the Committee. I presume that that construction is correct. Very truly yours, BANKERS TRUST CO., 16 Wall Street, New York, N. Y. EDWARD W. BOURNE, Secretary. ALEXANDER & GREEN, New York 5, N. Y., May 21, 1947. (Attention Mr. R. G. Page, vice president.) DEAR SIRS: I am enclosing herewith an original letter from Senator Clyde M. Reed, dated May 20, 1947, received by the chairman of this committee. Will you kindly give me as promptly as possible the information requested in Senator Reed's letter with respect to deposits, and return the letter? Very truly yours, Re: Chicago, Rock Island and Pacific Railway Co. General Mortgage 4 percent bonds due January 1, 1988, deposit agreement Mr. EDWARD W. BOURNE, MESSRS. ALEXANDER & GREEN, New York, N. Y. DEAR MR. BOURNE: As requested in your letter of May 21, we advise that our records, as depositary, show that $9,970,000 principal amount of the above bonds were on deposit with us as of the close of business May 22, 1947. The greatest maximum amount of such bonds deposited was $39,853,000 as of April 3, 1934. There is also enclosed a list of the present "institutional" holders showing the present holdings. This is also the greatest maximum holding in each case with the exception of the Bowery Savings Bank. Very truly yours, J. C. KENNEDY, Assistant Secretary. |