St. Joe Paper Company v. Atlantic Coast Line Railroad Company Lynch/Dissent Douglas
Mr. Justice DOUGLAS, with whom Mr. Justice BURTON and Mr. Justice MINTON concur, dissenting.
The Court misstates the issue in these cases. The sole question, the Court says, is whether the Interstate Commerce Commission has the statutory power to submit a plan of reorganization under § 77 of the Bankruptcy Act 'whereby a debtor railroad would be compelled to merge with another railroad'. That is not the issue. Neither the Interstate Commerce Commission nor the reorganization court has attempted to force a merger of these railroads. If at some future time any such attempt is made, it will be time enough to deal with it. Hence it is misleading for the Court to say that the issue is whether a merger may be 'foisted upon one of the parties by the Commission.' The one and only issue before us at the present time is whether the Commission may include in a plan of reorganization a provision that the debtor or bankrupt railroad should be merged with another road and submit that plan for approval or disapproval to the security holders who are entitled to vote on a plan. To understand the issue in these cases it is necessary to have an understanding of the respective functions of the Commission and the reorganization court under § 77.
First. Under § 77 the Commission is the chief architect of any plan of reorganization. The plan must originate with the Commission. § 77, sub. d. Second. Once a plan is certified by the Commission it goes to the Court for a hearing. § 77, sub. e. Third. After that hearing the judge either approves or disapproves the plan. § 77, sub. e. Fourth. If the judge disapproves the plan, he either dismisses the proceedings or refers the matter back to the Commission. § 77, sub. e. Fifth. If the judge approves the plan, he sends a certified copy of his opinion and order to the Commission. § 77, sub. e. Sixth. In that case the Commission submits the plan to the security holders for a vote. § 77, sub. e. Seventh. The Commission certifies the results of the submission to the court. § 77, sub. e. Eighth. The judge then confirms the plan, if the creditors and stockholders of each class entitled to vote and holding 'more than two-thirds' of the claims in each class have accepted the plan. § 77, sub. e. Ninth. If that percentage of creditors and stockholders does not approve the plan the judge, by terms of § 77, sub. e, may nevertheless approve the plan. This is the so-called 'cram down' provision and it reads as follows:
'if the plan has not been so accepted by the creditors and stockholders, the judge may nevertheless confirm the plan if he is satisfied and finds, after hearing, that it makes adequate provision for fair and equitable treatment for the interests or claims of those rejecting it; that such rejection is not reasonably justified in the light of the respective rights and interests of those rejecting it and all the relevant facts; and that the plan conforms to the requirements of clauses (1) to (3), inclusive, of the frist paragraph of this subsection (e)'. 
The case has been discussed as if we are at the Ninth stage of the reorganization. Rather, only the Fifth stage has been completed and the Sixth stage is about to start.
The case has been discussed as if the creditors will vote the plan down and the judge, in the face of that, will force the plan on the creditors through the 'cram down' provision.
But as yet no vote has been taken. Perhaps the powerful interests represented by the petitioners will vote solidly and overwhelmingly against the plan. Perhaps not. Election campaigns sometimes change votes. Perhaps the creditors will eventually approve the plan.
Our present problem must be weighed in light of both of those contingencies.
If the creditors approve the plan by 'more than two-thirds' vote but less than 100 percent, would it be lawful to confirm it? I think it plainly would be for the following reasons:
Section 77 contemplates the use of reorganizations to consummate mergers. Section 77, sub. b 5 says that a plan '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,' etc. (Italics supplied.) So it is clear that Congress contemplated that mergers of railroads could be effected by a § 77 plan of reorganization.  Since mergers could be accomplished that way, Congress felt-as the legislative history abundantly shows-that the Commission must apply in this class of mergers the same standards it must apply in other mergers. Accordingly Congress wrote into § 77, sub. f the 'consistency clause'-that on confirmation of a plan the Commission shall grant authority for the 'transfer of any property, sale, consolidation or merger of the debtor's property * * * to the extent contemplated by the plan and not inconsistent with the provisions and purposes' of the Interstate Commerce Act. (Italics supplied.) Section 5 of the Interstate Commerce Act prescribes both a procedure for the Commission to follow in those cases and the standards which the Commission must apply.
The procedure includes among other things (a) notification to the Governors of each State in which the properties of the carriers are situated; and (b) a reasonable opportunity for the 'interested parties' to be heard. No objection is made in these cases (and no showing is attempted) that that procedure was not followed.
The standards for the Commission's action on mergers are different from those prescribed in case of reorganizations. In reorganizations the Commission is concerned with matters of valuation, the amount of fixed charges, the ratio of bonds to stock, and like financial problems. See Ecker v. Western Pacific R. Corp., 318 U.S. 448, 63 S.Ct. 692, 87 L.Ed. 892. Congress by § 5 of the Interstate Commerce Act has prescribed special standards for mergers. Section 5(2)(c) states:
'In passing upon any proposed transaction under the provisions of this paragraph (2), the Commission shall give weight to the following considerations, among others: (1) The effect of the proposed transaction upon adequate transportation service to the public; (2) the effect upon the public interest of the inclusion, or failure to include, other railroads in the territory involved in the proposed transaction; (3) the total fixed charges resulting from the proposed transaction; and (4) the interest of the carrier employees affected.'
There is no objection made nor showing attempted that in these cases the Commission failed to make findings on those issues nor that the findings as made were inadequate. The Commission indeed was most explicit. It said that control of Florida East Coast by the petitioner in No. 24, St. Joe Paper Co., would be 'contrary to the public interest' since that company, 'particularly because of its large banking interests,' would be in a position to influence the routing of shipments. 282 I.C.C., p. 187. It found that the merger of the Florida East Coast with Atlantic Coast Line
-would be in the public interest.  Id., pp. 187, 188.
-would adequately protect the interests of employees.  Id., p. 187.
-would result in savings as a result of unification.  Id., p. 187.
- would result in a betterment of service to the public.  Id., p. 187.
-would not adversely affect the citizens and communities of the east coast of Florida.  Id., pp. 187-188.
-would give the debtor greater financial stability.  Id., p. 188.
-would give a better service than service under an operation by St. Joe Paper Co.,  petitioner in No. 24. Id., p. 188.
We are not asked to set aside those findings. They are indeed not challenged. On their face they plainly meet the standards of § 5 of the Interstate Commerce Act. We cannot say on this record that they are not consistent with § 5 within the meaning of the consistency clause of § 77, sub. f. So far as this record shows, the Commission has faithfully, painstakingly, and conscientiously performed the obligations which § 5 of the Interstate Commerce Act imposes on it. It would seem obvious, therefore, that the Commission should be allowed to submit the plan, including the provision for a merger, to the security holders for their approval or disapproval.
The Court, however, disallows the submission and rests its action on a curious reason. It says that consent of the railroads has not been obtained and without that consent no merger can be consummated in § 77 proceedings. But that reason is wholly at war with the statutory scheme of railroad reorganizations.
Once a petition for reorganization is approved, the court appoints trustees who have full management of the business under the court's supervision. § 77, sub. c. The trustees take over the functions of the officers and board of directors. But apparently the Court, when it refers to 'the debtor,' does not mean the trustees, for it speaks of 'those who in the absence of § 77 would wield the corporate merger powers'. That must mean either the old management or the stockholders. Yet such a reading cannot square with § 77. One can look through § 77 in vain for any status granted the old management to approve or disapprove a plan. 'The debtor' commonly is identified with the stockholders, i.e., the equitable owners of the road. But the method of getting their consent to any plan of reorganization is prescribed in § 77. They may or may not be entitled to vote, depending on whether their stock represents a value in the railroad. If the stock has no value, they are not entitled to vote. If it has value, they are entitled to vote. § 77, sub. e. If the security holders who have a vote approve the plan, the consent necessary to effect both the recapitalization and the merger has been given. To allow the old management or the stockholders a veto power where Congress has provided they shall not vote is to indulge in as bold a piece of judicial legislation as one can find in the books.
It is said that the consistency clause of § 77 incorporates by reference § 5 of the Interstate Commerce Act. And so it does. But that does not mean that because the initiation of merger plans rested with the management prior to bankruptcy, it rests with the old management after bankruptcy. The conclusion that it does reveals a basic misunderstanding of the system of bankruptcy reorganization contained in § 77. When Congress designed that legislation, it prescribed precisely how the consent necessary for each step in the reorganization should be obtained. Section 77 gives the old management no vote on any measure. If the equity votes, the stockholders cast the ballot. And a procedure is designed to deprive them of a vote if their securities no longer represent any value, as is the case here.
No comfort can be found in § 77, sub. d, which gives the debtor, i.e., the old management, standing to propose a plan of reorganization. Plans of reorganization may be proposed by the debtor, by the trustees, by 10 percent of any class of creditors or of stockholders 'or with the consent of the Commission by any party in interest.' § 77, sub. d. The proposal of a plan expresses merely the wish. In logic and in history there is no reason why a plan containing a merger may not be proposed by the new management as well as the old, by creditors as well as stockholders. Standing to present a plan has no relevancy to the fairness or feasibility of the plan presented. To say that only 'the debtor' may submit a plan that contains provisions for a merger is to give a whiphand to people who do not even have enough of an interest to vote on a plan. The debtor commonly represents the equity; and when, as here, the equity is so far under that it can have no possible interest in the reorganization (except possibly a nuisance value created by long-drawnout litigation), it violates all sense of fairness and disregards the mandate of Congress to let the equity have the preferred position the Court now creates. Congress has set the standards for the protection of the 'equitable owners.' Where, as here, they have no value in the enterprise, Congress said they should be disregarded.
Much emphasis is placed by the Court on S.Rep. No. 1170, 79th Cong., 2d Sess. 80-85, a report by the Senate Committee on Interstate Commerce headed by Chairman Wheeler. There are two reasons why that Reprot is irrelevant to the present issue. First, that Report condemned the use of § 77 'to bypass' § 5 of the Interstate Commerce Act. As I have shown, § 5 was not 'bypassed' in the present case. The procedures, safeguards, and standards it prescribes were fully satisfied by the Commission. Second, that Report covered a bill which endeavored to make changes in the existing law and practices. But that bill never was enacted. It is, however, now used as an authoritative interpretation of a law which it sought to change.
An unjaundiced reading of § 5 of the Interstate Commerce Act and of § 77 of the Bankruptcy Act results, I submit, in the following conclusions:
Any person with standing to submit a plan of reorganization may include in it provisions for a merger.
Section 5 of the Interstate Commerce Act provides the standards for the Commission to apply in passing on such a plan and those standards have been wholly satisfied here.
Section 77 prescribes the procedure for getting the consent to a plan, including a plan that provides for a merger.
What reason then can there be for not letting the security holders vote to adopt or reject this plan?
It is said that if the security holders reject the plan, the reorganization court may nonetheless force it on them. There are several answers to that, as I have already suggested:
(1) The security holders may not reject the plan.
(2) Even if they do reject the plan, the reorganization court may decide not to force the plan on them. To force it on them the court must have a hearing and find, among other things, that the rejection 'is not reasonably justified in the light of the respective rights and interests of those rejecting it and all the relevant facts * * *.' § 77, sub. e.
(3) Even if the reorganization court undertook to force any plan on the security holders, we might well overrule that order. In the only case of the 'cram down' provision on which we have passed, Reconstruction Finance Corp. v. Denver & R.G.W.R. Co., 328 U.S. 495, 66 S.Ct. 1282, 1384, 90 L.Ed. 1400-one involving issues different from those now tendered -we reserved decision on the power of the reorganization court. We said, 328 U.S. at page 535, 66 S.Ct. at page 1303:
'this does not mean that if a plan is approved as fair and equitable by the Commission and court, there cannot be a reasonable justification for its rejection by a class of claimants on submission. Reasons to make their rejection reasonable may arise * * *.'
I say we might well stop any attempt of the court to invoke the 'cram down' provision because we cannot tell in advance what a particular situation might disclose. Under § 77, sub. e, it will be remembered, 'more than two-thirds' of each class entitled to vote can vote for a plan and force it on the minority. Unanimuos consent is not necessary.
(1) Suppose the election returns bring approval by a bare two-thirds. Suppose the judge is satisfied that one block of securities voting against the plan has a special ax to grind, as the Commission suggests is true in this case of the St. Joe Paper Co., petitioner in No. 24. Would it be unlawful for the court to invoke the 'cram down' provision in that case? 'Consent' has not been obtained since Congress provided that 'more than two-thirds' should approve a plan. But the public interest might well justify use of the 'cram down' provision in that case as the only effective method for dealing with a recalcitrant (or even black-mailing) minority. In light of what we said in the Denver & Rio Grande case (328 U.S. at page 535, 66 S.Ct. at page 1303) such rejection by the one-third minority might well be deemed to have no 'reasonable justification' in light of all the facts and circumstances.
(2) Suppose the election returns bring approval from only 1 per cent of the security holders. Could the 'cram down' provision properly be invoked in that case? It is difficult even to imagine a case where it would be proper to do so. The 'cram down' is a harsh remedy, the use of which would require special reasons.
But the fact that the occasions for its use should be closely guarded should not mean that it can never be used in connection with a § 77 plan of reorganization involving a merger, unless 'the debtor' (here representing security holders not even entitled to vote on a plan) proposes the merger. Under § 77 and § 5 of the Interstate Commerce Act, read together, it is plain that Congress subjected plans containing mergers to the same 'consent' requirements as plans not containing mergers. There is not a word in the statute or in the legislative history to indicate that the old management or stockholders not entitled to vote on a plan nevertheless have a veto over it.
The question of the application of the 'cram down' provision of § 77 to plans involving mergers has never been presented to us.  That question is premature here, for it may never be reached. It is a large question of great importance and one that should be decided, not in the abstract, but only on the specific facts of specific cases. In these cases we should specifically reserve decision on it until it is presented. We should affirm the judgment in these cases, allowing the plan to be submitted for approval or rejection, explicitly saving the rights of all parties in case the 'cram down' provision is used against them.
^1 Clauses (1) and (2) referred to read as follows:
'the judge shall approve the plan if satisfied that: (1) It complies with the provisions of subsection (b) of this section, is fair and equitable, affords due recognition to the rights of each class of creditors and stockholders, does not discriminate unfairly in favor of any class of creditors or stockholders, and will conform to the requirements of the law of the land regarding the participation of the various classes of creditors and stockholders; (2) the approximate amounts to be paid by the debtor, or by any corporation or corporations acquiring the debtor's assets, for expenses and fees incident to the reorganization, have been fully disclosed so far as they can be ascertained at the date of such hearing, are reasonable, are within such maximum limits as are fixed by the Commission, and are within such maximum limits to be subject to the approval of the judge; * * *.'
^2 The Commission has repeatedly proposed and approved reorganization plans requiring consolidations or mergers. See, e.g., Alton R. Co. Reorganization, 261 I.C.C. 343; New York, N.H. & H.R. Co. Reorganization, 254 I.C.C. 63, 405; Missouri Pac. R. Co. Reorganization, 239 I.C.C. 7; Denver & R.G.W.R. Co. Reorganization, 233 I.C.C. 515, 239 I.C.C. 583, 254 I.C.C. 349. As a result of some of these proceedings the Commission has been criticized for misapplying or disregarding the standards set up for mergers by § 5 of the Interstate Commerce Act. S.Rep.No.1170, 79th Cong., 2d Sess. 80-85. In the present case, however, no argument is made that the proper standards have not been applied. Indeed that question is not before us. Moreover, not even the Senate Report, supra, suggests that the Commission cannot ever approve reorganization mergers. That Report says only that the 'procedure and safeguards of the Transportation Act must be preserved. * * *' And, as we shall see, the standards prescribed in § 5 have been satisfied here, so far as this record reveals.
^3 'The public interest in its broader concept will be better served by integration of the debtor into a large railroad system than by its continued operation as an independent railroad.
'The effect of a merger upon the Southern Railway system and Seaboard Air Line Railroad Company, if any, will not adversely affect the public interest.
'The record is sufficient in all respects for a determination of the issue of the public interests involved in an acquisition of the debtor's properties by the Coast Line.
'It will be compatible with the public interest for the Coast Line to control the debtor's property.
'While the plan proposed by the Coast Line is inequitable in that it does not provide for the full equitable equivalent of the rights to be surrendered by the debtor's creditors, the plan as hereinabove modified will comply with such requirements, will be fair and equitable, and otherwise in the public interest.'
^4 'The interests of the railroad employees affected by the merger will be adequately protected.'
^5 'There should eventually result savings through a unification of the two carriers of between $850,000 and $1,000,000 per annum, through (a) eventual unification of the executive and supervisory forces of the two carriers; (b) consolidation of interchange yards and shop facilities at Jacksonville; (c) unification of operations of the freight stations of the two carriers at Jacksonville; and (d) coordination and consolidation of off-line traffic offices of the two carriers.'
^6 'There would be betterment of service to the public resulting from a unification of the debtor's line with that of the Coast Line.'
^7 'The apprehensions of the citizens and communities of the east coast of Florida that a merger would adversely affect their interests are not justified since (a) it would be to the inerest of the Coast Line to serve all its territory impartially, (b) existing through routes via Jacksonville will be maintained and (c) while the Coast Line would attempt to retain its long haul, its appeal to the public would be based primarily on the quality of its service, and the traffic relationships between trunk-line carriers would prevent any abuse of power such as would be possible under control of the debtor's line by the St. Joe Company.'
^8 'The merger of the debtor with the Coast Line will be of appreciable benefit in assuring greater financial stability for the debtor.'
^9 'In general, there is a substantial preponderance of evidence that a merger will insure a more adequate, economical, and efficient transportation service than will operation of the debtor by the St. Joe Company.'
^10 See note 11, infra.
^11 We have considered the 'cram down' provision of § 77, sub. e only once. See Reconstruction Finance Corp. v. Denver & R.G.W.R. Co., 328 U.S. 495, 531, 66 S.Ct. 1282, 1301, 1384, 90 L.Ed. 1400. A merger was involved in that reorganization but it was not at issue before this Court. The complaint there was by junior creditors on matters that were purely financial: that the valuation and allocation of securities proposed had left them too small a participation. We decided that the 'cram down' provision could be and was in that case constitutionally and properly applied. On the facts we held that the objecting class was without 'reasonable justification,' since it complained only of financial aspects of the plan which were fair and equitable. We made no decision regarding mergers and laid down no rule of law. We left the reorganization courts free to confirm or reject future plans as the facts, the equities, and the votes required.