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July 8, 1936


The opinion of the court was delivered by: GIBSON

This is a proceeding for the reorganization of the Pressed Steel Car Company under section 77B of the Bankruptcy Act (11 U.S.C.A. § 207). Said company (hereinafter for convenience referred to as the company) was incorporated under the laws of New Jersey in 1899. It is engaged in the manufacture, sale, and repair of freight and passenger cars of all types, and the manufacture and sale of miscellaneous car parts and other materials. Its principal plants, owned directly by the company, are located at McKees Rocks (Pittsburgh), Pa., and at Hegewisch (Chicago), Ill.The company ranks third in the industry in rated capacity of production of freight cars.

 The company for many years enjoyed a substantial position in the equipment industry, with a record of fluctuating earnings common to this type of business. Consolidated net earnings declined from approximately $1,000,000 in 1930 to deficits of approximately $1,250,000 in 1931 and $1,430,000 in 1932, as shown by the company's books. On January 1, 1933, an outstanding issue of $3,000,000 of 5 per cent. debentures matured. As of that date, the company had outstanding, in addition to the $3,000,000 of maturing debentures, a small issue of $387,500 of debentures of later maturity, approximately $537,000 of additional funded or long-term debt, with approximately $900,000 of guaranteed obligations. It also had outstanding $13,600,000 par amount of 7 per cent. cumulative preferred stock, on which dividends were in arrears from July 1, 1931, and approximately 411,000 shares of common stock without par value.

 Efforts to provide for or refund the $3,000,000 of debentures maturing January 1, 1933, proved unavailing. Certain holders of debentures commenced actions against the company, and subsequently, viz., on May 11, 1933, receivers in equity were appointed by this court. The receivers continued to conduct the business of the estate until June 13, 1934, at which date the company filed a petition for reorganization under section 77B of the Bankruptcy Act, and trustees were appointed for the company and have continued the operation of the business since that time. Under authority of this court, the receivers issued receivers' certificates of indebtedness to provide for certain costs of preservation of the estate and the operation of the business to the extent that cash therefor was necessary. Subsequently, the receivers' certificates were refunded by the issue of 5 per cent. trustees' certificates of indebtedness, of which $2,500,000, principal amount, due January 31, 1937, are now outstanding.

 Subsequent to the appointment of the receivers, various committees representing security holders were organized. There are two committees representing holders of debentures, known respectively as the Hayden committee and the Cohen committee; two committees representing preferred stock, known respectively as the Marston committee and the Gilchrist committee; and one committee representing common stock, of which Mr. Arthur Loasby is chairman. The debenture holders' committees called for deposits of debentures, and the record indicates that each received substantial deposits; deposits with the Hayden committee aggregating approximately $1,000,000 of debentures, and deposits with the Cohen committee approximately $300,000. The Gilchrist committee also called for deposits of preferred stock, and received, according to the record, deposits of three or four thousand shares. The other committees did not call for deposits.

 In February, 1935, a holder of the company's debentures circularized the security holders of the company with a suggested plan of reorganization involving the refunding of the existing debentures with new mortgage bonds and stock and the raising of necessary new money by subscriptions by stockholders. This plan was never formally proposed in these proceedings or any serious attempt made to secure its acceptance by security holders. In May, 1935, the Cohen committee, representing holders of debentures, filed in court a tentative plan of reorganization which was predicated upon securing a mortgage loan of $2,000,000 from the Reconstruction Finance Corporation. This plan was abandoned as the negotiations with the Reconstruction Finance Corporation proved unsuccessful.

 In order to expedite a reorganization, this court fixed June 1, 1935, as the date for the submission of plans of reorganization by creditors and stockholders as contemplated by section 77B of the Bankruptcy Act. As no feasible plan of reorganization was proposed on the date fixed, said date was extended from time to time. In the meantime, efforts were made to interest responsible bankers in the reorganization of the company. Such bankers included Kuhn, Loeb & Co. of New York City, who had, from time to time, assisted the receivers and trustees in disposing of their certificates. Kuhn, Loeb & Co. associated with them in their consideration of the business the banking firm of J. & W. Seligman & Co. of New York.

 On October 14, 1935, the company filed in these proceedings a plan which contemplated that necessary new money would be provided through the sale of first mortgage bonds ranking ahead of the securities given to any existing security holders, but did not assure the underwriting of such first mortgage bonds.

 Shortly after the filing of said plan on October 14, 1935, the Gilchrist committee announced to security holders a plan differing in certain respects from the plan proposed by the company, but similarly providing for the raising of new money by the sale of first mortgage bonds. This plan was never proposed by the requisite number of security holders.

 Before the plan of October 14, 1935, had been submitted to security holders, the firm of Kuhn, Loeb & Co. received from General American Transportation Corporation a proposal to provide new money to assist in the reorganization of the company by the purchase of first preferred stock of a reorganized company. This proposal was communicated to the company, and, after further negotiations, a modified plan was filed by the company on December 23, 1935, which, as subsequently modified, is discussed hereafter. It contemplated the raising of new money through the purchase of first preferred stock by General American Transportation Corporation and its associates; such associates being Kuhn, Loeb & Co., A.G. Becker & Co., Tri-Continental Corporation, and Selected Industries, Inc. Such purchase was to be made two-thirds for account of General American Transportation Corporation and one-third for account of these associates. This plan as originally filed did not provide for any subscription rights to be given to existing security holders. It contemplated that Kuhn, Loeb & Co. would be reorganization managers thereunder. At about the same time, a joint plan was filed in these proceedings by the Cohen and Gilchrist committees, but such plan was not proposed by the percentage of security holders required under section 77B. This joint plan provided for the raising of new money by the sale of first mortgage bonds.

 Upon petition of the trustees for instructions as to the sending out of plans to security holders, a hearing was held on December 23, 1935, the two plans before the court for consideration at that time being the company plan (hereinafter referred to as the "debtor's plan") of December 23, 1935, which involved the issuance of new preferred stock to obtain new money, and the Gilchrist plan, which involved the sale of first mortgage bonds to produce new funds. After hearing, this court filed a memorandum opinion on January 6, 1936, 16 F.Supp. 325, in which it concluded that it would be confusing to security holders to send out both plans at the same time, and directed the debtor's plan to be sent out to security holders. The court indicated that it regarded the debtor's plan, which left the company free from mortgage indebtedness, as more desirable, if approved by the security holders, than the then presented Gilchrist plan, and the court gave tentative approval to the debtor's plan of December 23, 1935, but imposed certain amendments and conditions, the most important of which were (a) that the new money to be raised be increased from $1,500,000, as proposed, to a minimum of $1,750,000, or a maximum of $2,150,000; (b) that the existing stockholders be given the first opportunity to provide this money if they cared to do so; and (c) that if they were unable to provide the whole amount, they be given some participation in the purchase of the new stock with General American and its associates. These modifications were accepted by General American and its associates and by the company, and an amended plan, in compliance with the suggestions of the court, was filed January 16, 1936.

 An order was entered on January 21, 1936, as to the manner of submitting the plan to the security holders and prescribing the forms for assent to the plan, and such forms were sent to security holders by the trustees under direction of the court. The plan known as the "Gilchrist plan," urged upon the court at the final hearing, is different entirely from the so-called Gilchrist plan considered by the court in that memorandum opinion. The present Gilchrist plan was submitted after the debtor's plan (as amended January 16, 1936) had been sent out to security holders for their approval, and it follows generally the provisions of the debtor's plan as modified in accordance with the conditions imposed by the court, except as to the underwriting.

 The General American Transportation Corporation was willing to invest its money only if it should have a substantial interest in the company, yet the court was desirous of giving the first opportunity to provide all the funds to the existing stockholders, and so it was necessary to give stockholders two separate options; one known as option I, under which they might, if they so desired, provide the entire funds required and eliminate the General American Transportation Corporation entirely, and, if that failed, a second option known as option II, under which they might have subscription rights to a portion of the new stock on the same basis as General American Transportation Corporation.

 The amended debtor's plan, as filed on January 16, 1936, provided, in substance, as follows:

 (1) Trustees' certificates and prior claims to be paid in cash or assumed, and certain underlying liens to be assumed.

 (2) Holders of debentures and general claims classified with debentures to receive a principal amount of new debentures equal to the principal of the old debentures and claims, and unpaid interest to January 1, 1936, on the old debentures, such new debentures to bear interest at the rate of 5 per cent. per annum (payable only as earned for the first two years), to mature January 1, 1951, and to have a sinking fund based on net earnings as provided in the plan.

 (3) Holders of preferred stock to receive for each share three-fifths of a share of new second preferred stock of $50 par value and 1 share of common stock; such second preferred stock to be convertible ...

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