of the principal of these bonds. Then security is to continue unimpaired and they are to receive interest at the present rates during the extended period. Far below these two grounds so far as security is concerned stand the holders of the General Consolidated Bonds. The primary necessity of the Lehigh Valley in its financial difficulty is to secure cash with which presently to liquidate the loans from the banks and the R.F.C. and thus to release the collateral which they hold and which comprises substantially all of the assets of the Company available for future financing. The only feasible way which has been suggested to provide immediate funds for this purpose is to require the holders of the General Consolidated Bonds to accept the postponement for a limited period of a portion of the interest upon their bonds, and thereby to release a substantial portion of the operating revenues of the Company. The plan accordingly provides for the postponement for five years of 75% of each of five semi-annual installments of interest upon these bonds. This is undoubtedly a hardship, particularly upon individual holders. However, in consideration of this postponement these bondholders receive a very real benefit, namely, a reasonable assurance that the railroad, which constitutes their security and from the operating revenues of which their interest payments must come, will continue to operate as a going concern for their benefit. Unless some plan is adopted they are faced, almost certainly, with the cessation of all interest payments. Furthermore, as we have seen, a sinking fund is to be provided which may benefit them materially by accelerating the payment of their deferred interest installments in case the future revenues of the Company should prove greater than now anticipated.
While the shareholders stand to benefit in the long run by the avoidance of reorganization or bankruptcy and the continuance of the railroad as a going concern they give up all right to receive dividends so long as the R.F.C. and bank loans and deferred General Consolidated Bond interest remain unpaid. Furthermore they do not under the plan receive any benefits at the expense of the creditors. On the contrary by giving up all possibility of dividends from 75% of the net income until the system's indebtedness is reduced to $120,000,000 they contribute substantially to the protection of the bondholders. Consequently the contention of Victor S. Gettner and Lena Mendelsohn, trustees under the will of Louis Silverstein, holders of $3,000 Terminal Bonds, that the plan of adjustment is unfair and inequitable under the rule laid down in Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S. Ct. 1, 84 L. Ed. 110, cannot be sustained. We conclude that the plan is fair and equitable as an adjustment and that it affords due recognition and fair consideration to each class of securityholders adversely affected by it.
There remains for consideration the petition of Greydon A. Rhodes, a holder of $27,000 General Consolidated Bonds, that the Lehigh Valley be restrained from paying out any portion of the net amount which may be received by it upon its claim against Germany for damages resulting from the Black Tom explosion and for a modification of the plan so as to provide that the Black Tom award when received be applied to the discharge of the deferred interest installments upon the General Consolidated Bonds. A brief statement of the facts with regard to the Black Tom claim is necessary in order to understand the question raised.
On July 31, 1916, the Black Tom Terminal in New York Harbor owned by the Lehigh Valley was blown up. As a result of the explosion the Company suffered a loss of about $10,000,000, including large sums paid to various persons to satisfy damage claims. From time to time these payments for damages were charged off until there now stands upon the books of the Lehigh Valley an item of approximately $1,796,000 unadjusted debit arising from this source. This item was included in the balance sheet attached to the plan of adjustment. The Company's claim for damages was prosecuted before the Mixed Claims Commission set up by agreement between the United States and Germany upon the theory that the explosion was caused by German saboteurs. On October 30, 1939, the Mixed Claims Commission announced its award in favor of the Lehigh Valley in the amount of $9,900,322.27 with interest. Payment of this amount has not been made, however, because of litigation pending in the District Court for the District of Columbia and not yet finally disposed of on appeal.
The net amount to be received by the Lehigh Valley from this claim cannot presently be determined for a number of reasonsons. In the first place it seems certain that the funds available for its payment will not be sufficient to pay it in full. Then also the fees and expenses of counsel incurred in prosecuting the claim and collecting the award must be paid out of the gross amount received. The Lehigh Valley has entered into an agreement with its counsel in this case, Amos J. Peaslee, for the payment to him of 50% of the amount received to cover all the fees and expenses of himself and his associates. This amount is subject to revision, however, in a proceeding instituted by the Lehigh Valley before the American Commissioner of the Mixed Claims Commission under the provisions of the Settlement of War Claims Act of 1928, 50 U.S.C.A.Appendix, § 9 et seq., for the determination of the reasonable fees payable to counsel in this matter. In an opinion filed May 22, 1940, this court held that the proceeding thus pending before the American Commissioner was the appropriate proceeding for the determination of the amount of the fees to be paid out of the fund. 34 F.Supp. 750. Until that proceeding is concluded it is obvious that the amount cannot definitely be known. Finally the amount received upon the Black Tom Award may constitute income and consequently be subject to income tax in amounts now unknown. In view of all these uncertain factors we cannot now say that more than $3,500,000 of this award when received by the Lehigh Valley will become available for its general purposes.
The Company has assigned any sums received by it upon the Black Tom award to the R.F.C. as additional collateral security for its loans. These loans aggregated $1,722,500 on January 1, 1940. Consequently when and if the net proceeds of the Black Tom award are actually received by the Lehigh Valley and the loans from the Reconstruction Finance Corporation are thereby paid, it does not certainly appear at this time that more than $1,800,000 of the sum received will remain available for the general purposes of the Lehigh Valley. We have pointed out, however, that there now stands upon the Company's books an item of approximately that amount which represents unadjusted debits arising from the Black Tom explosion. Consequently it may well be that the balance of the fund will be consumed by its application to these debits.
Enough has been said to demonstrate how inappropriate it would be for this court at this time to direct the specific application by the Lehigh Valley of a fund so uncertain in amount and in time of receipt. We conclude that this court ought not by modification of the plan or otherwise to direct the specific application of this fund when and if it is received.The Lehigh Valley must be left free to deal with it in such way as it may think proper within the limits prescribed by its legal and contractual obligations. The petition of Greydon A. Rhodes will accordingly be denied.
For the reasons herein stated and in the light of the facts disclosed by the evidence received in this proceeding a decree will forthwith be entered fully setting forth our findings of fact and approving and confirming the Lehigh Valley Railroad Company's plan of debt adjustment.
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