The opinion of the court was delivered by: MARIS
The Lehigh Valley Railroad Company and three of its subsidiary corporations, the Lehigh Valley Rail Way Company, Lehigh Valley Railroad Company of New Jersey, and Pennsylvania and New York Canal and Railroad Company, on August 7, 1939, filed in this court petitions averring that they are unable to meet their debts, matured or about to mature, and that they desire to carry out a plan of adjustment, dated August 25, 1938, under the provisions of Chapter XV of the Bankruptcy Act, 11 U.S.C.A. c. 15, § 1200 et seq. A special court of three judges was at once convened as directed by Sec. 713 of the Bankruptcy Act, 11 U.S.C.A. § 1213. Thereupon the court approved the petitions as properly filed under Chapter XV, directed that they be heard and disposed of in a single proceeding, fixed September 29, 1939, for a hearing, and directed that notice of the hearing be given to all persons in interest. One of the judges of the specical court having died and another having found himself to be disqualified, the special court was reconstituted on September 27, 1939. The court as reconstituted held the hearing upon the plan of adjustment on September 29, 1939, which hearing was continued by adjournments on December 8, 1939, March 15, 1940, June 7, 1940, and June 27, 1940 and concluded on July 25, 1940.
The Lehigh Valley Railroad Company (hereinafter called the "Lehigh Valley" or the "Company") is a railroad corporation of the State of Pennsylvania. It operates by direct ownership, stock ownership and lease, a railroad system (hereinafter called the "railroad" or the "system") of some 1,300 road miles in the states of New York, New Jersey and Pennsylvania. Its principal operating office is and for many years has been in the City of Bethlehem in the Eastern District of Pennsylvania. The Lehigh Valley operates the entire railroad. It has a number of wholly owned subsidiaries, the properties of which it leases. Among these are Pennsylvania and New York Canal and Railroad Comany, a Pennsylvania corporation (hereinafter called the "Canal Company"), which owns a substantial portion of the railroad in Pennsylvania, the Lehigh Valley Rail Way Company, a New York corporation, (hereinafter called the "Rail Way Company"), which owns most of the property of the railroad in the State of New York, and Lehigh Valley Railroad Company of New Jersey, a New Jersey corporation (hereinafter called the "New Jersey Company"), which owns most of the property of the railroad in New Jersey.
The Lehigh Valley's railroad is an old and seasoned one, well constructed and well maintained. The Company enjoys a diversified traffic, a larger part of its freight revenues being derived from steel, foodstuffs, chemicals, machinery, cement and coal. In the years from 1921 to 1929 it enjoyed large operating revenues and showed a substantial net income after the payment of fixed charges in each year except 1922. In 1930 it began to feel the effects of the economic depression and its operating revenues dropped very greatly. They continued to fall in 1931 and 1932, the decline over the period of three years being almost 50%. In 1933 and 1934, however, the operating frevenues leveled off and then began to recover. They increased in 1935 and again substantially in 1936, the increased revenues being maintained in the early part of 1937. Expenditures for maintenance were reduced as revenues declined but when the revenues began to increase again maintenance expenditures were kept down to the previous low level. The result was that although during the years from 1932 to 1935 the operations showed net deficits, the operations of 1936 and 1937 resulted in a net income.
About the middle of the year 1937 a sudden decline in operating revenues took place and continued during 1938 to a point where on April 1st of the latter year the Lehigh Valley had $1,246,000 in cash, $778,000 in bills outstanding, and was faced with the payment on May 1st of interest on its General Consolidated Mortgage Bonds (hereinafter called the "General Consolidated Bonds") amounting to approximately $1,558,000. On April 30th the Company borrowed from the Reconstruction Finance Corporation (hereinafter called the "R.F.C.") $778,000 which was applied to maintenance account. With the money thus freed and with other funds which it secured the Lehigh Valley was able to pay the interest due on the next day on the General Consolidated Bonds. At this time the system owed a total funded debt outstanding in the hands of the public of approximately $154,250,000. Of this debt three issues were about to mature. $8,500,000 Canal Company Consolidated Mortgage Bonds (hereinafter called the "Canal Bonds") became due April 1, 1939. $15,000,000 Rail Way Company First Mortgage Bonds (hereinafter called the "Rail Way Bonds") matured July 1, 1940. $9,999,000 Lehigh Valley Terminal Railway Company First Mortgage Bonds (hereinafter called the "Terminal Bonds") assumed by the New Jersey Company were payable October 1, 1941. The Lehigh Valley had guaranteed the payment of all three issues of bonds. The Lehigh Valley also owed the R.F.C. registered serial collateral notes totalling approximately $1,333,000 in addition to the sum of $778,000 which it had borrowed on April 30th. The Company also owed Manufacturers Trust Company of New York $5,000,000 payable March 1, 1940, and Philadelphia National Bank $1,200,000 payable September 10, 1938. In June, 1938, it was obliged to borrow the further sum of $2,175,000 from Manufacturers Trust Company of New York, Marine Midland Trust Company of New York and Marine Trust Company of Buffalo. These obligations aggregating $8,375,000 are hereinafter called the "bank loans." The R.F.C. and bank loans were secured by the pledge of collateral consisting of system obligations or shares of stock which had been in the treasury of the Lehigh Valley.
In the light of the precipitate decline in the gross revenues of the Lehigh Valley the approaching maturity of three first mortgage bond issues aggregating $33,499,000 secured upon various important portions of its line, the necessity of meeting its obligations to the R.F.C. and the banks, aggregating more than $10,000,000, and the necessity of making the interest payments on its General Consolidated Bonds, amounting annually to more than $3,000,000, made it obvious that some arrangement must be made by the Company for dealing with its debts. It accordingly entered into negotiations with its bondholders and other creditors and under date of August 25, 1938, it submitted to them the plan for the adjusment of its debts which in the present proceeding it asks this court to approve and confirm.
Very briefly stated, the principal features of the plan are (a) to extend the maturity of the three presently maturing first mortgage bond issues for a period of ten years, (b) to extend the R.F.C. and bank loans to November 1, 1943, and (c) to extend without interest for a period of five years 75% of the amount of each of the five semi-annual installments of interest falling due from November 1, 1938, to November 1, 1940, inclusive, upon the General Consolidated Bonds. Certain of the general provisions of the plan will also be noted. So long as the total debt of the system shall exceed $120,000,000 75% of its net income is to be withheld from the payment of dividends. 40% of the amount thus set aside may be retained as a capital fund and the balance, not less than 45% of the total net income, is to be applied in a sinking fund to retire the R.F.C. and bank loans, to anticipate the deferred nstallments of interest on the General Consolidated Bonds, and to retire obligations senior in lien to those bonds. So long as the R.F.C. and bank loans and the deferred interest on the General Consolidated Bonds remain unpaid, no dividends whatever are to be paid to shareholders. Supplemental indentures are to be executed as to each of the bond issues affected by the plan. A committee of bondholders is provided for to take important responsibility in carrying out the plan.
By December 28, 1938, assents to the plan of adjustment had been received from the banks, from the R.F.C., subject to approval of its action by the Interstate Commerce Commission, and from more than 80% of each of the four classes of bondholders affected by the plan. Accordingly on that date the Lehigh Valley filed with the Interstate Commerce Commission a petition asking its approval of the plan and asking also that it approve the extension of the R.F.C. loans. The pettion was joined in by its three affected subsidiaries. On March 1, 1939, Division 4 of the Commission filed its report finding that the adjustments proposed by the plan are for lawful objects and compatible with the public interest, are necessary and appropriate for and consistent with the proper performance of the petitioners' service to the public as common carriers and that the proposals will not impair the ability of the petitioners to perform that service. At the same time the Commission filed its order authorizing the carrying out of the plan. Lehigh Valley Railroad Company and Subsidiaries Financial Readjustment, 230 I.C.C. 685. On the same day the full Commission filed its report finding that the Lehigh Valley is not in need of financial reorganization in the public interest if the plan of August 5, 1938 becomes operative and that the extension of the R.F.C. loan should be authorized provided the extension becomes operative at the same time that the plan becomes operative. An appropriate supplemental certificate was on the same day issued. Lehigh Valley Railroad Company Reconstruction Loan, 230 I.C.C. 670.
On March 14, 1939, the Lehigh Valley declared the plan operative. On July 28, 1939 Chapter XV was added to the Bankruptcy Act by the Act of July 28, 1939, c. 393, 53 Stat. 1134, and ten days later the Lehigh Valley and its subsidiaries filed the petitions now before us seeking approval and confirmation of the plan.
We have carefully considered the plan and the objections thereto in the light of the evidence offered at the hearings and of the arguments of counsel. Our conclusion is that the plan and the adjustment which it provides should be approved and confirmed without modification. We shall immediately enter a final decree which will include findings in full detail of all the facts referred to in clauses (1) to (6), inclusive, of Section 725 of the Bankruptcy Act, 11 U.S.C.A. § 1225 (1-6). Many of these findings relate to formal and uncontested matters as to which on the record before us there can be no debate and which therefore require no discussion here. We shall accordingly confine ourselves to a discussion of those facts as to which there may be controversy, the objections which have been made and the questions of law which have been raised.
The benefits of Chapter XV are by its terms not available to a railroad corporation which is in need of financial reorganization of the character provided for under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. To put the matter differently, it must appear that the railroad corporation's inability to meet its debts matured or about to mature is reasonably expected to be temporary only. We think that in the light of these tests the benefits of Chapter XV are available to the Lehigh Valley and its subsidiaries. The evidence strongly supports the conclusion that the Company's difficulties are temporary. The revenues of the system have been steadily increasing since 1938. A fair estimate of the net income to be expected for the present year indicates that it will be the largest enjoyed since 1930. There are reasonable grounds for believing that the upward trend will continue to the extent necessary to enable the Lehigh Valley to meet its obligations as modified by the proposed plan of adjustment.
Is the plan feasible? We think it is. Its feasibility is of course dependent upon the results of the railroad's operations in the years to come. The results of these operations can, as we have said, only be estimated at this time. Our conclusion of feasibility is, therefore, necessarily based upon two assumptions. One of these is that the gross operating income will continue to be not less than the amount realized during the present year. The evidence indicates that this assumption may fairly be made. We must also assume that the railroad will continue to keep its expenditures for maintenance, additions and betterments at approximately the present figures. The testimony of the president of the Lehigh Valley indicates that this assumption also is reasonable. A third factor must be considered at this point, however. Since 1932 the Lehigh Valley and many other railroads operating in the State of New Jersey have been contesting the taxes levied upon their property by the State. Pending the determination of this controversy the Lehigh Valley has paid only about 60% of the taxes actually levied.If payment of the total amount of these taxes should ultimately be enforced it is quite doubtful whether the plan of adjustment now proposed would be feasible. However, negotiations for the adjustment of these taxes upon a reasonable basis of compromise have been taking place. At the last hearing the vice president and general counsel of the Lehigh Valley testified that he was confident that a settlement would be reached with the State of New Jersey under which all of the taxes levied for the years 1932 and 1933 will be paid and approximately 75% of the taxes levied for subsequent years. The evidence indicates that such a settlement, if it is reached, can be carried out under the plan. We think it fair to assume that a tax settlment will be arrived at which will not endanger the plan. Our conclusion as to this is fortified by a letter from the Attorney General of the State of New Jersey to ...