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IN RE PHILADELPHIA & READING COAL & IRON CO.

February 27, 1945

In re PHILADELPHIA & READING COAL & IRON CO.


The opinion of the court was delivered by: KIRKPATRICK

General Considerations

1. In fixing compensation for services in reorganization, especially counsel fees, the value of the estate in the custody of the Court is always an important consideration because it tells something of the character of the services and affords a fairly accurate measure of the skill required to perform them with success and the responsibility assumed.

 When this debtor filed its petition under § 77B, 11 U.S.C.A. § 207, in 1937 it had a total outstanding funded indebtedness consisting of mortgage bonds and debentures amounting to $ 53,000,000 (round numbers will generally be used throughout this opinion). The book value of its assets was about $ 71,700,000. The examiner reported the value of the assets (excluding undeveloped coal lands) as of June 30, 1941, at $ 20,000,000. Since that date the Company has earned $ 19,000,000, less interest and depreciation, or say $ 14,000,000. Cash disbursements amounting to $ 7,300,000 have been made. The market value of its two issues of bonds on the New York Stock Exchange as of November 24, 1944 (the Company being on that date still in reorganization), was $ 26,750,000. For the 12 months ending September, 1944, its net earnings available for interest on its present funded debt, were $ 5,600,000 which, capitalized at 12 1/2 per cent, gives a value of $ 44,800,000. As of the last mentioned date the debtor had current assets of $ 14,760,000.

 Taking all the foregoing factors into consideration I shall assume the value of the estate to be $ 32,000,000, it being understood that this is a rough estimate made solely for the purpose of obtaining a starting point in fixing the fair value of professional and other services.

 2. The proceedings lasted nearly eight years, and in a number of cases the petitioners were active throughout that entire period. It seems a long delay but a good deal of it could not be avoided (e.g. the time when progress was suspended pending the report of the examiner and the period, after submission of the plan to security holders, when there was uncertainty as to the Government's tax program and its effect upon the proposed reorganization). The first part of the period was necessarily occupied in (1) putting into effect a drastic program of economy which involved the debtor's divesting itself of the tremendous tax burden arising from its ownership of undeveloped coal land far in excess of its needs, cancellation of unprofitable coal leases and sales of numerous properties deemed unadvisable to hold, (2) obtaining the necessary capital to keep the enterprise afloat and (3) establishing the right of the debtor in possession as against the mortgagee to use the income from the mortgaged properties and collateral in operating the business and administering the estate. All this had to be accomplished before any real start toward reorganization could be made. During this period there was always a possibility of liquidation, and the work done unquestionably contributed to the ultimate reorganization of the Company. Nor can it be said that this postponement of the submission of a final plan was in the long run detrimental. In four or five years, the expansion of markets as a result of the war, plus the steps described, plus efficient management converted an extremely precarious situation into one far more advantageous than anyone in the early stages could reasonably have believed possible.

 3. The debtor is quite able to pay the full reasonable expenses of reorganization, even though they add up to a pretty large amount of money, without adversely affecting its cash position. It has on hand cash or the equivalent in the amount of $ 11,500,000. Ability to pay was one of the items suggested as proper for consideration by the Circuit Court of Appeals in Steere v. Baldwin Locomotive Works, 3 Cir., 98 F.2d 889, 891 and by this Court in Re Pine Hill Colleries, D.C., 46 F.Supp. 669. It is by no means a controlling factor nor can it operate to increase allowances beyond a reasonable amount, though inability to pay might work the other way. At any rate the Court, in this case, need not be concerned about the possibility of crippling the reorganized company by overburdening it with administration expenses.

 4. Certain considerations arising from the present abnormal conditions may properly be taken into account. They are: The increased cost of doing business for lawyers and other persons engaged in rendering professional or expert services of all kinds, increased tax burdens, tax reductions which the debtor may obtain for such expenses as can be classed as operating costs and the fact that, due to the war, the larger law offices have been practically stripped of their younger associates, with the result that a much larger percentage of the work has to be performed by lawyers whose services ordinarily command higher compensation.

 5. The total amount of requests for allowances now presented is about $ 1,100,000. Something over $ 400,000 has already been paid out for expenses and interim allowances, making a total in excess of $ 1,500,000 or a little less than five percent of the value of the estate. Making a rough grouping of the requests, it appears that counsel for the debtor in possession asks for $ 300,000, creditors, creditors' committees and their attorneys ask for nearly $ 700,000 (including expenses), the special master, the examiner and the examiner's counsel and the consulting engineers employed by the examiner, a total of about $ 200,000. Counsel for the debtor (the Corporation, as distinguished from the debtor in possession, the Company) $ 34,000 and the indenture trustee and its counsel about $ 45,000. The balance is to reimburse various parties for expenses incurred in connection with their services. No attempt will be made to fix a general rule, percentagewise, as to what a reorganization of this kind should cost, though, obviously, the larger the estate, the lower the percentage should be. However, the relation of the requests to the total value of the estate is a factor which must be kept in mind and I have stated the above figures merely to indicate that it is one of the bases for my conclusions.

 6. The Securities and Exchange Commission, by their counsel, appeared and, based on what was obviously a painstaking appraisal of the value of the services, made with the permission and at the request of the Court a full statement supported by reasons, covering all the requests, and supplemented it by the Commission's recommendation as to the reasonable value of compensation properly chargeable against the estate in each instance. Participation by the Commission in this way is always of the greatest value to the Court and I have given the recommendations careful consideration. Counsel for the Corporation has submitted a brief in which he argues, 'the statement of the S.E.C. on this subject is in an entirely different category from the report which the statute authorized the Commission to file with respect to a plan of reorganization, and that no more weight should be given to the statement of the S.E.C. on the subject of allowances than would be given to any other statement by any other party to the proceedings.' I agree with this statement, with the qualification that it is proper to have in mind that the Commission is about the only wholly disinterested party in the proceeding and that, while it may not be entirely familiar with 'the problems of making both ends meet in a law office' referred to by counsel, its experience has made it thoroughly familiar with the general attitude of the Courts and the amounts of allowances made in scores of comparable proceedings.

 There are in addition some principles which apply particularly to claims for services on the part of creditors' committees, attorneys, accountants and other agents engaged by them. They may be noted as follows:

 8. It goes almost without saying that work done by creditors and their attorneys in furthering private individual interests and having nothing to do with the reorganization or not contributing to it in any way can not be paid for out of the estate. A fortiori, work the effect of which, if successful, would be to obstruct or thwart the reorganization is not compensable. In addition, however, creditors and their attorneys can not always be allowed full compensation from the estate, even for services which do contribute to the final result. See In re Standard Gas & Electric Co., 3 Cir., 106 F.2d 215. Claimants of this class come into the proceedings employed by and representing private interests, but the cost of their services will be largely borne by parties other than those who have employed them. As to their principals and clients, their position is no different from that of a lawyer in any private employment, but, as to the estate, they act in a quasi-public capacity.

 Another reason for the rule lies in the matter of duplication of work. In the present case, for example, there were four creditors' committees and two very small independent groups of creditors. Each committee and its attorneys began their work by a study not only of the history and the particular problems of the debtor but of the problems of the entire industry -- a very proper and necessary preparation. This study may have accounted for a good many weeks. Indirectly, it was a contribution to the reorganization but during that preliminary period all four committees were doing the same thing. Other creditors, and committees for that matter, might have seen fit to participate and if they had they would have needed similar preparation. This is one kind of work which can not be fully compensated on the basis of the total time expended on it by all of those who did it.

 It is, of course, impossible to arrive at any formula by which to apportion the obligation to compensate creditor services which contribute to the reorganization between the estate and the individual interests represented. The best that can be done with the rule is to take it as a cautionary pronouncement, and that is apparently what it was intended to be, for the Court in the Standard Gas & Electric case stated its conclusions in the most general terms, saying merely that creditors and their counsel 'cannot expect to be compensated at the rate which similar services would command in purely private employment.'

 9. The petition was filed in 1937, and reorganization began as a 77B proceeding, with the debtor in possession. The duties of the examiner, appointed in 1940, did not include the preparation of a plan. Had this proceeding been begun under Chapter X or had all the provisions of that statute been put into effect much of the burden of that work would have fallen to a trustee. However, it having been obvious from the beginning that the Company was insolvent, the preparation and negotiation of a plan were, at all stages, very largely in the hands of the creditors, involving somewhat more extended services than might be expected by present-day standards.

 10. The reorganization has been successful and the plan finally adopted is apparently satisfactory to all interests. Involving as it did a rather nice question of adjustment between mortgage bondholders and the debenture creditors, the fact that there has been comparatively little dissent or criticism manifested indicates unusually constructive and cooperative work on the part of the creditor interests involved.

 Counsel for Debtor

 The services of counsel for the debtor were performed continuously and touched on almost everything that was done in the proceedings from the beginning to the end. A detailed account of them would simply be a history of the entire eight years' reorganization and is not deemed necessary.

 The firm does not keep hourly timesheets but the Securities and Exchange Commission, in accordance with a method of its own, estimated from the records and counsel's statements that the firm spent approximately 41,000 hours on reorganization work. The Commission doubts the accuracy of its estimate and believes that the time actually spent was much less. However, even if it be assumed that the estimate is as much as 25 percent too high, the request would be at the rate of $ 10 an hour, which can hardly be called excessive in an employment involving as much responsibility as this. If the estimate is anywhere nearly correct the claim would be on the basis of $ 7.50 or $ 8 an hour. I see no reason to reduce this allowance below the amount requested and it will be approved in the total amount of $ 300,000.

 Indenture Trustee

 Correctly apprehending its duties under the trust indenture as trustee for the mortgage bondholders, this bank entered the proceedings almost at their inception and actively participated from beginning to end. However, a considerable portion of the services for which compensation is claimed by it and its attorneys cannot be said to have contributed to the plan or to have been beneficial to the administration of the estate. I refer to its strongly pressed efforts first, to have sequestered and impounded for the benefit of the mortgage bondholders all income arising from the mortgaged property after the beginning of the proceedings and second, to have paid to it dividends and interest on stocks and bonds pledged as collateral. Both of these proceedings were carried to the Circuit Court of Appeals and in both the applications were finally denied. As to the first, there can be little doubt that, had the position of the indenture trustee been sustained, it would have made the reorganization of the debtor as a going concern 'well-nigh impossible,' Central Hanover Bank, etc., v. Philadelphia & Reading Coal & Iron Co., 3 Cir., 99 F.2d 642, 645. Liquidation at a staggering loss to all other interests would have followed as the only alternative. As to the second, though it did not involve so large a percentage of the debtor's income, its final refusal was predicated upon the Court's finding that it would have deprived the debtor of income needed to carry on its operations. As to both, although the proceedings were entirely proper and were not wholly without benefit to the estate in that they resulted in a determination of certain basic rights it cannot be denied that they were conducted entirely in the interests of one class of creditors and were inimical to the interests of all other parties concerned ...


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