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March 28, 1947


The opinion of the court was delivered by: KALODNER

The Trustee's plan of reorganization was referred to the Special Master herein, to conduct the plan hearing and report thereon to the court. At the plan hearing an extensive record was made by testimony and exhibits. No other plan of reorganization was proposed, but the Trustee and other parties in interest submitted certain proposed amendments.

The Master filed an exhaustive and detailed report, carefully reviewing the entire content of the record and thoroughly covering the Debtor's history, past and current earnings, the evidence as to valuation of the Debtor, the structure, fairness and feasibility of the plan, and all objections made and amendments offered. The comprehensive and accurate statement provided by the Master's report on these subjects makes it unnecessary to review them in elaborate detail in this opinion.

 Briefly, the Debtor owns and operates a group of cold storage warehouses in Philadelphia, of which the largest is a modern and up-to-date structure, built in 1926, and the others are old buildings. The construction of the new plant in 1926 involved great enlargement of the corporation's debt, to $ 3,500,000, with annual fixed charges of $ 200,000. The Debtor failed by a wide margin to earn its fixed charges in the ensuing years, and in 1935 was reorganized under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. That reorganization left the Debtor with (1) a first mortgage bond issue in the total principal amount of $ 1,028,500, bearing interest at vive per cent; (2) preferred stock, now outstanding in the amount of approximately 25,000, shares with a liquidation preference of $ 50 per share per year; and (3) an issue of common stock holding the exclusive voting power in the corporation, all of which common stock was issued to and is held by Philadelphia Perishable Products Terminal Company.

 Following its reorganization in 1935, the Debtor again failed in every year to earn its fixed charges until 1942, when this proceeding was initiated after default in the payment of interest. During this proceeding, the Debtor has earned on the average of $ 58,000 per year after present bond interest, depreciation and income taxes. However, although these earnings are undoubtedly due in substantial part to a vast improvement in the management of the business, it is conceded that they also reflect abnormal war-time conditions.

 Basically, the plan proposes to cancel the present bond issue and substitute a new bond issue in 60 per cent of its amount, or $ 617,500, maturing in 25 years. The new bonds are to bear fixed interest at the rate of four per cent per annum, and the Debtor is to pay $ 15,000 per year if earned, into a sinking fund, which will be a cumulative charge on earnings and, if maintained, will reduce the new issue to less than $ 250,000 by the time of tis maturity. The present stock issues are to be cancelled and replaced by a single new issue of common stock.

 The present first mortgage bondholders will receive, for each present $ 1,000 bond, $ 100 in cash, a new first mortgage bond for $ 600, and 100 shares of new common stock. The preferred stockholders will receive one share of new common stock for each share of the present preferred. The effect of this distribution is to give to the present first mortgage bondholders (in addition to the cash and new bonds mentioned) 80 per cent of the new common stock, and to give the present preferred stockholders 20 per cent. No provision is made for the present common stock, since there is clearly no equity for that stock.

 The plan provides that the new stock shall be issued subject to a voting trust, discussed below.

 The Master found that the Trustee's plan, as amended by him, complies with the requirements of Section 216 of the Bankruptcy Act as amended, Title 11 U.S.C.A. § 616; is fair, equitable and feasible, and recommended that it be approved. He did not recommend approval of any other amendments.

 In considering the report and the exceptions filed, one is impressed at the outset with the support all basic features of the Trustee's plan have received from the security-holders. The dominant securities in this case are of course the first mortgage bonds, and representatives of an unusually large proportion of these bonds have actively participated in this proceeding. The Burns Committee represents the holders of approximately $ 473,000 of the first mortgage bonds, or nearly 46 per cent of the entire issue. The Philadelphia Perishable Products Terminal Company and affiliated interests, which have been directly represented by counsel, hold $ 237,750 of the bonds as well as 5,730 shares of preferred stock. The Carter-Gregory Committee filed appearances in behalf of approximately $ 175,000 of the first mortgage bonds. Clifford T. Kelsh and Ethel D. Kulp, also directly represented by counsel, hold $ 38,000 of bonds and 2,200 shares of preferred stock, and the petitioning bondholders, who instituted this proceeding, hold $ 11,000 of the bonds. The representations mentioned aggregate $ 935,000 of the $ 1,028,500 first mortgage bond issue -- approximately 90 per cent. Allowing for some duplication resulting from changes in ownership it is reasonable to assume that at least 75 per cent of the present first mortgage bondholders have been represented in the reorganization proceedings.

 The representatives of this very large proportion of the bondholders have approved the plan in all basic respects, and their exceptions are limited to matters of detail relating to the voting trust, hereafter considered. Certain exceptions, limited in scope, have been filed by the Securities and Exchange Commission relating to the financial structure of the plan and the division of the new common stock, and in some of these exceptions the Commission is joined by the Carter-Gregory bondholders committee. The Commission also objects to the voting trust.

 Of course, neither the absence of objection to a plan, nor overwhelming support of a plan from security-holders, obviates the duty of the court to consider independently whether the plan meets the requirements of the Act. On the other hand, if the court finds that a plan so supported meets the Act's requirements, it is not its function to seek a 'better' plan, or to substitute its personal preferences on optional matters of policy for the declared wish of the great body of the parties in interest. In re Philadelphia & W. Ry. Co., D.C., 51 F.Supp. 129, 130; In re Lower Broadway Properties, D.C., 58 F.Supp. 615, 618.

 The Master found, and all parties agree, that the plan is feasible. The Debtor has at all times been able to earn a profit on its operations. Its repeated difficulties have resulted from a continuing combination of excessive fixed charges and poor management. A history of two organizations within seven years demands a reduction of fixed charges to a level unquestionably safe, and the plan reduces the fixed interest charges to less than $ 25,000 per year. The principal amount of the mortgage approved in 1935 is reduced by 40 per cent. To meet its fixed interest requirements and maintain the sinking fund, the new company will have to earn on the average $ 40,000 per year after depreciation and taxes. The current profit from operations (before depreciation, interest and income taxes) is running over $ 200,000 per year. This is concededly abnormal. But over the pre-war years 1926-1941, under poor management and before the advent of the increased volumes resulting from the quick-frozen food business, the comparable average figure was $ 96,000. Conservative estimates of the future average annual operating profit, offered at the plan hearing, ranged from $ 90,000 to $ 110,000. A liberal allowance for depreciation is $ 30,000 a year. It accordingly appears that the new company should be able to meet its fixed charges and maintain the sinking fund.

 Evidence of the working capital margins of other cold storage companies, submitted by the Securities and Exchange Commission, indicates that the new company will have an ample working capital. There are strong indications that future competitive conditions will require considerable investment in plant improvements, and the plan wisely leaves management a broad leeway to meet such needs. Assurance of a continuance of good management is essential, and this is provided through the voting trust.

 On the basis both of the record and my own study of the Debtor's operations, on which I have kept closely informed during this reorganization proceeding, I conclude that the plan is feasible.

 While conceding the feasibility of the plan as it stands, the Securities and Exchange Commission has suggested that the plan would be improved by increasing the annual sinking fund payment to $ 25,000 or 50 per cent of the earnings, whichever is higher, until the new first mortgage is reduced to $ 400,000. No security-holders press for this change, and there are reasonable arguments against it. The proposal is based on the current high rate of earnings, and there is no assurance that such earnings will continue until the mortgage is reduced to $ 400,000. Enlargement of the sinking fund may prevent needed plant improvements, which if made would, of course, enhance the security supporting the mortgage.

 The same observations apply to the Commission's further suggestion that expenditures for plant improvements which may be deducted in computing earnings available for sinking fund payments, should be limited to $ 25,000 per year. The plan adopts the policy that the new company should not be prevented from making a needed improvement (which may cost more than $ 25,000) simply for the sake of meeting sinking fund requirements. The fact that the sinking fund payment is not eliminated, but continues as an additional charge on the next year's earnings, seems an adequate safeguard against abuse. The sinking fund must still be ...

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