The opinion of the court was delivered by: WATSON
The Plan of Reorganization before the Court was proposed by the Delaware, Lackawanna & Western Railroad Company, hereinafter referred to as the Lackawanna, and approved by the Interstate Commerce Commission, hereinafter referred to as the Commission, by its report and order dated December 6, 1957. (295 I.C.C. 653). The Plan is now before this Court for approval before being submitted to creditors afforded recognition in the Plan for their approval.
(a) the interests or equities of (1) holders of claims junior to claims secured by the first mortgage, i.e., debenture holders and unsecured creditors, and of (2) holders of the debtors' capital stock, have no value and nothing shall be distributable to them on account thereof.
(b) the capitalization of the reorganized company shall be $ 1,950,000, consisting of $ 975,000, principal amount, of general mortgage 4 per cent 50-year income bonds and 9750 shares of common stock having a par value (or without par value or stated value) of $ 100 per share or if so determined by the reorganization manager, 19,500 shares of common stock having a par or stated value of $ 50 per share; thus each $ 1,000 first mortgage bond of the debtor would be exchanged for one $ 500 income bond and common stock having a par or stated value of $ 500.
The debtor was reorganized through the merger of the properties of four street car lines, and for many years operated a double track electric railroad providing both freight and passenger service between Scranton and Wilkes-Barre. Due to competition from automobiles and busses revenues from passenger service declined over a period of years, and in 1949 a petition for reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, was filed and approved by this Court. Passenger service continued to decline and was finally abandoned at the end of 1952. In 1953 use of electric locomotives was abandoned, and motive power is now provided by a diesel-electric locomotive leased from the Lackawanna. The debtor is now operated as a freight line only and its future earning power depends on developing freight traffic.
Present revenues do not justify a permanent independent operation. During each of the nearly 10 years the debtor has operated under a trustee there has been an operating loss before provision for fixed charges. Success of the Plan of Reorganization therefore depends upon reduction of operating expenses which, it appears from the record, will be possible through control by the Lackawanna. The Commission's report sets out in detail the history of the debtor, a description of the property, present capitalization and debts, proposed plan, and operation under the plan.
The only objection to the Plan was filed by the trustee under the trust indenture securing the debentures. The specific grounds for objections were (1) operations since abandonment of passenger service do not afford sufficient experience to base a finding of value which would wipe out the claim of the debenture holders, (2) projecting the earnings for only one year does not show the ultimate growth and value after reorganization and the prospective earning power of the railroad, (3) the Commission failed to give any consideration to the reproduction cost, and (4) the Commission failed to give any consideration to the value of the line to the Lackawanna, and (5) the Commission should have determined the value of the debtor's property. In summary, the trustee objects to the Plan because it is based on a valuation which does not permit recognition of the debenture holders. The trustee's counsel did not appear at the hearing before this Court on the Plan and no testimony was offered to support the trustee's objections either before this Court or before the Commission.
The Bankruptcy Act (11 U.S.C.A. § 205, sub. e) provides:
The Statute has given the Commission the exclusive right to determine value for the purposes of a railroad reorganization. Upon considering approval or disapproval of the Plan of Reorganization the only questions concerning valuation before this Court are whether the Commission's determination of value was supported by material evidence and whether the Commission properly applied the legal standards prescribed in the Statute. Ecker v. Western Pacific R. Corp., 318 U.S. 448, 472, 473, 63 S. Ct. 692, 87 L. Ed. 892.
While the Commission made no specific finding as to value, a finding as to value is implicit in the Commission's findings that the Plan is fair and equitable, affords due recognition to the rights of each claim of creditors and stockholders, and does not discriminate unfairly in favor of any class of creditors and stockholders. The Commission, as stated in its report (p. 662), made no valuation of the debtor's property, but did have before it the investment less depreciation, testimony of a Lackawanna witness estimating cost of reproduction new to be about $ 12,400,000, cost of reproduction ...