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February 21, 1952

SAKIS et al.

The opinion of the court was delivered by: TAMM

Factual Background.

This is an action invoking the functions of a statutory three-judge court under Section 2321 of Title 28 of the United States Code to enjoin, suspend, set aside and annul an order of the Interstate Commerce Commission (hereafter called the Commission). The plaintiffs ask also that the Court declare Section 20b of Title 49 of the United States Code Annotated (known as the Mahaffie Act) unconstitutional. The order challenged in this action had its genesis in a proceeding before the Commission entitled Finance Docket No. 16250. The order authorized the Boston and Maine Railroad (hereafter called the Railroad) to put into effect a plan of security modification.

 The plaintiffs in this action are Mable Benson Sakis, an individual, and Mabel Benson Sakis and Byron J. Harrill, a Committee of Stockholders (hereafter called the Committee) representing certain other shareholders. Both the individual plaintiff and the members of the Committee held stock of the Boston and Maine Railroad at the time of the proceedings before the Commission as they do at present. The plaintiffs participated as intervenors in the Commission proceedings and opposed the plan.

 The United States appears as party defendant as it is required to do under the provisions of Title 28 of the United States Code, Sections 2321, 2322. The statutory defendant has confessed error as to certain of the allegations made by the plaintiffs. Joined with the United States as a defendant is the Boston and Maine Railroad.

 The Commission intervened in this action under the provisions of Title 28 of the United States Code, Section 2323. Other intervenors before the Court were the Old Colony Trust Company of Boston, Mass., the independent depository approved by the Commission to receive and tabulate the assents of shareholders to the security modification plan; L. F. Rothchild & Company; Goldman Sachs & Company; The Pennroad Corporation; and a group of three individual stockholders of the Railroad.

  The Railroad filed an application with the Commission on August 25, 1948, to modify its security structure under the provisions of Section 20b of the Interstate Commerce Act, 49 U.S.C.A. § 20b. This statutory provision, popularly known as the Mahaffie Act, was enacted April 9, 1948, to relieve the financial distress of railroads that are not in need of reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, or by way of an equity receivership. It provides for a binding plan of modifying a railroad's capital structure when a stated percentage of those stockholders affected approve, with power to bind the dissenters. Before any proceedings were taken with respect to the original application, the Railroad submitted its Supplemental Application No. 1 on January 24, 1949. The Commission entered an order on February 8, 1949, setting the matter for hearing. Pursuant to this order, a hearing was held before an Examiner in Boston during a five-day period commencing March 28, 1949. The plaintiffs before this Court, as well as certain other intervenors, appeared, offered evidence, submitted a brief, and cross-examined witnesses supporting the proposed modification plan. At the hearing, 778 pages of testimony and twenty-seven exhibits were adduced. The Examiner released his proposed report under date of August 17, 1949, and exceptions thereto were filed, all pursuant to statutory authority, by the Railroad, the plaintiffs and certain of the other intervenors. Thereafter, on October 24, 1949, the proceeding was argued before Division 4 of the Commission.

 On April 19, 1950, the Commission issued its first report in this case. It approved with some minor changes the plan of security modification submitted by the Railroad. Briefly, this plan calls for a reduction in the number of classes of the Railroad's stock, as well as the aggregate par value of its capital stock; authorizes the issuance of new stock; and cancels dividend arrearages on certain classes of the Railroad's stock. Following this decision of Division 4, certain of the intervenors filed a petition for reconsideration and modification of the report. In response thereto, the entire Commission issued a supplemental report on July 10, 1950. In this report the Commission stated: 'Upon consideration of the entire record in this proceeding and of the petitions and reply thereto filed herein, we find that there has been presented no error of fact or law in the report and order by division 4 herein dated April 19, 1950. We further find that no showing has been made warranting reargument or vacation of the order and entry of an order denying the application herein, or modification of the report and order as requested by the petitioners. We further find that the report and order should be affirmed in all respects and that the petitions, except so far as they ask reconsideration, should be denied.'

 Thereafter, the plaintiffs, on July 14, 1950, filed objections to the material proposed to be sent to stockholders of the Railroad in connection with the solicitation of assents under the Plan. Division 4 ruled that the objections were not timely. Petitions were then filed for hearing and review by the full Commission of the action of Division 4. The Commission denied the petitions on August 15, 1950.

 The Railroad conducted its campaign to solicit assents; and on December 15, 1950, by appropriate publication, announced the end of the submission period upon the ground that sufficient assents had been received to comply with the requirements laid down by Division 4 in the order of April 19, 1950. Thereupon, the Railroad filed Supplemental Applications Nos. 2 and 3 (December 27, 1950) which sought a final order permitting the consummation of the plan. The plaintiffs filed a reply to these supplemental applications, raising certain questions which the Commission discussed in its third report and order issued January 23, 1951. The Commission in this report found that the Railroad had obtained the required number of assents to the plan and authorized the Railroad to execute the plan.

 On February 20, 1951, the plaintiffs filed a further petition with the Commission on behalf of a committee of stockholders for reopening of the proceeding. The Commission on the next day, February 21, 1951, denied this petition. That same day, the plaintiffs filed in this court a complaint challenging the proceedings before and order of the Commission and obtained a restraining order from this court, which order stayed the Commission's final order placing the plan in operation.

 Subsequently, on February 28, 1951, the plaintiffs filed a supplemental and amended complaint alleging that the Commission's order was invalid because: (1) of some procedural errors in the Commission proceedings which constituted arbitrary and unlawful conduct on the part of the Commission; (2) there was no evidence in the record before the Commission to support certain of its findings, and (3) Section 20b of the Interstate Commerce Act is unconstitutional and void.

 The pleadings in this case have raised many and varied questions of law. Of necessity, the Court's opinion is a longer one. The several challenges of the plaintiffs to the order of the Commission will be considered individually.

 Classes of Stock.

 The Mahaffie Act, under which the modification plan was proposed and considered, requires: 'If the Commission shall find that as a result of such submission the proposed alteration or modification has been assented to by the holders of at least 75 per centum of the aggregate principal amount or number of shares outstanding of each class of securities affected thereby (or in any case where 75 per centum thereof is held by fewer than twenty-five holders, such larger percentage, if any, as the Commission may determine to be just and reasonable and in the public interest), the Commission shall enter an order approving and authorizing the proposed alteration or modification upon the terms and conditions and with the amendments, if any, so determined to be just and reasonable.' 49 U.S.C.A. § 20b(2)(d).

 It thus appears that the Commission must determine how many classes of securities are involved in a carrier's capital structure. The Commission found that the Railroad had, for the purpose of this proceeding, four classes of stock. The plaintiffs contend that this finding is unsupported by the record. They argued before the Commission and the Court that there were at least eight or as many as fifteen classes of stock.

 The four classes of stock to which the Commission ordered the proposed plan submitted were: prior preference, first preferred, preferred (non-cumulative) and common.

 The Court addresses itself first to the contention of the plaintiffs that the five series of first preferred stock constitute distinct classes of stock. Some reference to the history of this stock is essential to a discussion and consideration of its nature. In 1919, the Railroad underwent a reorganization. At that time, the present preferred stock was issued on a share-for-share exchange basis for stocks of the Railroad's then major lessor lines. Each series of this stock bore a dividend rate equal to the rate theretofore guaranteed by the Railroad on the stocks of lessor lines. Thus, the five series of first preferred stock bear different dividend rates, and each series now has accumulated different amounts of unpaid dividends on a per share basis. The consolidation agreement of November 26, 1918, under which the 1919 reorganization was effected, provided that the original issued capital stock of the reorganized corporation, consisting of 814,728 shares of the par value of $ 100 each 'shall be divided into classes having different rights and preferences and bearing different rates of dividend,' and designated those 'classes' as first preferred, Class A., Class B, Class C, Class D, Class E, as well as the non-cumulative preferred and the common stocks, and in the provisions relating to dividends referred to the 'difference classes of first preferred stock.' It was also provided that, 'No class of first preferred stock shall have any preference or priority over any other class' of such stock. (Emphasis supplied.)

 Holders of this first preferred stock are entitled to any distribution of dividends after payment of the prior-preference dividend and before any such distribution is made on non-cumulative preferred or common stock. If dividends declared payable on the first preferred stock are less than the amount necessary to satisfy the full dividend requirements of that class, the several series thereof share ratably in the dividend distribution. In case of liquidation, holders are entitled to receive all their accrued and unpaid dividends before any payment may be made to holders of the noncumulative preferred and common stocks on account of the par value thereof, but thereafter, the remaining assets of the corporation shall be distributed equally among the holders of first preferred, non-cumulative preferred and common stocks.

 This partial priority in liquidation, and provided in the agreement of consolidation, dated November 26, 1918, pursuant to which this series of stock was issued, was modified by a stock readjustment agreement in 1926, whereby those holders of first preferred stock who assented to the stock readjustment plan were given priority in liquidation over the assenting holders of non-cumulative preferred and common stocks for the par value of the stock plus the accrued and unpaid dividends not surrendered or assigned under the 1926 agreement.

 Although there were statements made by certain of the Railroad's officers to the effect that there were eight classes of stock, the testimony of the Railroad's officers and witnesses before the Commission generally was to the effect that there are four classes of stock. The Court is not unmindful of the fact that such testimony would facilitate the Railroad's obtaining the required percentage of assents.

 The statute as set forth above does not define the word 'classes'. It appears from the Commission's reports that a test employed by the Commission in determining whether the various series of first preferred stock constituted distinct classes was borrowed from Section 77 of the Bankruptcy Act. By Sub. c(7) of that section, the reorganization court is specifically directed to determine 'the division of creditors and stockholders into classes according to the nature of their respective claims and interests.' That statute also provides that 'such division shall not provide for separate classification unless there be substantial differences in priorities, claims, or interests.' Under the provisions of Sub. e, such classification forms the basis for submission of the approved plan to creditors and shareholders for acceptance or rejection. Although recognizing that a modification proceeding under Section 20b of the Interstate Commerce Act was substantially different from a proceeding under Section 77 of the Bankruptcy Act, the Commission utilized the criteria of Section 77 as an aid in determining what constitutes a 'class' of stock.

 The Commission examined the character and composition of the various series of first preferred stock and determined that there was no 'substantial difference in priorities, claims, or interests' so as to have them constitute more than one class of stock. Considering the testimony before the Commission and the significant facts concerning the contractual rights of the holders of first preferred stock, the Court believes that the finding of the Commission was proper.

 It is further contended by the plaintiffs that in determining the number of classes of stock the Commission erred in not treating the stamped and unstamped securities of the Railroad as constituting distinct classes. All classes of the Railroad's stock, except prior preference, appear in the market as stamped or unstamped to reflect the fact that the holder or his predecessor either agreed or did not agree to the Railroad's stock readjustment plan in 1926. That plan, pursuant to which the prior preference stock was issued, provided for the assent of holders of first preferred stock to the surrender and assignment to the Railroad of their rights to receive and be paid certain cumulative dividends accruing after July 1, 1920; and, in consideration thereof, such assenting stockholders were granted a certain priority in liquidation. The nonassenting shareholders of this class were paid their accumulated dividends in cash. Consummation of the plan also called for assent of holders of non-cumulative preferred and common stocks. Thus, it came about that there were stamped and unstamped stocks, respectively, for the first preferred, A, B, C, D, and E, the non-cumulative preferred and the common.

 The record discloses that the difference in rights, which the plaintiffs urge is the determinative factor, between the stamped and unstamped stock lies only in the amount of their liquidation claims. Since this is not a liquidation proceeding, the amounts of liquidation claims did not constitute a factor in the Commission's method of evaluating the several classes of existing stock for the purpose of determining the proper basis of allocation of the new stock issues. Witnesses for the Railroad before the Commission expressed the opinion that, so far as value is concerned, any distinction between the stamped and the unstamped stocks has long since disappeared and that the provision is now worthless. Concurrence in this view was expressed by two of the Railroad's directors who were called as witnesses for the plaintiffs, it being their conclusion that so far as value is concerned any differential had been wiped out several years ago during the depression and that such provisions are now valueless. Stock-market quotations on these securities covering the years 1929 to 1948 were considered by the Commission. They indicated that during the years 1939-1948, when the market prices of the Railroad's securities were quite low, any distinction in market value between the stamped and unstamped securities had practically disappeared.

 In its report dated April 19, 1950, the Commission stated: 'On the basis of all the evidence, we find that any distinction in rights and privileges between the stamped and the unstamped stocks lies only in the amount of their liquidation claims, is not of such a character as to give rise to any substantial differences in priorities, claims or interests, and therefore does not justify the creation of separate classifications for the purposes of this proceeding.'

 This conclusion of the Commission appears to the Court to be warranted by the record.

 Sufficiency of Evidence.

 Section 20b of Title 49, United States Code Annotated, requires that the Commission make findings that a plan of security alteration or modification is just and reasonable, is in the best interest of the carrier, of each class of stockholder, and is in the public interest. In their complaint, the plaintiffs allege that there is no evidence in the record to support the Commission's finding that the Railroad's plan meets the statutory test.

 With respect to the contention that the plan is not in the best interest of the carrier and the public, the plaintiffs rely on evidence before the Commission to the effect that the Railroad is, at present, in the best physical and financial condition of its 119 year history; that there is no danger of rights of the Railroad's creditors being impaired and that the approval of the plan would in no way improve the service rendered by the Railroad to the public. Essentially, the position of the plaintiffs is that the security modification plan is unnecessary. It is not the understanding of the Court that the Commission must find that the plan is necessary, but rather that it is in the best interest of the carrier and the public.

 The Congress in enacting section 20b declared it to be in aid of the transportation policy as set forth in the preamble of the Interstate Commerce Act, among other things, 'to enhance the marketability of railroad securities impaired by large and continuing accumulations of * * * dividends on preferred stock * * *.'

 One of the ends to be accomplished through enhancing the marketability of such securities is 'to promote the public interest in increased stability of values of railroad securities with resulting greater confidence therein of investors.'

 The record has been examined. It reveals that the Commission considered evidence that the capital stock structure of the Railroad was exceedingly cumbersome and complicated *fn1" ; that considerable dividend arrearages had accumulated on certain classes of stock *fn2" ; and that there was little hope that the situation would be alleviated without a reorganization *fn3" ; that there was a great necessity for reconstituting the stock structure if the Railroad was to continue to furnish efficient service *fn4" ; that approval of the plan would improve the credit position of the Railroad *fn5" ; and would probably enable the Railroad to resume paying dividends *fn6" . Several witnesses who possessed an intimate knowledge of the Railroad testified as to the desirability of the plan. The plaintiffs and other intervenors were heard in opposition to the plan. They presented arguments in support of their position, submitted exhibits and advanced alternate plans for relieving the financial distress of the Railroad.

 It is the duty of this Court to determine whether there is sufficient evidence in the Commission's record to justify its findings. That being done, our work is completed.

 'The credibility of witnesses and weight of evidence are for the Commission and will not be reviewed here if supported by evidence.' Merchants Warehouse Co. v. United States, 283 U.S. 501, 508, 51 S. Ct. 505, 508, 75 L. Ed. 1227. 'The judicial function is exhausted when there is found to be a rational basis for the conclusions approved by the administrative body.' Mississippi Valley Barge Line Co. v. United States, 292 U.S. 282, 286, 54 S. Ct. 692, 694, 78 L. Ed. 1260. 'The findings of the Commission are made by law prima facie true. This court has ascribed to them the strength due to the judgements of a tribunal appointed by law and informed by experience. * * * And, in any special case of conflicting evidence, a probative force must be attributed to the findings of the Commission, which, in addition to 'knowledge of conditions, of environment, and of transportation relations,' has had the witnesses before it and has been able to judge of them and their manner of testifying.' Illinois Central R. Co. v. Interstate Commerce Commission, 206 U.S. 441, 454, 27 S. Ct. 700, 704, 51 L. Ed. 1128.

 The question is not whether this Court, upon a consideration of the record that the Commission had before it, would make the same findings as the Commission; the question rather is, Was there rational basis for the finding that the Commission did make? Rochester Telephone Corp. v. United States, 307 U.S. 125, 146, 59 S. Ct. 754, 83 L. Ed. 1147; ...

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