misconduct on the part of the depository and of the Railroad. A section of this petition is set out above. The Committee merely expressed its belief that the Railroad's solicitors had acted improperly and that an inquiry 'might reveal that the necessary assents were not freely given to support the plan.' This Court believes that the language of the Commission in denying the petition of the plaintiffs of January 8, 1951, is equally sound when applied to the petition of February 20, 1951. The Commission stated: 'To grant the intervenors' request that they be given an opportunity to make an individual investigation and inspection such as they suggest obviously would result in substantial further delay. In the complete absence of any evidence, or even any allegation that any irregularities occurred in the conduct of the submission, or that any errors or irregularities occurred in the certifying of the results of the submission, we must conclude that there is no justification for thus delaying the consummation of this proceeding. On the basis of the record, we find that the intervenors' request should be denied.'
Had the plaintiffs presented any tangible evidence of fraud or error in connection with these affidavits, which they did not, or had they alleged any specific fraud or irregularity in their petition to the Commission, which they did not, and had the Commission then declined a hearing on this question, the Court's position on this point might well be the reverse of its present ruling. The Court cannot overlook the fact that plaintiffs had some five months to conduct investigations, contact stockholders or send Commission approved literature to the stockholders, but failed to take any affirmative action prior to December 7, 1950.
Constitutionality of Mahaffie Act.
The plaintiffs attack the constitutionality of the Mahaffie Act on several grounds. The first of these, as stated in the plaintiffs' brief, is that 'Congress failed to prescribe the proper standards by which the Commission is to administer the Act', and consequently, Congress 'unlawfully delegated to the Commission the legislative power of Congress in contravention of Article I, Section 1, of the Constitution of the United States.' This general challenge appears to be directed to a failure of the Act itself to define the phrase 'class of securities', used in Sub-section 2 of the Act and to establish standards to be used by the Commission in determining the rights of the senior and junior shareholders in the distribution of the new securities.
With respect to the phrase, 'class of securities', the plaintiffs have argued that it is not a term of art but a generic term. They point to the fact that Congress has given the Commission nothing as a guide by which the Commission could determine what is a 'class of securities'. The phrase, according to the plaintiffs, is so ambiguous as not to define an ascertainable standard.
The Court does not agree with this contention. The Supreme Court has stated: 'The requirement of reasonable certainty does not preclude the use of ordinary terms to express ideas which find adequate interpretation in common usage and understanding.' Sproles v. Binford, 286 U.S. 374, 393, 52 S. Ct. 581, 587, 76 L. Ed. 1167.
The Commission has been dealing for many years with classes of stock, issuance of securities and reorganization of Railroads. It does not seem unreasonable that Congress in charging this body to determine the number of classes of stock of a carrier did not elaborate on that phrase. As the Court has noted previously, the Commission in reaching its determination on this question borrowed the well-recognized test of Section 77 of the Bankruptcy Act: Is there a substantial difference in the rights, priorities and interests of the various security holders?
Turning to the contention of the plaintiffs that Congress failed to prescribe standards for the Commission to follow in determining the rights of the senior and junior stockholders in the distribution of new securities, the Court, in rejecting this contention, relies principally on the provisions of the statute setting forth.the criteria governing.
Of necessity, the statute could not spell out with more particularity the method by which the Commission will reach its determination as to how many new securities will be issued to each stockholder. The existing capital structure, as well as the proposed, peculiar to each carrier, will necessarily result in different arrangements on the issuance of securities. The Court has already indicated that the procedure followed by the Commission in determining the amount of the Railroad's new total capitalization and the allocation of new securities to the various classes of stockholders have been approved by the Supreme Court. (See discussion under heading, 'Sufficiency of evidence').
Further challenges to the constitutionality of the Mahaffie Act are based on the Due Process clause of the Fifth Amendment to the Constitution. The plaintiffs allege that under the provisions of the Act, parties in their position are deprived of property without due process of law in that:
1. they are denied a hearing on the question of whether the required number of assents to the plan have been obtained, and
2. seventy-five per cent. of each class of stockholders are given the power to deprive twenty-five per cent. of their contract rights with the Railroad corporation.
The first of the above contentions will be dealt with briefly since the Court has already extensively considered the propriety of the Commission's denial of the plaintiffs' petition to hold a hearing on the validity and number of assents filed with the depository. The Court has previously observed that the plaintiffs had a full hearing on the merits of the plan and the method of submission to the stockholders. The statute does not require a hearing on the question of the Commission's finding that the required percentage of assents had been obtained, nor does due process. In the complete absence of any specific charge of fraud or irregularity, the Commission's finding was an administrative task of a purely mechanical or clerical nature. The Court is of the opinion that due process does not require that this finding be based on a hearing unless it affirmatively appears that there is some substantial or tangible charge that an irregularity exists.
The Court turns now to the contention of the plaintiffs that they have been deprived of property without due process of law in that under the Act, seventy-five per cent. of the holders of each class of securities can deprive them of their contract rights with the Railroad corporation.
Congress is the proper branch of the government to declare policy and, having found a danger existing, to design the legislative machinery to avoid or repel the danger. In enacting the Mahaffie Act, Congress defined the danger and designed appropriate machinery to obviate it. If contract rights stand in the way of the exercise by Congress of a power within its competence under the Constitution, the contract right must fall. Support for this position is found in Norman v. Baltimore & Ohio R. Co., 294 U.S. 240, 55 S. Ct. 407, 79 L. Ed. 885. The fact that the contract rights are held against a corporation in the terms of corporate securities is of no consequence, as has been established in cases decided under the Public Utility Holding Company Act, 15 U.S.C.A. § 27. As the Court said in American Power & Light Co. v. Securities & Exchange Commission, 329 U.S. 90, 67 S. Ct. 133, 143, 91 L. Ed. 103: 'Section 11(b)(2), like Sec. 11(b)(1), materially affects many property interests of holding companies and their investors; it may even destroy whatever right there is to continued corporate existence on the part of a holding company that is found to complicate a system unnecessarily and to serve no useful function. But Congress carefully considered these various interests and found them 'outweighed by the political and general economic desirability of breaking up concentrations of financial power in the utility field too big to be effectively regulated in the interest of either the consumer or the investor and too big to permit the functioning of democratic institutions.' It is not our function to reweigh these diverse factors or to question the conclusion reached by Congress * * *.' See also: North American Co. v. Securities and Exchange Commission, 327 U.S. 686, 66 S. Ct. 785, 90 L. Ed. 945, and Securities and Exchange Commission v. Central-Illinois Securities Corp., 338 U.S. 96, 69 S. Ct. 1377, 93 L. Ed. 1836.
Legislation of the character represented by Section 20b is designed to modify or alter contract rights- not capriciously, but in order that the relationship between the security holder and his fellows, and between the security holder and the corporation, may be stated in terms of present day realities rather than in terms that are so remote from reality as to be misleading. The Court's language in Schwabacher v. United States, 334 U.S. 182, 68 S. Ct. 958, 967, 92 L. Ed. 1305 (which deals with the situation of altering the contract rights of security holders pursuant to a merger), is appropriate on this point: 'Apart from meeting the test of the public interest, the merger terms, as to stockholders, must be found to be just and reasonable. These terms would be largely meaningless to the stockholders if their interests were ultimately to be settled by reference to provisions of corporate charters and of state laws. Such charters and laws usually have been drawn on assumptions that time and experience have unsettled. Public regulation is not obliged and we cannot lightly assume it is intended to restore values, even if promised by charter terms, if they have already been lost through the operation of economic forces. Cf. Market St. Ry. Co. v. Railroad Commission, 324 U.S. 548, 65 S. Ct. 770, 89 L. Ed. 1171. In appraising a stockholder's position in a merger as to justice and reasonableness, it is not the promise that a charter made to him but the current worth of that promise that governs, it is not what he once put into a constituent company but what value he is contributing to the merger that is to be made good.'
The Commission, having regard for the Congressional policy expressed in the Mahaffie Act, found after extensive investigation that the plan was just and reasonable as to all classes of the Railroad's shareholders. It appears to the Court, from the cases cited, that a denial of due process does not arise from the fact that the dissenting stockholders will be deprived of certain contract rights.
In their complaint, the plaintiffs further alleged that the Mahaffie Act was unconstitutional in that it:
'1. Is an unlawful extension of the power delegated to Congress by Article I, Section 8, Clause 3, of the Constitution of the United States.
'2. Is an unlawful exercise of judicial power contravening Article III, Section 1, of the Constitution of the United States.
'3. Is an unlawful exercise of powers reserved to the States by Amendment X to the Constitution of the United States.'
At the hearing of this case, counsel for the plaintiffs did not argue in support of these three grounds of constitutional attack, now are they referred to in the plaintiffs' brief. The Court is of the opinion, however, that these allegations are not so patently meritorious as to justify the Court in upholding them upon the basis of the record before it.
Expenses of the Plaintiff.
The Commission in its order of April 19, 1950, denied the Commission Committee's request for an order requiring the Railroad to pay the Committee's expenses and attorneys' fees incurred in opposing the plan. This is challenged by the plaintiffs. The Commission in denying the plaintiffs' request relied on its prior decision in Lehigh Valley R. Co. Securities Modification, 271 I.C.C. 655, 657-8. In that decision, the Commission emphasized the fact that in those proceedings where an administrative body ordered the payment of participant's expenses it was expressly authorized to do so by statute. Under Section 20b of the Interstate Commerce Act, no provision is made for the Commission to authorize or direct payment by the Railroad of compensation or reimbursement of expenses of parties to the proceeding. Accordingly, the Court finds no error in the Commission's denial of the plaintiffs' request that it order the Railroad to pay their expenses.
The department of Justice under the statutory requirement that the Attorney General represent the United States in this type of case filed an answer to the original complaint on April 27, 2951. Later, on November 2, 1951, the Department of Justice filed an amended answer in which it supported the constitutionality of the Mahaffie Act but challenged certain of the findings, rulings and conclusion of the Interstate Commerce Commission in approving the modification plan. The Justice Department also supported certain of the findings, rulings and conclusion of the Interstate Commerce Commission in approving the modification plan. The Justice Department also supported certain of the plaintiffs' contentions concerning lack of due process in the proceedings before the Commission. The Court has treated those aspects of the case wherein the Justice Department supported the plaintiffs in its discussion of the various points raised by the plaintiffs.
In support of its pleading which, in effect, confesses error on the part of the Commission, however, the Justice Department has as a result of an extensive investigation obtained a number of affidavits and depositions which were filed with the Court in support of the efforts of the plaintiffs and the Justice Department to overthrow the Commission's ruling in favor of the modification plan. The Court does not question the right of the Attorney General to take a position adverse to the Commission. Henderson v. United States, 339, U.S. 816, 70 S. Ct. 843, 94 L. Ed. 1302. The Court upon motion of the Railroad, the Commission and various intervenors declined to consider the additional evidence tendered by the Justice Department because this evidence was never presented to the Interstate Commerce Commission. The Court ruled that the present case requires the Court to review the ruling of the Commission in the light of the evidence which was before the Commission. This Court does not believe that this proceeding is de novo in character and construes the Court's function and responsibility to be exclusively that of reviewing the case upon the basis of the record actually before the Interstate Commerce Commission at the time that the Commission made the ruling. The Court did not in reaching its conclusions in this case consider the evidence tendered by the Justice Department because, as indicated, it was conceded that the Commission had no knowledge of the facts alleged by the affidavits and depositions obtained by the Justice Department.
The affidavits and depositions submitted by the Justice Department as a result of its investigation after the issuance of the temporary restraining order by this Court contain serious charges of irregularity and fraud on the part of the Railroad, its officers, agents and employees in the obtaining of assents to the modification plan and of the depository, the Old Colony Trust Co. These documents offer evidence which if credible and true charge that a grave and serious fraud has been perpetrated upon the Interstate Commerce Commission. If the facts alleged in these documents were established by competent evidence and were not explained and dissolved by other competent evidence, the gravity of the perpetrated fraud would shock the conscience of a Court or Commission. This Court does not believe, however, that it is the function of a statutory three-judge court to take and weigh evidence of this kind at this stage of this type case. The Court believes that the Commission is the proper forum to sift, hear, evaluate and act upon the matters charged by the Justice Department. There is no reason for the Court to feel that the Commission will not give consideration to an appropriate motion filed by the plaintiffs upon the basis of the documents tendered by the Justice Department which, in effect, constitute a claim of new evidence before the Commission.
For the reasons set forth above, the Court affirms the orders of the Interstate Commerce Commission entered in this proceeding and dissolves the restraining order issued by the Court staying the effective date of the Commission's order of January 23, 1951.
Present New securities New New
Present stock shares per share Preferred Common
Prior 229,414 1.2 shs. new pfd. 275,296.80
1 sh. new com. 229,414
A 188,341 .65 sh. new com. 122,421.65
B 76,488 .85 sh. new com. 65,014.80
C 79,115 .79 sh. new com. 62,500.85
D 43,239 1.05 shs. new com. 45,400.95
E 650 .60 sh. new com. 390.00
Preferred 31,498 .07 sh. new com. 2,204.86
Common 394,728 .05 sh. new com. 19,736.40
1,043,473 275,296.80 547,083.51
Total shares: 822,380.31
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