484 F.

2d 369

In the Matter of BOSTON AND MAINE CORPORATION,

Debtor.
The GROUP OF INSTITUTIONAL BONDHOLDERS,
Appellant,
Robert W. MESERVE, Trustee of the Property of Boston and
Maine Corporation, Debtor, Appellee.
No. 73-1069.

United States Court of Appeals,

First Circuit.
Heard June 5, 1973.
Decided Aug. 23, 1973.

Jerome Preston, Jr., Boston, Mass., with whom Lewis H. Weinstein,

Philip Burling, and Foley, Hoag & Eliot, Boston, Mass., were on brief, for
appellant.
Robert G. Parks, Boston, Mass., with whom Mulcahy & Mulcahy, and
Charles W. Mulcahy, Jr., Boston, Mass., were on brief, for Robert W.
Meserve, trustee, appellee.
John L. Davidson, Jr., St. Louis, Mo., with whom Greenfield, Davidson &
Mandelstamm, St. Louis, Mo., Richard Ely, Alan L. Lefkowitz, Tom L.
Peterson, and Ely, Bartlett, Brown & Proctor, Boston, Mass., were on
brief, for Passaconaway Co., intervenor appellee.
John T. Collins, Boston, Mass., with whom Sherburne, Powers &
Needham, Robert H. Quinn, Atty. Gen., Com. of Mass., and Mark
Furcolo, Asst. Atty. Gen., Boston, Mass., were on brief, for the State of N.
H., The Com. of Mass., and Vermont Railway, Inc., intervenors appellees.
Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit
Judges.
LEVIN H. CAMPBELL, Circuit Judge.

Appellant, called the Group of Institutional Bondholders (Group), consists of

insurance companies1 holding first mortgage bonds of the debtor, the Boston
and Maine Corporation (B&M). The Group is now appealing from orders of the
reorganization court allowing the trustee of the B&M to make certain capital
expenditures. We affirm.

B&M is a medium-sized railroad corporation operating in Massachusetts,

Maine, New Hampshire, Vermont and for a short distance in New York. From
earlier prosperity, the B&M deteriorated after 1958 into financial distress,
operating through the 1960's on the verge of bankruptcy. In early 1970 the
B&M had accumulated unpaid property taxes exceeding five million dollars,
and bond interest was in arrears; it was placed in reorganization under Sec. 77
of the Bankruptcy Act, 11 U.S.C. Sec. 205, upon petition of the four insurance
companies that constituted the appellant Group. Trustees were appointed by the
district court in the spring of 1970.

The trustees at first attempted to reopen a merger proposal, rejected in the late
1960's by the B&M's stockholders, that would have joined the B&M with the
Norfolk & Western system. The Interstate Commerce Commission (ICC) in
1971 turned down this proposal as "prima facie impracticable." At the same
time it rejected the Group's application for abandonment of the B&M's entire
line. Later in 1971, at the ICC's request and after they were able to improve the
B&M's cash position substantially, the trustees submitted a preliminary
reorganization plan. In 1972 twenty-one days of hearings were held on this and
alternative plans by an Administrative Law Judge who, early in 1973, issued a
report2 approving, with modifications, the trustees' proposed plan. He rejected
the Group's second proposal which, like the first, called for the prompt
liquidation of the B&M. He ordered the trustee3 to submit a "definitive plan for
reorganization" by June 30, 1974, and set the hearing on that plan for
September 9, 1974.

The trustee's plan requires, to bring about a successful reorganization, the

realization of operating economies; provision of maintenance sufficient to keep
essential services in operation; sale of unprofitable trackage and real estate,
including a sale to Massachusetts of all Boston commuter operations; successful
attempts to secure tax abatements; and ultimately recapitalizing a much smaller,
but self-sustaining, freight railroad. At the hearing before the Administrative
Law Judge proposals from other interested parties indicate the possibility of
merger with neighboring lines. Stockholders of the Maine Central, who control
the Bangor & Aroostook, a Maine freight line, are seeking control of the B&M
and, according to the ICC judge, could play a role in the reorganization and
refinancing arrangements. Presumably it was to allow factors such as these to

jell, as well as to permit further negotiations with Massachusetts and New

Hampshire over the possible sale of parts of the B&M line and operations, that
the Administrative Law Judge continued the proceedings until mid-1974.
5

Against this background the Group, or such as is left of it, appeals from the
district court's approval of six petitions by the trustee to make certain capital
expenditures. All of the expenditures would facilitate continued operation of
the railroad. The Group asserts that the capital expenditures, especially those
for the repair of the Hoosac Tunnel, are unreasonable, but it relies primarily
upon allegations of statutory and constitutional error: it says that under Sec. 77,
if creditors oppose expenditures on the ground that there is no reasonable
prospect of successful reorganization, and introduce evidence to support that
contention, the court must make a finding "as to whether or not the Railroad is
probably reorganizable."

We disagree. Section 77 does not contemplate that a court will make, as a

matter of course, an unaided judgment on reorganizability before the ICC has
considered the matter and certified a plan to the court. It instead provides in
detail for a multi-staged effort by the ICC, creditors and court to develop, if
feasible, a satisfactory reorganization plan. The ICC is an expert agency
invested with "primary responsibility for the development of a suitable plan."
Ecker v. Western Pac. R. Corp., 318 U.S. 448, 468, 63 S.Ct. 692, 705, 87 L.Ed.
892 (1942). Section 77 "manifests the intention of Congress to place
reorganization under the leadership of the Commission, subject to a degree of
participation by the Court." Id.

Doubtless the court, perhaps even without consulting the Commission, could
terminate a reorganization proceeding were it manifestly frivolous or brought in
bad faith. That is plainly not the case here. The trustees, the ICC
Administrative Law Judge after hearings, and Passaconaway have expressed the
belief that the B&M is reorganizable. We have examined the trustee's plan, the
Administrative Law Judge's Recommended Report and Order, and the
testimony of the Group's expert. While the trustee and the ICC judge
acknowledge that reorganization of the B&M presents unique problems, they
think it can be done and describe a variety of factors bearing on the likelihood
of success. We cannot say that the prospects of reorganization are so dim that
the process established by Congress for developing, refining and considering a
plan should be short-circuited by a court's summary attempt to substitute its
own premature and likely ill-informed judgment as to reorganizability. Under
Sec. 77 the court's plain duty is to defer at this juncture to the ICC.

We do not say that senior creditors must sit by for years while their security

evaporates. Section 77(g)4 permits the reorganization court, on motion of any

party or on its own motion, "after hearing and after consideration of the
recommendation of the Commission", to dismiss the reorganization proceedings
if "there is undue delay in a reasonably expeditious reorganization." The Group
did not formally make a motion under Sec. 77(g) but instead sought to raise
reorganizability collaterally to its objections to capital expenditures. Even were
we charitably to treat its objections as, in effect, a Sec. 77(g) motion, we
nevertheless would conclude that the court, under the circumstances presented,
did not abuse its discretion in failing to rule specifically on reorganizability and
in otherwise denying the motions.
9

The same delay could be justified in one case but "undue" in another. We
would therefore not necessarily limit Sec. 77(g) dismissal to circumstances in
which a plan had been certified and approved, although not expeditiously
carried out. Were the ICC and other parties to the reorganization to be unduly
lethargic in evolving an initial plan, an injured party might, upon a proper
showing, invoke Sec. 77(g). Indeed, we would even agree with appellants that
in unusual circumstances a party might be entitled to a preliminary ruling on
reorganizability if the party could demonstrate peculiar and major irreparable
injury that would make any additional delay "undue." Each case turns on its
own facts; the court must consider and weigh the effect of delay on all parties
and on the public interest as well.

10

The Group has failed to demonstrate, with any precision, the extent to which
the passage of time is affecting its security. Obviously the B&M's tax and
interest liabilities, and other priority indebtedness such as administrative
expenses, continue to mount; but while we know in a general way that the
claims against the bondholders' security increase with time, the record here
does not inform us as to how badly off they are, and will be, and appellant
made no serious effort to marshall and present such information in the
reorganization court. This information is important, since the greater the
bondholders' cushion and the slower the rate at which their security is eroding,
the less dire for them the consequences of delay even if attempts at
reorganization should ultimately fail.5

11

Further, the Group has not demonstrated that the alternative plan it proposesthe expeditious liquidation of the B&M's assets-would necessarily be desirable,
particularly for the unsecured creditors who are also entitled to protection of
their assets. Canada Southern R. Co. v. Gebhard, 109 U.S. 527, 536, 33 S.Ct.
363, 27 L.Ed. 1020 (1883). Cf. Louisville Joint Stock Land Bank v. Radford,
295 U.S. 555, 597, 55 S.Ct. 854, 79 L.Ed. 1593 (1935). The ICC judge is of the
opinion that summary liquidation would have adverse consequences for the

bankrupt's estate. Even if it were shown that a distress sale would be best for
secured creditors as a group, we cannot say that it would protect adequately the
interests of the junior creditors, and from the viewpoint of the public interest it
would seem still less desirable. The twin objects of Sec. 77 are to conserve the
debtor's assets for the benefit of all creditors and to preserve the ongoing
railroad in the interest of the public. Continental Illinois National Bank & Trust
Co. v. Chicago, R. I. & Pac. Ry., 294 U.S. 648, 671-680, 55 S.Ct. 595, 79 L.Ed.
1110 (1935); New Haven Inclusion Cases, 399 U.S. 392, 431, 90 S.Ct. 2054, 26
L.Ed.2d 691 (1970). While these objects cannot be pursued to the point of
unfair discrimination against one class of creditors, and the secured creditors
cannot be made to devote their property, uncompensated, to the public welfare,
cf. Note, Takings and the Public Interest in Railroad Reorganizations, 82 Yale
L.J. 1004 (1973), the present record falls short of presenting facts sufficient to
raise the issues of discrimination among creditors or unconstitutional taking.
12

It has long been established that secured creditors may be required to defer
realizing on their security for a reasonable time to permit the trustees to make
efforts to reorganize the railroad. Continental Illinois National Bank & Trust
Co. v. Chicago, R. I. & Pac. Ry., supra. As the Supreme Court has said, during
the reorganization period

13 collateral will decline in value; . . . . A claim that injurious consequences will

"the
result to the pledgee or the mortgagee may not, of course, be disregarded by the
district court; but it presents a question addressed not to the power of the court but to
its discretion-a matter not subject to the interference of an appellate court unless such
discretion be improvidently exercised." Id. at 677, 55 S.Ct. at 606.
14

Given the relatively short time that has elapsed since the filing of the petition
under Sec. 77, the diligence of the trustee and the ICC, and the absence of any
showing of irreparable harm, the district court was plainly right to respect the
procedures of Sec. 77. The time may soon come when the deferral, in the
interest of others, of appellant's rights becomes so oppressive as to raise the
issues the Group now seeks to assert. By inserting Sec. 77(g), and by imposing
time limits throughout Sec. 77, Congress reflected awareness that a
reorganization proceeding might be so unreasonably delayed as to be
"subversive of the spirit in which [Sec. 77] was conceived and adopted." Id. at
685, 55 S.Ct. at 610. How much damage and risk a secured creditor may be
required to accept in the interest of reorganization is no easy question. See New
Haven Inclusion Cases, supra, 399 U.S. at 490-491, 90 S. Ct. 2054. But we say
with some confidence that appellant has failed to show that it is no longer in the
zone of permissible bankruptcy regulation but is instead in the zone where
equitable principles, Sec. 77(g), and the Fifth Amendment entitle it to relief

from further delay.

15

As to the Group's more detailed complaints, we have reviewed the complained

of orders and the record. We agree with the 10th Circuit in Van Schaick v.
McCarthy, 116 F.2d 987, 993 (10th Cir. 1941), that during the period before a
satisfactory and proper plan is worked out, the trustees may be permitted to
make expenditures that are "reasonably necessary to preserve and protect [the
relevant public and private] interests and maintain the integrity of the railroad,
so that it may be turned over to the reorganized company as a going concern."
During the 1960's the B&M apparently ceased to maintain or modernize its
facilities. Part of the trustee's plan is to engage in rehabilitation and
maintenance sufficient to attract customers and to prevent the line from falling
into such a state that it may become impossible to rehabilitate profitably. We
find nothing to suggest that the reorganization court exceeded sound discretion
by approving expenditures for the transfer of 50 employees to Billerica,
Massachusetts; for air conditioning at Billerica; for automatic grade crossing
signals at Mechanicsville, New York; for purchase of snow blowers; and for
entering into a substantial salary agreement with its chief executive officer, see
Smucker v. Nassau County, 183 F.2d 447 (2d Cir. 1950), upon whom, more
than anyone else, the responsibility for future success or failure may depend.

16

Similarly, the court was warranted, from the findings of the special master,
which were based, we think, on substantial evidence, in allowing expenditures
for repair of the Hoosac Tunnel. The findings were not clearly erroneous and,
while alternative plans were proposed, and the decision involves subjective
judgment, we are not persuaded that the reorganization court did not act
reasonably and in the best interests of the railroad, its creditors, and the public.

17

Finally, the court did not exceed its allowable discretion in deferring its ruling
on the so-called draw downs. Depending on future events, deferral offers
potential benefits as well as hazards to appellant. We cannot now review the
propriety of whatever rulings the court may later make. Such rulings, as the
reorganization court has stated, will be made only after a full hearing.

18

Affirmed.

The Group originally included four insurance companies holding first mortgage
bonds in the face amount of $14,198,000, or about 30 percent of the
outstanding total. On December 27, 1972, $10.3 million of the bonds were sold
by two of the insurance companies to an independent dealer. These bonds were

subsequently purchased by Passaconaway Company, now the largest single

bondholder. The Group currently represents only slightly more than $4.1
million. Passaconaway has intervened in the proceedings to oppose the Group's
position and support the position of the trustee
2

Report and Order recommended by Victor A. von Rinteln, Administrative Law

Judge, ICC Dkt. 26115 (Feb. 13, 1973)

By early 1973 two of the original three trustees had resigned, and no new
trustees had been appointed

Section 77(g) provides:

If in light of all the existing circumstances there is undue delay in a reasonably
expeditious reorganization of the debtor, the judge, in his own discretion, shall,
on motion of any party in interest or on his own motion, after hearing and after
consideration of the recommendation of the Commission, dismiss the
proceedings. Upon the filing of such an order of dismissal, all right, title, or
interest of the trustee or trustees shall vest by operation of law in the debtor
unless otherwise provided by such order.

Some information on the current prospects of the bondholders is available to

this court, but it is of such uncertain and speculative nature that we take little
account of it in reaching our decision. It is particularly important that there is
no definitive indication of the rate at which the railroad's assets are depreciating
and the rate at which priority indebtedness is displacing the bondholders'
claims to the available assets. Thus, even though we believe that an adequate
cushion exists for the bondholders today, we have no way to tell about
tomorrow
The outstanding principal amount of the first mortgage bonds is $48,090,376.
Accrued and unpaid interest, and interest on the unpaid interest, total
$12,562,408.47, so that the total indebtedness on the bonds is $60,652,784.47.
According to the Administrative Law Judge's Report, p. 35, real estate and
other tax claims taking priority over the bonds are currently approximately
$14.5 million. No estimate of other claims prior to those of the bondholders is
available to us, but in order to fully satisfy all bondholders it is clear that at
least $75 million must be available.
Several estimates of the value of the B & M have been made. The Financial and
Statistical Statements of the B & M list the total transportation property less
depreciation and amortization at $181,464,474. This book value figure,
however, bears no necessary relation to the currently realizable value on sale or
liquidation. A Coverdale & Colpitts valuation of all B & M properties except

land and some buildings put the gross value at $46,000,000 and the net salvage
value at $26,700,000. The market value of B & M land has been variously
estimated from a high of $182,749,000, assuming that the land is devoted to
transportation corridor use and that the Massachusetts Bay Transportation
Authority (MBTA) agrees to purchase the Boston area passenger lines, to a low
of $106,533,100, which assumes that some land will be sold in small parcels
for nontransportation use. The B & M also has a liquidated but unpaid claim of
$18,000,000 due from the MBTA for some of its Boston properties. Thus,
according to the Administrative Law Judge's Report, the "lowest" value of the
railroad, assuming liquidation and salvage of all except the Boston
transportation corridors, would be $151,731,487. Higher values can be obtained
by assuming that some portions of the railroad would be sold as a going
concern for values as high as gross replacement value; these estimates range to
$375,188,387.
Even though some of these properties have depreciated since the time the
estimates were made, the value of the B & M continues to be substantially in
excess of the value needed to satisfy the bondholders. Much of the value is in
real estate that, if present trends continue, may appreciate rather than depreciate
over time. The Group argues for a rather lower valuation based on immediate
liquidation, and asserts that such a sale would bring $89 to $117 million. From
this they subtract an erosion of the bondholder's position that adds, to the $14.5
million now due in taxes, an additional depreciation of $11.5 million, sundry
losses of $6.0 million, and future erosion of all sorts at approximately $11.2
million per year. (App. 690; 1882-95) Taking the Group's figures at face value,
the security available to meet the $75 million in claims is still $71.5 to $99.5
million. [The "additional depreciation" above may be overstated, since based on
depreciable property of only $26.7 million. The Group neglects to count as an
asset the $18 million claim against the MBTA. In addition, the "erosion"
figures failed to account for possible appreciation in the value of the raw real
estate.] It thus appears that by either the values used by the Administrative Law
Judge or those proposed by the Group there is currently security sufficient to
satisfy the bondholders.
To the available security must be added the expenditures, approved in this
opinion, for capital improvements. For example, the Hoosac Tunnel, unless it is
repaired, may soon have no value at all; it may be, although we do not know,
that the repairs add more to the value of the Tunnel, and thus to the security of
the bondholders, than they cost. If so, the expenditures increase rather than
decrease the well-being of bondholders as a group. Against this must be
balanced the possibility of eventual cessation of railroad operations; the Hoosac
in repaired condition is valuable only to an operating railroad. The concern of
the Group is that, if operations cease, the investment in the Hoosac will

become valueless. But it is precisely this kind of fine balancing of probabilities

that is addressed to the reorganization court's discretion. Since the Group has
not, and perhaps cannot, demonstrate with any certainty that it is suffering from
the continued operation and repairs to the B & M, the statutory and
constitutional claims are inappropriate at this time.