reorganizations are complete. The first of the reorganization cases to reach the Supreme Court were those of the Western Pacific (Frederick H. Ecker v. Western Pacific RR. Corp., 318 U. S. 448, 87 L. ed. 892), and the Chicago, Milwaukee, St. Paul & Pacific (Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific RR. Co., 318 U. S. 523, 87 L. ed. 959), both decided March 15, 1943. The court held in these cases that the findings of the Interstate Commerce Commission as to "capitalizable value" would not be disturbed if they were supported by substantial evidence, and the courts were powerless, under section 77, to grant a judicial review of the findings of the Commission as to valuation determined under section 77 (e), and as to the total capitalization determined under section 77 (d). The result was that the stockholders of both companies were eliminated from participation in the reorganized company, although their stock represented actual investment in the properties, and all security holders of both companies suffered a reduction in the integrity of their holdings and in the probable return on their investments.

In five major companies now undergoing reorganization, the reductions in capitalization aggregate some $600,000,000, meaning that this amount of railroad securities has been eliminated in the reorganization of these five companies alone, although there is no question that the investment in road and equipment and the 19a valuations at the present time are far in excess of the capitalization determined by the Commission. The same is true generally of the other roads involved in reorganization, these five being specifically mentioned, because they are included in one exhibit submitted to this committee by the Interstate Commerce Commission (hearings on H. R. 2857, serial No. 9, p. 199) (78th Congress).

That this situation has created an unbearable hardship upon the junior investors in railroad securities and constitutes a real danger to railroad credit may be easily seen from a glance at current railroad earnings. In 1942 the Missouri Pacific earned $32.67 a share on the common stock outstanding under the old capitalization; the Denver & Rio Grande Western $34.40 a share. Rock Island, $25.11, Frisco, $18.03; St. Louis Southwestern, $27.23. These figures approximately were repeated in 1943, and the high earnings are continuing in 1944. Yet these stocks, which have demonstrated such an earning power, have been absolutely wiped out in reorganization, and the stockholders are without remedy. Moreover, the junior securities of all these roads have been drastically cut in reorganization and the senior securities have been very largely converted into income bonds and preferred and common stock. In one case, the Commission estimated a normal earning power of $11,000,000, and based its capitalization upon that figure; yet in the same year in which the Commission's plan was announced (1941) that road earned more than $18,000,000. In 1942, it earned $36,000,000, and in 1943, $37,000,000. Nevertheless the Commission still says the old common stock is worthless. The stockholders are without remedy. There is in practical effect no judicial review of the action of the Commission. Although its guess as to future earning power has been demonstrated to be wrong, its findings are final.

It is true that in the last few years earnings due to wartime traffic have surpassed all expectations. It is a fortunate thing for the country that its first line of defense-the transportation systemwas able to handle this traffic with such magnificent results. The

Commission, in fixing its plans, did not foresee it; likewise, no one can foresee what traffic there will be for the railroads after hostilities have ceased. There will, of course, be a reduction in the wartime traffic, but, unless we are to concede that we are willing to get along with a much less adequate transportation system, and unless we are to admit that our efforts at readjustment after the war will be a failure, then we must insist that the owners of these securities now being confiscated should share in the prosperity which has come as a result of the war and in that which necessarily will follow in rebuilding the Nation's industries.

THE PURPOSE OF THE BILL

The primary purpose of the bill is to insure that the courts shall make an independent judicial review of each plan and of the evidence upon which the plan is based. Under the existing statute, the Commission is required to certify to the court a transcript of its proceedings; and the court is required to notify all parties and, if objections are filed, to have a hearing. The effect of the proposed amendments is to require the judge to make an independent judicial determination of the facts found by the Commission, and not to hold that the adminstrative finding of the Commission is beyond judicial review. With this object in mind, the bill provides that the judge shall not only be satisfied that the plan complies with the provisions of subsection (b) as in the present statute, but must also be satisfied that it complies with the provisions of subsection (d), which the Supreme Court held was not within the province of judicial review. This will add nothing to the requirements of the present statute as to the hearing and the scope of the evidence; it will merely direct the courts to exercise the traditional right of review, and to give the parties and the public the benefit thereof.

Second, and as a means of insuring that the Interstate Commerce Commission shall be guided by some standard in determining the permissible capitalization of the reorganized company, the bill provides that the existing total capitalization shall not be reduced below the lower of either the investment in the property or the physical valuation as previously determined by the Commission under section 198. Naturally, if the existing capitalization exceeds the investment, it should be susceptible of reduction, if the Commission finds it is not supported by earning power; or, if the existing capitalization exceeds the physical valuation found by the Commission, it should be susceptible of reduction, unless in that event the Commission deems the earning power sufficient to support it. But where the existing capitalization represents actual investment in the property, or where it is not in excess of the value determined by the Commission under the mandate of law, then it should not be disturbed.

If the transportation system of the country is to be adequately financed, investment in railroad securities must be kept attractive for private investors. It is folly to expect investors to finance new railroads by purchasing stocks or junior securities which may be arbitrarily eliminated. Twenty-four years ago in Congress the question of railroad credit was discussed by Mr. Rayburn, of Texas, who, in advocating the enactment of section 20a of the Transportation Act of 1920, stated (Congressional Record, 66th Cong., 1st sess., vol. 58, pt. 8, p. 8376):

H. Repts., 79-1, vol. 1-8

Of course, the credit of the railroads has been destroyed. But if we write into the law of the land a statute to the effect that before a railroad can issue new securities, before it can put them on the market, it must come before the properly constituted governmental agency, lay the full facts of its financial situation before that body, tell that body what it intends to do with the money derived from the sale of the issue of securities, and after it has received the approval of that regulating body and it goes out and puts those securities on the market, then the Interstate Commerce Commission by this law is empowered at any time to call it to account and have it tell to that regulating body that it expended the money, the proceeds of the sale of securities, for the purposes for which it had made the application. Then we shall have railroad securities that will stand for value in the markets of this country and in the markets of all the world.

It is under this section 20a that the Commission has authorized the issue of some $20,000,000,000 of securities, plus some 20,000,000 shares of capital stock without par value (I. C. C. Activities, 18871937, p. 168). Section 20a of the act requires in every case that the Commission certify that the proposed issue of securities is compatible with the public interest. It is ironical that many of the securities which the Commission is now wiping out in reorganizations under its determinations of permissible capitalization are securities which, directly or indirectly, have been approved by the Commission under section 20a. Many instances have been cited to us which it is not necessary to repeat here.

The important thing is that the Commission in determining total capitalization has no standard to guide it. It must make an estimate of future earning power. In the very nature of things, it cannot foresee with any degree of accuracy what the future earning power will be. As Commissioner Miller said in one case (242 I. C. C. 475). "We are not omniscient and cannot foresee the future."

Another reason why the Commission's estimates of earning power are unsatisfactory as a means of determining value is that the earning power of the carriers generally is within the control of the Commission. Under our scheme of regulation, it is the Commission's duty so to regulate the rate structure that there will be a fair return on the value (as determined under sec. 19a) of the property devoted to public use (act, sec. 15a). It is that provision which justifies an investor in investing his funds in railway capitalization. To say that because the Commission has failed, for whatever reason, to obtain this result, the investor should be destroyed, is certainly not due process of law and cannot conceivably benefit railway credit.

In order to carry out the policy, however, of having fixed interest charges reduced, the bill contains a proviso in section 1 (ii) that, if the existing capitalization is in excess of the value of the debtor's property as certified by the Commission under subsection (e)—that is, of what the Commission terms "capitalizable value"-the excess shall be represented by no-par stock issued at the rate of one share for each $100 of such excess. The purpose of this is to afford to the existing stockholders and junior security holders a continued interest in the property. This no-par common stock will still represent actual investment in the property and will still represent a value which the Commission itself has determined under section 19a. It will in no sense be a speculative medium. In bad years, it will pay no dividends; in the good years it should reap the benefit of prosperity at least sufficient to compensate for what the investor has lost in the bad years. As the matter stands now, the investor has suffered through the bad years, and when prosperity has returned the procedure under

section 77-originally designed as an act for the relief of debtors-has taken his investment and turned it over to his creditors.

In this connection, the bill contains an additional provision which may be quite helpful. It requires the Commission to name one of its members to confer with the parties in interest and to endeavor to act as a mediator to reconcile their differences. It is thought that this provision will avoid much controversy and consequently shorten the proceedings.

EFFECT ON PENDING REORGANIZATIONS

The bill is made to apply to all reorganization proceedings now pending, except where the property dealt with by the plan has been transferred to a new corporation or retained by the debtor pursuant to the plan, or where the plan has been voted on and accepted by the requisite percentage of creditors of each class prior to the effective date of this amendment.

It is not believed that the provisions of the bill will result in any delay in the pending cases. If it did so result, however, that would not be an objection to correcting a wrong. All of the facts in all of the pending cases are already of record. No long-drawn-out investigation in any case would be necessary to enable the court to pass judicially upon the Commission's determination of earning power. The standards by which the new capitalization is to be measured, that is, the actual investment and the 19a valuations, are readily accessible from the files of the Commission, and in most cases have been introduced into the records already before the courts. While the Commission's valuations under section 19a are by statute made only prima facie evidence (sec. 19a (i)), and may be contested in court when improperly made (United States v. Los Angeles & Salt Lake RR. Co., 273 U. S. 299) 19a valuations do not involve any conflict as to the facts, all of which are matters of record. The controversy would relate only to principles, or the evaluation of evidence.

We conclude, therefore, that the enactment of this portion of the bill would not tend to delay the progress of pending plans. Delay, however, would be preferable to confiscation.

CONCLUSION

The committee has held protracted hearings on H. R. 2857 (78th Cong.) for which the present bill is a substitute embodying amendments made as a result of those hearings, and has reached the conclusion that the consummation of the reorganization plans as now framed would be a severe blow to railroad credit and make it well-nigh impossible for any but the richest railroads to obtain new capital on attractive terms. Certainly the present prices of railroad stocks, which are discouragingly low in spite of very high earnings, indicate that no new financing can be done through the medium of common stock until something has been accomplished toward the restoration of railroad credit. Particularly is this true in the case of the reorganized railroads whose preferred and common stocks are being traded in on a when-issued basis at far below par, generally around 35 to 40 for new preferred stocks, and 15 to 20 for new common stocks. This in itself is a commentary on the public regard in which railroad stocks are held. Just

emerging from reorganizations after years of careful consideration by the Commission and in a time of rare prosperity, the natural expectation would be that all of the new securities would bring par. As it is now, the only way for the reorganized roads to finance their necessary capital requirements, which we are advised will be heavy after the war, is to issue first mortgage bonds to provide funds, and this will lead back to the evils which section 77 was designed to prevent. The current prices of the new junior securities about to be issued under the Commission's plan indicate that future investment therein has been discouraged by what has happened to the present holders of existing issues. We believe this bill will go far toward curing this situation, and, therefore, recommend its passage.

CHANGES IN EXISTING LAW

In compliance with clause 2a of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill are shown as follows (existing law in which no change is proposed is shown in roman, new matter is printed in italic, and existing law proposed to be omitted is enclosed in black brackets):

SEC. 77. * (b) A plan of reorganization within the meaning of this section (1) shall include provisions modifying or altering the rights of creditors generally, or of any class of them, secured or unsecured, either through the ssuance of new securities of any character or otherwise; (2) may include provisions modifying or altering the rights of stockholders generally, or of any class of them, either through the issuance of new securities of any character, or otherwise; (3) may include, for the purpose of preserving such interests of creditors and stockholders as are not otherwise provided for, provisions for the issuance to any such creditor or stockholder of options or warrants to receive, or to subscribe for securities of the reorganized company in such amounts and upon such terms and conditions as may be set forth in the plan; (4) shall provide for fixed charges (including fixed interest on funded debt, interest on unfunded debt, amortization of discount on funded debt, and rent for leased railroads) in such an amount that, after due consideration of the probable prospective earnings of the property in light of its earnings experience and all other relevant facts, there shall be adequate coverage of such fixed charges by the probable earnings available for the payment thereof; (5) shall provide adequate means for the execution of the plan, which may include the transfer of any interest in or control of all or any part of the property of the debtor to another corporation or corporations, the merger or consolidation of the debtor with another corporation or corporations, the retention of all or any part of the property by the debtor, the sale of all or any part of the property of the debtor either subject to or free from any lien at not less than a fair upset price, the distribution of all or any assets, or the proceeds derived from the sale thereof, among those having an interest therein, the satisfaction or modification of any liens, indentures, or other similar interests, the curing or waiver of defaults, the extension of maturity dates of outstanding securities, the reduction in principal and/or rate of interest and alteration of other terms of such securities, the amendment of the charter of the debtor, and/or the issuance of securities of either the debtor or any such other corporation or corporations for cash, or in exchange for existing securities, or in satisfaction of claims or rights or for other appropriate purposes; and may deal with all or any part of the property of the debtor; may reject contracts of the debtor which are executory in whole or in part including unexpired leases; and may include any other appropriate provisions not inconsistent with this section.

The adoption of an executory contract or unexpired lease by the trustee or trustees of a debtor shall not preclude a rejection of such contract or lease in a plan of reorganization approved hereunder, and any claim resulting from such rejection shall not have priority over any other claims against the debtor because such contract or lease had been previously adopted. The term "securities" shall include evidences of indebtedness either secured or unsecured, bonds, stock, certificates of beneficial interest therein, certificates of beneficial interest in property, options, and warrants to receive, or to subscribe for, securities. The term