the reasoning of the trustees that, even if the subordinated classes were initially credited with distributive shares on a parity with unsubordinated claims, such distributive shares would have to be withheld from them and be added to the amounts distributable on claims to which they had agreed to subordinate themselves. 62 Thus the subordinated classes still would not be entitled to participate in any distribution. 63

Judge Leibell at the same time left open the question whether the Original Holders of COs and preferred and preference stocks might properly be allowed to participate as potential CDC holders, but held that any right of rescission they might have was not available to others than Original Holders. In reaching this conclusion he held that since AGECO is a New York corporation and the COs and preferred and preference stocks (issued in exchange for CDCs) were transferable in New York, the law of that State governs the effect of the assignments. He pointed out that the instruments of assignment did not purport to transfer any rights other than those embodied in the COS or shares of stock themselves, and that these do not include a right of rescission for fraud practiced upon the assignor as a CDC holder (citing Abel v. Paterno, 245 App. Div. 285; Hendry v. Title Guarantee & Trust Co., 255 App. Div. 497). In this connection Judge Leibell observed:

That an assignee of a stock certificate should not, by a bare assignment of the certificate, obtain any claim or causes of action accruing to his assignor out of the transaction by which the assignor originally acquired the certificate, is strongly supported by the practice of a sale by the assignor of his certificate for the purpose of fixing his damages preparatory to bringing an action for fraud or deceit.

Judge Leibell gave effect to the foregoing holdings by issuing certain orders of classification, from which appeals have been taken and are now pending in the Circuit Court of Appeals for the Second Circuit. On the basis of our independent consideration we concur in Judge Leibell's conclusions. 64

62 Bird & Son Sales Corp. v. Tobin, 78 F. (2d) 371 (C. C. A. 8, 1935). The subordination agreements were also held not to be in conflict with Section 65a of the Bankruptcy Act (11 U.S.C.A. Sec. 105A), on the authority of In re Aktiebolaget Krueger & Toll, 96 F. (2d) 768 (C.C.A. 2, 1938) and In re George P. Schinzel & Son, Inc., 16 F. (2d) 289 (S. D. N. Y. 1926).

Since the subordinated classes have no interest in the reorganization on the above theory, it would seem they are in no position to complain that in fact the CICs are given equal treatment with the nonconvertible FIDs under the plan. AGECO never attempted to convert the CICS, which matured (after extension) in 1943. It may justly be said that the apportionment of assets among the CICs and other FIDs depends on legal and equitable considerations wholly unrelated to the subordinated classes, and has no effect on their substantive rights. 63 Although on some theories advanced in the Recap litigation the FIDs and SFIDs might be satisfied in full before participation by the AGECORP 73's and 78's, there would be small equity in allowing AGECO's subordinated debt to share ahead of or on a parity with the AGECORP claimants. We can see no tenable theory on which assets or earnings might reach the nonparticipating securities.

64 With respect to shares of preferred and preference stock issued upon the purported conversion of CDCs, we would point to another reason for concluding that ordinary purchasers would be classified as mere holders of stock rather than as potential CDC holders. This is that under the circumstances it is incredible that a market purchaser of the stock in question could have bargained or paid for any right in respect of the original CDC.

Many shares of these classes of stock were issued independently of any conversion of CDCs,

The potential CDC holders (Original Holders of COs and preferred and preference stocks) assert a claim to unsubordinated securities, and if the purported conversion of their CDCs was not in accordance with the conditions of the option, or was impelled by fraud, their apparent acquiescence might be held to be of little significance. We think the plan's allocation to them of half the amount allowed on unsurrendered CDCs is within a permissible range of fairness.

There remain for comment the arguments on the treatment of the scrip, which constitutes an obligation of AGECO resembling the COS in that it has similar subordination provisions. The scrip also presents a related problem in that it was issued in "payment" of interest on the COs. On behalf of the scrip it is urged that some participation, at least for Original Holders of scrip, should be allowed; but the scrip does not by itself represent a potential right to rescission or recovery of a CDC.

It is true, as is urged by representatives of the scrip, that ordinarily a person seeking rescission of a transaction must tender back not only the thing received but also anything of value derived therefrom. Basically the contention is that a CO Original Holder who received scrip as interest on the CO must tender back his scrip as well as his CO in order to obtain a CDC. But, as we have seen, the scrip is a subordinate class of security having no value of its own, and a requirement of tender would be a useless formality.66 In short, the scrip has the weaknesses of the COS as a subordinated class but lacks the strength of COs held by Original Holders.

It is pointed out that some CO holders, prior to bankruptcy, sold their scrip or were permitted to use it for payment of elec tric bills or the like, thus receiving a benefit denied to those who still hold their scrip; and it is urged that for this reason the plan is unfair in allocating nothing to present scrip holders. However, the same argument could be made with respect to stock of a bank

and there is nothing on the stock certificates that would disclose the circumstances of their issuance. Thus, an ordinary purchaser in the market could not possibly know whether he was buying shares originally issued for CDCs or otherwise, even in the unlikely event that he had any thought of buying an equitable right to recover a CDC. If there is any purchaser of these stocks claiming under an agreement whereby he expressly acquired the transferor's rights as a former CDC holder, the fact has not been called to our attention. Judge Leibel opinion mentions no such claim, and we must assume that there is none. The only persons who can be assumed to have acquired the peculiar rights of a former CDC holder, as Judge Leibell indicated, are persons who have succeeded by operation of law to the entire bundle of rights of such a holder; and successors by operation of law are included within the excepted class whose rights were not foreclosed by the orders of classification.

Similar reasoning, in our opinion, applies to purchasers of COs issued in exchange før CDCs. Many of the COs were issued in exchange for Old COs and CCs, and had no relation to CDCs. It would therefore be unrealistic to assume that an ordinary purchaser of a 00 thought the security he was buying had any rights with respect to a CDC attached to it bargained for any such rights.

65 See Andrews, et al. v. Commissioner, 135 F. (2d) 314 (C.C.A. 2, 1943, cert. den. Oct. 11 1943), where the issuance of the scrip is described and discussed in the light of the Feders! income tax law.

66 As we have seen, the COs are also without value as a class, and tender thereof would be equally useless except to identify the holder as an Original Holder entitled to claim as a po tential CDC holder, and to evidence the surrender of such claim against payment under the plan. Scrip, if surrendered with the CO, would add nothing to the claim asserted in respect of the original CDC.

rupt corporation. Stock may have had a market prior to bankruptcy, or may have been surrendered to the company for cash or services by some stockholders, yet those who retain their stock will still receive nothing in reorganization.

We conclude that the contentions made on behalf of the scrip are not such as to establish its right to treatment differing from that of the other subordinate classes of AGECO debt.

G. TREATMENT OF GENERAL CREDITORS

It is estimated that general creditors' claims against the two estates amount to about $3,000,000. As provided in the Recap Compromise, these claims are to be allowed against the combined estates for 100 percent of the amounts established in the proceedings or agreed to by the AGECO trustee or AGECORP trustees subject to the approval of the court, and are to rank on a parity with the claims of the FIDs and other securities junior to the 8's of '40. The plan provides that new common stock shall be distributed in respect of these claims at the rate of 2.14 shares for each $100 of principal and all rights to interest thereon to the effective date of the plan.

This treatment is substantially equivalent to that accorded the FIDs, 73's, and 78's, with a differential that reflects the absence of any right to interest on the amounts of the creditors' claims as finally allowed or settled. No differentiation is made between claims against AGECO and claims against AGECORP. In view of the essential parity which the plan recognizes among security holders of the two debtors, and the relatively small amounts involved, we believe this treatment of general creditors meets the fair and equitable standard.

H. CONCLUSIONS AS TO FAIRNESS

On the basis of the claims, counterclaims and defenses outlined in the foregoing discussion we find:

(1) That in giving priority to position to the 8's of '40 and in allocating new debentures and cash equivalent to 102.56 percent of principal plus interest on principal at a 4 percent rate to the effective date of the plan, the plan accords the 8's of '40 "the equitable equivalent of the rights surrendered"67 in view of existing doubt as to their right to realize the maximum amount of their claims.

(2) That in allocating new common stock of the Surviving Company to the other participating securities and to general creditors of AGECORP and AGECO, on the premise that their claims are on a parity with each other (subject to adjustment as to amounts), the plan has a sound and rational basis meeting the requirements of equity arising out of the confused situation in which the two debtors and their respective creditors have been placed by the actions of a common management prior to bankruptcy.

67 Group of Institutional Investors v. Chicago, St. P. & P. R.R. Co., 318 U. S. 523, 565 (1948).

(3) That the differentials among the various parity claims, as reflected in the allocations of new common stock provided for in the plan, compensate each participating class and group in the light of its claims and litigation strength in relation to the claims and litigation strength of each other class and group, without exact measurement of each (which is impossible under the cir cumstances) but by practical adjustments which fall well within a permissible range of fairness and equity, having due regard to the benefits to be derived by all from the prompt termination of litigation.

(4) That in excluding the nonparticipating securities of AGECO from participation in the reorganization, the plan conforms with the absolute priorities doctrine applicable in bankruptcy cases, and excludes no class having an interest or a reasonable prospect of acquiring an interest in the assets or earnings of the debtor estates.

(5) That the plan, accordingly, is fair and equitable to the persons affected.

FEASIBILITY AND STANDARDS OF THE ACT Feasibility requires, among other things, that the capitalization proposed for the Surviving Company bear a reasonable relationship to its underlying assets and reasonably prospective earning power. We must also pass upon the proposed corporate structure in the light of the requirements of Sections 7, 10, and 11 of the Holding Company Act. 68

The trustees have long recognized that many of the assets of the AGECO and AGECORP estates cannot be permanently retained in view of the integration requirements of Section 11, and that a substantial amount of rehabilitation of subsidiaries is necessary before any plan for the reorganization of the top companies would be feasible.

(a) INTEGRATION PROGRAM

The trustees have stated that their program of system rearrangement is designed so that, as its several goals are reached, securities representing interests in integrated systems will be available for distribution among claimants against the estates from time to time, in order that through such distributions, or by sales of assets, the Surviving Company will eventually reduce itself to the top company of a single integrated system, together with such additional integrated systems and incidental businesses as it may be permitted to retain under Section 11 (b) (1) of the Holding Company Act. Thus the Surviving Company is to be essentially a liquidation vehicle until the integration program is completed, and its capital structure must be suitable for the attainment of that objective.

The trustees contemplate the ultimate establishment of four

68 Cf. The United Telephone and Electric Company, et al., 3 S.E.C. 653 (1938), adopting the views of Commissioner Healy expressed in a concurring opinion in Peoples Light and Power Company, et al., 2 S.E.C. 829, at 844 (1937); Utilities Power & Light Company, i S.E.C. 483, 512 (1939).

separate holding company systems made up of present AGECORP subsidiaries located in the following areas:

(1) New York-Northern Pennsylvania

(2) Eastern Pennsylvania-New Jersey
(3) Western Pennsylvania

(4) Florida-Georgia.

The problems involved in ultimate compliance with Section 11 (b) (1) are before us in separate proceedings which have not yet been completed, and disposition of them will be made in due course. Meanwhile the Surviving Company will take over the subsidiaries and will be a registered holding company subject to the requirements of the Act and the proceedings and orders thereunder to the same extent as the debtors and their trustees.

(b) NY PA NJ RECONSTRUCTION PROGRAM

One of the important obstacles to reorganization has been the restrictions on the flow of earnings from the subsidiary operating companies up to AGECORP. The trustees' rehabilitation program has been designed to eliminate or reduce to a minimum these restrictions on the upward flow of earnings, particularly those of NY PA NJ and certain of its subsidiaries, the largest of the present subholding company groups. The NY PA NJ program contemplates the achievement of at least the following:

(1) Reduction, by about $20,805,600, of the publicly held debt and preferred stocks of NY PA NJ subsidiaries, with consequent trengthening of the Surviving Company's equity, and increased ncome available to it in dividends.

(2) Elimination of cross-holdings of securities of NY PA NJ and its subsidiaries.

(3) Payment by NY PA NJ of $24,324,100 principal amount f its own debt held by the public and by associate companies aving senior securities in the hands of the public, and retirement f all its preferred stock, by June 30, 1944.

(4) Rearrangement of a number of NY PA NJ subsidiary roperties, with resultant economies.

NY PA NJ will then be in a position either (a) to restate its ssets and eliminate its present earned surplus deficit through an ccounting reorganization, or (b) to vest its assets directly in the urviving Company, whichever may be appropriate.

A total of $26,306,308 in cash is needed to effectuate the NY 'A NJ reconstruction program, in addition to about $3,000,000 eeded by the trustees for estimated tax liabilities and reorganiation requirements. 69 It is anticipated that by June 30, 1944, here will be available the following amounts of cash to meet 10se needs:

62 The $3,000,000 estimate includes $500,000 for cash payments on the AGECORP 8's of '40; 50,000 for settlement of Federal tax liability (including income taxes and penalties and terest but exclusive of taxes under Titles VIII and IX of the Social Security Act) claimed om AGECO, AGECORP, or the trustees in respect of the taxable years 1934 to 1939, inclure: $1,500,000 for other tax liabilities and reorganization costs; and the balance for payment trustees' certificates which have now been paid in full.

15 S. E. C.