Specialists

Three months ago some two-thirds of the railroads of the U. S. could be divided into two classes: those insolvent and those not yet insolvent. World War II's boom has not yet fundamentally altered the case. Two Government specialists last week suggested what could be done for the two classes:

>For railroads which are not yet insolvent Federal Loan Agency Administrator Jesse Jones turned up with an idea. He has quite a few railroad loans not of the best (e.g., $86,261,578 to the nearly bankrupt Baltimore & Ohio), but the immediate problem he tackled was the Boston & Maine.

To President Edward Sanborn French of B. & M., which has $60,000,000 of debt coming due within five years, Jesse Jones outlined a recapitalization plan to put through before bankruptcy becomes unavoidable. His main proposals:

1) Let holders of the B. & M.'s $103,833,000 first mortgage bonds swap each dollar for 50-c- of 20-year 4% first mortgage bonds (or cash, if they demand it), 50-c- of 30-year bonds to pay 4% when it is earned.

2) Issue enough more first mortgage bonds to pay off $5,500,000 of bank loans plus $14,750,000 owed RFC, and raise up to $26,000,000 cash for paying off if necessary. (Obviously if more than 50% of the bondholders demand cash the plan falls through.)

This plan would not only cut B. & M.'s fixed charges (from $7,428,555 to $3,428,555) but considerably reduce its fixed debt instead of just postponing the evil day as the Baltimore & Ohio did under its voluntary scaling down last summer.

Harassed President French replied: ". . . The proposed plan would avoid the waste, expense and losses which would be involved in a judicial proceeding which would probably be necessary. . . ." Other not-yet-insolvent railroads wondered whether Mr. Jones would urge similar plans on them.

> A strong indication of the way out for railroads already bankrupt, hogtied in the Courts by common stockholders' claims, came last week from the Supreme Court. The Court was unanimous and its spokesman was Mr. Justice William Orville Douglas, who first made his jurisprudential name as a Yale Law School professor by analyzing bankruptcies for the SEC. Actually the case did not concern a railroad at all. It concerned obscure Los Angeles Lumber Products Company, Ltd. and was chosen as a kind of Schechter case for a New Deal test of Section 776 of the Federal Bankruptcy Act.

Under 776, the company's Common stockholders had got over 67% of preferred holders to agree to a plan giving them a piece of the solvent, new company (to be known as Los Angeles Shipbuilding & Drydock Co.), had got their plan past the Federal courts as fair, feasible and equitable.

Now former Investigator Douglas had been suspicious for years about plans being railroaded through courts without the judges having had a chance to decide whether they were scrutinizably fair, feasible and equitable. He had attacked many a plan as inequitable for giving the common stock rights when it really had no equity if creditors and preferred stockholders got their just due. When Douglas became Chairman of the SEC, he sponsored the Chandler Act which set up a special SEC division to study reorganization plans and inform judges about them as "friends of the Court."

Friends of the Supreme Court in this case were SEC, ICC, Solicitor General Robert H. Jackson. Mr. Douglas thought the Court's friends were right, that the common stockholders had pulled a fast one on the preferred, ruled that they could get their foot inside the door of the reorganized company only if they paid their way in with new money. The decision thus strengthened the hands of bondholders, preferred stockholders in future reorganizations. Wrote Mr. Justice Douglas:

"We believe that to accord the creditor his full right of priority against the corporate assets . . . the stockholders' participation must be based on a contribution in money or in money's worth. . . ."

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