[Argument of Counsel from pages 652-656 intentionally omitted]
Mr. Elihu Root, Jr., of New York City, for respondents Bondholders' Protective Committees.
Mr. Marcus L. Bell, of New York City, for respondents Trustees in Bankruptcy.
Messrs. James H. McIntosh, Clifton P. Williamson, and Edward W. Bourne, all of New York City, for respondent Protective Committee for Chicago, R.I. & P. Ry. Co. General Mortgage Bonds.
Mr. Justice SUTHERLAND delivered the opinion of the Court.
On June 7, 1933, the Chicago, Rock Island & Pacific Railway Co. filed a petition seeking a reorganization under section 77 of the Bankruptcy Act (11 USCA § 205), in the Federal District Court for the Northern District of Illinois, Eastern Division, alleging that it was 'unable to meet its debts as they mature.' Nine of the debtor's subsidiaries thereafter joined in the proceedings as permitted by subdivision (a) of the section. On September 26, 1933, the debtor filed a petition for instructions which alleged that it had outstanding collateral notes secured by mortgage bonds, part of which were issued by it, part by corporations forming a part of the system; that it had been unable to pay interest on its funded debt secured by mortgage liens on various portions of its property; that it would be obliged to default on interest about to become due on other mortgage bonds of the system; that the value of the collaterial securing each of the outstanding notes is substantially in excess of the loan thereby secured; that if holders of the notes should sell the collateral it would cause a substantial and irreparable loss to the trust estate; and that a forced sale of the collateral at the present time might result in a substantial deficiency judgment against the debtor and the depletion of the respective interests in the trust estate of all creditors in proportion to the rank and lien of the obligations by which their claims or interests therein are evidenced. The petition prayed that the court determine whether it should enjoin the holders of the collateral notes, in the event of a default, from selling any of the collateral.
Practically all of the collateral held by the banks and the Reconstruction Finance Corporation consists of bonds of the debtor and its subsidiaries. These bonds are secured by mortgages on the property of the system; and the collateral, therefore, constitutes fractional interests in the liens created thereby. The collateral pledged to the banks consists of bonds of the Rock Island or of bonds (guaranteed by the debtor) of one of the subsidiary corporations, wholly owned and operated under lease by the debtor. Six of the collateral notes, aggregating.$13,659,877.58, are held by the Reconstruction Finance Corporation and are secured by collateral of the face value of $41,702,465.85. The remaining notes, aggregating $4,125,000 in amount, and secured by collateral of the face value of $14,409,000, are held severally by five banks: The Chase National Bank and the New York Trust Company, of New York City, the Continental Illinois National Bank & Trust Company and Harris Trust & Savings Bank, of Chicago, and Mississippi Valley Trust Company, of St. Louis. Each of the collateral notes contains a provision that it shall become due in case of, among other events, (1) nonpayment of interest, (2) insolvency of the debtor, (3) appointment of a receiver for the debtor. Each note held by a bank provides also that it shall become due in case of nonpayment of interest on any of the notes held by the Reconstruction Finance Corporation. And all the outstanding notes provide that: 'Upon default of any kind hereunder, the payee may sell in * * * New York City, or elsewhere * * * all or any of the security held for the payment of this note, at any broker's board or at public or private sale, without * * * notice * * *. And the payee may be the purchaser of any or all property, rights and/or interests so sold * * *.'