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decided: January 5, 1931.



Author: Sutherland

[ 282 U.S. Page 318]

 MR. JUSTICE SUTHERLAND delivered the opinion of the Court.

In 1925 the Chicago, Milwaukee and St. Paul Railway Company, a Wisconsin corporation, became insolvent and

[ 282 U.S. Page 319]

     passed into the hands of receivers appointed by the federal district court for the northern district of Illinois and subsequently by other federal district courts. Thereupon, and pending a decree of foreclosure of outstanding mortgages, committees were formed by and for the various classes of security holders for the purpose of protecting their several interests in the receivership proceedings and in the ultimate disposition of the railway property. Reorganization managers were appointed by the committees for the purpose of preparing and submitting a plan of reorganization. Thereafter, a plan was submitted to, and adopted and approved by, the committees, with an exception not material here, and after some modification was approved by the court below. There was a final decree of foreclosure under which the properties of the Railway company, in November, 1926, were sold, subject to certain existing liens, to persons acting as agents for the managers and for the benefit of the security holders. This sale was confirmed and the plan held valid by the court, with a proviso that conveyances should not be delivered to appellee, the new company formed in pursuance of the reorganization plan, until after the Interstate Commerce Commission, pursuant to law, had authorized such company to issue the securities provided for in the plan.

The reorganization plan provided that the stockholders of the old company who accepted the plan might participate in the reorganization by depositing their common and preferred stock, together with the sum of $32 for each share of the former and $28 for each share of the latter. Each depositor was thereupon to receive in exchange common and preferred stock in the new company, and in addition $28 and $24, respectively, in five per cent bonds of the new company. Out of the remainder of the money deposited, being $4 per share of the old stock, an amount equivalent to $1.50 per share was separated from the remaining $2.50 of the $4 fund and "set aside to provide for the compensation of the reorganization managers

[ 282 U.S. Page 320]

     and the committees . . . and the fees and disbursements of their counsel and all depositaries and sub-depositaries, any balance of said sum to be paid over to the new company as additional working capital or, if the reorganization managers in their discretion shall so determine, to be returned pro rata to the holders of certificates of deposit for stock." The discretion so to be exercised by the managers was declared to be absolute and uncontrolled. The amount to be paid as compensation to the managers was definitely fixed by agreement contained in the plan and compensation for the services of the committees was to be fixed by the managers unless the plan should be abandoned, in which event none was to receive any compensation. Payment to other persons for services was to be made whether the plan should be carried through or abandoned. In respect of the remainder of the $4 fund, namely $2.50 per share, the effect of the plan was to require that after satisfying such expenses as costs of foreclosure, court allowances, engraving of securities for the new company, charges of corporate trustees, etc., any balance remaining should be paid over to the new company.

An application was made to the commission for a certificate of public convenience and necessity under the appropriate provisions of the Transportation Act, 1920, and for an order under § 20a of that act (c. 91, § 439, 41 Stat. 494; U. S. C., Tit. 49, § 20a) authorizing and approving the issue of securities in accordance with the reorganization plan. Section 20a of the act among other things provides:

"(2) . . . It shall be unlawful for any carrier to issue any share of capital stock or any bond or other evidence of interest in or indebtedness of the carrier (hereinafter in this section collectively termed 'securities') or to assume any obligation or liability as lessor, lessee, guarantor, indorser, surety, or otherwise, in respect of the securities of any other person, natural or artificial, even

[ 282 U.S. Page 321]

     though permitted by the authority creating the carrier corporation, unless and until, and then only to the extent that, upon application by the carrier, and after investigation by the Commission of the purposes and uses of the proposed issue and the proceeds thereof, or of the proposed assumption of obligation or liability in respect of the securities of any other person, natural or artificial, the Commission by order authorizes such issue or assumption. The Commission shall make such order only if it finds that such issue or assumption: (a) is for some lawful object within its corporate purposes, and compatible with the public interest, which is necessary or appropriate for or consistent with the proper performance by the carrier of service to the public as a common carrier, and which will not impair its ability to perform that service, and (b) is reasonably necessary and appropriate for such purpose.

"(3) The Commission shall have power by its order to grant or deny the application as made, or to grant it in part and deny it in part, or to grant it with such modifications and upon such terms and conditions as the Commission may deem necessary or appropriate in the premises, and may from time to time, for good cause shown, make such supplemental orders in the premises as it may deem necessary or appropriate, and may by any such supplemental order modify the provisions of any previous order as to the particular purposes, uses, and extent to which, or the conditions under which, any securities so theretofore authorized or the proceeds thereof may be applied, subject always to the requirements of the foregoing paragraph (2).

"(11) Any security issued or any obligation or liability assumed by a carrier, for which under the provisions of this section the authorization of the Commission is required,

[ 282 U.S. Page 322]

     shall be void, if issued or assumed without such authorization therefor having first been obtained, or if issued or assumed contrary to any term or condition of such order of authorization as modified by any order supplemental thereto entered prior to such issuance or assumption; . . ."

The commission, after a hearing, certified that public convenience and necessity required the acquisition and operation by the new company of the lines of railroad theretofore owned by the Chicago, Milwaukee and St. Paul Railway Company, and entered an order that the new company be authorized to issue the securities which were described in the report and order of the commission, "Provided, however, . . . that the applicant . . . (b) shall impound in a separate fund the money received from the payment by holders of preferred and common stock in an amount equal to $4 a share, which shall not be paid out unless and until so authorized by order of the court in respect to payments subject to the court's jurisdiction or by this commission."

The present suit was brought to have the foregoing clause (b) of the proviso declared beyond the lawful authority of the commission and void, and perpetually to enjoin appellants from enforcing the order of the commission in that respect. In addition to the facts hereinbefore set forth, and others, it was alleged in the petition that the commission and the United States had threatened to institute criminal or civil proceedings against appellee, in accordance with applicable provisions of the Interstate Commerce Act, for violation of the condition imposed by clause (b) of the proviso. Appellants answered separately, admitting all the material allegations of the petition pertinent to the question now under review; and separately moved to dismiss the petition on the ground that the court was without jurisdiction to set aside that part of the order which was assailed. After

[ 282 U.S. Page 323]

     argument the court below entered a decree denying the motions to dismiss and perpetually setting aside, suspending and annulling, and perpetually enjoining the enforcement of, or attempt to enforce, the condition (b) imposed by the proviso, so far as it here is in question; that is to say, such part thereof as required appellee to obtain the special fund of $1.50 per share and impound the same, and which prohibited the making of any payment out of that fund without a prior determination by the commission in respect thereof.

The court below was of opinion that the proviso should be so construed as to include only the $2.50 part of the fund and exclude the special fund of $1.50 per share from its operation; otherwise that the condition in respect of the latter was void. The court further held that the case made by the petition was within the jurisdiction transferred to the district courts from the Commerce Court by c. 32, 38 Stat. 219, namely, jurisdiction over "Cases brought to enjoin, set aside, annul, or suspend in whole or in part any order of the Interstate Commerce Commission." c. 309, 36 Stat. 539. 33 F.2d 582.

We do not stop to discuss the holding of the court below in respect of the construction of the proviso further than to say that, contrary to the view of that court though plausibly stated, we have reached the conclusion that the terms of the proviso embrace, and were meant to embrace, the entire fund of $4 per share, including the special fund of $1.50. Thus construed, two questions remain for consideration: (1) Was it within the power of the commission to impose the condition so far as it included the special fund? (2) Was that condition such a part of the commission's order as to cause it to fall within the jurisdiction conferred by the language last quoted above?

First. The legality of the acquisition and operation by the new company of the lines of railroad theretofore owned by the old company is not now in question. The

[ 282 U.S. Page 324]

     requisite certificate of public convenience and necessity was issued by the commission. The order of the commission authorizing the new company to issue securities was made after a finding of all the facts required by the act as a necessary basis therefor. By subdivision (3) of § 20a the commission is empowered to make its grant of authority to issue securities upon such conditions as the commission may deem necessary or appropriate in the premises. The power to impose such conditions, however, is not unlimited and may not be exercised arbitrarily or (since Congress cannot delegate any part of its legislative power except under the limitation of a prescribed standard, Union Bridge Co. v. United States, 204 U.S. 364, 384-385) unless there be found substantial warrant for the conditions in the applicable standards established by the provisions of the act relating to such securities. The powers possessed by the commission are delegated by Congress under, and are to be exercised in conformity with, the constitutional grant of authority to regulate interstate and foreign commerce. Proceeding under that grant, as applied to the present matter, neither the commission nor Congress itself may take any action which lies outside the realm of interstate commerce. Hammer v. Dagenhart, 247 U.S. 251. It follows that if the condition in question relates not to such commerce, or to the rights or duties of the carrier engaged in such commerce, but exclusively to extrinsic matters, it is imposed without authority of law.

In the light of the foregoing, we examine the provision of the reorganization plan in respect of the special fund of $1.50 per share. That provision embodies a contract between the committees (voluntarily created by private persons), the managers, and such stockholders as shall elect to become depositors under the plan and shall advance, with other monies for other purposes, the specified sum for the distinct and sole purpose of paying the managers

[ 282 U.S. Page 325]

     and others for services rendered in behalf of and for the exclusive benefit of these depositors. Neither the old company nor the new one was a party or was privy to this contract. Neither the contract when made nor any of the parties to it, in respect of the contract, was subject to the jurisdiction of the commission. It was not contemplated by any of the parties, by the new company, or by the court which held the plan to be valid, that the new company should have any enforceable interest in this special fund. Indeed, by contract between the new company, the managers and the purchasers at the sale, it was expressly agreed that the remainder of all cash received by the managers under the reorganization plan should be paid over to the new company, except the special fund of $1.50 per share of the old company's stock, "which, as provided in the reorganization plan, is to be set aside to provide for the compensation of the managers and the committees, fixed as therein provided, and the fees and disbursements of their counsel and of all depositaries and subdepositaries." And, correlatively, the new company agreed to pay all other expenses incurred by the managers except such as were to be paid out of this special fund. These agreements of the interested parties lend emphasis to the conclusion that the services to be rendered and expenses to be incurred in formulating and bringing about an approval of the plan were to be paid for out of the special fund as matters in which the private parties alone were concerned.

If the security holders, instead of agreeing to the provision for a special fund incorporated in the body of the reorganization plan, had bound themselves by a separate contract to compensate the managers and others for their services in behalf of the security holders, and had placed a sum of money in the hands of a trustee to secure payment of the ...

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