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Coriell v. Morris White, Inc., 1931, C. C. A. 2d, 54 Fed. 2d, 555, 560. Reversed on other grounds, National Surety Co. v. Coriell, 1933, 289 U. S. 426.

Gilfillan v. Union Canal Co., 1883, 109 U. S. 401.

To be sure, where a company has become financially embarrassed to the point that it is insolvent and is unable to meet its maturing obligations, the rights of the various creditors and security holders cannot be satisfied in full according to their terms. Consequently in the exercise of the specific power to “establish uniform laws on the subject of bankruptcies

*" (Constitution I, sec. 8, par. 5), Congress may provide that a reorganization plan accepted by a majority of the creditors and security holders of each class may be binding upon the minority members. Campbell v. Alleghany Corporation (Mar. 2, 1935, C. C. A. 4th, not yet reported); Continental Illinois National Bank & Truse Co. v. C. R. 1. & P. Ry. Co. (Apr. 1, 1935, S. Ct. U. S., not yet reported). But it is perfectly certain that the bankruptcy power cannot be exercised with respect to solvent companies that are able to meet their maturing obligations. The very meaning of the word "bankrupt” is a person who is incapable of paying his debts (Kunzler y. Kohaus, N. Y., 5 Hill 317, 320), and the bankruptcy power relates solely to "a law-making provisions for cases of persons failing to pay their debts.” (In re Reiman, 1874, D. Ct. N. Y., 20 Fed. Cas. 490.)

The bankruptcy power therefore has no bearing whatever on the question of what action Congress may authorize with respect to the reorganization of solvent companies. That question must be decided solely on the basis of the commerce clause as limited by other provisions of the Constitution. There is no judicial precedent for the view that the rights of a creditor to be paid can be destroyed or impaired where the debtor corporation is still solvent.

The recent decision of the Supreme Court in the so-called "Gold Clause cases"notably, Norman v. Baltimore & Ohio Railroad Company ((1935), 79 L. Ed. 417), did not change these accepted principles of the guaranties of the due process clause. The Court in that case devoted a major part of its discussion to the question whether the joint resolution there involved was or was not a violation of the due process clause, and defined its authority under that clause by saying with respect to the action of the Congress (429):

We may inquire whether its action is arbitrary or capricious, that is, whether it has a reasonable relation to a legitimate end."

The power of Congress there involved was the specific constitutional power to coin money and regulate the value thereof (Constitution, art. I, sec. 8) and it was held that the gold clause in private contracts was a direct interference with the exercise of this power. The decision was reached on the ground that "it is not established that the Congress arbitrarily or capriciously decided that such an interference existed", or that the provisions of the joint resolution there in question were

without any reasonable relation to the monetary policy adopted by the Congress” (pp. 432, 430).

The decision in that case disposed of an issue which had been thrown into high dramatic relief by the concern of the security markets, and for that reason has received a great deal of attention. The application of the relevant principles of law had been considered to be doubtful. But the principle which was announced by the Court and under which the decision proceeded has been an accepted principle for many years. The statement of the meaning of the due process clause made by the Court in that case is the same that had been announced in many previous decisions, and it still remains the province and the duty of the courts to inquire whether a particular action of Congress or its agencies has a reasonable relation to a legitimate end, that is, a real and substantial relation to one of the specific enumerated powers of Congress.

As has been said above, the disposition of securities consequent upon the disintegration of a holding company, and the division among the various classes of security holders of the securities or the proceeds from their sale, has in fact no relation to the accomplishment of the Federal purpose of compelling a disintegiation to be made. The Federal purpose is satisfied by the disintegration itself and does not reach beyond to the subsequent division of proceeds and new securities among the old security holders, even if we are to assume that the Federal Government has authority to prevent the issuance of new securities which would con. stitute an improper burden on the operating companies. The prescription and effectuation of a reorganization plan cannot have any reasonable or substantial relation to the accomplishment of the Federal purpose, which is solely to require that disintegration be effected. The decision in the Gold Clause cases therefore supports the view that such action on the part of the Congress or its agencies would be beyond the power of the Congress under the due-process clause.

It is certain, of course, that in the event of compulsory dissolution or reorganization of corporations representing such an enormous investment as the holding companies now under consideration, the legal questions presented by whatever legislation may be finally adopted will be thoroughly explored by the courts. Therefore, even if it could be supposed that the major constitutional difficulties discussed above can finally be overcome, it is clear that compulsory and directed reorganization of the holding companies' affords no real and practical means of relief from the hardships and losses to security holders which would result from the dissolutions decreed by the bill. Long before any such remedies could be effectuated a large portion of the junior security holders would have suffered the complete loss of their investments in the turmoil and demoralization due to endless litigation.

The preceding discussion has been entirely on the assumption that Congress has power to require the disintegration of holding companies. The fundamental question as to whether the Congress really has that power, however, is beyond the scope of this memorandum which is devoted to the Constitutional limitations upon the manner of the exercise of such power, assuming the power to exist.

4. THE ANTITRUST DECISIONS The final argument advanced by the proponents of the bill in this connection is that in the antitrust cases disintegration was effected without any great delay or expense or destruction of values. A very brief examination of that argument will show that it is not sound.

There are a number of decisions under the Sherman and Clayton Acts, but a discussion of all those cases would serve no useful purpose here, as only four of them have been claimed to have significance in this connection.

These are: Northern Securities Co. v. United States (1904, 193 U. S. 197), see also Harriman v. Northern Securities Co. (1905, 197 U. Š. 244); Standard Oil Co. v. United States (1910, 221 U. S. 1, 397); United States v. American Tobacco Co. (1910, 221 U. S. 106); United States v. Reading Company (1920, 253 U. S. 26), see also Continental Insurance Co. v. United States (1922, 259 U. S. 156).

The Northern Securities Co. case and the Standard Oil Co. case do not throw any light on the present problem because they did not involve any such complicated state of facts as to make them a fair precedent in this connection. In neither case were any bonds outstanding or any preferred stock. In both cases there was only one class of security outstanding, a single issue of common stock. The problem of distribution was therefore simply the mechanical problem of dividing the company's portfolio of securities into as many parts as there were stockholders to claim it.

In both cases, moreover, it is a conspicuous fact that the Court permitted the company, in agreement with its security holders, to work out its own plan of reorganization. The Court was interested only in seeing that the plan of disintegration was sufficient to terminate the violation of the Sherman Act. Aside from that one object, the matter was left to the security holders and the company to dispose of by customary methods in accordance with their rights.

It is true that the American Tobacco Co. case involved a capitalization on the part of the American Tobacco Co. which was analogous to that of some of the holding companies here involved. It is true, moreover, that in that case a disintegration of the company in accordance with the mandate of the Court was effected. But the proponents of the bill do not present a clear picture of that case when they say that this disintegration was effected without difficulty or destruction of value. On the contrary, it appears that the Supreme Court was gravely impressed with the intricacy of the problem and the practical difficulties presented. These were greater, the Court said, than had been presented by any case involving the antitrust law which had theretofore been considered by it (221 U.S. at 185). The corporate situation was so complicated, the Court added, "that it is difficult, if not impossible, to formulate a remedy which would restore in their entirety the prior lawful conditions" (id., p. 186). These difficulties were so imposing that the United States, in its prayer for relief, did not specifically demand any precise remedy, but merely suggested, in a tentative way, that such remedies should be granted. The loss incurred in working out the plan of reorganization in this case was enormous, in relation to the amounts of securities involved. It was said to amount to at least $22,000,000, in addition to more than $36,000,000 in cash that had to be raised and paid by the common-stock holders in order to discharge the company's bonds (191 Fed. at p. 397). When this sum is compared with the total par value of the common stock, which' was $40,000,000, the extent of the -sacrifice imposed upon the common-stock holders becomes evident.


It may be noted that in this case again the courts left the problem of working out a suitable plan of reorganization to the company and its security holders for negotiation and agreement between them. Moreover, the Supreme Court was extremely reluctant to order the appointment of a receiver in order to effectuate a disintegration of the company, as is proposed to be done by the bill now under consideration, except as a last resort, recognizing that such an appointment would

cause widespread and perhaps irreparable loss to many innocent people" (221 U. S. 187). The trial court was even stronger in its language concerning the appointment of a receiver, saying that it was impossible to forecast the disaster which would follow such a step. It would wreck a flourishing business upon which an army of employees are depending for a livelihood; it would unsettle trade and it would punish with equal severity the innocent and the guilty” (191 Fed. 371, 385).

Somewhat the same considerations apply to the Reading case. Here, likewise, a complicated capital structure was involved. Here, likewise, the plan was developed by the company in agreement with its security holders. In order to accomplish the separation of the properties involved, å mortgage secured by those properties (railway properties and coal properties, the single ownership of which was held to be in violation of law) was split, and new bonds were issued in place of the outstanding bonds. But under the judicial mandate to separate the properties, the terms of the new issue and the securities involved in it were accepted by all of the bondholders without any dissent, and accordingly no question of the power of Congress to prescribe and compel the adoption of a plan of reorganization was presented.

The facility of disintegration in this case which the proponents of the bill have suggested is not borne out by a consideration of the case. In the first place, it may be noted that as a practical step in the accomplishment of this disintegration, it was necessary to create a new holding company to hold the shares of stock in the Philadelphia & Reading Coal & Iron Co. and this new company has continued in existence to the present time.

In the second place, the time consumed in litigation over the disintegration of the Reading Co. provides a solemn warning against any plan which would impose such measures on an entire industry whose vigorous functioning and growth are essential to the Nation's welfare. The bill asking a disintegration of the Reading Co. was filed by the United States in 1913. The final decree of the Supreme Court on this aspect of the case was not handed down until April 26, 1920 (253 U, S. 26). The decree governing the procedure of dissolution was not entered until the latter part of June 1921 (271 Fed. 848, 854), and on account of an appeal from this decree taken by certain interests to the Supreme Court (259 U. S. 156), a final decree was not entered by the trial court until June, 1923. Even at the present time the case is still on the docket of the district court.

It is of particular interest to note that one of the important provisions of the decree of June 1921 directed a transfer of the shares of stock in the Central Railroad Co. of New Jersey to trustees for ultimate disposition by sale. The shares remained in the hands of these trustees until 1933, and at that time were reconveyed to the Reading Co., under a decree of the court which originally appointed the trustees, after the authority of the Interstate Commerce Commission had been obtained. One of the most conspicuous facts about the decision, accordingly, is that over 15 years were occupied by the effort to accomplish the disintegration and that ultimately it was decreed that segregation should not be continued because it was detrimental to the public interest.

Even if it be admitted, therefore, that the American Tobacco Co. case and the Reading Co. case may fairly be compared to the corporate situation presented by many of the holding companies now under consideration, the history of those cases constitutes an instructive example of the great delays, difficulties and losses that will be involved in any program of dissolution. The references made by the proponents of the bill to the anti-trust litigation present no judicial or financial experience which would warrant this committee in supposing that the provisions of the bill could be carried into effect without that great destrue. tion of value, expense, delay and confusion which the utility companies have sought respectfully to present to the committee's consideration. Respectfully submitted.


Philip H. GADSDEN, Chairman. APRIL 25, 1935.



Most gas sold for industrial use.- -The 24 billion dollar natural-gas industry which sells 75 percent of its product for fuel to industries and only 25 percent as a utility, and which is as much or more closely allied with the oil and carbonblack industries as it is with the electric industry, finds itself by force of circumstances vitally involved in the Public-Utility Holding Company Act of 1935 (title I—the first 78 pages-of S. 1725), the policy of which act is defined in section 2 (c) as follows:

Policy of the bill.—“It is hereby declared to be the policy of this act, in accordance with which policy all the provisions of this act shall be interpreted, to meet the problems and eliminate the evils connected with the public-utility holding company as enumerated in this section; and for the purpose of effectuating such policy to compel the simplification of public-utility holding-company systems and the elimination therefrom of properties not economically and geographically related in operations, and to provide at the end of 5 years for the abolition of the public-utility holding company.(Italics ours.)

Bill would include many companies not within stated policy. Since the term "holding company" as defined in the act (2a7) includes any company which controls a company engaged in whole or in part in the natural-gas business (that is, one which owns or operates facilities for the production, transportation, or distribution of, and which transports, distributes, or sells, natural gas), the oil companies and the carbon-black companies (among other industrial companies) find themselves here denominated as "public-utility holding companies” the same as the electric-utility holding companies which have subsidiaries engaged in natural gas. or electric operations.

The provisions of the act apply to all such operating companies as well as to such holding companies, and appear to have been drafted upon the assumption that the fundamental characteristics of the natural gas business are essentially the same as those of the electric business.

Fundamental characteristics of electric and gas business differ.-Since this assumption is erroneous and, as a consequence of the enactment of this bill, would lead to disastrous results-even greater than those which would befall' the electric industry--it becomes necessary, at the outset of this brief, to picture the historical background and the development and operation of the natural gas industry in such detail as may suffice to distinguish its fundamental characteristics from those of the electric industry and of the public utility industry generally.

The need for such an exposition becomes increasingly apparent when one notes the following important facts with respect to the background of the Public Utility Holding Company Act of 1935—title I now under discussion:






Origin of bill.-Mr. Thomas G. Corcoran, a proponent for title I, in addressing the Committee on Interstate Commerce at the hearing held on the 18th instant made the following statements:

“Title I relating to holding companies, was drawn at the instance of the National Power Policy Committee * Colonel Chantland, who testified before you yesterday, counsel for the Federal Trade Commission, spent approximately 7 years investigating the ramifications of the public utility industry, which really means the holding company situation.

Last fall the President appointed a committee, an interdepartmental committee, composed of those persons in each department of the Government concerned with the power problem who knew the most about the problem, to consider what should be done in the way of definite recommendations to Congress on the holding company problem as a result of all those investigations." (Italics ours.)

Personnel of drafting committee.-Mr. Corcoran characterized the membership. of this interdepartmental drafting committee as follows:

There is Mr. Ickes, the Secretary of the Interior; Mr. McNinch the Chairman of the Federal Power Commission; Mr. Mead of the Reclamation Bureau; Mr. Norcross of the Forest Service; Mr. Morris L. Cooke, who has for many years been a consulting engineer in the electrical field; Mr. Healy, formerly a member of the Federal Trade Commission, who initiated and conducted the most of the investigations and about which Colonel Chantland testified before you yester



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day, is now a member of the Securities and Exchange Commission; Mr. Lilienthal, to whom has been peculiarly committed power problems, of the Tennessee Valley Authority; and Mr. Markham, Chief of Army Engineers.” (Italics ours.)

Policy of committee.-Mr. Corcoran further stated: “This bill was drafted and then submitted to the National Power Policy Committee. It was in process of drafting nearly 5 months. It has been probably prayed over as much as any bill that has been brought up to Congress in a long time.

After all that checking and cross-checking the bill was introduced in both the Senate and the House in substantially identical form. Now, when the National Power Policy Committee went into this holding-company situation it started with the fundamental and underlying operating industry, which as Commissioner Splawn testified before you on Tuesday, was fundamentally the local industry. It starts as a legal monopoly, relieved from the check of competition by reason of special grant of the local government. There retically or not theoretically but practically, a tremendous amount of the confidence which the public has in public-utility securities is based upon the supposition that local regulation, justified by the fact of that monopoly, protects the industry so that it will be a stable industry, with stable earnings and stable management. We also faced the fact that from the scientific point of view, as Commissioner Splawn pointed out to you on Tuesday, there is no reason why it should be organized on anything more than a local scale. As he testified, at the present time the feasible limit of transmission of power over a high line is about 300 miles, and there have been, recently, improvements in Diesel generating equipment that makes it very doubtful whether it is economical or is going to be economical in the future, to use a high line even for such distances.” (Italics ours.)

BECOND The Federal Trade Commission (referred to above) was instructed and directed by the Committee on Interstate Commerce in 1928, through the Walsh resolution adopted by the Senate, to make an investigation and report upon the gas industry as well as the electric industry, and to recommend "what legislation. if any, should be enacted by Congress to correct any abuses that may exist in the organization or operation of such holding companies.".

Investigation of gas industry by Federal Trade Commission not yet made.- After 8 years of investigation the Federal Trade Commission, under date January 26, 1935, submitted to the Senate its concluding chapter (chap. XIV—“Conclusions and Recommendations") from which it is clear that the recommendations made were based largely upon its investigation of the electric industry and were intended to apply principally to legislation affecting the electric industry. The following is quoted from that report:

While all of the more important holding company groups have been examined, there still remain a few in the electric field which will be examined during the er. tension of time directed by the last Congress and will be reported on subsequently. However, the investigation into natural-gas holding companies, and especially of the natural-gas pipe-line companies, will be the chief task during the coming year and will be reported on at the close of the investigation.” (Italics ours.)


* Federal Trade Commission attorney states Commission not ready to make recommendations.-Col. William T. Chantland, attorney for the Federal Trade Commission (referred to above), in his appearance before the Committee on Interstate Commerce on the 17th instant as one of the proponents for the bill, directed his remarks particularly to the electric industry. While he made some casual references to the natural-gas industry, he also made the following significant statement:

“Now, I do not think I should take up any more of your time unless you would like for me to say something about the natural-gas situation. I might say a few words about that, because while you do not have title III in your bill, I think you should be advised of the gas situation because it already presents a feeling for Federal legislation. The Commission makes only a very brief recommendation in its conclusions for the obvious reason that we are in the middle of the study of that subject.(Italics ours.)

No information before committee on regulation of gas industry.In point of fact, the record made before the Committee on Interstate Commerce in the hearings on S. 1725, taking the testimony of the proponents as a whole, discloses scant information with reference to the natural-gas industry and no showing whatever as to the problems of regulation. Attention is respectfully directed to the following points in particular:

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