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decided: February 7, 1949.



Vinson, Black, Reed, Frankfurter, Douglas, Murphy, Jackson, Rutledge, Burton

Author: VINSON

[ 336 U.S. Page 134]

 MR. CHIEF JUSTICE VINSON delivered the opinion of the Court.

The Central of Georgia Railway Company, whose Trustee is the petitioner here, and its predecessor have leased and operated the property of the South Western Railroad Company since 1869. The Central went into receivership in 1932, and in 1940 entered reorganization under § 77 of the Bankruptcy Act. 49 Stat. 911, 11 U. S. C. § 205. South Western's lease was adopted successively by Central's Receiver and Trustees. It has, in consequence, remained solvent, and no petition for reorganization has ever been filed in its behalf.

Under the plan of reorganization of the Central approved by the Interstate Commerce Commission and by the district court, South Western is given the alternative of selling its property to the reorganized company in return for a fixed amount of bonds of the latter, or of having the lease disaffirmed by the debtor and its property returned.*fn1 South Western appeared specially

[ 336 U.S. Page 135]

     in the reorganization proceedings and asked that its lease be adopted by the reorganized company, but on the basis of studies and estimates not now open to challenge, the Commission rejected the proposal and found that the amount offered for its properties appears "fair and equitable and to equal the value of the transportation property, and [is] approved."*fn2

Following Commission and court approval of the plan, South Western's officers, reversing their previous stand, urged acceptance of the offer by its stockholders and signified their intention of conveying the company's property to the Central if a majority of the stockholders voted to accept. Thereupon the respondents, who are individual stockholders of South Western, brought an action in the Superior Court of Bibb County, Georgia, where South Western's principal office is located, asking for an injunction against South Western, its officers and directors, restraining them from certifying the company's acceptance of the offer to the Interstate Commerce Commission or from selling the railroad's property to the reorganized debtor if, upon a vote of the stockholders, a "mere majority" of the stock was voted in favor of the plan. The basis of the petition for injunction was the contention that under the laws of Georgia, where South Western was incorporated,

[ 336 U.S. Page 136]

     the entire assets of the company cannot be sold except upon unanimous approval of the stockholders.

Before a decision was reached in the state court action, a meeting of South Western's stockholders was held at which the offer of purchase incorporated in the Central's plan of reorganization was considered. 30,137 shares were voted in favor of acceptance against 9,057 shares favoring rejection. Petitioner, acting as Trustee of the Central, which was not a party to the state court suit, then filed a petition in the bankruptcy court asking that respondents and other stockholders of South Western be enjoined from further prosecution of the state court action, and a temporary restraining order was entered as prayed. Thereupon the state court, of its own motion, entered an interlocutory injunction restraining the officers and directors of South Western from selling its property, on the ground that such a sale under Georgia law requires unanimous consent of the stockholders. Petitioner then amended his petition in the bankruptcy court by bringing to its attention the injunctive order of the state court, and, after holding hearings, the federal district court granted a permanent injunction restraining further prosecution of the state action and declared the state court's temporary injunction null and void as in excess of its jurisdiction. Upon appeal, the Court of Appeals for the Fifth Circuit, one judge dissenting, reversed the order of the district court. 165 F.2d 877. We granted the petition for a writ of certiorari*fn3 because of the conflict between state and federal authority and the importance of the question in the administration of the Bankruptcy Act.

First. The district court's injunction was based primarily on the premise that the plan of reorganization requires the inclusion of South Western's lines within the

[ 336 U.S. Page 137]

     system of the reorganized company. The state action is said to be an attempt on the part of respondents "to prevent the consummation of the plan as respects South Western." Again, the court held that "the question of the consolidation, merger and sale, and under what conditions South Western may convey its property to the reorganized Company, in consummation of the plan, is not a question of State law; it is a question of Bankruptcy law -- a question which arises under the Bankruptcy Act and the Interstate Commerce Act." The court's conclusion was, therefore, that although the question whether a Georgia railroad corporation can convey all of its properties without unanimous consent of its stockholders would ordinarily be one of state law cognizable in the state's courts, under these circumstances the decision was one for the bankruptcy court applying federal law.

We do not agree. The language of the plan and the factors which the Commission took into consideration in arriving at the amount offered South Western for its properties indicate clearly that, so far as the reorganization plan contemplates acquisition of the lessor railroad, the ordinary rules of offer and acceptance were intended to apply. That has invariably been the practice. As a consequence, we have held that the amount which may be offered a lessor is a question of "business judgment"; that "if the Commission deems it desirable to keep the leased line in the system, it must necessarily have rather broad discretion in providing modifications of the lease where, as here, the lessor is not being reorganized along with the debtor. For under that assumption the modification must be sufficiently attractive to insure acceptance by the lessor or its creditors." Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., 318 U.S. 523, 550 (1943). The plan itself recites that the leased lines are to be acquired only "if they can be acquired on the

[ 336 U.S. Page 138]

     terms hereinafter set forth."*fn4 Otherwise, the lease is to be disaffirmed and the property returned to the lessor. In addition, the record is replete with statements by the Commission, the court, and the parties that South Western's stockholders are to have the choice open to any offeree: an unfettered right to accept or reject.*fn5

Under these circumstances, we can see no reason why the ordinary incidents of a sale of the assets of a corporation should not be applicable. One of the most important of these is, of course, the question of the proportion of a corporation's stock which must be voted in favor of accepting the offer of purchase in order to make its acceptance effective. Since, as the district court held, this would ordinarily be a question of Georgia law, we believe that substitution of any other rule of law is erroneous.*fn6

[ 336 U.S. Page 139]

     Not the least of the difficulties with a contrary result is the fact that the Bankruptcy Act gives no clue to what proportion of the lessor's stockholders must vote to accept the offer if state law is not controlling. Section 77 (e) provides that confirmation of a plan requires acceptance by creditors holding two-thirds in amount of the total allowed claims of each class voting on the plan, but that the judge may confirm the plan in any event "if he is satisfied and finds, after hearing, that it makes adequate provision for fair and equitable treatment for the interests or claims of those rejecting it." But neither the two-thirds vote provision nor the so-called "cram-down" provision applies to a lessor not in reorganization or its stockholders. They apply to "creditors of each class whose claims have been filed and allowed in accordance with the requirements of subsection (c) of this section," which obviously does not include a lessor-offeree.*fn7 And, although South Western is a "creditor" under the specific terms of § 77 (b), its stockholders, individually, are not.

The district court sought to find a federal rule permitting acceptance by a simple majority vote of the shareholders in the provisions of § 5 (11) of the Interstate Commerce Act.*fn8 But that section relates to voluntary mergers,

[ 336 U.S. Page 140]

     not to the purchase of a leased line as part of a plan of reorganization. The Commission can undoubtedly carry on § 5 proceedings simultaneously with § 77 reorganization proceedings, see United States v. Lowden, 308 U.S. 225 (1939), but that procedure was not followed in this case. The Commission preferred, instead, to carry out the consolidation under the authority of § 77 (b) (5) of the Bankruptcy Act, which provides that the plan of reorganization may include "the merger or consolidation of the debtor with another corporation or corporations." That power flows from a different source than the power over consolidations under the Interstate Commerce Act. While some of the findings required of the Commission under the two Acts are similar, and § 77 (f) provides that consolidation and merger of the debtor's property shall not be inconsistent with the provisions and purposes of chapter 1 of the Interstate Commerce Act, their procedural and jurisdictional requirements do not overlap.*fn9 It may be noted, in addition, that § 5 (11) contains a proviso that the majority ...

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