Railroad Reorganization

by Stuart Daggett

The directors’ own scheme was dated May 1, 1893. It provided for a collateral five-year 6 per cent mortgage to the amount of $15,000,000, of which $12,000,000 were to be issued at once. There was to be a committee of five which should take charge of the issue, and which might sell the collateral before the maturity of the notes at certain minimum prices or over. Until all the notes should have been paid the railroad company agreed not to undertake the construction of any new lines without the consent of the committee, or to purchase or lease any railroad or navigation lines, or to guarantee, endorse, or purchase the bonds or other obligations or stocks of other companies. The committee was to have the voting power on the underlying stocks, and might direct the trust company to waive any default of the railroad company in payment of interest. The railroad company might call in the notes before maturity, after May 1, 1896, and pay them off at par and accrued interest.[592] This, it will be seen, did not differ in essence from the scheme proposed by Mr. Ives:—the real contest was between parties and not between plans. In June, Mr. Villard resigned his position as director and chairman of the board, and J. D. Rockefeller was elected a director. Somewhat earlier, but doubtless in anticipation of this action, a syndicate agreed to underwrite the collateral issue, subject to the stockholders’ right of subscription;[593] and by the end of the year $10,275,000 of the collateral notes were outstanding, of which the bulk had been taken by the syndicate.[594] The whole device was very similar to that employed by the Union Pacific in 1891. It was not designed as a permanent remedy for anything, but served to postpone a reckoning to what was hoped would be better times. As a matter of fact its effect was very small.

Receivers for the Northern Pacific Railroad Company were appointed August 15, 1893, on a petition alleging that the company was insolvent and had no funds to meet payments coming due on September 1, October 1, November 1, and December 1. The company in its answer admitted the facts, and the United States Circuit Court at Milwaukee, Wisconsin, put Messrs. Henry C. Payne, Thomas F. Oakes, and Henry C. Rouse in charge of its affairs.[595] Receivers were rapidly appointed for most of the branch lines, the intent being to put all these properties in separate hands.[596] The receivers of the main line had nothing to do with the branches, although in November they were authorized to enter into temporary traffic agreements with them. In regard to the Wisconsin Central, application was early made to compel the Northern Pacific to carry out the provisions of the lease; but Judge Jenkins of the Milwaukee court granted the receivers until September 15 to decide whether or not they desired to continue, and upon their negative reply authorized a surrender. The accounts submitted, he said, showed that since the lease had gone into effect the Chicago & Northern Pacific had been operated at a loss to the Northern Pacific of $1,304,169 and the Wisconsin Central at a loss of $1,142,316; although business during the three years in question had been generally prosperous. In accordance with the decision the property was turned over to the Wisconsin Company on September 26, 1893, and the Northern Pacific for a time gave up the idea of a Chicago terminus. Of the other leases those of the St. Paul & Northern Pacific and of the Cœur d’Alene Railway & Navigation Company were at this time approved by the court, and the receivers were authorized to make the necessary payments.

The failure of the Northern Pacific was the signal for still more active and bitter personal struggles between opposing factions than had before occurred. The opposition, led by Brayton Ives and August Belmont, endeavored to get control of the company through the annual election on October 19, and to procure the removal of the appointed receivers. They displayed the greatest bitterness toward Mr. Villard, and held him responsible for the position in which the company was placed. Villard’s “remarkable qualities,” wrote Ives, “have been of advantage only to himself.... The syndicate composed of Villard, Colby, Abbott, and Hoyt, and their friends made millions [by the Wisconsin Central deal] and the Northern Pacific has suffered and is suffering a corresponding loss.”[597] Circulars were sent out asking proxies, and August Belmont, J. Horace Harding, Brayton Ives, Donald Mackay, and Winthrop Smith were appointed a committee to receive proxies as they came in. On the other side the directors appealed to the stockholders, reminded them that though the company had failed while they were in office it was also during their term that it had reached its greatest prosperity, and took the cautious step of amending the by-laws so as to shorten the term of future boards from three years to one. Conditions were against the management, and the result of the election was a complete victory for the Belmont-Ives party, which was followed up by the choice of Mr. Ives for president. The real results were less than might be supposed, for the operation of the railroad and the control of its funds were to be in the hands of the receivers and not in those of the officers of the road. On January 20 President Ives filed a petition in the Milwaukee Federal Court for an order directing the receivers to surrender the seal, books and papers and stock certificates, and to pay over sufficient money to enable the president to rent rooms and pay the salaries of the auditor, secretary, and treasurer.[598] The petition was denied, and the elected officers were left in an anomalous position.

In other matters the opposition lost no time in appealing to the courts. Previous even to the election two actions had been begun against Henry Villard: the one in September by John Swope of Philadelphia to compel Henry Villard and others to restore stock and bonds obtained as a result of an illegal conspiracy:[599] the other a petition in October by the Northern Pacific Company to force the receivers to bring suit against Messrs. Villard, Hoyt, and Colby to recover nearly $2,600,000 alleged to have been made unlawfully through Northern Pacific deals.[600] The complaints were in the main the same as those which had been made by the investigating committee, and charged, inter alia, that Villard had secured a profit to himself by bringing about the purchase of the Chicago terminal properties by the Northern Pacific. Mr. Villard swore that his whole interest in the transaction had been as officer and stockholder and securityholder of the Northern Pacific Company,[601] and the receivers professed themselves ready and willing to bring suit, provided they were furnished with the information and evidence wherewith to prosecute the same.[602] The Court reserved the Ives motion for further consideration, and the following year directed the receivers to bring suit; but the litigation was eventually dropped.[603]

In December, 1893, the Ives faction filed a petition for the removal of the receivers. The charges were in part similar to those of the Swope suit. It was asserted that at the time the receivers were appointed the road had practically had no hearing; that its managers had in less than a year burdened it with the interest of $60,000,000 for properties which were of no value to it, but in many of which they were personally interested and out of which they made large profits, and that when insolvency was produced by this fraud they had put the road in the hands of receivers nominated by them for the purpose, with the effect of perpetuating the same control which had brought the bankruptcy. Specific charges were made against Oakes, Villard, and Roswell C. Rolston, president of the Farmers’ Loan & Trust Company; no charges were made against Receivers Payne and Rouse, but their removal was asked for because they happened to be in the company of and presumably in the interest of Mr. Oakes. Besides this, finally, it was alleged that separate receivers had been unnecessarily appointed for branch lines, and that the expense of administering the affairs of the company had been enormously increased.[604] The receivers filed lengthy answers on February 3; Receiver Oakes in particular answering every charge specifically, filing exhaustive documents in proof, and maintaining in general the value of the branch properties and his innocence of unlawful profits.[605] The court on the whole inclined to his view. On April 14 Judge Jenkins handed down his decision, dismissing the petition for the removal of Messrs. Payne and Rouse, and holding Mr. Oakes’s conduct to have been above investigation except in three instances, to examine which a master was appointed.[606] In the course of his decision Judge Jenkins concluded that the branch lines in question, though unprofitable for a while, were necessary to the system; and that in particular the branches in Washington, Oregon, Montana, and Idaho were built as feeders, and owing to the sparsely settled district were necessarily built for the future. If Mr. Oakes were to be removed on these charges, said he, then it would make the entire board of directors of the company at that time liable to impeachment.[607] Mr. Cary, the master, reported that Mr. Oakes had had no pecuniary interest and no personal advantage or gain from any of the matters referred to him for investigation. Mr. Villard was said to have made unlawful gains in the acquisition of the Northern Pacific & Manitoba Company to the extent of $363,494, but Mr. Oakes did not know that Mr. Villard was so interested, and was not bound to take notice to prevent such gains.[608] In consequence, Judge Jenkins in October granted a motion to dismiss the petition for the removal of Oakes as receiver,[609] and the incident was closed.

It thus appears that Mr. Ives and his friends obtained but little satisfaction in the courts up to this point. They were unable to force the receivers to turn over any share of the Northern Pacific’s earnings, and they were equally unable to remove the receivers from office. So long as the road should remain in the receivers’ hands their authority seemed destined to be nominal, and they were thus spurred on by their own private interests to make some attempt at reorganization. At the same time their opponents, as bondholders, were not unwilling to receive some interest on their bonds, and succeeded in this, as in other matters, in drawing substantial control into their own hands. The year 1894 was a bad one and made the importance of a reduction in fixed charges loom large. Passenger earnings decreased from $5,917,054 to $3,960,772, and freight earnings from $17,017,630 to $11,418,692; while in spite of attempted economies by the receivers, net earnings decreased by almost the same absolute amount.[610] Cuts in wages were inevitable, and a serious strike aggravated the situation. It became necessary to borrow money from the Adams Reorganization Committee, of which more will be said later, and to issue $5,000,000 in receivers’ certificates to pay off $5,000,000 already authorized in 1893. On September 8 formal announcement was made that the receiverships of the twenty-four branch lines of the Northern Pacific system were to be terminated, and that the trustee was to undertake the legal management of all the lines for a stated sum per annum; while the general receivers, Messrs. Oakes, Rouse, and Payne, were to operate the separated lines under a fair traffic agreement. It was figured that $64,000 per annum would be saved; and further economies were made in the cost of the administrative staff at New York. The relief was insufficient. Net earnings for 1894 were $5,506,007, and fixed charges were $12,004,985, and the need of a reorganization was impressively shown.

The work of devising a reorganization plan was done in the various bondholders’ committees. Late in 1893 a committee of consolidated 5 per cent bondholders had been formed, with E. D. Adams as chairman and General Louis Fitzgerald as vice-chairman; which declared itself to be independent, but was regarded as affiliated with the former managers of the road. In March, 1894, this committee announced that, having received responses from the holders of a majority of the consolidated bonds, it had prepared an agreement and had secured its acceptance by the German bondholders. All consolidated bondholders were requested to deposit their securities with the Mercantile Trust Company, which would issue engraved certificates of deposit, which the committee would endeavor to have listed on the Stock Exchange. Mr. Ives was opposed to any step toward reorganization of this sort, and objected particularly to the composition of the committee; he therefore asked bondholders to withhold their acceptance of the agreement, and gave various reasons to lend weight to his request. In April, as a counter-move, he invited bondholders to send in their names and addresses to him, together with the amount of their holdings, saying that this action would not commit the bondholders, and was desired only to enable the company to furnish information respecting its affairs, and, when the proper time should arise, to confer about a reorganization plan. The rapid falling off in earnings soon imperilled the interest of the second and third mortgage bonds, superior to the consolidated mortgage. In July the Adams Committee appealed to the holders of these issues, and secured a considerable number of deposits. Henceforth it planned to act as a general reorganization committee. On the other hand a committee headed by Johnston Livingston competed for deposits of the second mortgage, and one headed by C. B. Van Nostrand for deposits of the third mortgage bonds. It was urged that holders of the earlier issues should not deposit with the consolidated committee, because its interest lay in cutting down prior liens; whereas the Van Nostrand Committee declared that the road could earn the interest on the third mortgage, and that these bonds should not accept less than par and interest in cash. Nevertheless the Deutsche Bank’s London agency announced in September that it was prepared to receive second mortgage, third mortgage, and consolidated bonds on behalf of the Adams Committee, and to forward the same to New York for deposit. Various rumors were afloat at this time concerning reorganization, and suggestions were made for converting the third mortgage bonds into 5 per cent income bonds and the consolidated bonds into preferred stock;[611] but the only result was to stir up protests from the third mortgage bondholders, who still insisted in August that earnings were more than sufficient to pay the interest on all prior liens. Late in the year there was talk of selling the road under foreclosure of the second mortgage, but this too came to nothing.

Meanwhile the operation of the road went on. Receiver Rouse reported on the condition of the property in January, 1894. He estimated that $10,000,000 would be required to bring the permanent way into the most effective condition for economical operation. Exceptional causes, said he, had contributed to make the earnings for the previous three years exceptionally large, and this fact, together with the prevailing depression, the competition of the Great Northern, and reduced rates, would decrease the gross earnings in the immediate future at least 27 per cent. Although Mr. Rouse believed in the value of the Northern Pacific’s branch lines, his report was not encouraging.[612] In September, on the approach of the annual election, President Ives issued a long circular. The serious decrease in the earnings of the road, he said, had affected for the worse the position of the stockholders, and these holders should understand that no one of the reorganization committees was working for their interest. He announced the appointment of a committee to receive proxies, and revealed the embarrassment of the management by a request for contributions of $12.50 per hundred shares in order to pay the expenses of the officers. So far as the officers should have any voice in the matter, President Ives assured the stockholders, contributions should be credited on any assessments which might be made thereafter. On the day of the election no opposing ticket was presented, and the Ives party were reëlected to their positions. This is where matters stood at the beginning of 1895. The hostility of the opposing committees was in no way abated; but the Adams Committee had secured deposits of nearly $21,000,000 of the consolidated mortgage bonds, $1,000,000 more than a majority of the third mortgage bonds,[613] and $3,000,000 less than a majority of the second mortgage bonds, and with the hearty support of the Deutsche Bank was steadily strengthening its position.[614]

In May, 1895, the Adams Committee reorganization plan came out and marked the first serious suggestion for a rehabilitation of the property. It proposed a sale, under foreclosure, of the old company and the formation of a new company under special arrangements for this purpose. The new company was to issue $100,000,000 in shares, and a maximum of $200,000,000 in gold bonds free from taxation, secured by a mortgage lien on the whole Northern Pacific system, including the St. Paul & Northern Pacific Railway, and bearing interest partly at 4 per cent and partly at 3 per cent, all under the same mortgage. A sufficient amount of these bonds was to be reserved to replace the existing first mortgage, besides a further amount to acquire independent branch lines or for new construction at a maximum charge of $20,000 per mile. The principal and interest of the new bonds were to be guaranteed unconditionally by the Great Northern Road, in return for which the Great Northern was to receive one-half of the stock of the new company. The new board was to consist of nine directors, of whom four were to be nominated by the Northern Pacific Reorganization Committee. Each $1000 Northern Pacific second mortgage bond was to receive a $1125 new Northern Pacific guaranteed bond; each $1000 third mortgage bond a new $1000 3 per cent guaranteed bond, and at least $250 in shares; each $1000 5 per cent consol at least $500 in new 3 per cent guaranteed bonds and $300 in shares. Overdue coupons of the second mortgage were to be paid in cash at the rate of 5 per cent annually, those of the third mortgage at 4 per cent, and those of the consols to be adjusted at the rate of 2½ per cent in new 3 per cent bonds. The floating debt of the receivership was to be paid by an assessment of about $11,000,000 on the old stock. The reorganization and the raising of the necessary working capital were to be secured by a syndicate headed by J. P. Morgan & Company and the Deutsche Bank.[615]

Briefly stated, this plan proposed to decrease somewhat the funded debt, while reducing also the interest rate from 6 and 5 to 4 and 3 per cent. The reduction in fixed charges which would have ensued it is impossible to estimate without further details. The amount which bondholders were asked to give up was, however, considerable, and for this compensation was variously given in new bonds and in new stock. The floating debt was not to be funded, but was to be paid off by the commendable method of an assessment; and provision was made for working capital, although at what cost in profits to the syndicate was not stated. But more important than the details of the plan was the guarantee of the new issues by the Great Northern Company for which it provided. The question of consolidation between the Northern Pacific and the Great Northern was said, on what purported to be good authority, to have originated on the side of the Northern Pacific among men to whom an alliance seemed necessary to the prosperity of the latter road.[616] Mr. Hill was said to have been at first reluctant, and to have consented only on condition that a majority of the Northern Pacific stock should be placed within his hands. It can scarcely be supposed, however, that he did not welcome such a union; and the petition of the Northern Pacific receivers for the cancellation of contracts with the Great Northern and the Minneapolis Union railway companies[617] made consolidation especially desirable at this time. To the end of this consolidation the Adams Committee plan was chiefly framed, and on its execution the adequacy of the plan depended. If the Great Northern could have been induced to guarantee the principal and interest of the new Northern Pacific bonds the likelihood of a default would have been reduced to a minimum, even on the indebtedness outstanding before the receivership; and a scheme for paying the floating debt and for providing a certain amount of new capital would have been all that would have been required. But it is clear that a proposal for a consolidation of two of the principal lines serving the Northwest brought the consuming and producing public to an interest in the Northern Pacific reorganization which they had not felt before. So long as a reorganization plan dealt merely with exchanges and manipulation of securities by and among securityholders, the influence of any settlement on outsiders was very indirect; but when it operated to reduce competition in a large section of the country the effect was plain and striking. Certain conservative financiers suggested a holding company to hold the Great Northern and Northern Pacific stock, in order to throw some sort of a veil over the proceedings, but Mr. Hill would not consent.[618] Late in August, 1895, therefore, a bill in equity was filed to prevent the proposed coöperation, and on September 17 Attorney-General Childs, for the state of Minnesota, brought suit for an injunction on the ground that the combination was contrary to the laws of the state and would prevent competition. It was said that Mr. Childs was supported by the practically unanimous sentiment of the people of Washington and Montana. The matter came before the Supreme Court on suit by one Pearsall, a stockholder of the Great Northern, and this tribunal held that the combination was contrary to the laws of Minnesota and should, therefore, be enjoined, affirming the principle for which Mr. Childs contended.[619] This settled the fate of the Adams reorganization plan; and an entirely new scheme had to be devised.