Meantime, after the bill for the appoint ment of the receiver has been prepared, and the protective committee agreement drafted, counsel for the management trying to steer a safe course through reorganization will be preparing the foreclosure suit, which they will begin as soon as possible after the ap pointment of the receiver. It will be their aim so far as possible to avoid the delays and complications of intervening parties. We have assumed that the holders of a majority of the bonds of the issue have deposited their bonds with the depository of the " official " committee. If the minority bondholders, or any part of them, have organized under a separate committee, counsel for the major ity committee bringing the foreclosure suit may welcome the intervention of the minority committee in the foreclosure action in order that it may appear conclusively that the mi nority holders have had their hearing.
The mortgage regularly gives the trustee the right to other remedies besides fore closure. It provides that the trustee, in the event of a default by the corporation, may take possession of the mortgaged premises and operate the road and otherwise manage the business until the money due under the mort gage is either paid or provided for. When the trustee has taken possession under this pro vision, the trustee may, under the regular provisions of the corporate mortgage, also sell the property to satisfy the claims of the bondholders. The mortgage further author izes the trustee, without first taking posses sion of the property, to sell it at public sale.
As a matter of fact these special remedies stipulated for in the mortgage are not taken advantage of. They raise perhaps too many questions of the rights of other parties. Yet the lawyer drawing the mortgage would not think of leaving them out. They are addi tional rights and protection, and a situation might conceivably arise when they would prove useful. But the path to settlement by way of the receivership and foreclosure is too well worn and relatively easy to travel to be departed from unless very exceptional cir cumstances should arise.
One of the first steps looking toward a fore closure of the mortgage, after the action is brought, is to have an examination and ap praisal of the property. This looks toward de termining its real condition and value, and when done will be helpful, especially in de termining what shall be the minimum price at which it may be sold under foreclosure. Such minimum price is called the "upset price," and means that at the foreclosure sale no bid below the upset price will be received. In the case of a large railroad property this examination is bound to take a year or two. Engineers will have to go over the entire mileage and report on the physical condition of the property. Expert accountants will go over the books and make an auditor's report. A reorganization of a large railroad involves a great deal of real work. This discussion will probably give the uninitiated some idea of the reason why it usually takes several years, even with no especially unfavorable develop ments, to complete the process.
It is the duty of the trustee under the mort gage to bring the foreclosure suit. The bond holders bring the action directly only in case of the neglect or refusal of the trustee to act. The trustee is the mortgagee and the proper party to appear. The mortgage contains elaborate provisions for guidance in the event of foreclosure. Some of these are concerned with the protection of the trustee and are in serted in the mortgage at the trustee's in stance. The trustee cannot be compelled to bring the action unless first given an indem pity against any liabilities it may incur in the course of the proceedings. Of course, the trustee has no real financial interest in the proceedings, and those who are attempting to guide the business through to reorganization will probably supply most of the energy nec essary to push the matter along. They will find it desirable to push it as rapidly as possi ble, because the longer the matter is delayed the greater opportunity is given for hostile forces to arise.
With the foreclosure suit entered and the appraisal under way, those who are in charge of the movement toward reorganization will begin to work on the reorganization plan. All the work of reorganization looks forward, of course, to the formation of a new corporation, under such conditions and with such a plan of capitalization as will enable it to operate the railroad or continue the enterprise and meet its obligations. We will consider later the financial considerations of the new financial plan and its aim of reducing fixed charges to a point where the business can meet them.
Obviously a large railroad system cannot be bought offhand like a piece of second-hand furniture at an auction sale. The magnitude of the transaction requires that it be care fully prepared for. Even though the property is sold at public sale, as a matter of course there is only one bidder, the group which has been in charge of the reorganization pro ceedings all along, and has carefully prepared its plan and arranged for the necessary finan cial backing. It is the magnitude of the en terprise that requires the holders of the de faulted securities to provide for carrying on the business in order that they may realize something on their investment. If the bond holders saw a chance of various outside inter ests coming forward and bidding for the property in such a way that it would realize approximately its actual value, then they would be very glad to let somebody else buy it, and they would take their share of the proceeds. But the only way they can actually realize the fair value of the property is to take the property itself for themselves. The fore closure proceedings are gone through with to fix definitely the rights of all the parties in interest and to permit the business to go ahead on a well-defined basis. Because those who have been in charge of the proceedings have a well-organized plan and financial back ing arranged, they are prepared to purchase the property at the foreclosure sale.