Bogart v. Miller Land & Livestock Co.

HEALY, Circuit Judge. This appeal is from an order made in a proceeding under the conciliation features of § 75 of the Bankruptcy Act, 11 U.S.C.A. § 203 subs, a to r. The question presented relates to the authority of the court to reduce the rate of interest on a secured debt. From the somewhat sketchy record it appears that the debtor (appellee), after the filing and approval of its petition under the act, made an extension proposal which was accepted by the requisite majority of its creditors and was confirmed by the court October 27, 1939. By its proposal as accepted and confirmed the debtor undertook to pay all creditors in full. Secured claims, with interest at the contract rate, were to be paid within three years. Unsecured claims were to be paid with interest at the rate of 5% per annum within a period of twelve months after the payment of secured creditors. Following the confirmation of this proposal, appellant filed his claim and an order approving the same was made March 25, 1940. The indebtedness to appellant, which is secured by a first mortgage upon real property of the debtor, is in the principal amount of $150,-000 and bears interest at the contract rate of 6% per annum. The claim filed is against the security alone. It is to be gathered from the record that approximately $200,000 of unsecured claims were approved in the proceeding. The precise amount of the secured debts, aside from that owing appellant, is not shown; but it does appear that there is at least one other secured claim, amounting to $9,300 and bearing interest at the rate of 9%. Under the terms of the extension secured creditors were given the option to accept the amount of a reasonable annual rental upon the property held as security, or, in the alternative, annual payments equal to 10% of the debt owing. Appellant elected to take under the latter alternative. Subsequent to the approval of his claim appellant applied to the court for leave to foreclose, asserting that the proposed payment for the year 1940 had not been fully met. The debtor controverted this contention; and eventually appellant’s application was conditionally denied. In a cross petition filed in response to the application the debtor alleged that the real property securing appellant’s debt was, at the commencement of the proceeding, worth many times the amount of the mortgage thereon; and that since that time the debtor had substantially increased the value and productivity of the security.1 The petition of the debtor further stated that “considering the value of the security, the amount of the investment, the present money market and all the circumstances surrounding such investment, as well as the best interests of all of the parties, including the unsecured creditors of Debt- or who have claims of approximately $200,000.00, it is just, equitable and right that the Court should reduce the interest [773] rate upon [appellant’s] claim from six per cent to three and one-half per cent per annum and that the Proposal heretofore made be modified accordingly insofar as the claim of [appellant] is concerned.” It was stated that such modification would not adversely affect any other creditor but would be of benefit to the debtor and to the other creditors, in that the reduction of the interest rate payable to appellant “will naturally lessen the time within which all creditors shall be paid.” Appellant demurred to the granting of this application on the ground that on the facts alleged the court was without authority to give such relief. On August 16, 1941, the court made an order granting the application and reducing the interest rate on appellant’s claim to 4% per annum.2 This appeal followed. Appellant argues that where, as here, the security is ample to discharge the mortgage debt, and particularly where the mortgagee asserts no claim against the debtor personally, the bankruptcy court is without power to reduce the contract rate of interest. The authorities are said to hold that the right of the mortgagee to the payment of interest, as well as principal, to the extent of the security furnished by the lien of the mortgage, is a vested right protected by the Fifth Amendment.3 We have not, however, inquired into the constitutional question. Nor do we determine whether, in the absence of the consent of the requisite majority of creditors, the court has statutory authority to modify the terms of an extension arrangement by reducing generally the rate of future interest. It is said, and the court below thought, that authority for the action taken here is to be found in subsections l and k of the statute. Subsection l provides, among other things, that “the court may, after hearing and for good cause shown, at any time during the period covered by an extension proposal that has been confirmed by the court, set the same aside, reinstate the case, and modify the terms of the extension proposal.” Subsection k is shown on the margin.4 As originally enacted, the proviso of this subsection stated merely that “such composition or extension shall not reduce the amount of nor impair the lien of any secured creditor, but shall affect only the time and method of its liquidation.” The proviso was changed to read as at present ' by an amendment contained in the Act of August 28, 1935, 49 Stat. 942, C. 792, § 3. The clause at the end of the proviso, having reference to the reduction of the future rate of interest, was also added by that act.5 [774] Laying aside rather serious questions as to the authority of the court under subsection k to reduce contract rates of interest on the mere application of the debtor after confirmation,6 we turn to subdivision i of the statute. So far as pertinent that subsection provides that “the court shall confirm the proposal if satisfied that (1) it includes an equitable and feasible method of liquidation for secured creditors and of financial rehabilitation for the farmer; (2) it is for the best interests of all creditors * * A proposed extension plan which reduces the contract rate of interest on a single secured debt from 6% to 4%, but which leaves intact higher rates on all other debts, unsecured as well as secured, can hardly be thought otherwise than discriminatory. It is true, as the debtor here says, that the reduction of the rate of interest on this large secured debt will be of benefit not alone to the debtor but to other creditors, in that the reduction will tend to lessen the time within which all other creditors may be paid in full. But we find no authority in the statute for sacrificing a senior creditor in order to improve the position of others of equal rank or to bolster up the claims of junior or unsecured creditors. Cf. Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110. A plan which thus unfairly discriminates against one creditor for the benefit of his fellows is not of that equitable character which the court is authorized to confirm. It follows, as a matter of course, that if a proposal of that sort would be inequitable prior to confirmation, it is not rendered equitable because imported into the plan by court action after confirmation; and this irrespective of such general authority as the court may possess to modify the plan. For the reasons given the order below must be held erroneous. Reversed. Footnotes [1] In its pleading the debtor states that the land mortgaged to appellant (more than 16,000 acres) is worth $800,000. [2] The order was as follows: “The application of debtor for a reduction of interest on the Bogart claim, in the above ■ entitled cause, is now before the court for consideration. The briefs for and against the application have been carefully considered, and as a result, the court is now convinced that the application of debtor presents a proper case for allowance of a reduction of interest, and that the court has authority to entertain such request; consequently, in the opinion of the court, the interest rate on the above claim should be reduced to 4% per annum, and it is so ordered.” [3] Coder v. Arts, 213 U.S. 223, 29 S.Ct. 436, 53 L.Ed. 772, 16 Ann.Cas. 1008; Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593, 97 A.L.R. 1106; Wright v. Vinton Branch of Mountain Trust Bank, 300 U.S. 440, 57 S.Ct. 556, 81 L.Ed. 736, 112 A.L.R. 1455. [4] “(k) Upon its confirmation, a composition or extension proposal shall be binding upon the farmer and his secured and unsecured creditors affected thereby: Provided, however, That such extension and/or composition shall not reduce the amount of or impair the lien of any secured creditor below the fair and reasonable market value of the property securing any such lien at the time that the extension and/or composition is accepted, but nothing herein shall prevent the reduction of the future rate of interest on all debts of the debtor, whether secured or unsecured.” [5] Subsection k appears to relate solely to the power of the court to confirm a plan which has had the approval of a majority of creditors. The Senate Committee having the 1935 amendments under consideration (Senate Report No. 985, 74th Congress, 1st Session) reported that: “The amendment to subsection (k) relates to the confirmation of a composition or extension proposal. It provides that a majority of the secured creditors may agree to accept such a proposal, provided it does not reduce the amount of or impair the lien of any secured creditor below the fair market value of the property. The majority of the secured creditors may agree to accept a lower rate of future interest than the contract interest. It does not affect the accumulated or earned interest, nor reduce the lien below the value of the property * * *.” [6] Doubts suggested here were not urged or considered in Cohan v. Elder, 9 Cir., 112 F.2d 967. The proposal there made by the debtor for the reduction of interest affected all creditors alike.