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In re Kenilworth Bldg. Corp.

July 14, 1939


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Treanor

Before EVANS, TREANOR, and KERNER, Circuit Judges.

TREANOR, Circuit Judge.

This is an appeal from a decree of the District Court confirming a plan of reorganization. The proceeding below was an involuntary one filed pursuant to Section 77B of the Bankruptcy Act,*fn1 the appellees being bondholders and the petitioning creditors. The bonds were in default and foreclosure proceedings were pending in an Illinois state court at the date of the institution of reorganization proceedings.

The petition for reorganization was approved on June 14, 1938, as properly filed; and on July 15, 1938, the court, by order, fixed August 25, 1938, as a final date for the filing of claims of creditors. The order further provided that unless filed within such time no claim "may participate in any plan of reorganization herein, except on order of court for cause shown." It was further ordered that the trustee under the mortgage trust deed be authorized "to file a claim in this cause not only on behalf of said trustee under said trust deed individually but also on behalf of the holders of the bonds." Notice was thereafter issued to creditors, stockholders and claimants stating that the trustee was authorized to file a claim on behalf of the holders of the bonds.

In accordance with the foregoing the trustee filed a timely claim for the entire bond issue in the principal sum of $112,000; and this claim was allowed subject to deduction pro tanto for any duplicating claims which should be filed by individual bondholders.

Creditors holding bonds in the amount of approximately $30,000 and a bondholders' committee representing deposited bonds in the amount of $62,600 each proposed a plan. Both plans provided for the creation of a new corporation to acquire the debtor's assets and to issue shares in exchange for outstanding obligations of the debtor. The plans differed only in the following feature: The committee's plan provided that the shares should be issued to three trustees appointed by the court and held in trust for a period of ten years, such trust arrangement being subject to termination by 51% of the creditors. The court directed that only the committee's plan be submitted to the creditors for consideration, and upon submission sufficient creditors filed dissents and objections to prevent confirmation of the plan.

The District Court was advised by counsel that the rejection of the plan was due to the antipathy of the creditors to the trust arrangement; but the court thereafter repeatedly informed counsel that no plan which did not include control through a trust arrangement for a definite term, subject to termination only by the court, would receive the confirmation of the court. Further, the court stated that it would not approve the committee's plan, which had been rejected by the creditors, because it provided for termination of the trust by vote of majority of the creditors. Thereafter, the bondholder's committee proposed an amended plan of reoganization from which was omitted the provision authorizing termination of the trust by a vote of 51% of the creditors. The court ordered this plan to be filed and submitted to creditors.

In connection with the submission of the plan the court approved a communication to all of the creditors which stated in substance that the court would not approve any plan differing from the submitted plan; that the court would dismiss the proceedings unless such plan was accepted; and that if so dismissed the time and expenses incurred would be lost and jurisdiction revert to foreclosure proceedings. The communication contained the following statement: "The failure to execute and forward to the clerk of the court a written acceptance of the plan of reorganization is equivalent to a vote against the confirmation of the amended plan * * * This communication is being sent to you by authority of the court and it has been submitted to and approved by the judge before whom the case is now pending." The court entered two orders, the first of which authorized the committee to send the communication and a copy of the plan to bondholders who had deposited their bonds with the committee, and the second order provided that the committee should print copies of the communication and deliver them to the debtor and that the debtor should "cause to be sent by mail to the creditors * * * (other than the depositing first mortgage bondholders) a copy of said communication which shall be inclosed with the plan of reorganization * * * "

After a hearing on confirmation of the committee's amended plan, the plan was confirmed despite the fact that consents to the plan represented only $47,800 worth of claims out of a total of $112,000 on the outstanding bond issue. The total consents to the plan fell far short of representing two-thirds of the claims filed and allowed if the claims filed by the trustee under the trust deed securing the bondholders are taken into consideration, in the computation. The District Court, however, disregarded all the claims filed by the trustee and allowed by the court and considered only the claims filed by the bondholders' committee or by the individual claimants.

In support of the foregoing action the court ruled, and appellees contend, that Section 198 of the Chandler Act*fn2 is applicable and requires that the claims filed only by the trustee must be disregarded. The District Court also made a finding "that under the old practice the trustee would not be entitled to vote or his claim would not be counted."

We are of the opinion that under Sec. 77B the total amount of claims, twothirds of which must be represented by assenting creditors, includes the claims filed by an indenture trustee which are allowed. The language of Sec. 77B is definite and unambiguous and makes it mandatory that written acceptances be filed by or on behalf of the creditors holding two-thirds in amount of the claims allowed.*fn3 Perhaps we should emphasize that the act requires an affirmative expression of acceptance but does not require a dissent. The necessary meaning is that if creditors holding more than one-third in amount of the claims allowed do not cause written acceptances to be filed the plan cannot be lawfully confirmed. The evident purpose of the provision is to insure that any plan which is adopted will have the advantage of the affirmative approval and support of creditors holding at least two-thirds in amount of claims allowed. For the purpose of filing written acceptances no distinction is made between claims filed by an indenture trustee and allowed and claims filed by individual creditors or by someone expressly authorized to file for them. The only restriction placed upon claims is that they be claims of creditors and that they be allowed. If a claim has been filed and allowed nothing in the act authorizes the striking of such claim from the amount of claims to be considered for purposes of acceptance of the plan. In short, the total amount of all claims which have been allowed constitutes the amount of claims, two-thirds of which must be voted for acceptance. In the instant case the trustee was expressly authorized to file a claim on behalf of all bondholders, the amount of the claim being subject to reduction pro tanto by subsequent filings of bondholders' committee or individual creditors. The trustee's claim was allowed and such allowance has not been expunged. The total amount of claims allowed was $112,000.

It does not follow from the foregoing that under Sec. 77B an indenture trustee has implied authority to file written acceptances. Since the language of Sec. 77B expressly requires that written acceptances be filed by or on behalf of creditors holding two-thirds in amount of the claims allowed, we think the reasonable construction is that anyone filing written acceptances on behalf of creditors must be specially authorized. But the relationship and duty of the indenture trustee to the bondholders is such that he would have implied authority to file claims for them even in the absence of a special authorization in the deed of trust. The court recognized the existence of this authority by authorizing the trustee to file claims for the bondholders subject to the right of the bondholders to withdraw his authority by filing their own claims or by expressly authorizing someone else to do so. The relationship and duty of the indenture trustee to the bondholders would not imply authority to bind these bondholders to an acceptance of a particular plan of reorganization.

We conclude that Sec. 77B requires the claims filed by the indenture trustee and allowed to be considered in determining the amount of the claims, two-thirds of which has to be ...

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