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In re Diversey Bldg. Corp.

February 29, 1944


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

Author: Sparks

Before EVANS, SPARKS, and MINTON, Circuit Judges.

SPARKS, Circuit Judge.

The debtor filed its motion in the District Court for permission to file its petition to amend and modify the plan of reorganization which had theretofore been approved and confirmed by that court, and was then being effectuated by the debtor and the defendant trustees appointed by the District Court for that purpose. With that petition the debtor tendered its proposed modified or amended plan, asked that it be set for hearing on a day certain, and that notice of that fact be given to all creditors and stockholders, in order that those desiring to do so might object to, or accept, the proposed amended plan, and withdraw their acceptance of the original plan. Both trustees under the trust indenture filed written objections to the motion, and the matters in issue were briefed by all parties. The District Court denied the debtor's motion to file its petition, and from that ruling this appeal is prosecuted.

The motion here in issue was filed by the debtor, on February 25, 1943, in its original bankruptcy proceeding, wherein its original petition for reorganization was filed June 22, 1934. In that proceeding, the debtor, on February 25, 1935, filed its proposed plan of reorganization, which was approved by the bankruptcy court on April 20, 1935. In its decree the court found that the debtor's proposed plan complied with the provisions of the pertinent statutes, and had been accepted by the requisite percentage of the debtor's creditors and stockholders. It authorized the debtor corporation to take all action necessary to consummate it, and set the cause for further hearing with respect to the allowance of fees and expenses, and the entry of a final decree.

At that time the creditors were the holders of 6 1/2% first mortgage bonds issued by the debtor on May 22, 1924, which were guaranteed by Fred Becklenberg. The original amount of those bonds was $1,250,000. However, at the time of the approval of the original plan, it had been reduced by payments and retirement to $987,500, of which $135,700 were in the hands of Johnson H. Pace and Fred Becklenberg, Jr., as trustees, the latter now being president of the debtor company.

The approved plan proposed to exchange the outstanding 6 1/2% bonds for new 15 year first mortgage bonds, guaranteed by Fred Becklenberg, to bear interest at 5% per annum, if earned during the life of the bonds, but with minimum interest at 3% per annum guaranteed.The new issue was to consist of $851,000 series "A" bonds, and $135,000 series "B" bonds. However, nothing was to be paid on the "B" bonds until all interest and principal on the "A" bonds were paid in full.

The District Court, on June 28, 1935, entered what it termed its final decree, ordering the confirmed plan carried out. Pursuant to that decree the debtor executed a trust deed, securing the new bonds, to Metropolitan Trust Company as corporate trustee, and Benjamin V. Halstead, as individual trustee; it executed and delivered a chattel mortgage upon the furnishings and equipment of the hotel, then being operated in the building, to the Metropolitan Trust Company as mortgagee, as additional security for the bonds issued; it furnished resolutions of its board of directors authorizing its officers to execute and deliver all the bonds, the trust deed and chattel mortgage referred to in the plan, and they were so delivered; the debtor and its stockholders delivered to the trustees all the outstanding shares of the debtor's capital stock as security under the terms of the indenture; the bonds of Pace and Becklenberg, Jr., so delivered, were endorsed with the legend that they were subordinated and exchangeable for series "B" bonds; Fred Becklenberg executed and delivered to the mortgage trustees his guaranty of the bond principal and the minimum annual interest of 3%; the trustee under the trust deed of May 22, 1924 released that lien, and the indenture trustees thereupon distributed the bonds according to the plan.

Creditors were enjoined from prosecuting proceedings at law or in equity against the debtor or its assets upon any claim, whether or not filed therein, and all rights and interests of creditors of the debtor were thereby terminated and ended.

The debtor was directed to take all steps necessary to consummate the plan, and, in conjunction with the bondholders committee, to construe and interpret the provisions of the plan, and to make such alterations, modifications, changes and amendments to the documents and instruments thereby approved as might be deemed necessary to properly consummate the plan, provided that no such alteration should be made without the authority of the court, if it should be adverse to the interest of any of the creditors or stockholders of the company.

For the determination of all matters germane to that proceeding, not theretofore or thereby determined, the debtor, or any other party in interest, might apply to that court for further instructions and directions with respect to any of the maters covered in the order of confirmation, or in the order then being entered, or by the plan. The court reserved jurisdiction to hear and determine the subject matter of any application with respect to all other matters which might arise in the execution of the order of confirmation, "or in this order, or in the consummation or carrying out of the plan of reorganization." In this final decree no changes were made in the plan which had been confirmed and ordered consummated by the decree of April 20, 1935.

The new bonds and trust indenture were made effective as of May 1, 1935, and the bonds are to mature in 1950. Since May 1, 1935, the debtor has operated this property under the terms of the trust indenture. All taxes have been paid. The guaranteed 3% interest on the class "A" bonds has all been paid promptly, and a large amount of the additional 2% interest upon the same bonds, which was to have been paid if earned, has been paid, up to and including the year 1942. This was due to the fact that the debtor was enabled to and did pay on that interest account 6% during the year 1942, and a fraction more than 6% during each of the years 1940 and 1941. However, the earnings have not been sufficient to retire any part of the bonded indebtedness, and no funds are available for allocation to the sinking fund for that purpose. Herein is the basis of appellant's contention.

Notwithstanding the fact that since 1938 the gross income of the debtor company has averaged approximately $8000 per month, and that in each year since 1939 there has been available more than $50,000 for interest on the bonds, appellant has presented its motion and petition, under the original proceeding, for an amended plan of reorganization. This it does on the theory that no part of the principal can or will be paid before or on the date when due in 1950. It bases its right to an amended plan of reorganization on that part of subsection f of section 77B, Bankr. Act, 11 U.S.C.A. ยง 207, sub. f, which reads as follows:

"Before or after a plan is confirmed, changes and modifications may be proposed therein by any party in interest and may be made with the approval of the judge after hearing upon notice to creditors and stockholders, subject to the right of any creditor or stockholder who shall previously have accepted the plan to withdraw his acceptance, within a period to be fixed by the judge and after such notice as the judge may direct, if, in the opinion of the judge, the change or modification will be materially adverse to the interest of such creditor or stockholder, and if any creditor or stockholder having such right of withdrawal shall not withdraw within such period, he shall be deemed to have accepted the plan as changed or modified: Provided, however, That the plan as changed or modified shall comply with the provisions of subdivision (b) of this section and shall have been or shall thereafter be accepted as required by the provisions of subdivision (e), clause (1), ...

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