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June 30, 1959


The opinion of the court was delivered by: LA Buy, District Judge.

The petition for review of the referee's order of April 27, 1959 raises the issue of whether the plan of arrangement, as modified, filed by the debtor under Chapter XI, 11 U.S.C.A. § 701 et seq., should be confirmed. The referee concluded that it was reasonable and in conformity with all provisions of Chapter XI of the Bankruptcy Act, and particularly § 366, 11 U.S.C.A. § 766, thereof. Objections to this confirmation are made by Zenith Radio Distributing Corporation and Admiral Distributing Corporation, creditors of the debtor.

Under the plan, all unsecured merchandise creditors, other than the ten principal unsecured merchandise creditors, were to be paid in full as Class IV creditors. The ten principal creditors were placed in Class V, to receive 35% of their May 1, 1958 claims due and unpaid, and to be paid in full for unpaid indebtednesses incurred subsequent thereto as Class IV creditors. Seven of the ten creditors whose claims aggregate $612,581.25, have accepted the arrangement; three — Admiral, Zenith and Magnavox, — whose claims aggregate $265,466.40, have not filed acceptances. These three filed the objections which were heard, considered and overruled by the referee, who then confirmed the plan.

At the court's request briefs have been submitted on the objections relating to the arbitrary and discriminatory nature of the Class V designation.

The Bankruptcy Act sanctions a division of creditors into classes and a treatment thereof in different ways or upon different terms. Such classification, however, must be necessary and proper and made on a reasonable basis in order that the arrangement be for the best interests of all creditors. Ordinarily, a creditor is not entitled to better treatment merely because he holds a small claim rather than a large one.

The debtor has conceded in arguments before this court that the plan would not be an appropriate classification of unsecured merchandise creditors into two groups were it not for two agreements by the ten creditors affected by the plan. The classification of these ten creditors as Class V rests upon the effect of a May 16, 1958 extension agreement and an alleged oral agreement of October 23, 1958. Both agreements relate to obligations due and unpaid on May 1, 1958 and it is with regard to that indebtedness that a distinction is made between the ten principal unsecured merchandise creditors and all other unsecured merchandise creditors.

It appears that none of the parties dispute the existence or the terms of the May agreement. That agreement, accepted by these ten creditors, was submitted by the debtor to work out a program "which in our judgment will completely liquidate our past indebtedness to you and the others of said ten largest creditors in the most expeditious manner". It was provided that the creditors would receive an initial 20% payment, based on the amounts then due, and $40,000 each month to be proportioned among themselves; payments on new purchases were to be on terms "as may be mutually agreeable". All other creditors were to be paid as their bills matured. Upon default in payment, the creditors had a right to accelerate their indebtedness and in the event of filing of a voluntary petition for composition, the creditors had the option to terminate the agreement and it would be "considered for naught".

After making the initial 20% payment and two $40,000 payments, the debtor paid nothing to these ten creditors for the months of August, September, October and November.

The court is of the opinion that the May agreement, by its terms, contemplated that the ten creditors would be paid in full on debts owing to them for the debtor's express purpose was to "completely liquidate" their past due indebtedness "in the most expeditious manner". There is nothing contained in its provisions to indicate they were to receive less than full payment on such debts. It was on this debt that an extension of time for payment was evolved, but it was not intended that less than the full amount be paid. Such an agreement was not a composition agreement, nor did it displace the original debt. Sales by all creditors, including these ten, made after May 1, 1958 were to be on a current basis, and the fact that debtor urges that these ten were paid in full on such subsequent sales while some of the others were not does not affect the position of these creditors so far as their agreement on the May indebtedness is concerned.

The referee concluded that these ten creditors received "very substantial benefits" from their Class V classification because of the May agreement. The record, however, shows that they did not receive the full payment for their May indebtedness and have a remaining balance thereon of $877,862.93; that the other unsecured merchandise creditors of the debtor were paid in full as their debts matured and therefore received 100% payment of the indebtedness due them as of May 1, 1958; that these ten creditors received only 28% under an agreement which contemplated full payment.

To conclude that by this agreement, the ten creditors indicated an intention to be subordinated to the claims of other unsecured creditors on debts existent May 1, 1958 does violence to the language of the agreement and adds terms thereto which the parties had not intended and had not expressed. The court holds that this agreement cannot be construed to have committed these ten creditors to a Class V, or subordinate classification, and the referee's finding in that respect is clearly erroneous.

By its terms, this agreement also provided for termination at the option of any of these creditors in the event of the voluntary filing of a composition petition. While no positive exercise of such option was made, the conduct of the parties following default in the installment payments by the debtor shows a clear intention on the part of both the debtor and creditors to abandon the same. That the debtor regarded the agreement as terminated is shown by his sworn statement of executory contracts filed November 18, 1958 wherein it avers that the May agreements had "by their terms expired" and that the plan of arrangement was "in lieu of and in substitution of any prior agreements or understandings with said merchandise creditors in respect of said indebtedness existing prior to May 1, 1958".

The other basis offered by the debtor to substantiate a subordination agreement results from circumstances surrounding several meetings held by these creditors some months after default in the payments under the May agreement. The referee found that on or about October 23, 1958 the ten creditors met and all agreed to accept a sum equivalent to 35% of the balances owing them on debts due May 1, 1958; that notwithstanding the oral agreement, the three objecting creditors thereafter refused to accept the settlement.

It is objecting creditors' position that no unanimous agreement could have been reached since the representatives of Zenith and Admiral attending that meeting were not authorized to accept such agreement without home office approval; that such final approval was never given. Tr. 110, 112-113, 118; 496-499, 503, 575-577. The chairman of the creditors' committee, Mr. Krause of Norge Sales, testified that no expression of lack of authority to approve was made, but did testify that final consents of Zenith, Admiral and Magnavox were not received and that the creditors' committee would not have the power to make them agree to anything. Tr. 2753-2755; 2763.

It is also contended that said oral agreement, if any, was inchoate and contemplated final written acceptance in the form of ten executed written assignments of claims; that only eight were so executed, and of these eight, one withdrew the assignment because it was sent "conditional * * * upon ...

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