Scherk v. Newton

Decision Date28 December 1945
Docket NumberNo. 3210,3258.,3210
Citation152 F.2d 747
PartiesSCHERK v. NEWTON et al. (two cases). In re ROCKY MOUNTAIN FUEL CO.
CourtU.S. Court of Appeals — Tenth Circuit

Louis G. Isaacson and I. L. Quiat, both of Denver, Colo., for appellant.

Anthony F. Zarlengo, of Denver, Colo., for Wilbur Newton, trustee.

John I. Mayer, Atty., Securities and Exchange Commission, of Chicago, Ill. (Roger S. Foster, Sol., of Philadelphia, Pa., and John L. Geraghty, of Denver, Colo., Thomas B. Hart and G. Gale Roberson, both of Chicago, Ill., Theodore L. Thau, of Washington, D. C., and Alfred Hill, Attys., Securities and Exchange Commission, of Philadelphia, Pa., on the brief), for Securities and Exchange Commission.

Before PHILLIPS, BRATTON, and MURRAH, Circuit Judges.

PHILLIPS, Circuit Judge.

The Rocky Mountain Fuel Company1 is a corporation organized under the laws of Wyoming. It is engaged in the business of mining and selling coal. On April 1, 1913, it issued its First and Refunding Mortgage Bonds, maturing April 1, 1943, and bearing interest at the rate of 5 per cent per annum, payable semi-annually on April 1 and October 1, evidenced by interest coupons attached to such bonds. The aggregate principal of the outstanding bonds is $3,814,600.

To secure such bonds the debtor, on April 1, 1913, executed a trust indenture, conveying to The International Trust Company, as trustee, all of its real estate and mining property.

The trust indenture provides that the debtor will not, directly or indirectly, extend the time, or assent to the extension of the time for payment of any coupon or claim for interest, and if the time for payment of any coupon or claim for interest shall be extended, then in the event of default, such coupon or claim for interest shall not be entitled to the benefit of the security until after the payment in full of all bonds and all matured coupons and claims for interest which have not been extended.

It further provides that the mortgaged property is "for the equal and proportionate benefit and security of all the holders of the bonds * * * and the coupons * * * without preference or priority of any bond over another, or the coupons * * * on account of the time of their issue, or otherwise."

It further provides that in the event of the sale of the mortgaged property, whether pursuant to the terms of the trust indenture or under judicial proceedings, the proceeds of the sale, if such proceeds shall be insufficient to pay the bonds in full, shall be applied ratably in payment of the principal of the bonds and the interest thereon, "without preference or priority of principal over interest, or interest over principal, or of any installment of interest over any other installment of interest, * * * provided, that if the payment of any coupons * * * shall have been extended by the issue of other obligations of the" debtor, "or otherwise, the holders of said coupons or obligations * * * shall not be entitled to participate in the proceeds of such sale until the principal of the bonds and the coupons due and payable and not so extended have been paid in full."

The debtor has been in financial difficulties for many years. In 1939, it presented to its bondholders a voluntary plan for a reduction in the interest rates on the bonds to 1 per cent per annum for the period from April 1, 1938, to April 1, 1940, and thereafter to 2½ per cent per annum and for the extension of the principal of the bonds to April 1, 1953. Such plan provided that it might be declared effective upon its acceptance by the holders of a majority in amount of the outstanding bonds. The holders of $3,582,000, or 93 per cent, of the principal of the outstanding bonds assented to the voluntary plan. Such bonds will be referred to hereinafter as the assented bonds. The holders of $232,600, or 7 per cent, of the outstanding bonds refused to assent to such plan. Such bonds will be referred to hereinafter as the nonassented bonds. The voluntary plan was put into effect April 1, 1939. Pursuant to such plan the holders of the assented bonds were paid interest at the reduced rates for the period from April 1, 1938, to October 1, 1943.

The voluntary plan provides that in the event foreclosure or other proceedings to enforce payment of any of the bonds shall be prosecuted to final decree by any bondholder, the holders of the assented bonds shall be entitled to share equally with all bondholders in "the proceeds of such decree."

The principal of the nonassented bonds matured on April 1, 1943. In May, 1943, Scherk and certain other holders of nonassented bonds instituted actions against the debtor to recover the principal of their bonds and accrued interest at the rate of 5 per cent per annum.

On February 12, 1944, the debtor filed its petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The District Court approved the petition and appointed Newton trustee.

Thereafter, the trustee filed a plan of reorganization. On May 31, 1945, the District Court entered its order directing that such plan be submitted to the Securities and Exchange Commission for an advisory report, pursuant to § 172 of Chapter X. In its advisory report, dated July 18, 1945, the Commission concluded that the plan, provided certain minor modifications not here material were made, was fair, equitable, and feasible. The trustee thereafter filed an amended plan which modified the original plan so as to conform to the recommendations contained in the Commission's advisory report. The amended plan was accepted by the requisite percentage of creditors entitled to vote thereon. It was confirmed by order of the District Court filed September 24, 1945. The amended plan provides that a new corporation shall be formed with an authorized capital stock of 800,000 common shares, each of the par value of $1.00; that 758,720 of such shares shall be issued to holders of outstanding bonds on the basis of 20 shares of stock for each $100 principal amount of bonds; that holders of non-assented bonds shall be paid interest thereon in cash at the rate paid the holders of assented bonds for the period from April 1, 1938, to October 1, 1943, or a total of 10¾ per cent.

Scherk duly filed a notice of appeal from each of the above-mentioned orders. Whether the first of such orders is appealable we do not stop to determine because the same issues are presented on both appeals.

I

Counsel for Scherk assert that since the nonassented bonds matured before the assented bonds, the former are entitled to priority over the latter and should be paid first. The contention is predicated on the so-called "earlier maturity rule."

Counsel are agreed that the law of Colorado governs. In Toll v. Colorado National Bank of Denver, 86 Colo. 529, 283 P. 778, 780, the court quoted, with approval, from the syllabus in Georgia Realty Co. v. Bank of Covington, 19 Ga. App. 219, 91 S.E. 267, as follows:

"In the absence of an agreement or a special equity to the contrary, assignees holding separately several notes secured by a mortgage or otherwise are entitled to share pro rata, and...

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    ...In re Los Angeles Land & Investments, Ltd., 282 F.Supp. 448, 453 (D.Hawaii 1968), aff'd, 447 F.2d 1366 (9th Cir.1971); In re Scherk v. Newton, 152 F.2d 747 (10th Cir.1945). By their interpretation, these cases hold that all claims of similar legal status vis-a-vis their entitlement to estat......
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    ...Securities Corp., 53 F.Supp. 1010 (E.D.N.Y.1943) mentioned in the legislative history of § 1122, are summarized by Scherk v. Newton, 152 F.2d 747 (10th Cir.1945), at 750-51, when the Court Classification is simply a method of recognizing difference in rights of creditors which calls for dif......
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    ...class. In re Los Angeles Land Investment, Ltd., 282 F.Supp. 448, 453 (1968), affirmed 447 F.2d 1366 (9th Cir.1971) quoting In re Scherk, 152 F.2d 747 (10th Cir.1945). Granada Wines, 748 F.2d at The court was presumably influenced by the legislative history of § 1122 which states that "this ......
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