203 F.2d 381 (7th Cir. 1953), 10712, In re Union League Club of Chicago

Docket Nº:10712.
Citation:203 F.2d 381
Case Date:April 16, 1953
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 381

203 F.2d 381 (7th Cir. 1953)


O'MALLEY et al.



No. 10712.

United States Court of Appeals, Seventh Circuit.

April 16, 1953

Page 382

Arnold I. Shure, Chicago, Ill., Paul N. Dale and Brimson Grow, Chicago, Ill., for appellants.

Roscoe C. Nash, Charles A. Thomas, Chapman & Cutler, Chicago, Ill., of counsel, for appellee.

Before DUFFY, FINNEGAN and LINDLEY, Circuit Judges.

Page 383

LINDLEY, Circuit Judge.

In the course of the proceedings incident to the reorganization of the debtor, the Union League Club of Chicago, under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., an issue arose as to whether the debtor is liable for interest upon bonds secured by a second mortgage upon its real property, for the period from August 1, 1932 to July 16, 1935. The District Court having decided, in its decree of July 10, 1952, that no such liability exists, the bondholders committee perfected this appeal. While the ultimate question of whether the court erred in this respect would seem to be a narrow one, its solution involves a somewhat careful examination of the record of an earlier reorganization of the same debtor under former Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207.

The first proceeding had its inception in a voluntary petition filed June 14, 1935, accompanied by a proposed plan of reorganization, which, on June 15, the court approved. At the same time it approved also a form of transmittal letter and one of acceptance to be sent to the bondholders, fixed a date for a hearing as to confirmation of the plan and directed that notice be given to all parties in interest. Later, on July 8, the court approved the notices, granted the debtor leave to propose its plan, allowed and classified certain claims and determined that the only creditors who would be affected by the plan were the first and second mortgagees.

At the hearing on July 16, 1935, the court entered an order confirming the plan. After reciting that all parties in interest had been heard or had had opportunity to be heard, the court found that the Northwestern Mutual Life Insurance Company held a third class claim under a first mortgage securing a note for $2, 350, 000 with interest at 5 1/2% per annum and the bondholders a fourth class claim consisting of bonds aggregating originally $1, 457, 500 secured by a second mortgage, together with interest due upon coupons maturing between August 1, 1932 and July 16, 1935 aggregating $218, 625. It is this interest which the District Court in the present case found had been cancelled as a result of the earlier reorganization and with which we are here concerned.

The plan, thus confirmed and expressly made a part of the decree of confirmation, recited that the first mortgagee had agreed to waive all interest in default, amounting to $269, 165, and certain additional interest accruing in the future in the sum of $176, 250, provided the bondholders joined in the plan; that the debtor would pay no interest on or principal of any of the second mortgage bonds, until the principal of the first mortgage debt had been reduced to $1, 000, 000; that, after such reduction, it would apply one-half of its net earnings to payment of interest upon the second mortgage bonds to the extent and in the manner provided in the plan; that the debtor's obligation to pay interest on the bonds would be so modified that it would 'be under no obligation to pay any interest whatsoever, whether heretofore accrued or otherwise' except as provided in the plan; that until the first mortgage debt 'shall be reduced to $1, 000, 000 or less, or until Nov. 7, 1944, whichever date shall be earlier, the club shall be under no obligation to pay interest on said' bonds 'at any time, nor shall any interest accrue thereon'; that upon the happening of whichever should be the earlier of the said events, 'interest * * * shall commence to accrue upon said bonds'; that if the date when said reduction in the first mortgage debt occurs should be earlier than November 7, 1944, the Club would apply one-half of its net earnings for each six months accounting period after the date of reduction to the payment of interest for such accounting period. In case the indebtedness due the first mortgagee had not been reduced to $1, 000, 000 on or before November 7, 1944, then, commencing on the latter date, interest upon the bonds 'shall accrue' but that no 'such interest shall be paid' until the first mortgage indebtedness has been reduced to $1, 000, 000 or less, when, under the terms of the plan, the Club would become obligated to apply one-half of its net earnings to the payment of interest on the bonds as aforesaid. If, after such events, the amount of earnings for any

Page 384

six months accounting period should exceed the interest requirements under the plan for such accounting period the Club was to apply such excess to the payment of 'accrued interest' upon the bonds if there should be at that time any such 'accrued and unpaid' interest.

The court approved also the comments on the plan submitted to the creditors, wherein it was said that, although the 'bondholders waive interest for a substantial period of time, ' such waiver merely 'recognizes' existing conditions. The Extension Agreement, also a part of the plan, called for delivery of the bonds to the First National Bank of Chicago as Depositary and provided that the interest coupons attached thereto, for the period in controversy, should be detached, cancelled and...

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