In re Union League Club of Chicago, 10712.

Decision Date16 April 1953
Docket NumberNo. 10712.,10712.
Citation203 F.2d 381
PartiesIn re UNION LEAGUE CLUB OF CHICAGO. O'MALLEY et al. v. UNION LEAGUE CLUB OF CHICAGO.
CourtU.S. Court of Appeals — Seventh Circuit

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.

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 5½% 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" (all emphasis supplied) 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 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 cremated and the bonds registered and redelivered to the bondholders endorsed in accord with a legend included in the plan.

The court, in its decree confirming the plan, directed the Depositary to detach, cancel and cremate the coupons and enjoined any and all bondholders, whether they had deposited their interest coupons or not, "from suing on, collecting or taking any action with respect to the interest coupons appertaining to said bonds". The Extension Agreement executed by the bondholders contained a clause to the effect that the plan contemplated "the elimination of interest payments thereon until the time specified in the plan and limits the extent to which interest is payable after that time". The notice approved by the court and sent to the creditors likewise recited that the plan would eliminate all interest payments until the first mortgage indebtedness had been reduced to $1,000,000, that it would limit the extent to which interest should be payable after that time and that all interest coupons would be detached and cremated and the bonds endorsed with a legend evidencing the extension of their maturity, "the elimination of interest payments" and other modifications of the indenture proposed in the plan. In the final decree the court declared that all interest coupons "shall from the date of the said order be null and void" and that from and after that date payment of interest should be governed by the plan of reorganization, the Extension Agreement and the order of the court.

It is the position of the bondholders that, despite the quoted provisions of the plan, the Extension Agreement and other documents, all approved by the court, and despite the provisions of the decree itself, they are entitled to recover the interest represented by the cancelled coupons maturing between August...

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9 cases
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