473 F.2d 417 (5th Cir. 1973), 72-1928, In re Pennyrich International, Inc.

Docket Nº:72-1928.
Citation:473 F.2d 417
Party Name:In the Matter of PENNYRICH INTERNATIONAL, INC. OF DALLAS, Bankrupt. LANE INDUSTRIES, INC., d/b/a Century Studios, Appellant, v. Harold C. ABRAMSON, Trustee, Appellee.
Case Date:February 08, 1973
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 417

473 F.2d 417 (5th Cir. 1973)

In the Matter of PENNYRICH INTERNATIONAL, INC. OF DALLAS, Bankrupt. LANE INDUSTRIES, INC., d/b/a Century Studios, Appellant,

v.

Harold C. ABRAMSON, Trustee, Appellee.

No. 72-1928.

United States Court of Appeals, Fifth Circuit.

February 8, 1973

Rehearing Denied March 13, 1973.

Page 418

[Copyrighted Material Omitted]

Page 419

Robin P. Hartmann, Dallas, Tex., for appellant.

G. Dennis Sullivan, Dallas, Tex., for trustee.

Before GOLDBERG, AINSWORTH and INGRAHAM, Circuit Judges.

GOLDBERG, Circuit Judge:

This is an appeal from an order reducing a claim made by a secured creditor against a bankrupt estate. The standard procedures for valuing the security were not followed, and the principal question before us is whether a referee in bankruptcy may ever assign a date not specifically authorized by statute as the time for valuing the security. Finding that the referee's action in creating such an exception to the "standard" valuation procedure was appropriate under all the facts and circumstances of this case, we affirm.

Prior to the institution of the instant bankruptcy proceedings, claimant, Lane Industries, Inc., d/b/a Century Studios, received an order from the bankrupt, Pennyrich International, Inc. of Dallas, to manufacture two promotional motion picture films. 1 After the films had been completed, but before delivery had been made, the bankrupt became insolvent. The films have never been delivered and the bankrupt had never tendered payment for them.

The bankrupt filed a Chapter XI proceeding, 11 U.S.C. § 701 et seq., on November 28, 1969, and was adjudicated bankrupt on February 12, 1970. On April 13, 1970, claimant filed the amended proof of claim with which we are here concerned. The claim was filed as unsecured "except as to $50.00 secured value" and was composed of the following items:

Balance due on the first film $32,216.00
Balance due on the second film 20,196.80
Balance due on open account 9,720.68
Claim for attorney's fees 15,000.00

TOTAL $77,133.48

On May 1, 1970, special counsel for the trustee wrote a letter to claimant's attorney that stated:

"In reviewing the claims of this matter, it has come to my attention that your client is in the position of a secured creditor. As [claimant] still has in its possession the asset upon which your claim is based, I am requesting by this letter that you confer with your client and place a valuation on the asset. This can be done through the provision of Section 57 of the Bankruptcy Act [11 U.S.C. § 93(h)]. In the alternative, I request that you turn the films over to the Trustee and we shall auction them off as an asset of the estate.

"If you feel this matter cannot be worked out in this way, please let me know and I shall prepare the necessary show cause order."

Page 420 Claimant did not make the requested valuation, turn the films over to the trustee, or advise the trustee that the valuation could not be reached without court involvement. On May 19, 1970, a compromise and settlement for the benefit of all unsecured creditors was reached. Although claimant was not a party to that agreement, claimant was later found to have had full knowledge of it. Throughout this time period, claimant made some attempts to solicit offers to purchase the films but apparently was never given an actual offer. Due to the specific content of the films, only a very limited potential market was available, and due to the constant updating of the design of the products involved, the films soon approached obsolescence and their value diminished to a nominal level. The trustee filed an objection to the instant claim and a hearing before the bankruptcy referee was held on March 24, 1971. On April 24, 1971, the referee entered detailed findings of fact and conclusions of law and entered an order that (1) allowed the claim for the films, but only after reducing the amount substantially, (2) allowed the entire claim on the open account, and (3) disallowed entirely the claim for attorney's fees. 2 To compute the allowable amount of the claim for the films, the referee determined the value of the films as of May 19, 1970. Characterizing that amount as the secured portion of the claim, the referee subtracted it from the total claim for the films and thereby ascertained the allowable unsecured portion. 3 The referee thus effectively held that when claimant, a secured creditor, failed to value the films itself, surrender the films to the trustee, or seek a court evaluation, it assumed the risk of the films' declining in value after May 19, 1970, the date of the major compromise and settlement. Finding that it was unreasonable for claimant to continue holding the films without taking more affirmative action after that date, the referee utilized May 19, 1970, as the date of valuation. A petition for review of the referee's order, duly certified, was filed in the United States District Court for the Northern District of Texas. That court sustained the referee's findings of fact and conclusions of law and overruled the petition for review. This appeal is brought from that order. The only issue before us is whether the claim regarding the two films was properly disposed of below. We hold that it was. I. The referee below explicitly found that claimant was a secured creditor as to its claim regarding the two films. That finding is an essential preliminary determination that must be made before applying the provisions of § 57(h) of the Bankruptcy Act, 11 U.S.C. § 93(h), discussed at length infra. It is only where the creditor is secured that § 57(h) is applicable, and our first task is thus to decide whether the referee's determination was correct. The Bankruptcy Act defines the term "secured creditor" as follows:

"'Secured creditor' shall include a creditor who has security for his debt upon the property of the bankrupt of a nature to be assignable under this title or who...

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