Boston and Maine Corp., In re

• Decision Date: 30 September 1983
• Docket Number: No. 83-1086,83-1086
• Citation: 719 F.2d 493
• Parties: 9 Collier Bankr.Cas.2d 1377, Bankr. L. Rep. P 69,412 In re BOSTON AND MAINE CORPORATION, Debtor. Appeal of CITY OF CAMBRIDGE.
• Court: U.S. Court of Appeals — First Circuit

Page 493

719 F.2d 493

9 Collier Bankr.Cas.2d 1377, Bankr. L. Rep. P 69,412

In re BOSTON AND MAINE CORPORATION, Debtor.

Appeal of CITY OF CAMBRIDGE.

No. 83-1086.

United States Court of Appeals, First Circuit.

Argued June 10, 1983.

Decided Sept. 30, 1983.

Joseph F. Ryan, Boston, Mass., with whom John F. Collins, Hirsh Freed, Robert E. Brooks, Steven B. Levine, and Brown, Rudnick, Freed & Gesmer, Boston, Mass., were on brief, for City of Cambridge.

Robert M. Gargill, Boston, Mass., with whom John N. Garner, Choate, Hall & Stewart, Charles W. Mulcahy, Jr., and Mahoney, Hawkes & Goldings, Boston, Mass., were on brief, for Reorganization Trustees of Boston and Maine Corp.

Before CAMPBELL, Chief Judge, BOWNES, Circuit Judge, and TORRUELLA, ^* District Judge.

BOWNES, Circuit Judge.

This is another, and perhaps the last, in a long line of decisions involving the reorganization of the Boston and Maine Railroad (B & M). Appellant, the City of Cambridge, appeals from an order of the district court sitting as a Reorganization Court. That order approved the final plan of reorganization for the B & M. Cambridge's objections stem from the treatment afforded its claims for taxes under the plan. Some background is necessary.

On March 12, 1970, an involuntary petition for reorganization was filed against the B & M under section 77 of the Bankruptcy Act, 11 U.S.C. Sec. 205 (1977). For some time before this date and throughout the reorganization period--March 12, 1970 through June 28, 1982--B & M did not pay taxes owed to Cambridge on a current basis. B & M's failure to pay the taxes due during the reorganization period was the result of an order of the district court on September 19, 1978, which authorized the Trustees "to defer the payment of taxes heretofore or hereafter assessed on or in connection with property of or in the possession of the Debtor or the Trustees ...."

Cambridge's claims for taxes are substantial. It is owed approximately $434,000 in taxes accruing prior to the filing of the reorganization petition (prepetition taxes) which includes prepetition interest, and approximately $4,026,000 in taxes accruing during the reorganization period (postpetition taxes). The reorganization plan provides for cash payment in full for these claims. It does not, however, provide for postpetition interest on the taxes owed. This interest amounts to approximately $375,000 on the prepetition taxes and approximately $1,868,000 on the postpetition taxes. It is the plan's failure to provide for postpetition interest payments to which Cambridge objects.

In assessing the district court's affirmance of the plan's disallowance of interest it must be remembered that the district court, in passing on the allowance of claims, sits as a court of equity. Pepper v. Litton, 308 U.S. 295, 307, 60 S.Ct. 238, 245, 84 L.Ed. 281 (1939); see Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 219, 61 S.Ct. 904, 907, 85 L.Ed. 1293 (1941). We have previously articulated the standard of review:

"It is not for us to pass upon the myriad factual and legal issues as though we were trying the cases de novo. 'It is not enough to reverse the District Court that we might have appraised the facts somewhat differently. If there is warrant for the action of the District Court, our task for review is at an end.' " Group of Institutional Investors v. Chicago, M., St. P. & P.R. Co., 318 U.S. 523, 564 [63 S.Ct. 727, 749, 87 L.Ed. 959].

Boston and Maine Corp. v. First National Bank of Boston, 618 F.2d 137, 141 (1st Cir.1980) (quoting New Haven Inclusion Cases, 399 U.S. 392, 435, 90 S.Ct. 2054, 2080-81, 26 L.Ed.2d 691 (1970)). The district court's decision would, of course, not be warranted if it were the result of an error of law or based on factual findings that were clearly erroneous.

I. INTEREST ON PREPETITION TAXES

Cambridge, in its appeal, asserts that the district court erred in holding that its prepetition secured tax lien is not entitled to payment of postpetition interest from the assets of B & M. For the reasons set forth below, we agree with the district court.

It is a well-established principle that in bankruptcy and other insolvency proceedings interest upon claims ceases to accrue at the initiation of the proceedings. Nicholas v. United States, 384 U.S. 678, 682, 86 S.Ct. 1674, 1678, 16 L.Ed.2d 853 (1966); City of New York v. Saper, 336 U.S. 328, 332, 69 S.Ct. 554, 556, 93 L.Ed. 710 (1949); Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 162, 67 S.Ct. 237, 239, 91 L.Ed. 162 (1946); Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244 (1911); Thomas v. Western Car Co., 149 U.S. 95, 116-17, 13 S.Ct. 824, 833, 37 L.Ed. 663 (1893); Debentureholders Protective Committee of Continental Investment Corp. v. Continental Investment Corp., 679 F.2d 264, 268-69 (1st Cir.), cert. denied, --- U.S. ----, 103 S.Ct. 192, 74 L.Ed.2d 155 (1982). As the Supreme Court has explained:

Exaction of interest, where the power of a debtor to pay even his contractual obligations is suspended by law, has been prohibited because it was considered in the nature of a penalty imposed because of delay in prompt payment--a delay necessitated by law if the courts are properly to preserve and protect the estate for the benefit of all interests involved.... "The delay in distribution is the act of the law; it is a necessary incident to the settlement of the estate." Thomas v. Western Car Co., 149 U.S. 95, 116-117 [13 S.Ct. 824, 833, 37 L.Ed. 663]. Cf. American Iron Co., v. Seaboard Air Line, 233 U.S. 261 [34 S.Ct. 502, 58 L.Ed. 949]. Courts have felt that it would be inequitable for anyone to gain an advantage or suffer a loss because of such delay. Sexton v. Dreyfus, 219 U.S. 339, 346 [31 S.Ct. 256, 258, 55 L.Ed. 244]. Accrual of simple interest on unsecured claims in bankruptcy was prohibited in order that the administrative inconvenience of continuous recomputation of interest causing recomputation of claims could be avoided. Moreover, different creditors whose claims bore diverse interest rates or were paid by the bankruptcy court on different dates would suffer neither gain nor loss caused solely by delay.

Vanston Bondholders Protective Committee v. Green, 329 U.S. at 163-64, 67 S.Ct. at 240 (footnote omitted).

Historically governmental entities' claims for past due taxes received special treatment, accruing postpetition interest until the date of payment. See City of New York v. Saper, 336 U.S. 328, 333, 69 S.Ct. 554, 557, 93 L.Ed. 710. In Saper, however, the Supreme Court held that the general prohibition against the payment of postpetition interest embraced tax liens in bankruptcy cases. Id. at 338, 69 S.Ct. at 559. Saper 's ban on postpetition interest for tax claims has been extended to Chapter X reorganizations, United States v. Edens, 189 F.2d 876, 877 (4th Cir.1951), aff'd per curiam, 342 U.S. 912, 72 S.Ct. 357, 96 L.Ed. 682 (1952); Chapter XI arrangements, Massachusetts v. Thompson, 190 F.2d 10, 10-11 (1st Cir.1951), cert. denied, 342 U.S. 918, 72 S.Ct. 364, 96 L.Ed. 686 (1952); United States v. General Engineering and Manufacturing Co., 188 F.2d 80, 81-83 (8th Cir.1951), aff'd per curiam, 342 U.S. 912, 72 S.Ct. 358, 96 L.Ed. 682 (1952); direct actions against a debtor after the confirmation of an arrangement, National Foundry Co. v. Director of Internal Revenue, 229 F.2d 149, 150-51 (2d Cir.1956); and Section 77 railroad reorganizations, In re Penn Central Transportation Co., 358 F.Supp. 154, 170 (E.D.Pa.1973); In re New York, New Haven and Hartford Railroad Co., 304 F.Supp. 1121, 1129-32 (D.Conn.1969).

Despite the general prohibition on the payment of postpetition interest, three exceptions have been developed by the federal courts. Interest may accrue: (1) where the bankrupt ultimately proves to be solvent; (2) where securities, held by the creditor produce income after the filing of the petition; and (3) where the amount of the secured creditor's security is sufficient to satisfy both the principal and interest due on the secured claim. In re Walsh Construction, Inc., 669 F.2d 1325, 1330 (9th Cir.1982); In re Kerber Packing Co., 276 F.2d 245, 246-47 (7th Cir.1960); United States v. Bass, 271 F.2d 129, 130 (9th Cir.1959); In re Macomb Trailer Coach, Inc., 200 F.2d 611, 613 (6th Cir.1952), cert. denied, 345 U.S. 958, 73 S.Ct. 940, 97 L.Ed. 1378 (1953); see also Debentureholders Protective Committee of Continental Investment Corp. v. Continental Investment Corp., 679 F.2d at 269 (discussing first exception); United States v. Kalishman, 346 F.2d 514, 517-18 (8th Cir.1965) (discussing first and second exceptions), cert. denied, 384 U.S. 1003, 86 S.Ct. 1913, 16 L.Ed.2d 1017 (1966); United States v. Harrington, 269 F.2d 719, 720 (4th Cir.1959) (same); Castaner v. Mora, 234 F.2d 710, 712 (1st Cir.1956) (discussing third exception); Kagan v. Industrial Washing Machine Corp., 182 F.2d 139, 146 (1st Cir.1950) (same); Oppenheimer v. Oldham, 178 F.2d 386, 388-89 (5th Cir.1949) (same).

These exceptions are not rigid doctrinal categories. Rather, they are flexible guidelines which have been developed by the courts in the exercise of their equitable powers in insolvency proceedings. The reorganization court must consider whether to grant postpetition interest, not as an abstract matter, but in light of the nature of each claim and the equities of the case before it. In re Penn Central Transportation Co., 358 F.Supp. at 170; In re Leeds Homes, Inc., 222 F.Supp. 20, 33 (E.D.Tenn.1963), aff'd 332 F.2d 648 (6th Cir.), cert. denied, 379 U.S. 836, 85 S.Ct. 71, 13 L.Ed.2d 43 (1964); see also In re Magnus Harmonica Corp., 262 F.2d 515, 518 (3d Cir.1959). At all times the reorganization court must be guided by the basic equitable principle announced in Vanston:

It is manifest that the touchstone of each decision on allowance of interest in bankruptcy, receivership and reorganization has been a balance of equities between creditor and creditor or...