In re Prima Co.

• Decision Date: 03 March 1937
• Docket Number: No. 6141,6142.,6141
• Citation: 88 F.2d 785
• Parties: In re PRIMA CO. FIRST NAT. BANK OF CHICAGO v. PRIMA CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

88 F.2d 785 (1937)

In re PRIMA CO. FIRST NAT. BANK OF CHICAGO v. PRIMA CO. et al.

Nos. 6141, 6142.

Circuit Court of Appeals, Seventh Circuit.

March 3, 1937.

Henry S. Blum, of Chicago, Ill., for appellant.

Paul F. Koenig and P. A. Rattray, both of Chicago, Ill. (Edmund D. Adcock, of Chicago, Ill., of counsel), for appellee Marshall Keig.

Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.

EVANS, Circuit Judge.

The narrow question presented for our determination concerns the power of the District Court sitting as a court of bankruptcy to authorize, in a pending proceeding brought under section 77B of the Bankruptcy Act, as amended 11 U.S.C.A. § 207, the issuance of trustee's certificates which are to have a lien¹ prior to an existing mortgage trust deed on debtor's property, where the trust deed expressly provided that no lien prior to the trust deed's lien should be created, secured by the said property.

The debtor, a large manufacturer and distributor of beer, with its place of business in Chicago, filed a voluntary petition under section 77B. Its "going value" and other assets are asserted to be worth $3,043,228.35. Its liabilities were $1,070,797.89. The statement of asset value is an estimate, or opinion. The total liabilities are a reality. The debts include $761,400 of five per cent. notes secured by the trust deed dated September 1, 1935, maturing serially September 1, 1936, 1937, and 1938. The First National Bank of Chicago, trustee named in the trust deed, intervened in the proceedings in the District Court and objected when the trustee petitioned the court for an order authorizing the issuance and sale of $20,000 of trustee's certificates, which were to be payable in six months. Over said trustee's objection, the court directed the issuance of these trust certificates, and directed that they be a first lien (ahead of the lien of the mortgage) on all of the debtor's property.

The petition for leave to issue these certificates set forth the necessity of securing funds with which to purchase licenses, stamps, malt and other beer ingredients, to pay labor, and material bills, etc. The petition for adjudication was filed August 14, 1936, and it appears that the winter months are not the most profitable months for the manufacture and sale of beer. It also appeared that large amounts of perishable products, valued at $60,000, would be destroyed if the business were closed. Without reciting all the facts, it is a fair statement of the District Court's conclusion to say that a closing and liquidation of the debtor's business would result in large losses; that the continuance of the business is necessary to a realization of a fair value of the debtor's assets; that the security of the lien of the first mortgage would not be, in fact, impaired by the issuance of the $20,000 of trustee's certificates.

The action of the court in ordering the issuance of the certificates is supported generally by the unsecured creditors and the stockholders, as well as by some of the mortgage bondholders. Appellant is the trustee named in the trust deed. It is also the holder of a substantial number of the bonds. Another bank is also the holder of a considerable number of bonds. There are other bondholders who are desirous of continuing the brewery and attempting a reorganization under section 77B, as amended 11 U.S.C.A. § 207. They are, generally speaking, individual bondholders. It is as trustee named in the trust deed that the First National Bank objected and now appeals.

In determining this question of the court's power to issue first lien certificates, we must assume that in view of the court's action it would be highly advantageous to the debtor to issue the trustee's certificates in question and that the termination of the debtor's business and the liquidation of its assets would be prejudicial to the interest of all, save first mortgage bondholders; that the first mortgage bondholders would not, in fact, be prejudiced in any way by the issuance of the trustee's certificates, because the security of the mortgage bondholders is ample whether the property be liquidated or whether the business be continued. At least this is the conclusion which appellee asserts and is inferentially supported by the court's order.

If we accept, as we do, the fact statement of the preceding paragraph, appellant's rights are naked legal rights devoid of equity and are based upon a legal proposition which denies to a court of bankruptcy power to direct the issuance of first lien trust certificates against the objection of the first mortgage bondholders, regardless of the strong showing of necessity and advisability.

It is counsel's contention that neither a trustee appointed in a proper 77B proceedings nor an equity receiver (excepting in utility receiverships) may issue certificates, even though authorized so to do by order of the court, which will be ahead of the lien of an existing mortgage, over the objection of the mortgagee.

The appellee on the other hand finds his support for the action of the court in subsection (c) (3) of section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207 (c) (3). He stresses the difference between the phraseology in respect to the court's authority to issue trustee's certificates, appearing in section 77 (c) (3), 11 U.S.C.A. § 205 (c) (3), which provides "as might in an equity receivership be lawful," and that appearing in section 77B (c) (3), which provides "as may be lawful in the particular case," as indicative of Congressional intention to provide different limitations on the court's powers in the two situations.

Section 77B (c) (3) provides:

"* * * The judge * * * (3) may, for cause shown, authorize the debtor or the trustee or trustees, if appointed, to issue certificates for cash, property, or other consideration approved by the judge for such lawful purposes, and upon such terms and conditions and with such security and such priority in payments over existing obligations, secured or unsecured, as may be lawful in the particular case."

With the fact issue thus eliminated there remain two questions, both legal. (a) Did Congress, through section 77B (c) (3), confer upon the court of bankruptcy authority to issue trustee's certificates and give them priority over existing mortgage liens? (b) If it did, was such legislation repugnant to and subject to provisions of the Federal Constitution which expressly denied power to Congress?

In considering section 77B and the authority of the court to direct the issuance of trustee's first lien certificates, we accept as well settled the following: (1) Section 77B is remedial in character and should be liberally construed to carry out its purposes.² (2) In the somewhat analogous field of law, in equity suits where receiver's certificates are issued, courts are, with rare exceptions, not authorized to make the certificates a lien ahead of existing mortgages.³ The exception referred to has been almost entirely limited to railroad receiverships.⁴ In railroad receiverships the courts have held that such certificates may be made a lien prior to that of the existing mortgage. The exception in favor of the first lien receivership certificates has been extended in a few cases.⁵

In analyzing and construing section 77B (c) (3), we must keep in mind that this and all other bankruptcy legislation was expressly authorized by the Federal Constitution. As we stated in the Chicago, R. I. & P. Ry. Co. Case, 72 F.(2d) 443, 452:

"Likewise, legislation which deals with the subject of bankruptcy, that is, legislation for the benefit and relief of creditors and debtors — is not subject to the same constitutional limitations as legislation which deals with other subjects and which affects contractual rights and obligations of debtors and creditors. The grant of power `to establish * * * uniform Laws on the subject of Bankruptcies' (Const. art. 1, § 8, subd. 4) was necessarily a grant of power the exercise of which would impair the obligation of contracts."

All parties to a contract are, of necessity, aware of the existence of, and subject to, the power of Congress to legislate on the subject of bankruptcies. They were and are chargeable with knowledge that their rights and remedies, in case the debtor becomes insolvent and is adjudicated a bankrupt, are affected by existing bankruptcy laws and all future lawful bankruptcy legislation which might be enacted. The amendments to the bankruptcy laws were not therefore necessarily an unlawful impairment of the contractual rights of either party. All loans were made and all credit extended with the knowledge that the power to enact such laws existed and application of such legislation might alter the contractual rights of the creditor. To illustrate: A discharge in bankruptcy is the goal of the debtor in the ordinary bankruptcy proceedings. Yet, a discharge of debts necessarily abridges the creditor's contract and his rights thereunder. Another unavoidable conclusion is that all contracts are made with the knowledge that existing bankruptcy laws may be amended.

Modification of the bankruptcy laws, however, does not necessarily mean the impairment of existing contracts or the lessening of creditor's rights and remedies. The amendments may be promotive of such remedies. In fact, the entire bankruptcy act might be repealed and no vested right invaded.

The significant fact which this discussion is aimed to establish is that the Constitutional provision authorizing bankruptcy legislation existed when the contracts were made, and therefore all contracts were, and are, subject to all valid legislation which Congress may enact pursuant to the grant of power appearing in article 1, section 8.

As illustrative of the power of Congress to act as well as of its enactment, reference is made to that section (77B (e) (1), amended by Act Aug. 29, 1935, 11 U.S.C.A. § 207 (e) (1), which permits of a modification of the terms of...