In re Realty Associates Securities Corporation

• Decision Date: 08 December 1947
• Docket Number: No. 200,Docket 20500.,200
• Citation: 163 F.2d 387
• Parties: In re REALTY ASSOCIATES SECURITIES CORPORATION.
• Court: U.S. Court of Appeals — Second Circuit

163 F.2d 387 (1947)

In re REALTY ASSOCIATES SECURITIES CORPORATION.

No. 200, Docket 20500.

Circuit Court of Appeals, Second Circuit.

July 23, 1947.

Writ of Certiorari Denied December 8, 1947.

Hooker, Alley & Duncan and Root, Ballantine, Harlan, Bushby & Palmer, all of New York City (William P. Palmer and James B. Alley, both of New York City, of counsel), for the Debtor and its stockholder, appellants.

Newman & Bisco, of New York City (Perry A. Hull, of New York City, of counsel), for Manufacturers Trust Co., Indenture Trustee, appellant.

Percival E. Jackson, of New York City (Percival E. Jackson and Theodore N. Tarlau, both of New York City, of counsel), for Vanneck Realty Corporation, appellee.

Lewis, Marks & Kanter, of Brooklyn, and Julius Silver, of New York City (Julius Silver, of New York City, Lloyd B. Kanter, of Brooklyn, and Jack L. Rappaport, of New York City, of counsel), for Bondholders' Protective Committee, appellee.

Roger S. Foster, Sol., and Robert S. Rubin, Associate Sol., both of Philadelphia, Pa., George Zolotar, Sp. Counsel, of New York City (Alexander Cohen, of Philadelphia, Pa., and Ezra Weiss and Kiva Berke, both of New York City, of counsel), for Securities and Exchange Commission.

Before L. HAND, SWAN, and CLARK, Circuit Judges.

Writ of Certiorari Denied December 8, 1947. See 68 S.Ct. 218.

SWAN, Circuit Judge.

These appeals present questions as to the interest payable upon bonds of the debtor after they became due on October 1, 1943. The debtor is a New York corporation organized to deal in mortgages and real estate securities. Prior to 1933 it had outstanding three issues of 6% bonds maturing respectively in 1937, 1939 and 1943. Pursuant to a composition in bankruptcy, effective as of July 10, 1933, the bonds then outstanding were reduced in amount and made subject to a new Indenture dated July 10, 1933, which fixed the maturity date for all the bonds as October 1, 1943 and provided that they were to bear interest at 5% per annum payable out of earnings, any unpaid portion of the interest to be cumulative and payable with the principal at maturity. The old bonds were required to be "stamped" to indicate the modification effected, and to be registered. On October 1, 1943 the principal amount of the outstanding stamped and registered bonds was $5,710,400 and, as the debtor had paid only about 3% interest out of earnings, the accumulated, accrued and unpaid interest thereon was $1,286,646.43. On September 28, 1943, three days before the maturity date, the debtor filed a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. On April 2, 1945, upon the petition of the debtor and its sole stockholder, Consolidated Realty Corporation, a wholly-owned subsidiary of Reconstruction Finance Corporation, the court made an order dismissing the reorganization proceedings for the unique reason that funds were available to pay all debts, including the bonds with interest thereon up to April 15, 1945, the date set for payment. The order of dismissal, however, reserved to the court jurisdiction to determine the amount of interest payable and, particularly, whether the rate after maturity should be 5% or 6% and whether interest was payable on that portion of the bondholders' claim which represented the unpaid interest which had accrued before the bonds matured on October 1, 1943. By its order of August 5, 1946, which is now before us on appeal,¹ the court decided that after October 1, 1943 interest was payable at the rate of 6% both on the principal of the bonds and on the unpaid interest then due. The debtor and its sole stockholder contend that the 5% rate should have been applied to principal and no interest on interest allowed.

The first question is whether the contract between the debtor and the bondholders provides for a 5% interest rate after maturity as well as before. This turns upon the proper construction of the Indenture of July 10, 1933 which expressly declares that the rights and remedies of the parties and of the holders of the stamped bonds shall be governed by the New York law. It is common ground that under the New York decisions interest continues at the specified contract rate rather than at the legal rate of 6%, if the contract provides for payment of interest "until the principal shall be paid."² In Article III, section 1 of the debtor's Indenture the company covenanted "that it will pay to the registered holder of each Stamped Bond * * * until the reduced principal of each such Bond shall be duly paid * * * interest on the reduced principal amount thereof from July 10, 1933 at the rate of five per cent (5%) per annum * * *" Because of the phrase "duly paid" and a similar expression in Article IV, section 1,³ the district judge concluded that the word "duly" was used to denote the obligation of prompt payment at maturity and limited the debtor's promise to pay interest to the period prior to the maturity of the bonds. We cannot agree with this construction and are fortified in the view that no such limitation was intended by the word "duly" because Article VI, which deals with "remedies of Trustee and Bondholders," provides in section 4 that any moneys collected by the Trustee pursuant to this Article after an "event of default" (nonpayment at maturity being specified as one such event) shall be applied to payment of the principal and interest then owing, "with interest at the rate of five per cent (5%) per annum on the overdue principal." Obviously this provision leaves no doubt about the trustee's right to collect only 5% interest after maturity of the bonds. But the bondholders say that section 8 of Article VI, which provides that "on and after October 1, 1943 the registered owner of any Stamped Bond may maintain an action in his own name and in his own right to recover any amount due thereon for principal or interest," gives them an unconditional right to sue, and implies that they may collect interest at the legal rate after maturity. This would mean that the debtor need pay only 5% if the Trustee collected, but must pay 6% if the bondholders sued. We cannot accept such an interpretation of the contract. It would introduce an inconsistency into the debtor's obligations which the parties cannot reasonably be believed to have intended, for it would result in making it necessary for all the bondholders to sue personally, or in a class action, in order to recover the full amount of their claims, and would prevent the trustee from adequately asserting their rights. Certainly the trustee is not to be understood to be so crippled; their individual rights are supplementary to his, but he is fully armed to protect them. Accordingly we think it clear that the contract of the parties provides that interest is to continue at the 5% rate after maturity of the bonds.

Irrespective of the contract provisions, the bondholders advance two alternative theories to support their right to the 6% rate. The first may be called the "judgment theory": it asserts that allowance by the court of the claim on the bonds is a judgment which bears interest at the legal rate from the date of the Chapter X petition. In a straight bankruptcy case, In re John Osborn's Sons & Co., 2 Cir., 177 F. 184, 29 L.R.A.,N.S., 887, this court decided, relying upon National Bank of Commonwealth of New York City v. Mechanic's Nat. Bank, 94 U.S. 437, 24 L.Ed. 176, that allowed claims in bankruptcy are of the same efficacy as judgments with respect to bearing interest, where the assets of the bankrupt are sufficient. In that case the bankrupt had made no contract providing for the payment of interest, and the principal appellants contend that the decision does not control the case at bar for that reason. Assuming without decision that the attempted distinction would be invalid in an ordinary bankruptcy, we are not convinced that the "judgment theory" is applicable in a Chapter X reorganization, where the very purpose of the proceeding is to keep the debts in statu quo until a plan can be adopted under which the debtor may continue in business without having its property burdened with judgments. It is, of course, necessary to liquidate the debts, but the proposal is not that they will be paid at maturity but that they will be extended in whole or in part by means of substituted obligations; and it would run entirely counter to this purpose to treat them as peremptory demands, like judgments, upon which damages in the form of interest for delay in payment will commence to fall due as soon as the reorganization petition is filed. Until the "plan" is proposed and accepted, the debtor gets a moratorium; and the debts do not become finally due except to the extent and in the manner that the "plan" provides. That the practice has been to treat the contract rate of interest as continuing to the effective date of the plan in Chapter X and railroad reorganizations is amply shown by the cases cited by the debtor. although the point does not appear to have been discussed. See Ecker v....