In re Schafer's Bakeries

• Decision Date: 30 September 1957
• Docket Number: No. 36060.,36060.
• Citation: 155 F. Supp. 902
• Parties: In the Matter of SCHAFER'S BAKERIES for the Reorganization of a Corporation.
• Court: U.S. District Court — Western District of Michigan

155 F. Supp. 902

In the Matter of SCHAFER'S BAKERIES for the Reorganization of a Corporation.

No. 36060.

United States District Court E. D. Michigan, S. D.

September 30, 1957.

COPYRIGHT MATERIAL OMITTED

Levin, Levin, Garvett & Dill, Detroit, Mich., Archie Schimberg, Chicago, Ill., for petitioning creditor, Woodward Commercial Corp.

Butzel, Levin, Winston & Quint, Detroit, Mich., Eckhart, Klein, McSwain & Campbell, Chicago, Ill., for the Creditors' Committee, interveners.

FREEMAN, District Judge.

This is a petition in a Chapter X reorganization proceeding under the Bankruptcy Act of 1898 (11 U.S.C.A. §§ 501-676), as amended, by Woodward Commercial Corporation (hereinafter called Woodward), a secured creditor, requesting that the court enter an order directing the trustee to pay Woodward the sum of $15,775.06, representing amounts claimed to be due and owing as the result of certain obligations entered into between the debtor organizations and Woodward, as hereinafter set forth.

The debtor organizations are composed of Schafer's Services, Inc., Schafer's Kalamazoo Bakery, Inc., and four other Schafer corporations, all being an integral part of a common enterprise known as Schafer's Bakeries engaged in operating a bakery business.

In 1952, the Schafer organization commenced a modernization program of its plant in Lansing, Michigan, with the objective of consolidating all its baking operations in that plant. This program was scheduled for completion on October 1, 1953, but the new plant did not open until May, 1954. The cost of this program was far in excess of the original estimates and Schafer was forced to obtain additional funds, which were procured from Woodward.

On April 29, 1954, Schafer's Services, Inc., and Schafer's Kalamazoo, Inc., executed installment notes in the amounts of $29,500 and $73,650, respectively, to Woodward, in consideration of loans to the respective corporations of $25,000 and $62,500, which notes were payable in Illinois and were guaranteed by certain of the other debtors. The notes and guarantees were secured by certain pledges and real and chattel mortgages, all of which were signed by the debtors in Michigan and mailed to Woodward in Chicago, Illinois, where the documents were examined and approved. As a result of these transactions, the Schafer organization obtained $87,500 from Woodward and was obligated to pay Woodward $103,150 in monthly installments commencing June 1, 1954, in the amount of $4,300 for a period of twenty-three months and $4,250 as the twenty-fourth and final payment. Each of the collateral notes contain the following provision:

"It is expressly agreed that in case the holder hereof, its successors or assigns, shall be a party to, or shall intervene, by reason of this note, or any of the collateral pledged hereunder, in any suit or proceedings of any kind, nature or description, or if the holder hereof shall incur or pay any expenses or attorney's fees by reason of the employment of counsel for advice, or to secure the payment of the moneys due hereunder, or to secure full and complete title to the collateral herein pledged free of any claim of the undersigned, whether such payment or full and complete title to said collateral shall be sought from the maker hereof or any assignee, receiver or trustee of the undersigned, and whether in court proceedings or otherwise, such expenses and attorney's fees and any and all moneys advanced, shall be allowed and paid to the holder hereof, and the same shall be and is hereby made a further charge and lien upon the collateral herein pledged."

Each of the chattel mortgages contain a provision similar to that in the collateral notes, for payment of attorney fees and expenses in case of foreclosure, intervention in any suit or proceeding, advice, to secure possession of the mortgaged property, etc.

The Schafer organization paid the first installment on June 3, 1954, defaulted on the July 1, 1954 installment, and on July 13, 1954, filed its petition for reorganization under Chapter X of the Bankruptcy Act.

On July 30, 1954, Woodward filed a petition in these proceedings for leave to foreclose chattel mortgages, sell collateral and for other relief. On March 7, 1955, an order was entered by this court directing the trustee to pay Woodward $2,500 per month commencing as of July 1, 1954, to apply on such indebtedness. On April 28, 1955, the trustee was authorized to sell certain real estate for the sum of $15,000 and apply the proceeds on the indebtedness, which was done upon Woodward discharging a mortgage against the premises. On April 9, 1956, an order was entered authorizing the trustee to pay the balance of $27,900 then due and owing to Woodward and to purchase United States securities in the amount of $20,000 to be held by the trustee in substitution of Woodward's original security which was released by the court pending the determination by this court of the amount due Woodward for interest, expenses and attorney fees arising from its loans to the said debtors. Woodward received the balance of $27,900 on April 11, 1956, and the securities were purchased by and are now in the possession of the trustee.

On October 1, 1956, Woodward filed an amended and supplemental petition alleging that substantially all the monthly installments were not paid when due, that Woodward was entitled to interest at the rate of one and one-half per cent (1½%) per month on all such defaulted installments from the due date of each installment until actually paid, that no such interest was paid and that delinquent interest in the amount of $5,592.42 was then due and owing from the debtor organization in accordance with the contracts. This amended petition further alleged that on the filing of Chapter X proceedings it became necessary for Woodward to retain attorneys "for counsel and advice, and to intervene in these proceedings to protect the contractual rights of Woodward in its various security devices and to secure the payment of the moneys due it." Woodward claims that said attorneys rendered extensive services and that the fair value of such services is $10,000, that expenses were incurred by said attorneys in connection with such services in the amount of $182.64 and that under the several security instruments involved in this matter the said attorney fees and expenses are an additional charge and lien upon the property pledged and mortgaged to Woodward by the debtor organizations, which lien, under an order of this court dated April 9, 1956, has been transferred to $20,000 of United States securities held by the trustee.

Thus, Woodward now requests this court to direct the trustee to pay Woodward the sum of $15,775.06 for delinquent interest, attorney fees and expenses alleged to be due and owing as aforesaid.

The Unsecured Creditors' Committee filed a response to this amended and supplemental petition in which it is asserted, among other things, that the sums paid to Woodward by the trustee in accordance with the orders of this court represent an amount in excess of principal and interest upon the indebtedness to the date of payment, since interest upon the loans to dates of maturity was included in the principal amount of the notes and interest was compounded in the notes subsequently delivered and included in the principal amount thereof and finance charges and other charges were also included in the principal amount thereof and, therefore, Woodward is attempting to recover interest on interest and penalty interest, which is not recoverable in Chapter X reorganization proceedings. The response of the Committee also alleges that no compensable service was rendered by Woodward's attorneys within the meaning of § 243, Chapter X, of the Bankruptcy Act and that provisions for attorney fees in instruments are void in Michigan unless expressly sanctioned by statute and that no Michigan statute authorizes a charge for attorney fees and expenses so asserted by Woodward.

Both Woodward and the Committee have submitted extensive briefs in this matter.

It is the position of Woodward that its claim for reasonable attorney fees and expenses is purely contractual, is not sought under any provisions of Chapter X of the Bankruptcy Act and is not based on any services rendered for the benefit of the estate for which the court may allow reasonable compensation under § 243, Chapter X, of the Bankruptcy Act. Woodward contends that under Michigan Conflict of Laws Rules the law of Illinois governs as to the validity of the agreements to pay reasonable attorney fees and expenses since the contracts were made in Illinois, that such contracts are valid under Illinois law, that such contracts are not contrary to Michigan public policy and are also valid under Michigan law and are therefore enforceable in Michigan. Woodward further contends that such agreements to pay reasonable attorney fees and expenses, if valid under applicable state law, are enforceable against the trustee in a Chapter X proceeding. Woodward also asserts that a secured creditor in a Chapter X proceeding is entitled to recover interest on delinquent installments of principal to the date of payment where the security is sufficient to pay both principal and interest.

The Creditors' Committee points out that the attorney fees and expenses claimed by Woodward were incurred in these proceedings and contends that § 243 of Chapter X, which provides for allowances to creditors for expenses and attorneys' services beneficial to the estate, is exclusive authority for allowances to creditors for their attorney fees and expenses in Chapter X proceedings. The Committee also contends that, under Conflict of Laws Rules, the law of Michigan governs the validity of these contracts to pay attorney fees and expenses since the mortgaged chattels were located in Michigan, that such contracts are invalid under Michigan law and are not enforceable under Michigan law, even though valid under...