In re Shaffer Furniture Co., Bankruptcy No. 86-01526T.

• Decision Date: 08 January 1987
• Docket Number: Bankruptcy No. 86-01526T.
• Citation: 68 BR 827
• Parties: In re: SHAFFER FURNITURE COMPANY, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

68 B.R. 827 (1987)

In re: SHAFFER FURNITURE COMPANY, Debtor.

Bankruptcy No. 86-01526T.

United States Bankruptcy Court, E.D. Pennsylvania.

January 8, 1987.

Eugene C. LaManna, Reading, Pa., for debtor.

Kenneth F. Carobus, Phila., Pa., for Unsecured Creditors.

David C. Schattenstein, Allentown, Pa., Examiner.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

The posture of this case presents to us one rather simple legal issue: whether unsecured creditors of a solvent Debtor involved in a liquidating Chapter 11 case are entitled to payment of post-petition interest on their claims. We hold that the creditors are indeed entitled to post-interest, especially due to the course of conduct of the Debtor here, which does not suggest any equities in its favor, and that, therefore, distribution of proceeds must be accomplished accordingly. Our role as a visiting judge in our Court's Reading Station due to the temporary disability of Chief Judge Thomas M. Twardowski causes us to take no action except to decide the rather simple issue put before us, although we do note that, according to an Examiner's Report, numerous improprieties may have taken place in the course of this proceeding which may constitute a bar to confirmation of any Plan. However, the ultimate resolution of this case must be made by Judge Twardowski, into whose hands this case will be returned for ultimate disposition.

This Chapter 11 proceeding was filed in our Court and assigned to our Reading Station. In July, 1986, a creditor, Bassett Furniture Industries, Inc., moved for the appointment of an Examiner, and David C. Schattenstein, Esquire, was accordingly appointed as Examiner by agreement of all parties, including the Debtor.

On November 7, 1986, the Examiner filed a Report which recites developments which both trouble us and which partially explain the unusual posture of this case. In February, 1986, prior to the bankruptcy filing, the Debtor engaged Gene Rosenberg Associates of Hartford, Connecticut, to conduct a "bankruptcy sale" of the Debtor's inventory. The subsequent sale was then widely advertised in the Reading area news media and conducted both before and after the filing of the Petition in this case without even an attempt to obtain court approval or even notification of same, which appears to have been conduct clearly in violation of 11 U.S.C. § 363(b).

Further, according to the Examiner, the Debtor, by its Counsel and apparently both before and after the filing, solicited creditors to accept a fifty (50%) percent payment "plan," and disbursed certain payments to creditors in accordance therewith. This conduct appears to have been deceptive, as well as clearly violative of 11 U.S.C. § 1125(b), because the Debtor, as is indicated below, had sufficient assets to pay all creditors in full. According to the Examiner's Report, the Debtor also failed to list certain trucking companies as creditors on its schedules, and continued to make payments to them. In addition, it failed to list Hamilton Bank as a creditor on its schedules, although the Bank was a secured creditor and the largest of the Debtor's creditors. Upon the intervention of the Examiner, the Bank was paid in full, in a sum including post-petition interest.

Finally, at the conclusion of the "bankruptcy sale," again subsequent to the bankruptcy filing, the Debtor, again without court approval, compounded its previous violations of 11 U.S.C. § 363(b) by hiring an auctioneer to liquidate all of its remaining assets.

On July 23, 1986, apparently at the conclusion of all of the foregoing activities, the Debtor filed a proposed Disclosure Statement and Plan. Without noting any of the irregularities alleged by the Examiner in his Report, the one and one half page Disclosure Statement stated that the Debtor had available cash resources of $214,420.92 and remaining unsecured debts totalling about $71,806.99. The Debtor was therefore solvent and proposed to pay all creditors in full.

On November 7, 1986, Counsel for the unsecured creditors, Counsel for the Debtor, and the Examiner appeared before us while we were sitting for Chief Judge Twardowski in Reading. Having had no opportunity to review the Examiner's Report, which was not filed until that very day, the Court welcomed the representation of all counsel present that the only issue to be resolved was whether the unsecured creditors were entitled to post-petition interest on their claims before the remaining cash reserves were distributed to the Debtor's principals. Despite the revelations contained in his Report, the Examiner did not see fit to bring same to the attention of the Court, apparently on the belief that no harm was done to the creditors by the Debtor's conduct and that further action could be taken against the Debtor and other participants in the improprieties, such as the auctioneer, Gene Rosenberg Associates, and the Debtor's Counsel, after the meeting, per 11 U.S.C. § 341, which apparently had not yet been conducted. The Examiner therefore presented to the Court, at this juncture, a proposed Order denying Approval of the Debtor's presently-submitted Disclosure Statement, but allowing the Debtor to file a subsequent amended Disclosure Statement, upon consent of the Examiner, without further notice and hearing, after the disposition of the issue of whether the unsecured creditors were entitled to post-petition interest. With the agreement of all present, the Court executed the Order and further ordered that the parties simultaneously file Briefs addressing the issue of whether the unsecured creditors were entitled to post-petition interest on their claims on or before November 21, 1986.

As we indicated at the outset, this issue is rather easily resolved on the present record. We do observe that the Code speaks directly to the issue of allowance of post-petition interest in Chapter 7 cases, at 11 U.S.C. §§ 726(a)(5) and (a)(6), which provide a fifth priority of distribution to "interest at the legal rate from the date of filing of the petition" on all creditors' claims and a sixth priority of distribution to the Debtor. Therefore, the Code expressly grants unsecured creditors a right to post-petition interest in Chapter 7 cases. There are, however, no provisions comparable to 11 U.S.C. §§ 726(a)(5) and (a)(6) in Chapter 11, although we believe that there are numerous guideposts and unanimity among the precedents that exist which establish that the distribution priorities in Chapter 11 cases should be the same as that expressly established by §§ 726(a)(5) and (a)(6) in Chapter 7 cases.

One guidepost is 11 U.S.C. § 1129(a)(7), which states that "each impaired class of claims or interests . . . will receive . . . on account of such claim property of value, as of the effective date of the plan, an amount that is not less than the amount that . . . would be received . . . if the debtor were liquidated under Chapter 7 of this title on such date; . . ." Although this statutory provision might be read as expressly setting forth the same rules for distribution in Chapter 11 cases that apply in chapter 7 cases, it does not appear that this provision is more than a guidepost because the unsecured creditors here, who will be paid in full, are not impaired. 11 U.S.C. § 1124(3)(A).

Another guidepost is 11 U.S.C. § 1141, which provides that the limitations on the Debtor's right to a discharge and dischargeability of certain obligations is the same in a Chapter 11 case as in a Chapter 7 case. See 11 U.S.C. §§ 1141(d)(2), 1141(d)(3)(C).

However, even more convincing are the precedents, under various chapters of the Bankruptcy Act and the Code, which hold that, based upon general equitable principles, post-petition interest ought to be paid to the creditors of solvent debtors before proceeds of liquidation are returned to the debtor.

Most pertinent are those cases decided under Chapter 11, which include In re San Joaquin Estates, 64 B.R. 534, 536 (9th Cir. BAP 1986) (relying on parallel between § 726(a)(5) and § 1129(a)(7)); In re Manville Forest Products Corp., 43 B.R. 293, 199 (Bankr.S.D.N.Y.1984) (relying on "equitable principles"); and In re Oahu Cabinets, Ltd., 12 B.R. 160, 163 (Bankr.D.Hawaii 1981) (relying on commentary of Collier on what is analyzed to be the comparable Chapter X of the Act). There are several cases decided under...