In re Sterba

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: ALSCHULER, EVANS, and FITZHENRY, Circuit
• Citation: In re Sterba, 74 F.2d 413 (7th Cir. 1935)
• Decision Date: 05 January 1935
• Docket Number: 5229.,No. 5193,5193
• Parties: In re STERBA. CHICAGO TITLE & TRUST CO. v. STERBA.

74 F.2d 413 (1935)

In re STERBA CHICAGO TITLE & TRUST CO. v. STERBA.

Nos. 5193, 5229.

Circuit Court of Appeals, Seventh Circuit.

January 5, 1935.

George Gillette and Elmer M. Leesman, both of Chicago, Ill., for appellant.

Samuel Wodika, of Chicago, Ill., for appellee.

Before ALSCHULER, EVANS, and FITZHENRY, Circuit Judges.

EVANS, Circuit Judge.

These appeals are from a decree refusing to vacate an order entered in a proceeding instituted by appellee, under section 74 of the Bankruptcy Act (Act March 3, 1933, § 1 see 11 USCA § 202), restraining appellant, mortgagee, from foreclosing its mortgage on appellee's property.

Appellee's petition, filed July 24, 1933, sought a composition or an extension of time within which to pay her debts. Appended to the petition were schedules of debts and of assets. The enumerated secured liabilities included a $70,000 mortgage (evidenced by 164 bonds held by unknown persons; this bond issue had been reduced to $56,000); a $20,000 mortgage held by appellant, which is the basis of this appeal; a $2,000 mortgage; and two other comparatively small claims. The unsecured liabilities were for small amounts. The assets consisted of the three pieces of realty, mortgaged as stated. The value of the equities was stated as "unknown." Choses of action of the value of $3,873 were listed.

The District Court referred the debtor's petition to a referee who reported that the petition had been filed in good faith. On August 7, 1933, the District Court entered an order restraining the foreclosure of mortgages against the property of the estate of the debtor. Appellant petitioned to vacate the restraining order. After another hearing, the referee sustained the entry of the restraining order. In support thereof referee found that income from the mortgaged property was being paid to the county collector on past due general taxes and that the remainder of the income was being deposited with the clerk of the court and that monthly reports of the handling of the property were made to the court.

Appellant's exception to the referee's report was predicated on a lack of authority in Congress to enact section 74 which provides for extension of time for payment of debts, as that subject matter was not within the category of "bankruptcies" upon which Congress possesses the constitutional power to legislate. The District Court overruled the exceptions to the referee's report. The appeal from this order followed.

Appellant's position, broadly stated, is that a law granting a moratorium cannot be classified as legislation concerning bankruptcy. It further argues that, assuming section 74 to be valid, it is inapplicable to a secured indebtedness which is owned solely by one owner who is unwilling to accept an extension proposal and whose secured claim is the sole incumbrance against one piece of property. And lastly it argues that even though section 74 be legislation authorized by the Constitution, that part of section 74 which authorizes time extensions where the mortgage is held by a single creditor, is unconstitutional.

This court has held in Re Fred E. Landquist et al., Debtors, 70 F.(2d) 929, that the enactment of section 74 was a valid exercise of power by Congress. We see no reason for withdrawing from the position there taken. Again, in Re Chicago, Rock Island & Pacific R. Co., Debtor, 72 F.(2d) 443, this court sustained the validity of similar legislation.

Nor can we find support in reason for a different conclusion because of its application to secured creditors. Assuming as we do that Federal legislation on the subject of bankruptcies is "for the benefit and relief of creditors and debtors in cases where the debtors are unable to pay their debts," we see no basis for distinguishing between the right of a bankrupt to invoke the jurisdiction of the court to administer estates which are encumbered in part and instances where it is invoked to administer estates where the debts are all unsecured. Likewise, if Congress may authorize the discharge of a bankrupt from his debts, it may, we think, provide for the lesser act of extending the time of payment of the debtor's secured debts. Of course, it is hardly necessary to observe that the court can not disturb the status of the lien. The act so provides: "Provided, however, That such extension or composition shall not reduce the amount of or impair the lien of any secured creditor, but shall affect only the time and method of its liquidation." Section 202(i), 11 USCA.

Does section 74 apply to instances where one creditor holds the only incumbrance upon a single piece of property?

Section 74 (e) of the Act (11 USCA § 202(e) provides:

"An application for the confirmation of a composition or extension proposal may be filed in the court of bankruptcy after, but not before, it has been accepted in writing by a majority in number of all creditors whose claims if unsecured have been allowed, or if secured are proposed to be affected by an extension proposal, which number must represent a majority in amount of such claims * * *."

Appellant's argument seems to hinge around the word "or" italicized above. It argues that the use of the disjunctive is significant of the fact that Congress meant to make two distinct classes of creditors, the unsecured, who should pass upon the extension of their claims; and the secured creditors who alone should approve of the extension of the debt. It contends that if there were to be but one class of creditors, Congress would have used the word "and" in place of "or" and would have used the word "all" instead of the word "such."

We cannot accept this construction of the language.

Congress was describing the claims to be included — all creditors whose claims if unsecured have been allowed

or

if secured are proposed to be affected by an extension proposal. It is to be noticed that the word "number" is used in the singular — meaning the majority in number of both kinds of claims. The reason the word "such" was used instead of "all" is that not all claims necessarily were included, those of the secured claims not proposed to be included being excluded. If Congress had said "all," it would possibly have covered some secured claims which were not included in the plan.

This conclusion is in harmony with what was obviously the intention and purpose of Congress in passing this legislation.

The contention that the act as thus construed, and applicable to creditors like appellant, is contrary to the Constitution must be rejected if we adhere to the views expressed in the Landquist and Chicago R. I. & Pac. Ry. Co. Cases, supra. The conclusions there reached were predicated upon what we believed was embraced in the grant of authority to Congress found in article 1, § 8, cl. 4, which reads, "The Congress shall have Power * * * To establish * * * uniform Laws on the subject of Bankruptcies throughout the United States."

The serious question, it seems to us, in cases of this character, is not so much one of jurisdiction of the court to act as of feasibility of the plan of extension submitted. The creditors holding the $70,000 mortgage may be interested in the estate's equity in the property covered by the $20,000 mortgage. The secured creditor holding the $20,000 mortgage should not be permitted to withdraw the property thus liened from the control of the court and the claims of the other creditors. For by so doing, an asset of value may be taken from the creditors, and likewise, the debtor's prospect of ultimately paying his debts in full, for which this section 74 was enacted, might be greatly lessened.^*

On the other hand, the court must jealously guard the interests of secured creditors like appellant, and avoid inexcusable losses which are brought about by delays.

This section cannot meet with successful enforcement unless the court insists (a) that the plan of composition or the extension proposal be promptly submitted, and (b) that the plan or "extension proposal" be carefully analyzed from the viewpoint of each secured creditor and that there be fairness to all as well as a justifiable basis for the hope of a realization of the plan.

The necessity for the prompt submission of the plan is apparent. It cannot be too strongly emphasized. This section was enacted because of the failure of receiverships to effectuate, and in many instances to attempt, reorganizations. In equity receiverships, on occasions, the jurisdiction of a court was invoked and a receiver appointed where the mortgage vastly exceeded the value of the property and there was no equity of redemption, and yet the receivership was continued for three, four and even five years with the expenses of the receivership consuming the entire revenue and leaving the bondholders in a worse position each year. The amendments...