In re Waern Bldg. Corporation

• Citation: 145 F.2d 584
• Decision Date: 18 December 1944
• Docket Number: No. 8538.,8538.
• Parties: In re WAERN BLDG. CORPORATION. MORRILL v. WAERN BLDG. CORPORATION.
• Court: U.S. Court of Appeals — Seventh Circuit

145 F.2d 584 (1944)

In re WAERN BLDG. CORPORATION.

MORRILL v. WAERN BLDG. CORPORATION.

No. 8538.

Circuit Court of Appeals, Seventh Circuit.

November 8, 1944.

Rehearing Denied December 18, 1944.

COPYRIGHT MATERIAL OMITTED

Simon H. Alster, Kernel Freeman, Alster, Berger & Wald, and Freeman & Freeman, all of Chicago, Ill., for appellant.

Walter E. Wiles and Evart O. Ostberg, both of Chicago, Ill. (Herman Barrington, of Chicago, Ill., of counsel), for appellee.

Before MAJOR, KERNER, and MINTON, Circuit Judges.

KERNER, Circuit Judge.

The debtor, Waern Building Corporation, filed a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S. C.A. § 501 et seq. After hearings before the referee at which the proposed plan was modified by eliminating the common stockholders' and the Series B preferred stockholders' equity, so as to leave outstanding only the bonds and the new no par common stock, said stock to be distributed pro rata to holders of the Series A preferred stock, the court confirmed the plan. From this order of confirmation, an objecting bondholder, Ernest Morrill, appeals.

The plan involves an extension of the maturity date of the first mortgage from 1942 to 1948, interest of 4½% annually, deposit of $3,500 annually by the debtor for retirement of the bonds, and deposit of all net rentals with the Chicago City Bank and Trust Company, indenture trustee for the bondholders. More than the required number of creditors consented to the plan, as modified, and the referee and the court found it fair, equitable, and feasible, in accordance with Chapter X. Additional facts appear in the discussion of appellant's arguments against the plan.

Appellant first argues that the burden of proving that the plan was fair, equitable, and feasible was upon the debtor and that the burden was not sustained; that there was no necessity on his part of producing evidence showing that the plan does not meet these requirements.

We think the burden was sustained. The terms of the plan were considered by the referee and the court, and lengthy and full hearings were had as to the plan's feasibility; there was evidence of the debtor's earnings record, valuation, capital structure, nature and condition of the property, and other important facts. These were fully discussed and weighed, and since the court had before it sufficient evidence on which to base a determination, we are not disposed to upset the holding of the court on the mere allegation of unfairness. In re New Rochelle Coal & Lumber Co., 2 Cir., 77 F.2d 881, 883.

Appellant next argues that the plan violates the absolute priority rights of the bondholders because it does not provide for 7% interest. It is true that the bonds provide for an accelerated interest rate after maturity of 7% and that under the plan stockholders participate to the extent of their equity while the bondholders' interest rate is 4½%. The record shows that the appellant never objected to the plan on this ground at any time, either before the referee or the court. Appellant attempts to thrust this objection in as an afterthought on this appeal. If appellant wished to complain of this aspect of the plan, he should have raised a specific objection before the referee and the court in order to have permitted a finding as to its validity. Since he did not, the objection may not be raised for the first time in this court. In re Grosse, 7 Cir., 24 F.2d 305, 306; McGee v. Nee, 8 Cir., 113 F.2d 543, 546; Reconstruction Finance Corporation v. Sun Lumber Co., 4 Cir., 126 F.2d 731, 738; Century Furniture Co. v. Bernhard's, Inc., 9 Cir., 82 F.2d 706, 707; Maloney v. Brandt, 7 Cir., 123 F.2d 779, 782; Richter v. Hoglund, 7 Cir., 132 F.2d 748, 753; Towle v. Pullen, 7 Cir., 238 F. 107, 111, 151 C.C.A. 183; In re Massa, 2 Cir., 133 F.2d 191, 192.

My colleagues concur in the conclusion that appellant is precluded from raising this question for the first time on review. The author of this opinion, however, feels impelled to add this paragraph which represents his own personal opinion. I am convinced that even if the procedural barrier to considering appellant's argument that the absolute priority rights of the bondholders are violated by the plan were to be ignored, the argument is still without merit for the following reasons. Any "stockholder participation" here is more nominal than real, being restricted so far as any beneficial enjoyment goes to the distant future — long after the termination of this plan. All the net rentals must be deposited with the indenture trustee. The money so received must, under the terms of the trust indenture, be applied to payment of taxes, insurance, interest, and payments into a fund to be used for the redemption of bonds. Thus the stockholders do not receive any dividends. Though the corporation has legal title to the property, all earnings must be used for the bondholders' benefit. No mismanagement on the part of the operator of the building is charged, and since the debtor's control is subject to the stringent conditions of the trust indenture, there is no participation by the stockholders in the debtor beyond the extent of their equity. There is no attempt here to subordinate the interests of creditors to that of stockholders. Furthermore, the provision in the bonds is for interest after maturity at the rate of 7%. The very soul and purpose of the present plan is to extend the maturity date. Bondholders owning over 82% in amount of the bonds consented to the confirmation of the plan, and only appellant, who owned less than 1%, took any affirmative steps to oppose it. The 4½% rate provided under the plan is merely the average rate which the bondholders received under the indenture for the period of the original extension under the plan in force since the 77B proceeding of 1936, and allows them the same return under the proposed extension that they received in the previous period. It seems to me that the bondholders have no legitimate complaint that the plan does not put them in a better position and allow them a greater return than they formerly had. I think it is the purpose of Chapter X to make possible such plans and to prevent a single recalcitrant party from blocking a plan deemed beneficial by more than two-thirds of creditors of the same class. Finally, the right of the bondholders to interest accrued on the bonds is given the same priority as the principal, and payments of such interest have been made on each due date. Hence Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 318 U.S. 523, 546, 63 S.Ct. 727, 87 L.Ed. 959, which appellant cites, is not material here, for it does not hold that a provision in the original bonds as to an accelerated rate of interest after maturity must be the interest rate which is to be included in the plan if stockholders participate. So much for my additional reasons for finding appellant's argument unsound.

Appellant's next contention is that the plan does not meet the test of feasibility because there is no reasonable assurance that either the interim requirements of the plan can be carried out or that the debtor will be able to pay or refund the balance of the bonded indebtedness at the end of the extension period. For the sake of convenience this will be considered along with appellant's contention that the court did not have before it competent and sufficient valuation data relating to the debtor's property and earning capacity. In valuing the property, there must be a meticulous regard for earning capacity. Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982. Here the referee had the financial history as well as financial statements of the corporation which showed the following:

                      Year   Rents        Operating Expenses
                  ------------------------------------------
                      1938  $28,000            $15,000
                      1939   28,100             14,800
                      1940   29,800             15,200
                      1941   31,300             15,850
                      1942   32,400             15,880
                      1943   33,000*        16,000*
                

The operating expenses above stated are all expenses exclusive of taxes, which run about $3,300 per year, interest, which is nearly $6,400, insurance, and the trustee's charge of 2% of the net rentals.

The referee also had the benefit of the testimony of three witnesses as to valuation. Although appellant's appraiser, one McKey, valued the property at only $139,550, he conceded on...