Littleton v. Kincaid

• Decision Date: 12 January 1950
• Docket Number: No. 5962.,5962.
• Citation: 179 F.2d 848
• Parties: LITTLETON v. KINCAID et al.
• Court: U.S. Court of Appeals — Fourth Circuit

179 F.2d 848 (1950)

LITTLETON v. KINCAID et al.

No. 5962.

United States Court of Appeals Fourth Circuit.

Argued October 12, 1949.

Decided January 12, 1950.

COPYRIGHT MATERIAL OMITTED

Leslie C. Garnett, Washington, D. C. (Samuel F. Beach, Washington, D. C., on the brief), for appellant,

Clarence R. Ahalt, Arlington, Va., and Elijah B. White, Leesburg, Va., for appellees Mary W. Rust, and others, holders of first trust notes, Estate of William A. Metzger and Clarence R. Ahalt.

Stilson H. Hall, Leesburg, Va., and T. Bruce Fuller, Washington, D. C., for appellees R. H. McNeill and Coleman C. Gore.

Armistead L. Boothe, Alexandria, Va., for appellee John F. Kincaid.

Before SOPER and DOBIE, Circuit Judges, and BARKSDALE, District Judge.

SOPER, Circuit Judge.

The appeal in this case is taken from an order of the District Judge which approved, with minor modifications, the distribution of the proceeds of the sale of the property of the farmer-debtor proposed in the report of the conciliation commissioner under the Frazier-Lemke Act, 11 U.S.C.A. § 203 et seq.

Frank Campbell Littleton, the owner of Oak Hill, the historic place of James Monroe in Loudon County, Virginia, filed a petition under the statute June 18, 1941 stating that he was engaged in producing products of the soil and live stock, and that he was unable to meet his debts as they matured and desired to effect a composition or extension of time to pay his debts under Section 75 of the Bankruptcy Act. At that time there was pending in the Circuit Court of Loudon County, Virginia, a suit by Littleton to enjoin the sale of the property which had been advertised by William A. Metzger and David N. Rust, Jr., trustees under a deed of trust of August 29, 1939, to whom Littleton had conveyed the property to secure the payment of certain promissory notes in the aggregate sum of $110,000.

When the injunction suit was filed in the state court, the trustees under the deed of trust retained Clarence R. Ahalt as their attorney to defend the suit. It transpired that Rust, one of the trustees, was disqualified to act as such since he was in an inconsistent position, being not only trustee but the owner of the indebtedness represented by the promissory notes, and consequently he resigned as trustee. The court then referred the case to a commissioner and upon his report, decreed the advertisement and sale of the property and designated Metzger as the trustee to accomplish this purpose. The filing of the petition in the federal court put a stop to the proceedings in the state court, as provided by Section 75, sub. o, 11 U.S.C.A. § 203, sub. o, of the Frazier-Lemke Act, and proceedings under the federal statute ensued. The debtor's petition was approved and the matter was referred to John F. Kincaid, conciliation commissioner for Loudon County. The debtor, however, was unable to effect a composition with his creditors and on December 19, 1941, upon his amended petition, he was adjudicated a bankrupt and the matter was referred to the conciliation commissioner for further proceedings under Section 75, sub. s of the Bankruptcy Act. Three appraisers were appointed who appraised the real estate and farm equipment at $199,886.75, and three other appraisers appraised the furniture and household goods at the sum of $21,612.85; and it was ordered that the property remain in the possession of the debtor subject to the further order of the court. During the ensuing years, many questions were brought to the attention of the conciliation commissioner and the court, and finally the court appointed trustees to make a sale, who on September 2, 1948, sold the property for $220,000, which was sufficient to pay all of the claims against the debtor with interest, as well as the expenses of the proceedings, and to leave a surplus of approximately $20,000 for the farmer-debtor. The purchase price of the property was paid and deposited in the registry of the court on December 16, 1948.

After the sale, the debtor moved that the case be referred to the regular referee in bankruptcy to make a report as to the transactions of the conciliation commissioner, but the court denied this petition and ordered that the conciliation commissioner, acting as referee, convene the creditors and ascertain the amounts due them and report to the court a scheme of distribution of the funds on deposit to the credit of the cause. Accordingly, the conciliation commissioner on April 13, 1949 reported a scheme of distribution of the funds to the creditors which after certain modifications, was approved by the District Judge. The final order directed that the claims against the bankrupt estate should bear interest to May 1, 1949; that the trustee appointed by the state court in the foreclosure proceedings should be allowed the sum of $1,000, that the attorney for the said trustee should be allowed a fee of $500 for services rendered therein; that the conciliation commissioner should be allowed the sum of $1,877.13, being 1 per cent. of the amount to be paid to creditors, for his services as referee in the proceeding, and the additional sum of $1,850 for services as conciliation commissioner during the period of more than seven years; that three appraisers appointed to appraise the real estate be each allowed the sum of $100 for services rendered, and that three appraisers appointed to appraise the personal property of the debtor be each allowed the sum of $150 for their services, and that Robert H. McNeill, attorney for the debtor, and Coleman C. Gore, his associate, be paid the sum of $38,406.26, which represented the amount of their claim against the estate with interest based upon an assignment on February 5, 1948 of a note of the debtor of February 4, 1941 for $27,200.92 with interest of approximately $9,000, which was held by Frank Campbell Littleton, Jr., the son of the debtor. These allowances in the scheme of distribution constitute the subject matter of this appeal.

The first question relates to the allowance of interest to May 1, 1949 on mortgage notes given by the debtor on August 29, 1939 in the sum of $110,000 which at the time of the report of the conciliation commissioner were held by D. N. Rust, Jr., and others under a deed of trust of that date; and also the allowance of interest to May 1, 1949 on the note of the debtor in the sum of $27,300.92 of February 4, 1941, payable to Frank Campbell Littleton, Jr. and secured by a second deed of trust, and assigned by the holder to Robert H. McNeill and Coleman C. Gore on February 5, 1948. Ordinarily interest on claims against a bankrupt estate runs to the filing of the petition in bankruptcy, which in this case was filed on December 19, 1941. Section 63, sub. a (1, 5), 11 U.S.C.A. § 103, sub. a (1, 5), of the Bankruptcy Act; City of New York v. Saper, 336 U.S. 328, 69 S.Ct. 554; Collier on Bankruptcy, 14th Ed., Vol. 3, p. 1835 et seq. As was pointed out by Mr. Justice Holmes in Sexton v. Dreyfus, 219 U.S. 339, 344, 31 S.Ct. 256, 55 L.Ed. 244, this rule is not a matter of legislative command or statutory construction but, rather, a fundamental principle of the English bankruptcy system which we adopted. Three reasons are usually given for its existence: (a) The delay in payment is not the act of the debtor but is an act of law for the mutual benefit of the creditors. (b) In the case of claims bearing different rates of interest, it would be inequitable to permit the running of interest to increase the proportion of the assets to which some of the creditors are entitled at the expense of the other creditors while the estate is in the process of administration. (c) If all claims bear the same rate of interest, the addition of interest would not change the proportion of assets to which each would be entitled, and the computation may therefore be omitted as a useless act. Clearly the last two reasons for denying interest subsequent to the petition cease and the first loses its force, especially in the case of a voluntary proceeding when the assets are more than sufficient to pay all the claims in full. See, Hanson, Effect of Insolvency Proceedings on Creditor's Right to interest, 32 Mich.L.Rev. 1069; Stein v. Delano, 3 Cir., 121 F.2d 975, 978. Accordingly, when this unusual event occurs interest is payable out of this surplus to the date of payment. Johnson v. Norris, 5 Cir., 190 F. 459; City of New York v. Saper, supra, 336 U.S. at page 330, 69 S.Ct. 554, note 7; American Iron & Steel Mfg. Co. v. Seaboard Air Line, 233 U.S. 261, 34 S.Ct. 502, 58 L.Ed. 949; Miles Corp. v. Lindell, 8 Cir., 107 F.2d 729; In re Hopkins, D.C.R.I., 15 F.2d 206; In re Norcor Mfg. Co., D.C., E.D.Wis., 36 F.Supp. 978; Brown v. Leo, 2 Cir., 34 F.2d 127.

It is held under certain circumstances that interest is not payable on funds in custodia legis, and hence the debtor contends that interest in the pending case should not be allowed after December 14, 1948, when the purchase price of the property was paid into court. This rule is applied when the debt is secured by mortgage on real estate or collateral which yields interest or dividends during the pendency of the proceedings, in which case the income is applied to the payment of the interest until the day of the sale. Coder v. Arts, 8 Cir., 152 F. 943, affirmed 213 U.S. 223, 29 S.Ct. 436, 53 L.Ed. 772; Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 55, 256 L.Ed. 244; Collier on Bankruptcy, supra, page 1840. The reason for the allowance of interest subsequent to the beginning of the proceeding is that the collateral is security for the payment of the interest as much as the payment of the principal. Coder v. Arts, supra; Mortgage Loan Co. v. Livingston, 8 Cir., 45 F.2d 28. But the reason for the stoppage of interest on funds in custodia legis is not because the claims lose their interest bearing quality, but because of the inequality which would otherwise result in the forced distribution in receivership to debts carrying different...