Ruskin v. Griffiths

• Decision Date: 26 August 1959
• Docket Number: Docket 25317.,No. 219,219
• Citation: Ruskin v. Griffiths, 269 F.2d 827 (2nd Cir. 1959)
• Parties: Lewis J. RUSKIN, Collateral Trustee, v. Charles H. GRIFFITHS, Trustee in Reorganization.
• Court: U.S. Court of Appeals — Second Circuit

269 F.2d 827 (1959)

Lewis J. RUSKIN, Collateral Trustee, v. Charles H. GRIFFITHS, Trustee in Reorganization.

No. 219, Docket 25317.

United States Court of Appeals Second Circuit.

Argued March 11, 1959.

Decided August 26, 1959.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Ruskin & Rosenbaum, Chicago, Ill. (Simon H. Rifkind, New York City, Harry H. Ruskin, Chicago, Ill., John E. Massengale, New York City, Irving Younger, Forest Hills, N. Y., of counsel), for appellant, Lewis J. Ruskin.

Frederick P. Close, White Plains, N. Y. (Martin Drazen, White Plains, N. Y., of counsel), for Trustee in Reorganization, appellee.

Louis J. Weinshenker, New York City (Edward A. Gorenstein, Walter Goodman, Chicago, Ill., of counsel), for Richard Goodman, stockholder.

Richard Goodman, pro se.

Thomas G. Meeker, General Counsel, David Ferber, Asst. General Counsel, Pace Reich, Washington, D. C., Melvin Katz, Attorneys, SEC, Chicago, Ill., Richard V. Bandler, Special Counsel; Kiva Berke, New York City, Attorney, for Securities and Exchange Commission.

Before WASHINGTON, WATERMAN, and MOORE, Circuit Judges.

WATERMAN, Circuit Judge.

On May 19, 1954 Lewis J. Ruskin, his wife, and the Rexall Drug Company sold all the stock of a retail drug store chain known as Ford Hopkins Company to General Stores Corporation. The purchase price was $2,800,000, of which $735,000 was to be paid in cash and the balance by notes to Ruskin and Rexall payable in installments until 1964. As security for these notes all the stock of Ford Hopkins and all the stock of Stineway Drug Company, another drug store chain owned by General Stores, was transferred to Ruskin as trustee for himself and for Rexall under a "Collateral Agreement" entered into simultaneously with the execution of the notes. Ruskin, as trustee under this agreement, had the right to elect a majority, or, after default, all the members of the Boards of Directors of these corporations. The notes were to accrue interest on principal at the rate of 4% per annum, but the collateral agreement provided that in case of an "event of default" as defined in that agreement the then total unpaid amount could be declared due and payable forthwith, and interest would then accrue upon overdue payments at the rate of 6% rather than at 4%. One "event of default" provided for in the agreement was as follows:

"If any proceedings before Control Date involving General or any subsidiary (other than Ford of Stineway) thereof or any successors thereto, and after Control Date involving General, Ford or Stineway or any subsidiary thereof or successors thereto, are commenced by or against such company under any bankruptcy, reorganization, arrangement, insolvency or readjustment of debt, dissolution or liquidation law or statute of the Federal Government or any state government, * * *; then, in any such event, the holder or holders of any of the Notes then outstanding or the Trustee may, at their or his option, declare such Notes to be, and thereupon such Notes shall become, forthwith, due and payable * * *".

The agreement also provided that the trustee was to be entitled to "reasonable compensation" for all the services he might render in the execution of the trusts and, in connection therewith, for his attorneys and counsel. This compensation was to constitute a prior lien on the trust estate and on all funds in the hands of the trustee.

In October 1954 the debtor, General Stores, filed a petition for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. However, instead of accelerating the debt because of this petition, Ruskin entered into a standby agreement with debtor, dated November 1, 1954, wherein he agreed that unless certain specified conditions occurred he would not foreclose prior to July 18, 1955. On March 7, 1955, the United States District Court for the Southern District of New York granted similar motions by a shareholder of debtor and by the Securities and Exchange Commission to dismiss debtor's petition unless it was amended so as to comply with the requirements of Chapter X of the Bankruptcy Act. In re General Stores Corporation, D.C.S.D.N.Y.1955, 129 F.Supp. 801. One month later we affirmed that decision, General Stores Corporation v. Shlensky, 2 Cir., 1955, 222 F.2d 234. On August 17, 1955, Lewis J. Ruskin as trustee under the collateral agreement, Lewis J. Ruskin individually, and Rexall Drug Company notified the debtor that they elected to declare the notes "forthwith due and payable because of an event of default occurring and existing under said collateral agreement by reason of the proceedings involving General Stores Corporation under Chapter XI of the Bankruptcy Act * * * commenced by General Stores Corporation and pending to this date in the United States District Court for the Southern District of New York." The Supreme Court of the United States affirmed our decision in General Stores Corporation v. Shlensky on March 26, 1956, 350 U.S. 462, 76 S.Ct. 516, 100 L. Ed. 726, and about one month later the debtor filed an amended petition asking for reorganization under Chapter X of the Bankruptcy Act. The district court approved the amended petition on May 1, 1956 and appointed a reorganization trustee.

This appeal stems from a petition filed by Ruskin, as trustee under the collateral agreement, seeking a determination of the amount of his claim on the unpaid notes, principal and interest, and of the amount of his lien for his own and his attorneys' compensation. Ruskin claimed unpaid accrued interest at 4% to August 17, 1955, the date of the acceleration, and 6% thereafter. As compensation for his services as trustee Ruskin sought, at the rate of $35,000 per annum, $112,715.13 for the period October 18, 1954 to January 7, 1958. He also sought $180,000 as compensation for his attorneys. The court below decided that the post-default interest rate should remain at 4% rather than be increased to 6%; awarded Ruskin $24,215 as total compensation for his own services as collateral trustee, and granted attorneys' fees in the amount of $60,000. In re General Stores Corporation, D.C.S.D.N.Y.1958, 164 F.Supp. 130. The parties seem to agree that the debtor is solvent.

From these several determinations Ruskin appeals. The reorganization trustee, a stockholder of the debtor, and the Securities and Exchange Commission are all in opposition.

The Claim for Increased Interest

Although the contract between the parties explicitly provided that interest was to be at 6% rather than 4% after acceleration, the district court refused to allow the additional 2% interest. Relying upon Vanston Bondholders Protective Committee v. Green, 1946, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162, rehearing denied 1947, 329 U.S. 833, 67 S.Ct. 497, 498, 91 L.Ed. 706, it held that Ruskin was not entitled to the benefit of his variable interest contract. We disagree with that holding.

In Vanston the Supreme Court disallowed an indenture trustee's claim against an insolvent debtor for interest on interest payments provided for in the trust indenture. The interest on interest accrued because the district court, pursuant to its administration of an equity receivership, had ordered both the debtor and the receiver not to pay simple interest coupons that fell due under the indenture after the court assumed jurisdiction. Even if we agreed with the court below that a Supreme Court precedent dealing with an obligation for interest on interest falling due because of an equity court's stay order is equally applicable to a claim based upon a contractual provision for additional simple interest arising because the debtor sought the intervention of the bankruptcy laws, a question we need not now decide, we would still have to distinguish Vanston on what we find was a basic ground of that decision. In Vanston the debtor was insolvent, and in our case it appears the debtor is solvent. In Empire Trust Co. v. Equitable Office Bldg. Corp., 2 Cir., 1948, 167 F.2d 346, we avoided a resolution of the effect of Vanston upon parties to a reorganization proceeding involving a solvent corporation, but the issue is squarely before us now, and we hold that the Supreme Court did not intend that the principle enunciated by it in Vanston, in a contest between creditors, should be applied to a contest between a debtor's creditor and its stockholders.

The Supreme Court held in Vanston that since the district court had taken over the debtor's assets for the purpose of preserving and protecting them "pending a ratable distribution among all the creditors according to their interests as of the date the receivership began," 329 U.S. 156, 67 S.Ct. 242 it would have been contrary to that purpose and inequitable to the junior creditors to have junior creditors suffer and the mortgage bondholders enriched because of a stay order required to further the receivership aim. This result naturally followed from an examination of the usual rules that deal with simple interest claims in bankruptcy and in reorganization proceedings, In re Wisconsin Cent. Ry. Co., D.C.D.Minn.1950, 93 F.Supp. 579, 582, affirmed United States Trust Co. of New York v. Zelle, 8 Cir., 1951, 191 F.2d 822, certiorari denied 1952, 342 U.S. 944, 72 S.Ct. 558, 96 L.Ed. 703. Thus, with respect to simple interest the Supreme Court said:

"The general rule in bankruptcy and in equity receivership has been that interest on the debtors\' obligations ceases to accrue at the beginning of proceedings. Exaction of interest, where the power of a debtor to pay even his contractual obligations is suspended by law, has been prohibited because it was considered in the nature of a penalty imposed because of delay in prompt payment — a delay necessitated by law if the courts are properly to preserve and protect the estate for the benefit of all interests involved * * * Courts have felt that it would be inequitable for anyone to gain an advantage or suffer a loss because of

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