Schwab, Matter of, 78-1553

• Citation: 613 F.2d 1279
• Decision Date: 17 March 1980
• Docket Number: No. 78-1553,78-1553
• Parties: 28 UCC Rep.Serv. 1123 In the Matter of Charles F. SCHWAB, Bankrupt. COLORADO LIVESTOCK PRODUCTION CREDIT ASSOC., Appellant, v. Charles F. SCHWAB, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1279

613 F.2d 1279

28 UCC Rep.Serv. 1123

In the Matter of Charles F. SCHWAB, Bankrupt.

COLORADO LIVESTOCK PRODUCTION CREDIT ASSOC., Appellant, v. Charles F. SCHWAB, Appellee.

No. 78-1553.

United States Court of Appeals, Fifth Circuit.

March 17, 1980.

Jay M. Vogelson, Dallas, Tex., for appellant.

Palmer & Palmer, Philip I. Palmer, Jr., Dallas, Tex., for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before THORNBERRY, GODBOLD and TATE, Circuit Judges.

TATE, Circuit Judge:

This litigation takes place in the context of a Chapter XI proceeding, formerly 11 U.S.C. § 701 Et seq., under the now-repealed Bankruptcy Act of 1898, formerly 11 U.S.C. § 1 Et seq. The provisions of the former statute are nevertheless statutorily specified as applicable to proceedings (as this) commenced under the former enactment. ¹ Unless otherwise denoted, the citations to provisions in Title 11 of the United States Code will be to those in effect prior to the repeal of the (former) Bankruptcy Act.

The creditor's appeal concerns the denial of secured status to a portion of its claim that was filed in this Chapter XI proceeding. The bankruptcy judge, affirmed by the district court, held that the creditor's security interest in growing crops was not perfected in accordance with the recordation requirements of state law. The creditor, the Colorado Livestock Production Credit Association (hereinafter, "CPC") contests that determination, and additionally it urges that the bankruptcy judge, having earlier "allowed" its entire claim as secured, lost jurisdiction to disallow that status to a portion of it. ² Finding that the bankruptcy judge properly denied secured status to CPC's claim at issue, we affirm.

The Facts

The debtor, Schwab, owned several large cattle ranches in Texas and Colorado. In 1971, he filed a Chapter XI proceeding in bankruptcy.

Chapter XI of the (now-repealed) Bankruptcy Act, 11 U.S.C. § 701 Et seq., permitted an insolvent debtor to petition for court approval of an arrangement for the settlement or extension of time of payment upon any terms of his Unsecured debts. 11 U.S.C. §§ 706(1), 707, 723. ³ The arrangement must be approved by at least a majority of the Unsecured creditors under sections 762 and 766. The court may retain jurisdiction under section 768 if so provided in the arrangement, and the court "Shall in any event retain jurisdiction until the final allowance or disallowance of all claims affected by the arrangement," section 769. The Chapter XI proceeding may be dismissed and the debtor directed into bankruptcy if the arrangement is unsatisfactorily processed or is withdrawn or abandoned, section 776, or (where the court has retained jurisdiction after confirmation of an arrangement, section 777) if the debtor defaults in fulfilling the arrangement.

We need not here detail the subsequent proceedings except to note that a plan of arrangement was confirmed on March 28, 1972. The plan of arrangement provided for the sale of the Schwab assets to another corporation, at a price which would pay (a) all priority debts and (b) ten cents on the dollar of unsecured claims (which claims, however, would receive additional dividends if Schwab's claims against third persons were successfully prosecuted).

It was not until June 13, 1973, more than a year after confirmation of the plan, that Schwab (in his status as debtor in possession exercising the powers of a trustee for the benefit of the unsecured creditors, 11 U.S.C. § 742) for the first time disputed the secured nature of a portion of CPC's claim.

The bankruptcy judge upheld Schwab's contention and denied secured status, and he also rejected CPC's argument that he had lost jurisdiction to disallow secured status to the CPC debt. ⁴ The district court affirmed his judgment. CPC's appeal to this court, as noted, questions both (a) the bankruptcy judge's jurisdiction at that stage of the proceedings to disallow secured status to CPC for part of its claim and (b) his determination that CPC had not perfected its security interest in growing hay crops because of the technical insufficiency of the description in its recorded financing statement.

Jurisdiction of the Bankruptcy Court to Disallow Secured Status to CPC's Claim

Schwab's petition had recognized CPC's entire claim of $221,232.37 as secured. It was so treated until June, 1973, when (after the financing statements were produced) recordation-description deficiencies were discovered, which brought into issue CPC's right to receive as a Secured creditor the proceeds from growing 1971 and 1972 hay crops, about $50,000 in amount. CPC's premise is that, by June of 1973, when the secured status of its claim was first questioned, the bankruptcy court had lost jurisdiction because it had previously "allowed" CPC's claim as secured.

CPC argues that the bankruptcy court was not authorized to reconsider its previous allowance of this claim after confirmation of the plan of arrangement. It bases this contention solely upon a prohibition it finds expressed or implied by section 369 of the (former) Bankruptcy Act, 11 U.S.C. § 769:

The court shall in any event retain jurisdiction until the final allowance or disallowance of All claims affected by the arrangement which has been filed within the limitations as to time and amount prescribed by § 355 But have not been allowed or disallowed prior to confirmation. (Italics ours.) ⁵

The (former) Bankruptcy Act does not itself prescribe a specific procedure formalizing allowance of a claim. In scattered decisions, none of recent vintage, the courts have considered whether a bankruptcy court has directly or indirectly allowed a claim. From these decisions, none of which concerned an issue related to section 369, 11 U.S.C. § 769, the following principles may be educed: Allowance of a claim is a judicial act, which need not but preferably should be evidenced by a formal order, by which the claim has been examined and determined to be valid. It is distinguishable from the ministerial act of "filing" the claim and the party's act of "proving" it.

See: Hammer v. Tuffy, 145 F.2d 447, 450 (2d Cir. 1944); Monjar v. Higgins, 132 F.2d 990, 994 (2d Cir. 1943); In re Branner, 9 F.2d 883, 886 (2d Cir. 1925); In re Two Rivers Wooden Ware Co., 199 F. 877, 880-81 (7th Cir. 1915); In re Arcadia Restaurant, 19 F.Supp. 355 (E.D.Pa.1937). See generally 9 Collier on Bankruptcy P 7.10(1) (14th ed. 1978); 3 Collier on Bankruptcy P 57.14 (14th ed. 1977).

The debtor's petition of August 2, 1971 originally classified CPC's full claim as secured. CPC argues that this claim was judicially allowed as secured by the following acts:

1. On September 29, 1971, November 19, 1971, and February 3, 1972, the court approved requests by the debtor to pay certain proceeds to CPC as a secured creditor on claims noted as "properly classified as secured; "

2. On February 24, 1972, the court did not allow CPC's claim as UnSecured for Purposes of voting as an unsecured creditor and "for no other purpose, and without prejudice to the later possible allowance of the claims," when it upheld the debtor's objections "to the temporary allowance of all claims filed as unsecured in the amounts allowed."

3. On February 18, 1972, at the adjourned first meeting of the creditors to consider the confirmation of the arrangement plan presented by the debtor, the minute entry reflects that "claims on file would be accepted in the Amount on file unless objections filed." CPC contends that therefore its claim was recognized as secured, overlooking that the approval was for temporary allowance for voting, as were the objections. See 11 U.S.C. App. Rule 207(a) (1976); 9 Collier on Bankruptcy P 7.10(2) at 58 (14th ed. 1978). (As styled in Schwab's objection which was sustained on February 24, see 2 above the "objection (was) to temporary allowance of claims for voting," App. 136).

None of the acts relied upon evidences a judicial determination to allow CPC's Entire two hundred thousand dollar claim as secured, so as to constitute a judicial determination that CPC enjoyed secured status with regard not only to the one-hundred-fifty-thousand dollar admittedly secured portion of the claim but also including the fifty-thousand dollar of proceeds to be derived (later) from growing hay. For instance, as the appellee argues quite persuasively, the record does not reflect other than that the relatively minor proceeds ($818.75 and $6,759.15 respectively) paid to CPC per orders of November 19 and February 3 were from hay which had Already been harvested at the time the debtor's petition was filed, in which CPC concededly had a perfected secured interest.

As the district court held:

None of these acts of classification evidence judicial recognition of the liens. The debtor's scheduling is the debtor's, not the court's acts. The remaining acts were incident to the plan's approval. Because voting on a plan often precedes allowance of claims § 44a, 5f and 5e of the act authorized objection for purposes of voting only. The February 18, 1973 order specifically provided:

It is further ordered that all other claims filed as unsecured are temporarily allowed for voting only on the amounts filed.

Given the voting power of W. L. Moody who represented 91% Of all unsecured claims ($2,597,514.65), this denial of CPC's voting rights as an unsecured creditor was harmless. Certainly in view of the plain language of the February 18, 1973 order CPC was not entitled to infer that its claim had been allowed.

In sum, the claim of CPC was not allowed and the Bankruptcy Court had jurisdiction to entertain the objection of June 13, 1973.

Validity of CPC's Security Interest in Growing Crops

Colorado has adopted, with variations here important, the Uniform Commercial Code. The issue is whether CPC's security interest in growing hay crops on a Colorado ranch was perfected under Colorado law so as to affect third...