United States Trust Co. of New York v. Zelle

• Decision Date: 18 October 1951
• Docket Number: No. 14308,14309.,14308
• Citation: 191 F.2d 822
• Parties: UNITED STATES TRUST CO. OF NEW YORK v. ZELLE et al. WARNER et al. v. ZELLE et al. GASTON GROUP OF HOLDERS OF WISCONSIN CENT. RY. CO. FIRST GENERAL MORTGAGE BONDS v. ZELLE et al.
• Court: U.S. Court of Appeals — Eighth Circuit

191 F.2d 822 (1951)

UNITED STATES TRUST CO. OF NEW YORK v. ZELLE et al. WARNER et al. v. ZELLE et al. GASTON GROUP OF HOLDERS OF WISCONSIN CENT. RY. CO. FIRST GENERAL MORTGAGE BONDS v. ZELLE et al.

Nos. 14308, 14309.

United States Court of Appeals Eighth Circuit.

October 18, 1951.

M'Cready Sykes, New York City (Samuels H. Morgan, St. Paul, Minn., on the

brief; Morgan, Headley, Raudenbush & Morgan, St. Paul, Minn., and Stewart & Shearer, New York City, of counsel), for appellant United States Trust Co. of New York, as Trustee of Wisconsin Cent. Ry. Co. First General Mortgage.

Reese D. Alsop, New York City (Hunt, Hill & Betts, New York City, of counsel), for appellant The Gaston Group of Holders of Wisconsin Cent. Ry. Co. First General Mortgage Bonds.

C. W. Wickersham, Jr., New York City (C. W. Wickersham and William D. Ford, New York City, on the brief; Cadwalader, Wickersham & Taft, New York City, of counsel), for appellants Joseph R. Warner et al.

James E. Dorsey, Minneapolis, Minn. (Donald West, Minneapolis, Minn., on the brief; Dorsey, Colman, Barker, Scott & Barber, Minneapolis, Minn., of counsel), for appellee Edgar F. Zelle as Trustee of Wisconsin Cent. Ry. Co.

Henry S. Mitchell, Minneapolis, Minn. (Wm. G. Murphy, New York City and Thomas P. Helmey, Minneapolis, Minn., on the brief; Leonard H. Murray, Minneapolis, Minn., of counsel), for appellees Canadian Pac. Ry. Co. and for Empire Trust Co., Trustee of Debtor's First and Refunding Mortgage.

James L. Hetland and E. E. Boyner, Minneapolis, Minn., for appellee Minneapolis, St. Paul & Sault Ste. Marie R. Co.

Abraham K. Weber, New York City, for appellee Wisconsin Cent. Ry. Co., Debtor.

Josiah Brill, Minneapolis, Minn., Jaffin, Schneider, Kimmel & Galpeer, New York City (Irving J. Galpeer, New York City, of counsel), for appellee First and Refunding Mortgage Bondholders Committee.

Before GARDNER, Chief Judge, and WOODROUGH and COLLET, Circuit Judges.

COLLET, Circuit Judge.

These three consolidated cases constitute separate applications by different representatives of bondholders for an allowance of 6 per cent interest on First General Mortgage bonds of the Wisconsin Central Railway Company. The present controversy involves the sole question of what rate of interest should be allowed on First General Mortgage bonds during the period of receivership of the Wisconsin Central Railway Company, after the maturity date of those bonds. Wisconsin Central was placed in receivership in the United States District Court for the District of Minnesota on December 2, 1932. An equity receiver was appointed on that day and directed to take complete and exclusive control, possession and custody of all of its properties. The order of the court entered at the inception of the receivership contained the usual and typical provision enjoining the payment of Wisconsin Central's debts or the interference with its operation.

The First General Mortgage bonds now under consideration were fifty-year bonds, issued in 1899 and due July 1, 1949. They provided for the payment of annual interest at the rate of 4 per cent until due. No definite provision was made in the bonds for the rate of interest after the maturity date. The equity receivership proceeded from 1932 until in 1944 a petition for reorganization was filed and approved by the court. Subsequent thereto the bankruptcy proceedings have been continued under the provisions of 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. Again the usual and customary order was made in the reorganization proceedings, prohibiting the payment of debts of the debtor without the approval of the court and placing the entire operation of the debtor company under the control and direction of the court.

The First Mortgage bonds being amply secured, interest was paid during the period of bankruptcy (although not always at regular intervals) at the rate of 4 per cent up to July 1, 1949, the date of maturity of the bonds.

The mortgage and the bonds contained provisions which the trial court concluded made them New York contracts, with the result that in that court's opinion the law of the State of New York was applicable relative to the rate of interest to be paid in the absence of a specific provision therefor after the maturity date of the bonds unless equitable considerations to be applied under the Bankruptcy Act were controlling. The parties agree that by statute New York has provided that when obligations calling for the payment of interest do not specifically fix the rate thereof, the legal rate shall be 6 per cent per annum.

Representatives of the First General Mortgage bondholders filed application with the District Court seeking an order of that court providing for and directing the payment of interest on these bonds at the rate of 6 per cent from and after July 1, 1949, until the reorganization proceedings were terminated, upon the premise that the law of the State of New York applied in determining the rate of interest and that the court was bound to allow that rate. It is conceded that the security is ample for the payment of the interest at either 4 or 6 per cent. The trial court denied that application upon the authority of Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162, and ordered the payment of interest on the bonds at 4 per cent. This appeal is from that order.

The representatives of the debtor, appellees here, not only contend that the order of the trial court was proper upon equitable principles under the Bankruptcy Act, but also insist that the terms of the mortgage and bonds by fair implication call for the payment of interest at 4 per cent after the maturity of the bonds. The trial court held otherwise. While we are definitely inclined to the conclusion that appellees are correct in that contention, we do not deem it necessary to pass upon the question, because of our conclusion that the trial court's order is correct on equitable grounds under the authority of the Vanston case. Nor do we deem it necessary to do more than assume for the purpose of this case that the law of New York would apply, absent overriding provisions of the Bankruptcy Act, for reasons which will be noted.

Appellants contend in effect that the law of New York fixed an indivisible interest rate (of 6 per cent) which was the legal rate on the bonds after maturity and the only rate which the court was authorized to apply, and that the effect of the trial court's action in fixing the rate to be paid after maturity at 4 per cent was to unjustifiably split the rate fixed by New York law into two parts and to give that law only partial effect by allowing only two-thirds of the rate fixed by the New York statute.

Appellants argue that in the Vanston case the Supreme Court only condemned the allowance of interest on interest and that principles of equity do not require and the facts of this case do not authorize the court to disregard the 6 per cent simple interest rate fixed by the New York statute. As we read and interpret the majority opinion in the Vanston case, it goes further than to merely hold that provisions of a state law authorizing interest on interest may be disregarded by a Bankruptcy Court if principles of equity in the administration of that Act prompt so doing. It definitely establishes the rule of law that any state statute which is not consistent with principles of equity in the management and...