White Chemical Company v. Moradian, 22788.

• Decision Date: 17 October 1969
• Docket Number: No. 22788.,22788.
• Citation: 417 F.2d 1015
• Parties: WHITE CHEMICAL COMPANY, Appellant, v. Henry MORADIAN, Receiver in Bankruptcy of Cal-Zona Farms, a Corporation, and Henry Moradian, Trustee in Bankruptcy, et al., Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

417 F.2d 1015 (1969)

WHITE CHEMICAL COMPANY, Appellant, v. Henry MORADIAN, Receiver in Bankruptcy of Cal-Zona Farms, a Corporation, and Henry Moradian, Trustee in Bankruptcy, et al., Appellee.

No. 22788.

United States Court of Appeals Ninth Circuit.

October 17, 1969.

Joseph B. Miller (argued), of McKesson, Renaud, Cook, Miller & Cordova, Phoenix, Ariz., for appellant.

Robert H. Carlyn (argued), of Fennemore, Craig, von Ammon, McClennen & Udall, Phoenix, Ariz., for Southwest Forest Industries.

William D. Baker (argued), of Rawlins, Ellis, Burrus & Kiewit, Phoenix, Ariz., for Producers Cotton Oil Co.

Richard B. Wilks, James B. Rolle, III, Phoenix, Ariz., for appellee.

Before MERRILL and CARTER, Circuit Judges, and JAMESON^*, District Judge.

JAMESON, District Judge:

This is an appeal from an order holding that receiver's certificates of indebtedness issued pursuant to Section 344 of the Bankruptcy Act¹ were entitled to priority over other costs of administration in Chapter XI proceeding.

On July 16, 1964, the debtor, Cal-Zona Farms, filed a petition proposing an arrangement under the provisions of Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. On July 22, 1964, appellee Henry Moradian was appointed receiver with authorization to continue the business.

On July 28, 1964, the referee entered an order authorizing the receiver to issue his certificate of indebtedness to appellee Producers Cotton Oil Company of Arizona in the sum of $30,000. An amended order was entered August 21, 1964, and an amended certificate was issued on the same date. There is now due and owing on this certificate the sum of $16,777.85.

Following a meeting of creditors on September 16, 1964, the referee on October 24, 1964, approved an agreement authorizing the receiver to issue a certificate of indebtedness to appellee Southwest Forest Industries, Inc., for $50,000.² A certificate in that amount was issued on October 26, 1964, and there is now due and owing thereon the sum of $50,000.

The funds advanced by both Producers and Southwest were used to keep the debtor's business in operation.³ In each case either the certificate itself or the order authorizing its issuance expressly provided that subject to valid liens, if any, existing at the commencement of the Chapter XI proceedings, the certificate "shall have precedence and priority over all other liens, claims and demands against the property and estate of the aforesaid Debtor and shall have preference and priority over the expenses of administration".

Beginning on August 1, 1964, appellant, White Chemical Company, furnished "fungicides, insecticides and fertilizers" to the debtor at the request of the receiver in the amount of $28,451.28. The receiver did not issue a certificate of indebtedness to White; nor was he authorized to do so by the referee.⁴

On December 29, 1964, the referee entered an order adjudging the debtor a bankrupt and directing bankruptcy proceedings pursuant to the provisions of the Bankruptcy Act. The funds held by the trustee consist of the proceeds of sale of assets of the bankrupt and the proceeds received by the trustee from the settlement of a civil action and a turnover order. None of these funds represent any income from crops grown by the receiver or the trustee.

On September 27, 1967, the referee entered an order providing that the assets of the bankrupt's estate be distributed in the following order of priority: (1) fees and expenses of trustee, his attorney and accountant, receiver and his attorney, and bankrupt's attorney; (2) certificates of indebtedness issued to Producers and Southwest; and (3) the claim of White and another creditor as administrative expenses of the Chapter XI proceedings.

Upon review the district court on January 30, 1968, entered its opinion and order holding that the referee properly authorized the issuance of the certificates of indebtedness pursuant to section 344, but that the order of priority of payment should be modified by limiting the first priority to costs of administration in the superseding bankruptcy proceedings.⁵

In holding that the certificates of indebtedness are entitled to priority over other costs of administration in the Chapter XI proceedings, the district court said in part:

"* * * It is not unreasonable to assume that Southwest and Producers, in accepting the certificates and loaning the money to the debtor, placed reliance on the provisions of the certificates awarding them a priority over other costs of administration. The Referee obviously thought that such a priority was equitable at the time he issued the certificates. The only change in circumstances from the time the certificates were issued to the date of the final order in bankruptcy was that the arrangement attempt had failed, and there were insufficient funds in the bankrupt\'s estate to meet all of the costs of administration. The Referee does not allege that the priority in the certificates was obtained by fraud or that the holders thereof have acted in bad faith. The Referee obviously expected the arrangement proceedings to work, and that the farming operation would net the estate considerable funds. The mere failure of this to happen and the resultant lack of funds to cover the administrative costs of the proceedings is not, in and of itself, grounds upon which one might, under his equitable powers, retract a previous guarantee of priority. This is, in fact, one of the very contingencies that the provisions as to priority would seem to guard against. To retract a priority which was granted under the equitable powers of the court because of the subsequent occurrence of events which accord the priority a meaningful status in the proceedings is to deny equity to the holders of the certificates, and render the initial power to award priorities a meaningless function."

Appellant contends that under section 64(a) (1) of the Bankruptcy Act⁶ all costs of administration, including the certificates of indebtedness and appellant's claim, "are on a parity and should share on a pro rata basis in the assets available after the payment of costs of administration of the superseding bankruptcy proceedings"; that the referee had no power to give the certificates of indebtedness priority over the other costs of administration in the Chapter XI proceedings; and that under section 344 "the authority of the Court is restricted to granting unto Certificate holders security and priority over `existing obligations' and not over other costs of administration".

Appellant argues that in giving what Collier terms a "super priority" to costs of administration in an ensuing bankruptcy proceeding,⁷ "it is quite evident that Congress has intended this and this alone as the only priority among the various costs of administration that are incurred in the course of bankruptcy proceedings". We do not agree. Construing the provisions of section 344 with those of section 64(a) (1) and giving effect to each, we conclude that section 344 authorizes another priority for certificates of indebtedness, subject of course to the "super priority" given costs in the superseding bankruptcy.

The purpose of an arrrangement is to provide a plan whereby a debtor can settle or satisfy his unsecured debts.⁸ Although bankruptcy is available should the arrangement fail,⁹ the arrangement is designed to avoid entirely the necessity of proceedings in bankruptcy and not merely provide a temporary stay from an unavoidable bankruptcy. In explaining the use of certificates of indebtedness under section 344 Collier says in part:

"Authority to issue certificates of indebtedness may be granted under § 344 `upon cause shown\'. What constitutes sufficient cause necessarily depends upon the facts of each case. Money, property or other consideration can often be procured by an ordinary credit transaction, as is the more frequent practice in the continued operation of the debtor\'s business. Section 344 is usually resorted to where the business is being operated, but it essentially contemplates transactions of an unusual character, although not actually limited to such. In general, there should appear both benefit to the estate by the issuance of the certificates, and necessity for their issuance because the consideration to be acquired therewith cannot be acquired by an ordinary credit transaction. * * *" 8 Collier on Bankruptcy, Section 344, Subsection 6.40(4), p. 1003.

The certificate of indebtedness authorized by section 344 protects the creditor who provides necessary and otherwise unavailable credit, and who is unwilling to extend that credit without priority or security. It is clear from the petitions and orders in the Chapter XI proceedings in this case that it was necessary for the referee to issue the certificates of indebtedness in order to obtain funds to continue the business and harvest the debtor's lettuce crop. There is no evidence that credit was otherwise available; nor does appellant advance this contention. Rather it is argued that the goods and services furnished by White were on a parity with the funds obtained through the certificates of indebtedness, even though appellant did not seek or obtain any priority or security for its advances.

The priority of certificates of indebtedness issued under ...