Petition — Glen Corp. v. O. C. Associates

Office Supreme Court. U.S.

82-106 FILED

No.

JUL 19 1982

FR L. STEVAS,

IN THE : CLERK

Supreme Court of the United States

OCTOBER TERM, 1981

GLEN CORPORATION, et al.,

. Petitioners,

O. C. ASSOCIATES, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

LLOYD N. CUTLER *

WILLIAM J. PERLSTEIN

DAVID SEIDMAN

WILMER, CUTLER & PICKERING

1666 K Street, N.W.

Washington, D.C. 20006

(202) 872-6000

WILLIAM F. MACAULEY

CRAIG AND MACAULEY,

Professional Corporation

One Post Office Square

Boston, Massachusetts 02109

Counsel for Petitioners Glen

Corporation, Monte J. Wallace

and Neil W. Wallace

RICHARD E. BACHMAN

HALE, SANDERSON, BYRNES

& MORTON

10 Post Office Square

Boston, Massachusetts 02109

Counsel for Petitioner Minority

Stockholders’ Committee

July 19, 1982 * Counsel of Record

— —

QUESTIONS PRESENTED

1. Where the right to payment of interest on interest

is barred by governing state law regardless of the debtor’s

solvency, is there an overriding “general rule of fed-

2. Even if there is such a “general rule of federal

bankruptcy law,” does that rule require the payment of

post-petition interest on each unpaid installment of inter-

est that becomes due during a bankruptcy proceeding.*

* The following were parties to the appeals below: Glen Corpo-

ration, Monte J. Wallace, Neil W. Wallace, Paul Lazzaro (Trustee of

Continental Investment Corporation), Minority Stockholders’ Com-

mittee of Continental Investment Corporation (appellees); O. C.

Associates, Debentureholders Protective Committee of Continental

Investment Corporation, The First National Bank of Boston, as In-

denture Trustee, and Bankers Trust Company, as Indenture Trustee

(appellants). Glen Corporation has no partially-owned subsidiaries

or affiliates. Global Investments Limited Partnership owns the

preferred shares of Glen Corporation. Global Investment Limited

Partnership has one partially-owned subsidiary, ConVest Energy

Corporation.

(i)

TABLE OF CONTENTS

QUESTIONS PRESENT Eo

TABLE OF AUTHORTTI ESS.

Z 4

RISDICTIotnnnddd‚

( —— ee

STATEMENT OF THE CAS

REASONS FOR GRANTING THE WRIT ................

I. THE COURT OF APPEALS’ DECISION THAT

II.

A “GENERAL RULE OF FEDERAL BANK-

RUPTCY LAW” ESTABLISHES A RIGHT

TO INTEREST ON INTEREST EVEN

WHERE STATE LAW BARS ITS PAYMENT

IS CONTRARY TO THE DECISIONS OF

THIS COURT AND IMPROPERLY OVER-

RIDES GOVERNING STATE LAX

A. The Cases Relied Upon By the Court of Ap-

peals Clearly Establish That Applicable Non-

Bankruptcy Law, Not Bankruptcy Law It-

self, Determines Any Right to Post-Petition

Interest on Unpaid Installments of Interest

B. This Court’s Decisions in Absolute Priority

Rule and Other Cases Confirm That There Is

No Overriding Federal Right to Post-Petition

EVEN IF THERE WERE SUCH A “GEN-

ERAL RULE OF FEDERAL BANKRUPTCY

LAW,” IT WOULD HAVE TO BE LIMITED

TO INTEREST ON UNPAID INTEREST IN-

STALLMENTS THAT BECOME DUE BE-

FORE THE BANKRUPTCY PROCEEDINGS

BEGIN AND WOULD NOT APPLY TO IN-

TEREST ON INTEREST INSTALLMENTS

THAT BECOME DUE THEREAFTER R

(iii)

P

.

iv

TABLE OF CONTENTS—Continued

Page

III. THE COURT OF APPEALS’ DECISION CON-

FLICTS WITH THIS COURT’S HOLDING IN

BUTNER v. UNITED STATES AND WITH

TWO DECISIONS OF THE UNITED STATES

COURT OF APPEALS FOR THE SECOND

6 —— — — —¼. 20

A. Butner v. United States Establishes That

the Bankruptcy Laws Look to State Law

in Determining the Validity of Post-Petition

Claims EEE IE ORT Sos Ree CP 20

Court of Appeals Here 21

IV. THE CREATION OF A “GENERAL RULE

OF FEDERAL BANKRUPTCY LAW” IM-

PROPERLY INFRINGES ON STATE COM-

MERCIAL LAW AND WILL ENCOURAGE

THE FILING OF ADDITIONAL BANK-

RUPTCY CASES ........ K——ů—ů— 23

A. This Court and Other Courts Have Repeat-

edly Held That Bankruptcy Law Will Recog-

nize State Laws Governing Commercial

SR SE ee Ae 23

B. The Court of Appeals’ Decision Will Encour-

age Creditors to Improve Their Positions by

Resort to the Bankruptcy Courts Under the

New Bankruptcy Colle 26

CONCLUSION ................. — 30

*

TABLE OF AUTHORITIES

CASES: Page

Abbott v. Abbott, 188 Neb. 61, 195 N.W.2d 204

9393999 ͤ̃ — —L— 25

Abramowitz v. Washington Cemetery Association,

189 N. J. Eq. 298, 51 A.2d 461 (N.J. Ch. 1947).. 25

American Iron and Steel Manufacturing Co. v.

Seaboard Air Line Railway, 233 U.S. 261

ATS EE I 9, 10, 19

Bromley v. Goodere, 1 Atk. 75, 26 Eng. Rep. 49

RESALE ae Se a oe 9

Butner v. United States, 440 U.S. 48 (19799 20-21,

24, 29

Case v. Los Angeles Lumber Products Co., 308

r Sp Oe CP ee 12

Cherokee Nation v. United States, 270 US. 476

IR REI AR Poe SC 16

City of New York v. Saper, 386 U.S. 328 (1948),

aff’g 168 F.2d 268 (2d Cir. 194) 8,9

Coder v. Arts, 218 U.S. 228 (1909)9ỹꝗ 10, 11

Consolidated Rock Products Co. v. Du Bois, 312

U.S. 510 (1941), aff’g 114 F.2d 102 (9th Cir.

Fr 12, 14, 19

Continental Securities Co. v. New York Central

& Hudson River Railroad, 217 N.Y. 119, 111

r in 18

Corbin v. Federal Reserve Bank, 629 F.2d 233 (2d

Cir. 1980), cert. denied, 450 U.S. 970 (1981) 22

Ecker v. Western Pacific Railroad, 318 U.S. 448

FFF 11, 14, 15

Eddy v. Prudence Bonds Corp., 165 F.2d 157 (2d

Cir. 1947), cert. denied, 383 U.S. 845 (1948) 11

Empire Trust Co. v. Equitable Office Building

Corp., 167 F.2d 846 (2d Cir. 194 6, 19, 22

Ex parte Clark, 4 Ves. Jr. 677, 31 Eng. Rep. 349

r 9

Ex parte Mills, 2 Ves. Jr. 295, 30 Eng. Rep. 640

ERT PEC a ee oes SS A q

Giventer v. Arnow, 87 N.Y.2d 305, 383 N.E.2d 366,

Z Fe 6

vi

TABLE OF AUTHORITIES—Continued

Goodwin v. Northwestern Mutual Life Insurance

Co., 196 Wash. 391, 88 P.2d 281 (193)

Grant v. Fourth National Bank of Columbus, 229

Ga. 855, 194 S.E.2d 918 (197777

Group of Institutional Investors v. Chicago, Mil-

waukee, St. Paul & Pacific R.R., 318 U.S. 523

c A

In re Georgia, Florida, and Alabama R. R., 88

F. Supp. 796 (M.D. Ga. 1950)

In re International Hydro-Electric System, 32

is I ..

In re International Hydro-Electric System, 101

F. Supp. 222 (D. Mass. 1961) ...........................

In re New York, New Haven and Hartford Rail-

road, 4 B. R. 758 (D. Conn. 1980) ........................

In re Norcor Manufacturing Co., 36 F. Supp. 978

Ie

In re Oklahoma Railway, 61 F. Supp. 96 (W..

rr CRE eS FEES CRE CO

In re Realty Associates Securities Corp., 163 F.2d

387 (2d Cir.), cert. denied, 382 U.S. 836 (1947)

In re Tastyeast, Inc., 126 F.2d 879 (8d Cir.), cert.

denied, 316 U.S. 696 (194ᷣ/:· 77

Levine v. U.N. Cleaners, 4 A.D.2d 954, 167

N.Y.S.2d 801 (App. Div. 1987j

Lewis v. Manufacturers National Bank, 364 U.S.

1 „

Littleton v. Kincaid, 179 F.2d 848 (4th Cir.), cert.

denied, 340 U.S. 809 (1950) -..............................

Murray v. Prudential Insurance Co., 144 Pa. Super.

reh

Newburger-Morris Co. v. Talcott, 219 N.Y. 506,

re

Northern Pacific Railway v. Boyd, 228 U.S. 482

D

Northern Pipeline Construction Co. v. Marat hon

Pipeline Co., —— U.S. ——, 50 U.S. L. W. 4892

Goll

Page

19

14

12

16

vii

TABLE OF AUTHORITIES—Continued

Page

Palo Alto Mutual Savings and Loan Association

v. Williams, 245 F.2d 77 (9th Cir. 1957) 11

Perkins State Bank v. Connolly, 682 F.2d 1306 (5th

r 24

Powell v. Retirement Board, 481 Pa. 396, 246 A. 2d

D 001 25

Railway Labor Executives’ Association v. Gibbons,

— US. ——, 102 8. Ct. 1169 (1982) 28, 24

Ruskin v. Griffiths, 269 F.2d 827 (2d Cir. 1959),

cert. denied, 361 U.S. 947 (1960)0ỹ7;7 ......... 22

Sloan v. Paris, 541 S.W.2d 316 (Mo. Ct. App.

r 25

Southern Union Exploration Co. v. Wynn Explora-

tion Co., 95 N.M. 594, 624 P.2d 536 (N. M. Ct.

App.), cert. denied, 95 N. M. 593, 624 P.2d 535

(1981), cert. denied. U.S. ——., 102 S. Ct.

D. 25

Speare v. Consolidated Assets Corp., 367 F.2d 208

11 — 11,12

Stellwagen v. Clum, 245 U.S. 605 (191555 23

Ticonic National Bank v. Sprague, 308 U.S. 406

1 11

United Merchants & Manufacturers, Inc. v. Equita-

ble Life Assurance Society of the United States,

674 F.2d 184 (2d Cir. 1982) ...................... 27

United States v. Bass, 271 F.2d 129 (9th Cir.

REE ON EES Na NS 10

United States v. Kimbell Foods, Inc., 440 U.S. 715

11 Ae SS a 16

United States ez rel. Georgia Electric Supply —

v. United States Fidelity and Guaranty Co., 656

GY 24

Vanston Bondholders Protective Committee v.

Green, 329 U.S. 156 (1946) 6, 13-16, 24

Williamsburgh Savings Bank v. Town of Solon,

186 N.Y. 465, 32 N. E. 1068 (1898) 6

Woods-Tucker Leasing Corp. v. Hutcheson-Ingram

Development Co., 626 F.2d 401 (1980), modi-

fied, 642 F.2d 744 (5th Cir. 1981) 12, 26

Young v. Hill, 67 N.Y. 162 (1876) 6

TABLE OF AUTHORITIES—Continued

STATUTES:

Bankruptcy Act of 1898:

USS. 6900) 000111

11 U.S.C. §108(a)(1) (197

11 U.S.C. §506(1) (1970)

a USC. $608 (1976) ——..........................

11 U.S.C. §621(2) (1970) ——ĩĩ7[

Bankruptcy Reform Act of 1978, Pub. L. No. 95-

598, 92 Stat. 2549:

11 U.S.C. prec. § 10: (Supp. II 1978)...

11 U.S.C. 5 502 (b) (2) (Supp. III 1979)

11 U.S.C. 5 506 (b) (Supp. III 1979)

11 U.S.C. 5 7286 (a) (5) (Supp. III 19799)

1 ) ?˙—:];:Lͤ:

eG ETE EE

Miller Act, 40 U.S.C. § 270a-d (1970)

JJ

D.C. Code Ann. § 28-3308 (19817)7)ʒ/

Fla. Stat. Ann. § 687.04 (West 1966 & Supp.

r

Ga. Code Ann. § 57-112 (197

Idaho Code § 28-22-106 (1948)

Iowa Code Ann. § 585.5 (West 19850

La. Rev. Stat. Ann. § 9.3501 (West 1951 & Supp.

ARISES: IE PS SI ON RE I

Mich. Stat. Ann. § 19.15(2) (Callaghan 1981)

Miss. Code Ann. § 75-17-1 (1972 & Supp. 1981)

Stat. § 408.080 (Vernon 19583)

. Stat. § 45-106 (1978) —............................

Ann. § 31:1-3 (West 19683

Ann. § 31:1-4 (West 1963)

Va. Code E TEI

LEGISLATIVE MATERIALS:

H.R. Rep. No. 95-595, oan Spee nO Shes SF

CGD ————ñ—ů———

ix

TABLE OF AUTHORITIES—Continued

TREATISES: Page

3A Collier on Bankruptcy { 63.07[15] (14th ed. *

1975)

8A Collier on Bankruptcy { 68.1613] (14th ed.

1K4—ͤ—“ SER Se a 10

6 Collier on Bankruptcy { 9.05 (14th ed. 1978) 19

6 Collier on Bankruptcy { 9.08 (14th ed. 1978)... 13, 15

GLEN CORPORATION, et al.,

Petitioners,

V.

O. C. ASSOCIATES, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

Glen Corporation, Monte J. Wallace, and Neil W.

Wallace (the majority shareholders of Continental Invest-

ment Corporation), and the Minority Stockholders’ Com-

mittee of Continental Investment Corporation, respect-

fully petition for a writ of certiorari to the United States

Court of Appeals for the First Circuit to review that

court’s judgment of April 30, 1982, in O. C. Associates v.

Continental Investment Corp., No. 81-1743; Debenture-

holders Protective Comm. of Continental Investment Corp.

v. Continental Investment Corp., No. 81-1741; and Bank-

ers Trust Co., Indenture Trustee v. Continental Invest-

ment Corp., No. 81-1756.

respect to a fourth related

. Con-

i

i

rf

OPINIONS BELOW

The opinion of the court of appeals is not yet officially

and appears as Appendix A to this Petition.

STATUTES INVOLVED

This case involves Sections 68a and 221(2) of the

former Bankruptcy Act, 11 U.S.C. §§ 103 (a), 621(2)

(1976).

STATEMENT OF THE CASE

This appeal involves the relationship between federal

agreement. Despite finding that New Y

the payment of such interest, the court or-

dered the award of interest on both pre-petition and

order on an overriding “general rule of federal bank-

ruptey law.”

This case arises out of the reorganization under Chap-

ter X of the Bankruptcy Act (“the Act”) of Continental

Investment Corporation (“CIC”).* In October 1970 CIC

2,

1

i

Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549,

which provided that a new Bankruptcy Code would apply to cases

issued 9 percent per annum convertible subordinated

debentures in the aggregate face amount of $30 million

due on November 1, 1990. In April 1973, CIC offered a

new issue of straight debentures, due on November 1,

1985, in exchange for the outstanding convertible deben-

tures. The straight debentures also bore interest at 9

percent per annum. The holders of the convertible deben-

tures were initially offered a 30 percent premium, $1,300

principal amount of straight debentures for each $1,000

principal amount of convertible debentures; this premium

was later increased to 40 percent, and most, but not all,

of the convertible debentures were exchanged for the

straight debentures.

The provisions of the indentures that gave rise to this

appeal provided that different state laws would govern

the respective debenture issues. The indentures for both

issues provided that, in the event of default, the prin-

cipal and any then-unpaid installments of interest would

become due upon demand. They also provided that while

interest would be paid on the principal, interest on any

unpaid installments of interest would be due only “to the

extent permitted by law.” But by explicit provision in

the indentures, the “law” governing the 1970 convertible

debentures “for all purposes” was the law of Massa-

chusetts ; that governing the 1973 straight debentures “for

all purposes” was the law of New York. See App. A at

3a-4a; Court of Appeals’ Joint Appendix (“J.A.”) at

256, 353.

Both indentures provided for semi-annual payments of

installments of interest, with the principal due in a

lump sum on the maturity dates. CIC failed to pay the

installments of interest due on both issues of debentures

on November 1, 1974, and thereafter failed to make any

interest payments. Both indentures permitted the in-

commenced on or after October 1, 1979. As discussed in Section

IV below, the issues raised by this appeal apply both to the many

cases currently pending under the Bankruptcy Act and to cases

filed under the new Bankruptcy Code.

4

denture trustee to demand immediate payment of the

full amount of principal and all accrued and unpaid

interest following such a default. (J.A. 214-15, 311.)

Notwithstanding these provisions, neither trustee de-

manded payment or commenced suit to collect any amount

owing thereon, so neither issue of debentures was accele-

rated. A year and a half later, on April 30, 1976, CIC

filed its petition for arrangement under Chapter XI of

the Act. That proceeding was converted to a Chapter

X reorganization in March 1978.

The reorganization of CIC proved to be a major suc-

cess, allowing all creditors to be paid in full with the

balance to be paid to the shareholders.’ On June 5, 1981,

the trustee for CIC submitted his Third Modified Plan.

The plan provided for payment in full, in cash, of each

debentureholder’s allowed claim. The trustee proposed to

pay both the full face amount of the principal of the

debentures and all unpaid and accrued installments of

interest up to the date of proposed payment, but did not

provide for payment of interest on the unpaid install-

ments of interest.

On June 18, 1981, the district court issued a decision

approving the trustee’s plan but reserving decision con-

cerning the payment of interest on the unpaid install-

ments of interest (J.A. 429); no appeal was taken from

that decision or from the district court’s order confirming

the plan. In an opinion dated September 9, 1981, the

district court found that there was good cause to deny

payment of the additional amounts representing interest

on all unpaid installments of interest. With respect to the

small amount of debentures governed by Massachusetts

law, the district court found that while Massachusetts

law permitted agreements to pay such interest, payment

*There are approximately 4,000 public shareholders of CIC.

See Opposition of the Minority Shareholders’ Committee to Claims

of the Debentureholders, filed in the district court, at 4. The share-

holders will realize approximately $40 million from the reorganiza-

tion of CIC. (J. A. 480.)

of the full amount of principal due the debentureholders

nine years before the final maturity date satisfied the

requirement that the plan be fair and equitable. With

respect to the far larger amount of debentures governed

by New York law, the district court concluded that be-

cause New York law clearly barred any right to interest

on unpaid installments of interest, no such payments

would be allowed under the plan.

The briefs on appeal to the United States Court of

Appeals for the First Circuit made diverse arguments

on behalf of the New York (i.e., straight) debenture-

holders.* The Debentureholders Protective Committee ar-

gued that the contractual provision for interest on in-

terest was valid under New York law and entitled the

debentureholders to interest on all overdue installments

of interest, including both those matured at the time of

the petition and those maturing post-petition. The Inden-

ture Trustee and O. C. Associates, representing the bulk

of the straight debentureholders, abandoned any claim to

interest on interest based on state law, arguing instead

that federal bankruptcy law entitled the debentureholders

to interest on installments of interest already overdue

when CIC filed its Chapter XI petition (“interest on pre-

petition interest”).* They made no claim, however, that

federal law entitled the debentureholders to interest on

installments of interest falling due post-petition (“inter-

est on post-petition interest“).

*The convertible debentureholders also appealed and won re-

versal. Because those debentures were governed by Massachusetts

law, which does allow contracts for interest on future unpaid in-

stallments of interest, that case is not the subject of this petition.

5 Brief of Debentureholders Protective Committee at 4-14, in

81-1741.

* Brief of Bankers Trust at 8; Brief of O.C. Associates at 21,

in 81-1756 and 81-1743, respectively. O.C. Associates, which holds

almost 60 percent of the straight debentures, acquired those deben-

tures after the filing of the petition in bankruptcy (J.A. 369-70).

The general partners of O.C. Associates are an affiliate of the

Charter Company and an affiliate of Oppenheimer & Co. /d.

Of the five possible categories of interest arising under

these debentures, two (pre-petition and post-petition in-

terest on principal) were not before the court because the

debentureholders’ entitlement under state law had not

been disputed. The court of appeals, in an opinion by

Judge Wyzanski, denied a third category (pre-petition

interest on unpaid pre-petition interest) as barred by

state law and, because pre-bankruptcy, not within any

entitlement under bankruptcy law. The court held that

the fourth possible category, post-petition interest on

unpaid pre-petition interest, was a matter of federal

bankruptcy law. The court proceeded to award this in-

terest because it asserted that a “general rule of federal

bankruptcy law” established the right to payment of post-

petition interest on claims, even though it also held that

the debentureholders were not entitled to such interest

under governing state law.’ Finally, the court held that

the debentureholders were entitled to post-petition inter-

est on post-petition interest (that is, on interest install-

ments that became due after the debtor filed its petition

in bankruptcy). The court based this right not on state

law, as had been argued by the one debentureholder rep-

The court described the contention that New York law permits

recovery of interest on interest as “devoid of merit,“ App. A. at 14a,

citing the leading case of Young v. Hill, 67 N.Y. 162 (1876), as

well as Newburger-Morris Co. v. Talcott, 219 N.Y. 505, 510, 114

N.E. 846, 847 (1916) (“The rule is settled that a promise to pay

interest upon interest is void if made at a time before simple inter-

est has accrued”) (Cardozo, J.); Giventer v. A now, 37 N.Y.2d

305, 308, 333 N.E.2d 366, 368, 372 N.Y.S.2d 63, 66 (1975) (same);

Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156,

171-76 (1946) (citing Talcott at 510 and lower court's opinion)

(Frankfurter, J., concurring); Empire Trust Co. v. Equitable

Office Bldg. Corp., 167 F.2d 346, 348-49 (2d Cir. 1948) (promise

to pay interest on overdue interest coupons is void under New York

law) (Swan, J.). See also Williamsburgh Savings Bank v. Town of

Solon, 136 N.Y. 465, 481, 32 N.E. 1058, 1062 (1893); Levine v.

U.N. Cleaners, 4 A.D.2d 954, 167 N.Y.S.2d 801, 802 (App. Div.

1957).

7

resentative claiming such interest, but rather on over-

riding federal law.

The court of appeals also held that the absolute pri-

ority rule required, in the circumstances of this case. that

the plan of reorganization could not award any payments

to the shareholders unless it compensated debenture-

holders for each of the categories of interest payments

to which the court found they were entitled. It there-

fore reversed the district court’s decision.

REASONS FOR GRANTING THE WRIT

I. THE COURT OF APPEALS’ DECISION THAT A

“GENERAL RULE OF FEDERAL BANKRUPTCY

LAW” ESTABLISHES A RIGHT TO INTEREST ON

INTEREST EVEN WHERE STATE LAW BARS ITS

PAYMENT IS CONTRARY TO THE DECISIONS OF

THIS COURT AND IMPROPERLY OVERRIDES

GOVERNING STATE LAW.

The court of appeals overturned the decisions of the

trustee and the district court because it concluded that a

plan of reorganization of a solvent debtor could not be

“fair and equitable” within the meaning of Section 221

(2) of the Bankruptcy Act if it failed to provide for the

payment of post-petition interest on all unpaid pre-peti-

tion and post-petition installments of interest. The court

concluded that the right to such payment arose from an

overriding “general rule of federal bankruptcy law” pro-

viding for interest even where there is no right to that

interest under governing state law. There is no such

“general rule” and none of the cases cited by the court

of appeals supports the court’s decision. This Court

should grant certiorari because the court of appeals’ un-

precedented decision is contrary to numerous opinions of

this Court and improperly intrudes on contractual rela-

tions governed by state law.

A. The Cases Relied Upon by the Court of Appeals

Clearly Establish That Applicable Non-Bankruptcy

Law, Not Bankruptcy Law Itself, Determines Any

Right to Post-Petition Interest on Unpaid Install-

ments of Interest.

The court of appeals recognized that this Court has

held on a number of occasions that post-petition interest

on claims usually is not allowed under federal bank-

ruptey law. App. A. at 10a. Post-petition interest may

be allowed, however, where, as here, the debtor proves

solvent. The court of appeals read the cases recognizing

this “solvency exception” as supporting an overriding

“general rule of federal bankruptcy law” creating a

right to payment of interest even where applicable state

law bars the payment of interest. The cases cited by the

court show, however, that the only general federal rule

is that where a debtor proves solvent, bankruptcy courts

may enforce a right to interest arising under applicable

non-bankruptcy law.

The only opinion of this Court cited by the court of

appeals in support of the existence of its “general rule”

is City of New York v. Saper, 336 U.S. 328 (1949). App.

A at 15a. In Saper this Court held that post-petition in-

terest would not be allowed on tax claims against a

bankrupt because of the “long-standing rule against

post-bankruptcy interest.. 336 U.S. at 332. The hold-

ing in Saper clearly provides no support whatsoever for

the decision below.

The court of appeals presumably* sought support in

this Court’s footnote 7 in Saper, which said:

In fact, this Court observed there that “there is no interest

except that which accrues according to law, . . id. at 331-32, and

the claim to interest in Saper arose not from bankruptcy law, but

from federal and state tax law, id. at 340 n.18; Saper v. City of

New York, 168 F.2d 268, 269 (2d Cir. 1948), aff'd, 336 U.S. 328

(1949).

* The citation of Saper as authority for the general rule” re-

ferred to no particular part of that opinion, App. A at 15a; the

only citation of Saper with a specific reference was to footnote 7,

id. at Lia.

“Two exceptions [to the rule against post-bankruptcy

interest] were recognized: if the alleged ‘bankrupt’

proved solvent, creditors received post-bankruptcy in-

terest before any surplus reverted to the debtor,

Bromley v. Goodere, 1 Atk. 75; Ex parte Mills, 2

Ves. Jr. 295; Ex parte Clark, 4 Ves. Jr. 6763

These exceptions have been carried over into our sys-

tem. See American Iron & Steel Mfg. Co. v. Sea-

board Air Line Ry., 233 U.S. 261, 267... .”

This footnote, however, stands for nothing more than

the proposition that if the creditor is otherwise entitled to

interest under applicable nonbankruptcy law, then tne

creditor may receive that interest if the debtor turns out

to be solvent. It creates no overriding “general rule of

federal bankruptcy law” transforming a noninterest-bear-

ing claim into a right to interest, as analysis of the cases

this Court cited makes clear.

Bromley v. Goodere, 1 Atk. 75, 26 Eng. Rep. 49 (1743),

the leading English case on interest payments in such

circumstances, held only that where debts are interest-

bearing by a valid explicit contract, creditors of a bank-

rupt’s estate are entitled to post-bankruptcy interest be-

fore any surplus reverts to the debtor. Ex parte Mills, 2

Ves. Jr. 295, 30 Eng. Rep. 640 (1793), stands for the

same proposition (it explicitly approved the decision in

Bromley) and extends it to implied contracts for interest.

And Ex parte Clark, 4 Ves. Jr. 677, 31 Eng. Rep. 349

(1799), simply held that one group of creditors was not

entitled to be paid interest until after another group of

creditors had their claims for principal satisfied.

The relevant Supreme Court opinion cited, American

Iron & Steel Mfg. Co. v. Seaboard Air Line Railway, 233

U.S. 261 (1914), adopts this English exception, but like

the English cases, provides no support for an inde-

pendent federal right to interest. In fact, that opinion

demonstrates that the only “federal rule” is a rule of dis-

tribution that permits federal bankruptcy courts in cer-

10

tain circumstances to allow payment of interest which

has been accruing pursuant to a contract valid under

state law.“ The Court explained that the general rule

refusing to allow interest after bankruptcy “is not be-

cause the claims had lost their interest-bearing quality .. .

but is a necessary and enforced rule of distribution

Id. at 266. Since interest continued to run, “in the rare

instances where the assets ultimately proved sufficient for

the purpose, . . creditors were entitled to interest ac-

cruing after adjudication.” Jd. at 267. In order to de-

termine if there were any “interest accruing” on the

claim before it, the Court looked to governing Virginia

law and concluded that state law would allow interest on

such a claim. Id. at 265.

The two other cases cited in the decision below as sup-

port for the supposed general federal rule, see App. A at

15a, are of no possible relevance.“

The court of appeals’ decision is also inconsistent with

two other lines of bankruptcy cases. One such line

consists of those cases that have allowed the payment

of post-petition interest when the collateral securing a

claim is sufficient to satisfy payment of both the pre-

petition claim and post-petition interest. See Coder v.

10 Cf. 3A Collier on Bankruptcy { 63.16 [3] at 1870.1 (14th ed.

1975) (“The rate of interest depends upon the contract and the

applicable state law as to usury and the legal rate of interest”).

u In United States v. Bass, 271 F.2d 129 (9th Cir. 1959), the

Court of Appeals for the Ninth Circuit held that the United States

was not entitled to post-bankruptcy interest on a tax claim sup-

ported by a lien prior to the filing of the petition in bankruptcy.

This holding is clearly irrelevant, and the opinion below apparently

cites Bass only because, in passing, the Bass court referred, id. at

130, to the solvency exception, discussed above. Similarly, Littleton

v. Kincaid, 179 F.2d 848 (4th Cir.), cert. denied, 340 U.S. 809

(1950), provides no support for the decision below, since the issue

there was the date to which interest on interest-bearing notes

should be allowed, id. at 852, and not whether bankruptcy pro-

ceedings created an independent right to interest.

11

Arts, 213 U.S. 228, 245 (1909). This Court’s opinions

have consistently stated that the nature of the underlying

claim determines whether, and at what rate, post-petition

interest will be paid on such a secured claim. See, e. g.,

Ecker v. Western Pacific Railroad, 318 U.S. 448, 455

(1943). The court of appeals’ decision is also at odds

with the federal bankruptcy treatment of claims based on

contracts allegedly usurious under state law. Where

claims arising under such contracts have been made, the

courts have looked to state law to determine whether to

allow such claims in bankruptcy and whether, if allowed,

they bear interest. This rule led the Second Circuit

to hold that where governing state law provided that a

mortgagee who had engaged in a usurious transaction

could recover only its principal with no payment of in-

terest, bankruptcy law would follow state law and no

interest would be allowed. Speare v. Consolidated Assets

Corp., 367 F.2d 208 (2d Cir. 1966).”

12 See also Palo Alto Mutual Savings & Loan Ass'n v. Williams,

245 F.2d 77 (9th Cir. 1957); Eddy v. Prudence Bonds Corp., 165

F.2d 157 (2d Cir. 1947), cert. denied, 333 U.S. 845 (1948).

1 In Ecker, post-petition interest was paid to secured creditors

at the “contract rate“ on interest-bearing claims; the highest-

ranking creditor of all (the Reconstruction Finance Corporation) re-

ceived no interest because its Trustee’s certificate did not provide for

interest. Jd. at 455. If the right to post-petition interest were

indeed a “federal rule,” the top-ranking secured creditor would

always be entitled to post-petition interest before lower-ranking

creditors were paid. Similarly, Ticonie National Bank v. Sprague,

303 U.S. 406, 410 (1938), held that where a depositor with a

valid lien was otherwise “entitled to interest as damages for the

failure to pay that balance upon demand . [t]he bank’s obliga-

tion . . is not cut off by suspension of its business and receiver-

ship.” This Court never intimated that the right to interest arose

as an incident of the bankruptcy proceeding.

14 See 3A Collier on Bankruptcy, supra, { 63.07 [15], at 1822-24.

1 The mortgagee in Speare sought payment of its principal with

“legal interest,” the debtor having been in bankruptcy for five

years. In rejecting the claim to post-petition interest because it

would not be allowed under governing state law, the court never

X or similar statu-

equitable, it must adhere

rule set down by this Court in

and

v. Boyd, 228 U.S. 482 (1913).

the proposition that “‘any arrange-

which the subordinate rights and

by

for

es

stands

the parti

terests of the stockholders are to be secured at the ex-

pense of prior rights’ of creditors ‘comes within judicial

denunciation.’” Consolidated Rock Prod. Co. v. DuBois,

Accord, Case v. Los Angeles

Lumber Prod. Co., 308 U.S. 106, 116 (1939).

312 U.S. 510, 527 (1941).

hinted that because the creditor had a valid pre-petition claim to

its principal, there was an alternative federal right to post-petition

interest where barred by state law. See also Woods-Tucker Leasing

determinant of the validity and enforceability of the claim, and of

the appropriate remedy).

Corp. v. Hutcheson-Ingram Dev. Co., 626 F.2d 401 (5th Cir. 1980),

modified, 642 F.2d 744 (5th Cir. 1981) (state usury law the critical

Healt F ri!

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10 [ Tbe [absolute priority] rule controls the payment of allow-

able interest, not the determination of what interest is allowable.”

In re New York, New Haven and Hartford R.R., 4 B.R. 758, 799

(D. Conn. 1980) (emphasis in original).

See 312 U.S. at 514-15.

15

Western Pacific Railroad, supra, 318 U.S. at 455, the

post-petition interest awarded on the allowed claims was

computed at the “contract rate.” Thus, where the con-

tract underlying the highest-ranking claim did not provide

for interest, none was allowed.” The plan approved in

Ecker, therefore, is also inconsistent with the overriding

“general rule” found by Judge Wyzanski.”

The court of appeals claimed to find support for its

“general rule“ in this Court’s opinion in V Bond-

holders Protective Comm. v. Green, supra. App. A at 15a.

But Vanston could not provide support for any such

“rule.” Because the debtor in Vanston was insolvent, this

Court declined to order any post-petition interest on in-

terest, even though provided by contract arid even assum-

ing that it were permitted by state law. 329 U.S. at 166-

67. In reaching that decision, this Court confirmed that

while the decision whether to allow interest is a matter of

federal law, there is no claim to interest for a federal

court to allow or disallow unless it arises under governing

state law.

This two-step analysis is clear from this Court’s treat-

ment of the claim in Vanston. The first step there was

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tice Frankfurter, “We do not reach considerations of

policy in bankruptcy administration until there are

rights, created by local applicable law, to be recognized.”

Id. at 171 a ge

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Co.. —— US. ——, 50 U.S.L.W. 4892, 4901 n.36 (U.S. June 28,

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II. EVEN IF THERE WERE SUCH A “GENERAL

RULE OF FEDERAL BANKRUPTCY LAW,” IT

WOULD HAVE TO BE LIMITED TO INTEREST

ON UNPAID INTEREST INSTALLMENTS THAT

BECOME DUE BEFORE THE BANKRUPTCY

PROCEEDINGS BEGIN AND WOULD NOT APPLY

TO INTEREST ON INTEREST INSTALLMENTS

THAT BECOME DUE THEREAFTER.

the filing of the petition in bankruptcy. In fact, in

appeals to the court of appeals, the bulk of the debenture-

holders sought post-petition interest on the unpaid pre-

petition installments of interest only.“ The court of

appeals, however, applied its overriding “general rule”

to produce not just the interest that these debenturehold-

ers sought, but also post-petition interest on each install-

ment of interest that came due during the bankruptcy

proceedings. The court did this by reading the proofs of

claim filed in April 1976 to include claims for each post-

petition instaliment of interest, even though those install-

ments were not then due, and awarding interest on each

of those installments from the date that it came due.

“General rule” or no “general rule,” what the court of

appeals did in creating a right to interest on install-

ments of interest that matured during the reorganization

proceeding is simply wrong.“

Post · pet it ion simple interest on principal, accruing pursuant to

state law, was provided by the plan and was never at issue.

27 Because entitlement to post-petition simple interest is unques-

tioned, the court’s inclusion of post-petition installments of interest

on the principal in the claim, rather than treating them as interest

on a claim to the principal, may at first seem an unimportant tech-

nicality. However technical, this error more than doubled the stakes

interest due and unpaid as of April 30, 1976,” the

of the filing of the petition. J. A. 363-65.** Second.

(App. A at 6a-7a) to an amount calculated by counsel to the Trustee

Protective Committee made any claim to such interest payments.

It based its claim on state law, a basis clearly rejected by the court

of appeals, (App. A at 14a-15a), and on the absolute priority rule,

which cannot be the source of any such right, see pp. 13-15 supra.

2 See In re Oklahoma Ry., 61 F. Supp. 96 (W. D. Okla. 1945). Not

even in the case of judgments obtained post-petition and incorporat-

ment allowable. Act, §63a(5). Nor can unmatured interest be

allowed as within Section 63a(8), covering “contingent debts and

contingent contractual liabilities.” To hold otherwise would render

the bar to unmatured interest in Sections 63a (1) and 63a(5) a

nullity. Moreover, New York’s highest court has said that “[u]n-

earned interest to become due in the future is not a debt.” Conti-

nental Securities Co. v. New York Central & Hudson River R.R.,

19

this conclusion by specifically providing that a court shall

disallow a claim to the extent it is for “unmatured inter-

est.” 11 U.S.C. § 502 (b) (2) (Supp. III 1979).” Finally,

the court of appeals did not cite a single case supporting

its award of interest on unmatured interest, and its deci-

sion is contrary to the decisions of this and other courts.”

The extension by the court of appeals of its “general

rule” to require not only the payment of interest on un-

paid pre-petition interest but also the payment of interest

217 N.Y. 119, 111 N.E. 484, 486 (1916) (Cardozo, J.). Cf. In re

Tastyeast, Inc., 126 F.2d 879 (3d Cir.), cert. denied, 316 U.S. 696

(1942) (where a note provided for post-maturity increased inter-

est, note matured post-petition, and debtor erroneously believed

contingent obligations not provable and allowable, the court accepted

debtor’s argument that it was a contingent obligation but held it

unenforceable as a penalty).

Section 106(1) of the Act, 11 U.S.C. § 506(1), which defines Chap-

ter X claims to include claims not “provable under section 63,” leads

to no different result. Since the unmatured interest was not a debt

owed at the time the petition was filed, its inclusion in a proof of

claim would have been disallowed under Section 196, 11 U.S.C.

§ 596, on the ground that there was “no valid claim.” See 6 Collier

on Bankruptcy, supra, f 9.05, at 1544 (footnote omitted).

% Although the provisions of the Code do not apply to this case,

see Bankruptcy Reform Act of 1978 f 403(a), 11 U.S.C. prec. 101

(Supp. II 1978), the legislative history of the Code clearly states

that Congress understood the Code treatment of unmatured inter-

est as simply codifying existing law: Section 502(b) . . contains

two principles of present law. First, interest stops accruing at the

date of the filing of the petition, because any claim fer unmatured

interest is disallowed under this paragraph.” H.R. Rep. No. 95-595,

95th Cong., Ist Sess. 353 (1977).

n See, e.g., Consolidated Rock Prod. v. Du Bois, supra; Ecker v.

Western Pacific Railroad, supra; Empire Trust Co. v. Equitable

Office Building Corp., 167 F.2d 346 (2d Cir. 1948) (discussed in note

33 infra). See also American Iron & Steel Mfg. Co. v. Seaboard Air

Line Ry., supra, at 265 (question certified: “Is interest recoverable

on such a claim for the period of the receivership?”) (emphasis

added) ; Group of Institutional Investors v. Chicago, Milwaukee, St.

Paul & Pacific R.R., 318 U.S. 523, 535 n.7 (1943) (claims include

principal and pre-petition interest; interest on claims considered

separately ).

on each installment of interest falling due during the

bankruptcy proceeding demonstrates the far-reaching im-

pact of its opinion. This Court should grant certiorari to

review this unprecedented and significant decision.

III. THE COURT OF APPEALS’ DECISION CONFLICTS

WITH THIS COURT'S HOLDING IN BUTNER v.

UNITED STATES AND WITH TWO DECISIONS

OF THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT.

A. Butner v. United States Establishes That the Bank-

ruptcy Laws Look to State Law in Determining the

Validity of Post-Petition Claims.

The court of appeals conceded that pre-petition “in-

terest is governed by state law, absent an overruling

federal law.” App. A at 8a. When it came to post-

court below totally ignored this Court’s recent decision

in Butner v. United States, 440 U.S. 48 (1979). Butner

also concerned an alleged “federal rule” allowing post-

petition claims nonexistent under applicable state law. A

mortgagee there claimed a right to recover rents collected

21

and two courts holding that federal bankruptcy law alone

governed such post-petition claims. Jd. at 52-53.

This Court, in an opinion by Justice Stevens, unani-

mously rejected the holding of the two courts of appeals

that had “adopted a federal rule of equity” giving a mort-

gagee a secured interest in post-petition rents “even if

state law would not recognize any such interest until

after foreclosure.” Id. at 53 (footnote omitted). This

Court rejected that approach because, “at least in some

circumstances, [it] affords the mortgagee rights that are

not his as a matter of state law. The rule we adopt

avoids this inequity because it looks to state law to define

the security interest of the mortgagee.” Id. at 56. The

Court held that state law would determine the mortgagee’s

rights and affirmed the lower court’s decision that barred

the creditor’s claim because it was not valid under ap-

plicable state law.

Petitioners argued below that the claims of the creditor

in Butner are indistinguishable from the claims made by

the debentureholders here. The vast majority of the de-

bentureholders abandoned any claim under state law and,

like the mortgagee in Butner, relied entirely on an alleged

federal right; the same is true of the court of appeals

itself, which found no right arising under state law. The

failure of the court of appeals even to mention, let alone

distinguish, Butner clearly indicates the need for this

Court to reinforce its holding in that case.

B. The Second Circuit Has Twice Rejected the Same

Claims That Were Upheld By the Court of Appeals

(2d Cir.), cert. denied, 332 U.S. 836 (1947). The credi-

tors there sought payment of interest from a solvent

debtor on the portion of their claim which represented

unpaid pre-petition interest. Like the creditors here, they

did not rely on any express contract claim to such in-

terest since their ——— made no provision for interest

on interest. The court in Realty found that interest on

This issue was again presented to the Second Circuit

approximately one year later in Empire Trust Co. v.

Equitable Office Building Corp., 167 F.2d 346 (2d Cir.

1948). In an opinion by Judge Swan (Judges L. Hand

the claim was not valid under applicable New York law.

That determination ended its review of the claim, the

court said, “since we have already decided that the prom-

ise to pay interest on interest created no valid obligation

to holders of unnegotiated coupons.” Id. at 349.

Thus, the Second Circuit holds that the allowance of a

claim for interest on interest is to be considered in reor-

* Empire Trust is also inconsistent with the ruling of the Court

below that interest must be paid on each post-petition installment of

interest. Even though the debtor there had failed to pay six years

of semi-annual interest payments, no interest was paid on the

unpaid post-petition installments of interest. Both Realty Associates

and Empire Trust were recently discussed and distinguished by the

Second Circuit in Corbin v. Federal Reserve Bank, 629 F.2d 233,

287-88 (2d Cir. 1980), cert. denied, 450 U.S. 970 (1981); cf. Ruskin

v. Griffiths, 269 F.2d 827, 830 (2d Cir. 1959), cert. denied, 361 U.S.

947 (1960) (distinguishing Empire Trust and upholding variable

interest rate provision against solvent debtor where valid under

state law).

ganization only if it is valid under state law.“ The First

Circuit holds that such a claim, invalid under state law,

can be allowed under an overriding “general rule of fed-

eral bankruptcy law.” This Court should grant certiorari

to resolve this conflict between the circuits.

IV. THE CREATION OF A “GENERAL RULE OF

FEDERAL BANKRUPTCY LAW” IMPROPERLY

INFRINGES ON STATE COMMERCIAL LAW AND

WILL ENCOURAGE THE FILING OF ADDITIONAL

BANKRUPTCY CASES.

A. This Court and Other Courts Have Repeatedly

Held That Bankruptcy Law Will Recognize State

Laws Governing Commercial Transactions.

As this Court recently noted, while “Congress has power

to enact bankruptcy laws that are uniform throughout

the United States,” a uniform bankruptcy law “ ‘may

recognize the laws of the State in certain particulars,

although such recognition may lead to different results in

different States.“ Railway Labor Executives’ Associa-

tion v. Gibbons, — U.S. —, 102 S. Ct. 1169, 1176 (1982)

(quoting Stellwagen v. Clum, 245 U.S. 605, 613 (1918) ).

Thus, “uniformity does not require the elimination of any

* Accord, In re Georgia, Florida, and Alabama R.R., 88 F. Supp.

796 (M.D.Ga. 1950) (New York law; provision void, and per

Vanston, would not be allowed if valid). See also In re International

Hydro-Electric System, 32 S.E.C. 504, 512 (1951) (noncontractual

claim for interest on interest on interest not enforceable under

Massachusetts law; claim denied); this issue was not raised on

appeal to the district court, see In re International Hydro-Electrice

System, 101 F. Supp. 222, 225 (D. Mass. 1951). The Second Cir-

cuit’s approach was also employed by the district court in In re

Norcor Mfg. Co., 36 F. Supp. 978 (E.D. Wis. 1941). The court

there considered a claim for interest on an interest claim that a

master had allowed in an earlier state receivership proceeding.

The court noted that the underlying contract did not provide for

such interest, found that there “is no statutory authority for allow-

ing compound interest on claims that are allowed in bankruptcy,”

and concluded that “all that the creditor is entitled to is the face of

his claim, plus accrued interest. Id. at 980.

differences among the States in their laws governing com-

mercial transactions.” 102 S. Ct. at 1176.

Congress has recognized these “differences among the

States” by providing that “no obligation finds its way into

a bankruptcy court unless, by the law of the State where

the acts constituting a transaction occur, the legal conse-

quence of such a transaction is an obligation to pay,”

Vanston Bondholders Protective Committee v. Green, 329

U.S. 156, 170 (1946) (Frankfurter, J., concurring) .”

This is merely one aspect of the more sweeping policy un-

der which “Congress has generally left the determination

of property rights in the assets of a bankrupt’s estate to

state law,” Butner v. United States, 440 U.S. 48, 54

(1979). As this Court stated in Butner:

“Property interests are created and defined by state

law. Unless some federal interest requires a different

result, there is no reason why such interests should

be analyzed differently simply because an inter-

ested party is involved in a bankruptcy proceeding.

Uniform treatment of property interests by both

state and federal courts within a State serves to re-

duce uncertainty, to discourage forum shopping, and

to prevent a party from receiving ‘a windfall merely

by reason of the happenstance of bankruptcy.’ Lewis

The differences among the states recognized by this Court in

Butner and Railway Labor Executives have been respected in

. analogous situations where the payment of interest has been at

issue. For example, the Miller Act, 40 U.S.C. §§ 270a-d (1976), pro-

vides a cause of action, in lieu of state statutory mechanics’ liens,

for subcontrac.ors on federal government construction projects.

While the allowance of prejudgment interest has been held to be a

matter of federal law, the Fifth Circuit looked to state law as a

matter of convenience and practicality’” in deciding whether it

would be awarded in that case. United States ex rel. Georgia Elec-

tric Supply Co. v. United States Fidelity & Guaranty Co., 656 F.2d

998, 996-98 (5th Cir. 1981). And under the federal interpleader

statute, 28 U.S.C. § 1835 (1976), it has been held that where gov-

erning state law did not permit the award of prejudgment interest,

none would be awarded by the federal courts. Perkins State Bank

v. Connolly, 682 F.2d 1306, 1319-20 (5th Cir. 1980).

v. Manufacturers National Bank, 364 U.S. 603, 609.”

440 U.S. at 55.

The court’s decision has significant implications for

state commercial relations. A number of states either

totally disallow the payment of interest on unpaid interest

or permit such payments only if expressly provided for

by contract.“ These laws reflect the states’ concern about

the effect that compound interest can have on even rela-

tively small claims. All of these laws are rendered mean-

ingless after bankruptcy by the court’s decision creating

a federal right overriding them. The same is true of the

many state laws which bar creditors with usurious con-

tracts from collecting interest on those contracts; if there

is a federal right to interest, those creditors could col-

lect post-petition interest barred by state law.“ But there

Georgia: Grant v. Fourth Nat'l Bank of Columbus, 229 Ga.

855, 194 S.E.2d 913, 919 (1972). Idaho: Idaho Code § 28-22-106

(1948). Missouri: Mo. Ann. Stat. § 408.080 (Vernon 1953); Sloan

v. Paris, 541 S. W. 2d 316, 321 (Mo. Ct. App. 1976). Nebraska:

Abbott v. Abbott, 188 Neb. 61, 195 N.W.2d 204, 209 (1972). New

Jersey: Abramowitz v. Washington Cemetery Ass'n, 139 N. J. Eq.

293, 51 A.2d 461, 463 (NJ. Ch. 1947). New Mexico: Southern

Union Exploration Co. v. Wynn Exploration Co., 95 N.M. 594,

624 P.2d 536, 543 (Ct. App.), cert. denied, 95 N.M. 598, 624 P.2d

535 (1981), cert. denied. U.S. ——, 102 S.Ct. 1276 (1982).

Pennsylvania: Murray v. Prudential Ins. Co., 144 Pa. Super. 178,

18 A.2d 820 (1941); Powell v. Retirement Bd., 431 Pa. 396, 246

A.2d 110 (1968). Washington: Goodwin v. Northwestern Mut.

Life Ins. Co., 196 Wash. 391, 83 P.2d 231, 238 (1938).

* At least eleven states bar creditors holding usurious contracts

from collecting interest on their debt, although permitting the credi-

tors to recover their principal. F. g., Ala. Code § 8-8-12 (1975);

D.C. Code Ann. § 28-8303 (1981); Fla. Stat. Ann. § 687.04 (West

1966 & Supp. 1982); Ga. Code Ann. § 57-112 (1977); Iowa Code

Ann. § 535.5 (West 1950); La. Rev. Stat. Ann. §9:3501 (West

1961 & Supp. 1981); Mich. Stat. Ann. § 19.15(2) (Callaghan 1981);

Miss. Code Ann. § 75-17-1 (1972 & Supp. 1981); Neb. Rev. Stat.

§ 45-105 (1978); N. J. Stat. Ann. §§ 31: 1-3, 31: 1-4 (West 1963 &

Supp. 1981); Va. Code § 6.1-330.45 (1979 & Supp. 1982). Those

creditors would have a “claim” in bankruptcy for their principal, on

which the court of appeals’ decision apparently would award inter-

26

is no reason underlying the bankruptcy laws that justifies

overriding state policy simply because a borrower volun-

tarily or involuntarily ends up in bankruptcy proceed-

decision of the court below achieves just the

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There is no policy in the bankruptcy laws for failing to

such differences.” As the Second Circuit re-

cently stated in enforcing contract clauses, valid under

state law, that permitted creditors to recover col-

lection costs and liquidated damages, bankruptcy law

should recognize “the bargained-for terms of the loan con-

tract.” United Merchants & Manufacturers v. Equitable

Life Assurance Society, 674 F.2d 134, 137 (2d Cir. 1982).

If creditors can improve the explicit terms of their

loan contracts by resort to a bankruptcy court, they

have an incentive to bring bankruptcy proceedings in-

stead of relying on negotiated arrangements. At a mini-

mum, the court of appeals offers an incentive to a credi-

tor whose contract does not provide for interest on interest

to start bankruptcy proceedings if the debtor is likely to

prove solvent or the creditor’s collateral is sufficient to

cover payment of interest on interest. The same applies

to creditors under contracts for usurious interest where

state law bars the recovery of any interest under such a

contract. Beyond this, the court of appeals’ decision may

The equitable powers of a bankruptcy court to, e.g., subordinate

claims are unquestioned, but are not relevant here. The court of

appeals did not purport to rearrange rights on equitable grounds.

Rather, it purported to find claims based on federal law. Only after

finding those claims did it address the equitable question of whether

those claims must be paid.

% The decision nowhere says whether contractual provisions bar

resort to the supposed federal right. However, the indenture gov-

erning the straight debentures provided for interest on interest “to

the extent permitted by law,” §7.02 of the 1973 Indenture (J. A.

311), quoted in App. A at 4a-5a; since New York law did not allow

any interest on interest, the contractual rate for interest on inter-

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tors a choice between their contract rate and

der the general rule,” whichever is .

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is invalid under state law, the creditor would also appear

to have a right to receive interest on interest as a matter

of federal law, just as the straight debentureholders were

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awarded such a right here.“

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July 19, 1982

Corporation, Monte J. Wallace

and Neil W. Wallace

RICHARD E. BACHMAN

HALE, SANDERSON, BYRNES

& Morton

10 Post Office Square

Boston, Massachusetts 02109

Counsel for Petitioner Minority

Stockholders’ Committee

* Counsel of Record