Petition for Writ of Certiorari — In Re 620 Church St. Corp.

Supreme Court brief1936

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AUG 8 1996

CHARLES ELMORE i

, eC

‘IN THE ""

SUPREME COURT OF THE UNITED STATES

- OCTOBER TERM, 1936

No. a1

In the Matter of

620 CHURCH STREET BUILDING CORPORATION,

a corporation, Debtor under Section 77B of the Bank-

ruptey Act as Amended. |

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES CIRCUIT COURT OF

APPEALS FOR THE SEVENTH CIRCUIT

AND BRIEF IN SUPPORT THEREOF.

i THeopore EK. Ret, .

Counsel for Petitioners.

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CHICAGO LAW PRINTING CO., 111 N. WACKER DRIVE (COR. WASHINGTON ST.) TEL. FRANKLIN 6521

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INDEX.

PAGE

Petition for Writ of Certiorari 1

Summary Statement of the Case... 2

Respective Interests of Petitioners ..... 2

Tg RTS asi ltl A a ee ae cochlea 2

Questions Presented sateen anise biicisnsian 5

Reasons for Allowance of Writ... 6

Comiiet in Tiadisions 0 «6

Failure to Observe Local and Federal Law ____.. 6

Importance of Questions Presented 7

The Plan of Reorganization under Section 77-B a

Order Appealed From pills vacidtbessbeescduoneeas 4-5

Prayer for The Writ of Certiorari iia Gnsadnieedagiedadees 7

Brief in Support of Petition for fe | , 8

thse gt a eT s

The Statute Involved ot i)

Judgment Sought to be Reviewed 10

Statement of Nature of the Case... 11

Specification of Errors NE

Summary of the Argument iabuiesaheibilaaaaniat ligase: 13

MINI Sotelo oA a 17

The approval of the plan of reorganization with- ~

out consent, without compensation and without

making provision for protection of clair. imts

violative of Section 77-B of the Bankruptcy Act 17

SWS OPE ecerencee 20

The Decisions Applicable to the Construction

OF NE CPE atic 23-28

; PAGE

The rights of junior lien holders acquired prior to

enactment of Section 77-B including the rights to -

. require a public judicial sale, to bid at such sale

and to redeem therefrom within fifteen months

are, under the law of the State of Illinois, sub-

* stantive property rights which cannot be ‘de-

stroyed without consent .........---------------1---

“The Illinois Statute of Redemption Seoposaadons

The Decisions of the Supreme Court of the

} . United States -........--- ad Cotes soanler 31-32

| 3 The Decisions of the Courts of Illinois -....... ~32-34

Cpe cence nenes snr encensinnsoninennanenanrnen—emahnhomemmnacnnononane 35

Taste oF AUTHORITIES CITED.

CASES.

_Brine v.-The Hartford Fire Insurance Company, 96

U. &. 627, G34, 636... .n--n------ennenecceeneeensensensneeedeceensenenses 1

- Bronson v. Kinzie, 4 Hew. 281, Be -............ Lean eaasolad

Buzin v. Martinowicz, 178 Ill. App. a ae ............-

2 Cram v. Cottrell, 48 Neb. 646 ~.....--------------c rrr

| Fitch v. Wetherbee, 110 Ill. 475, 492 -...--.-.-------------%

Francisco Building Corp., Ltd. v. Battson, 83 Fed. (2d)

DS CC: C. A, GEM) panna ann nennn anna eann sean nenetennnsentsnmnsennncenmennne

Georgian Hotel Corporation, In re, 82 Fed. (2d) 917,

OI isnnccansnnennsentsinartannnnesnansinciinas ; a eos akg sadlotakameaennnnetoniaibn 1

Hotel Charles Co., In re, 12 Fed. Sup. 734, 736 (D. C.

De) sansa nna nnann nn nnn nn ann naan nnnnnsasenennnennnnnnnnsennts aosceeeeee

Louisville Joint Stock Land Bank v. Radford, 295.U. S.

555, 589, 590 ........-------- exechaseesennseesenneennnaszennnssese 14, 15, 26, 28

Murel Holding Corporation, In re, 75 Fed. (2d) 941,

QA2 (C. C. A. 21d) «...-----:--n--ecnseeennesensnerenseeccasennnasccenserennes 14

Parker v. Dacres, 130 U. S. 43, 48 sees

“

- Tennessee Publishing Co. v. American National Bank,

United States Code Annotated, Title 11, Section 207

CasEs.

81 Fed. (2d) 463, 468 (C.-C. A. 6th) 0. HALT 14, 2

Turk v. Mayberry, 721 Pac. 665, 669 (Okla. 1912)

Warner Bros. Pictures v. Lawton-Byrnes-Bruner Ins.

Agency, 79 Fed. (2d) 804, 817 (C. C. A. 8th) 0... 14, 23

STATUTES.

United States Code Annotated, Title 28, Section 347,

Section 240; Judicial Code, as amended...

(Sec. 77B of the Bankruptcy Act as amended) (1935

Cumulative Part, Page 175) 0 9, 13, 20

Cahill’s Illinois Revised Statutes—1931, Chapter 77,

Paragraphs 18 and 20 2220s eeeceeeeeeeec 16, 30

IN THE

SUPREME COURT OF THE UNITED STATES

Octoser Term, 1936 |

No.

In the Matter of °

620 CHURCH STREET BUILDING CORPORATION,

a corporation, Debtor under Section 77B of the Bank-

' ruptey Act as Amended.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES CIRCUIT COURT OF

APPEALS FOR THE SEVENTH CIRCUIT. |

To the Honorable, the Chief Justice of the

United States, and the Associate Justices

of the Supreme Court of the United States:

Your petitioners, 620 Church Street Building Corpora-

tion, a corporation, Irene Goodman, G. Walter, M. Long, >

A. W. Kibby, Emil Rosenthal and B.. K. Goodman, re-

spectfully pray that a Writ of Certiorari issue to’ review

an order entered May 11, 1936, by the United States Cir-

euit Court of Appeals for the Seventh Cireuit, denying

petitioners’ application for leave to appeal from an order

2 -

. of the United States District Court, for the Northern, Dis- |

trict of Illinois, Eastern. Division (Barnes, D. J. ‘ en-

tered March 31, 1936, confirming a plan of reorganization:

-in proceedings under Section 77B of the Bankruptcy Act

as Amended. 4

The plan of reorganization was so approved by said

District Court withbut the consent and over the objections

“of the holders of all of the second and third mortgage in- |

‘debtedness, and of all of the owners of the capital stock

of the Debtof, and over the objection of the Debtor, all

being petitiowers herein, disregarding substantive sta.

erty rights of certain of your petitioners and eliminating

them from all of the benefits of the reorganization.

SumMAkY STATEMENT OF THE CASE.

Respective Interests of Petitioners.

Petitioner, 620 Church Street Building Corporation, is

the owner of the property involved in the proceedings.

Petitioners, Irene Goodman, G. Walter, M. Long and A.

W. Kibby own all the capital stock of the 620 Church Street

Building Corporation. Petitioner, Emil Rosenthal, is the

owner of the second mortgage on the property, and peti-

_tioner, B. K. Goodman, is the owner of the third mortgage

on the property:

| The Facts.

On July 12, 1934, the 620 Church Street Building Cor-

poration (hereinafter referred to as Debtor) filed its vol-

untary petition in the District Court of the United States,

- Northern District of Illinois, Eastern Division, (Case No.

56564) for reorganization under. Section. 77B of the Bank-,

ruptey ‘Act.

Thereafter, claims were filed, allowed and classified in

‘said proceedings as follows:

Ciass 2. First mortgage 6% bonds se-

cured by trust deed dated June

30, 1928, principal amount (in-

‘terest from January 1, 1931 not

being included) .................1........ $445,500

Crass 3. Second mortgage notes secured

by trust deed dated July 13,

1928, principal amount (interest

from December 13, 1929, not

being included) ............. Sndaeeeians - 40,250

Cuass 4. Third mortgage note secured by

_ trust deed dated June 3, 1931,

principal amount (interest from

December 3, 1931 not being in-:

cluded) 27,000

Cuass 5. Common Stock wi

7 Raa iad ete n 1,260 shares

Various appraisals of Debtor’s property, ranging from

$205,000 to $600,000 were submitted to the District Court.

On or about January 30, 1936, a committee representing

. first mortgage bondholders filed a plan-of reorganization

of the Debtor, which provides, in brief; that the property

of the Debtor be conveyed to a corporation, also under

reorganization under Section 77B, which owns a building

adjoining the ‘property of the Debtor, and which ‘has digsa™+

‘tinct and separate stockholders and creditors. _.The plan

provides that such grantee corporation; in consideration of

the conveyance of Debthr’s property shall issue a part of

its first mortgage bonds and stock to be distributed solely

among the holéers of the first mortgage bonds of the

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{ Debtor. No payment or consideration of any kind to the

holders of the second ‘mortgage, to the holders of the third

mortgage, or to the stockholders of the Debtor is contem-

, platéd. It does not provide for a public sale of Debtor’s:

; property, and makes no provision whereby the holders of

j the second mortgage, third mortgage or stockholders of

the Debtor may bid for the property. Furthermore, it

1 does not provide and, in fact, wipes out, the right of re- -

| demption of Debtor’s property by any of the petitioners.

i] The plan was accepted by the Committee in behalf, of

| the holders of more than two-thirds of the first mortgage

bonds, but no acceptance of the plan was filed’ by the

‘a holders of any of the claims based upon the second mort-

gage notes, or the third mortgage note, nor by any of

the stockholders of the Debtor, all of whom filed objce-

tions to said plan. |

On tke 31st day of March, 1936, the District Court en-

tered an order of confirmation (R. 12) from which leave

to appeal was sought in the United States Cireuit Court

of Appeals for the Seventh -Cirguit. The order of com

firmation finds, among other things, that the property of

the Debtor has a fair market value of $245,025, that, there-

fore, there is no equity in said estate over and above the |

$445,500 of principal amount of first mortgage bonds, that

_ the Debtor is accordingly insolvent, and that the consent

of a majority of the stockholders of the Debtor is not a

prerequisite to the confirmation of the plan (R. 14, 15). Said

order, in paragraph 12 thereof, purports to appraise all

claims filed in Class 3, (the second mortgage notes), and ~

all claims filed in Class 4, (the third mortgage note), to

be of no value, and that; therefore, the consents of two-

thirds in amount of claims allowed in Classes 3 and 4 were

not prerequisite to, the confirmation of the plan.

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Wile esceorrec erry er ere eA TON to SO NROEN TY PE ory anc erprnep remnants Sorat TORN

Thereafter, petitioners filed a joint betithen for leave

to appeal from said order of confirmation, and likewise

filed a- joint assignment of errors. On May 11th, 1936,

the Cireuit Court of Appeals denied petitioners bees io

appeal. ;

Questions Presented. ;

The questions accordingly presented by this application -

- are as follows:

(1) Does Section 7B of the Bankruptey Act author-

ize the District Court to approve a plan of reorganization

which has not received the consent of two- thirds of each *

class of claims seeured by junior liens, and which does not

provide adequate protection for the payment of such claims?

(2) Are the rights of owners of junior liens acquired

prior to the. enactment of Section-77B of the Bankruptey

Act as Amended, including (a) the right to have the prop-

erty subject to the junior liens sold at a public sale, and

(b) the right to bid at such sale, and (c) the right to make

redemption from a sale at the bid price in accordance with

the Statutes of the State of Illinois, property rights, with-

in the purview of the Fifth Amendment of the Constitution -

of the United States, of which the owners may not be di-

vested without their consent?

+E ERED

Reasons Relied Upon for Allowance of the Writ.

P| : -The- reasons respectfully presented for the allowance of

a the Writ of Certiorari in the instant case, are as follows:

i 1. The conflict between the decision of the District Court which

ani the Circuit Court of Appeals declined to review, and the.

‘al decision of the Supreme Court of the United States.

The ruling of the Circuit Court of Appeals is in con-

~ flict with the recent decision of this Court involving the

same substantive rights. (Louisville Joint Stock Land

i | Bank v. Radford, 295 U. 8. 555)

3 | 2. Conflict in the decision of the Circuit Courts of Appeal.

The refusal of the Circuit Court of Appeals to grant peti-

tioners leave to appeal and the memorandum filed by the

Court (R. 21), conflicts with the decision of the Sixth Cir- »

cuit (In Re: Tennessee Publishing Co., 81 Fed. 2nd 463),

and also conflicts with the decision of the Second Cireuit

(In re: Murel Holding Corporation, 75 Fed. 2nd 941),

and is*also in conflict in some respects with its own recent

_ decision (In re: Georgian Hotel Corporation, Debtor, .82

Fed. 917). | :

3. Failure to observe and follow local and Federal law aff ord-

ing protection of property rights. wre

Both the Jaw of the State of Illinois and the Federal. -

law recognize that the right of redemption of lien hold-

ers iS a right in specific property, which cannot be taken

away by subsequently enacted legislation in violation of the

Fifth Amendment to the Constitution of the United States,

' (Louisville Joint Stock Land Bank v. Radford, 295 U. 8.

'555; Parkér v. Dacres, 130 U. S. 43; Bronson v. Kinzie,

“1 Howard 311; Fitch v. Wetherbee, 110 Ill. 475, 492; Buszin-

vy. Martinowica,.178 Ill. App. 519, 523). -

. P

] me 47,61 aanenn r 5

SRT NERNEY PRAIRIES BAC EOE TERS UT LP ESET MERON ER reas mee tee NSIS YUE

4. Importance of the questiong involved.

Uncertainty as to the meaning of a law as important in

economic affairs as Section 77B should be removed by de-

cision as rapidly as possible, and it is respectfully sub-

mitted, when such a case is presented squarely raising sig- -

nificant issues, it is advisable that this court give to the

bar and to the public the benefit of its considered judg-

ment.

Considerations of practical justice recommend that the

prayer of the petition for Writ of Certiorari be allowed.

Numerous cases involving junior liens are pénding in the

District Court, and their disposition will be facilitated by

a decision of this Court.- If petitioners be compelled to

await final decree in the proceedings below, and then ap-

peal as of right to the Cireuit Court of Appeals for the

Seventh Circuit,. (which Court already. by its memoran-

dum filed below (R. 21) indicated that it will decide the

merits of the proceeding contrary to petitioners’ conten-

tions), much time will elapse during which steps will be

taken affecting the title to the property of Debtor, and

a substantial sum expended to put the plan of ‘ reorganiza-

tion into effect.

Wuererore, your petitioners respectfully pray that a

Writ of Certiorari issue out of and under the seal of this

Honorable Court to review the decree of the Circuit Court

of Appeals for the Seventh Circuit and review the decree’

of the District Court, and that said decrees: of said courts

may ‘be’ reversed,

Tueopore E. Retry,

Counsel for Petitioners.

10 South LaSalle Street,

Aen Illinois, -

IN THE

SUPREME COURT OF THE UNITED STATES

. Octoser TeRM, 1936

a No.

In the Matter of

: 620 CHURCH STREET BUILDING CORPORATION,

: a corporation, Debtor under Section 77B of the Bank-

Ai ruptey Act as Amended.

BRIEF IN SUPPORT OF PETITION FOR THE

WRIT OF CERTIORARI.

3 STATEMENT.

i A.

aq | Jurisdiction.

| The jurisdiction of this Court is invoked under Section

q 240 of the Judicial Code as amended; United States Code,

ii Title 28, Section 347.

;

see dain: apt on vn ga dei PRA SENN AIR NA deine ie enn tae Rael oes —s

PtSi I

The Statute Involved.

The statute involved is Section 77,B of the Bankruptcy

Act as amended. United States Code, Title 11, Section 207.

Petitioners seek a construction of paragraph b of Section

77-B, the provisions of which pertinent to this inquiry are

as follows:

‘‘A plan of reorganization within the meaning of this

Section (1) shall include provisions modifying or alter-

ing the rights of creditors generally, or of any: class of

them, secured or unsecured, either through the issu-

ance of new securities of any character or otherwise ;

* * * ‘

(5) Shall provide in’respect of each class of ered-

itors of which less than two-thirds in amount shall

accept such plan (unless the claims of such class of.

creditors will not be affected by the plan, or the plan

makes provision for the payment of their claims in

cash in full), provide adequate protection for the real-

ization by them of the-value of their interests, claims,

or lens, if the property affected by such. interests,

claims, or liens is dealt with by the plan, either as pro-

vided in the plan

(a) -By the transfer or sale of such property sub-

ject to such interests, claims, or liens or by the reten-

‘tion of such property by the debtor subject to such

interests, claims, or liens, or -

(b) By a sale free of such interests, claims, or

liens at not less than a fair upset pride and the trans-

fer of such interests, claims, or liens to the proceeds

of such sale; or

. OE as

value either of such interests, claims, or liens, dr,

the objecting creditors’ election, of the securities al-

lotted to such interests, claims, or liens under the plan,

if any shall be so allotted; or |

(d) By such method as will in the opinion of the

judge, under and consistent with the circumstances of

the particular ease, equitably and fairly. provide such nN

protection.”’ | —

Judgment Sought to be Reviewed.

The Cireuit Court of Appeals for thé Seventh Circuit

denied petitioners’ application for leave to appeal on May

11, 1936 (R. 22), and on June 26, 1936 denied petitioners’

motion for reconsideration of said petition for leave to ap-

peal (R. 24).

The order sought to be reviewed in the Cireuit Court of

Appeals is an order of confirmation of the District Court

of the United States approving and confirming a plan of

reorganization under Section 77-B of the Bankruptcy Act,

entered by said District Court March 31, 1936.

In connection with the order denying leave to appeal the

Ciréuit Court of Appeals filed a memorandum (R. 21) in

which said court stated that the District Court did not err

in ruling that if the property involved were not worth the

amount wf the first mortgage indebtedness, the junior in-

terests had no equity to be protected, thus treating the in-

terests of petitioners as possessing a temporary, monetary

value alone, based upon opinion evidence, and disregard-

ing petitioners’ substantive rights to require a public sale,

‘to he permitted to bid thereat and to redeem from such -

‘. gale. |

_ Statement of the Nature of the Case.

_ A petition for the reorganization of the debtor corpora-

tion was filed pursuant: to Section 77-B of the Bankruptcy

Act, as amended, the property of the debtor consisting of

a store and office duilding located in the City of Evanston,

in the State of Illinois. The plan of reorganization as con-

firmed requires the debtor to convey its property to the

corporation owning the adjoining premises, the grantee

corporation being a distimet legal entity with its own stock-’

holders and creditors. In consideration for the conveyance

_ the grantee is to issue its bonds and some common stock, *

all of which will go to the holders of the first mortgage

‘bonds of the debtor. The debtor, the debtor’s stockholders

and the holders of all of its second and third mortgage in-

debtedness will receive nothing. The District Court, upon

opinion evidence, found that the value of the debtor’s prop-

erty was less than the amount of the first mortgage en- ©

cumbrance and that, therefore, the claims of the holders

of the second and third mortgage indebtedness were of no

value, there being no equity for them in the property, and

that, accordingly, nothing of value should be distributed to

thém. The order provided, further, that the consent of

' the’ petitioners here who hold all of the second and third

mortgage indebtedness was not prerequisite to the -confirma-

tion of the plan (R. 15). The court found that the plan

“provides adequate protection for the realization by the

holders of the second and third mortgage indebtedness

under the circumstances. of the case,. such claims being of

no value (R. 15). |

Petitioners contended that their rights did not depend

upon their immediate or temporary ability to collect in

a ne oe I

terms of money and that the plan disregarded atid violated

the right to require a judicial sale, to bid at such sale and

to redeem in the ‘event that! the property was struck aff to

some other bidder. These rights the District Court disre-

garded and, thereupon, petitione prayed for leave to ap-

peal toefthe United States Cireuit Court of Appeals for the

Seventh Cireuit where petitioners contended that a review

of the order of the District Court was necessary to deter-

mine the question as to whether or not Section 77-B of the

Bankruptey Act authorizes plans of reorganization under

the circumstances of the case. The Cireuit Court of Ap-

peals declined to review and, therefore, petitioners pre-

sent this application for the writ of certiorari.

To avoid needless repetition the court is respectfully re-

ferred to the fuller statement of the case contained in the

petition for the Writ of Certiorari ‘with which this brief

is filed (ante page 2).

Specification of Errors.

1. The courts below erred in holding that the approval

of a plan of. reorganization by the District Court may be

ordered: without tlie consent of two-thirds of the holders

“of recognized classes of claims secured by junior encum-

brances, without compensation to them and without making

provision for their protection. -

9. The courts below further erred in refusing to ‘hold |

that the rights of junior lien holders, acquired prior to the

enactment of Section 77-B, including the right to insist upon

a publie sale, the right to bid thereat and the right to re-

deem within fifteen months after a sale to a successful bid-

der are, under the: law of Illinois, property rights which

cannot be disregarded or destroyed without consent.

SUMMARY OF THE ARGUMENT.

_—_—

The approval of the plan of reorganization by the District

Court without the consent of the holders of two-thirds

.in amount of secured junior indebtednesses, without com-

pensation to them and without making provision for their

protection, violates the provisions of Section 77-B of the

Bankruptcy Act, as amended.

Section 77-B requires the consent of two-thirds of any

recognized class of creditors ‘to a proposed plan of reor-

ganization unless their claims are not affected or unless

the plan makes provision for payment to them in full or

unless the plan makes other adequate protection for the

realization of the value of their interests, if such interests

be affected. The methods for assuring such adequate pro-

tection are described in the Act itself, none of which me-

thods was adopted by the plan.

Section 77-B of the Bankruptey Act asvamended,

United States Code, Title 11, Section 207, para-

graph b. , ,

A4 ; °

nN B

‘That the rights-of_classes of creditors must be so pro-

" tected in the absence of the required consent, is recognised

. by the decided cases.

In re Hotel Charles Co., 12 ha ios. 734, 736

(D..C. Mass.) ;

In Re Murel Holding Corp., 75 Fed. (2nd) 941,

942 (C. C. A. 2nd);*

* Francisco Building Corporation, Ltd. v. Battson,

83 Fed. (2nd) 93, (C. C. A. 9th) ;

Tennessee Publishing Co. v. American National

Bank, 81 Fed. (2nd) 463, 468, (C. C. A. 6th);

Louisville Joint Stock Land Bank v. Radford, 295

U. S. 555, 589, 590.

The true value of property in a reorganization proceed-

ing is not a foreclosure, or forced sale value, reorganiza-

tion contemplating not a present liquidation but a continu-

ance of life into the future.

Warner Brothers Pictures v. Lawton-Byrnes-

Bruner Ins. Agency, 79 Fed. (2nd) 804, 817,

(C. C. A. 8th).

The present or immediate collectibility of a claim is not

the true or full measure of a claimant’s rights and interests.

If the value of the property be as low as'the amount found

by the court then, it may be immediately seen, a public

judicial sale would permit petitioners to bid within the

same low range of. prices and would afford them an op-

portunity to redeem, within fifteen months, by payment of

. the amount successfully offered at the sale. Tt is thus ap-

parent that the value of petitioners’ interests cannot be

determined by a present appraisal of the debtor’s property

upon the theory of a liquidation price at a forced sale.

II,

The rights of junior lien holders acquired prior to the en-

. actment of Section 77-B, including the right to insist

upon a public, judicial sale, the right to bid at such.

sale, and the right to redeem within fifteen months after

@ sale to a successful bidder are, under the law of the

State of Illinois, property rights which cannot be disre-

garded or destroyed without consent.

oe |

This court has held that no Bankruptcy Act may under-

take to destroy the substantive and previously acquired

rights of creditors. | 4.

Louisville Joint Stock Land Bank v. Radford, 295

U. S. 555, 589. ee

- This court has also held that in order to determine what

are substantive property rights, recourse must be had to

the law of the State where the litigation is pending.

Louisville Joint Stock Land Bank v. Radfgrd, 295

U. S. 555,590. ~

-— ¢-——_ —. —-—

vet

Under the Lay of Illinois, the mortgagor possesses the

right to redeem forithe period of twelve months, and a

judgment creditor for - sineates of fifteen months, after

sale. -

_ Cahill’s Illinois Revised Statutes, -1931, Ch. Ey ap

paragraphs 18 and 20, .

P D

This court has held that the right of redemption as con-

ferred by a state’ statute is a rule of prapeny and. is a sub-

stantive property right.

Brine v. The Hartford Fire Insurance Co., 96 U.S.

627, 634, 636; _

Parker v. Dacres, 130 U.S. 43, 48;

Bronson v. Kinzieo1 How. 311, 315.

The. courts of Illinois recognize the absolute nature of ©

the right of redemption.

Fitch v.. Wetherbee, 110 Ill. 475, 492;

Buszin v. Martinowrcz, 178 Ill. App. 519, 523;

In Re Georgian Hotel os ie tt 82 Fed. (2nd)

917, 920.

F .

Because the right of redemption is a substantive right

constituting a rule of property in Illinois, the attempted

destruction of that fight in the approval of-the plan of

reorganization is clearly erroneous.

ARGUMENT.

SE EEEEEee

The approval of the plan of: reorganization by the District

_ Court without the consent-of the holders of two-thirds

in amount of secured junior indebtednesses, without com-

pensation to them and without making provision for their

protection, violates the provisions of Section 77B of the

Bankruptcy Act, as amended. &

For the purposes of this application, under the theory.

that the greater must include the smaller, only the rights

of petitioners who hold all of the evidences of the second

and third mortgage indebtednesses of the debtor, will be

treated. : 3

There can be no question that those of the petitioners

who hold all of the second and third mortgage indebted- | -

- hess and whose claims were classified and allowed as valid,

are invested with all of the rights inherent in their Te-

spective contracts,—rights which are specifically recog-

nized by the laws of the State of Illinois. The District

Court, however, finding ‘that the temporary value of the

Debtor’s property, from a present sale standpoint, did‘ not

equal the amount of the first mortgage indebtedness, pro-

ceeded to eliminate these secured creditors from considera-

tion and, without their consent and over their objection,

approved the plan which provides for the conveyance of

the Debtor’s property to the corporation which owns the

adjoining structure, in consideration of the: delivery’ of

bonds and stock to be; issued by the grantee corporation

to the holders of the first mortgage indebtedness of

the Debtor. -While the building of the Debtor and that

of the grantee corporation adjoin and possess certain

physical, cooperative facilities, such as a common entrance,

a connecting bridge, elevator service. in the adjoining

building, and a heating system therein which furnishes

heat to the Debtor’s tenants,—the building of the Debtor

is so constructed that these cooperatiye features are not

permanently essential and, at comparatively ms cost, the

Debtor’s building could be made self- sufficient

Notwithstanding that the two corporations are separate

: legal entities, each- with its own. stockholders and credi-

_tors, they were treated together in such fashion that, as

the result of correlated plans of reorganization, the cor-

poration owning the adjoining piece obtains the convey-

ance of the Debtor’s property in consideratjon of the

delivery of $222,750.00 par value of the first mortgage

bonds of the grantee corporation, out*of a total issue of

$668,250.00, and twenty-five per cent..of the capital stock

of the grantee, all of which bonds and stock go to the hold-

ers of the first mortgage indebtedness 6f the Debtor.

No provision is made for the protection of the second

‘and third mortgage creditors and no payment to them .

contemplated, the court contenting itself with the finding

that by reason of a present, hypothetical value of the _

Debtor’ s property, resting upon opinion alone, they pos-

sessed no equity in the property and their security was,

accordingly, .worthless. As will be seen in the succeeding

point, by their contracts which existed long before Sec-

tion 77B was contemplated, these petitioners had the right

to require a judicial sale. This was denied by the plan.

They had the right to bid at such sale. This opportunity

was likewise eliminated. Above all, they had the continu-

ing and substantive right to redeem from judicial sale,

19 | bd

under the pre-existing law of the State of Illinois for fif-

teen months after any stich sale should take place: This

right was forever cut off by the approved plan.

It may be observed, in passing, that the wide difference

in views of the experts as to fair cash *‘market’’ value,

when there is no market to furnish a standard of com-

parison, indicates, if anything, the inevitably inconclusive

and unsatisfactory nature of partisan opinions.

What the District Court neglected to observe was that

if the Debtor’s property actually had the low value as-

cribed to it by the ‘depression experts’’, the price paid

by a successful bidder at foreclosure or at any other liqui-

dation sale would be the same low price at which peti-

tioners could redeem had their right so to do been recog-

nized.

How petitioners were treated appears from ‘the order

confirming the plan. The District Court found “that there

is no equity over and above the $445,500.00 principal

amount of Carlson Annex Bonds outstanding * * *; ‘that

the Debtor is accordingly insolvent; that the stockholders

are not entitled to participate in the plan and that their

acceptance * * * isnot a prerequisite to the confirmation

of the plan’’ (R. 14, 15). 34

The court further found that, based upon the evidence

and testimony concerning the value of the property, the

court appraised the claims allowed in Classes 3 and 4

(petitioners’ claims ‘as second and third mortgage credi-

tors), to be of no value, there being no equity in the prop-

erty and ‘‘accordingly no securities, cash or any other

thing of value shall be distributed under the plan in re-

spect of any of the claims allowed in Classes 3 and 4, and

the acceptance of the plan by the holders of such claims

is not a prerequisite to the confirmation of the Plan (R..

14, 15). :

Ow 6 Xe ns - aad

Pe > 20

eo then made the foilowing surprising finding:

‘“‘The court further finds that the foregoing method »

of treatment of the holders of claims in Classes 3 and ©

exides adequate protection for realization ‘of the

holders\thiereof of the value thereof under and con-

sistent with the circumstances of the ¢ase, the same

being of no value”’ (R. 15).

The erroneous assumption: by the District: Court that

the alleged, temporary, sale value of property is the sole

measure of property rights, disregarding the substantive, .

continuirg right: to redeem arf the other rights of the

petitioners, may thus be plainly seen:

Therefore, on this branch of dhe controversy, the ques-

tion is can the holders of junior mortgage indebtednesses,

- recognized as valid claimants in specified classes, be wholly

‘disregarded and their rights eliminated from beneficial

participation in a plan of reorganization without their con-

sent, without compensation, and without any provyision for

their protection? P wie

_This question is answered by the Act it

(That Section 77B of the Bankrupte

or in the absence thereof, compensation or adequate pro-

tection for each of such classes, plainly appears frem the |

language of the statute itself. Subdivision th) of Clause" , /

5 is as follows:

‘A plan of reorganization within the meaning of

, this Section shall include provisions for modifying or

altering the rights of creditors generally, or any class

of them, secured or unsecured, either through the is- .

suance of new securities of any character or otherwise;

* * * shall provide in respect of each class-of credi-

. tors of which less than two-thirds in amount shall ac-

Act requires the -

. consent of two-thirds in. amount of. each lass of credi

1 (Ct id

. cept: such plan (unless the claims of such class of cred-

itors will not be affected by the plan, or the plan makes

provision for the payment of their claims in gash in

full), provide adequate protection for the realizafion

by them of the. value of their interests, claims, or liens,

‘if the property affected by such interests, claims, or

liens, is dealt with by the plan, as provided in the plan’

(a) By the transfer or sale of such property sub, |

ject to such interests, claims, or liens, or by the reten-

tion of such property by the debtor subject to such

interests, claims, or liens, or .

(b) -By a sale free of. such interests, claims, or

liens at not less than a fair upset price and the trans-

fer of such interests, claims, or liens to the proceeds

of such sale; or

‘(e) By appraisal and payment either in cush of the

value either of such interests, claims, or liens, or, at

the objecting creditors’ election, of the securities al- *

___lotted to such interests, claims, or liens under the plan,

if any shall be so allotted;.or

(d) By such method as will in the opinion of the

- Judge, under and consistent with the circumstances of

the particular ‘ case, equitably and fairly provide such

protection. :

Dissecting this provisio e find:

That a plan: of reorganization may be adopted and ap-

proved which may modify or alter rights of creditors gen-

erally or any class of them, provided, however,

(1) That two- thirds of each class of creditors accept

such plan. .

(2) That such tan is unnecessary where the cred-

__ itors of a given clafs are not affected.

Yen

(3) That such acceptance is unnecessary when the plan

- makes provision for the payment of theit claims in .

eash in full. and wre :

(4) That such acceptance is unnecessary if te plan pro-

vide adequate protection for the realization of the

value of the interests, claims or liens dealt with by

. the plan, ;

Since petitioners who are the holdess of all of the se-

’ eured claims in classes 3 and 4 are entirely wiped out, it

cannot be said that their interests are not affected. If,

then, classes of claims be affected, and if payment in cash

is not provided for, then, in the absence of consent, the

ensuing language of the law becomes applicable which

makes specific the requirement that adequate protection be

accorded for the realization of such claims and interests

and describing the means and methods of affording such

protection.

None of cians was adopted for the protection

‘ of the interests of those of the petitioners here who hold

junior securities. There was no transfer or sale subject

to their interests. There was no retention by the debtor of

_the property, subject to their interests. There was no sale

at a fair, upset price and a transfer of the claims to the

proceeds of the sale. There was no appraisal of the in-

terests and claims of these petitioners and, obviously, this

could not have been dorie as it would have involved plac-

ing a value.on the rights of the petitioners to bid at the

sale of the property and to redeem at the sale price for

_ @ period of fifteen months after the sale in the event that

the property had been bid in by others. The only ap-

_ praisal that was made by. the court inyolved the valuation.

‘of the debtor’s property as a whole, and in so doing the

eourt gave to it ‘‘a foreciosure price’’. ;

> ae

—

me. Oo

In passing, it may be observed that reorganization under

Section 77B, or by any other means, contemplates continued

existence, continued operation, continued interests, even \

if altered or modified. A sale of all of the assets of a

business, lock, stoek and barrel, is not reorganization but

liquidation in the strictest sense. It was upon the liquida-

tion theory that the District Court valued the property .

of the debtor. yy Ae

As was said in Warner Brothers Pictures v. Lawton-

Byrns-Brumer Ins. Agency Co., 79 Fed. (2nd): 804, 817 .

(C. C. A. 8th): °

“‘However, the foreclosure sales prices are by no

means measures of the values of the properties for

corporation purposes. Prices at foreclosure sales are

notoriously under actual values Auniess. the property

sold has a free open market value, as listed securities,

grain, live stock, ete.). Such dispositions are forced

sales. It is this forced sale value which is in mind

waen adequacy of bids at foreclosure is considered.

It is the actual fair value at a free sale that is in mind

when considering the value of property used for pay-

ment of corporate stock and bonds issued.”’ |

é. | a

So, in the case at bar, the actual fair value at a free

sale should have been the subject matter of the court’s

consideration since the property of the debtor was con-

“veyed to the grantee and payment. made in bonds of the

grantee corporation. Under the announced decisions of -.

. the United States Courts inferior to the Supreme Court,

it would seem that the judges are of the prevailing opinion

that Section 77-B requires adequate protection or- com-

pensation or, in their absence, consent.

| | 24

In the matter of Hotel Charles Co., 12 Fed. Supp. 734, °

736, (D. C. Mass.) Judge Brewster said: ”

‘‘If any creditor claims a lien upon the property

affected by the plan of reorganization and he-doés not |

belong to a class of duly assenting creditors, the plan

- . *cannot be confirmed unless it provides adequate pro-

tection for the” realizatiqn by the creditor of the value

of his interest or lien: in or upon the property.”’

The Circuit Court of Appeals of the Second Circuit in _

In Re Murel Holding Corporation, 75 Fed. (2nd) 941,

speaking through Judge Hand eine rendered the opinion

said at page 942:

- ‘Normally it was expected that consents ee he

obtained. If-they were not, the plan must ‘provide

- adequate protection for the realizations by them’ the |

dissenting class, ‘of the full value.of their interest,

. claims or liens.’ This may be done:in four ways:

(a) The liens may be merely kept in statu quo. (b)

The property may be sold free and clear and the liens

attached to the proceeds. (c) The value of the liens -

may be appraised and paid, or, if the objectors pre-

fer, the same course might be taken with any new

securities. (d) The last is not, properly speaking a

‘method’ at all; it merely gives power génerally to

the judge ‘equitably and fairly’ to ‘provide such pro-

tection’ * * * It is plain ‘adequate protection’ must be

completely compensatory.’”’ |

Going to the other end of the continent, the Cirenit Court

‘of Appeals of the Ninth Cireuit in Francisdo Building

Corporation, Ltd.ev. Battson, 83 Fed.. (2nd) 93 (C. C. A. |

9th) completely approved the preceding opinion by Judge. -

F e P.

Hand in a case where it was contended that it. was un-

'. mecessary to secure the consent of bondholders and eredi-

tors because the proposed plan ‘‘came under Séction 77-B

of the Bankruptcy Act’’, — : .

If the statute be construed as authorizing the erasure

of rights of second and third mortgage bondholders, with-

out their consent and without compensation or protection,

then, in principle, rights ‘of first Iortgage bondholders

may be similarly, and without their consent, adversely

affected. While the -rights of holders. of junior securities

are subject, in material respects, to the rights of creditors

who are‘senior to them, such junior holders, nevertheless,

_ do possess rights which are in no manner subject to, or

eliminated by, the presence of an antecedent first mort- .

gage. The first mortgagee cannot successfully object to

the request of junior mortgage bondholders to have a.

public sale, nor can such first mortgagee deny the rights

of creditors inferior to him to bid at such sale. Certainly

the important property right to redeem becomes solidified

when the: foreclosure by the first mortgagee reaches the

final result of a sale. To deny to whole classes of credi-

tors rights Which are not in aay manner affected by the

presence of a senior mortgage, and to hold that Section

77-B permits such denial, is to give to the Statute an un-

constitutional interpretation refuted by the language of

the Act itself. | |

In Tennessee Publishing Co. v. American National Bank,

81 Fed. (2nd) 463, (C. C. A. 6th) the Court said at page

468 : | |

**We are here concerned only with the validity of

a clause which provides. for adjustment of debts

without the consent of creditors. It has long been

Settled that provisions in bankruptcy statutes author-

izing compositions have never been held to invalidate

them. This is because a composition is a matter of .

agreement between the bankrupt and his creditors as.

a class, with the will of the majority imposed upon

the minority. In re Lane. (D. C.) 125 F. 772, 773;

Cumberland Glass Mfg. Co. v: DeWitt, 237 U. S. 447,

452, 35 S. Ct. 636, 59 L. Ed. 1042.

‘‘We confine ourselves to the provisions of sub-

section (b) (5), which outline a method for adjusts ~

ment of claims of non-assenting creditors, and inquire

as to their validity in the light of the due process

clause. Upon this issue we view the decision of the

Supreme Court in Louisville Jomt Stock Land Bank

v. Radford, 295 U. S. 555, 55 S. Ct. 854, 79 L. Ed

1593, 97 A. L. R. 1106, controlling. Here, under Ten-

nessee law, as there under Kentucky law, the lien

holders had the right under their contract to retain

the lien until the indebtedness secured was paid, the

right to realize upon the security by. a judicial public

sale, the right to determine when such sale should be

held, subject only to the discretion of the court, the

right to protect their interest'in the property by bid-

ding at such sale, the right to have the mortgaged

property devoted primarily to the satisfaction of the

debt; and the right to control the property nreanwhile

during the- period of default, subject only to the dis-

cretion of the court, and to have the rents and profits

during such period applied to the satisfaction of the

: debt. These rights are substantive property rights,

and any invasion of them under the authority of the

present statute is as clearly violative of the due

process clause of the Fifth Amendment. as it was in

the Radford Case.’’ : |

By all processes of logical reasoning, this court, in-

Louisville Joint Stock Land Bank v. Radford, 295 U. 8,

a ee ee ee PL ERS Se

505 rendered an opinion, the inevitable result of which is

to confirm petitioners’ contentions. There this court held

the Frazier-Lemke Act unconstitutional because it pro-

posed to deny property rights under a mortgage existing

prior to the enactment of the statute. As the court said

at page 589: ,

‘*Because the act is retroactive in terms and as here

applied purports to take away rights of the mortgagee

in specific property, another provision of the Consti-

tution is controlling. oo

‘“‘The Bankruptcy power, like the other great sub-

stantive powers of Congress, is subject to the Fifth

Amendment.’’

At page 589 of the opinion the Court said:

‘But the effect of the act here complained of. * * *

is the taking of substantive rights in specific property

acquired * * * prior to the act.”’ . |

Unless it is possible to say, therefore, that the rights

of junior security. holders are dependent wholly upon a —

_ temporary value based upon opinion and found by the

court and unless the substantive, although not monetary,

rights to require a public sale, to be permitted to bid there-

at, aad to redeem, aré regarded as of no legal sigxfficance,

it must follow with mathematical inevitabili#f that any

attempt to disregard and destroy such righf is an invalid .

exercise of governmental power. If a st4tute makes such

attempt it is unconstitutional, and if a Court by its order

produces the same result under a statute whithdoes not

authorize it, its order is invalid. - In the one case it is a

legislative, and in the other a judicial, invasion of private

rights.

Sh ap site tng

Whether or a. the right to redeem, for example, be a

substantive right and, as such, indestructible under the

provisions of any subsequently enacted legislation depends

upon the law of the State of Illinois. As was said by Mr.

Justice Brandeis in the Radford case at page 590:

‘In order to determine whether rights of that na-

ture have been taken, we must ascertain what the

mortgagee’s rights were before the passage of the act.

We turn, therefore, first to'the law of the state.’’

This brings the present discussion to the consideration

ef the nature and inviolability of the rights of petitioners

which are in no manner subject to the rights of creditors

senior to them. ie:

The rights of junior lien holders, acquired prior to the

enactment of Section 77-B, including the right to insist

upon a public sale, the right to bid at such sale, and

the right to redeem within fifteen months after a sale

to a successful bidder are, under” the law of the State

of Illinois, property rights which cannot be disregarded

or destroyed without consent.

That the rights of junior lienholders to require a public

sale, to be permitted to. bid thereat and to redeem from

such sale, are substantive property rights, is not open to

question under the decisions of this courl and of the Su-

preme Court of the State of Dlinois,

Mr. Justice Brandeis in the Radford case said at page

583 : | os ;

‘‘No bankruptcy act had undertaken to modify in

the interest of either the debtor or other creditors any

substantive right of the holder of a mortgage valid

under federal law.’’

)

In the same case, speaking of bankruptcy acts which had

expressly or impliedly authorized the marshalling of liens on

property of the bankrupt and the sale of such property free

of encumbrances but directing that the rights of lien hold-

ers be transferred to the proceeds of such sale, the Court

said at page 584:.

‘‘But there had been no suggestion that such a sale

could be made ‘to the prejudice of the lienor, in the

interest of either the debtor or of other creditors. By

the settled practice, a’sale free of liens will not be

ordered by. the bankruptcy court if it appears that the

amount of the encumbrance exceeds the value of the

property. And the sale is always made so as to ob-

tain for the property. the highest possible price. No

court appears ever to have authorized a sale at a

price less than that which the lien creditor .offered to

{ pay for the property in cash. Thus, a sale free of

: liens in no way. impairs any substantive right of the

mortgagor; and such a sale is not analogous to the

sale of the bankrupt provided for by Paragraph 7

of the Frazier- Lemke <Act.”’

a :

Commenting upon compositions in bankruptcy, Mr. Jus-

tice Brandeis said at page 585:

‘‘So far as concerns the debtor, the composition is

an agreement with the ereditors in lieu of a distribu-

tion of the property in bankruptcy —an agreement

which ‘originates in a voluntary offer by the bankrupt,

and results, in the main, from voluntary acceptance by

his creditors.’ * * * In no case of composition is a se-

cured claim affected except-when the holder is a mem-

ber of a class; and then only when the composition is

desired by the requisite majority and is approved by

the court. Never, so far as appears, has any com-

‘

position affected a secured claim held by a single credi-

tor. Compositions are comparable to the voluntary

adjustment with the mortgagee provided for in Para-

graph 3 of the Frazier-Lemke amendment. They are

not analogous to the so-called adjustment’ compelled

by paragraph 7.”’ \

Under the law‘of Illinois, the right to redeem is clearly

set forth in its statute which provides that a mortgagor

shall have the right of redemption for a period of twelve

months after sale; and that judgment creditors possess

a similar right for fifteen months thereafter.

‘The Illinois Statute upon redemption, Cahill’: ’s Illinois

Revised Statutes, 1931, ch. 77, paragraph 18, provides:

‘¢Any defendant, his heirs, administrators, assigns,

or any person interested in the premises, through or

) under the defendant, may, within twelve months from

said sale, redeem the real estate so sold by paying to

the purchaser thereof, his executors, administrators or

assigns or to the sheriff or master in chancery, or other

officer who sold the same, or his successor in office,

for the benefit of such purchaser, his executors, ad-

ministrators, or assigns, the sum of money for which

the premises were old or bid off, with interest thereon

at the rate of sis per centum per annum from the

time of such sale, whereupon such sale and certificate

shall be null and void.’’

ee ee eee

’

Paragraph 20 of this Statute deals with redemption by

i creditors and provides:

‘“‘Tf such redemption is not made, any decree or

judgment creditor, his executors, administrators or as-

signs may, after the expiration of twelve months and

within fifteen months after the sale, redeem the prem-

31°

ises in the following manner: Such creditor, his exec-

utors, administrators or assigns may sue out an exe-

cution upon his judgment or decree, and place the

same in the hands of the sheriff or other proper of-

ficer to execute the same, who shall indorse upon the

back thereof a levy of the premises desired to be re-

deemed ; and the person desiring to make such redemp-

tion shall pay to such officer the amount for which the

prentises to be redeemed were sold, with interest’ there-

on at the rate of six per centum per annum from the

date of the sale, for the use of the purchaser of such

premises, his executors, administrators or assigns,

whereupon such officer shall make and file in the office

of the recorder of the county in which the premises

are situated a certificate of such redemption, and shall

advertise and offer the premises for sale under said

execution as in other cases of sale or execution.”’

In Brine v. The Hartford Fire Insurance Company, 96

U. S. 627, this court held that the statute of Illinois which

so allowed redemption confers a substantial right and

thereby becomes a rale of aires The court said at

page 636:

“*The Legislature of Illinois has prescribed, as an

essential element of the transfer by the courts in fore-

closure suits, that there shall remain to the mortgagor:

‘the right of redemption for twelve months, and to

judgment creditors a similar right for fifteen months,

after the sale, before the right of the purchaser to

the title becomes vested. This right, as a condition

on which'the title passes, is as obligatory on the Fed-

eral Courts as on the Stafe Courts, ‘because in both

cases it is made a rule of property by the Legisla-

ture, which had the power to prescribe such a rule.

= ae there i is another view of the question which

, waa’

is equally forcible, and which leads to the same result.

All contracts between private parties are made with

reference to the.law of the place where they are made

or are to be performed. Their construction, validity and

effect are governed by the place where they are made ,

this case. It is, therefore, said that these laws enter

into and become a part of the contract.”’

Again, in Parker v. Dacres, 130 U. S. 43, Mr. Justice

Harlan, delivering an opinion of this court, said at page 48:

‘In many of the states the right to redeem with. |

in a prescribed time after sale under a decree of fore-

closure is given, in.certain cases, by statute. This

right, when thus given, is a substantial one, to be

recognized even in the Courts of the United. States

-. sitting in equity, because the statute constitutes a rule

of property in-the State that enacts it. Brine v. Hart- .

ford F. Ins. Co., 96 U. S. 627 (ad: 858) ; Hammock

y. Farmers Loan & T. Co., 105 U. 8. 77; 88 (26; 1111,

1115); Mason v. Northwestern Mut. L. Ins. Co», 106

U.-S. 164 (27: 130); Conn. Mut. L. Ins. Co. v. Cush-

man, 108 U. 8. 91, 63 (27: 648, 652).”’

The Supreme Court of Illinois has repeatedly ehiok |

the statute of redemption of its own state. Thus in Fitch

¥. Wetherbee, 110 Ill. 475, the court, in commenting upon

the absoluteness of the right of redemption, said at. page

492:

. “The right of redemption given by the statute to a

decree or-judgment ereditor is not affected by a fail-

ure of the court to provide in its decree for the sale

of real estate, with the privilege of redempfion. It is »

the statute that gives the right of redemption, and \

not the decree of the court. In a case where the stat-

ute.authorizes a redemption from a sale, a clause in

the decree ordering the sale that declares the sale

shall be absolute, will not bar that right. That. por-

tion of the decree will be: regarded as inoperative, and

a redemption will be allowed as in other cases: Nor

does it make any difference whether the sale was con-

ducted by an officer of the law or by one appointed

- by the court to perform that special duty.’’

- Other illuminating cases upon the subject are:

Bronson v. Kinzie, 1 How. 311, 315.

Buszin v. Martinowicz, 178 Ill. App. 519, 523.

Turk v. Mayberry, 121 Pac. 665, 669 (Okla..1912).

The right to redeem by paying the price bid at the fore-

slosure sale, continuing as it does for 15 months, gives to

junior seeurity holders a valuable option. Frequently the

first mortgagee is the successful bidder, and, as frequently,

he bids less than the amount of the indebtedness, as is evi-

denced by the well: nigh invariable practice of taking de-

ficiency decrees. Particularly valuable is the right of re-

__ demption in.a rising market. Whether valuable or -not

from a monetary standpoint, however, it is absolute and

vested and it is not for the court to put a price upon it or

to declare it valueless. As was said in Cram vy. Cottrell,

48 Neb. 646 :

rs - “he plaintiffs had a legal cake’ ie redeem, ‘whether

)

or not the exercise of that right would be profitable

to them. It was for them to determine whether they

should exercise the right, and not for the court te

deny them:the right because, in.its opinion, its exer-

cise would not be — ae

The Circuit Court of Appeals for the Seventh Circuit,

Un. re nc Hotel Corporation, 82 Fed. (2nd) 917, ree-

ognized that the right of subordinate creditors to redeem

should be observed by the court saying in page 920:

‘While it is not likely that at the present time. the

subordinate creditors would have realized anything

if the first mortgage had been foreclosed, these credi-

tors would, for three moargths after one year follow-

ing the foreclosure sale, have had a right of redemp-

‘- ‘ tion—a right which might have been valuable. And

there is the possibility that, with a substantial ‘come--

back’ in affairs, property values may’ increase suff-

ciently to give the Aebtor a substantial equity in the

— _ property of which these creditors would have the bene-

fit.’’

Becayge the right of redemption is a substantive right

and constitutes a rule of property in the State of Illipois,

and sinee this right was disregarded by the order which

approved. the plan of reorganization, it necessarily ‘fol-

lows that the order of the District Court was invalid.

Carrying with it, as it did, the announcement of a prac-

tice and of a construction placed upon Section 77B by the —

_ United States Courts administering such proceedings, the

Cireuit Court of Appeals should have permitted a com-

plete ‘presentation of the question by a full review of the

action of the lower court.

CONCLUSION. |

The debtor corporation in the instant case has not been

reorganized by the plan approved by the District Court..

It has,-pn the contrary, been sold out and wound up by

eompelling it to convey all of its property to another, sepa-

rate, legal entity. This constitutes strict liquidation and

foreclosure in the most rigorous sense. The legislative

thought which induced the passage of Section 77B was

not destruction and termination, but protection and con

tinuation. It seems to contemplate. settlement and reor-~

ganization by the interested parties themselves under the

watchful supervision of the court. No matter what may

have been the legislative philosophy which induced its pas-

sage, however, a careful examination of the provisions of

the Act demonstrates that no whole class of lien claimants

can be summarily eliminated under its terms. No state

law, no federal law, no decision by a court which attempts

rights has ever been approved by this court, and yet, as

has been seen, this is exactly the result accomplished by

the decree of the District Court in confirming the plan of

reorganization.

A review of the case at bar will decide whether or not

such a result is possible under Section 77B and will es-

tablish a timely and meeded precedent. °

Respectfully submitted,

THEoporE E. Rer,

Counsel for Petitioners.

10 South La Salle Street,

Chicago, linois.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.