Respondents Brief — In Re 620 Church St. Corp.

“OCT 52 1936

RLES ELMORE CROP

CLER

In the

Supreme Court of the United

October term, A. D. 1936.

No. 271 .

In the matter of 620 CuHurcu Street Buitpine Corporation,

a corporation, debtor under section 77B of the bank-

ruptcy.act.

620 Cuurco Street Buripine Corporation, Irene K. Goop-

MAN, G. Wauuer, M. Lone, A. W. Kissy, Emit Rosen-

THAL AND B. K. Goopman,

petitioners,

| | vs.

' Warner G. Bam, trustee of debtor, Caester R. Davis, Mur-

RAY WoLBACH AND JAMES R. McCauey, as members of

t bondholders committee for the holders of first-mort-

f gage bonds, Lovis M. Qurrman anp Epeoar N. Greene-

BAUM, as trustees under first mortgage, Wiuuiam L.

O’ConNELL, as receiver of Central Republic Trust Com-

pany, Crara Ast, Lucinte Ast, Epwarp ScHoEN AND

nN

Auice G. Himss, : (, \

| omapiliiine. \

a?

On writ of certiorari to the Circuit Court of Appeals

for the Seventh Circuit.

Brief for the respondents Louis M. Quitman and Edgar N.

Greenebaum; first mortgage trustees.

/ Huao SONNENSCHEIN,

Hersert M. LautTMann,

j Isaac E. Fercuson,

_all of Chicago, Illinois,

_ attorneys for said

respondents.

Isaac E. Fercuson, -

Henry L. Koun,

both of Chicago, Illinois, .

of counsel.

bsiuestiabiai anidinetnasperne sa: noeeeenatcaeen decasataetaatioaee caeie auammaen canine aacmeimernem ema cade

Cie eee, ta Giana, GH Am oe, O20 o eee, TB 4

| INDEX. a,

Statement of Case: Page

Order granting certiorari ......

_ Errors assigned by petitioners and findings of court

to which directed D)

Men he A ee ee ee es ee oe oe ee ee

.

i Sata ie icant

Value of debtor’s property and petitioners’ claims.. 5

Noes energy

_ Confirmation of plan without petitioners’ consents.. 5

Contention of respondents ...................... _ 2

PEE LOU OTF

“Summary of the Argument 7-10

dei we ee ese ee a ae Oe ee

Argument... 0... e000. Eee 11-21

Appendix (quoting relevant portions of section. (7B) 22

Divisions oF ARGUMENT.

I..Since appeal: under section 24 (b) of bankruptey

act is confined to questions of law, Circuit Court

_ of Appeals properly held that ¢orrectness of valu- ‘

ation arrived at by the district judge is not re-

- viewable 3a

TEC ORC MEAT BRS ONLY AT ASL ITY ip TCE PONE ACE mM

II. Reorganization ynder section 77B not limited to

plan extending ‘participation to-all classes of

creditors and stockholders, when liabilities ex-

ceed unminw erie ee eae 7; 11-17:

HI. Exercise of bankruptcy jurisdiction in manner that

- disposes of property of debtor without foredlo-..

. Sure sale and redemption rights does not violate

due process provision of fifth amendment... ..8; 17-19

_ IV. Though sale free of liens is not usually ordered

| in ordinary bankruptcy liquidation proceedings

if incumbrance exceeds value of property, never-

theless power of bankruptcy court to order such

‘Sale under appropriate circumstances does not

depend upon value of ‘property eee ey ere 9; 17-19

‘

>

—

ii Index Continued. / |

Page

V. Power of Congress to legislate on“ subject of

bankruptcies includés power to bring within bank-

ruptey jurisdiction corporate reorganizations ;

and such jurisdiction is not rendered unconstitu-

tional because it extends to secured claims as well

as unsecured claims, nor. because it provides rem-

edies for ascertainment and enforcement of pre-

existing lien claims other than those provided by

' state law—re substantially equiv-

EU WE iad po caen cdl nnseasus hae dawn 9; 20-21

ji | Referred

CASES CITED to at pages

American Mines Equipment Co. v. Illinois Coal Corp.

(CCA 7), 31 F. (2d) 507, 510-513; cert. den. 280 U.S.

Oy OE, WU 6 nh ak dna. sce <tienedécncn<aebiaes 8

. Brown v. Timmons, 79 Mont. 246, 256 Pac. 176, 178-179. 8

Campbell v. Allegheny Corp. (CCA 4), 75 F, (2d) 947,

951-955 ; cert. den. 296 U. S. 581, 80 L. ed. 104. ....10, 14

. Central Funding Corp, In re (CCA 2), 75 F. (2d) 256,

EE. Kh dae ceck i pbbdns usa decdwes seks taes. 7, 8, 9, 12

_ City Bank of New Orleans, Ex parte, 3 How. (44U.8.) *

292, 316; 11 L. ed. I ses se 10, 12,18

Continental Tilinois National Bank & Trust Co. v. C. R. .

I. & P. Ry Co., 294 U. S. 648, 667-675, 79 L. ed. 1110,

.; ne a dibube webs Cem re Lek cm! 9

. Dugan v. Logan, 229 Ky. 5, 16S. W. (2d) 763; cert.

den. 280 U. 8’ 587,74 L.'ed. 636. POLI IES Pre rer 8

“aa v. Toeppner, 187 U. 8. 327, 334, 47 L. ed. 200,

TTT TY VEE TT OTE UL CETTE TTT EET OTCTeTTe 7, 11

Franklin Brewipg Co., In re, (CCA 2), 249 Fed. 333,

i Ase eMU Tasha dshndedahsded amined 06 8i0066ekes ¢ 9 .

Hanover Nitional Bank v. Moyses, 186 U. 8. 181, 46 L.

SS aE i Rn Cie ae 10

Hasie, In re, (D.'C., N. D. Tex.), 206 Fed. 789, 792. 9

Houston v. City Bank of New Orleans, 6 How. (47 U.

S.) 486, 506, 12 L. ed. 526, 534. ..5......0........ 8, 18

Jersey Island Packing Co., In re, (CCA 9), 138 Fed.

MME SE 5G GR G505 Ga kGbeCar een deneesenceeesoac 10

Landquist, In re, (CCA 7), 70 F. (2d) 929, 933; cert.

den. 293 U. 8. 584, De ee Eb oben te taxeneesdsi 10

Index Continued. iii

, Page

Loveland, In re, (CCA 1), 155 Fed. 838, 839. ........ 9

Loving, In re, 224 U. S. 183, 188-189, 56 L. ed. 725,

capt OOO Lididwnceunckes cad tee wairs 7,11

McRaney v. Riley, 128 Miss. 665, 91 So. 399, 400-402. .. 10

Mortgage Securities Corp., In re, (CCA 2), 75 F. (2d)

Sk adhasseec dimes eT Pee re caenumae |

Law Service 4172, p. 2157, 2161-2162 ............ 8, 10

Novak, In re, (D. C., N. D. Ia.) 111 Fed. 978 ........ 8

Nugent, Assignee, v. Boyd, 3 How. (44 U. S.)426, 437,

11 L. ed. 664, 669 ........ aw otaele Gamvaiaeie ited a tabi 10, 18

Ray v. Norseworthy, 23 Wall. (90 U. 8.) 128, 23 L.

Swe cevdusssddedeesgiouceoee.. Perr rr ere 8,18

Reading Hotel Corp., In re, (D. C., E. D. Pa.), 10 F.

SANE 6 kok da cans daueeeununaciel coh ona banaue 7, 16

Roger Brown & Co., In re, (CCA 8), 196 Fed.#58, 761 9

Theiberg, In re, (D. C. N. J.), 280 Fed. 408.......... 9

i Leen seb ng kis baie kun caches seedicn a. 9,18 ©

Van Huffel v. Harkelrode, 284 U. S. 220, 227-228, 76.

me ee airs eas: 8,18

STATUTES CITED.

Section 24(b) of Bankruptcy Act, 11 U. 8: C., sec.

| | OA AT ANE Ieee Ce ae :5, 11

In the

om Court of the Gnited states

October term, A. D. 1936.

_ No. 271

te the matter of 620 CuurcH Street Buiwprne Corporation,

a corporation, debtor under section 77B of the bank-

ruptcy act.

620 Cuurcu Srreer Bumnpine Corporation, Irene K. Goop-

MAN, G. Wauuer, M. Lone, A. W. Kissy, Emu Rosen-

THAL AND B. K. Goopman,

* | petitioners,

vs.

Warner G. Bairp, trustee of debtor, Cuzsrer R. Davis, Mur-

RAY WOLBACH AND JAMES R. MoCaney,

bondholders committee for the holders of

gage bonds, Louis M. Quirman. AND Epear N. G

_ BAUM, as trustees under first mortgage, W

'O’ConnELL, as receiver of Central Republic Trust Com-

pany, Ciara Ast, Lucie Ast, Epwarp ScHOEN AND

ALICE G. Hirsa,

respondents.

_ Brief for the respondents Louis M. Quitman and Edgar N.

Grant of certiorari:

Greenebaum, first. mortgage trustees.

STATEMEN T OF THE CASE.

_-

The order granting certiorari in this case (October 12,

1936) provided that the case be advanced for he ring im- -

Mediately following no. 48, Tennessee Publishing’Company .

Vv, American National Bank, et al. (R. 29.)

2

Errors assigned by petitioners:

Petitionerg. do not question the regularity or propriety

of any of the proceedings and orders in this case prior to

the entry of the order of March 31, 1936, confirming the

plan of reorganization. Thus it is undisputed (1) that

the debtgr’s voluntary. petition for reorganization under

section7/7B of the bankruptcy act was properly filed under

the ‘statute, in good faith (R. 12—par. 1); (2) that the

court acquired jurisdiction in this proceeding of the debtor

and its property, all its creditors and stockholders (R. 12— -

par. 1); (3). that possession of the debtor’s property—two

leasehold estates and the improvements thereon, comprising

the ‘‘Carlson Building Annex,’’ in Evanston, Illinois—was

in the hands of the trustee appointed in this proceeding (R.

7—par. 5); (4). that the petitioners, other than the debtor

corporation, came jnto the proceeding to obtain allowance

of their respective claims, to-wit, some as class.3 claims (on

second mortgage notes), some as class 4 (on third mort-

gage riotes), some as class 5 claims (stockholders) (R. 7—

. par. 4; RB. 13—par. 3). , ;

The errors assigned by petitioners (R. 18-20) are directed

to the following findings and orders embraced in the con-

firmation decree:

‘<5. That the committee acting under the deposit agree-

ment dated December 12, 1929, referred to ebove,

is lawfully constituted, and that the said committee

has full power, right and authority to consent to and

aecept the plan for and on behalf of each of the hold- |

ers of Carlson Annex bonds deposited with said com-

mittee under said deposit agreement; that the com-

mittee has accepted the plan in writing on behalf of

’ the holders of all Carlson Annex bonds on deposit

with it under said deposit agreement, to-wit: on behalf

of the holders of $371,300 principal amount of said

bonds with interest thereon, which amount is in ex-

cess of 66-2/3% of the aggregate amount of allowed

claims of class 2, and sugh consent and acceptance 80

filed by the committee is hereby declared to constitute

3

the consent and acceptance of the. plan by the holders

) ° of the certificates of deposit issued under said deposit

agreement in respéct: of said Carlson Annex bonds on

deposit-with the committee thereunder.’”’ (R.' 14.)

‘*11. That the court having heard evidence and testi-

( mony on the value of the property of the debtor finds:

that the principal property of the debtor consists of

the two leasehold estates and improvements on the

property located at 620 to 628 Church Street, in the

City of Evanston, County of Cook, and State of Ili-

nois, said two leasehold estates, together with all im-

provements thereon and appurtenances thereto, being

more specifically described in the plan and being here-

inafter sometimes referred to -as.the ‘Carlson Build-

ing Annex’; fhat the Carlson Buildfmg Annex has a

fair market value of $245,025, and that there is no

equity over and above-the $445,500 principal amount of

Carlson Annex bonds outstanding against the Carlson

Building Annex; that the debtor is accordingly insol-

vent; that the stockholders are not entitled to partici-

pate in the plan, and that their acceptance of ‘the plan

is not a prerequisite to the confirmation of the plan.”’

(R. 15.) i |

“12 That based on the abovementioned evidence and

testimony-edncerning the value of the Carison Build-

ing Annex, the court has appraised and does hereby

appraise all claims allowed in class 3 and class 4 to

be of no value,‘there being no equity in the Carlson

Building Annex bonds outstanding against the Carlson

Building Annex, and aceordingly no securities, cash

or other thing of value shall be distributed under

the plan in respect 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. The court further finds that

the foregoing method of treatment of the holders of

_ e¢laims in classes 3 and 4 provides adequate protection

for the realization by the holders thereof of the value

thereof-under and consistent with the circumstanées ©

of the case, the same being of no value.’’ (R. 15.) ~

4 s

a

‘13. That the plan has been accepted advrequired by

the provisions of subdivision (e), of section 77B of the -

Act to Establish a Uniform System of Bankruptcy

throughout the United States as amended (hereinafter .

referred to as the ‘Bankruptcy Act’), ‘and the above _

described acceptances“have been filed in this proceed-

ing.’’ (R. 15.)

‘15. That the plan is fair, equitable, and feasible, and

‘does not discriminate unfairly in favor of any class

or classes of creditors or stockholders,’’ (R. -16.)

**20. That all provisions of the bankruptcy act which

ought to be complied with prior to the confirmation of

the plan have been fully complied with in the manner

provided therein.’’ (R. 16.)

‘21. That all objections to the plan, oral or written, ;

_ are hereby overruled, and the plan is hereby in all re-

spects finally approved and confirmed.”’ (R. 16.)

Pam That the provisions of the plan and of this or-

_ .der shall be binding upon the debtor, all of its sctock-

holders, including those whc have not as well as these

who -have accepted the pian, and all creditors of the

debtor, secured or unsecured, whether or not affected

_ by the plan, and whether or not their claims have been

filed, and if filed whether or not allowed, including

creditors who have not as well as those who have ac-

cepted the plan.’”’ (R. 16.)

The errors assigned by petitioners, theugh seventeen in

' number (R. 18-20), present only two distinct propositions :

" - “(1) That the district court erred in finding that the fair

‘ °- market value of debtor’s property is $245,025; and

that consequently (a) there is no equity over the

. principal: amount of the outstanding first mort-

gage bonds ($445,500) ;* (6) the debtor is insol-

. “The first mortgage indebtedness includes imterest from January 1, 1931; °

at 6% to date of confirmation decree—ignoring the 7%: rate applicable after

default—equals $144,332.50. This brings the total to $585,832.50, without

taking account of the expenses of litigation and other accrued charges

‘ under «the first mortgage. : é,

5

vent ; (c) the class 3 and class 4 claims are value-

less. ~~

(2) That, notwithstanding these circumstances, the dis- -

trict court erred in decreeing that junior claimants

. were not equitably entitled to apportionment of any

cash or securities under the plan of reorganization

and their consent was not a prerequisite to confir-

mation of the reorganization plan.

Value of property and claims: .

The Cireuit Court of Appeals, in its memorandum on the

petition for appeal, said (R. 21):

‘‘In view of the fact that, upon what must have been a

full hearing as to value of the premises, the court made

a specific finding as to that value, this court would have

no right to disturb that finding. >

“We remind the court that the petition for leave to appeal

from the decree of the district court was filed under section

24(b) of.the bankruptcy act, pursuant to which the Circuit

Cqtttt“of Appeals: could exercise jurisdiction only” ‘to su-

perintend and revise in matter of law.’’ No claim is made

by any assignment of error that the petitioners were denied

a fair and adequate hearing as to 11¢ value of debtor’s —

‘property and of petitioners’ claims. No question of law

1s raised with respect. to any incident of this hearing. ©

Confirmation of plan without petitioners’ consents:

Thus the case narrows down! to a single point. Value or :

no value, is the consent of junior claimants of various

classes an indispensable prerequisite to confirmation of a

plan of reorganization by a court of bankruptcy, exercis-

ing jurisdiction under section 77B of the bankruptcy act,

when after a fair hearing it has beén determined that such

claims are valueless? Or, lacking such consents, must the

court reject reorganization for the venefit of senior lienors

- and abandon its jurisdiction (so that, as petitioners assume,

oan

\

. 6

the first mortgage bondholders will be compelled to resort

to a foreclosure sale under state law, with attendant rights

of redemption) ?

Contentions of respondents:

(1) The benefits of a reorganization plan under. section

77B need not extend to all classes of creditors and stock-

holders, if the liabilities of the debtor corporation exceed

its assets, but only to those equitably entitledtto participate,

according to the amount, quality and priority of their re-

spective claims.

(2) Subsection (b) of sedion 77B*—more particularly,

subparagraph (4) and subparagraph (5) (c) and (d) of

subsection (b)—as applied in this case, does not deprive.

petitioners-of property without due process of law.

*Quoted in Appendix, p. 22.

7

SUMMARY OF ARGUMENT.

1.

Since an appeal under section 24(b) of the bankruptcy

_act is conned to questions of law, the Circuit Court of Ap- -

peals properly held (R. 21) that—with no challenge to the

fairness or adequacy of the hearing as to the value of

debtor’s property and petitioners’ claims—the correttness

of the valuation arrived at by the district court is not re-

-. Viewable.

In re Loving, 224 U. S., 183, 188-189, 56 L. ed. 725,

726-727. -

Elliott v. Toeppner, 187 U.S. 327, 334, 47 L. ed. 200,

203.

II.

Reorganization under section 77B of the bankruptcy act

is not limited—either (a) by statutory formula, or (b) by

demands of equity, or (c) by constitutional mandate—

to a plan extending participation to all classes of creditors .

and stockholders, when the liabilities of the debtor corpo-

ration exceed its assets.

Section 77B of the bankruptcy act, subsection

(1), (2), (4), (5), (9); also subsection (e) (¥) (11

U.S.C. section 207, subsections as above).*

In re Central Funding ae (CCA 2), 75 F. (2d)

256, 259-260. |

In re Mortgage Securities Corp. (CCA 2), 75 F. (2d) |

261.

In re Reading Hotel wiles (D.C., E. D, Pa.), 10 F.

Supp. 470.

In re William Penn -sarage (D. C., ‘W. D. Pa.), Com-

merce Clearing House Bankraptey Law Service,

13649.

See also cases cited under Points III, IV and-V, infra.

"Quoted in Appendix, pp. 22-24.

—

Exercise of bankruptcy jurisdiction in a manner that dis-

poses of the property of the bankrupt (or “debtor” under ~

section 77B) without foreclosure sale. and attendant rights

of redemption under state !aw, does not violate the due

process provision of the fifth amendment.

Van Huffel v. Harkelrode, 284 U. S. 225, 227-228,

76 L. ed. 256, 259 (sale in bankruptcy free and

clear of liens, under Act of 1898).

Ray v. Norseworthy, 23 Wall. (90 U. 8S.) 128, 23 L.

ed. 116 (sale in bankruptcy free and clear of liens,

under Act of 1867).

Houston v. City Bank of New Orleans, 6 How. (4%

U. 8.) 486, 506, 12-L. ed. 526, 534 (sale in bank-—

ruptcy free and clear of liens, under Act of 1841).

Dugan v. Logan, 229 Ky..5, 16 S. W. (2d) 763; cert.

den. 280 U. S. 587.

American Mines Equipment Co. v. Illinois Coal

Corp. (CCA 7), 31 F. (2d) 507, 510-513; cert. den.

980 U. S. 572, 74 L. ed. 624 (sale by federal court

without right of redemptjon, under general ered-

itors’ bill filed with debtor’s consent). : .

In re Novak (D.C., N.D. Ia.), 111 Fed. 978 (no right ~

of redemption from trustee’s sale in bankruptcy).

Brown v. Timmons, 79 Mont. 246, 256 Pac. 176,

178-179 (bankrupt’s right of redemption from fore-

closure sale by state court passed to trustee in

bankruptcy).

_ Inte Central Funding Corp. (CCA 2), 75 P. (2d) a

260-261. .

In re New York, New Haven & Hartford Rad. Co. .

C. Conn.—Sept. 15; 1936), Commerce Clearing

House Bankruptcy Law Service, 4172.

9

IV.

Although it is stated in-the opinion of this court in

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

555, that “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 incumbrance exceeds the value of the

property,” this refers to ordinary bankruptcy liquidation

proceedings and not to reorganization proceedings under

section 77B; and moreover, does not deny the power of a

bankruptcy court, under appropriate circumstances, to

order such sale regardless of the value of the property. |

In re Franklin Brewing Co. (CCA 2), 249 Fed. 333,

335. .

: : In re Union Trust Co. (CCA 1), 122 Fed. 937, 939,

. 940. |

In re Roger Brown & Co. (CCA 8), 196 Fed. 758, 761.

In re Throckmorton (CCA 6), 196 Fed. 656, 659.

In re Hasie (D.C. Tex.), 206 Fed. 789, 792. «

In re Thetberg (D.C., N.J.), 280 Fed. 408.

In re Loveland (CCA 1), 155 Fed. 838, 839.

In re Central Funding Corp. (CoA. 2), 75 F. (2d)

256, 260-261.

_ V.

It is no longer open to dispute that the power of Congress

to legislate on the subject of bankruptcies includes the

power to bring within the bankruptcy jurisdiction the sub-

ject of corporate reorganizations. Such jurisdiction is not

rendered unconstitutional because it extends to secured

claims against the debtor and its property as well as un-

' secured claims; nor because it provides remedies for the

ascertainment and enforcement of pre-existing lien claims

other than those provided by state law—remedies affording

substantially equivalent benefits.

Continental Illinois National Bank & Trust Co. v.

C. R. I. & P. Ry. Co., 294 U. 8. 648, 667-675, 79 ,

L. ed. 1110, 1123-1127.

a

| ‘fo \

Campbell v. Allegheny Corp. (CCA 4), 75 F. (2d)

947, 951-955 ; cert. den. 296 U. S. 581, 80 L. ed. 104:

In re Londquiet (CCA 7), 70 F. (2d) 929, 933; cert.

den. 293 U. S. 584, 79 L. ed. 680. .

Hanover National Bank v. Moyses, 186 U.S. 181, 46

‘ L. ed. 1113.

Ex parte City Bank of New Orleans, 3 How. (44

U. 8.) 292, 316, 11 L. ed. 603, 614.

Nugent, Assignee, v. Boyd, 3 How. (44 U. S.) 426,

437, 11 L. ed. 664, 669. ,

McRaney v. Riley, 128 Miss. 665, 91 So. 399, 400-402.

In re Jersey Island Packing Co. (CCA 9), 136 Fed.

625, 627.

In re New York, New Haven & Hattford Rd. Co.

(D.C. Conn.), Commerce Clearing House Bank-’ -

ruptey Law Service, 4172, at pp. 2161-2162.

il cell

ARGUMENT.

The correctness of the trial judge’s valuation of debtor’s

property and of petitioners’ claims is not reviewable.

Petitioners, in conformity with section 24(b) of the bank-

ruptey act, petitioned the Circuit Court of Appeals ‘‘that

they may be allowed; in the discretion of this honorable

court, to appeal in matter of law herein.’’ (R. 9.)

_ The scope of such appeal, if granted, is strictly limited

to questions of law (In re Loving, 224 U. S. 183, 188-189;

Elliott v. Toeppner, 187 U. S. 327, 334.) -

With*no challenge to the fairness of the hearing on the

value of debtor’s property dnd of petitioners’ claims, no

contention that incompetent evidence was received or com-

petent evidence excluded, the Circuit Court of Appeals cor- -

rectly concluded that it would have no right to disturb the

trial judge’s finding pf value. (Memorandum denying ap-

-peal, supra, p. 5.) |

OL

Reorganization under Section 77B need not extend partici-

pation to all classes of creditors and stockholders, when

liabilities of debtor corporation exceed assets.

The text of the statute, quoted at pp. 22-24 infra, leaves

no doubt of the intention to provide fora reorganization

such as that accomplished in this case, namely: a transfer

of the Carlson Annex leaseholds, held by the 620 Church’

Street Building Corporation, to khe 636 Church Street

Building Corporation, holder of the adjoining Carlson

Building leasehold, and issuance to the holders of Carlson

Annex bonds of (a) $222,850 new first mortgage bonds out

of $684,750 to be secured By the combined leaseholds, also

(b) 25% of the common stock of the new owner corpora- _

tion.* A complementary plan of xeorganization of the 636 -

“The new bonds allocated to the Carlson Annex bondholders “Papresents

ath = face amount of their old bonds; the stock, one share per $500

old bond.

12°

?

7” fs r

ti

Church Street Building Corperation Ba NT med in

another section 77B proceeding in the same court. (R. 7-8,

-par. 9.)°. . ; e |

No question is raised as to the regularity of the proceed-

ings in this case up to the point of entry of the decree con-

firming the plan of reorganization. At this stage of the

proceedings—in a case ‘where the fair market value of -

the debtor property is but 40% of the first mortgage in-«

debtedness—challenge comes only from claimants whose

interest in the debtor’s property are indisputably inferior

to the interest of the first mortgage bondholders.

_ Manifestly, if under the circumstances of this case a re-

organization under section 77B could not apportion all of

the debtor’s property to the senior claimants, in accordance

with elementary precepts of equity, the statute would be

of no avail in this case and many similar cases. Instead, —

the ‘‘nuisance values’? and ‘‘maneuvering values”? by

means of which unjust toll was commonly exacted as part

of the price of eorporate reorganization through equity

receivership proceedings, or kindred proceedings, would —

continue to thrive. _ ,

As stated by Circuit Court of Appeals for the ‘Second

Circuit, in upholding a reorganization under ‘section 77B

for the benefit of first mortgage bondholders only, where .

_ essentially all that was accomplished was to defer liquida-

tion of the collateral securing the first mortgage bonds (In

re Central Funding Corp., 75 F. (2d) 256):

‘‘The most flagrant occasion for a reorganization ~~

is where only creditors’ rights are to be adjusted, and

liquidation is to be slow enough to take advantage of

market conditions obtaining over a long period. Sec-

tion 77B expressly provides for such situations as we

.. "The Carlson Building is a 9-story office and store building at the southeast

corner of Orrington avenue and Church street, Evanston, Illinois. The Carlson

Annex is a part 7-story and part 2-story office and store building adjoining

the corner building to the east of Church street. The Annex has no inde- -

pehdent heating plant, elevators, or entrance lobby, but avails itself (under

operating contract) of these facilities of thé corner building. ,

13

have here, and they are proper subjects of bankruptcy

legislation. To restrict the Act to réorganizations

where the debtor has an equity would be to deprive

the section of much, if not most, of its usefulness.’’ (p.

261.) | a “°

‘‘We cannot, however, doubt that it is within the

general meaning of the term ‘reorganization’. In com-

mon parlance that term is not limited to cases where

the rights of all persons interested in a corporation,,.

whether lienors, general creditors or stockholders, are

made to survive under some new corporate arrange- —

ment. Not infrequently the rights of some of these

classes have become so worthless that they deserve

and receive no recognition in the reorganization.’

(p. 259.) ;

Under paragraph (4) of subsection (b) of section"77B,

if the judge determines that the debtor is insolvent, no pro-

vision need be made in the plan of reorganizatior for stock-

holders. Under paragraph (5) of subsection (b), if two-

thirds of any class of creditors do not accept the plan, the °

plan must provide ‘‘adequate protection’’ for the realiza-

tion of the value of the interest, claim, or lien of such class

in debtor’s property, through (a) continued subjection of

the property to such interest or lien, or (b) sale free of

such interest or lien at fair upset price, or (c) appraisal of

such interest. or lien and payment of appraised value ing

eash, or.{d) by.such method as, in the opinion of the judge,

under the circumstances of the particular case, will equi-

tably provide such ‘‘adequate protection.’”*

The court’s finding of insolvency obviated any. need to

make provision, under the plan confirmed in this ease, to

protect the interest of stockholders. ‘‘ Adequate protec-

tion’’ of the interests, claims and liens of the second and

third mortgage noteholders was afforded’ under the plan

by providing for appraisal of the value of these claims,

such value to be paid in cash.

r=

*Text of statute, infra, p. 22.

Naturally, with first mortgage indebtedness two and one-

half times the value of debtor?s property, it was undoubt-

edly anticipated by the proponents of the plan that ap-

praisal would yield no cash to the junior créditors. But

i ie e ‘adequate protection® afforded by the plan yielded

ing to the aed and third mort gage noteholders, this

result was caused not by the plan, nor by the court’s decree,

nor by the enactment of section 77B, but by misjudgmeht

in the original investment represented by these junior

claims, or if the original investment was sound to subse-

quent retrogression due to the turn of economic events. If!

in the apportionment of assets consistent with equitable

_ priorities, a court of bankruptcy turns away. some claim-

ants empty-handed, this is not a deprivation of property

without due process of law. Rather, it is of the essence

of bankruptcy process, of which‘one df the main objectives

_—formerly the sole objective—is the distribution of the

debtor’s assets to its creditdrs in measure with the casei

and quantity of their. claims.

We quote from the opinion of the Circuit Court of Ap-

peals for the Fourth Circuit in Campbell v. —

Corporation, 75 F. (2d) 947, at Pp. 953-954 :

_ “Little need be said as to the question which arises

under the fifth amendment. There is no question, of

course, but that the exercise of the bankruptcy power

by Congress, as is the case with other delegated pow-

ers, is subject to the requirement of due process con-

tained in that amendment., Monogahela Nav. Co.-v.

U. S., 148 U. S. 312, 336, 13 S. Ct. 622, 37 L. Ed. 463;

Hanover Nat. Bank v. Moyses, supra, 186 U. §S.; 181,

192, 22 St. Ct: 857, 862, 46 L. Ed. 1113. But as any ex-

ercise, of the bankruptcy . power impairs the obliga-

tion of contracts, such impairment is not to- be taken

as in itself a denial of due process. For the provisions

of the act to violate the amendment, they must be so”

grossly arbitrary and unreasonable as to be incom-

patible with fundamental law. Hanover Nat. Bank v..

Moyses, supra. We do not think that the requirement

/

15 /

that secured creditors scale their debts in accordance

with a plan which two-thirds of them are willing to.

accept and which has been approved by the court as

reasonable and fair, and accept in lieu of payment in

money such securities as are specified in the plan, can

be said to be such an arbitrary and unreasonable ex-

ercise of the bankruptcy power as to amount to a de-

nial of due process. .

The fact that secured debts are affected by the act

does not, of course, raise any grave constitutional ques-

tion, and can be dismissed with brief comment. ‘“A

secured debt or lien is, so far as the Constitution of

the United States is concerned, a no more sacred kind

‘of property than an unsecured debt. * * * And the

Constitution expressly permits and grants to Congress

the exercise of the power to affect such property,

whether it be an unsecured debt or whether it be a

lien, by laws relating to ‘subject of bankruptcies.’ ’’

_ In re Burgh (D. C.), 7 F. Supp. 184,185. * a

As a matter of fact, no property in any real sense is

taken from the dissenting creditor when he is com-

. pelled under section 77B to scale his claim and accept

securities in lieu thereof. The securities held by him

have already shrunk in yalue before the proceeding

under the act is instituted; and all that % required of

him is that he face reality and accept his pro rata in-

terest in the debtor’s property in a form which will not.

jeopardize the rights of other creditor similarly situ-

ated. If he were allowed to insist on r+ be-wesne M of

the lien.in which he is interested in common with-others,

‘he would bring serious injury to them without benefit to

himself. Under the act, he is merely*required. to ac-

cept what two-thirds of those similarly situated are

willing to accept, and what the court bas found to be

fair and reasonable under the circumstances ; and, when

the situation is viewed realistically, it is readily seen

that he is ‘not required to surrender any part of the

value either of his securities or of the property avail-

able fer-the payment of his ciaim. What he in fact

gives up is merely the arbitrary power to frustrate the

wishes of the great majority of those who have a com-

mon interest in the property of the debtor, or, in other

words, the power to demand from other creditors an

. < Se ,

~ aneonscionable settlemént of his claim as the price of

withdrawing objeation to a_plan of reorganization

which is fair to all parties concérned.

The act is based upon-an equitable recognition of the

_ Tights of all ‘who have an interest in a common prop-

_ erty, and is in accord with the principle under which

*. courts of equity have denied to dissenting creditors the

right to prevent the consummation of a plan, of reor-

ganization which has been found to be fair and open

“Ss _- to all creditors on ‘the same terms. See Fearon v.

—- +" Bankers’ Trust Co. (C. C. A. 3), 238 F. 83; Simon v.

“New Orleans R. Co.*(C. C. A. 5), 242 F. 62. It em:

bodies substantially the principles of ‘corporate reor-

ganization adopted in England and Canada many years

ago, and, as shown above, held reasonable by the Su-

preme Court in the case of Canadian Southern Ry. Co.

v. Gebhard, supra, where the court said: ‘In no just

sense do such governmental regulations deprive a per-

son of his property without due process of law.’ ”’ :

In the reorganization of the Reading Hotel Corporation

‘under section 77B, approved by the, District Court for the

Eastern District of Pennsylvania (10 F. Supp. 470), the

_ Inaster found the debtor ‘‘definitely and hopelessly insol-

_vent.’’? The stockholders, on exceptions td-the master’s re-

port, contended that the master erred in failing to take ac-

count of ‘‘a potential value which is really based upon a

- guess (perhaps not altogether unjustified) that the hotel by.

- reason of past history of wide advertisement, good manage-

ment, and excellent reputation will, when- times improve,

make money for its thén owners.’’ The corrt held, how-

_ ever, that there was nothing in section 77B which justified

such an interpretation of the statute, or changed the orig-

inal definition of insolvenéy. To the argument of the stock-

holders that section 77B was passed for the relief of debt-

ors, and that unless some recognition were given to the

' interests of stockholders a reorganization under section _

_. TTB in the case of an insolvent corporation with a mortgage __

indebtedness would amcunt to nothing more than foreclos- ,—

+

17

ure with possible readjustment of interests among various

classes of creditors, the court-responded (p. 471) :

‘*The insolvency of the debtor corporation eliminates _

the necessity for acceptance by a majority of stock-

holders as a prerequisite to the confirmation of the

plan. It also eliminates the necessity of making provi-

sion for dissenting stockholders in the plan. But when ©

subsection (b) (4) speaks of. providing for stockhold-

ers, the provision it refers to is ‘adequate protection’

for the realization by them of the value of their equity.’

Obviously, if there is no equity, there.is nothing which

- can be ‘realized,’ and the stockholders are not entitled

to any Of the alternatives such as sale of the property.

,or cash payments, which they would have if their hold-

- ings had a present cash value.’’

III and IV.

; Bankruptcy distribution of debtor’s property without fore-

closure sale and rights of redemption does not Violate

the due process provision of the fifth amendment.

_ The petition for certiorari in this case ‘stresses mainly.

' _ the rights of junior lienors: the right to insist upon a pub-

lic sale, the right to bid at such sale, the right of redemption

within fifteen months. (Petition, p. 28.) Of the right to

redeem, petitioners say: ‘‘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.’’ (Petition, p. 33.) eg aie

It is by no means-a self-evident postulate, as &ssumed

by petitioners, that in defanlt of reorganization under sec-

_ tion 77B the debtor’s property would be disposed of by

foreclosure sale. and that some of the petitioners would

thereupon become vested with the right to redeem from

such sale within fifteen months. Other methods of liquida-

__ tion of the debtor’s property, without rights of redemption, ”

are illustrated by the cases cited at pp. 8-9, supra (under

points ITI and IV). These methods include sale in bank-

18

ruptey liquidation free and clear of liens; sale free of re-

_ demption rights in a federal equity receivership proceed-

’. ing; sale free of redemptien rights in. equivalent state court

. corporate liquidation proceedings.

In neither the 184}, 1867 or 1898 bankruptcy acts do we

. find any express grant of power to courts of bankruptcy to

sell mortgaged property free and clear of liens; in each of .

these acts, at the same time, we find (in varying form) an -

express declaration that valid mortgages and liens on the

_ debtor’s property shall not be affected, if not fraudulent

or preferential; yet under each of these acts the power to

sell the debtor’s property free and clear of liens has been -

recognized as implicit in the general grant to the courts of

bankruptcy of all equitable powers essential to the proper

administration and distribution of insolvent estates.. Un-

der the act of 1841: Ex parte The City Bank of New Or- 2

leans, 3 How. 292, 11 L. ed. 603; Nugent, Assignee, v. Boyd,

3 How. 426, 11 L. ed. G64; Houston v. City Bank of New:

- Orleans, 6 How. 504, 12,L. ed. 426. Under the act of 1867:

Ray v. Norseworthy, 23 Wall. 128, 23 L. ed. 116. Under

_ ‘the act of 1898: Van Huffel v. Harkelrode, 284 U. S. 225,-.

76 L. ed. 256; In re Union Trust Co. (C. C. A. 1), 122 Fed.:

' 987; additional cases cited under point IV, supra, p. 9.

While it may well be ‘‘the settled practice’’ in general

_ ‘bankruptcy not to sell property free and clear of liens un-

’ Jess it is fairly anticipated that the sale will produce a mar-

gin over the lien indebtedness, it has often been declared

that this is a rule of policy, and not a delimitation upon

bankruptcy-jurisdiction. '(See cdses cited at. p. 9, supre,

under point IV.)

But even if it is assumed that the only alternative ‘to

reorganization under section 77B is reversion to the fore-.

closure suit suspended by the institution of this proceeding, |

and that a foreclosure sale of tfe debtor ’s‘leaseholds would

‘vest in some of the petitioners the right to redeem, if is a.

_ distortion of the decision of this court in Louisville ;Joint

19

Stock Land Bank v. Radford to say that the bankraptey

power transgresses the due process of law, in‘contravention

of .the fifth amendment, when it produces such a result,

It is the, ordinary and inherent routine of bankruptcy juris-

‘diction to divest property rights. -The difficulty encountered

in the Radford case was not merely that the mortgagee was —

' to recover less than its due from an insolvent debtor. The ?

mortgaged farm was not to be sold or conveyed for the

benefit of the mortgagee (and other eréditors, if the pro-

ceeds of the sale exceeded the mortgage), but to be restored

to the mortgagor on a renta] basis for a span of five years,

. subject meanwhile to an option in the mortgagor to dispose

_of the mortgage indebtedness at less than half its amount.

_ The Radford case, withits forceful insistence that the

mortgagor could not be thus indulged at the expense of the

mortgagee, after default had ripened the mortgagee’s right ©

‘ to satisfy its claim out of the mortgaged property, is strong

authority against the contention of petitioners in this case.

The rights of) petitioners are not cut down by section 77B

of the bankruptcy act, but fully recognized and preserved. ~

All that happened, in consequence of debtor’s resort to bank-

ruptey jurisdiction under section 77B, was a change of .

forum and procedure, but not interposition of a new mea-

sure of rights. It*is elementary that bankruptcy may sup-.

plant any and all modes of procedure provided by state law

- for the enforcement of the obligations of a debtor in failing

circumstances. {‘It is, in short, a‘system of laws to take

care of the rights of.the parties interested, when a business

failure Saperyence. ae | — on Bankruptcy, 4th ed.

~v. I, p. 47.) :

>

mr

V..- p

Bhe power of Congress to legislate on the subject of bank-

ruptcies may properly extend to secured claims against

the debtor’s property as well as unsecured claims; and

‘may provide remedies for the ascertainment and en-

forcement of pre-existing lien claims other than those

. provided by state law, provided such remedies afford

‘ substantially equivalent benefits,

Petitioners do not question the géneral validity Locdian

7B as a code of procedure far the reorganization of finan-/

cially embarrassed or ingolvent corporations; nor that such

reorganization may deal with claims secured by liéns on the

. . debtor’s property as well as unsecured claims. The peti-

.. tioner corporation itself initiated this proceeding for reor-

ganization; the petitioners who hold second or third mort-

| gage notes of the debtor corporation came into the pro-

) ceeding to prove their claims—and, if possible, to persuade )

- ° the first mortgage bondholders voluntarily to yield to them -

some share in the reorganization, despite the great-dispar-

ity between the first mortgage indebtedness and the value

of the debtor property. {R. 7—pars. 7 and 8.)

Because their claims were worthless ab initio, or have

been retidered worthless by the course of events, the pro-

cedure provided by section 77B has brought petitioners no

cash or‘ substituted securities. Not by legislative or judi-

’ giql fiat that they shal] take less than their due, but by

orderly and fair ascertainment of what is justly recover-

. ble on their general distribution ef the insol- —

\—-vent-debtor’s ts. Petitioners protest that, as the mat-

.* \. ter has turned out, they might’ be better off if the first mort-

gage bondholders were denied the facilities and: economies

ef reorganization procedure under section 77B and re-

_ mitted to foreclosure under state law. If so, it is not be-

cause of any showing that prolongation of the litigation for

another year or more would increase the value of debtor’s .

property from $245,025 to something over $600,000, the ap- _ -

proximate first mortgage indebtedness at this time with- 4.

4

“ff

21 ; e

out reckoning accrued: and future costs of litigation. Re-

duced to its ultimate essence, the true complaint of peti- -.

tioners is that section 77B, as applied in this case, hag de-

prived them of such maneuvering advantages as they might

have had under the inefficient and unduly costly modes of

procedure for corporate reorganization which section 77B

was designed to supplant. It would be anomalous, indeed,

‘if equity or the constitutional requirement of due process

could reasonably be found tp support a contention so flag-

rantly at odds with justice and good conscience.

.. Not to elaborate upon what this court has said about the

nature and scope of the bankruptcy power (cases cited at

pp. 9-10, supra), we submit that this great and beneficént oe

power conferred on Congress by the federal constitution

has not been unconstitutionally exercised in the enactment

of section 77B of the bankruptcy act, or any of the subdivi-

sions thereof herein involved ; that in the application of Bec-

tion 77B in this case no inequity has resul ayto the peti-—

-tioners, or any of them; that the first mortgage bondhold- -

__ere, through the reorganization confirmed by the court, will

receive no mare than their equitable due as the holders of

obligations secured by superior lien on the debtor’s prop-

erty. Wherefore, these. respondents urge that the Circuit - -

Court of Appeals did not err. in denying to petitioners leave

to appeal, and that said order of the Circuit Court of Ap-

peals and the decree of the District Court sheild be affirmed. .

Respectfully submitted,

Hvuco SonNENSCHEIN,

Heasert M. Laurmann,

Isaac E. Ferauson, 2

all of Chicago, Illinois,

: Attorneys for the respon-

Henry L. Koun, dents Louis M. Quitman and

Issac E. Fencusox, = = ===» Edgar N. Greenebaum, first

Math Seg Mino, ergage rats

ae oe

Section 77B of Bankruptcy Act, 11 U. 8. 0: Section 207. - |

Subsection (b):

“‘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 is- _-

suance of new securities of any character or otherwise;

(2) may include provisions modifying or altering the

rights of stockholders‘ generally, or of any class of - -

them, either through the issuance of new securities of

any character or otherwise; * *.* (4) shall provide

_.- in respect of each class of stockholders; of which less -

a than a majority shall accept such plan (unless the

judge shall determine either that the debtor is insol-

vent, or that the interest of such class of stockholders —

will not be affected adversely by the plan), adequate

| .— protection for the realization by them of the value of

i ‘their equity, if any,.in the property of the debtor dealt

with by the plan, either, as provided in the plan, (a)

by a sale of the property at not less than a fair upset

price, or (b) by appraisal and payment in cash of the, -

value either of their stock, or at the objecting stock- ‘

* holders’ election, of the securities allotted to such

stockholders ander the plan, if any shall be so allottd,.

or: (c) by such methods as will.do substantial justice

to'such stockholders under and consistent with {the cir-

is - Gumstances of the particular case; (5) shall provide in

<. respect of each class.of creditors of which less than twe

|: 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), —

. ‘adequate protection for the realization by - them. of

the value of their intérests, claims, or liens, if

the prop 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 yeoperty subject to such interests, claims, or —~

liens, or by the retention of such property by the

AY ‘S

ne .

23

; _ -

* 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 transfer of such .

-. interests, claims, or liens to the proceeds of such sale;

-or (c) by appraisal and co ge either in cash of the -

‘value either of such interésts, claifns, 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,- équita-

. bly and fairly provide such protection; * * * (9) shall

provide adequate means for the execution of the plan,

which may include the transfer of all or any past of

the. property of the.debtor to another corporation or

to other corporations, or the consolidation of the prop- |

erties of the debtor with those of another corporation, or

the merger or consolidation of the debtor inta or with

_ another corporation or corporations, or the retention

of the property by the debtor, the distribution of as-"

sets among creditors or any class thereof, the satisfac-

tion or modification of liens, indentures, or other simi-

lar instruments, the curing or waiver of: defaults, ex-

_ tension of maturity dates of outstanding securities, the

/ change in interest rates and other terms of such seeu-

4 Tities, the amendment of the charter .of the debtor, and

the issuance of -securities of either thé debtor or any

such corporation or corporations, for cash, or in ex-

change -for existing securities, or in satisfaction of

claims or rights, or for’other appropriate purposes. ”’

Subsection (e):

« * “(1) A plan of reorganization shal not be confirmed

, - until it has been accepted in writing, whether before or

_ after the filing of the petition or answer under this sec-

tion, and such acceptance shall have been filed in: the

proceeding by or on behalf of creditors holding two

‘thirds in amount of the claims of each class whose

Claims have been allowed and would be affected by the

- plan and by or on behalf.of stockholders of the debtor

merorg | a@ majority = stock of each class: Fro-

ided,

owever, that such acceptance shall not be requi-

24

site to the confirmation of the plan by any creditor or

class of creditors (a) whose claims are not affected by

the plan, or (b) if the plan makes provision for the pay-

ment of their claims in cash in full, or (c) if provision-:

is made in the plan for the protection of the interests, _

_- Claims, or liens ‘of - reditor or class of creditors in.

the manner provided in subdivision (b), clause (5), o

this section: And provided further, that stich accept-

ance shall not be requisite to the confirmation of the

‘plan by any stockholder or class of stockholders (1) if

the j ghall have determined either that the debtor

is insolvent, or that the interests of such stockholder or

stockholders will not be affected by the plan, or (2) if

he pee ision is made in the plan for the protection of the

nterests of such stockholder or class of stockholders in |

the. manner provided in subdivision (b), clause (4), of

this section.’’

PILED

DEC 2 1836

CHARLES ELMORE CRORS

IN THE CLE

SUPREME COURT OF THE UNITED STATES

Octoser TERM, 1936 -

— oo oor eee eee

‘ No. 271

“In THE MATTER OF THE

620 CHURCH STREET BUILDING CORPORATION,

A CORPORATION, DEBTOR UNDER SECTION 77B oF THE BaNkK-

RuPTCY ACT.

620 CHURCH STREET BUILDING CORPORATION,

ET AL.,

Petitioners,

vs. |

WARNER G. BAIRD, er at.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE SEVENTH CIRCUIT.

Petition for Rehearing.

\

=,

GE AERTS SPB a im toot) og

THeEoporRE E. Retry,

Isaac M. Mis,

Counsel for Petitioners.

CHICAGO Law PRINTING CO.. 11! N. WACKER DRIVE (COR. WASHINGTON ST.) TEL. FRANKLIN 6821

oe de taco nae ee

g

»

4

: INDEX.

eae or bes ee Ft Pr PAGE

Introductory Statement 22.0 one 2

' Suaziadiction’ ........ Ree LIE he NRE TL 2

- Reasons for petition for rehearing —...........2...0.......-.. ae ie

IID intcttihcnneuitasestchainitcnnsce iaescliaidpilasihicitdateeiedgcalaiaa i 5

General «:. PT Se Ce hcuidlcacatieaiien” aan

Publi¢ importance of issues 000.0. esccccccccccceeceeeeeeeevecen 18

Effect on mortgages ........................ dna hecainee 18

Effect on 77B proceedings 2020.02.02... ..-eeccccecceceececseeee- Ss

I era caerencscicienressinideiee aadalise 23

_ Divisions oF THE ARGUMENT,

A. The District Court erred in viewing the rights of r

petitioners as being limited solely to a claim on

_ the notes held by them. - It overlooked their vested .

substantive rights in specific property arising out

of and existing by virtue of the mortgages secur:

ing the notes, and the statutes of the State of Il-

linois Rane ,

_B. The District Court erred in drawing, from the tes-

timony as to, and its finding of, the fair market

value of the property of the debtor, the erroneoys

inference that the-vested property rights of peti-

a

5-9

tioners are of no value ..: O18

C. The District Court erred in not: ascertaining the’

value ‘of the security to petitioners’ notes by the

methods set forth in Section 57 (h) of the Bank-

"SUPREME. COURT OF THE UNTED STATES

No. 271 |

Fi es

“620 CHURCH STREET BUILDIN G CORPORATION,

A CORPORATION, DEBTOR UNDER Szoriow 77B oF THE a Baxx-

’. RUPTOY.Acr. © -

| t 2 i

NZ:

620 CHURCH STREET BUILDIN G CORPORATION,

BEAL,

v8.

"WARNER G. BAIRD, ) MF, Hes pee

Reape,

ON WRIT OF CERTIORARI TO THE UNITED stirs Cacurr

' MGR OT eaeen tee ee

A ‘s .

“Petition fr x Rear,

To the Honorable Justices oft the Supreme Court ae

ee i the United Btategs,’: ’

Comes, no, Ht

nil, eeeb 7 Pe” +, ex . ats; kf Bn s y we

- tioners . ee OF a or ) oe aarta H aenee

‘ ee Na Saks ee 7% bY . " > Tat « S pias Ue oe £7

* “Ss eS aie ea aS AS SOSA Re es Bi rs Meat Bsle ¢

thei. pation igure ‘and in support.

” C2 ir ae +: : fos te i, p Tea SE ed Fae CS a fe a4

mt ‘fia tae Bg ee ee ae "he * Pe es SO Peers a

re ~ Ds a a “ <<

_ This case deals with the right of a District Court to con-

firm a plan of reorganization without the consent cf junior

lienors which deprives them of their liens, their right to

a public. gale, their right to bid and their right of redemp- .

tion under the Illinois Statutes, all without compensation.

tie 620 Church Street Building Corporation (herein re- ©

ferred to as Debtor) filed its voluntary petition for reor- -

ganization under Section 77B of the Bankruptcy Act. Its

principal property, consisting of a building constructed on -

leased ground, is subject to three trust deeds executed prior -

to the enactment of Section 77B and securing:

a. First mortgage bonds we 445,500

b.. Second mortgage notes --- 40,250

ey Third mortgage notes 27,000

‘The plan. epproved. by the District, Court provides that

the property of the Debtor shall be conveyed to the 636

. Church Street Building Corporation, a separate and inde-

pendent corporation, in consideration of stocks and bonds --

to be divided solely among fhe "plders of the first mortgage

bonds of the Debtor.

ol

ea ale a ee eee nee

. appeal: from the order Stig. to

Jerenalg coepraed EE a cate

Const rendered ite opinion on November 9th, 1996, to the

; ee ee eT:

in deatcing 0 Ree ALARA:

“fou oo & that that all the rights

of the petitioners are of no value. This Court held that ©

petitioners, being beund by the finding of the District Court,

could not raise the constitutional — arte no-value

to, protect.

’ The fact is that the District Court did not titties all

the rights of petitioners and made absolutely no. p fining

as to the most important of them. sae

The District Court found that petitioners’ claims én their.

notes are of no value but made no finding as to the value

. Of the substantive property rights of petitioners under their

mortgages and the Statutes. of Illinois, particularly their

right to redeem the property of the Debtor.

*‘Had the District Court fully considered petitioners’

rights under their mortgages and under the Illinois Stat-

utes, it would not have entered the order of confirmation

_in this case which, unless set Aside by this Court, will have

& disastrous effect on the security of all real estate mort-

gages and introduce a new, and dangerous doctrine in the

- lay. of mortgages—a doctrine which will upset long estab-

| sone pa om caniahias ate

gage many generations—a will

net appeaciahly facilitate: proceedings tinder: Sections TTB

AEE HPA seperts Shnk-a mantener; ty Mg « gui

g Big

es

ig?

Res

Ly.

4

tion.im bankraptey,'may change the terms of a mortgage

Petitioners earnestly beg this Court to consider the grave

mes 6f its decision not only out of regard for the ‘

rights of petitioners but in view of its effect on the law of _

mortgages. Men egostad aus iMeidis TR LAF 235i ESS aL

To demonstrate that the: District Court did not make

the. finding of fact which this Court ‘assumed and on

the binding ‘effect of which this Court based its opinion,

. petitioners desire to clearly point out the errors made by

the District Court, namely:

&-“The District Court erred in viewing the rights

e of the petitioners as being limited solely to a claim on

the ‘notes held by them. It‘ overlooked their vested

substantive rights in specific property arising out of -

¢ and existing by virtue of ‘the trast deeds securing the

motes, and the statutes of the State of Ilinois.

, . B. Granting that the District Court did not ovet-—

|“ «Jookthe property rights of petitioners under. their

rtgages: and the Illinois Statutes, then it ‘erred in

See Se See rs

Ree hese NS: LES oy 3

. The District Court placed the notes of ‘the petitioners

‘ in clasots ¥ and (B. 13), using the following fanguage:

“Class 3: ‘Those claims allowed in these proceed-

. ings-against 620 Church Street Building Corporation

ote eats, with respect to the notes secured by

_ trust deed dated July 13, 1928, from Carlson Annex

: "Building ‘Corporation to B. F K. Goodman, aé trustee.”

“Claas 4: : ,Those, claims allowed in these proceed-

ings against. 620 Charch Street. Building Corporation

: or ite property, with. respeet, to the. note secured by

trust deed dated June 3, 1931, from.620 Church Street

—- Building Corporation to W. ‘Kahn, as trustee.”

The express language used refers to’ claims on the notes.

“The. , ee nti ote

Be by \.

te ae Partha ot i ocd of stride (R: 15) covers

"the so-called appraisal.of'the above'claims. ° Eis intgutgs

aot priestess. si-conaip remap ras Qodl

wi abo above-mentioned etme tad

a, svn "Wie Withee sf the‘ Carlaw Bolte

hig ‘denis, tho Const Dein euprelped’ anit dows herekss

sunrenne SK Sateen Sewer ie Cideoes 3 and 4 te) be

of no value * * *

Here, too, the reference io @fpitaly to the claims on; the

notes.

ia i, Reestiacsestiiniaent don cation nk: ba, ihe, Sipsak. td

when notes are issued and secured by a mortgage on real

various’ rights come into existence. Whe notes evi- |

a personal obligation of the maker to pay the prin-

_ Gipalsand interest at the time and in the manner specified

in the notes. These obligations constitute claims of the

holders of the notes to receive money from the maker,

and may be discharged in bankruptcy. At the same‘time

there come -into being, property rights by virtue of the

execution of the mortgage securing the notes and by virtue

of the statutes of the state wherein the property described

in the mortgage is Iggated. These constitute substantive

rights in specific property and are protested by the Fifth

Amendment. In law, the claims on the notes and the prop-

erty rights under the mortgage and statutes are entirely

separate and distinct. These separations exist not only

in law, they are frequent in fact. Whenever the mortgagor

conveys its property and the grantee des not assume the

payment of the debt, a separation occurs. The debt re-

mains the obligation of the mortgagor. The rights in the

‘ property created by the mortgage and statutes follow the

If the District Court intended to find the valine only

of the notes, from the standpoint of their immediate col-

lectibility, its finding of .no value based on the market

valine of the property of the Debtor and the amount of the

e 7 r

-

sched wisived Wy ‘jumlon‘tign ‘ny ‘ceilily Bs valads. by

finding the value of the property and déducting therefrom ”

the amount due onthe notes secured by the prior lien.

When, however, the District Judge confirmed the ‘desk

. on the basis that the noted of petitioners were of no value, —

he overlooked entirely the rights of petitioners uadér their

Ss acne yee ae Let us look at

setbiniiie, just as the Bank in the Radford case, pds-

‘sess certain rights by virtue of the aed mortgages and

the Illinois statutes, namely :

1. The right to retain their lien on the property de-

scribed in the wenn, mle lien is paid or until *

the lien is terminated, ed by law, by a public |

sale of the property. - | pai

2. The right to bid at such sale.

3. The right to redeem from such sale within one year

from the date of the sale by paying to the purchaser

the amount bid. .

Let us consider for @ momént the most important and

most: valuable right of petitioners, namely, the right of

redemption. Under the laws of Illinois this. right of re-

demption continues for twelve to fifteen months after the

sale of the property. It constitutes an option to acquire

the- property during this period at the price ‘hid at the

sale with interest. . What gives great value to this right

is the fact that the redemption price is not the. market

value of the property, not the.amount of the pricr liens,

but: the amount bid'st the sale which frequently is much

less. This right i the exact. equivalent .o? the rigit to

receive all the inc in tke value of the property over.