Respondents Brief — United States v. Key

[ g@beree s ge

INDEX

Page

Se AUD Sein eb AME veSk wee vite ease oe iii

I tite 2b 5a as as cies Kceadsceneeneeeus 1

EN kK Anaad ke ADAG Nedecdesenhncscabansscas 2

EE 5s kbc cavcventavhensasenanckenent 2

EE EE oc cack cdcbcceesaneneasenssencucce 2

ShchGndne cade sees yeheewsn sdGkus used dks 2

i iyi veesnessegneeeeactenes vs 10

Ph (v.k6s bhehchtudepesens en cacecheacs se 6se0 13

The priority status of the United States granted by

section 199 is not inconsistent with nor does it ex-

clude the application of the provisions of section

SME CnLe et eek keke Rhuehhivancesbeucass 13

The United States cannot demand cash pay-

ment on confirmation of the plan .......... 20

The government has no right to interest on a

tax claim from the date of the filing of a Pe-

eee 24

The priority rights of the United States are af-

forded ‘‘fair and equitable treatment’’ under the

so-called absolute priority rule ................ 29

i

INDEX—Continued

Page

The plan provides adequate protection for the pay-

ment in full of the United States as a non-assenting

creditor therefore the plan can be confirmed over

the rejection of the plan by the petitioner as a

LIST OF AUTHORITIES

Page

Cases

Associated Gas & Elec. Co., In re, 149 F. 2d 996 (CA-2,

1945), cert. demed, 326 U.S. 736 (1945) ..........

Atlas Pipeline Corp., In re, 39 F. Supp. 846 (W. D.

Bank of Marin v. England, 385 U.S. 99 (1966)

Campbell v. Alleghany Corp., 75 F. 2d 947 (CA-4,

1935), cert. denied, 296 U.S. 581 (1935)

Canada So. R. R. Co. v. Gebhard, 109 U.S. 527 (1883).. 18

Capitol Foundry Corp., In re, 83 F. Supp. 413 (E. D.

Case v. Los Angeles Lumber Products Co., 308 US.

106 (1939) rehearing denied, 308 U.S. 637 (1939)

11, 12, 29, 30, 33, 34

Central Forging Co., In re, 38 F. Supp. 18 (M.D. Pa.,

City of New York v. Saper, 336 U.S. 328 (1948) 12,

24, 25, 26, 28, 40

Clinton Trust Co. v. John H. Elliott Leather Co., 132

F. 2d 299 (CA-2, 1942)

Consolidated Rock Products Co. v. DuBois, 312 US.

510 (1940)

Day, Meyer, Murray & Young, In re, 93 F. 2d 657

(CA-2, 1938)

LIST OF AUTHORITIES—Continued

Page

Cases—continued

Downtown Inv. Ass’n. v. Boston Metro. Bldg., 81 F. 2d

SER (CAA, WEPR) oc ns ckdsverccevccenvenssesenene 35

Duparquet Hout & Moneuse Co. v. Evans, 297 US.

OP CUE canara xprevnwws gone oarnans tena eens 18

Englander Spring Bed Co., In re, 17 F. Supp. 15 (E.D.

N.Y., 1936), aff’d per curiam 86 F. 2d 998 (CA-2,

EE Fase h ce enkies sous ashen ir eoceeeeab keen has 41

Fidelity Assurance Ass’n, v. Sims, 318 U.S. 608 (1943) 17

Francisco Bldg. Corp. v. Batson, 83 F. 2d 93 (CA-9,

DE bk vkcevsddeeanekebacnessekeueseeuesebnen 36, 41

BOE). vc cvcredcccreccesceveccvovcesesvestetseces 21

Group of Institutional Investers v. Milwaukee Railroad

Cais SP RE 8s esse Nee ccntviveuvieeses 35

Halo Metal Prod, Inc., In re, v. Randall, C.C.H. 1969

Stand. Fed. Tax Rep. (Cas. No. 17608) para. 9123

ER ME vid bG cecksteucsatbeseuskehewiveles

Huyler’s In re, 107 F. Supp. 318 (S.D. N.Y., 1952)

aff’d sub nom, State of New York v. Feinberg, 204

ee BS ee eee 22, 23, 27

Kalamazoo Bldg. Corp., In re, 21 F. Supp. 852 (W.D.

Rs Te TTT Tir Te ert erie 33

Kinnane Co., In re, 221 Fed. 762 (S.D. Ohio, 1915) .. 24

Lorraine Castle Apartments Bldg. Corp., In re, 149

F. 2d 55 (CA-7, 1945), cert. denied, 326 U.S. 728

Lyford v. City of New York, 137 F. 2d 782 (CA-2, 1943) 24

iv

LIST OF AUTHORITIES—Continued

Page

Cases—continued

Marine Harbor Properties, Inc. v. Manufacturers

RVG Og Mee Ge FE CHOUED scasicvecsevecscscsss

National City Bank of New York v. O’Commel, 155

oe 8 RE

National Foundary Co. of New York v. Dir. Int. Rev.

ee ee Se OED Viens yccacbveccveevenes

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

GE ince deeds thaw od Ne eUewaNsaebedesyenstoneass

One Hundred Siaxty-Eight Adams Bldg. Corp., In re,

105 F. 2d 704 (CA-7, 1939), cert. denied, 308 U.S. 623

SE ss cROSRa eRe EE ONSSS VRAD ASRS KR UNGR CAR OURN ess

Py MONE CRC ees eea cess eeeveeNSee eb ed soee bene

BOE WASe eter een tnrsaneeesheedineyeesbeecscenrs

Petition of Portland Electric Power Co., 162 F. 2d 618

(CA-9, 1947), cert. denied, 332 U.S. 837 (1947) ....

Peyton Realty Co., In re, 18 F. Supp. 822 (H.D. Pa.,

SOE «3.0 0dtkd vhs CARRE S Sn ehieiehaeabekerecnanene

SS a Abie RS

Radio-Keith-Orpheum Corp., In re, 106 F. 2d 22 (CA-2,

1939), cert. denied, 308 U.S. 622 (1940) ...........

Reiman, In re, 20 Fed. Cas. No. 11,673 (S.D. N.Y.,

1874), aff’d., 20 Fed. Cas. No. 11,675 (S.D. N.Y. 1875)

State of New York v. Feinberg, 204 F.2d 502 (CA-2,

LIST OF AUTHORITIES—Oontinued

Page

Cases—continued

Texas Hotel Securities Corp. v. Waco Development Co.,

87 F. 2d 395 (CA-5, 1936), ceré. denied, 300 U.S. 679

(1937), rehearing denied, 301 U.S. 713 (1937) ..... 42

United States v. Anderson, 334 F. 2d 111 (CA-5, 1964)

cert. denied, 379 U.S. 879 (1964) ...........0..008. 15

United States v. Edens, 189 F. 2d 876 (CA-4, 1951)

aff’d ptr curiam, 342 U.S. 912 (1952) ...... 25, 26, 27, 28

United States v. Emory, 314 U.S. 423 (1941) ......... 17

United States v. General Engr. @ Mfg. Co., 188 F. 2d

80 (CA-8, 1951), aff’d per curiam, 342 U.S. 912

CRUE . n4.0'0< cna nennQdabasbennes Gbwaesneeeae bien 25, 28

Waern Bldg. Corp., Im re, 145 F. 2d 584 (CA-7, 1944)

cert. dented, 324 U.S. 871 (1945) ...............8. 43

Wilton Realty Corp., In re, 30 F. Supp. 486 (E.D.

Mich., 1938), aff’d per curiam, 106 F. 2d 1022 (CA-6,

1938), cert. dented sub. nom., Wilton Realty Corp.

v. Weadock, 308 U. S. 626 (1940) ............0...

Statutes

Bankruptcy Act. c. 541, 30 Stat. 544:

Section 64 (11 U.8.C., Sec. 104) ............ 22, 31,32

Section 64(a)(4) (11 U.S.C., See. 104 (a)(4)) .... 21

Section 65 (11 U.S.C., See. 105) ................ 21

Section 102 (11 U.S.C, Sec. 502) ............... 22

Section 179 (11 U.S.C., Sec. 579) ............... 19

Seetion 199 (11 U.S.C., Sec. 599) ....... 10, 11, 13, 14,

15, 16, 20, 29,

LIST OF AUTHORITIES—Oontinued

Statutes—continued

Section 216 (11 U.S.C., Sec. 616) .............. 14, 19

Section 216(7) (11 U.S.C., Sec. 616(7)) ..10, 11, 12,19,

20, 29, 39, 40, 41, 42

Section 221 (11 U.S.C., Sec. 621) ............. 10, 14

Section 221(2) (11 U.S.C., Sec. 621(2)) ..... 11, 21, 29

Section 236 (11 U.S.C., Sec. 636) ............. 16, 32

Section 337(2) (11 U.S.C., See. 737 (2)) ....21, 22, 31

Revised Statutes:

Section 3466 (31 U.S.C., Sec. 191) ..11, 14,15, 17,20, 29

Miscellaneous

Bernardt, Government Priority for Repayment of

Monies Advanced to Contractors, 20 J. Nat'l Assn.

fF OR eer rerrer 21

Blair, The Priority of the United States in Equity

Receiverships 39 Harv. L. Rev. 1 (1925) .......... 17

79 Cong. Rec., pt. 13 (Aug. 19-26, 1935) ........... 18

Gilchrist, Fair and Equitable Plan of Reorganization:

A Clearer Concept, 26 Cornell L. Q. 692 (1941) .... 29

H. Rep. No. 194, 73d. Cong. 1st Sess. (1933) ..... 17,18

I. C. CC. Docket #MC-F-8117, Finance Docket

CY £5000604665000066006060400066406000608 43

Note, 51 Harv. L. Ree. 1408 (1938) .............. 24

S. Rep. No. 482, 73d Cong. 2d Sess. (1934) ........

Vii

LIST OF AUTHORITIES—Continued

Page

Treatises

Collier, Bankruptcy, (rev. ed. 1969) :

3A Collier on Bankruptcy

eee ees ech egnkneegeessnene shee 24

6 Collier on Bankruptcy

Para. 0.11 ones Seal ¢ ek che cou beeneeee 17

eee oe nc oenenneeecseeceeuns 18

6A Collier on Bankruptcy

I ET on ob nncn b60nee6es se nees basses cubes 35

ere rr eT Tree Teper er T 21

SET nn puch ose etetedeseuceseseueesesande 42

eS ED i-dicéentkeaeWedsebbces6oneeesdcusean 42

Sh TE non 6 eect ndechss Hnckaheseestes cones 31

EE SEE nike buothocuw des 406 b6e0sseeecéeccade 28

8 Collier on Bankruptcy

Fineletter, The Law of Bankruptcy Reorganizations

CREED Ke scddnecncccicccccsssss etanbdesveuncceve 18

viii

No. 402

IN THE

Supreme Court of The United States

October Term, 1969

UNITED STATES OF AMERICA,

Petitioner,

v.

SHELDON A. KEY, Trustee,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SEVENTH CIRCUIT

BRIEF FOR THE RESPONDENT

OPINIONS BELOW

The order of the District Court for the Southern District

of Indiana confirming the plan of reorganization (R. 58-

63)' is not officially reported. The opinion of the United

1“R” references are to the separately bound record appendix.

1

2

States Court of Appeals for the Seventh Circuit (R. 74.

80) is reported at 407 F. 2d 635. It affirmed the ruling of

the District Court.

JURISDICTION

The judgment of the court of appeals was entered on

February 27, 1969 (R. 81). On May 20, 1969, Mr. Justice

Marshall extended the time for filing a petition for a writ

of certiorari to and imeluding July 27, 1969, a Sunday. The

petition for a writ of certiorari was filed on July 28, 1969

and was graated on October 20, 1969. The jurisdiction of

this Court is conferred by 28 U.S. C., Seetion 1254 (1).

QUESTION PRESENTED

Does the priority status of a tax claim of The United

States vest in the Secretary of the Treasury the authority

to defeat a plan of reorganization under Chapter X of the

Bankruptcy Act by rejecting the same even though pay-

ment of the claim has been provided for pursuant to

means authorized by Section 216(7) ?

STATUTES INVOLVED

The pertinent provisions of the Bankruptcy Act, as

amended, are Sections 199, 216, 221 and 236. The only

statute involved in addition to the Bankruptcy Act is

Revised Statute, Sec. 3466. The statutory provisions are

set forth at pages 45 to 47 of the appendix to the

Respondent’s brief.

STATEMENT

The trustee (Respondent) has no objection to the United

States’ (Petitioner) statement (pp. 2-4, Petitioner’s brief).

3

The trustee would elaborate on the government’s state-

ment of the case as follows:

When the debtor filed its voluntary petition in the Dis-

trict Court for a reorganization under Chapter X of the

Bankruptcy Act, on May 3, 1954, the debtor was a general

eommodity carrier operating by authorization of the Inter-

state Commerce Commission over a network of regular

routes bounded by the area included within a line ex-

tended between Milwaukee, Wis., St. Louis, Mo., Kahlo,

Ill, Louisville, Ky., Pittsburgh, Pa. and points within

forty miles thereof, Cleveland, Ohio, and Detroit, Mich.

The trustee filed his plan of reorganization on March

25, 1955, and the District Court approved the plan on

April 5, 1955. Subsequently, the trustee modified the plan

in 1956, and the plan as modified was approved on Oc-

tober 2, 1956, and confirmed on January 31, 1957. The

modified plan, as eonfirmed, provided for payment in

full or part of claims totalling in excess of $1,500,000,

including the claim of the United States for taxes totalling

$411,458.06. In brief, the plan provided for a transfer of

assets to the reorganized debtor to be recapitalized in

part through an underwriting agreement between the

debtor and a third party whereby the latter would under-

write $1 Million of the sale of new seeurities of the

corporation and guarantee the sale of assets up to

$250,000.

The United States was classified as a Class 4 creditor

under the 1956 plan and was to be paid 25% of its claim

in cash on the date of consummation and the balance of

said claim in four annual payments of 25% each, bearing

interest at 6% per annum. The plan also provided that

specified secured creditors in Classes 2 and 3 were to

receive interest at the rate of 6% from July 1, 1957, to

4

payment. Cash payment in full was to be made on all

wage claims, secured creditors, claims of governmental

agencies other than for taxes and real property taxes,

Other tax claimants, classified as Classes 5 and 6, re-

ceived the same terms of payment as did the United States,

Holders of freight and overcharge claims, on confirma-

tion of the plan, were given a choice between 25% of

their claim in cash or payment in full in the form of 5%

in cash and 19 promissory notes, each representing 5%

of the debt, to be paid over a period of time. The rights

of the shareholders of the debtor were adjusted under the

plan thereby permitting the shareholders to acquire shares

in the new corporation by redemption of old shares plus

cash. General unsecured creditors receiived a choice of

10% in cash of the face amount of their claims, on consum-

mation, or one-quarter share of new preferred stock for

each $100 in the principal amount of their claim.

The United States tendered a conditional acceptance of

the plan in writing setting forth several conditions, among

which was the condition that, through the District Di-

rector, it received the right under the order of confirma-

tion to declare the entire balance due and payable on any

default by the reorganized debtor in payment of its claim

and collect such amount due in the manner as provided for

in the Internal Revenue Code.

On January 31, 1957, the District Court confirmed the

plan of reorganization, providing therein inter alia (1) the

reservation of jurisdiction to enter orders from time to

time aiding in consummation of the plan; (2) finding the

debtor insolvent; (3) incorporating the conditions set forth

by the United States in its conditional acceptance; and

(4) directing the trustee to consummate the plan on or

before June 17, 1957.

5

The date of consummation of the plan was subsequently

extended, due to the complexity of financing agreements,

through June 1, 1958. On June 1, 1958, the property and

assets in possession of the trustee were vested in the re-

organized debtor corporation, and the cash and shares of

stock provided for under the plan were paid out as desig-

nated to the creditors involved therein.

On June 1, 1958, the reorganized debtor proceeded to

operate its business without supervision of the trustee or

reorganization court.

On December 6, 1961, the trustee filed his petition to

declare the plan of reorganization substantially consum-

mated and to direct a filing of his final report. At that

time all claims in the proceeding had been adjudicated.

The claim of the United States had been paid down

pursuant to the plan, to a balance of $181,563.33, inclusive

of principal and interest.

At or about the same time the reorganized debtor had

entered into negotiations with Hennis Freight Lines, Inc.

(hereinafter referred to as ‘‘Hennis’’), a general commo-

dity carrier doing business mainly between the southern

states and the New York, Philadelphia, and New Jersey in-

dustrial centers, for a sale of its certificate of convenience

and necessity issued by the Interstate Commerce Com-

mission. On February 15, 1962, an agreement of sale was

entered into between the parties providing for a sale of

the Hancock operating rights to Hennis for the sum of

$1 Million, inclusive of principal and interest, payable

$300,000 within 90 days of approval and the balance in

78 equal monthly installments. The contract also provided

in the event of cancellation of a portion of the Hancock

operating rights by the Interstate Commerce Commission

for a reduction in the purchase price in direct ratio to

6

the number of miles embraced in the cancelled rights.

Pending the approval of sale by the Interstate Commerce

Commission, Hennis agreed to lease the operating rights

pursuant to temporary authority for the sum of $2,000

per month.

On March 5, 1962, before hearing on the trustee’s pe-

tition was held, three creditors whose claims had arisen

subsequent to June 1, 1958, filed a petition praying: (1)

that the plan of reorganization be amended to provide

for payment of creditors whose obligations arose subse-

quent to the confirmation of the plan; and (2) that the

trustee be empowered to retake control and possession of

the debtor. The petition alleged inter alia the insolvency

of the reorganized debtor. On March 15, 1962, after due

hearing, the District Court entered its order revesting the

trustee with title to the property of the debtor and di-

recting the trustee to proceed as though Chapter X pro-

ceedings had commenced.

Among the claims filed with the trustee after he reas-

sumed possession of the property and assets of the debtor

was that of the government in the total sum of $380,419.01,

representing the balance due it under the plan confirmed

in 1958 totalling $181,563.33, together with new liabilities

incurred by the reorganized corporation, inclusive of prin-

cipal and interest, totalling $197,975.40. The claim has

since been reduced and allowed pursuant to stipulation

in the sum of $375,386.55 (R. 71-73).

Subsequent to the return of the assets and property to

the possession of the trustee, the District Court entered

its order on August 10, 1962, affirming the contract of sale

between Hennis and the debtor involving the sale of the

debtor’s interstate operating rights and authorizing the

trustee to take all steps necessary to consummate the sale.

T

The application under Section 5 of the Interstate Com-

merce Act was referred to a hearing examiner who sub-

mitted his report on August 15, 1964, recommending that

the sale transaction be approved providing, however, for a

modification imposing certain restrictions on shipments

originating from and destined to Detroit, Michigan.

The Interstate Commerce Commission issued its order

approving the hearing examiner’s report on March 11,

1965.

The trustee filed suit in the District Court to overrule

the Interstate Commerce Commission. The three-judge

court entered an order on January 12, 1967, sustaining

the Interstate Commerce Commission.

Thereafter, Hennis insisted on a reduction in sale price

pursuant to the terms of the contract. After extensive ne-

gotiations a modification of the original purchase agree-

ment was entered into.

The modification provided for a purchase price to be

paid by Hennis of $935,000 in lieu of the original $1

Million, payable as in the original agreement—$300,000

within 90 days of final approval and the balance of

$635,000 by a note secured by a chattel mortgage on the

operating rights payable in 78 equal monthly installments.

The trustee agreed to submit a plan providing for pay-

ment of all administration and priority claims in full,

without interest, and for settlement of all unsecured claims

for 20% of the amounts due. The purchase price was to

be further reduced by deducting therefrom any funds in

excess of the amounts needed to satisfy the plan.

The proceeds from the sale of the operating rights under

the modified agreement of sale, together with approxi-

mately $75,000 representing funds in the hands of the

8

trustee, formed the means of execution under the trustee’s

amended plan of reorganization as filed on June 23, 1967,

The amended plan of reorganization classified the United

States as a Class 2 creditor providing payment as fol-

lows:

‘*A. Creditors in Classes 2, 3, 4, and 5.

‘‘Holders of the following claims, ie. the United

States with respect to all claims against the debtor

inclusive of but not limited to taxes, The State of

Indiana, Gross Income Tax Division for taxes arising

under the Gross Income Tax Laws, The State of Indi-

ana, County of Vanderburgh for personal property

taxes and the State of Ohio, Department of Taxation

for Highway Use Taxes shall be satisfied by the pay-

ment to said creditors of ten per cent (10%) of the

amount of said claims, in cash, within six months

from the date of confirmation of this plan of re-

organization, and by the payment of the balance of

said indebtedness in full, exclusive of interest, in

seventy-eight equal monthly instalments, the first said

instalment to be paid within six months after con-

firmation of the plan. Said instalment payments

shall be secured by the assignment of note and chattel

mortgage as herein after more explicitly set forth in

the Means of Execution of this plan; and the rights

of the creditors in the afore-mentioned classes shall

be modified and altered accordingly.’’ (R. 65).

Article VIII of the amended plan of reorganization

provides security for the payment of the United States

and other tax claimants by providing that Hennis will

execute a note in an amount not to exceed $635,000,

reduced by the amount in excess of the sum necessary to

make the payments provided for under the plan.

The actual amount of the note has now been fixed in

the sum of $600,968.16, representing the total amount of

9

the claims of the four tax creditors less the 10% to be

paid on confirmation.2 This note will be secured by a

chattel mortgage on the operating rights. The aforemen-

tioned note and mortgage will be assigned by the debtor

to a banking institution approved by the court as trustee

for the benefit of the United States and the three other tax

claimants. Hennis will make the prorated monthly pay-

ments totalling approximately $7,700 directly to the

claimants rather than to the trustee.

In addition to providing for tax claimants and unse-

cured creditors, holders of claims for wages will be paid

in cash within six months and the claims of various states

for real and personal property taxes are to be paid within

six months from the date of confirmation. No provision

is made in the plan for stockholders, by reason of the in-

solvency of the debtor.

On September 7, 1967, the petition for approval of the

agreement modifying the 1962 contract for sale of the

debtor’s operating rights to Hennis and approval of the

amended plan of reorganization were brought on for hear-

ing simultaneously. The court, after hearing the trustee’s

witnesses, Jesse L. Phipps, Vice President of Hennis

(R. 29-34); Thomas W. Andrews, Vice President of

McLean Trucking Company, Webster Division (R. 34-36) ;

and Sheldon A. Key, trustee (R. 36-40) ; held that $935,000

Class 2, United States $375,386.55

Class 3, State of Indiana, Gross Income Tax $1,218.91

Class 4, State of Indiana, Vanderburgh Co. 76,650.55

Class 5, State of Ohio, Highway Use Tax 184,486.39

$667,742.40

Less 10% 66,774.24

$600,968.16

10

was a fair price for the debtor’s interstate operating

rights and approved the agreement, to-wit:

“ORDERED: That the modification agreement en-

tered into between Hennis Freight Lines, Inc. and

Sheldon A. Key, as trustee for Hancock Trucking,

Inc., for the reduction of the purchase price relating

to the sale of the interstate operating authority is

approved;...’’ (R. 41-42).

On December 19, 1967, the District Court entered its

order confirming the plan of reorganization, in part as

follows:

‘11. That the provisions of Article VII, Section 199,

and Article X of Chapter X of the said Act have

been complied with.

12. That the said plan is fair and equitable, and

feasible.

13. That adequate protection for the realization by

the creditors in classes (2), (3), (4), and (5) is pro-

vided by the plan by securing the payment of their

claims by an assignment of note and chattel mort-

gage on the operating rights to be transferred to

Hennis Freight Lines, Inc., and that such method

safeguards the interests of such creditors and equi-

tably and fairly provides the protection for the pay-

ment of the claims of said creditors.’’ (R. 62).

+ a &

‘17. That the debtor is insolvent.’’ (R. 62).

There is no provision in the plan for any class of creditor

to receive interest on its claim whatsoever.

SUMMARY OF ARGUMENT

Section 199 of the Bankruptcy Act outlines the priority

of the government’s tax claim in the Chapter X proceed-

ing and Sections 216(7) and 221 establish a standard of

11

payment of such claim under the plan of reorganization.

The purpose of Section 199 is to insure the United

States payment of all valid tax claims and claims for

customs duties allowed by the District Court in a Chapter

X proceeding whether the debtor is solvent or insolvent in

the bankruptey sense. This purpose is not inconsistent

with the purpose of Revised Statutes Section 3466.

The Respondent-Trustee has never challenged the right

of the United States to have its claim ranked as a pri-

ority claim and the right to have its claim paid as allowed

in the proceeding. Such is the full ‘‘bundle of rights’’

accorded the Sovereign under the doctrine of Case v. Los

Angeles Lumber Products Co., 308 U.S. 106 (1939) and

Consolidated Rock Products Co. v. Du Bois, 312 U.S.

510 (1940).

Since the plan provides for satisfaction of the foregoing

‘‘rights’’ of the United States, the rejection of the plan

by the Secretary of the Treasury cannot block confirma-

tion since there is no statutory directive to this effect.

Under the facts of this case, it is within the broad dis-

cretion afforded the court under Section 216(7) and

221(2) to treat the class of the United States’ claim as

any other class of non-assenting creditor and examine

the terms of the plan to determine if adequate protection

assuring satisfaction of all the United States’ rights is

provided therein. The District Court and the Court of

Appeals found that the plan protected the United States’

claim under Section 216(7). A fund is set aside for pay-

ment to the United States and no other creditor receives a

share of that fund prior to the United States. The con-

tinued existence of the fund is assured by a chattel

mortgage on property of the debtor valued in excess of

the balance of the government’s claim.

12

Neither the demand of the United States for exemption

from application of 216(7), nor its demand for immediate

cash payment is supported by any provision of the Bank.

ruptey Act.

Rather, traditionally, installment and postponed pay-

ments to creditors have long been accepted as proper to

facilitate reorganizations.

The alternative demand by the United States for interest

on postponed payments in a debtor relief proceeding is

clearly prohibited by the strong public policy against pay-

ment of post petition interest on claims of taxing author-

ities. City of New York v. Saper, 336 U. S. 328 (1948).

The United States has no legitimate complaint that the

provision in the plan for a payment to unsecured creditors

of a 20% dividend dilutes its rights, or that junior creditors

are receiving something of value at the expense of

senior creditors, for two reasons:

(1) The 20% dividend to unsecured creditors is a com-

promise of their claims under the plan, since these credit-

ors would receive larger percentages if the estate were

liquidated in straight bankruptcy. The District Court is

given broad discretion in approving such a compromise

and payment throughout the Chapter X proceeding. Case

v. Los Angeles Lumber Products, Co., supra.

(2) Payment to other creditors is not being made from

the fund set aside for the United States, hence, it does not

dilute the government’s share.

The facts in this case clearly establish that the District

Court did not abuse its discretion in confirming the plan,

nor did the Court of Appeals err in affirming the order of

the District Court. The plan is ‘‘fair, equitable and feas-

ible’’ in all respects.

ARGUMENT

THE PRIORITY STATUS OF THE UNITED

STATES GRANTED BY SECTION 199 IS NOT INCON-

SISTENT WITH NOR DOES IT EXCLUDE THE AP-

PLICATION OF THE PROVISIONS OF SECTION

216(7).

Section 199 (11 U.S.C., Sec. 599) of the Bankruptcy

Act provides that the Secretary of the Treasury may ac-

cept or reject a plan of reorganization. It further pro-

vides that no plan of reorganization shall be confirmed

which does not provide for the payment of all claims of

the United States except upon the acceptance by the Secre-

tary of the Treasury of a lesser sum.’

3 Sec. 199 of the Bankruptcy Act provides as follows:

“SEC. 199. If the "Jnited States is a secured or unsecured creditor

or stockholder of a acbtor, the claims or stock thereof shall be deemed

to be affected by a plan under this chapter, and the Secretary of the

Treasury is hereby authorized to accept or reject a plan in respect of

the claims or stock of the United States. If, in any proceeding under

this chapter, the United States is a secured or unsecured creditor on

claims for taxes or customs duties (whether or not the United States

has any other interest in, or claim against the debtor, as secured or

unsecured creditor or stockholder), no plan which does not provide for

the payment thereof shall be confirmed by the judge except upon the

acceptance of a lesser amount by the Secretary of the Treasury certified

to the court; Provided, That if the Secretary of the Treasury shall fail

to accept or reject a plan for more than ninety days after receipt of

written notice so to do from the court to which the plan has been pro-

posed, accompanied by a certified copy of the plan, his consent shall be

conclusively presumed.”

13

14

Revised Statutes Sec. 3466, 31 U.S.C. Sec. 191, provides

for the priority status of all debts due the United States

by an insolvent debtor.*

The Petitioner, United States, goes to great length in its

argument to review the historical background of the right

of the United States to priority. (Petitioner’s Brief, pp.

8-25), and to state in its brief:

‘*. . . that the United States is entitled to payment

first if it insists upon it.’’ (Petitioner’s Brief, p. 13).

The trustee has never contended that the United States

does not have priority, nor did the courts below. It is the

assertion of the Petitioner that §3466 overrides the clear

intention of Secs. 199, 216 and 221 of the Bankruptcy Act

with which Respondent trustee takes issue.

It is best clearly stated by the Court of Appeals in the

decision rendered below.

‘‘Within Chapter X, §§ 199, 216 and 221 are inter-

related statutes and part of a studied statutory plan.

Section 199 outlines the nature of the government’s

tax claim ‘‘priority’’, and two other sections estab-

lish an equitable standard to go’rern the method of

payment. If, as the government would have us hold,

§ 3466 creates an absolute right to first payment in

addition to full payment, there would be little need

for §§ 199, 216(7) and 221. These sections apply spe-

cifically to Chapter X proceedings and should control

4R.S. §3466: “Whenever any person indebted to the United States, is

insolvent, or whenever the estate of any deceased debtor, in the hands of

the executors or administrators, is insufficient to pay all debts due from

the deceased, the debts due to the United States shall be first satisfied;

and the priority established shall extend as well to cases in which a

debtor, not having sufficient property to pay all his debts, makes a

voluntary assignment thereof, or in which the estate and effects of an

absconding, concealed, or absent debtor are attached by process of law,

as to cases in which an act of bankruptcy is committed.”

15

over the more general and conflicting direction of

§ 3466,"’ (R. 79).

United States v. Anderson, 334 F.2d 111, 116 (CA-5,

1964), cert. denied, 379 U.S. 879 (1964), succinctly states

what the trustee views as the relationship between Section

199 and B.S. § 3466:

‘*Nor do we think that section 199 (quoted supra

in n.5) is inconsistent with B.S. § 3466. Section 199 is

applicable in the reorganization of solvent as well as

insolvent corporations. It requires the consent of the

Secretary of the Treasury to the confirmation of any

plan of reorganization which does not provide for

the payment of claims of the United States for taxes.

This provision first appeared in the Act of August 29,

1935, 49 Stat. 965, 966, which amended former Section

77B of the Bankruptcy Act to give a first priority to

tax claims of the United States. Its legislative history

shows that its purpose was to insure full payment of

taxes and customs claims in every reorganization pro-

ceeding, including those involving solvent corpora-

tions where B.S. § 3466 would not apply. See Senate

Report No. 1386, 74 Cong., 1st sess.’’ United States

v. Anderson, 334 F.2d 111, 116 (CA-5, 1964)

The trustee concedes that no plan can be confirmed with-

out acceptance by the Secretary of the Treasury if pay-

ment of a lesser amount due the United States is called

for. This does not apply in the instant case. The plan of

reorganization provides for payment of the entire claim

due the United States.

The trustee concedes that as a claimant the United States

must be classified in one or more separate classifications

in any plan of reorganization by reason of the fact that

Section 199 provides that if the United States is a creditor

it shall be deemed affected and thus provisions for the

acceptance by the Secretary of the Treasury are included.

16

The United States, however, insists that Section 199

places in the hands of the Secretary of the Treasury the

power to veto any plan. Under the plain and usual lan-

guage of the statute, the second proviso of Section 199;

ie., the Secretary of the Treasury may veto the plan, ap-

plies if and only if the first proviso providing for pay-

ment is not met.

The meaning of Section 199 is clear that if the govern-

ment receives payment under the plan it has no right to

block confirmation of the plan. To read the statute as pro-

viding the government with a right to payment and a right

to veto the plan is to reach an absurd result. No creditor

can expect more than full payment under a plan; once he

is so provided, he has no standing to veto the plan. The

alternative as hereto alluded is to give the government the

ability of throwing corporations deliberately into bank-

ruptey at will through § 236 of the Act should the plan not

please the Secretary of the Treasury’s office, regardless

if it provides payment or not and on whatever terms.

The objective of this proceeding to reorganize a corporation

is not that the major part of the assets go to one or two

tax creditors and that the remaining creditors get nothing

or very little.

In these instances the over-all public interest, i.e., in-

terests of other creditors, can only be interpreted as being

endangered by the pressure of the Sovereign for an un-

warranted share of the available assets. The same danger

to the public good is presented by the government’s

position in the case at bar.

‘‘Whether or not the business could be forced into

liquidation, rather than reorganized, is thus a matter

of complete indifference to the government... .’’ (Pe-

titioner’s brief p. 38).

17

Such a stand can only be termed one made in total disre-

gard for the legislative history of Chapter X and its

forerunner §77B and the statutory purpose of this amend-

ment to the Bankruptcy Act. As documented in the Pe-

titioner’s brief on pages eight through eleven, R. S. $3466

has stood for since 1797 to assure the United States its

share of the estate on liquidation of the assets of an in-

solvent person. R. S. § 3466 has been held to apply to all

indebtedness due the United States by an insolvent debtor

unless inconsistent with another federal statute also ap-

plicable to the interest of the United States. United States

v. Emory, 314 U. S. 423, 433 (1941).

The purpose of R. S. § 3466 is to assure payment to the

United States from estates of insolvent debtors. The pur-

pose of Chapter X, as has long been recognized by this

Court, is not to liquidate an insolvent debtor but rather

to rehabilitate a corporate debtor in failing circumstances

into a solvent entity. See, Fidelity Assurance Assoc. v.

Sims, 318 U.S. 608, 617-622 (1943); 6 Collier, Bankruptcy

para. 0.11, 116-119 (rev.ed. 1969); H.R. Rep. No. 194, 73d

Cong. 1st Sess. 1-4 (1933).

The Respondent has no quarrel with the facts set forth

in the ‘‘legislative history’’ portion of the Petitioner’s

brief (pp. 8-28) only with the opinions interjected therein

and the conclusions drawn therefrom. The Petitioner cor-

rectly relates that the case law of federal equity receiver-

ship proceedings, which performed the function of enabling

corporations to be reorganized prior to the §77B amend-

ment, recognized priority to be given claims of the United

States under R. S. § 3466 prior to unsecured creditors but

behind costs of administration, wage claims and lien credi-

tors. Blair, The Priority of the United States in Equity

Receiverships, 39 Harv. L. Rev. 1 (1925).

18

Moreover, the Congress of the United States had no in-

tention of destroying the priority of the United States’

claims for taxes or customs duties and amended the act

in 1935 to so specifically provide. 79 Cong. Rec., pt. 18,

14101, 14658 (August, 1935).

Contrary to the Petitioner’s interpretation of history

however, Chapter X was not the child of the equity re-

ceivership proceeding but rather a cure for its ills. Du-

parquet Huot & Moneuse Co. v. Evans, 297 U. 8S. 216,

218-219 (1936).

It was the intention of the legislature in propounding

the corporate reorganization emergency legislature to al-

leviate as much as possible one of the major defects in

the equity receivership proceeding—among others—the

inability to deal with dissenting creditors. Under the

equity receivership proceeding dissenting creditors had

to be paid a pro rata portion of the debtor’s assets.

This payment had to be made by the new corporation

and accomplished a drain on operating capital. See, Fin-

letter, The Law of Bankruptcy Reorganization, 17-19

1939); 6 Collier, Bankruptcy, para. 0.05, 61-68 (rev.ed.

1969). In a bankruptcy proceeding the dissenting creditors

and stockholders could be bound by the terms of the plan

regardless of their rights under the ‘‘obligation of con-

tracts’’ and ‘‘due process’’ clauses of the Constitution.

Canada So. R. R. Co. v. Gebhard, 109 U. S. 527, 537-538

(1883) ; Campbell v. Alleghany Corp. 75 F. 2d 947, 952-955

(CA-4, 1935), cert. dented, 296 U. S. 581 (1935). The policy

of scaling down claims and binding dissenting minority

creditors of all classes was reported to both houses by the

Committees on the Judiciary in H. R. Rep. No. 194, supra

at p. 3 and S. Rep. No. 482, 73rd Cong., 2d Sess. 5 (1934),

to-wit:

19

‘‘The plan of reorganization shall include provisions

modifying or altering the rights of creditors generally

or any class of them, secured or unsecared, through

the issuance of new securities of any character or

otherwise. It may include provisions modifying or

altering the rights of stockholders generally or any

class of them, through the issuance of new securities

of any character or otherwise.’’ (emphasis, added).

The Act as drafted and passed gave effect to the desires

of the Committees on the Judiciary to deal with dissent-

ing creditors through 77B (e) (1) which provided for the

necessity of approval of a plan by only two-thirds of the

class and §77B (b) (5) which provided for treatment of

dissenting classes in the same terms as present §§179 and

216(7). There was no provision in §77B which preven

the application of §77B (b) (5) to the United States it it

should reject a plan. Nor, is there any provision in Chapter

X which excludes the United States from the application

of §216 (7).

The United States contends throughout its brief that

priority means payment in cash at the time of confirma-

tion or in the alternative, interest on the deferred install-

ments. The trustee’s position is that neither of these pro-

visions is necessary to satisfy ‘‘payment’’ under Section

199 if adequate protection for the realization of the value

of the claim of the United States against the property

dealt with by the plan has been provided pursuant to

Section 216(7), 11 U.S.C., Sec. 616(7). Nowhere in its

brief has Petitioner faced up to Section 216(7) of the

Bankruptcy Act, which provides as follows:

‘“‘“SEC. 216. A plan of reorganization under this

chapter—

20

‘*(7) shall provide for any class of creditors which

is affected by and does not accept the plan by the

two-thirds majority in amount required under this

chapter, adequate protection for the realization by

them of the value of their claims against the property

dealt with by the plan and affected by such claims,

either as provided in the plan or in the order con-

firming the plan, (a) by the transfer or sale, or by

the retention by the debtor, of such property subject

to such claims; or (b) by a sale of such property free

of such claims, at not less than a fair upset price,

and the transfer of such claims to the proceeds of

such sale; or (c) by appraisal and payment in cash

of the value of such claims; or (d) by such method

as will, under and consistent with the circumstances

of the particular case, equitably and fairly provide

such protection ;’’

Thus, the basic problem is whether or not a conflict

exists between Sections 199 and 216(7). The United States

refuses to face this issue squarely and head-on. Inferenti-

ally, however, the point is raised by the United States, in

asserting that by priority it is meant that all claims of

the United States must be paid in cash before any other

creditors receive any distribution.

The trustee is of the view that payment is equivalent to

satisfaction which is consistent with the provisions for pro-

viding adequate protection for dissenting creditors pursu-

ant to one or more of the means set forth in Section 216(7).

The United States Cannot Demand Cash Payment On

Confirmation of the Plan

Chapter X is silent on the method of payment to be

accorded creditors, but it appears from a reading of the

statute as a whole and a review of the case law that no

creditor, secured or unsecured, including the United States,

21

can demand cash payment on the date of confirmation or

any other date, should the court approve a plan providing

payment by another method.5

As a practical matter plans are often based on pay-

ment of creditors through cash flow from the debtor’s

rehabilitated business itself. Accumulation of sufficient in-

come to satisfy claims often takes a period of time after

confirmation of the plan. This period is determined by

the plan, not by the creditors’ demands. See, In re Gibson

Hotels, 24 F. Supp. 859, 865 (S.D. W. Va., 1938) ; See also,

Bernhardt, Government Priority for Repayment of Monies

Advanced To Contractors, 20 J. Nat’l. Assn. of Ref., 35,

41 (1946).

Chapter X is silent in regard to the payment method

of all claimants, including the tax claimant, thereby indi-

eating that payment may be made by any method which

is considered by the court to be ‘‘fair and equitable and

feasible,’’ under Section 221(2), 11 U.S.C., See. 621(2),

of the Bankruptcy Act. Other chapters of the Act pro-

vide specifically that the government shall be paid in cash.

In an ordinary bankruptcy proceeding under Section 64(a)

(4), 11 U.S.C. See. 104(a)(4), it is specifically provided

that the United States’ claim for taxes shall have priority

in advance of payment of dividends. Section 65(b), 11

U.S.C., See. 105(b), provides for payment of dividends

only if the money in the estate is in excess of the amount

necessary to pay priority debts. This can only contem-

plate cash after liquidation of the estate. Section 337(2)

of Chapter XI, 11 U.S.C., Sec. 737(2), provides that the

56A Collier, Bankruptcy, para. 10.05, 431 (rev. ed. 1969) postulates

that the court may even provide for payment of costs of administration

in part in securities. See also, In re Parker Young Co., 15 F. Supp. 965,

971 (D.C. N.H., 1936).

debtor shall deposit sufficient funds to pay priority credi-

tors before he can proceed with any plan of arrangement.

Section 64 of the Bankruptcy Act is held applicable to

Section 337(2) as explained in 8 Collier, Bankruptcy, para.

5.33, 703-704, as follows:

‘The debts given priority by clause (4) of §64a

consist of nondischargeable taxes legally due and

owing by the debtor to the United States or any state

or any subdivision thereof. All the provisions of §64a

(4) are applicable to Chapter XI proceedings, and the

taxes therein specified therefore have priority in

Chapter XI cases, and the debtor must deposit the

money necessary to pay those taxes. The taxes which

come within the priority conferred by §64a(4) are com-

pletely discussed in Volume 3, and that discussion is

applicable to Chapter XI proceedings.”’

In contrast, Section 102, 11 U.S.C., Sec. 502, specifically

provides that Section 64 shall not apply in Chapter X pro-

ceedings.

The government’s right to payment in cash was touched

on in the opinion of the District Court for the Southern

District of New York in In re Huyler’s, 107 F. Supp. 318

(1952), aff’d. sub. nom., State of New York v. Fewnberg,

204 F. 2d 502 (CA-2, 1953). In that case the New York court

approved a plan of reorganization involving an insolvent

corporation under which the United States and other tax

claimants received in satisfaction of their claims, subordi-

nated debenture bonds bearing interest at 6%. The Dis-

trict of Columbia objected to the payment of its claim in

the form of debentures and asserted its right to payment

in cash. The court noted that the District of Columbia had

no such right to cash payment, and in so holding said that

the District of Columbia could assert no greater rights

ase

than those of the United States, which were paid in like

manner.

‘‘The Collector of Taxes for the District of Colum-

| bia objects to the plan to the extent that it will have

| ‘to accept other than money’ as payment for taxes

‘

due it. There is no legal merit to this objection. By

virtue of the August 20 amendment to the plan neither

this nor any other taxing authority will have to accept

anything other than money as payment for the taxes

due. The new form of subordinated debenture is in

essence a method of postponing the full payment in

7 money due, and during the period of postponement

4 interest would be payable at the rate of 6 per cent.

The distraint powers of all taxing authorities may be

7 used in the event of a default under the subordinated

| debentures. The implicit assumption of this objection

is that Congress, which enacted the District of Co-

lumbia Revenue Act, D.C. Code 1951, $47-101 et seq,,

intended a departure with respect to District of Co-

lumbia taxes from the policy which the Congress has

q embodied in the Bankruptcy Act. The assumption that

the District of Columbia taxes are entitled to special

treatment not accorded to taxes owing to the United

States Treasury is completely unwarranted. In this

connection it is interesting to note that the Treasury

has filed no objection to its treatment under the

plan.’? In re Huyler’s, 107 F. Supp. 318, 323 (8.D.

N.Y., 1952).

It should also be noted in this regard that bondholders

_ asserted their rights to cash in In re Radio Ketth-Orpheum

4 Corp., 106 F.2d 22 (CA-2, 1939), cert. denied, 308 U.S. 622

(1940), and the court held that the plan was not unfair as

to these creditors because it did not provide for payment

in cash.

Installment payments and postponed payments have long

been accepted as a portion of workable plans to facilitate

reorganizations prior to the existence of Chapter X or

es.

even its forerunner, Section 77B. In re Reiman, 20 Fed.

Cas. No. 11,673 (S.D. N.Y., 1874) aff’d., 20 Fed. Cas. No.

11,675 (S.D. N.Y., 1875) ; In re Kinmnane Co., 221 Fed. 762,

766 (S.D. Ohio, 1915). See also, Note, 51 Harv. L. Rev.

1408, 1414-1415 (1938).

24

In the absence of specific provisions relating to the |

method of payment, the United States has no right to be

treated in any different fashion than other claimants. See, __

City of New York v. Saper, 336 U.S. 328 (1948). In addi- |

tion, the reorganization court has the authority to hear |

set offs and objections to the claim and accordingly ex- |

punge or scale down the tax claim, depending upon the

facts surrounding the particular case. Lyford v. City of

New York, 137 F.2d 782 (CA-2, 1943); In re Pittsburgh

Railways Co., 253 F.2d 654 (CA-3, 1958) ; In re 168 Adams

Bldg. Corp., 105 F. 2d 704 (CA-7, 1939), cert. denied, 308

U.S. 623, (1940).

In summary, therefore, even under a strict interpre-

tation of rights accorded the United States by reason of

its claim to priority, these rights do not encompass the

right to cash payment on the date of confirmation.®

er

The Government Has No Right to Interest

On a Tax Claim From the Date of the Filing

Of a Petition Under Chapter X

The Petitioner points out quite correctly, on page 27 of

its brief, that the United States is not entitled to post-

petition interest from the debtor’s estate in a Chapter X

6 As a practical matter, if the plan is repudiated and the estate is

liquidated under Chapters I - VII of the Act, the United States would

have no statutory authority to demand payment under § 64a until such

time as the trustee collected all the assets of the estate. 3A Collier,

Bankruptcy, para. 65.02, 2285.

25

proceeding. United States v. Edens, 189 F.2d 876 (CA-2,

1951), aff’d per curiam, 342 U.S. 912 (1952).

What the United States neglects to point out is the

strong public policy in existence behind the rule disallow-

ing the United States interest on its tax claim in a bank-

ruptey proceeding, be it straight bankruptcy, Chapter X

or Chapter XI. City of New York v. Saper, 336 U.S. 328

(1948) ; United States v. General Engr. & Mfg. Co., 188

F.2d 80 (CA-8, 1951), aff’d per curiam, 342 U.S. 912

(1952).

The leading case laying down the rule in this regard

as it originally applied to straight bankruptcy cases is the

opinion of the court by Justice Jackson in City of New

York v. Saper, supra, in which the ratio decedendi is stated

as follows:

‘*More than forty years ago Mr. Justice Holmes

wrote for this court that the rule stopping interest at

bankruptcy had then been followed for more than a

century and a half. He said the rule was not a matter

of legislative command or statutory construction but,

rather, a fundamental principle of the English bank-

ruptcy system which we copied. Sexton v. Dreyfus,

219 US 339, 344, 55 L ed 244, 245, 31 S Ct 256, 25

Am Bankr 363. Our present statute contains no pro-

vision expressly repudiating that principle or allow-

ing an exception in favor of tax claims. Every logical

implication from relevant provisions is to the con-

trary. Section 63(a) (1), 11 USCA §103(a) (5),3 FCA

title 11, §103(a) (5) allows interest only to that date

on debts reduced to judgment after bankruptcy. No

provision permits post-bankruptcy interest on other

claims in general or tax claims in particular. Section

57(j), 11 USCA 4§93(j), 3 FAC title 11, §93(j) for-

bidding allowance of governmental penalties or for-

feitures, permits allowance of losses sustained by the

acts penalized, with actual costs and ‘such interest

as may have accrued thereon aceording to law.’ How-

ever, on its face this appears to delimit even such

allowable debts as of the date of bankruptcy and to

allow no more interest than does 463 with respect to

the claims there specified.

Moreover, there is no interest except that which

acerues according to law—it is exactly such interest

that the ‘fundamental principle’ cuts off as of bank.

ruptey. Section 57(n), 11 USCA §93(n), 3 FCA title

11, §93(n), requires governmental claims to be proved

in the same manner and within the same time as other |

debts and only for cause shown may a reasonable

extention be granted. Tax claims are treated the same

as other debts except for the fourth priority of pay-

ments, §64(a), 11 USCA 104(a), 3 FCA title 11, $104

(a), and the provision making taxes nondischargeable,

$17, 11 USCA §35, 3 FCA title 11, §35. But each of

these sections is silent as to interest.

The long-standing rule against post-bankruptcy in-

terest thus appears implicit in our current Bankruptcy

Act. To read into such a statute an exception to that

rule would be unwarranted and, as an original propo-

sition, we should decline to do so.’’ City of New York

v. Saper, 336 U.S. 328, 330-332 (1948).

In extending the rule to Chapter X in the case of Umited

States v. Edens, supra, the Second Circuit Court of Ap-

peals pointed out that the United States should not be

permitted interest on its tax claims, since this would be a

harsh penalty to be borne by other creditors and an undue

benefit to the United States just because the proceeding

is so long and protracted.

‘‘The equitable considerations which justify deny-

ing post bankruptcy interest on tax claims in the case

of reorganization proceedings are quite as strong as

for denying it in straight bankruptcy proceedings.

The real reason in either case is that the delay re-

sulting from the institution of the proceeding should

not be permitted to benefit one class of creditors at

the expense of another, but that the rights of all should

be determined as of the commencement of the proceed-

ing. It is easy to see that post bankruptcy interest

on tax claims in ordinary bankruptcy comes out of

assets to which other creditors would be entitled.’’

United States v. Edens, 189 F.2d 876, 877 (CA-2,

1951), aff’d per curiam, 342 U.S. 912 (1952).

Never was the reasoning in a case so pointedly appli-

cable to another case as the reasoning in the Edens case,

| supra, is to the case at bar. If the United States were per-

' mitted interest on its claim from the date of confirmation

to the date of full payment, the unsecured creditors would

receive nothing. They, like the creditors in the Edens case,

{had no control over the period over which the administra-

tion of the estate runs; therefore, they should not be

penalized by reason of a long, protracted court proceed-

ing. No countenance will be given such a penalty by a

court of equity.

It should be understood that interest on all of the claims

of the United States has been computed and allowed to

March 3, 1962, the date viewed as the commencement of

the proceedings. See, Clinton Trust Co. v. John H. Elliott

Leather Co., 132 F. 2d 299 (CA-2, 1942).

The general principle applying to post-petition interest

is well stated by Judge Kaufman of the Southern District

of New York in In re Huyler’s 107 F. Supp. 318, 324

(1952).

i pwn a ‘+

‘*The face amount of the claims of the taxing au-

thorities includes interest only to the day of the filing

of the reorganization petition and not for the period

in which the bankruptcy is proceeding and the estab-

lished practice will be followed here.’’ (emphasis

added).

28

The rule disallowing the United States post-petition in-

terest bars this interest through the proceeding, which

would include the period between confirmation of the plan

and consummation of the plan. This period is but a step in

the administration of the debtor’s estate. See, 6A Collier,

Bankruptcy, para. 11.13, 666-667.

Public policy is so strong against permitting the United

States to collect post-bankruptcy interest, directly or in-

directly, that the bankruptcy court has been called on

more than once since 1956 to correct the efforts of the

United States to collect postbankruptcy interest on its

claim after completion of the proceedings. Various in-

genious methods have been conceived by District Di-

rectors in an attempt to recover that interest, but all have

been thwarted by the bankruptcy court. See, National

Foundry Co. of New York v. Dir. of Int. Rev., 229 F. 2d

149 (CA-5, 1956).

In setting forth this rule disallowing post-petition in-

terest, to which there are no exceptions it would appear

the Supreme Court in the Saper case, supra, the Edens case,

supra, and the United States v. General Engrs. € Mfg.

Co. case, supra, was attempting to protect junior creditors

in bankruptcy proceedings from receiving less than they

would otherwise receive if interest on the United States’

normally enormous claims was permitted. It is submitted

that sometimes, in insolvency situations, the United States

may be permitted to receive interest on its claim. The

interest thus provided is by agreement between the parties

or for the reason that some other class of creditor is af-

forded interest under the plan. No class of creditors is

given interest under the plan at bar.

29

THE PRIORITY RIGHTS OF THE UNITED

STATES ARE AFFORDED “FAIR AND

EQUITABLE TREATMENT” UNDER THE 80-

CALLED ABSOLUTE PRIORITY RULE

The rights of the United States to payment under the

plan are afforded due protection under the absolute pri-

ority rule as incorporated in Chapter X through the ‘‘fair

and equitable’’ provisions of Sections 216(7) and 221(2).

The United States argues that the plan as promulgated

does not satisfy the absolute priority rule.

The Petitioner’s presentation on the so-called absolute

priority rule most vividly points out the gross inconsis-

tency running through the government’s case. On the one

hand the United States takes the position that one stand-

ard of priorities should apply to plans of reorganization

of ‘‘solvent’’ debtors (§199) and a second to insolvent

debtors (R. S. §3466). On the other hand the Petitioner’s

position is that portions of Respondent’s plan violate the

absolute priority rule which traditionally deals with in-

terest of creditors vs. stockholders and creditor vs. credi-

tor in the new reorganized corporation whose assets are

to be valued on the basis of a ‘‘going concern.’

In this regard the Petitioner argues pertinaciously :

‘*Kach class of claims must be satisfied in full for the

rights surrendered, in descending order, before the

next junior class may properly be paid in the distribu-

tion. If junior creditors receive something of value

at the expense of the senior creditors, the plan is not

fair and equitable but ‘comes within judicial denuncia-

tion’.’’ (Petitioner’s brief, p. 29).

7 See, Gilchrist, Fair and Equitable Plan of Reorganization: A Clearer

Concept, 26 Cornell L Q. 592 (1941) Cf. Northern Pacific Railway Com-

pany v. Boyd, 228 U.S. 482 (1913); Case v. Los Angeles Lumber Products

Co., 308 U.S. 106, 130 (1939) rehearing denied 308 U.S. 687 (1939)

‘‘The present plan calls for such denunciation since

it provides junior creditors with immediate, partial

payment of their claims at the cost of requiring the

government to accept delayed (and therefore dis-

counted) payment of its claims and to bear the risk

me installment purchase contract will fail.’’ (id.

Pp.

‘‘By requiring the government to accept installment

payments, without interest, over a period of 78

months, the court has allotted it substantially less

value than it would receive if it shared in the down-

payment funds to the extent its priority suggests, or |

even equally with the other creditors. As senior —

creditor, it cannot be required to forego part of its

rights, the right to be paid out of the first available

funds, at least without receiving equivalent compen- |

sation in return.’ (td. p. 37). |

The trustee agrees that the United States has a right to

payment of the face amount of its claim in full. In order te

violate the absolute priority rule, the Petitioner must be

found to have surrendered this right under the plan with-

out compensation for the right so surrendered. Case v. Los

Angeles Lumber Products Co., 308 U.S. 106 (1939) ; Con

solidated Rock Products Co. v. Du Bois, 312 US. 510

(1940) ; Marine Harbor Properties, Inc. v. Manufacturers

Trust Co., 317 U.S. 78 (1942). The plan at bar preserves

the right of the Petitioner to receive payment in full and

requires it to surrender no right it is legally entitled to.

‘‘Under the absolute priority rule, a plan is not ‘fair

and equitable’ unless it provides participation for

claims and interests in complete recognition of their

strict priorities, and unless the value of the debtor’s

assets supports the extent of the participation afforded

each class of claims or interests included in the plan.

Any arrangement by which a junior class receives

values allocable to a senior class ‘comes within judi-

cial denunciation.’ Beginning with the topmost class

31

of claims against the debtor, each class in descending

rank must receive full and complete compensation for

the rights surrendered before the next class below

may properly participate. Thus the principle is applied

as between senior or junior secured creditors, between

secured creditors and unsecured creditors, between un-

secured creditors and stockholders, between different

classes of stockholders, and, of course, between se-

cured creditors as a whole and stockholders.’’ 6A Col-

lier, Bankruptcy, para. 11.06, 613-617.

There is no provision in Chapter X which provides that

the Petitioner must receive first proceeds coming into the

estate. In fact, there are no provisions in any part of the

Act that so provide, whether the proceedings be straight

bankruptcy or Chapter XI, provided a fund is set aside

to pay priority claims. See, Section 64, Section 337(2),

Bankruptcy Act, 11 U.S.C., Sec. 104; 11 U.8.C., Sec. 737(2).

In the case at bar a fund has been set aside to pay the

priority claims; as the estate receives payment, the United

States receives payment. There is no other creditor being

paid out of that portion of the fund designated to go to

the United States before it is paid.

The United States contends that the payment to unse-

cured creditors is at the expense of a senior class, i.e., the

United States—the contrary is true. It is the junior class

which is giving up rights.

The plan is actually a plan of liquidation. It is not dif-

ferent in effect than the plan considered in In re Capitol

Foundry Corp., 83 F. Supp. 413 (E.D. N. Y., 1949), wherein

the court determined the plan to be fair, equitable and

feasible, which did not provide for interest on the claims

of the United States even though general creditors received

cash dividends under the plan.

32

The modified contract of sale indicates that the original

$1 Million to be paid by Hennis to the debtor for its oper-

ating rights has now been set at $935,000, to be paid over

a six and one-half year period.

If the funds were collected by the trustee and distributed

in order of bankruptcy priority (assuming an adjudication

under §236 and application of Section 64), and if distri-

bution were ordered as funds received, the United States

and other tax claimants would not receive their full prin-

cipal amounts until four and one-half years later.®

The general unsecured creditors would thereafter re-

ceive a dividend of approximately 26-32%, dependent upon

8 The calculation is based on cash in the hands of the trustee of $75,-

000; payments made by Hennis under the contract to purchase operating

rights of $300,000 within 90 days and the balance of $635,000 in 78

monthly installments; and costs of administration of $90,000 maximum:

Total funds in the estate:

Procured from sale of operating rights $ 935,000

Cash in hands of trustee 75,000

Total $1,010,000

First distribution — 90 days:

(a) Funds available

Received from Hennis within 90 days $ 300,000

Funds in hands of trustee 75,000

$ 375,000

Less administrative expenses (90,000)

Available for distribution: $ 285,000

(b) Priority claims

64(a)(1) Wages $ 14,872.44

64(a)(5) Taxes 682,063.14

696,935.58

(c) Remaining Tax claims after 1st distr. $ 411,935

(d) Monthly payments from Hennis $8,141.00

Accumulated after 6 months — 48,846.00

Second distribution—6 months after bankruptcy 48,846.00

$ 363,089.00

Subsequent distributions—6 month intervals of $48,846

each (total of 8) 390,768.00

Balance accrued for general creditors $ 27,679.00

33

the final costs of administration. Thus, the general cred-

itors have agreed to scale down their equity from 26-32%

to 20%.°

Nothing has been taken from the United States. It re-

ceives at the same time as the unsecured creditors receive

their dividends the full value of its claim in the form of an

assignment of note executed by the purchaser of the oper-

ating rights and secured by a chattel mortgage on prop-

erty whose value is far in excess of its claim with provi-

sions for payment in a manner consistent with which it

would be paid in liquidation in straight bankruptcy.

Moreover, it is within the power of the trustee to com-

promise and pay claims during the proceedings or in the

plan of reorganization. In Case v. Los Angeles Lumber

Products Co., supra, the Supreme Court pointed out that

compromise and settlement of claims is not only an al-

lowable procedure in reorganization cases, but is often a

sensible and desirable course to pursue. A compromise

may be effected separately during the proceedings or in

the body of the reorganization plan itself. In re Para-

mount Publix Corp., 7 F. Supp. 988 (S.D. N.Y., 1934) ;

In re Kalamazoo Bldg. Co., 21 F. Supp. 852 (W.D. Mich.,

1937) ; In re Chicago Rapid Transit, 196 F. 2d 484 (CA-7,

9 Assuming administration expenses of $90,000 after payment of

priority creditors explained in fn 8, supra, $223,065 would remain

for payment to general creditors whose claims total $842,640.75. A

dividend of 26% would therefore be paid.

Total assets in the estate $1,010,000.00

Less costs of administration (90,000.00)

$ 920,000.00

Less total priority claims 696,935.00

Available for general creditors $ 223,065.00

As the costs of administration are decreased, the dividend to general

creditors increases proportionately. If costs of administration are $40,-

000, the dividend would be 32%. The general creditors would have to

wait 6% years for full payment of their dividends.

34

1952); In re Associated Gas & Elec. Co., 149 F. 2d 996

(CA-2, 1945), cert. denied, 326 U.S. 736 (1945). The agree-

ment in the plan to pay general unsecured creditors 20%

of their claims ia a compromise with that class, since as

pointed out above, if the estate were liquidated, in all

probability these creditors would receive 26-32% of their

claims. The trustee had the power to effect a settlement

of these claims at any point in the proceedings prior to

submission of the plan, or in the plan itself. Such com-

promise, if found in the best interests of the estate, must

be approved by the District Court. Approval involves the

exercise of judicial discretion and will not be disturbed

on appeal except for abuse.

In attacking the plan by asserting that it violates the

absolute priority rule, the United States omits to explain

fully that such rule is one of equity administered by a

court of equity. See generally, Bank of Marin v. England

385 U.S. 99 (1966).

The rule is a flexible one for two reasons: (1) the re-

organization court.has a duty to protect all creditors re-

gardless of priority, In re Atlas Pipeline Corp., 39 F.

Supp. 846 (W.D. La., 1941); and (2) its application de-

pends on the facts of the case, Consolidated Rock Products

v. Du Bois:

‘*Practical adjustments, rather than a rigid form-

ula, are necessary. The method of effecting full ¢om-

pensation for senior claimants will vary from case to

case.’’ Consolidated Rock Products Co. v. Du Bois,

312 U.S. 510, 529 (1940).

Collier defines the flexibility which the principle has

gained through application as follows:

‘*But even this ‘fixed principle,’ like other matters

of classification, is subject to the doctrine that the re-

35

organization court, acting as a court of equity and to

prevent injustice, unjust enrichment or the like, may

subordinate or postpone or separately classify for dif-

ferent treatment particular claims of a certain group,

or subordinate a certain class or classes that would

not otherwise be prior, on the basis of equitable con-

siderations invoked by the facts present.’’ 6A Collier,

Bankruptcy, para. 9.10, 214-215.

See also; In re Peyton Realty Co., 18 F. Supp. 822

(E.D. Pa., 1936); Downtown Inv. Ass’n v. Boston

Metro Bldg., 81 F.2d 314, 323 (CA-1, 1936); In re

Central Forging Co., 38 F. Supp. 18 (M.D. Pa., 1941).

Almost without exception the cases dealing with legiti-

mate complaint of violations of the absolute priority rule

under Chapter X involve situations where secured credi-

tors who have rights by contract find these rights flag-

rantly violated in that interest rates on bonds and notes

are reduced under the plan, and the terms for maturity

of these obligations are extended, while junior creditors

and stockholders receive some compensation which prop-

erly belongs to the senior creditor by contract. In addition

to the cases cited by the United States, which involve

bondholders under Chapter X, a bondholder under the rail-

road reorganization provision of the Bankruptcy Act, and

a stockholder under Chapter X, to-wit: Consolidated Rock

Products Co. v. Du Bois, supra; Group of Institutional

Investors v. Milwaukee Railroad Co., 318 U.S. 523 (1943) ;

Petition of Portland Electric Power Co., 162 F. 2d 618

(CA-9, 1947), cert. dented, 332 U.S. 837 (1947), Fhe follow-

ing examples of flagrant violations of the rule are given:

Where a group of nonassenting bondholders were af-

forded a reduction of interest paid on their bonds

under the plan and extension of the maturity date of

the bond, coupled with reduction of the principal

amount of the bonded indebtedness of some $26,000.

36

Francisco Bldg. Corp. v. Batson, 83 F.2d 93 (CA-9,

1936).

Where the class of non-assenting bondholders were

asked to give up interest under the bond and assent

to a seven-year extension of the maturity of said

bonded indebtedness. In re Lorrain Castle Apart-

ments Bldg. Corp., 149 F.2d 55 (CA-7, 1945), cert.

denied, 326 U.S. 728 (1945).

Where a plan of reorganization provided that first

mortgage bonds be reduced by one-half of their princi-

pal amount and that equity thereby created be rep-

resented by issuance of new preferred and common

stock to be shared by general creditors and present

shareholders coupled with a provision for elimination

of past-due interest on the bonds. Day, Meyer, Murry

and Young, 93 F.2d 657 (CA-2, 1938).

See also, In re Wilton Realty Corp., 30 F. Supp. 486

(E.D. Mich., 1938), aff’d per curtam, 106 F.2d 1022

(CA-6, 1938), cert. denied, sub. nom., Wilton Realty

Corp. v. Weadock, 308 U.S. 626 (1940).

It is illustrated from the above-cited cases that the plans

which have met destruction on the rock of the absolute

priority clause have, without exception, involved a de-

crease in the payment which the senior creditor involved

had a right to by reason of his contract with the debtor.

The United States asserts that the failure to pay the

government its full claim in a shorter period does not result

from a shortage of funds and that accordingly it is en-

titled to receive equivalent compensation in the form of

interest for the delay imposed. (Petitioners brief, p. 27)

As heretofore indicated, funds would not be available

to satisfy the claims of the government for more than four

and one-half years (Fn. 8). Thus, the interest which the

United States should be entitled to for equivalent com-

37

pensation, if at all, should amount to no more than

$6,492.00.'°

But no interest at any rate is being paid to other classes

of creditors, including other tax claimants who would share

an equal priority in straight bankruptcy. An analogous

situation is found in State of New York v. Feinberg, 204

F.2d 502 (CA-2, 1953). The State of New York contended

it was entitled to 9% interest on the debentures given to

satisfy its claim, as the statutory rate to which it was

entitled, and thus required to assure it equivalent com-

pensation under the absolute priority rule. The Court in

overruling the objections stated at p. 503:

‘*. . . ‘Congress assimilated taxes to other debts for

all purposes, including denial of post-bankruptcy in-

ied

‘*Hence, Judge Kaufman was quite within his power

in allowing the state here only such interest as other

bondholders of like class were to receive.’’

The District Court was aware that the absolute priority

rule is governed by the equities of the particular case, as

set forth in part at the hearing on confirmation of the

plan on December 8, 1967:

10 If payment were made first to the United States, at the end of 4%

years it would have received its full claim (Fn. 8, supra). Under the

plan at the end of 4% years, assuming no acceleration of payment of

the Hennis note, the United States will have received 72.3% of its claim

(54 installments of $4,332.00 or 1.15% each, plus the original 10% at

confirmation). Thus, at the end of 4% years, a principal balance of

$103,919.90 would be owing the United States. Allowing 6% interest on

future payments, allocating the monthly payments to principal and

interest results in an interest load of $6,492.00.

38

*““FHE COURT: I don’t want—Mr. Boyle, I don’t

want the impression to be gained that this is to be the

rule as far as this particular court is concerned. There

may be many, many cases in the future where I would

not pursue this course. This case has been pending a

long time, and many, many of the smaller creditors

have waited a very, very long time, and I have been

trying to weigh the equities, and this is an equitable

proceedings even though it’s governed by statute. I

have been trying to weigh the equities between follow-

ing the course that the Government would have the

Court follow and following the course that the Court

has chosen to follow, and I still believe that the fac-

tors weigh so heavily in favor of the Court confirming

the Plan to get this thing closed, that the Court would

not be doing what it thinks it should be if I were to

go the other route.’’ (R. 56-57).

Even under the strictest interpretation of the absolute

priority rule, the plan at bar violates none of the United

States’ rights. It is submitted that the plan would indeed

be inequitable if it were to provide interest for the United

States’ claim out of a fund which de came belongs to

unsecured creditors."'

11 If the United States and the other three tax claimants in Classes

8, 4, and 5 were allowed 6% interest as demanded by the United States,

this would amount to approximately $120,000. This added to the esti-

mated total cost to Hennis exceeds the maximum amount which they

are required to pay, bringing the total cash to $1,045,000.00, or in the

alternative, deducting the excess from the fund allocated to the general

creditors.

Am’t of Claim Cash Distr.

Est. Administration Costs $ 60,000.00 $ 60,000.00

Class 1, Wages 14,872.44 14,872.44

Class 2, United States 375,386.55 375,386.55

Class 3, Indiana Gross Income $1,218.91 31,218.91

Class 4, Vanderburgh County 16,650.55 76,650.55

Class 5, Ohio Highway Use Tax 184,486.39 184,486.39

Class 6, Misc. taxes 14,320.74 14,320.74

continued on p. 39

THE PLAN PROVIDES ADEQUATE PROTECTION

FOR THE PAYMENT IN FULL OF THE UNITED

STATES AS A NON-ASSENTING CREDITOR,

THEREFORE THE PLAN CAN BE CONFIRMED

OVER THE REJECTION OF THE PLAN BY THE

PETITIONER AS A CLASS.

Since the plan provides payment in full of the face

amount of the claim of the United States, its rejection of

the plan can be treated as a rejection by any other class

of creditor, giving the District Court the right to examine

the plan as to adequate protection under Section 216(7).

Section 216(7) of the Bankruptcy Act authorizes four al-

ternative methods of going forward with a reorganization

plan without the assent of an affected class, to-wit:

‘*(7) shall provide for any class of creditors which

is affected by and does not accept the plan by the

two-thirds majority in amount required under this

chapter, adequate protection for the realization by

them of the value of their claims against the property

dealt with by the plan and affected by such claims,

either as provided in the plan or in the order con-

firming the plan, (a) by the transfer or sale, or by the

retention by the debtor, of such property subject to

such claims; or (b) by a sale of such property free

of such claims, at not less than a fair upset price, and

the transfer of such claims to the proceeds of such

Footnote #11 continued:

Class 7 Personal Injury 1,119.42)

Class 8 Cargo Loss & )

Damage 38,240.06) 842,640.75 168,528.15

Class 9 General 803,281.27)

Total Cost Under Plan 925,463.78

Estimated Interest 120,000.00

Total Requird $1,045,463.72

Maximum Cost to Hennis $935,000.00

Cash Available 75,000.00

$1,010,000.00

40

sale; or (c) by appraisal and payment in cash of the

value of such claims; or (d) by such method as will,

under and consistent with the circumstances of the

particular case, equitably and fairly provide such

protection ;’’

Here, again, Chapter X is silent as to the exclusion of

the United States from the application of this provision;

therefore, it can be assumed that the provision is applica-

ble under the rule that tax claimants will be treated as

other claimants unless there is specific provision exclud-

ing them. City of New York v. Saper, supra.

For a general review of the legislative history and court

decisions diluting the priority treatment of taxing author-

ities in bankruptcy practice, seen generally, In re Halo

Metal Products v. Randall, C. C. H. 1969 Stand. Fed. Tax

Rep. (Cas. No. 17608) para. 9123 (CA-7, 1969).

It is the position of the trustee that the means of execu-

tion of the plan, as provided under Article VIII (R. 67-68)

provides adequate security to the United States as re-

quired under the cases interpreting Section 216(7).

It is submitted that the cases interpreting this section

are few, since generally if the plan is found fair and

equitable by the court; creditors have assented to the plan.

Section 216(7) provides the court with statutory matter

for dealing with irate or recalcitrant creditors when the

court in its discretion deems the plan as satisfying the

fair, equitable and feasible provisions of Chapter X. At

that point in the proceeding, the court usually requests

that the trustee amend the plan to provide adequate pro-

tection for the recalcitrant creditor. In the case at bar,

the plan had a built-in provision which satisfied the re-

quirements of Section 216(7).

41

‘‘The adequate protection for the realization by them

(the United States) of the value of their claims against

the property dealt with by the plan and affected by such

claims . . . “has been provided in this instance (a) by the

transfer or sale of the operating rights of the debtor, its

substantial asset, subject to the claims of the dissenter in

the form of a chattel mortgage for the balance due and

(b) by a sale of property (the operating rights) at not

less than a fair upset price ($935,000.00) and a transfer to

the proceeds of sale, the government receiving 10% of the

immediate cash and an assignment of the moneys due.

It would appear that all of the cases involving Sections

216(7) (a) and (b) relate to specific property to which

specific claims have attached, the holders of such claims

being mortgagees, bondholders or mechanic’s lienors.

In re Englander Spring Bed Co., 17 F. Supp. 15 (E.D.

N.Y., 1936), aff’d per curiam, 86 F. 2d 998 (CA-2, 1936)

(involving mortgagees) ; In re Central Forging Co., 38 F.

Supp. 18 (M.D. Pa., 1941) (involving bondholders) ; cf.

Francisco Bldg. Corp. v. Batson, 83 F. 2d 93 (CA-9,

1936).

In this instance the claim of the United States is not

secured by any specific property, it is at most a general

claim against all assets. Thus, the ordinary marshaling of

assets should be sufficient to protect its priority. The

Court in granting equitable relief has thus set aside under

the provisions of Section 216(7) (a) or (b) sufficient

property or proceeds to satisfy the requirements thereof.

If this appears too novel a situation to fall within the

meaning of Section 216(7) (a) or (b), then certainly this is

the case for which Section 216(7) (d) was intended.

ei

As stated in 6A Collier, Bankruptcy, para. 10.17, 490-491

(rev. ed. 1969), in speaking of Section 216(7) (d):

‘**Tt has been said that these methods, properly speak-

ing, are not ‘methods’ at all, but merely empower the

judge, who must approve and confirm the plan, to

approve any means of treatment which under the —

particular circumstances ‘equitably and fairly’ af-

fords adequate protection to the dissenters. Even —

though this may be a proper characterization, the

provisions are not to be read out of the statute be-

cause of it. Admittedly, the potentialities of para-

graphs (7) (d) and (8) (c) are difficult to define,

but there seems to be little reason why they should

not remain effective as possible alternatives to en-

compass the largely unforeseen case.’’

We submit that the instant plan is one which fite the

shoe of special circumstances described in Teras Hotel Se-

curities Corp. v. Waco Development Co., 87 F.2d 395, 400

(CA-5, 1936) ; cert. denied, 300 U. S. 679 (1937), rehearing

denied, 301 U. S. 713 (1937), in commenting on the fore-

runner clause in 77B:

‘‘There may be other cases of special circumstances

in which adequate protection for realization of value

ean be worked out as contemplated by subpara-

graph(d).’’

See also, National City Bank of New York v. O’Connell,

155 F. 2d 329 (CA-2, 1946).

In this regard it should be noted that under Section 221

of the Act the District Judge is given broad discretion in

weighing the facts and circumstances, in determining if

the plan ‘‘satisfies’’ the absolute priority rule as well as

Section 216. 6A Collier, Bankruptcy, para. 11.02, 581-582,

sets forth the rule in this regard as follows:

—————

‘‘The judge of the reorganization court is empowered

to confirm a plan only ‘if satisfied’ that the condi-

tions stated in $221 have been complied with. The

words ‘if satisfied’ vest a broad discretion in the

judge.’’ See generally, In re Waern Building Corp.,

145 F.2d 584 (CA-7, 1944), cert. denied, 324 U.S. 871

(1945).

The United States in its brief implies that the pur-

chaser may not be financially strong enough to see the

purchase through to its conclusion or that the value of

the operating rights might deteriorate.

The United States argues, on p. 38 of its brief, as fol-

lows:

‘*. .. There is the least possible basis for requiring

the government to assume any risk in this case, for

the debtor here is no longer operating its business.’’

The applicable reply to such a position is, perhaps, the

overused retort, ‘‘Life itself is a risk.’’

The District Court was well aware of the lengthy hear-

ings before the Interstate Commerce Commission, the hear-

ing examiner’s report of March 26, 1964, and the approval

by the Interstate Commission of said report recommending

the sale of the operating rights on March 11, 1965. Such

approval had necessarily to concern itself with the ability

of the purchaser to pay and the value of the rights. I.C.C.

Docket + MC-F-8117, Finance Docket #22243.

At the hearing on approval of the plan held on Sep-

tember 7, 1967, and the hearing on confirmation held

December 8, 1967, the District Court had before it both evi-

dence of the ability of the buyer, Hennis, to make payments

under the modified agreement of sale and the ability of

the estate to meet all payments as set forth under the

plan of reorganization.

lege

aes

44

The evidence before the court clearly establishes that

the value of the interstate operating rights transferred

by the debtor to Hennis is not less than $850,000

(R. 30-33, 34-36); that its value has increased over the

years; and that the income from the sale of these op-

erating rights will be sufficient to assure payment to the

government of its claim from the fund comprised of pay-

ments made under this agreement. (R. 31-34, 36-39). i

The record is sufficient to support the finding of the

court that adequate protection is provided the United

States for the realization of its claim from the property

dealt with and to provide protection for the aforesaid dis-

senting claimant.

CONCLUSION

The trustee’s plan is fair, equitable and feasible. The

order of the District Court confirming said plan should |

be upheld.

Respectfully submitted.

Sigmund J. Beck,

Edward B. Hopper II,

500 Union Federal Building,

Indianapolis, Indiana 46204

Attorneys for Respondent.

Bamberger & Feibleman,

Of Counsel.

ee

APPENDIX

Revised Statutes:

Sec. 3466. Whenever any person indebted to the

United States is insolvent, or whenever the estate

of any deceased debtor, in the hands of the executors

or administrators, is insufficient to pay all the debts

due from the deceased, the debts due to the United

States shall be first satisfied; and the priority hereby

established shall extend as well to cases in which a

debtor, not having sufficient property to pay all his

debts, makes a voluntary assignment thereof, or in

which the estate and effects of an absconding, con-

cealed, or absent debtor are attached by process of

law, as to cases in which an act of bankruptcy is

committed.

(31 U.S.C. 191.)

Bankruptcy Act, c. 541, 30 Stat. 544 [as amended by

Sec. 1, Act of June 22, 1938, c. 575, 52 Stat. 840] :

Sec. 199. If the United States is a secured or un-

secured creditor or stockholder of a debtor, the claims

or stock thereof shall be deemed to be affected by a

plan under this chapter, and the Secretary of the

Treasury is hereby authorized to accept or reject a

plan in respect of the claims or stock of the United

States. If, in any proceeding under this chapter, the

United States is a secured or unsecured creditor on

claims for taxes or customs duties (whether or not the

United States has any other interest in, or claim

against the debtor, as secured or unsecured creditor or

stockholder), no plan which does not provide for the

payment thereof shall be confirmed by the judge ex-

cept upon the acceptance of a lesser amount by the

Secretary of the Treasury certified to the court: Pro-

vided, That if the Secretary of the Treasury shall

45

46

fail to accept or reject a plan for more than ninety

days after receipt of written notice so to do from

the court to which the plan has been proposed, ac-

companied by a certified copy of the plan, his consent

shall be conclusively presumed. (11 U.S.C. 599.)

Sec. 216. A plan of reorganization under this chap-

ter—

(1) shall include in respect to creditors generally

or some class of them, secured or unsecured, and may

include in respect to stockholders generally or some

class of them, provisions altering or modifying their

rights, either through the issuance of new securities

of any character or otherwise;

(2) may deal with all or any part of the property

of the debtor;

(3) shall provide for the payment of all costs and

expenses of administration and other allowances which

may be approved or made by the judge;

(5) shall specify what claims, if any, are to be paid

in cash in full;

s € o * *

(7) shall provide for any class of creditors which

is affected by and does not accept the plan by the

two-thirds majority in amount required under this

chapter, adequate protection for the realization by

them of the value of their claims against the property

dealt with by the plan and affected by such claims,

either as provided in the plan or in the order con-

firming the plan, (a) by the transfer or sale, or by the

retention by the debtor, of such property subject to

such claims; or (b) by a sale of such property free of

such claims, at not less than a fair upset price, and

the transfer of such claims to the proceeds of such

sale; or (c) by appraisal and payment in cash of

the value of such claims; or (d) by such method as

will, under and consistent with the circumstances of

ee

47

the particular case, equitably and fairly provide such

protection;

o 7 * is *

(11 U.S.C. 616).

Sec. 221. The judge shall confirm a plan if satisfied

that—

(1) the provisions of article VII, section 199, and

article X of this chapter have been complied with;

(2) the plan is fair and equitable, and feasible;

* a * * *

(11 U.S.C 621).

Sec. 236. If no plan is proposed within the time

fixed or extended by the judge, or if no plan pro-

posed is approved by the judge and no further time is

granted for the proposal of a plan, or if no plan

approved by the judge is accepted within the

time fixed or extended by the judge, or if confirma-

tion of the plan is refused, or if a confirmed plan is not

consumated, the judge shall—

(1) where the petition was filed under section 127

of this Act, enter an order dismissing the proceeding

under this chapter and directing that the bankruptcy

be proceeded with pursuant to the provisions of this

Act; or

(2) where the petition was filed under section 128

of this Act, after hearing upon notice to the debtor,

stockholders, creditors, indenture trustees, and such

other persons as the judge may designate, enter an

order either adjudging the debtor a bankrupt and di-

recting that bankruptcy be proceeded with pursuant to

the provisions of this Act, or dismissing the proceed-

ing under this chapter, as in the opinion of the judge

may be in the interests of the creditors and stock-

holders.

(11 U.S.C. 636)