Case Name: EXCHANGE NATIONAL BANK OF CHICAGO et al. v. Frank SPALITTA et al.
Court: Louisiana Supreme Court
Jurisdiction: Louisiana
Decision Date: 1975-03-31
Citations: 321 So. 2d 338
Docket Number: No. 55012
Parties: EXCHANGE NATIONAL BANK OF CHICAGO et al. v. Frank SPALITTA et al.
Judges: SANDERS, C. J., dissents with written reasons.
Reporter: Southern Reporter, Second Series
Volume: 321
Pages: 338–348

Head Matter:
EXCHANGE NATIONAL BANK OF CHICAGO et al. v. Frank SPALITTA et al.
No. 55012.
Supreme Court of Louisiana.
March 31, 1975.
On Rehearing Nov. 3, 1975.
Leo S. Roos, Roos & Roos, New Orleans, for plaintiffs-applicants.
Joseph P. Henican, III, Carl W. Cleveland, C. Ellis Henican, Jr., Henican, James & Cleveland, New Orleans, for defendants-respondents.

Opinion:
BARHAM, Justice.
This suit was filed by Exchange National Bank in an attempt to collect money owed to it by Place Vendóme Corporation from the latter's accommodation guaran-, tors, C. Ellis Henican, Philip E. James, and Frank Spalitta. Place Vendóme Corporation is a subsidiary of Southern Land Title Corporation, both of which are presently in bankruptcy proceedings under Chapter X of the Bankruptcy Act, the chapter providing for corporate reorganization. 11 U.S.C. § 501 et seq.
The three defendants signed a continuing guaranty in solido for all sums advanced to Place Vendóme Corporation by Exchange National Bank and National American Bank of New Orleans, up to $1,824,234.00. Following the execution of a collateral mortgage on several French Quarter properties owned by Place Ven-dóme, Exchange National Bank advanced several large sums of money to Place Ven-dóme for construction purposes.
In June, 1967, Place Vendóme and Southern Land Title Corporation invoked bankruptcy proceedings by a petition for corporate reorganization entitled In the Matter of Southern Land Title Corporation, Debtor, No. 67-135 on the docket of the United States District Court for the Eastern District of Louisiana. During the corporate reorganization proceedings, Exchange National Bank petitioned for a sale of the mortgaged properties. Pursuant to its authority under Chapter X, the court ordered the trustee to sell the properties at a public auction where Exchange National Bank purchased them, applying the price to the amount allegedly due it.
During the pendency of the reorganization proceedings, but before the sale of the property, Exchange National Bank filed this suit in state court on its collateral mortgage note. (National American Bank, an original plaintiff, dismissed its suit with prejudice.) Following the sale of the property, Exchange National Bank amended its petition in order to include the sale, seeking only the balance due on the note after the sale of the property. The defendants filed an exception of no cause of action on the ground that a deficiency judgment was barred by failure to comply with La.R.S. 13:4106, 4107 because the property was not sold under executory proceedings with notice of seizure and proper appraisal and because compliance with the Act was not alleged in the petition, plaintiffs responded that compliance was not necessary because the Louisiana Deficiency Judgment Act does not apply to sales ordered in corporate reorganization proceedings under Chapter X.
The trial court sustained the exception of no cause of action, holding that the bank had lost its right to a deficiency judgment against the guarantors by its failure to follow the requirements of La. R.S. 13:4106 et seq. The court of appeal affirmed. 295 So.2d 18 (La.App. 4th Cir. 1974). We granted certiorari to review that decision. 299 So.2d 360 (La.1974). We reverse the judgment of the court of appeal and set aside the ruling of the trial court sustaining the exception of no cause of action.
Although we are in agreement with the finding in the trial court that the requirements of the Deficiency Judgment Act were not complied with, it is our opinion that it is not necessary to address ourselves to that issue because of our threshold determination that the Louisiana Deficiency Judgment Act is not applicable to sales under Chapter X of the Bankruptcy Act.
From the record, it appears that Place Vendóme Corporation filed for voluntary reorganization under Chapter X on June 19, 1967, following the initiation of reorganization proceedings by its parent corporation, Southern Land Title Corporation. On June 21, 1967, the federal district court approved the petition and appointed a trustee. At this time, title to all Of the debtor's property passed to the trustee under 11 U.S.C. § 586, retroactive to the date of the filing of the petition. See In Re Susquehanna Chemical Corp., 81 F.Supp. 1 (W.D.Pa.1948), aff'd, 174 F.2d 783 (3d Cir. 1949). Thus, Place Vendóme, by filing the petition, voluntarily divested itself of all property, title to which passed to the trustee who represents the general creditors and who was appointed with the approval of the federal district judge. 11 U. S.C. § 72.
If the proceeding had been one in straight bankruptcy, it would have been the duty of the trustee to liquidate the estate in a manner which would produce the greatest return for the general creditors. In straight bankruptcy, all sales must comply with 11 U.S.C. § 110(f), which requires the appointment of appraisers and a price not less than 75% of the appraised value. However, in corporate reorganization under Chapter X, the object is reorganization and recapitalization rather than liquidation, and in accordance therewith, the trustee is vested with the extraordinary power to sell or lease property in any manner which improves the strength of the debtor corporation and protects the creditors. This grant of authority is conferred by 11 U.S.C. § 516, which provides:
"Upon the approval of a petition, the judge may, in addition to the jurisdiction, powers, and duties in this chapter conferred and imposed upon him and the court—
"
"(3) authorize a receiver or a trustee or a debtor in possession, upon such notice as the judge may prescribe and upon cause shown, to lease or sell any property of the debtor, whether real or personal, upon such terms and conditions as the judge may approve;
The only limit upon this power is the sound discretion of the judge; 11 U.S.C. § 110(f) is specifically made inapplicable by the express wording of 11 U.S.C. § 502. See also Judge Augustus Hand's statement in In Re Loewer's Gambrinus Brewery Co., 141 F.2d 747, 750 (2d Cir. 1944):
" 11 U.S.C.A. § 502, expressly provides that an appraisal shall not be necessary in a Chapter X proceeding unless an order shall be entered directing that bankruptcy be proceeded with pursuant to Chapters I to VII inclusive, 11 U.S.C.A. § 1-112. In other words, Section 102 exempts sales in Chapter X proceedings from the necessity of appraisal which is required in straight bankruptcy."
The difference in requirements flows from the difference in objectives in straight bankruptcy as opposed to reorganization proceedings. These differences have been cogently explained in In re Danra Corporation, 400 F.2d 833, 836 (3d Cir. 1968), as follows:
"After a petition has been approved, the District Court may exercise its discretion in ordering the sale of all or of a portion of the assets of the debtor. There is no requirement that a plan for reorganization must be submitted, nor even that the sale be in aid of reorganization, or that it await a liquidation in straight bankruptcy. Furthermore, Section 102 of the Act (11 U.S.C.A. § 502) renders an appraisal of the assets in Chapter X proceedings unnecessary unless the Court has ordered the instigation of bankruptcy proceedings. [citations omitted].
" It must be noted that Section 116 authorizes such sales to be made within the sound discretion of the Court 'upon cause shown'. The statute makes no reference to the necessity or an impending emergency. Furthermore, the weight of authority in the various circuits is that Section 116 sales are proper where there is justifiable cause present, and where the sale is in the best interest of the debtor and the majority of the creditors, [citations omitted]."
In addition to the discretionary power vested in the trial judge regarding sales of a debtor's property under § 516, we note the well-established exclusive nature of the jurisdiction of the Bankruptcy Court over the debtor and its property under the provisions of 11 U.S.C. § 511:
"Where not inconsistent with the provisions of this chapter, the court in which a petition is filed shall, for the purposes of this chapter, have exclusive jurisdiction of the debtor and its property, wherever located."
The clause "wherever located" indicates the need, particularly in reorganization proceedings, for uniformity among the jurisdictions, as well as the need for exclusive jurisdiction in a single court, because of the fact that a bankrupt debtor corporation often owns property in several states. The essential purpose of the jurisdictional statute, as described in Collier on Bankruptcy, is:
" to render the authority and control of the reorganization tribunal paramount and all-embracing to the extent required to achieve the ends contemplated by Chapter X; and to exclude any interference by the acts of others or by proceedings in other courts where such activities or proceedings in other courts tend to hinder the progress of reorganization." 6 Collier on Bankruptcy 424, ¶ 3.03 (14th ed. 1972). (Emphasis here and elsewhere supplied.)
There exists only one federal case resolving the issue of the applicability of the Deficiency Judgment Act to sales under Chapter X, i. e., Bowl-Opp, Inc. v. Larson, 334 F.Supp. 222 (E.D.La.1971). That was a diversity suit in which the federal district court judge was bound to apply Louisiana law to the situation before him. This issue being one of first impres sion in Louisiana courts in the instant case, the judge was constrained to apply what, in his opinion, Louisiana courts would find the law to be if given the same facts. The holding in Bowl-Opp was that the Louisiana Deficiency Judgment Act did apply to Chapter X sales, but that it had not been complied with since the property had been sold without appraisal. In the instant case, Louisiana courts are confronted with the issue for the first time, and, as we are not bound by the federal judge's interpretation of our law, we hold that the Act does not apply to Chapter X sales. It is our opinion that J. Ray McDermott and Co. v. Vessel Morning Star, 5 Cir., 431 F.2d 714, rehearing en banc, 457 F.2d 815 (5th Cir. 1972), is the more preferable federal interpretation of the applicability of the Louisiana Deficiency Judgment Act to federal statutes which have been enacted in the interest of uniformity.
McDermott involved fishing vessels which had been foreclosed upon without appraisal; the shipbuilder attempted to enforce a guaranty against the defendant endorsers in spite of the lack of appraisal. Defendants sought protection under the Louisiana Deficiency Judgment Act. On first hearing, the three-judge panel held the Louisiana act applicable, in spite of the pre-emption of the area by the National Maritime Act. However, on rehearing, the Fifth Circuit en banc overruled their decision, holding the Louisiana act inapplicable. The reasoning of the court was that it was clear that Congress intended that the ready availability of credit to support interstate commerce should not be impeded by state limitations, and that the National Maritime Act should therefore supercede completely all aspects of state law at variance with that purpose. The court stated:
" 'to engraft the various nuances of state law onto federal legislation would introduce an undesirable lack of uniformity in the interpretation of Congressional enactments' and would impede the harmony and uniformity sought by the Act. "
In our opinion, the situation faced by the Fifth Circuit in McDermott is analogous to the one before us in the instant case. To impose the Louisiana requirements of exec-utory process on sales made pursuant to court order under Chapter X and to render such sales subject to deficiency judgments in state courts while corporate reorganization is still pending in federal court would also "introduce an undesirable lack of uniformity in the interpretation of Congressional enactments" and would impede the uniformity sought by Congress in passing the Federal Bankruptcy Act.
Moreover, resort to the Louisiana Deficiency Judgment Act is not necessary to fill any gaps in the federal bankruptcy law. Although Chapter X sales are not made pursuant to the specific appraisal and notice requirements of the Deficiency Judgment Act, there nevertheless exist procedural safeguards for the protection of both debtors and creditors. For example, once a bankruptcy petition is approved, the debt- or no longer owns the property: title vests immediately in the trustee who, as representative of the general creditors, seeks to achieve the highest price for the secured creditors in order to reduce the deficiency against the debtor, who will be protected by the discharge. Any deficiency will be claimed by the secured creditor in the status as general creditor, with a consequent reduction in the assets for distribution.
Under Chapter X, the trustee petitions, in his capacity as owner, for permission from the court to sell property. His function, in the interests of both debt- or and creditors, is to reorganize the bankrupt corporate debtor, eliminating as much of the debt as possible by sale of property as he deems it necessary. It is within his discretion to retain the property and include the secured creditor in his plan of reorganization if that option appears to be preferable upon consideration of the particular circumstances and the status of the corporate bankrupt which he is reorganiz ing. All petitions for sales are subject to the approval of the federal district court judge, and the opportunity to contest a petition for a sale is afforded interested parties, as was done in the instant case.
Thus, application of the Deficiency Judgment Act is not necessary in terms of safeguarding the rights of debtors and creditors. Moreover, such an application would frustrate the intent which Congress evidenced by enacting the bankruptcy act. As noted supra, Congress specifically exempted Chapter X sales from the requirement of appraisal found in other bankruptcy court sales in order to better effectuate the ultimate goal of corporate reorganization. Exclusive jurisdiction was vested in the court in which the petition for reorganization had been filed, in order that no proceeding in another court could impede the progress being made toward reorganization in the court of original jurisdiction. In fact, the goal of reorganization of a corporation to meet financial obligations gradually is at variance with the concept of the deficiency judgment, which results in the release of the debtor. For these reasons, we must hold the Louisiana Deficiency Judgment Act inapplicable to sales made pursuant to Chapter X of the federal Bankruptcy Act.
We reverse the decision of the court of appeal and set aside the ruling of the trial court sustaining the exception of no cause of action. We order the case remanded to the trial court for further proceedings. Casting of costs is reserved.
SANDERS, C. J., dissents with written reasons.
SUMMERS and MARCUS, JJ., dissent for reasons assigned by SANDERS, C. J.