Court Opinion

ID: 9444171
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:44:17.668911+00
Date Added: 2024-06-11T17:29:44.890469
License: Public Domain

FRANK, Circuit Judge
(dissenting).
1. The cases cited by my colleagues (which I shall discuss later) have decided only that post-petition interest on a tax claim is not allowable unless the debtor become solvent during the bankruptcy proceeding. A different question is before us here, viz. whether confirmation of a Chapter XI arrangement discharges such interest if it has not been .allowed (i e., when the debtor has not thus become solvent). No court has heretofore considered this question.
My colleagues say, in effect, that (1) it having been held such interest is not allowable, it would be absurd (2) to hold nevertheless that it is not discharged. I think it not at all absurd. For a discharge in ordinary bankruptcy or a confirmation of a Chapter XI arrangement leaves undischarged many un-allowed claims which may be immense in magnitude.
In ordinary bankruptcy, the other creditors usually have no concern with undischarged claims.1 But not so in a Chapter XI case. For there the assenting creditors often look solely to the debtor’s property for payment, yet, after confirmation, that property — thanks to § 17, 11 U.S.C.A. § 35 — may be subjected to huge undischarged claims which often are unknown to, and unknowable by, the assenting creditors at the time when the court confirmed- the arrangement. Such unknown and unknowable claims include, among others, the following:2 (1) liabilities for obtaining property by false pretenses or false representations, (2) unprovable liabilities for *871wilful and malicious injuries, (3) debts not duly scheduled of creditors who had no notice or no actual knowledge of the bankruptcy proceeding, (4) debts created by fraud, embezzlement, misappropriations or defalcations, while the debtor acted in a fiduciary capacity. To the extent that the undischarged claims are known and definite in amount, the assenting creditors act with their eyes open. But often the assenting creditors are unaware and cannot learn of either the existence or the amount of many undischarged claims which may add up to many thousands of dollars and utterly disrupt the arrangement. In this respect, any Chapter XI arrangement is undeniably vulnerable, as a Chapter X plan is not.
For Chapter X provides, in § 226 and § 228, 11 U.S.C.A. § 626 and § 628, that a confirmation order wipes out all claims not excepted in the plan, or the order, as against the debtor’s property dealt with by the plan.3 But Chapter XI — see § 371, 11 U.S.C.A. § 771 — incorporates § 17 as Chapter X does not, with the result that claims not discharged under § 17 are undischarged by confirmation of a Chapter XI arrangement.4
In 8 Collier, Bankruptcy (14th ed.) p. 1259, it is said that “the discharge provisions of Chapter X are radically different from those of Chapter XI in that debts which are not discharged under § 17 of the Act are not excluded from the operation of a discharge under Chapter X.” At pp. 1267-1270, Collier says: “Section 371 specifically excludes from the operation of the discharge ‘such debts as, under section 17 of this Act, are not dischargeable.’ Chapter X does not make the same exception; while some consideration was given to excluding from the discharge under Chapter XI only some of the debts specified in § 17, all of those debts have been excluded by § 371.” And at pp. 1270-71, Collier says: “An arrangement and its provisions, upon confirmation of the arrangement, are binding upon all creditors, including the holders of debts which are not discharged. That, however, does not affect the liability of the debtor upon the debts not discharged. If a creditor’s debt was not discharged because he was not provided for in the arrangement, it is clear that he may immediately proceed against the debtor to enforce collection. But where a creditor is provided for in the arrangement, and his claim is nevertheless not discharged under § 371, the problem is suggested as to the exact extent of that creditor’s rights. Thus, if the arrangement provides that creditors are to receive 20% in full settlement of their claims one month after confirmation, the right of the creditor whose debt is not discharged to enforce collection of the remaining 80% is clear. But the problem is whether he can immediately sue the debtor for the full amount *872of his original claim, or whether he can immediately sue for only 80%, and must await payment of the other 20% pursuant to the terms of the arrangement. It seems clear that he can immediately sue for the full amount, and such was the apparent intention of the framers of the Act. The creditor has the right to share in distribution, but the discharge consequent upon confirmation does not affect his original claim, which may therefore be immediately enforced in full. Where the creditor has actually received some payment under the distribution upon confirmation, that payment, of course, must be credited against the claim.”
The courts can do nothing to overcome this serious defect in Chapter XI. Congress alone, by future legislation, can remove it. Accordingly, we must answer the question here, recognizing this great gap in Chapter XI. (I note in passing that, if post-petition interest on taxes is not discharged, the assenting creditors, as to such interest, take a known risk, because the amount of such interest is precisely ascertainable.)
2. Outside bankruptcy, interest on a claim for a fixed sum is ordinarily an integral part of the principal. The Bankruptcy Act so treats pre-petition interest. Does it treat differently post-petition interest? I think not. The cases, cited by the Supreme Court in New York v. Saper, 336 U.S. 328 at page 330 footnote 7, 69 S.Ct. 554, 555, as stating the correct rule, hold (1) the interest accruing during the bankruptcy has come into existence but that it is "suspended,” or is “still running” during that period, and, significantly, that (2) such interest is a part of the debt for which no new or separate proof of claim is required to enable the creditor to collect it in the event of solvency while the bankruptcy proceedings are pending. See Johnson v. Norris, 5 Cir., 190 F. 459, cited with approval in American Iron & Steel Mfg. Co. v. Seaboard Air Line Ry. Co., 233 U.S. 2615, 34 S.Ct. 502, 58 L.Ed. 949. Johnson v. Norris cites many previous decisions to the same effect.6
In Johnson v. Norris, a bankruptcy proceeding where it turned out that the assets in the hands of the bankruptcy trustees exceeded the amount of the debts plus pre-petition interest, the court held that post-petition interest must be paid, ruling as follows (190 F. at page 465): “It is said that subsequently accruing interest should not be paid because it has never been proved as a debt. We do not think this objection is sound. The proof of an interest-bearing claim is proof of the interest collectible on such claim. Interest is an incident of, or a part of, the debt, and no separate proof of it is required.” In American Iron & Steel Mfg. Co. v. Seaboard Air Line, the Court, in an equity insolvency case, after referring to the usual rule that interest is not allowed after an insolvent’s property is in custodia legis, continued, 233 U.S. at pages 266-267, 34 S.Ct. at page 504: “But that rule did not prevent the running of interest during the receivership; and if, as a result of good fortune or good management, the estate proved sufficient to discharge the claims in full, interest as well as principal should be paid. Even in bankruptcy, and in the face of the argument that the debtor’s liability on the debt and its incidents terminated at the date of adjudication, and as a fixed liability was transferred to the fund, it has been held, in the rare instances where the assets ultimately proved sufficient for the purpose, that creditors were entitled to interest accruing after adjudication. 2 Bl.Com. 488; Cf. Johnson v. Norris [5 Cir.], 190 F. [459] 460(5).”
In 3 Collier (14th ed.) 1838-1839, it is said: “The principle that interest stops running from the date of the filing of *873the petition in bankruptcy should be understood as a rule of liquidation practice rather than as a rule of substantive law that the creditor of an interest-bearing claim is not entitled to interest beyond the filing date. The overwhelming majority of bankruptcy cases end with the distribution of a dividend that is far from satisfying the creditors even as to the principal. Disputes over interest thereby become largely academic. But it would not be accurate to allow this quantitative element to create a confusion as to what is the rule and what the exception. In liquidating interest-bearing claims, the computation of interest must be made as of some fixed date. The law selects as decisive the date of the filing of the petition in bankruptcy. It disregards, for the purposes of liquidation, interest accruing beyond that date. Yet this is primarily a technical device to cope in the most convenient and equitable manner with the debtor’s apparent insolvency. True, most eases of bankruptcy liquidation are, as it were, ripe for the surgical operation saving the patient’s life by amputating his debts. As to such cases the denial of interest accrued after the filing date, in its origin more a provisional method of calculation, becomes the final word. But in some cases the estate is sufficient to take care of the interest accrued after the filing date, and in this situation the debtor will not be handed over the residue without previous distribution to the creditors of such after-accrued interest up to the day of payment. Though numerically undoubtedly a negligible minority, these cases of ultimate solvency instance what is truly the rule rather than the exception, namely that a debtor should pay interest up to the day of payment, a rule whose operation is merely suspended where a debtor is so hopelessly insolvent that he is unable to pay even the provable part of a claim, namely principal and interest accrued prior to bankruptcy.”
Now turn to Section 17, 11 U.S.C.A. § 35.6a It provides that a discharge releases all “provable” debts “whether allowable in full or in part” except (inter alia) “such as are due as a tax levied by * * * any State”. Applying this provision, we have this result: All the interest on a tax — the pre-petition and the post-petition interest — constitutes a “provable” part of the tax claim. But-— absent solvency during bankruptcy — the total tax claim, including all that interest, is “allowable” only “in part.” The “part” consisting of post-petition interest is the “part” not “allowable” unless solvency occurs during bankruptcy. Consequently, were it not for the exception as to taxes contained in Section 17, the post-petition interest would be discharged (when the estate remains insolvent during bankruptcy). But that exception saves it from discharge in the case of an insolvent estate.7
The very cases cited by my colleagues —Redfield v. Ystalyfera Iron Co., 110 U.S. 174, 3 S.Ct. 570, 572, 28 L.Ed. 109, and Redfield v. Bartels, 139 U.S. 694, 701, 11 S.Ct. 683, 35 L.Ed. 310 — hold that where interest “is reserved express*874ly in the contract, or is implied by the nature of the promise, it becomes part of the debt, and is recoverable as of right * * *,” its recovery not being “discretionary.” As the New York statute expressly provides for interest on the tax here, it is part of the tax claim, and its recovery is not (as my colleagues suggest) within “the discretionary control of a court”.
3. The cases my colleagues cite decide nothing contrary to my position. In Saper v. New York, 2 Cir., 168 F.2d 268, where the sole issue was of the allow-ability of post-petition interest on a tax claim in an ordinary bankruptcy case, we explicitly left the question open, saying, 168 F.2d at page 271: “No cases appear yet to have held that interest thus survives beyond the principal claim which gives it birth. But assuming arguendo that interest is not discharged upon payment of the tax claim, we do not see how that fact can be decisive on the present issue.” Accordingly, the Supreme Court, in affirming our decision— City of New York v. Saper, 336 U.S. 328, 329, 69 S.Ct. 554, 93 L.Ed. 710 — did not face the present problem. An article in 58 Yale L.J. (1949) 982, 992, Interest on Tax Arrearages After Bankruptcy, discussing the Saper case, says, “Presumably * * * the case holds only that interest accruing after a petition is filed is not provable; it does not seem to affect the proviso of Section 17 that bars discharge of tax claims not satisfied out of a debtor’s estate.”8
In apposite is United States v. Edens, 4 Cir., 189 F.2d 876, affirmed without opinion in 342 U.S. 912, 72 S.Ct. 357, 96 L.Ed. 682. There the Court merely decided, on the basis of the Saper case, that post-petition interest on a tax claim was not allowable in a Chapter X case. No more in point are similar rulings in respect of Chapter XI arrangements — United States v. General Engineering & Mfg. Co., 8 Cir., 188 F.2d 80, affirmed without opinion in 342 U.S. 912, 72 S.Ct. 358, 96 L.Ed. 682, and Com. of Massachusetts v. Thompson, 1 Cir., 190 F.2d 10 — or, in respect of a general assignment — Pavone Textile Corp. v. Bloom, 302 N.Y. 206, 97 N.E.2d 755, affirmed without opinion sub. nom. United States v. Bloom, 342 U.S. 912, 72 S.Ct. 357, 96 L.Ed. 682.
State of New York v. Feinberg, 2 Cir., 204 F.2d 502, is surely not pertinent. In the first place, it related to a confirmed Chapter X plan, and, as already noted, such confirmation eliminates all post-confirmation claims not excepted from the plan as against all the debtor’s property covered by the plan. In the second place, the State — no doubt because of that Chapter X provision — expressly disavowed any right to interest accruing during the bankruptcy.9 Our opinion so stated as follows: “The State of New York does not object to the failure to pay interest during the reorganization proceedings * * The State advanced this sole contention: The plan allotted to all unsecured creditors- — ■ including the State for its pre-petition taxes — debentures bearing interest at 6% ; but for the bankruptcy, the State’s tax claim, under a state statute, would have carried interest at 9%, while the other creditors would have been entitled to a smaller rate; the plan was therefore unfair in not giving the State, through the debentures, 9% for the post-confirmation period. In affirming the order which confirmed the plan, we held the plan fair. This amounted to saying no more than that the rate of interest on new securities under a Chapter X plan need not vary according to the varying interest rates to which the several creditors had been entitled before bankruptcy. Patently, then, the Fein-berg case did not involve the question confronting us here.

. Nor usually is the debtor if it is a corporation. Cf. Saper v. City of New York, 2 Cir., 168 F.2d 268, 272.

. See § 17, 11 U.S.C.A. § 35.

. Section 226 reads: “The property dealt with by the plan, when transferred by the trustee to the debtor or other corporation or corporations provided for by the plan, or when tansferred by the debt- or in possession to such other corporation or corporations, or when retained by the debtor in possession, as the case may be, shall be free and clear of all claims and interests of the debtor, creditor's, and stockholders, except such claims and interests as may otherwise be provided for in the plan or in the order confirming the plan or in the order directing or authorizing the transfer or retention of such property.”
Section 228 reads in part as follows:
“Upon the consummation of the plan, the judge shall enter a final decree — (1) discharging the debtor from all its debts and liabilities and terminating all rights and interests of stockholders of the debtor, except as provided in the plan or in the order confirming the plan or in the order directing or authorizing the transfer or retention of property * *

. Section 371 reads: “The confirmation of an arrangement shall discharge a debtor from all his unsecured debts and liabilities provided for by the arrangement, except as px-ovided in the arrangement or tho order confirming the arrangement, including the claims specified in section 355 of this title, but excluding such debts as, under section 17 of this title, are not dis-chargeable.”

. Cf. Ryerson & Son v. Peden, 318 Ill. 105, 109-110, 148 N.E. 849, 41 A.L.R. 560.

. Brown v. Leo, 2 Cir., 34 F.2d 127, 128, cites Johnson v. Norris with approval.

. Section 17 reads in part as follows: “A discharge in bankruptcy shall release a bankrupt from all his provable debts, whether allowable in full or in part except such as (1) are due as a tax levied by the United States, or any State $ * % If

. Section 755, added by amendment in 1952, provides that, upon the entry of an order in a Chapter XI proceeding directing “that bankruptcy be proceeded with, only claims for taxes legally due and owing * * * at the time of the filing of the original petition * * * and such claims as are provable under section 03 * * * shall be allowed * *
This provision does not at all affect Section 17 as to the discharge of any “part” of a provable tax claim which is not “allowable” in an insolvent estate. Just as before the 1952 amendment, the post-petition interest is included in the provable tax claim; but is a part not “allowable” unless solvency occurs during bankruptcy.

. Footnote 35, p. 989, refers to the legislative history showing that Congress has refused to amend Section 17 so as to discharge tax claims.

. The debtor retained no property not covered by the plan,