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U.S. Supreme Court

Vanston Bondholders Protective Committee v. Green, 329 U.S. 156 (1946)

Vanston Bondholders Protective Committee v. Green

No. 42

Argued October 22, 1946

Decided December 9, 1946*

329 U.S. 156


In a reorganization proceeding under Chapter X of the Bankruptcy Act, claim was made under a covenant in a first mortgage indenture for interest on interest which had accrued after payments by the debtor corporation had been suspended by a court order in an equity receivership, which was succeeded by a reorganization proceeding under § 77B and later by the Chapter X proceeding. The corporation was insolvent; its assets were sufficient to pay the first mortgage bondholders in full, including the interest on interest, but to

Page 329 U. S. 157

allow payment of the interest on interest would greatly reduce the share of the subordinate creditors in the reorganized corporation.


1. Since the interest was left unpaid by order of the court, imposition of interest on that unpaid interest would be inequitable. P. 329 U. S. 165.

2. It is not necessary for this Court to pass on the question of possible conflicts between the laws of different States having some interest in the indenture transaction or upon the validity of the provision for the payment of interest on interest under applicable state law; because a bankruptcy court, in determining what claims are allowable and how a debtor's assets shall be distributed, does not apply the law of the State where it sits, but administers and enforces the Bankruptcy Act in accordance with equitable principles. P. 329 U. S. 162.

3. The general rule in bankruptcy and in federal equity receivership has long been that interest on the debtor's obligations ceases to accrue at the beginning of proceedings, since exaction of interest where power of a debtor to pay was suspended by law would be inequitable. P. 329 U. S. 163.

4. Simple interest on secured claims accruing after the petition was filed is denied unless the security is worth more than the sum of principal and interest due. P. 329 U. S. 164.

5. To allow a secured creditor interest where his security is worth less than the value of his debt would be inequitable to unsecured creditors. P. 329 U. S. 164.

6. But, where an estate is ample to pay all creditors and to pay interest even after the petition was filed, equitable considerations permit payment of this additional interest to the secured creditor, rather than to the debtor. P. 329 U. S. 164.

7. The touchstone of each decision on allowance of interest in bankruptcy, receivership, and reorganization has been a balance of equities between creditor and creditor or between creditors and the debtor. P. 329 U. S. 165.

8. That this proceeding has moved from equity receivership through § 77B to Chapter X in the wake of statutory change does not make these equitable considerations inapplicable. P. 329 U. S. 165.

9. It would not be consistent with equitable principles to enrich the first mortgage bondholders at the expense of the subordinate creditors because of a failure to pay when payment had been prohibited by a court order entered for the joint benefit of debtor, creditors, and the public. Pp. 329 U. S. 165-167.

151 F.2d 470 affirmed.

Page 329 U. S. 158

A District Court appointed an equity receiver for a corporation and suspended payment of its debts. The equity receivership was succeeded by reorganization proceedings under § 77B of the Bankruptcy Act, and later by a Chapter X proceeding. The District Court held the first mortgage bondholders entitled to interest on interest accruing after the receivership, on the theory that the validity of the covenant therefor was determined by New York law, and that it was valid thereunder. Holding that New York law prohibited covenants for payment of interest on interest, the Circuit Court of Appeals reversed. 151 F.2d 470. This Court granted certiorari. 327 U.S. 774. Affirmed on other grounds. P. 329 U. S. 167.

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