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U.S. Supreme Court

Mason v. Paradise Irrigation District, 326 U.S. 536 (1946)

Mason v. Paradise Irrigation District

No. 306

Submitted December 4, 1945

Decided January 7, 1946

326 U.S. 536


1. A plan for composition of debts of an irrigation district under Chapter IX of the Bankruptcy Act provided that the holders of outstanding bonds were to be paid in cash 52.521 cents on each dollar of principal, exclusive of interest, the cash to be supplied through a loan from the Reconstruction Finance Corporation, which was to receive new or refunding 4 percent bonds in the principal amount of its loan. Creditors owning not less than 92 percent in amount of the bonds accepted the plan, consented to the filing of the petition, and deposited their bonds under the plan. The RFC did not advance the funds to the irrigation district, but purchased the bonds at the composition figure and registered them in its name. The old bonds so acquired remained obligations of the irrigation district, were held by the RFC as security for its advances, and were to be exchanged under the plan for 4 percent refunding bonds in the full amount of its cash advances. The RFC, as holder of about 92 percent of the bonds, approved the plan prior to the filing of the petition. There was full disclosure to the security holders and to the court. The bankruptcy court, finding that all of the outstanding bonds were of one class, that the requisite percentage chanroblesvirtualawlibrary

Page 326 U. S. 537

of bondholders had approved the plan, that the irrigation district was unable to meet its debts as they matured, that the plan was fair, equitable, and for the best interests of creditors, and that it did not discriminate unfairly in favor of any creditor, approved the plan. Mason, who owned some of the old bonds and had opposed the plan, appealed, contending that, since he and the RFC were put in the same class, they should be treated alike, and he should receive 4 percent refunding bonds, instead of 52.521 cents in cash on each dollar of principal. There was no showing that the full value of his claim was more than 52.521 cents on the dollar.

Held: that this Court is unable to say that the bankruptcy court was not warranted in finding that the cash offer was fair and equitable. P. 326 U. S. 546.

2. The mere fact that the RFC holds the vast majority of all the bonds and is in a dominant position in the reorganization does not mean that it is entitled to preferred treatment. P. 326 U. S. 541.

3. However, those who put new money into a distressed enterprise may be given preferred treatment. Pp. 326 U. S. 541, 326 U. S. 543.

4. Congress intended the RFC to be treated in such situations as a creditor. P. 326 U. S. 542.

5. The securities acquired by the RFC pursuant to the plan of composition are not extinguished, and may be computed in determining the percentage of consenting creditors necessary for the filing of a petition under Chapter IX. P. 326 U. S. 542.

6. Since there was no showing that 52.521 cents in cash was not as advantageous as 52.521 cents in refunding bonds, it is impossible for this Court to say that, although a difference in treatment was warranted, any discrimination in favor of the RFC was so great as to be unfair. P. 326 U. S. 543.

7. While the provision of 11 U.S.C. § 403(b) to the effect that holders of all claims payable without preference from the same source shall be put in one class states the general rule, the bankruptcy court has the power to make a different classification where inequitable results would otherwise obtain. P. 326 U. S. 544.

8. Under § 403(j), the securities acquired by the RFC may be included in the percentage of consenting securities necessary for the filing of a petition under Chapter IX. P. 326 U. S. 544.

9. Section 403(d), requiring approval by creditors "holding at least two-thirds of the aggregate amount of claims of all classes," is construed to mean two-thirds of the total amount of all claims in all classes, and not two-thirds of each class. P. 326 U. S. 544.

10. The purpose of this legislation to give taxing agencies a workable and practical method of obtaining relief from oppressive debt burden chanroblesvirtualawlibrary

Page 326 U. S. 538

would be thwarted or impeded if Chapter IX were given a construction which placed the fate of composition plans in the hands of minority nonconsenting bondholders. P. 326 U. S. 545.

11. Provision "for the protection" of the claims of nonassenting creditors, as provided in § 403(d), could be made by leaving them undisturbed; but, if the nonassenting creditors had the option to come in under the plan or to retain their old securities, the debtor would be unable to get the relief which Chapter IX affords, or could do so only on such terms as a minority dictated. P. 326 U. S. 545.

12. Assuming that provision "for the protection" of the claims of nonassenting creditors could be made under § 403(d) in ways other than by leaving the claims undisturbed, there would seem to be no reason why payment in cash of the full value of their claims would not be adequate. P. 326 U. S. 546.

149 F.2d 334, affirmed.

Certiorari, post, p. 704, to review affirmance of a decree approving a plan of composition of the debts of an irrigation district under Chapter IX of the Bankruptcy Act -- limited to the question whether it was proper to approve a plan which treated petitioner differently from the Reconstruction Finance Corporation.

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