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June 11, 1946


The opinion of the court was delivered by: MOSCOWITZ

Three distinct questions of law are presented upon this review of the Special Master's report. A recital of the facts common to all three may precede a statement of the questions.

The debtor publicly issued in each of the years 1925, 1927 and 1928 coupon bonds in the aggregate principal sum of $ 15 million bearing interest at 6% per annum. These bonds were guaranteed as to principal and interest by New York Investors, Inc. On July 10, 1933, the debtor filed a voluntary petition in bankruptcy in the United States District Court of the Eastern District of New York, culminating in an offer of composition which, as amended, was accepted by the creditors, approved by the court, 6 F.Supp. 549, and became effective as of the date of filing. Pursuant to the new indenture, the outstanding bonds were to mature on October 1, 1943 and were to bear interest at 5% per annum payable out of earnings, any unpaid portion to be cumulative and payable with the principal at maturity. The new indenture also provided for the reservation of any rights which the bondholders might have against New York Investors, Inc. growing out of the latter's guaranty of the three earlier bond issues. In 1935, an involuntary petition for the reorganization of New York Investors, Inc. was filed and eventually the assets of that estate were liquidated in bankruptcy, resulting in dividends totaling 2.0694%. The bondholders herein received that proportion of their claim on the guaranty.

 On September 28, 1943, three days prior to the maturity of its obligations, the debtor herein filed a voluntary petition for reorganization under Chapter X of the Bankruptcy Act. During the course of the proceeding, various principal and interest payments were made to the bondholders which are immaterial to the matters at issue except insofar as they must be considered in computing the amounts unpaid. On April 2, 1945, before a plan of reorganization had been promulgated by the Trustees, the Court made an order which terminated and dismissed the proceeding for the unique reason that the debtor made available to the Trustees sufficient funds to pay all the public holders the full amount of the unpaid principal of their bonds with accrued and accumulated interest at 5% per annum to April 15, 1945, the date set for payment. Jurisdiction was reserved in this Court for determination of the three questions which are now here for review, the Trustees holding security for any payments required of the debtor.

 The three matters will be discussed in the order of their enumeration They are:

 I. Whether interest is payable at 5% or 6% on the unpaid principal from October 1, 1943, to April 15, 1945;

 II. Whether and at what rate interest is payable on the accumulated interest accrued on October 1, 1943 from that date until payment; and

 III. Whether a fund representing the amount of the dividends paid by New York Investors, Inc., should be paid to the bondholders or to the trustee of the bankrupt New York Investors, Inc.


 The Special Master has recommended that the bondholder's claim to interest at 6% per annum from October 1, 1943, to April 15, 1945, on principal be allowed. It is the contention of the debtor that interest at 5% for the same period is due, which has already been paid.

 The difference in views seems to stem from opposing applications of what is evidently settled New York law. Where a bond or other contract contains no provision for a rate of interest in the event that the principal is not paid at maturity, the law will impose as damages against the debtor the obligation to pay interest at the legal rate of 6% from the due date. Ferris v. Hard, 135 N.Y. 354, 32 N.E. 129; Pryor v. City of Buffalo, 197 N.Y. 123, 90 N.E. 423; Sands v. Gilleran, 159 App.Div. 37, 144 N.Y.S. 337; Oswego City Sav. Bank v. Board of Education, 70 App.Div. 538, 75 N.Y.S. 417, affirmed 174 N.Y. 515, 66 N.E. 1113. On the other hand, if the parties have themselves agreed that the rate of interest required to be paid before maturity shall also govern in the event that the principal is not paid when due, the agreement will be given effect and the debtor will be bound to pay the contract rate, be it higher or lower than 6%. Taylor v. Wing, 84 N.Y. 471; O'Brien v. Young, 95 N.Y. 428, 47 Am.Rep. 64; Zimmermann v. Klauber, 139 App.Div. 26, 123 N.Y.S. 642; City Real Estate Co. v. MacFarland, 67 Misc. 286, 122 N.Y.S. 477; Elmira, Iron & Steel Rolling Mill Co. v. City of Elmira, 5 Misc. 194, 25 N.Y.S. 657; Agency of Canadian Car & Foundry Co. v. American Can Co., 2 Cir., 1919, 258 F. 363, 6 A.L.R. 1182; In re Oklahoma Ry. Co. D.C. Okl. 1945, 61 F.Supp. 96. Difficulty often arises, as it does here, in determining whether or not the parties have agreed upon a rate to control after maturity. The answer lies in construction of the contract to ascertain their intention.

 The pertinent provisions of the contract here involved, viz. the bonds as controlled by the 1933 indenture, are as follows:

 'Article III. Interest in Retirement Covenants by the Company.

 'Section 1: 'The Company covenants that it will pay to the registered holder * * * until the reduced principal of each bond shall be duly paid * * * interest on the reduced principal amount thereof from July 10th, ...

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