Moore, Smith and Kaufman, Circuit Judges.
In May, 1963, Credit Industrial Corporation (CIC) consented to an involuntary petition in bankruptcy. CIC was a commercial finance company located in New York City which financed its operations primarily by loans from individual and institutional lenders. The institutional creditors, consisting of some 29 banks and a financial corporation, filed claims which were allowed in the amount of $9,830,381.21. In addition to borrowing from the institutional lenders, CIC had borrowed from certain individuals on promissory notes which bore a high rate (10%-12%) of interest and which subordinated payment of such notes until CIC's obligations to the institutional creditors were satisfied. These individual creditors filed claims which were allowed in the amount of $926,265.09.
The trustees in bankruptcy of CIC, appellants and cross-appellees Milton S. Gould, Alan Harris and Henry Landau ("the trustees"), applied for an order subordinating the claims of the holders of the subordinated notes to the claims of the institutional creditors. Resisting the trustees' petition for an adjudication (amongst other things) that the claims of the individual noteholders were subordinate to the institutional creditors, seventeen individual creditors (hereinafter referred to as the noteholders) filed six answers to the trustees' application which collectively alleged various defenses and counterclaims demanding affirmative relief. The defenses asserted, so far as relevant to this appeal, in substance were (a) that the institutional creditors had not advanced funds to CIC in reliance on the subordination agreements; (b) that the institutional creditors had waived their rights to enforce the agreements by knowingly permitting CIC to pay the noteholders' claims on demand, and (c) that the agreements were invalid for the reason that CIC had fraudulently induced the noteholders to accept them. In addition, noteholder Leo B. Levin, since deceased and who is represented as an appellee and cross-appellant here by Jeanne Levin, executrix of his estate (Levin), contended that the subordination agreements were invalid on the grounds that CIC had issued and sold subordinated notes in violation of federal securities laws, and that the terms of the agreements were vague, ambiguous and failed to state specifically that they were applicable to bankruptcy proceedings.
The trustees moved to dismiss the defenses as legally insufficient and noteholder Levin cross-moved for summary judgment. The Referee dismissed all the defenses and counterclaims asserted except the defense of non-reliance, holding that the institutional creditors would have to prove reliance on the subordination agreements before the claims of the noteholders could be subordinated. He also denied Levin's motion for summary judgment. The trustees and Levin separately filed petitions to review the order of the Referee in the district court pursuant to Section 39(c) of the Bankruptcy Act, 11 U.S.C. § 67(c). The district court upheld the Referee's determination that a showing of reliance is a prerequisite to the enforcement of an express subordination agreement in bankruptcy proceedings. The district court also affirmed the Referee's dismissal of the defenses based on fraud, on violations of the federal securities laws and on waiver on the ground that they were superfluous and thus did not pass on their legal sufficiency. The district court rejected the ambiguity defense as frivolous finding that the provisions of the subordination agreements were not vague and were broad enough to encompass bankruptcy proceedings.
The trustees appeal from so much of the district court's order as holds that non-reliance is a defense to the enforcement of the subordination agreements. Levin appeals from the affirmance of the Referee's denial of his motion for summary judgment whereby he sought to have his claim placed on a parity with all other creditors, from the striking of various defenses in his answer as legally insufficient and from placing the burden on him of pleading as a defense non-reliance by the institutional creditors.
Motion to Dismiss Appeals of Certain Noteholders
Preliminarily, the right of certain noteholders to appeal must be determined. Noteholders Rose Friedman, Edith Keller, Beverly Keller, Pauline Goldstein, and Fannie Winnick (the Friedman group), and Benjamin Fried, Marcus Fried, Milton Schwartz, Arthur Hilton, Gertrude L. Hilton and Edward H. Bottner (the Fried group) filed timely notices of appeal in this court. The trustees, however, filed a motion in this court to dismiss the appeals of the Friedman and Fried groups on the ground that they had failed to petition the district court for review of the Referee's order pursuant to the requirements set forth in Section 39(c) of the Bankruptcy Act, 11 U.S.C. § 67(c), which provides in relevant part that "[a] person aggrieved by an order of a referee may, within ten days after the entry thereof * * *, file with the referee a petition for review of such order by a judge * * *. Unless the person aggrieved shall petition for review of such order within such ten-day period * * * the order of the referee shall become final." In an order dated March 2, 1966 this court postponed hearing the trustees' motion and consolidated the appeals of the two groups of noteholders and the trustees' motion with the trustees' and Levin's appeals.
In support of the motion to dismiss, the trustees argue that since, under the terms of Section 39(c), the Referee's order has become final as to the Friedman and Fried groups, they cannot be considered aggrieved parties, and thus neither the district court nor this court can entertain their appeals. The noteholders, on the other hand, contend that the trustees' petition filed in the district court preserved the rights of all creditors to seek review on the theory that, if such were not the case, the trustees would be guilty of favoring one group of creditors (the institutional creditors) to the detriment of others. The determinative question is whether the purpose underlying the finality provision in Section 39(c) would be defeated by permitting the Friedman and Fried groups to participate in this appeal.
The finality provision in Section 39(c), which was added to the Bankruptcy Act in 1960, was designed to remove the uncertainty as to the finality of orders issued by bankruptcy referees which had resulted from bankruptcy courts exercising their discretion to permit untimely petitions for review of such orders, i.e., those filed more than ten days after entry of the orders. See S.Rep. No. 1689, 86th Cong., 2d Sess. (1960), U.S.Code Cong. & Admin.News 1960, p. 3194. But here there is no possibility that participation in this appeal by the Friedman and Fried groups would create uncertainty in the finality of the Referee's order or delay these bankruptcy proceedings since that order is properly before this court as a result of Levin's timely petition for review filed in the district court. Compare MacNeil v. Gargill, 231 F.2d 33 (1st Cir. 1956). To prevent the Friedman and Fried groups from using to their advantage determinations of this court which might be favorable to Levin would be clearly inequitable and contrary to the wellestablished policy of like treatment for like creditors. Moreover, both the Friedman and Fried groups filed briefs in the district court which opposed the trustees' attack on the Referee's decision concerning reliance and supported Levin's challenge to the Referee's dismissal of other defenses to enforcement of the subordination agreement which they had raised in common with him.*fn1 Consequently, we deny the trustees' motion to dismiss and hold that the Friedman and Fried groups can participate in this appeal as to all questions presented for consideration to the district court by Levin's timely petition for review. Their participation must be so restricted since, if they were permitted to challenge portions of the Referee's order that were not before the district court for review, finality of the Referee's order would be placed in jeopardy and the purpose behind the 1960 amendment of Section 39(c) would be frustrated.
Lack of Reliance by the Institutional Creditors on the Subordination Agreements
In bankruptcy, the parties claiming rights to participate in the assets of the bankrupt must do so in accordance with such contractual rights against the debtor as they may have purchased or acquired. Bankruptcy does not provide a forum for the realignment of rights or priorities but serves only as a forum for the recognition of rights already acquired. Thus the common stockholder, the first and second preferred, the debenture, note and mortgage holders in various degrees, must be accorded those rights and priorities set forth in the securities which they hold. Attention, therefore, must be focused on the contract upon the basis of which the noteholders loaned various amounts to CIC. If the terms of the contracts are clear and unambiguous, as they are here, it is unnecessary to resort to strained theories of third-party beneficiary, estoppel or general principles of equity to evaluate and determine the proper respective positions of the parties involved.
Looking at the promissory notes which are all substantially alike, we find that the lender knew that until CIC should satisfy "every one of its present or future loans, * * * now in existence or hereafter incurred from any bank, finance company, * * * or any other institutional organization hereinafter referred to collectively as 'institutional creditors,'" CIC would not pay the notes in whole or in part. So long as there was no default in the payment of CIC's obligation to the institutional creditors, interest could be paid on the notes. Any payments on the notes prior to the satisfaction of the indebtedness to the institutional creditors were to be held by the noteholders in trust for the institutional creditors. The noteholders also knew that there was to be no contractual relationship between them and the institutional creditors because "all notice of the acceptance of this subordination provision by any institutional creditor" or "of the reliance by any such institutional creditor upon the subordination herein contained" was specifically waived. In short, just ...