Appeal from a judgment of the United States District Court for the Southern District of New York, John M. Cannella, Judge, reversing an order of Bankruptcy Judge Edward J. Ryan and holding the 11 U.S.C. § 103(a)(1) does not entitle senior creditors to collect interest accruing after date of bankruptcy from junior creditors, absent express provision in the subordination agreement.
Lumbard, Oakes and Timbers, Circuit Judges.
We agree with the United States District Court for the Southern District of New York, John M. Cannella, Judge, reversing the decision of Bankruptcy Judge Edward J. Ryan, that under the subordination agreement here in question, the senior creditors are not entitled to be paid interest accruing after the date of bankruptcy through the date of payment of principal. Interest stops running against the bankrupt on the date of bankruptcy, § 63(a)(1) of the Bankruptcy Act, 11 U.S.C. § 103(a)(1), because any delay thereafter is by law for the preservation of the estate. Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 163, 91 L. Ed. 162, 67 S. Ct. 237 (1946). See 3A Collier, Bankruptcy para. 63.16.*fn1 See also City of New York v. Saper, 336 U.S. 328, 330-32, 93 L. Ed. 710, 69 S. Ct. 554 (1949); Sexton v. Dreyfus, 219 U.S. 339, 344-45, 55 L. Ed. 244, 31 S. Ct. 256 (1911).
Post-petition interest, Judge Cannella rightly held, is, for similar reasons, not recoverable by senior creditors out of dividends due from the estate to junior creditors, at least absent a structure of priorities among creditors by express provision in the subordination contract. In re Kingsboro Mortg. Corp., 379 F. Supp. 227 (S.D.N.Y. 1974).*fn2 Here the contract does not explicitly refer to post-bankruptcy interest. Judge Cannella's decision requiring unambiguous language in the subordination agreement conforms to the Third Circuit's in In re Time Sales Finance Corp., 491 F.2d 841 (3d Cir. 1974), and was followed by District Judge Winner in In re King Resources Co., 385 F. Supp. 1269 (D. Colo. 1974). Nor is our In re Credit Industrial Corp., 366 F.2d 402, 408 (2d Cir. 1966), inconsistent. That case did not involve post-petition interest, even while recognizing that subordination agreements are not unenforceable as such in bankruptcy.
We agree, then, that the language in Section 12(b) of the Subordination Agreement, "In the event of any insolvency, bankruptcy, liquidation, reorganization or other similar proceedings . . then all principal and interest on all Senior Debt shall first be paid in full . . before any payment on account of principal or interest is made upon the Notes [junior indebtedness]," is insufficiently express to relate to post-bankruptcy interest. This conclusion is reinforced by the language of the final paragraph of Section 12 that "The provisions of this section 12 are for the purpose of defining the relative rights of the holders of Senior Debt on the one hand, and the holders of the Notes on the other hand, against the Company [the bankrupt] and its property . . ." (emphasis added); the section in other words relates to priorities among creditors against the bankrupt estate, not inter sese. Appellants argue this final paragraph refers to reorganization under Chapter X and not to bankruptcy or an arrangement under Chapter XI. Not only do we find no such limitation; reference back to Section 12(b) above quoted indicates application specifically to "bankruptcy" as well as "reorganization."