SIBLEY, Circuit Judge.
The case concerns the proper application, of Subsection (s) of Sect. 75 of the Bankruptcy Act, 11 U.S.C.A. Sect. 203(s)'. .Benno Bartels as a farmer applied for -a composition and extension of his debts and his petition was approved and referred to the Conciliator. At the creditors’ meeting Bartels expressed a willingness to pay in full if given time, and proposed to work his farm himself and to apply the proceeds of the crops to his debts, selling and paying over at once property not needed on the farm. Theretofore he had let it out on shares because he had hurt his back, and poor crops had been made. He came to an agreement with his unsecured creditors but John Hancock Mutual Life Insurance Company held a mortgage on the farm for $6,000 principal, interest on which was three years in arrears, and this debt was a majority in amount of all his debts. This creditor required present payment of all arrearages, and since Bartels could not arrange cash therefor he could make no acceptable proposal. He then amended his petition and prayed to be adjudged a bankrupt under Subsection (s). On Jan. 10, 1938, he was so adjudged and the case re-referred to the Conciliator as referee. Bartels appears to have continued in possession of the farm, but under what terms does not appear. About ten weeks later the Insurance Company moved, not to have its security sold, but that the adjudication in bankruptcy be set aside and all proceedings dismissed. The bankrupt resisted this. On a hearing the judge held there was no reasonable probability of the mortgaged property being sold for enough to give the debtor any substantial equity, and that accordingly there was no reasonable probability of his financial rehabilitation. The motion was granted, the adjudication set aside and the cause dismissed, largely on the authority of our decision in Baxter v. Savings Bank of Utica, 5 Cir., 92 F.2d 404. Other decisions from the Circuit Court of Appeals cited to support the judgment are: In re Borgelt, 7 Cir., 79 F.2d 929, approving and affirming D.C., 10 F. Supp. 113; Knotts v. First Carolinas Joint Stock Land Bank, 4 Cir., 86 F.2d 551; and Massey v. Farmers & Merchants Bank, 4 Cir., 94 F.2d 526. Of these the first rested on two grounds, that the debtor had not made a good faith offer, and there were no assets to be administered. The second was really decided on the erroneous ground that Subsection (s) was unconstitutional. The third squarely took the position that Subsection, (s) cannot be invoked unless the initial offer made to creditors has come up to certain rather vague standards which would show good faith.
Confusion has arisen, we think, touching the way in which Subsection (s) fits into the scheme of bankruptcy, as to when [815] the stay provided therein may be denied, and how security holders are to have their rights preserved. Farmers were favored in the original Bankruptcy Act in that while they might voluntarily go into bankruptcy, they could not be forced in. This is continued in proceedings under Section 74 (l) 11 U.S.C.A. Sect. 202(1). Section 75 deals only with farmers, and as stated at its end, Subsection (s) (6), 11 U.S.C.A. § 203(s) (6) is emergency legislation, limited originally to five years, and not to be applied where the judge finds no emergency to exist locally. The emergency was the great economic depression which in 1933 had rendered farming unprofitable, and farm lands unsalable for their normal value. To force the sale of farms under such circumstances would be a hardship on the farmer who on a basis of normal values was really solvent, and would cause those who were insolvent to lose their means of livelihood, and probably in great numbers go to swell the ranks of the unemployed and those needing public relief. The surplus value inherent in the farms would, after economic revival, accrue to speculative buyers, and aggravate the social evil of the rich becoming ever richer and the poor poorer. Creditors as a rule do not wish farms, and 'would under safe arrangements prefer to extend time or to compromise their debts, if it would enable their farmer debtor to continue in business and pay them. Section 75 is intended to serve all these interests while seeking mainly to help distressed farmers so far as that may rightly be done. Its benefits are expressly extended both to those who cannot meet their debts as they mature, but are solvent in a bankruptcy sense, and to those who are insolvent. Subsection (c)’, 11 U.S.C.A. § 203(c).
Free access — add to your briefcase to read the full text and ask questions with AI
SIBLEY, Circuit Judge.
The case concerns the proper application, of Subsection (s) of Sect. 75 of the Bankruptcy Act, 11 U.S.C.A. Sect. 203(s)'. .Benno Bartels as a farmer applied for -a composition and extension of his debts and his petition was approved and referred to the Conciliator. At the creditors’ meeting Bartels expressed a willingness to pay in full if given time, and proposed to work his farm himself and to apply the proceeds of the crops to his debts, selling and paying over at once property not needed on the farm. Theretofore he had let it out on shares because he had hurt his back, and poor crops had been made. He came to an agreement with his unsecured creditors but John Hancock Mutual Life Insurance Company held a mortgage on the farm for $6,000 principal, interest on which was three years in arrears, and this debt was a majority in amount of all his debts. This creditor required present payment of all arrearages, and since Bartels could not arrange cash therefor he could make no acceptable proposal. He then amended his petition and prayed to be adjudged a bankrupt under Subsection (s). On Jan. 10, 1938, he was so adjudged and the case re-referred to the Conciliator as referee. Bartels appears to have continued in possession of the farm, but under what terms does not appear. About ten weeks later the Insurance Company moved, not to have its security sold, but that the adjudication in bankruptcy be set aside and all proceedings dismissed. The bankrupt resisted this. On a hearing the judge held there was no reasonable probability of the mortgaged property being sold for enough to give the debtor any substantial equity, and that accordingly there was no reasonable probability of his financial rehabilitation. The motion was granted, the adjudication set aside and the cause dismissed, largely on the authority of our decision in Baxter v. Savings Bank of Utica, 5 Cir., 92 F.2d 404. Other decisions from the Circuit Court of Appeals cited to support the judgment are: In re Borgelt, 7 Cir., 79 F.2d 929, approving and affirming D.C., 10 F. Supp. 113; Knotts v. First Carolinas Joint Stock Land Bank, 4 Cir., 86 F.2d 551; and Massey v. Farmers & Merchants Bank, 4 Cir., 94 F.2d 526. Of these the first rested on two grounds, that the debtor had not made a good faith offer, and there were no assets to be administered. The second was really decided on the erroneous ground that Subsection (s) was unconstitutional. The third squarely took the position that Subsection, (s) cannot be invoked unless the initial offer made to creditors has come up to certain rather vague standards which would show good faith.
Confusion has arisen, we think, touching the way in which Subsection (s) fits into the scheme of bankruptcy, as to when [815] the stay provided therein may be denied, and how security holders are to have their rights preserved. Farmers were favored in the original Bankruptcy Act in that while they might voluntarily go into bankruptcy, they could not be forced in. This is continued in proceedings under Section 74 (l) 11 U.S.C.A. Sect. 202(1). Section 75 deals only with farmers, and as stated at its end, Subsection (s) (6), 11 U.S.C.A. § 203(s) (6) is emergency legislation, limited originally to five years, and not to be applied where the judge finds no emergency to exist locally. The emergency was the great economic depression which in 1933 had rendered farming unprofitable, and farm lands unsalable for their normal value. To force the sale of farms under such circumstances would be a hardship on the farmer who on a basis of normal values was really solvent, and would cause those who were insolvent to lose their means of livelihood, and probably in great numbers go to swell the ranks of the unemployed and those needing public relief. The surplus value inherent in the farms would, after economic revival, accrue to speculative buyers, and aggravate the social evil of the rich becoming ever richer and the poor poorer. Creditors as a rule do not wish farms, and 'would under safe arrangements prefer to extend time or to compromise their debts, if it would enable their farmer debtor to continue in business and pay them. Section 75 is intended to serve all these interests while seeking mainly to help distressed farmers so far as that may rightly be done. Its benefits are expressly extended both to those who cannot meet their debts as they mature, but are solvent in a bankruptcy sense, and to those who are insolvent. Subsection (c)’, 11 U.S.C.A. § 203(c).
The applicant under Section 75 is at first not a bankrupt, but a debtor. The aid of the court is first extended to secure a voluntary adjustment with his creditors, both secured and unsecured, which will enable him to continue to farm, the will of a majority in number and amount controlling the minority. If this adjustment cannot be accomplished, the farmer may wholly drop the matter, or he may turn to Subsection (s) and “amend his petition * * * asking to be adjudged a bankrupt.” When so .adjudged he becomes a bankrupt under the bankruptcy law, required to surrender his property except exemptions, and entitled to ask a discharge from his debts. But Subsection (s) introduces for a farmer who timely invokes it very important changes in the applicable bankruptcy law. Instead of immediately surrendering his property, and especially his farm and equipment, he may retain them, or so much as he requests, for three years, paying a reasonable rent for them, and may even at the appraised value redeem them on terms fixed by the court, the redemption money then becoming part of the estate to be distributed in bankrupty in place of the property itself. All this, as respects unsecured creditors, has been considered to be within the bankruptcy power of the federal government. But secured creditors whose liens antedate the law have as to their security vested rights which must be effectuated. The present Subsection (s) has been construed as sufficiently flexible to care for them. Wright v. Vinton Branch Bank, 300 U.S. 440, 57 S.Ct. 556, 81 L.Ed. 736, 112 A.L.R. 1455. A creditor with a mortgage on the farm may be able to force a sale which will defeat a rehabilitation of the farmer which might otherwise have been accomplished. And, although there be no secured debts, or they are not urgently pressed, rehabilitation may appear to be impracticable, or pending it the farmer may breach his obligations, and then ordinary bankruptcy procedure may be ordered to go forward as Subsection (s) (3) declares. In neither case under a proper construction of Section 75 is the entire proceeding to be dismissed. On the contrary, when the rehabilitation sought by Subsection (s) fails, the farmer is still a bankrupt, and his estate is to be administered and his debts discharged as in other cases of voluntary bankruptcy. “In proceedings under this section [Section 75] except as otherwise provided herein, the jurisdiction and powers of the courts, the title, powers, and duties of its officers, the duties of the farmer, and the rights and liabilities of creditors, and of all persons with respect to the property of the farmer and the jurisdiction of the appellate courts, shall be the same as if a voluntary petition for adjudication had been filed and a decree of adjudication had been entered on the day when the farmer’s petition, asking to be adjudged a bankrupt, was filed with the clerk * * Subsection (n), 11 U. S.C.A. § 203 (n). Much more is the general bankruptcy law to be applied after an adjudication as a bankrupt has been actually made under Subsection (s). The only mention of dismissing the proceedings which we find is in Subsection (l), 11 U.S. [816] C.A. § 202 (l), when a composition has been carried out, or optionally when an extension proposal has been confirmed.
The courts have spoken of a lack of “good faith” in invoking Section 75 as a cause for dismissing the whole proceeding, and some countenance has been given the idea in a foot-note to the opinion in the case of Wright v. Vinton Bank, supra. We do not understand it to be a part of the court’s opinion. The note mistakenly states that good faith is made a requirement of the initiation of a proceeding under Sect. 75. That requirement appears in Sect. 74 (a), 11 U.S.C.A. § 202(a). Section 75 nowhere mentions initial “good faith” as a prerequisite to invoking Subsection (s), or going through bankruptcy if rehabilitation under that Subsection fails. The good faith of the offer and acceptance is to be enquired into by the court be'fore. confirming a composition or extension accepted by the majority of creditors, Subsection (i), 11 U.S.C.A. § 203(i) and that is the only mention of good faith in Sect. 75. If the farmer is desirous of continuing to farm and is willing to give his creditors their full rights in his property as the law fixes them hoping to obtain from them such extension or compromise as will enable him to work out, that we think is all the good faith necessary. That -he has no equity in his property but is actually insolvent is no bar. The statute says so in Subsection (c). That his creditors refuse to compromise or give time so as to enable him to farm, merely gives him the right to proceed in bankruptcy under Subsection (s) and thus to try conclusions with the judge. That Bartels in this case had no plan to present to his creditors except to offer to go to work personally on the farm/with his grown son, and apply presently to his secured debt what he could raise by selling some mercantile property and vacant lots, hoping to pay all in full finally, does not require the dismissal of his proceedings. His unsecured creditors were actually content to adopt the plan. The secured creditor whose debt was a majority in amount was not content. Bartels thereupon rightly asked adjudication as a bankrupt, invoking Subsection (s). His secured creditor had the right thereafter to ask the court for a sale or other disposition of the security, if the delay and rentals fixed under Subsection (s) would impair his vested rights. This he did not do. He had no right to set aside the adjudication and dismiss the proceeding. If there is no substantial equity, actual or potential, above the mortgage debt reasonably to be saved, a sale of the farm may be ordered, defeating of course rehabilitation, but the adjudication would stand and administration in bankruptcy continue. It was error in this case to set aside the adjudication and dismiss the proceedings.
What we said about Subsection (s)' in Dallas Land Bank v. Davis, 5 Cir., 83 F.2d 322, we see no occasion to modify. In Baxter v. Savings Bank of Utica, 5 Cir., 92 F.2d 404, the disposition of the case was correct, but some off the language touching initial good faith as a prerequisite to invoking Subsection (s), 11 U.S.C.A. § 203 (s), and indicating that the' adjudication under Subsection (s) should have been set aside to make way for another adjudication we now think was inaccurate. The adjudication under- Subsection (s) is good if the farmer never makes any applicatiqn to retain possession of his property and for its appraisal and a stay of all other proceedings. The language of the statute shows that such application is optional, and the option may be lost by failure to assert it ■at the times the statute names. “Such farmer may, at the same time, or at the time of the first hearing, petition the court that all of his property * * * be appraised,” etc. If no such petition is made, or if later the benefits of possession - and stay are defeated, the adjudication stands as a voluntary adjudication in bankruptcy. Appropriate proceedings ought to follow.
The judgment rendered on the motion of the Insurance Company is reversed and the case ordered reinstated for further proceedings not inconsistent with this opinion.