1. Subsections (a) to (r) of § 75 of the Bankruptcy Act do not
provide that a petition for composition or extension shall be
dismissed in the absence of a reasonable probability of the
financial rehabilitation of the debtor, nor do they warrant the
imputation of lack of good faith to a farmer debtor because of that
plight. P.
308 U. S.
184.
2. The purpose of § 75 of the Bankruptcy Act is to afford relief
to debtors in economic distress, however severe, by giving them a
chance to seek an agreement with their creditors, under subsections
(a) to (r) and, failing this, to ask for the other relief afforded
by subsection (s). P.
308 U. S.
184.
The farmer debtor may offer to pay what he can, and he is not to
be charged with bad faith in taking the course for which the
statute expressly provides.
3. Section 75(i) of the Bankruptcy Act in providing that, before
confirming proposals for composition or extension the court must be
satisfied that the offer and its acceptance are in good faith and
have not been made or procured by forbidden means or except as
provided by the statute, hits at secret advantages to favored
creditors or other improper or fraudulent conduct. P.
308 U. S.
185.
4. A farmer debtor, having failed to obtain the acceptance under
§ 75 of the Bankruptcy Act, subsections (a) to (r), by the
requisite majority of creditors, of a proposal for composition or
extension of time to pay his debts, filed his amended petition
under subsection (s) praying that he be adjudged a bankrupt, that
his property be appraised, that his exemptions be set aside, and
that he be permitted to retain possession of his property under the
supervision of the court.
Held, that he was entitled to be so adjudged and to
have his proceeding for relief entertained and his property dealt
with in accordance with that subsection, and that the court of
bankruptcy erred in dismissing the petition upon the ground that,
under the evidence, there was no reasonable probability of his
financial rehabilitation and because, in the judge's opinion,
Page 308 U. S. 181
no offer had been made by the debtor which could be construed a
an offer in good faith for extension and composition. P.
308 U. S.
183.
100 F.2d 813 affirmed.
Certiorari, 307 U.S. 617, to review the reversal of a decree
dismissing the petition of a farmer debtor to be adjudged a
bankrupt under § 75(s) of the Bankruptcy Act.
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
In this proceeding brought by a farmer under § 75 of the
Bankruptcy Act, the District Court dismissed the debtor's petition.
The Circuit Court of Appeals held that this action was contrary to
the requirements of the statute, and directed the proceeding to be
reinstated. 100 F.2d 813. Because of conflict in the rulings of the
Court of Appeals of the Fifth Circuit, due to the differing views
of the judges composing the court in the cases cited, [
Footnote 1] and because of the
importance of the question, we granted certiorari, 307 U.S.
617.
Respondent Bartels presented his petition to the District Court
on December 2, 1937, asking that he be afforded an opportunity to
effect a composition or extension
Page 308 U. S. 182
of time to pay his debts under § 75. The court referred the
matter to a conciliation commissioner, directing the debtor to
appear before the commissioner and to submit to such orders as
might be made in proceedings under that section. A meeting of the
creditors was held on December 21, 1937, at which the debtor was
present and was examined. It appeared that his debts amounted to
about $10,000 of which about $8,000 (including interest and
attorney's fees) was owing to the John Hancock Mutual Life
Insurance Company and was secured by a lien upon his home. As the
debtor was unable to obtain an agreement with a majority of his
creditors in number and amount, he notified the commissioner that
he would apply to be adjudged a bankrupt under subsection (s) of §
75. That application was filed on January 10, 1938. The debtor
asked that "his property be appraised," that "his exemption be set
aside to him," and that he be permitted "to retain possession of
his property under the supervision of the court." On the same day,
the District Judge entered an order adjudging the debtor a bankrupt
and requiring further proceedings before the commissioner acting as
referee under subsection (s).
On March 23, 1938, the John Hancock Company moved to set aside
the adjudication and to dismiss the debtor's petition on the ground
that the debtor was not entitled to avail himself of the provisions
of subsection (s); that he had not presented any feasible plan for
a composition and extension of his debts, and that his petition
"was not filed in good faith" or
"with and hope or expectation of working out his debts and
paying up his delinquencies, but apparently for the sole purpose of
hindering and delaying his creditors."
The Company also alleged that, at the fair market value of the
real property held by it as security, there was no equity for the
debtor, and that the Company would suffer irreparable loss unless
the adjudication was set aside and the proceeding dismissed.
Page 308 U. S. 183
The debtor denied these allegations and alleged that the land on
which the Company had a lien was worth, unimproved, more than
$7,000, and that the improvements were worth $6,000, and that he
thus had a large equity which would be lost to him unless he
obtained the benefits sought under the applicable law.
At the hearing of the motion on April 5, 1938, the court
received the evidence previously taken before the commissioner and
additional testimony. Thereupon the motion was granted. The
District Judge said in his opinion that the debtor had not made any
proposal which could be construed as a "good faith offer for an
extension or composition," and hence the debtor was not entitled to
be adjudged a bankrupt under subsection (s). The District Judge
observed that the evidence was conflicting as to the value of the
land (100 acres); that, separating the land from its improvements,
certain of the debtor's witnesses placed its value at $70 an acre
and the improvements at $5,000 or $6,000, while witnesses for the
creditor valued the land at about $40 an acre and the improvements
at about $2,000. He thought that there was no reasonable
probability of the property's being sold for enough to give any
substantial equity to the debtor, and accordingly found that there
was no reasonable probability of the debtor's financial
rehabilitation. In that view, the District Judge concluded "that
the order adjudicating the debtor a bankrupt under subsection (s)
was improperly entered, and should be set aside, and the cause
dismissed."
We think that the District Judge failed to follow the mandate of
the statute, and that the Circuit Court of Appeals was right in
reversing the judgment and ordering the proceeding to be
reinstated.
Subsection (s) of § 75, as amended by the Act of August 28,
1935, [
Footnote 2] prescribes a
definite course of procedure. That
Page 308 U. S. 184
subsection applies explicitly to a case of a farmer who has
failed to obtain the acceptance of a majority in number and amount
of all creditors whose claims are affected by a proposal for a
composition or an extension of time to pay his debts. That was
Bartels' situation. Provisions for proceedings by a farmer to
obtain a composition or extension, when he is insolvent or unable
to pay his debts as they mature, are found in subsections (a) to
(r) of § 75. For that relief, Bartels had presented his petition
under subsection (c), and the District Court had approved the
petition as properly filed. According to the report of the
conciliation commissioner, to whom the matter was referred
according to the statute, Bartels had appeared at the meeting of
the creditors and had submitted to a detailed examination
concerning his financial condition. He proposed to sell certain
property and to apply the proceeds to the payment in part of the
amounts due to the John Hancock Company, the secured creditor. He
succeeded in obtaining an agreement with certain unsecured
creditors for an extension, but the secured creditor refused
consent, as Bartels could not meet all his arrears. Bartels was
thus precisely in the condition prescribed in subsection (s).
The subsections of § 75 which regulate the procedure in relation
to the effort of a farmer debtor to obtain a composition or
extension contain no provision for a dismissal because of the
absence of a reasonable probability of the financial rehabilitation
of the debtor. [
Footnote 3] Nor
is there anything in these subsections which warrants the
imputation of lack of good faith to a farmer debtor because of that
plight. The plain purpose of § 75 was to afford relief to such
debtors who found themselves
Page 308 U. S. 185
in economic distress, however severe, by giving them the chance
to seek an agreement with their creditors, subsections (a) to (r),
and, failing this, to ask for the other relief afforded by
subsection (s). The farmer debtor may offer to pay what he can, as
Bartels did, and he is not to be charged with bad faith in taking
the course for which the statute expressly provides. The only
reference in § 75 to good faith is found in subsection (i), which
relates solely to the confirmation of proposals for composition or
extension, when the court must be satisfied that the offer and its
acceptance are in good faith and have not been made or procured by
forbidden means or except as provided in the statute. That
provision manifestly hits at secret advantages to favored
creditors, or other improper or fraudulent conduct.
As Bartels' case thus fell within subsection (s), he amended his
petition and asked to be adjudicated a bankrupt, as that subsection
permits. He was so adjudicated. Bartels then asked, also as
provided in subsection (s), that his property be appraised, that
his exemptions be set aside to him as provided by state law, and
that he be allowed to retain possession of his property under the
supervision of the court -- that is, subject to such orders as the
court might make in accordance with the statute. The court failed
to take that action. Instead of having the property appraised, the
court received conflicting testimony as to value, discussed the
chances of the debtor's rehabilitation, and dismissed the petition
and all proceedings thereunder.
The procedure under subsection (s) is intended to protect all
interests. It provides, in paragraph (1), that, after the value of
the debtor's property has been fixed by the prescribed appraisal,
the referee shall set aside the debtor's unencumbered exemptions
and direct his retention of possession of the rest of his property
subject
Page 308 U. S. 186
to all liens and to the court's supervision and control. Under
paragraph (2), if there has been compliance with the statutory
conditions, the court is directed to stay all proceedings against
the debtor or his property for a period of three years, and, during
that time, the debtor may retain possession of all or part of his
property subject to the court's control, provided he pays a
reasonable rental semi-annually. That rental is to be paid into
court, and is to be used first for the payment of taxes and the
upkeep of the property, and the remainder is to be distributed
among the creditors as their interests may appear. If the court
finds it necessary to protect the creditors "from loss by the
estate," or "to conserve the security," the court may order any
unexempt perishable property of the debtor, or any unexempt
personal property not reasonably necessary for the farming
operations of the debtor, to be sold at public or private sale, and
the court, in addition to the prescribed rental, may require
payments to be made by the debtor on the principal of his debts in
the manner set forth. Then it is provided, in paragraph (3), that,
at the end of the three-year period, or at any time before that,
the debtor may pay into court the appraised value of the property
of which he retains possession, "including the amount of
encumbrances on his exemptions, up to the amount of the appraisal,
less the amount paid on principal," for appropriate distribution to
his creditors. There is the proviso that, upon the request of any
creditor, or of the debtor, the court shall cause the debtor's
property to be reappraised, or, in its discretion, set a date for
hearing, and thereafter fix the value of the property in accordance
with the evidence, and the debtor shall then pay the value so
arrived at into court, less payments made on the principal, for
distribution to his creditors. In that way, by the order of the
court, the debtor may regain full possession and title of such
property, the ascertained
Page 308 U. S. 187
value of which has thus been devoted to the payment of his
debts. There is the further proviso, for the protection of secured
creditors, that, upon request in writing by any secured creditor,
the court shall order the property upon which the secured creditor
has a lien to be sold at public auction.
See Wright v. Vinton
Branch, supra, pp.
300 U. S.
458-461. The debtor is to have ninety days to redeem the
property so sold by paying the amount for which it was sold, with
interest, into court, and he may apply for his discharge as
provided in the Act. If, however, the debtor at any time fails to
comply with the provisions of the section or with any orders of the
court made thereunder, or is unable to refinance himself within
three years, the court may order the appointment of a trustee and
direct the property to be sold or otherwise disposed of as provided
in the Act.
The scheme of the statute is designed to provide an orderly
procedure so as to give whatever relief may properly be afforded to
the distressed farmer debtor, while protecting the interests of his
creditors by assuring the fair application of whatever property the
debtor has to the payment of their claims, the priorities and liens
of secured creditors being preserved.
See Wright v. Vinton
Branch, supra; Adair v. Bank of America Assn., 303 U.
S. 350,
303 U. S.
354-357;
Wright v. Union Central Life Insurance
Co., 304 U. S. 502,
304 U. S.
516-517.
We are not here concerned with questions which may arise in the
course of the administration under the statute, but merely with the
duty to follow the procedure which the statute defines and the
District Court failed to observe. We hold that, on his amended
petition invoking subsection (s), Bartels was entitled to be
adjudged a bankrupt and to have his proceeding for relief
entertained and his property dealt with in accordance with that
subsection.
Page 308 U. S. 188
The judgment of the Circuit Court of Appeals reversing that of
the District Court and directing the proceeding to be reinstated is
affirmed, and the cause is remanded to the District Court with
direction to proceed in conformity with this opinion.
Affirmed.
[
Footnote 1]
See Baxter v. Savings Bank of Utica, 92 F.2d 404;
In re Henderson, 100 F.2d 820;
Wilson v. Alliance Life
Insurance Co., 102 F.2d 365.
[
Footnote 2]
49 Stat. 943;
Wright v. Vinton Branch, 300 U.
S. 440.
[
Footnote 3]