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June 8, 1964


The opinion of the court was delivered by: John E. Miller, Chief Judge.

This is a review of an order of the Referee in Bankruptcy entered April 2, 1964, in this proceeding confirming an arrangement under Chapter XI of the Bankruptcy Act, Sec. 701 et seq., Title 11 U.S.C.

The United States, for and on behalf of the Small Business Administration, filed its petition April 10, 1964, to review the order of the Referee in Bankruptcy of April 2, 1964. The petitioner alleged that the Referee erred in finding that the SBA does not have a priority status with respect to a secured claim filed on its behalf prior to the confirmation of a plan of arrangement whereby the debtor shall fully discharge its unsecured debts. Specifically the petitioner alleged:

    "1. Your petitioner is aggrieved by the order
  herein of Arnold M. Adams, referee in bankruptcy,
  dated April 2, 1964, a copy of which order is
  annexed hereto, marked Exhibit A, and made a part
    "2. The referee erred in respect to said order,
  in finding that the Small Business Administration
  does not have a priority status.
    "3. The referee erred in respect to said order
  in confirming a plan of arrangement without
  fixing a time within which the debtor must make a
  deposit to pay all debts which have a priority,
  including specifically the indebtedness due to
  the Small Business Administration as evidenced by
  its Proof of Claim. In this connection,
  petitioner asserts the indebtedness due to Small
  Business Administration is entitled to priority
  under the provisions of Section 337(2) and
  Section 64 of the Bankruptcy Act, which statutes
  are further cited as Section 737 and Section 104,
  Title 11, U.S.C. and, Section 191, Title 31,
  U.S.C. and that the statutory requirement for a
  deposit to pay this indebtedness has not been
  waived in writing or otherwise.

The Referee in his certificate filed April 16, 1964, stated that this is a Chapter XI proceeding, in which Warren O. Kimbrough, attorney, was appointed receiver February 18, 1964, and instructed to do all things necessary to see that the assets and inventory of the debtor were not substantially depleted. After the filing of the statement of affairs and list of creditors, etc., the first meeting of creditors was held April 2, 1964, after notice to all creditors. At said meeting 23 common creditors had returned claims in addition to the SBA, which filed a claim 14, styled "Proof of Secured and Priority Claim of the United States of America." By this claim the SBA contended that the debtor owed it the sum of $18,810.39, plus interest from February 26, 1964, at the rate of 5 percent per annum, with a balance on May 11, 1962, of $25,000.00.

The SBA asserted that its claim was secured and entitled to a priority. Attached to the claim was a photostatic copy of a note and security agreement, granting a security interest to SBA in all machinery, equipment, furniture and fixtures now owned or thereafter acquired by the debtor. In addition to the foregoing security, the instrument contained individual guarantor signatures of Leslie Bryant, Don Tyson and Hal Cochran. The assets and liabilities of the debtor, as contained in the Referee's certificate and as set out in and attached to the brief of the petitioner, United States, are as follows:

Real Estate                     $None
Cash on hand                         50.00
Negotiable & Non-negotiable
 instruments                         None
Inventory                        22,000.00
Autos & Trucks
 (mtged to SBA)                   2,000.00
Machinery, fixtures and tools       500.00
Accounts receivable              14,000.00
Deposits                            100.00
Wages                           $None
Taxes due United States           1,000.00
Taxes due State of Arkansas         450.00
Taxes due Counties, etc.            220.00
Secured claims (Small Business
  Administration)                19,000.00
Unsecured claims                 32,262.94

The 23 unsecured common creditors accepted the proposed arrangement with no negative votes. The court in its certificate stated that, after examining the debtor and finding the arrangement feasible, it confirmed it, conditioned upon the debtor depositing with the distributing agent the sum required to pay all priority debts, which were stated to be $1,590.13, viz: $322.63 to Truss Russell, Clerk, for Referee's salary and expense fund; $400.00 to Warren O. Kimbrough, receiver; $675.17 to Internal Revenue Service; and $192.33 to the Tax Collector of Sebastian County, Arkansas.

The certificate further stated that, after the court indicated its intention to confirm the proposed arrangement, that Mr. Bailey F. Rankin, Acting Assistant Regional Counsel of SBA, objected to the proposed arrangement, stating that the SBA held a lien on the assets of the business in the sum of $18,810.39, plus interest, and insisted that the SBA was a priority creditor. Mr. Rankin demanded that the sum of $18,810.39, plus interest, be added to the deposit required by the court of $1,591.13, or a total of $20,400.52, and that this sum was required as a condition precedent to the confirmation of the arrangement.

The petitioner, United States, thus contends that the order confirming the proposed arrangement without requiring deposit of the entire debt owed to the SBA was erroneous because of its priority under Title 31 U.S.C. § 191, and Title 11 U.S.C. § 104.

As the court views the record, the issue presented is: Must the secured or lien debt owed to SBA, an agency of the United States, be paid in full by a deposit under Section 337(2) of the Bankruptcy Act as a condition precedent to the confirmation of this arrangement, accepted by all unsecured creditors, whereby the debtor ...

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