BOWNES, Circuit Judge.
This is another, and perhaps the last, in a long line of decisions involving the reorganization of the Boston and Maine Railroad (B & M). Appellant, the City of Cambridge, appeals from an order of the district court sitting as a Reorganization Court. That order approved the final plan of reorganization for the B & M. Cambridge's objections stem from the treatment afforded its claims for taxes under the plan. Some background is necessary.
On March 12, 1970, an involuntary petition for reorganization was filed against the B & M under section 77 of the Bankruptcy Act, 11 U.S.C. § 205 (1977). For some time before this date and throughout the reorganization period -- March 12, 1970 through June 28, 1982 -- B & M did not pay taxes owed to Cambridge on a current basis. B & M's failure to pay the taxes due during the reorganization period was the result of an order of the district court on September 19, 1978, which authorized the Trustees "to defer the payment of taxes heretofore or hereafter assessed on or in connection with property of or in the possession of the Debtor or the Trustees. . . ."
Cambridge's claims for taxes are substantial. It is owed approximately $434,000 in taxes accruing prior to the filing of the reorganization petition (prepetition taxes), which includes prepetition interest, and approximately $4,026,000 in taxes accruing during the reorganization period (postpetition taxes). The reorganization plan provides for cash payment in full for these claims. It does not, however, provide for postpetition interest on the taxes owed. This interest amounts to approximately $375,000 on the prepetition taxes and approximately $1,868,000 on the postpetition taxes. It is the plan's failure to provide for postpetition interest payments to which Cambridge objects.
In assessing the district court's affirmance of the plan's disallowance of interest it must be remembered that the district court, in passing on the allowance of claims, sits as a court of equity. Pepper v. Litton, 308 U.S. 295, 307, 84 L. Ed. 281, 60 S. Ct. 238 (1939); see Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 219, 85 L. Ed. 1293, 61 S. Ct. 904 (1941). We have previously articulated the standard of review:
"It is not for us to pass upon the myriad factual and legal issues as though we were trying the cases de novo. 'It is not enough to reverse the District Court that we might have appraised the facts somewhat differently. If there is warrant for the action of the District Court, our task for review is at an end. '" Group of Institutional Investors v. Chicago, M., St. P. & P.R. Co., 318 U.S. 523, 564, [87 L. Ed. 959, 63 S. Ct. 727].
Boston and Maine Corp. v. First National Bank of Boston, 618 F.2d 137, 141 (1st Cir. 1980) (quoting New Haven Inclusion Cases, 399 U.S. 392, 435, 26 L. Ed. 2d 691, 90 S. Ct. 2054 (1970)). The district court's decision would, of course, not be warranted if it were the result of an error of law or based on factual findings that were clearly erroneous.
I. INTEREST ON PREPETITION TAXES
Cambridge, in its appeal, asserts that the district court erred in holding that its prepetition secured tax lien is not entitled to payment of postpetition interest from the assets of B & M. For the reasons set forth below, we agree with the district court.
It is a well-established principle that in bankruptcy and other insolvency proceedings interest upon claims ceases to accrue at the initiation of the proceedings. Nicholas v. United States, 384 U.S. 678, 682, 16 L. Ed. 2d 853, 86 S. Ct. 1674 (1966); City of New York v. Saper, 336 U.S. 328, 332, 93 L. Ed. 710, 69 S. Ct. 554 (1949); Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 162, 91 L. Ed. 162, 67 S. Ct. 237 (1946); Sexton v. Dreyfus, 219 U.S. 339, 55 L. Ed. 244, 31 S. Ct. 256 (1911); Thomas v. Western Car Co., 149 U.S. 95, 116-17, 37 L. Ed. 663, 13 S. Ct. 824 (1893); Debentureholders Protective Committee of Continental Investment Corp. v. Continental Investment Corp., 679 F.2d 264, 268-69 (1st Cir.), cert. denied, 459 U.S. 894, 103 S. Ct. 192, 74 L. Ed. 2d 155 (1982). As the Supreme Court has explained:
Exaction of interest, where the power of a debtor to pay even his contractual obligations is suspended by law, has been prohibited because it was considered in the nature of a penalty imposed because of delay in prompt payment -- a delay necessitated by law if the courts are properly to preserve and protect the estate for the benefit of all interests involved. . . . "The delay in distribution is the act of the law; it is a necessary incident to the settlement of the estate." Thomas v. Western Car Co., 149 U.S. 95, 116-117, [37 L. Ed. 663, 13 S. Ct. 824]. Cf. American Iron Co., v. Seaboard Air Line, 233 U.S. 261, [58 L. Ed. 949, 34 S. Ct. 502]. Courts have felt that it would be inequitable for anyone to gain an advantage or suffer a loss because of such delay. Sexton v. Dreyfus, 219 U.S. 339, 346, [55 L. Ed. 244, 31 S. Ct. 256]. Accrual of simple interest on unsecured claims in bankruptcy was prohibited in order that the administrative inconvenience of continuous recomputation of interest causing recomputation of claims could be avoided. Moreover, different creditors whose claims bore diverse interest rates or were paid by the bankruptcy court on different dates would suffer neither gain nor loss caused solely by delay.
Vanston Bondholders Protective Committee v. Green, 329 U.S. at 163-64 (footnote omitted).
Historically governmental entities' claims for past due taxes received special treatment, accruing postpetition interest until the date of payment. See City of New York v. Saper, 336 U.S. 328, 333, 93 L. Ed. 710, 69 S. Ct. 554. In Saper, however, the Supreme Court held that the general prohibition against the payment of postpetition interest embraced tax liens in bankruptcy cases. Id. at 338. Saper's ban on postpetition interest for tax claims has been extended to Chapter X reorganizations, United States v. Edens, 189 F.2d 876, 877 (4th Cir. 1951), aff'd per curiam, 342 U.S. 912, 72 S. Ct. 357, 96 L. Ed. 682 (1952); Chapter XI arrangements, Massachusetts v. Thompson, 190 F.2d 10, 10-11 (1st Cir. 1951), cert. denied, 342 U.S. 918, 96 L. Ed. 686, 72 S. Ct. 364 (1952); United States v. General Engineering and Manufacturing Co., 188 F.2d 80, 81-83 (8th Cir. 1951), aff'd per curiam, 342 U.S. 912, 72 S. Ct. 358, 96 L. Ed. 2d 682 (1952); direct actions against a debtor after the confirmation of an arrangement, National Foundry Co. v. Director of Internal Revenue, 229 F.2d 149, 150-51 (2d Cir. 1956); and Section 77 railroad reorganizations, In re Penn Central Transportation Co., 358 F. Supp. 154, 170 (E.D. Pa. 1973); In re New York, New Haven and Hartford Railroad Co., 304 F. Supp. 1121, 1129-32 (D. Conn. 1969).
Despite the general prohibition on the payment of postpetition interest, three exceptions have been developed by the federal courts. Interest may accrue: (1) where the bankrupt ultimately proves to be solvent; (2) where securities, held by the creditor produce income after the filing of the petition; and (3) where the amount of the secured creditor's security is sufficient to satisfy both the principal and interest due on the secured claim. In re Walsh Construction, Inc., 669 F.2d 1325, 1330 (9th Cir. 1982); In re Kerber Packing Co., 276 F.2d 245, 246-47 (7th Cir. 1960); United States v. Bass, 271 F.2d 129, 130 (9th Cir. 1959); In re Macomb Trailer Coach, Inc., 200 F.2d 611, 613 (6th Cir. 1952), cert. denied, 345 U.S. 958, 73 S. Ct. 940, 97 L. Ed. 1378 (1953); see also Debentureholders Protective Committee of Continental Investment Corp. v. Continental Investment Corp., 679 F.2d at 269 (discussing first exception); United States v. Kalishman, 346 F.2d 514, 517-18 (8th Cir. 1965) (discussing first and second exceptions), cert. denied, 384 U.S. 1003, 16 L. Ed. 2d 1017, 86 S. Ct. 1913 (1966); United States v. Harrington, 269 F.2d 719, 720 (4th Cir. 1959) (same); Castaner v. Mora, 234 F.2d 710, 712 (1st Cir. 1956) (discussing third exception); Kagan v. Industrial Washing Machine Corp., 182 F.2d 139, 146 (1st Cir. 1950) (same); Oppenheimer v. Oldham, 178 F.2d 386, 388-89 (5th Cir. 1949) (same).
These exceptions are not rigid doctrinal categories. Rather, they are flexible guidelines which have been developed by the courts in the exercise of their equitable powers in insolvency proceedings. The reorganization court must consider whether to grant postpetition interest, not as an abstract matter, but in light of the nature of each claim and the equities of the case before it. In re Penn Central Transportation Co., 358 F. Supp. at 170; In re Leeds Homes, Inc., 222 F. Supp. 20, 33 (E.D. Tenn. 1963), aff'd 332 F.2d 648 (6th Cir.), cert. denied, 379 U.S. 836, 85 S. Ct. 71, 13 L. Ed. 2d 43 (1964); see also In re Magnus Harmonica Corp., 262 F.2d 515, 518 (3d Cir. 1959). At all times the reorganization court must be guided by the basic equitable principle announced in Vanston :
It is manifest that the touchstone of each decision on allowance of interest in bankruptcy, receivership and reorganization has been a balance of equities between creditor and creditor or between creditors and the debtor.
Vanston Bondholders Protective Committee v. Green, 329 U.S. at 165 (citation omitted).
Cambridge contends that, having perfected its tax lien prior to the filing of the petition, it became a secured creditor in the amount of its liened claims and enjoys the same status as all other secured creditors. As such a creditor, Cambridge alleges that it falls within the ambit of the third exception and is thus entitled to post petition interest. We disagree.
Those cases in which courts have applied the third exception, permitting postpetition interest to accrue, have generally involved mortgages, trust deeds, pledges or conditional sales contracts. In all of these circumstances, the creditor's security interest arises from a voluntarily executed agreement between the debtor and the creditor. The two parties have bargained with reference to a specific security with the expectation that the creditor may sell this security and realize the entire amount of the outstanding obligation, including interest accrued to the date of payment. In re Kerber Packing Co., 276 F.2d at 247; United States v. Harrington, 269 F.2d at 723-24. To deny such a creditor postpetition interest, when the amount of the security is sufficient to cover both the principal and interest due, would undermine the faith of lenders in the efficacy of credit arrangements. Such a loss of confidence could result in a curtailing of the free flow of capital in our economy. Note, The Federal Tax Lien in Bankruptcy: Enforceability of Liened Claims for Penalties and Post-Petition Interest, 44 Minn. L. Rev. 1149, 1156 (1960). Thus, granting postpetition interest to mortgages and other holders of contractual liens satisfies the expectations of the parties and strikes an equitable balance between the creditors and the debtors.
The Supreme Court has never ruled on the applicability of the third exception, granting postpetition interest when there is sufficient secured collateral, to tax liens. We agree with those federal courts of appeals which have held that the third exception does not embrace tax liens. In re Kerber Packing Co., 276 F.2d at 247-48; United States v. Mighell, 273 F.2d 682, 684 (10th Cir. 1959); United States v. Bass, 271 F.2d at 131; United States v. Harrington, 269 F.2d at 723-24. A meaningful distinction can be drawn between contractual liens, such as a mortgage or deed of trust, and statutory liens, such as Cambridge's perfected tax lien. A statutory lien depends for its existence solely on a legislative act creating the lien in specified circumstances. No bargaining takes place between the debtor-taxpayer and the taxing entity which is granted a lien; the lien cannot be classified as voluntary.1
Further, the payment of the interest, which is secured by the lien, is not contemplated by the parties at the beginning of each tax year. Rather, the imposition of interest on unpaid taxes is more in the nature of an enforcement device assuring the collection of delinquent taxes. In the context of an insolvency proceeding, to grant the taxing entity postpetition interest on its tax lien would impose the "enforcement device" not on the insolvent debtor, but on those lower priority creditors whose claims will go unpaid. Such creditors are but innocent bystanders; they could have done nothing to effect the prompt payment of taxes and avoid the imposition of postpetition interest. To penalize these creditors for the bankrupt's inability to pay its taxes on time violates all notions of equity. In re Cameron, 166 F. Supp. 400, 407 (S.D. Cal. 1958) (quoting In re Burch, 89 F. Supp. 249, 254 (D. Kan. 1949)), aff'd sub nom. United States v. Bass, 271 F.2d 129 (9th Cir. 1959). As one federal court has explained:
The allowance of interest [on tax claims] to the date of payment, an accumulation caused solely because of delays necessitated by the successful efforts of the Trustee to protect and increase the estate, seems to me to be entirely inequitable, and to result in an unbalance of equities between the several creditors rather than a "balance of equities" which the Supreme Court says is the touchstone of each decision.
In re Union Fabrics, Inc., 73 F. Supp. 685, 688 (S.D.N.Y. 1947), aff'd sub nom., Carter v. United States, 168 F.2d 272 (2d Cir. 1948), aff'd sub nom., City of New York v. Saper, 336 U.S. 328, 93 L. Ed. 710, 69 S. Ct. 554 (1949).
Cambridge points to only two cases in which postpetition interest has been granted to a governmental entity on its liened tax claims. In re Parchem, 166 F. Supp. 724, 730 (D. Minn. 1958); In re Ross Nursing Home, 2 Bankr. 496, 499-500 (Bankr. E.D.N.Y. 1980). We note that both cases were decided by inferior federal courts - a district court in Parchem, and a bankruptcy court in Ross Nursing Home. We feel that both cases were wrongly decided and choose to follow the better authority of the four circuit courts of appeals which have found the third exception inapplicable to liened tax claims.2
In light of Saper and the uniform rule in the Circuit Courts of Appeals, we think it appropriate to limit the granting of postpetition interest to those exceptional situations involving creditors deemed to have bargained for specific collateral to secure both the principal obligation and interest. Further, we perceive no need, on the facts of this case, to extend the third exception to cover Cambridge's perfected tax liens. "Collection of the public revenue is a favored object, but we think today it is no more favored than that of protecting remaining creditors from the law's delay to the extent of denying post-bankruptcy interest on tax claims, liened or not." United States v. Bass, 271 F.2d at 132.
In light of the above discussion, we find that the district court acted well within its discretion in disallowing Cambridge's claim for postpetition interest on its prepetition tax claims.
II. INTEREST ON POSTPETITION TAXES
During a period of reorganization a debtor is required to pay taxes on a current basis; they are an expense of administration. See In re Boston and Maine Corp., 693 F.2d 4, 5 (1st Cir. 1982); Southern Railway Co. v. United States, 306 F.2d 119, 126 (5th Cir. 1962). In a railroad reorganization, however, the district court is afforded a measure of discretion in determining when taxes are to be paid. See In re Boston and Maine Corp., 693 F.2d at 5; In re Penn Central Transportation Co., 452 F.2d 1107, 1108-09 (3d Cir. 1971), cert. denied, 406 U.S. 944, 92 S. Ct. 2040, 32 L. Ed. 2d 331 (1972). The court's ability to defer taxes is a reflection of the special nature of a railroad reorganization. Of paramount concern is the public interest in continued operation of the railroad. In fact, liquidation is not available to a railroad. See Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 671-72, 79 L. Ed. 1110, 55 S. Ct. 595 (1935). "A railroad debtor simply must continue to operate, without regard to the interests or desires of its creditors, at least until such time as the constitutional rights of secured creditors under the Brooks-Scanlon Co. v. Railroad Commission of Louisiana, 251 U.S. 396, 64 L. Ed. 323, 40 S. Ct. 183, line of cases are clearly in jeopardy." In re Penn Central Transportation Co., 458 F. Supp. 1234, 1277 (E.D. Pa. 1978), aff'd, 596 F.2d 1102 (3d Cir. 1979). In order to facilitate the continued operation of the railroad the district court has the authority to defer payment of taxes.
In the instant case the district court deferred payment of all postpetition taxes pending reorganization. Under the proposed plan, Cambridge will recover the principal amount of these taxes, but not interest thereon. Cambridge mounts several challenges to the plan's failure to award it postpetition interest, none of which we find persuasive.
Cambridge first asserts that Nicholas v. United States, 384 U.S. 678, 16 L. Ed. 2d 853, 86 S. Ct. 1674, makes mandatory the payment of interest on debts arising during the pendency of a reorganization. It claims that the district court erred as a matter of law in approving a plan that did not provide for interest to it. We need not determine whether Nicholas announced a rule of law or whether, as the Trustees argue, a bankruptcy court still retains a measure of discretion and may deny interest on administration claims when the "balance of equities" counsels against such payment. The holding of Nicholas is not applicable in this case.
Nicholas followed a line of cases in which the Supreme Court discussed the allowability of claims for interest accruing during a bankruptcy proceeding. As discussed above, Sexton v. Dreyfus, 219 U.S. 339, 55 L. Ed. 244, 31 S. Ct. 256, established the general rule: interest on a debtor's obligations is not computed beyond the date that a petition in bankruptcy is filed. Id. at 344. Vanston followed thirty-five years later, reaffirming the holding of Sexton and reminding "that the touchstone of each decision on allowance of interest in bankruptcy, receivership and reorganization has been a balance of equities between creditor and creditor or between creditors and the debtor." Vanston, 329 U.S. at 165. Then, in City of New York v. Saper, 336 U.S. 328, 93 L. Ed. 710, 69 S. Ct. 554, the Court made clear that the general principle that interest stops accruing as of the date of filing of a petition in bankruptcy is applicable to tax claims. Id. at 330.
Nicholas involved a claim for federal taxes incurred during a reorganization. The Court went a step further than the earlier cases by distinguishing among the various stages of a bankruptcy proceeding. The Court reaffirmed the justification for the general rule that interest stops as of the date of filing of a petition in bankruptcy.
* Of the District of Puerto Rico, sitting by designation.
1. Some courts have further distinguished statutory tax liens from contractual liens on the basis that tax liens are general, applying to all of the debtor's property, whereas contractual liens are specific, attaching only to one asset. In re Kerber Packing Co., 276 F.2d at 247; United States v. Bass, 271 F.2d at 131-32. This reasoning is inapplicable here, since Cambridge's lien attaches only to those parcels of real estate subject to Cambridge's property taxes.
2. Cambridge also maintains that its claim for postpetition interest falls within the second exception, which grants postpetition interest to a secured creditor who holds securities which themselves produce income after the filing of the petition. Cambridge claims that it is entitled to interest on those property taxes which are attributable to property rented by the B & M to a third party. The lease between the B & M and its tenant specifies that a portion of the rent is attributable to taxes. Despite this lease provision -- which we view only as a collection mechanism -- we find the second exception inapplicable. This exception arises only where securities, held by the creditor, produce income. Here, the B & M, and not Cambridge, holds the taxable property.
1. While the Supreme Court has not decided the issue, the lower courts have held the provisions of section 64 apply in railroad reorganizations. In re New York, O.&W. Ry. Co., 25 F. Supp. 709 (S.D.N.Y. 1937); 5 Collier on Bankruptcy para. 77.21 (14th ed.).
2. During the first half of this century prepetition tax claims werre awarded postpetition interest, thus enjoying a favored status vis-a-vis other prepetition claims. This preference was abolished in New York v. Saper, 336 U.S. 328, 337, 93 L. Ed. 710, 69 S. Ct. 554 (1949), in which the Court held that "Congress assimilated taxes to other debts for all purposes, including denial of post-bankruptcy interest [on prepetition debt]."
3. Although there is a public interest in operating a bankrupt railroad, under section 77 if the operation of the railroad endangered the constitutional rights of creditors, "the only action open to the court [was] to dismiss the petition, which would in all likelihood be followed by a State court receivership with all its attendant disadvantages." Historical Note to 11 U.S.C. § 1174.
4. The precedential value of New Haven is diminished by the facts that the plan provisions relating to taxes were uncontested and the court's decision was not appealed.