This appeal presents for review the question whether a provision for attorney's fees in a promissory note can be enforced in a Chapter X reorganization proceeding under the Bankruptcy Act when the creditor has not attempted to fulfill the preconditions to validity of a lien for such fees until after the Chapter X petition has been filed, and in the face of a prohibitory injunction against the enforcement of all liens on the bankruptcy estate. The District Court answered this question in the negative. We affirm.

On March 24, 1969, Atlanta International Raceway, the bankrupt debtor, executed a promissory note for $1,000,000 to Michigan International Speedway, Inc. A deed to secure debt, to the raceway's property, was also executed. As to attorney's fees, the note provided that

Should this note, or any part of the indebtedness evidenced hereby be collected by law or through an attorney at law, the holder shall be entitled to collect attorney's fees in an amount equal to ten per cent (10%) of the principal and interest, and all costs of collection.

On March 30, 1970, the note and deed were transferred and assigned to the Royal National Bank of New York. Security National Bank is that bank's successor in interest to the note and deed to secure debt.

On January 18, 1971, a petition for reorganization of Atlanta International Raceway was filed and approved under Chapter X of the Bankruptcy Act. Under Section 148 of the Act, 11 U.S.C. § 548, the order approving the petition operated as an automatic stay of mortgage foreclosure proceedings and of any act or proceeding to enforce a lien against the debtor's property.1 The District Court, pursuant to Section 116(4) of the Act, 11 U.S.C. § 516(4),2 immediately entered an injunction prohibiting all creditors and their attorneys from prosecuting any suit or doing any act to enforce claims against the bankrupt debtor.3 The promissory note for $1,000,000 above referred to was not then in default in payments of principal or interest.

On August 4, 1972, during the pendency of the Chapter X proceedings, attorneys for the bank sent the raceway and the Chapter X trustee a ten-day letter, which declared the note to be in default. The letter demanded payment and stated

This letter is written pursuant to Georgia Code Section 20-506 to advise that the principal and interest as stated above may be paid within ten (10) days from receipt of this notice without liability for attorney's fees. In the event the principal and interest as stated above is not paid within ten (10) days from receipt of this notice, the provisions of said promissory note relative to the payment of attorney's fees shall be enforced.

Under Georgia law a lien for attorney's fees is not valid until this notice and opportunity to pay have been provided to the debtor. Ga.Code Ann. § 20-506.4

The letter was received by the trustee on August 7, 1972, and on August 11 the bank applied to the bankruptcy court for permission to foreclose. The ten-day period elapsed without payment of the debt. The bank then moved for summary judgment on its claim for attorney's fees, amounting to over $120,000, which motion was denied by the District Court. The bank has appealed from this adverse decision.

II. Enforceability of the Claim for Attorney Fees in the Chapter X Proceeding

The validity of the bank's lien for attorney's fees is a question of Georgia law.5 The enforceability of the lien in a Chapter X proceeding, however, is a question of federal bankruptcy law. Security Mortgage Co. v. Powers, 278 U.S. 149, 153-154, 49 S. Ct. 84, 85-86, 73 L. Ed. 236 (1928). We conclude that enforcement of the bank's attorney fee lien in this Chapter X proceeding would frustrate the District Court's efforts to fulfill its responsibilities under the Act and would be inconsistent with the purposes of Chapter X. The bank does not contend that attorney's fees of $120,000 have been earned herein. What the bank seeks, therefore, is a $120,000 windfall to be added to its debt, all as a consequence of the debtor being in Chapter X reorganization proceedings in bankruptcy.

A. Conflicts between Enforcement of the Claim for Attorney Fees and the Purpose of Chapter X

The bank's ten-day letter was sent despite the federal court injunction clearly forbidding the enforcement of creditors' rights against the debtor. The sending of the demand letter was an "act or proceeding to enforce a lien upon the property of the debtor," 11 U.S.C. § 516, and fell within the terms of the District Court's prohibitory injunction. The court's injunction was entirely proper,6 and was necessary to preserve the court's "exclusive jurisdiction of the debtor and its property, wherever located." 11 U.S.C. § 511. Without this protection of the debtor's assets, the court's efforts to develop a plan or reorganization would have been in vain.

Thus the trustee was confonted with two restraints against complying with the bank's demand for payment: first, the District Court's injunction, which, as the court below specifically found, could not have been changed within ten days to permit the payment, in light of the statutory requirements of notice to other creditors, court approval, etc.; second, the trustee's responsibility, as well as that of the District Court, to hold all such demands for payment in abeyance lest the bankrupt's prospects for reorganization be jeopardized by the loss of essential assets.

The debtor and its trustee therefore had no opportunity to satisfy the bank's demand for payment, and avoid incurring an additional $120,000 liability for attorney's fees. We conclude that it is contrary to the purpose of Chapter X to inflict this added expense on the debtor, and derivatively, on its other creditors.

The bank argues that it was not required to obey the court's injunction by applying for permission to send its ten-day letter, because its right to make the demand for payment is a substantive right sanctioned by state law.7 As we stated recently, however, in ruling on a utility company's claim in a Chapter X proceeding:

If a creditor, like the telephone company, could continue to enforce his state law rights after the initiation of bankruptcy proceedings, the bankruptcy laws would be meaningless. Their very purpose is to suspend the normal operation of rights and obligations between the debtor and his creditors.

In re Fontainebleau Hotel Corporation, 5 Cir., 1975, 508 F.2d 1056, 1059.8

B. Prior Interpretations of the Enforceability of Post-petition Contractual Claims for Attorney's Fees

The bank's answer to the foregoing reasoning is that the present attorney's fee claim is controlled by two prior decisions, one by the Supreme Court and one by this court. These cases, however, are inapposite.

In Security Mortgage Co. v. Powers, 278 U.S. 149, 49 S. Ct. 84, 73 L. Ed. 236 (1928), the Court held that a claim for attorney's fees pursuant to a provision in a note similar to the note in this case was enforceable in a bankruptcy proceeding. The creditor's demand notice was sent, after the petition was filed, to a debtor from whom the bankrupt had purchased the land securing the note. When the creditor filed his claim with the bankruptcy court, the debt (including an amount for attorney's fees) had already been reduced to judgment in a state court action against the original debtor. Security Mortgage, however, was a straight bankruptcy proceeding rather than a reorganization under Chapter X. The reorganization provisions of the Bankruptcy Act were not enacted until 1934, six years after the Security Mortgage case.9 The Supreme Court has repeatedly stated that reorganization proceedings are sui generis, and rules appropriate in an ordinary bankruptcy may be inapplicable in a reorganization. See Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 470 n. 3, 94 S. Ct. 2504, 2507, 41 L. Ed. 2d 243 (1974); Continental Illinois Nat. Bank & T. Co. v. Chicago, Etc., Co., 294 U.S. 648, 676, 55 S. Ct. 595, 606, 79 L. Ed. 1110 (1935).

No prohibitory injunction was entered by the bankruptcy court in Security Mortgage against enforcement of secured creditors' liens against the debtor. Under the circumstances of that case there was no need to delay satisfaction of secured claims in contemplation of a reorganization. The purpose of the bankruptcy system was "to convert the assets of the bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness . . . ." Maynard v. Elliott, 283 U.S. 273, 277, 51 S. Ct. 390, 392, 75 L. Ed. 1028 (1931), quoting Williams v. U. S. Fidelity Co., 236 U.S. 549, 554, 35 S. Ct. 289, 290, 59 L. Ed. 713 (1915). See Young v. Higbee Co., 324 U.S. 204, 210, 65 S. Ct. 594, 597, 89 L. Ed. 890; Kuehner v. Irving Trust Co., 299 U.S. 445, 451, 57 S. Ct. 298, 301, 81 L. Ed. 340 (1937); Kothe v. R. C. Taylor Trust, 280 U.S. 224, 227, 50 S. Ct. 142, 143, 74 L. Ed. 382 (1930). That purpose was not subverted by the enforcement of secured claims against the debtor because the trustee and creditors were not restrained (as here) by an injunction or by the essential need to preserve the debtor's assets in a pending reorganization. The trustee's task was dismantling the debtor enterprise, rather than restructuring it for continued existence.10 Under these circumstances a trustee would have an opportunity to comply with a secured creditor's demand for payment, and could legitimately be held responsible for additional contractually stipulated attorney's fees. In the present case, as the court below found, there was no such opportunity.11

In Security Mortgage the Court did not instruct the District Court to pay the attorney's fee claim, but rather remanded the case for a hearing on several unresolved issues. The Court stated that if the trustee had not received notice of the bank's demand for payment,12 the claim for attorney's fees could not be enforced. The Court's discussion of that issue convinces us that for such a claim to be enforceable there must be an opportunity to comply with the creditor's demand for payment.

For, if he had been notified, the trustee might have arranged to pay the note on or before the return date of the suit against the (debtor). The purpose of the Georgia statute is clear. It is to protect the debtor, in spite of default, from any liability for attorney's fees, unless he fails to pay after the lapse of the ten days from receiving notice of intention to sue and such further time as must intervene between commencement of the suit and the return day. (citations omitted) The Legislature cannot have intended that the creditor should be able to impose the additional liability for attorney's fees without giving the real debtor the notice and opportunity to pay which the statute contemplated that a debtor should have.

278 U.S. at 158, 49 S. Ct. at 87 (emphasis added). See United States v. Hattaway, 5 Cir., 1974, 488 F.2d 55, 57.

The Supreme Court has considered the question whether, during a pending reorganization and in the face of an injunction, a trustee has sufficient opportunity to comply with a demand for payment, so as to render claims similar to attorney fees enforceable. In Vanston Bondholders Protective Com. v. Green, 329 U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162 (1946) the bankrupt debtor had issued mortgage bonds pursuant to an indenture agreement that provided for interest to be paid on any overdue interest coupons on the bonds. An equity receiver was appointed by the District Court, which concurrently enjoined the debtor and receiver from paying any pre-appointment debts. Thereafter the indenture trustee, acting on behalf of the bondholders, declared the entire principal due, because of the court-ordered default on the interest payments, and began accruing interest on the overdue interest. In disallowing the claim for interest on overdue interest, the Supreme Court stated:

(W)hen the equity receivership intervened, these interrelated obligations were drastically changed. The obligation to make prompt payment of simple interest coupons was suspended. In fact both Inland (the debtor) and the receiver were ordered by the court not to pay the coupons on the dates they were, on their face, supposed to have been paid. The contingency which might have created a present obligation to pay interest on interest i. e., a free decision by the debtor that it would not or could not pay simple interest promptly was prohibited from occurring by order of the court. . . .

(L)egal suspension of an obligation to pay is an adequate reason why no added compensation or penalty should be enforced for failure to pay.

329 U.S. at 166-167, 67 S. Ct. at 241-242 (emphasis added).

Like the attorney's fees in Security Mortgage, the interest on unpaid interest in Vanston was an additional liability claimed because of a default by the debtor on his obligations to the creditor. Enforcement of both claims was undertaken after the filing of the respective petitions. The difference in result in these cases may be attributed to the difference between the straight bankruptcy proceeding in Security Mortgage and the reorganization proceeding in Vanston, with its attendant injunction against payments to creditors. The present case is like Vanston but unlike Security Mortgage. Compare In re Black Ranches, Inc., 8 Cir., 1966, 362 F.2d 8; Northtown Threatre Corporation v. Mickelson, 8 Cir., 1955, 226 F.2d 212; United States Trust Co. of New York v. Zelle, 8 Cir., 1951, 191 F.2d 822; with In re Maryvale Community Hospital, Inc., 9 Cir. 1972, 456 F.2d 410; Ruskin v. Griffiths, 2 Cir., 1959, 269 F.2d 827.

National Acceptance Company v. Zusmann, 5 Cir., 1967, 379 F.2d 351, also relied on by the bank, is also inapposite. In Zusmann the debtor gave a promissory note to the creditor similar to the note in the present case. When the debtor failed to meet its payments, the creditor sent a ten-day letter demanding payment. Five days later the debtor filed a petition for an arrangement with his creditors under Chapter XI of the Bankruptcy Act. The District Court subsequently disallowed the creditor's claim for attorney's fees pursuant to the provision in the note, and we reversed.

The scope of a Chapter XI arrangement is different from that of a Chapter X reorganization. Chapter XI, unlike Chapter X, gives the court no power to alter the rights of secured creditors, such as the bank in the present case. 11 U.S.C. § 616(1); Collier's Trustees' and Receivers' Handbook § 1.003(2). Therefore the pressing need to postpone dealing with any individual secured creditor until a comprehensive plan of reorganization could be formulated was not present in Zusmann, because the Chapter XI arrangement eventually adopted there could not include secured creditors, being limited in its effect to unsecured creditors.

Moreover, in Zusmann, unlike the present case, no injunction was entered against enforcement of creditors' claims13 and there was no automatic stay provided by the Bankruptcy Act in that Chapter XI case. The trustee in Zusmann was not compelled by an order of the court or by the purpose of the proceedings to refuse the creditor's demand for payment.

The cases relied on by the bank, therefore, do not control the question presented here. The bank's claim for attorney's fees, under the circumstances of this case, cannot be enforced in this Chapter X reorganization proceeding.

It should be noted, as the bankruptcy court observed, that the denial of this claim does not prejudice the bank's right to apply for reasonable compensation for attorney's fees, costs, and expenses incurred in the bankruptcy proceeding itself, as provided in the Bankruptcy Act. 11 U.S.C. § 643.

Affirmed.