opinion: VANSTON BONDHOLDERS PROTECTIVE COMMITTEE v. GREEN et al.
  NO. 42.
  Argued October 22, 1946.
  Decided December 9, 1946.
  George W. Jaques argued the cause for petitioner in Nos. 42 and 43. With him on the brief were LeWright Browning and Rudolf B. Schlesinger.
  Robert J. Bulkley argued the cause and filed a brief for petitioner in Nos. 44 and 45.
  Roger S. Foster argued the cause for the Securities & Exchange Commission, respondent. With him on the brief were Solicitor General McGrath, Philip Elman and Alexander Cohen.
  Chas. I. Dawson argued the cause for Early et al., respondents. With him on the brief was A. Shelby Winstead.
  Jay Raymond Levinson argued the cause for the Green Committee et ah, respondents. With him on the brief was Oscar S. Rosner.
  Mr. Justice Black
  delivered the opinion of the Court.
  December 2,1930, a Kentucky District Court appointed an equity receiver of Inland Gas Corporation to take com-píete and exclusive control, possession, and custody of all of Inland’s properties, and enjoined Inland’s officers from paying its debts. At that time there was no interest unpaid on Inland’s first mortgage bonds. February 1, 1931, semiannual interest coupons fell due on these bonds. The debtor could not pay; the court did not direct the receiver to pay. The indenture trustee, acting under the terms of the indenture, promptly declared the entire principal due and payable despite the previous assumption of custody of the estate by the federal court. In 1935, the same District Court approved a creditor’s petition for reorganization under § 77B of the Bankruptcy Act, and at a subsequent date the reorganization was continued as a Chapter X proceeding. The indenture provides for payment of interest on unpaid interest. Inland is insolvent, but its assets are sufficient to pay the first mortgage bondholders in full, including the interest on interest. Should interest on interest be paid, however, subordinate creditors would receive a greatly reduced share in the reorganized corporation. These latter concede that the first mortgage bondholders should receive simple interest on the principal due them, but challenge their right to be paid interest on interest which fell due after the court took charge of Inland, and which interest the Court, out of consideration for orderly and fair administration of the estate, directed the receiver not to pay on the due date. It is this controversy which we must determine.
  The first mortgage indenture document was written and signed in New York, designated a New York bank as trustee, and provided for payment of the bonds and attached interest coupons at the office of the trustee in New York or, at the option of the bearer, at a bank in Chicago, Illinois. A group of investment bankers underwrote the issue, sold the bonds to the public, and received a percentage of the proceeds and additional compensation for their services. Inland was organized under the corporation laws of Delaware. Its principal place of business was in Kentucky, and the property mortgaged was located in that state.
  Under these circumstances the District Court was of the opinion that it must allow the claim for interest on interest if the indenture covenant was valid; that its validity must be determined by the law of New York, because the indenture was signed and the bonds were payable there; and that the covenant was valid there. Accordingly, the first mortgage bondholders were held entitled to interest on interest. Holding that New York prohibited covenants for payment of interest on interest, the Circuit Court of Appeals reversed. 151 F. 2d 470. We granted certiorari because of the importance of the questions raised.
  The Circuit Court of Appeals thought the bankruptcy ' court must allow or disallow the claim for interest on interest according to whether the covenant to pay it was valid or invalid as between the parties to that covenant. It considered the covenant invalid and therefore unenforceable in bankruptcy upon two alternative assumptions. First, it assumed that a controlling federal rule required the bankruptcy court to determine validity or invalidity of the contract by looking to the law of New York, the state where the court found that the contract was “made” and primarily payable. Second, since the bankruptcy court was sitting in Kentucky, it should determine validity of the covenant as would a Kentucky court. Reviewing Kentucky decisions, the Circuit Court of Appeals concluded that Kentucky courts also would apply New York substantive law. Arriving at New York law by both hypotheses, the Circuit Court of Appeals interpreted that law as rendering the covenant invalid. We agree with the conclusion of the Circuit Court of Appeals that the claim for interest on interest should not be permitted to share in the debtor’s assets, but disagree with the reasons given for that conclusion.
  A purpose of bankruptcy is so to administer an estate as to bring about a ratable distribution of assets among the bankrupt’s creditors. What claims of creditors are valid and subsisting obligations against the bankrupt at the time a petition in bankruptcy is filed is a question which, in the absence of overruling federal law, is to be determined by reference to state law. Bryant v. Swofford Bros., 214 U. S. 279, 290-291; Security Mortgage Co. v. Powers, 278 U. S. 149, 153-154. But obligations, such as the one here for interest, often have significant contacts in many states, so that the question of which particular state’s law should measure the obligation seldom lends itself to simple solution. In determining which contact is the most significant in a particular transaction, courts can seldom find a complete solution in the mechanical for-mulae of the conflicts of law. Determination requires the exercise of an informed judgment in the balancing of all the interests of the states with the most significant contacts in order best to accommodate the equities among the parties to the policies of those states. Certainly the part of this transaction which touched New York, namely, that the indenture contract was written, signed, and payable there, may be a reason why that state’s law should govern. But apparently the bonds were sold to people all over the nation. And Kentucky’s interest in having its own laws govern the obligation cannot be minimized. For the property mortgaged was there; the company’s business was chiefly there; its products were widely distributed there; and the prices paid by Kentuckians for those products would depend, at least to some extent, on the stability of the company as affected by the carrying charges on its debts. But we need not decide which, if either, of these two states’ laws govern the creation and subsistence and validity of the obligation for interest on interest here involved. For assuming, arguendo, that the obligation for interest on interest is valid under the law of New York, Kentucky, and the other states having some interest in the indenture transaction, we would still have to decide whether allowance of the claim would be compatible with the policy of the Bankruptcy Act. Cf. Kuehner v. Irving Trust Co., 299 U. S. 445, 451.
  In determining what claims are allowable and how a debtor’s assets shall be distributed, a bankruptcy court does not apply the law of the state where it sits. Erie R. R. v. Tompkins, 304 U. S. 64, has no such implication. That case decided that a federal district court acquiring jurisdiction because of diversity of citizenshp should adjudicate controversies as if it were only another state court. See Holmberg v. Armbrecht, 327 U. S. 392. But bankruptcy courts must administer and enforce the Bankruptcy Act as interpreted by this Court in accordance with authority granted by Congress to determine how and what claims shall be allowed under equitable principles. And we think an allowance of interest on interest under the circumstances shown by this case would not be in accord with the equitable principles governing bankruptcy distributions.
  When and under what circumstances federal courts will allow interest on claims against debtors’ estates being administered by them has long been decided by federal law. Cf. Board of Comm’rs of Jackson County v. United States, 308 U. S. 343; Royal Indemnity Co. v. United States, 313 U. S. 289. The general rule in bankruptcy and in equity receivership has been that interest on the debtors’ obligations ceases to accrue at the beginning of proceedings. 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. Thus this Court has said: “We cannot agree that a penalty in the name of interest should be inflicted upon the owners of the mortgage lien for resisting claims which we have disallowed. As a general rule, after property of an insolvent passes into the hands of a receiver or of an assignee in insolvency, interest is not allowed on the claims against the funds. 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. Cf. American Iron Co. v. Seaboard Air Line, 233 U. S. 261. 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. 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.
  Simple interest on secured claims accruing after the petition was filed was denied unless the security was worth more than the sum of principal and interest due. Sexton v. Dreyfus, supra. To allow a secured creditor interest where his security was worth less than the value of his debt was thought to be inequitable to unsecured creditors. Thus we recently said: “Since the distribution provided for these bonds on the basis of their mortgage securities is less than the principal amount of their claim, the limitation of their right to share the unmortgaged assets ratably with the unsecured creditors on the basis of principal and interest prior to bankruptcy only is justified under the rule of Ticonic National Bank v. Sprague, 303 U. S. 406.” Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific R. Co., 318 U. S. 523, 573. But where an estate was ample to pay all creditors and to pay interest even after the petition was filed, equitable considerations were invoked to permit payment of this additional interest to the secured creditor rather than to the debtor. Coder v. Arts, 213 U. S. 223, 245; Sexton v. Dreyfus, supra. See also Johnson v. Norris, 190 F. 459.
  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. See Sexton v. Dreyfus, supra, at 346. That the proceedings before us have moved from equity receivership through § 77B to Chapter X in the wake of statutory change does not make these equitable considerations here inapplicable. A Chapter X or § 77B reorganization court is just as much a court of equity as were its statutory and chancery antecedents. See Consolidated Rock Products Co. v. Du Bois, 312 U. S. 510, 527.
  In this case, where by order of the court interest was left unpaid, we do not think that imposition of interest on that unpaid interest can be justified by “an application of equitable principles." See Dayton v. Stanard, 241 U. S. 588, 590. Prior to the beginning of the equity reeeivership, Inland would have never owed interest on interest unless and until it had breached its obligation to pay simple interest promptly — on the date it was due. Before the receivership began, a failure by Inland to pay coupons on the date they were due might have breached an existing obligation. This breach would have imposed upon Inland, under the terms of the covenant, a duty to pay interest on the interest it had failed to pay. But when 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 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. That order issued for a good cause, we may assume: to preserve and protect the debtor’s estate pending a ratable distribution among all the creditors according to their interests as of the date the receivership began. The extra interest covenant may be deemed added compensation for the creditor or, what is more likely, something like a penalty to induce prompt payment of simple interest. In either event, first mortgage bondholders would have been enriched and subordinate creditors would have suffered a corresponding loss, because of a failure to pay when payment had been prohibited by a court order entered for the joint benefit of debtor, creditors, and the public. Such a result is not consistent with equitable principles. For legal suspension of an obligation to pay is an adequate reason why no added compensation or penalty should be enforced for failure to pay.
  Affirmed.
  Mr. Justice Reed took no part in the consideration or decision of this case.
  Section 77B was enacted June 7, 1934, 48 Stat. 912. The § 77B petition in this case was filed while the estate continued in the equity receivership. Section 77B was superseded by Chapter X, 52 Stat. 883, 11 U. S. C. § 501 ef seq. Section 276 of Chapter X, 11 U. S. C. 676, authorized continuance of the § 77B proceedings under Chapter X. See Young v. Higbee Co., 324 U. S. 204, 205, n. 1.
  The claims for interest on interest amount to some $500,000.
  The Circuit Court of Appeals thought a reference to New York law was authorized by the following cases: Cromwell v. County of Sac, 96 U. S. 51; Scudder v. National Bank, 91 U. S. 406, 412; Liverpool Steam Co. v. Phenix Ins. Co., 129 U. S. 397, 453. None of these cases nor any cited by petitioner here, e. g., Seeman v. Philadelphia Warehouse Co., 274 U. S. 403, involve questions of distribution of a debtor’s assets in receivership, bankruptcy or reorganization to meet claims for interest on interest said to have accrued after a court took possession of a debtor’s estate.
  Of course, there might be instances where the validity of the obligation would be determined by reference to the law of some foreign country.
  Heiser v. Woodruff, 327 U. S. 726, 732; American Security Co. v. Sampsell, 327 U. S. 269, 272; Pepper v. Litton, 308 U. S. 295, 303-306.
  See §63a (1) of the Bankruptcy Act, 11 U. S. C. 103a (1); cf. § 63 of the Act of 1898, 30 Stat. 562 and § 19 of the Bankruptcy Act of 1867,14 Stat. 525. For a discussion of interest claims in bankruptcy see 3 Collier on Bankruptcy (14th Ed.) 281,1835.
  Analogous principles have been applied to the liquidation of national banks. White v. Knox, 111 U. S. 784, 786-87, relied on in Sexton v. Dreyfus, supra, 346; Ticonic Nat’l Bank v. Sprague, 303 U. S. 406, 412-13.
  Section 115 of Chapter X; 11 U. S. C. 515 authorizes a Chapter X court to exercise “all the powers, not inconsistent with the provisions of this chapter, which a court of the United States would have if it had appointed a receiver in equity of the property of the debtor . . .” Former § 77B of the Bankruptcy Act, 48 Stat. 912, and §77 (a), 11 U. S. C. §205 (a) (Railroad Reorganization) contain similar provisions.
  Petitioner and the Circuit Court have cited non-bankruptcy cases which award interest on interest to support the award in this reorganization. Town of Genoa v. Woodruff, 92 U. S. 502; Edwards v. Bates County, 163 U. S. 269. Diversity of citizenship brought these cases to the federal courts. None of them presented to the courts the special bankruptcy problems of uniformity, ratable distribution and fairness and equity which grow out of the context of the bankruptcy law.
  Had a breach occurred and a suit been filed in state court prior to receivership or bankruptcy, that court would have been required to determine whether the covenant was valid under the controlling state law.
choices: stay, petition, or motion granted affirmed (includes modified) reversed reversed and remanded vacated and remanded affirmed and reversed (or vacated) in part affirmed and reversed (or vacated) in part and remanded vacated petition denied or appeal dismissed certification to or from a lower court no disposition