Memorandum — Marine Harbor Properties, Inc. v. Manufacturers Trust Co.

FiLE COP’ e sea. > oF

+ WE.

| MAR 4 1919

; fCUARLES 4 ce tharia

No. 048 im -

= Inthe Supreme Court of the United Sites

‘

Octontn, TeRy, 1941

* MARINE eispca'Peiplortinn, INc., PEQITIONER «|

: i a.

. MAN UPACTURERS ‘TrvUsr Company, AS Taverne

‘“Mavrice Rypinger, TRvsrer: oF MARINE | Harton:

Properties, INC., ET AL,

- «

.

ON on POR WRIT OF CERTIORARI TO THE UNITED ©

STATE ian COURT OF APPEALB POR THE SECOND,

CrRe vmT .

MEMORANDUM. FOR THE SECURITIES ‘AND EXCHANGE Fs

SOMMISSION :

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e INDEX

‘ ; Page

se “Opinions below = ie : ciate ‘ Cy ae 2

Jurisdiction... _._.__.-. in ; aha © 3

Question presented : 5 ra Rien ig em a 3

Statute involved ee ; . sae 4

Stgtement_* _ Price sos ‘ eae . 4

Argument at as ML pide ea 4

‘ Conclusion a “ ‘ hd

Appendix _. me : rhvebannthesed 15

: CITATIONS

Cases: ; -

Biinrig Realty Cory.; In're, 114 F. (2d) 100_- pad abiad 13

Brooklyn- Trust Co. v. Re mbaugh, 110 F. (2d) 838... 9 _- oe

Gise v. Los Angeles Lumber Products Co.. Ltd., 308 U. 8

q i ce : _. a! 9

John Hancock Mutual Life Jnoursnce Co. v. Bartels, 308

U.S. 180 . 4 ; PaaS be

Kach, In re 116 F. (2d) 243 dete @ ee

Paloma Estates, Inc., In re, decided Fe bruary 21,1942 5,8 13,15

: Securities‘and Exchange Commission v. U.S Realty & Ih.

E provement ( Co., 310 VS. 434 Saxe hewetin 6, 11

Statutes: . 4 : .

Bankruptay. Act: ; :

5 Sec. 75 (s). (TAU. S. OC. See: 203) ta 8

Bee. 141 (11 USC. See. 541) ee YS

»— i. See. 14/11 U.S. GC See. 546 i 3, 4, 5, 6,7

a Ta ene ar 11 US. C.'See. 567) _- ef 10

. Mg See 175 (tease Sec. 575) Ci wekG maak pas 19

Sec. 176 (11_.U. 8/ C. See. 576 am : 10

Sec. 208 <f1 UL KC. See. 608) ; 1,2

See. 21611 U/S. C. Sep. 616 ; 10

« L. 1933, ¢, 745 as/amended. ». Y. Unconsolidated Laws.

- a 4 1796 et 8eq : ad : Se 10

— L. to c. 19 4s ame nded, N.Y. Unconsolidated Laws.

WATSI et seq ; ie gone ‘<< * ae 10

Misce ies “OLS | , "

Note (1934) 34 Col. L. Nev. 663 0 7 + ae

Nota (1935) 35 Col % vt 874 / a 1]

Note (1941, ISN. YOULL ). Rev. 299, 418 . . 11

Siegel, eae 9 or aoe no Act. P roceedings? {1941}, 27

Corn. L. Q. | ; : Sabet Sin atelacuhe nae wicied ie 11

. «$4720 —42——1 I a

*-

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—

the Supreme Gourtof the inited Sites

OctoseR TERM, 1941

ae *s ,

No. 948 @

MARINE, Harsor Properties, INC., PETITIONER

sees v. eae ge TE

i Sroracronsns TRUST COMPANY, AS TRUSTEE :

Mavrice RuBINGER, TRUSTEE OF MaRINE Haxpor

PROPERTIES, INC., ET AL.

r

"ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED

STATER CIRCUIT“COURT OF APPEALS FOR. THE SECOND’

Cc IRCU IT

MEMORANDUM FOR THE SECURITIES AND EXCHANGE

COMMISSION

The Securities. and Exchange Commission be-

came a party in the District Court to the present cs

proceeding for the reorganization of Marine Har-

bor Properties, Inc., under Chapter X of the Bank-

ruptey Act." The. ‘Commigsion also participated

4s an appellee in the proceedings before the Circuit :

Court of Appeals, and the Ipetition 1 for a writ vat

* Phe Comsnission became a party pursuant to the provi-

fions-of Seion: 208 of the Bank’r ‘yptey Act fH U.S. C., See.

608). os

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certiorari filed by the Debtor names the Commis-

sion as a respondent. . :

The Commission is in doubt, however” whether

it should properly be regarded as a respondent be-

fore-this Court, since.it has consistently supported

‘the position taken by the. petitioner and .must -

therefore be considered as alignéd in interest with

the petitioner. If the. Commission is properly to

' be considered as a respondent, we ask the Court to

rogard this’ memorandum as a memorandum for

the respondent € ommission jeining in the petition

for certiorari. If the- Commission is not properly

to be regarded as : respondent, we ask the Court

to regard this memorandum as a memorandum. fur

the Commission, as amicus: ‘curiae, in support of

the petition.’

.

OPER EOS BELOW - : -

~The opinions of the Circuit Court of Appeals

- (R. 107-126) are-not yet reported:. The eg

of the District Court (R, 70-7; 5) is reported 1

41 F. Supp. 814. oe ;

* 5

*The Comnussion is not fifing a Separate petition ‘for’.

cert jorari because that would raise an-issue as to whether the

_ Commaission, whic h under Section 208 of the Bankruptey Act

may not take an appeal to the circuit courts of appeals, may.

- nevertheless tile a petition for a writ ‘of certiorari to review

‘an adverse decision of a circuit court of appeals in a cate

where the Conuaission was an appellee i in the cireuit court of

appeaig It seems preferable that the clear-cut issue in the

present case not be confused by this extr®heous issue.

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ge ae JURISDICTION

The decree of the Circuit apse of Appe: ils was

entered on January 27, 1942 (R. 426). “The ;eti-

tion for a writ of certiorari was filed on February

-15, 1942. .T he jurisdiction of this Cowt is in-

voked under Section 240 (a) of the. Judic ial Code,

as amended by the Act of February 13, 1925.

QUESTION PRESENTED |

+ 4 |

Section 141 of the Bankruptey Act provides

that a petition filed by a debtor under Chapter X

shall be dismissed if nof fijed in good faith, and:

“Section 146 (4) provides that a petition ‘sliall ibe

‘deemed not to be filed in good faith if ‘ta prior

proceeding is pending in any court and it appears

that the interests of creditors and stoc ‘kholders

would +e “Arest: subserved in such prior ptoceed-

ing.”’ . The question presented is: whether,..under

these provisions, a: bankruptey court must relin-

quish the jurisdiction conferred Upon. it hy Chap-

ter X in favor of a pending state court reorgani-

zation. proceeding upon'a mere showing that the

de btor.- company, which filed the petition under

Chapter X, once conse nted to a plan in the state

court procéedings for an extension of a mortgage.

omits property, and without’ any showin that the

interes#s of-the ‘debtor’s. creditors and stockhold- ,

ers Would be better safeguarded in.the state court |

proceéding than-in ‘proceedings under Chapter X.

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STATUTE INVOLVED

ection 141 of the Baftkruptey Act (11 U. 8. C,

i provides’ as follows:

the filing of.a petition by a debtor, ‘a

" the: judge shall eater an order approving the

petition, if satisfied that it complies with the

requirements of. this chapter and has been

' filed*in good faith, or dismissing it if not so

satisfied.

‘Section 146 of the Bankruptcy ‘Act qa U.S8. €:, .

‘ See. 546) provides in part as follows: un

+ Without limiting the generality of the .

- - meaning of the term ‘good faith, a petition .

_ " shall be deemed not to be filed.in good faith

if—* * * (4) a prior proceeding is pend- :

_ing in-any court and it appears that the in-

terests of creditors and stockholders. would

be best subseryed in such ae Prancennee,

STATEMENT

3 The relevant facts. are set forth in the Debtor's s

at petition (pp. 4-6) and need not be repentpd. here.

| ARGUMENT .

aes ‘Th Chapter X of bi Saeatepler . Act; the

‘Congress exercised its” paramount bankruptcy °

_ power to provide a procedure for the reorganiza-

tion of distressed corporations. However, in |

order to assure that this procedure would not be»

used to defeat rather than to accomplish the con-

gressional objective. of protecting security holders,

Congress~ ‘provided in’ Section 141 that the Dis-

-%

5 a. “a

- triet. Courts: are’ not. to, assume Osis of a

debtor’s petition under Chajyter X if it is not filed

. in good-faith, and in Section 146 (4) that a peti-

tion shall be deémed not to be filed in good faith

where a prior proceeding. is pending in another

court ‘“‘and .it appears that the interests of the

creditors and stoekholders would -be © best sub-

‘served in such prior. proceedings.”

In the. present céase, and in other similar cases

as well,*- the court below ruled that these provi- .

_. sions of the Act require the district courts to

dismiss. all petitions filed by .a debtor company

Ww henever-it i is shown that: the debtor actively. par-

: ticipated in prior state court proceedings, irre- ;

P spective of whether the prior proceedings pro- |

‘vide safeguards for public investors. comparable

to those*found in Chapter X. This construction |

=e ‘of the Act, with its emphasis upon. an _assumed.

andNits disregard of the interests of the debtor’s;

creditora_arid stockholders; is, we‘ believe, con-

| ~~ trary to both the clear terms and the obvious —

{ __. purpose of the statute; even more important, a

anes serves to deprive the security holders of a large _

' Paloma Estates, Inc., decided February 21, 1942, after thee

" ~petition-in this case was filed. Judge. Clark, dissenting in

the Paloma case, referred with approval to the dissent of -

- Judge Frank in the present-case. Kor the convenience of the

pn Court the opinions in the Palgma case are printed in the

| Appeatte, infre, pp. 15-23. : , C

ice

| : % Brooklyn Trust Co. v. Rembaugh, 110 F, (2d). 838; ine re

rsonal disqualification on the part of the debtor ‘ie -

-4 . fa

dnd important class ef corporations of the protec-

tion which Congress quite evidently intended to ~

confer upon them by the enactnient of Chapter —

X. According’ y. the decision seems lain cal ae

for review by this Court. ici fade:

2. The Court has recently had occasion to ex-

amine the entire structure of Chapter X: Securi- |

: ties and Exchange “Commission v. U.S. Realty &

Improvement Co.,-310 U. 8. 434. As was ‘there

_ observed,;. Chapter’ X provides an’ integrated. and a

carefully fashioned. procedure for the reorganiza-

tion of corporations and for the pr otection: of 1 their .

security holders. Provision is made, inter-alia, for

‘control by the-court over security holders’ com-

‘mittees -and the formulation “of reorganization

plans” (310 Uv. S. 44g gfor securing “impartial

-and expert administrative assistance” through par-

te ticipation in the proceedings by the Securities and

Exchange. Commission (ibid.) ;. for the appoint-

ment of a disinterested trustee and for an investi-

gation and report by such trustee concerning the

debtor’s: financial. problems and management; and

for: assuring that security holders will not be re-

quired to vote on any proposed plan of reorganiza-.

tion until they have reéeived: full information -

concerning the plan and until the plan has been’

initially approved by the court...

- This procedure, as Section 256 of Chapter X

makes clear, is to supersede all conflicting * state

procedures except, as stated in Section 146 (4),

where a prior state court proceeding is pending and -

ete Ga ig

.

, good. faith, or from.

- * tion 146 (4), requiring the dismissal of a debt- ..

——— ee tw

; i

the ir interests of creditors and stockholders would be

best subserved in such prior proceedings. The

_ mere pendency of prior state court proceedings is ~

ie immaterial ; : they must be of such character or have

_.proceeded to such a point thaf the security holders

would be harmed rather than helped by calling the _-

- remedial previsions of Chapter X into play.

The. court below disregarded this statutory’

- standard.’ It undertook to direct dismissal of the

petition, not because of the character of the prior .

" state court. proceeding, but because of an asserted. ’

“lack of. good faith flowing from the personal dis-

qualification of the debtor’? (R. 111). It is not

clear whether this result was thought to follow _

from the general provision of Section 141, requir--

ing dismissal of all debtors’ petitions not filed in

e specific provision of, See-

or’s petition where a prior proceeding i is pending 7

in-which the interests of the security holders would

“be better subserved than under Chapter, x. Tee

- court said: that there was no. “absence of ’ good

faith * *.* in the brdad’ meaning of those

words,” and yet, in the next sentence, stated that.

the special circumstances set forth in ‘Section ~

146 (4) are “‘not to be confused with what controls

here’ (R. 111). Whichever provision the, court

_ may have thought applicable, however, we e believe :

its decision to be clearly erroneous.

3. The alleged ‘‘personal disqualification .of the

debtor,’” the court said, arose weentse the Debtor

447208—42——-2 _

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8

had oncé consénted to an extension of the mort-

gage on its:properties approved by the state court

‘ and had failed to apply to. the -state court for

further relief. after the ‘extension expired. ~-

‘Whether the Debtor had the power itself:to pre-

sent an application to the state court for further

relief is a question on which the> majority of the

court below and the District Judge’ were in dis-. .

agredment (see R. 110, 71-72, 74-75; see also dis- . -

‘senting opinion of Judge Clark in the Paloma case, ;

Appendix, infra, p. 22). But whether or not the ©

Debtor might have had recourse to the state court,

its failure to do so and the exercise of its statu-

tory right to file a petition under the Bankruptey

Act do. not constitute bad faith..-As this Court

_has held in a proceeding: under Section’ 75 (s) of

the Bankruptey Act, a debtor should not be

| charged with bad faith because he takes the course

provided for him by Congress. John Hancock

| Mutual Life Insurance Co. v. Bartels, 308 U. Ss.

‘180, 185. And, as the court below held in a case

involving Chapter XI of the Bankruptcy Act, in

answer to the contention that the procéeding- had

been - ‘filed to avoid a state fraud receivership, -

“the answer is. that the debtor has a legal right

‘to have “her property administered iN, bank-

_ruptey.”” In re Koch; 116 F. (2d) 243, 247. ~

Moreover, the assumption that the peraonal. bad

faith of the debtor, if deemed to exist, is rele-—

* vant to the propristy of the exercise of juris-

.

9 - .

diction a the bankruptcy court ignores the es-—

sential elements of the statutory scheme devised

by Congress. Congress provided the ‘safeguards

.. of Chapter -X for the benefit of invd®tors ; it di-

rected that. consideration be given to the interests —

of \creditors and stockholders. To ignore the real

- parties in interest and to attach weight to the con-

duct. of the fictional legal entity known as the .

Z : debtor i is to nullify the purposes ‘of the Act.. The

| motives’ of the debtor itself are. unimportant, be- °

_ debtor, has control of the proceedings. See Case.

cause once the petition is filed the court, not the

vy, Los Angeles Lumber Products Co. Ltd., 308 bs.

_U. 8. 106, 125-126.. Under the rule enunciated

in, that case the debtor and its stoc kholdets can

gain no strategic advantage from the pendency . |

of the proceedings and their interests will be en-

tirely . eliminated . unléss‘a ‘surplus remains after

payment of all eréditors in full (id., 131). In--:

_ deed, the more questionable may be the motives of

. the debtor or ‘the persons: controlling it, the more.

reason there is. for the court to take jurisdiction

and: to make available to creditors and steckhold-

_ ers ‘the safeguards of Chapter X.

‘4. Had the court below directed its attention,

‘not to the alleged ‘personal disqualification” of

the debtor, but to the effect of the dismissal of the

-

<

:

!

—

petition upon the interests of the creditors and

stockholders, its decision would necessarily have .

been different.

_. reorganization proceeding by the Securities~ and

10

The prier proceeding has been conducted under

— the so-called Schackno and Mortgage Commission.

Acts of New York,‘ which lack almost all ther

basic safeguards for the protection of security-

holders provided by Congress in ~ Chapter “X..

There is no aeatehing i investigation of the debtor’s

past managemént and of its present business and

prospects which is required through the medium

of an independent trustee under Section 167, of .

- the Bankruptey Act.. There-is no provision simi-

‘lar to that ‘requiring participation in. Chapter Xo

_ Exchange Commission,” There is rio requirement ~

that a plan must receive preliminary approv al by’

_ the court before the assent of securityholders may

be obtained (ef. Section 176 of the Bankniptey

Act) ‘or that information must be furnished to se~.

curityholders (ef. Section 175 of the Bankruptcy |

Act); and there are no protective provisions as to .

the form of reorganization (ef. Section 216 of the

‘1. 1938, c. 745 as cere . Y. Uneonsolidated Laws,

§ 1796 et stg. Lr 1985, c. 19 as amended, N. ¥. Unconsoli-

dated Laws, 1751 et seq.

*It is true that the court havi ing sarialiction of the state

court proceedings in the county in which the state court’ pro-

ceedings in this case are pending has established an organi-

zation known as the Bureau. of Trust Supervision, There is

nothing to show, however, that this Bureau has facilities

similar to those of the Securities and Exchange Commission

for prowiding advice to the court or a record of achievement

in that field. .

4 .

. 7 11

Bankruptey Act). Indeed, ‘Chapter ns X. has: the

same superiorities over the state court procedure

as this Court held that it has over the procedure

provided in Chapter xI of the Bankruptey Act. foes 7

See Securities and Exchange Commission v.

2 i

U.S. Realty & Improvement. Co; supra.

Nor can there be any contention that the particu- 3

lar proceeding here involved had proceeded ‘to such

_a point that the maintenance of the Chapter X pe-

tition would haye been adverse to. the interests of .

* investors. To be sure, a “plan” had been approved

by the state court -in December 1934, but. this

“plan” merely provided for an.extension of the

mortgage and the extension expired in 1937 (R.

52, 45). _A modification of the plan’ was approved

‘in 1938; this modification, however; imerely estab-.

lished a trustee to act for security holders, without

effecting any adjustments of the rights of the cer--

tificate holders vis a vis the Debtor (R. 38, 22). In.

the modified plan the state court retained jurisdic. |

tion to consider further applications for relief (R. -

44), but no such applications were filed.’ Negotia- : Se

tions between the SR the Debtor were un- 5

"© See Note (1934) 34 Col. L,. Rev, 663 ;. Note (1985) 35 Col.

L.. Rev. 874; Note (1941) 18 N. Y. U. L, Q Rev. 399, 418; |

Siegel, Chapter X-or Schackne Act Proceedings? Gee

27.Corn. L. Q. 56.

* The Debtor pi ‘assumed that the: reservation of j juris-

diction did not empower it to make such an application (R. |

62, 67-68). :

—_——Act:pro

Sa en.

' dertaken but proved: futile (R. 14). Theteafter

' the Debtor defaulted in the. payment of interest

' due April 1, 1941 (R, 12).

. gave the creditors no remedy a

‘such default, foreclosure proceedings were com- /

'_.ménced and a receiver was appointed to take pos-

session of the Debtor’s " properties (R, 12-13).

' Subsequently, negotiations. for further extension

and modification of the mortgage were undertaken,

. but they again proved unsuccessful {R. 14). The

__ proceedings having reached this point, unless liq-

’ widation through foreclosure sale to an outsider

occurs, a new plan must be adopted. No such plan’

had been promulgated in the foreclosure proceed-

' ing at the time the ‘petition under Chapter X was

. _ filed.

__It seems evident, therefore, that. neither the

provisions of the statute pursuant to which the : ° |

- state court proceedings were brought, nor the ac- —

tual history of those proceedings, furnishes. any

ground for holding the interest of creditors and

. stockholders would be best served by the. dismissal |

"of the Chapter X proceeding. — - st

_ 5. The importance of the issue involved in this

case is manifest. Thousands of certificated mort-. _ |

gage issties are being “‘reorganized’’ in the state~

~ courts, and many of, these “reorganizations”? | have

- taken the form, as in the present case, of a short’ F

: extension of the’ oe of the mortgage. ‘As |

13 : :

‘these extensions expire, further “reorganization” ~

is needed: The decision in the present case -will, —

"to a. large extent, determine. whether the federal ‘

procedure provided by Chapter X shall be avail- -

able for such further reorganization. a

- It is no answer to say that the court below only

held the Debtor disqualified | to file a petition -

under Chapter X and that, despite this decision,

- thé federal remedy may be invoked by a petition

filed by three security holders having claims aggre-

gating at least $5,000. ° As Judge Frank pojnted

out in his dissenting opinion, such. security holders

are generally ignorant of. their theoretical rights

and consequently “seldom exercise them, but, in- °

stead, usually go along with whatever proceedings

have already been instituted”. (R. 120).. Indeed,

as Judge Frank = pointed-out (id.), it was

precisely such inertia on the part of ‘security

_ ‘holders which led to the enactment of many of

the on of Chapter Xx. |

: | Saae Sask teed cetaet nage hake ths federal ras :

‘in only a few cases thus far does not indicate that the per- .

sons concerned do. nog choose to resort. to it. It would seem —

rather to indicate that the line of decisions inthe Circuit:

Court of Appeals for the Second Circuit, begun in: Brooklyn

Trust Co. v. Rembaugh, 110 F. (2d) 888, and in re Blinrig

Realty Corp., 114 F. (2d) 100 (both decided early in 1940),

and continued in the present case, and Jn re Paloma Estates, -

dne. (infra, pp, 15-23), has ee. any extensive resort ;

to scien XxX. ese

orn : °

fe ® a °.

> Pp r

\ i Mn: * ses gee

“The petition tor a writ et certiorari should be

granted... mo

_ Respeetfully submitted. ree |

| ee ; “CHARLES Fany, — \

é be : . Sotizitor’ General.

Bars bce oe Ricuarp H. Demutu, i

A A are na HM a SR

CHESTER T. eg |

General Counsel,

J Manin _Ricer,

. Director, Reorganization Divisign,

‘Hoaiue KRIPKE, ..

Special. Counsel, iE eye

- wSécurities and Exchange Commission.

“Marc 1912.

_ APPENDIX: a

UNITED STATES CIRCUIT COURT OF ”

| APPEALS *

¥en THE SECOND CiRcUIT {| —

. c . \.

No. 152—October ‘Terni, 1941,

(Anand January 8, 1942, Decided February ”

1942.) 7

In the Matter

-—af—-

PALOMA Estates, Inc. 9 “y

: Debtor-Appellant.

4a

Serres C-2 TRUSTERS AND rate AND

ExCHANGE COMMISSION, ies

= _ Appellees.

CHase; Pivcnit Judge:

The debtor, which owns, subject to a first and to

a second mortgage, an apartment housé- and _ lot:

- at 200 West 86th Street in the City of New. York,

. filed its petition for reorganization in the District -

Court for the Southern District of New York

under Chapter X of. the Bankruptey — 09

| UGE CS page

5

a ‘difficulties are-of some years’ standin

judge, holding that the petition was not: filed in

good faith within § 146 (4) of Chapter X, and

algo that the debtor had not complied with the

general , good-faith. requirement of our decisions’

in Brooklyn Trust Company v. Rembaugh, 110 F.

- (2) 838, and In re Blinrig Corp:, 114 F. (2) 100, ~

‘dismissed thé petition: ~The debtor has appealed

“and.is supported by the Securities and Exchange

Commission,: which, at the request of the judge,

filed its notice of appearance. and became an in-

tervening party to the proceedings as provided by

; § 208 of the Bankruptcy Act. It has. filed a brief

in this eourt and has been heard on the oral argu-

ment: Other parties are permarient trustees. ap- ~

pointed by the state. court, for holders of certifi-

’eates: under -the first mortgage an o have’.

‘appeared to contest this appeal; the sec8 nd ‘mort-

““gagee.and some unsecured creditors .

The debtor is insolve vent and its seri ng tencial ;

: a The first_

oe oni the apartment house to which it_holds

. title is for $2,650,000.00 and is of the kind known

ax a certificated mortgage which was guaranteed as’

-- to thé payment of principal and interest by‘ the |

New York Title antl Mortgage Company. The

_ certificates are part of.such securities to.the’ § ~

amount of $24,000,000.00 held by the above-men-

. tioned permanent ‘trustees whp are otherwise

known as the. Series C-2) Trustees. The second

, mortgage is for the face amount of $300,000.00.

_. and there is admittedly due on it. $60,000.00 or

’ $65,000.00. The. unsecured indebtedness is ap-

proximately $3,000.00. The apartment house is a

assessed for we su the oy of New York at

-.$2,630,000,00 and has ‘a gross rent, roll of $360,-

000.00 per year. The net rent income does not

appear.

In August. 1933, the Superintendent ‘of Yngar- i

ance of the State of New York, took possession,

‘as rehabilitator, of the assets and basiness of the .

New York Title and. Mo _Gompany. . Fol-

lowing: that, the Mortgage Cohimission of the

State of New York, as successor to the Superin-

tendent,. proposed’ a plan under the Schackno

Act (Chap,-745 of the New York Laws of 1933, as ° 5

amended ), and the Mortgage . Commission ‘Act*

. (Chap. 19 of the New York. Laws of 1935) for

- the appointment of permanent trustees for the

Series C-2 issue. .This plan was approved by the ©

} -

state court on Jan. 15, 1936, and on April 6, in -

the same year, the court appointed Messrs.’ Frank |

L.. Weil, William E. Russel? and .Raymond J.

Scully such trustees. They have since been act-—

ing as such and are the appellees here. =

-Among the assets which came into their posses-

sion were the bond and mortgage of thé debtor Sti

which have previously been referred. to as the first

mortgage on the apartment house. “There were

arrears of $255,990.00 in interest and of

"$212,000.00 in principal. The debtor proposed to

the trustees that the amount’ of the interest pay-

_ ments ayerdue be compromised ; future amortiza- -

tion of the principal sum and. the payment of the |

part .in arrears be waived; the maturity date of -

the mort; extended ; and the interest rate re-.

duced. e trustees approved and applied -to the

state. pia - permission to accept*the debtor’s

offer. That — was oul on Aug. 7,

ee

a

°

|

eo.

1936 and an . extension setatinael pursuant to the

proposal was entered into. The maturity date’of

the ‘mortgage was. thereby extended to July 31,

~ 1941 upon condition that the debtor pay interest

at the rate of 41/07 for two ) Years beginning “Aug,

1, 1936; at the rate.of 434% fer twp years there-—

‘after; and at the rate of 5% for: the balance of...

. the term,

The debtor made the bayments as agreed with the

exception of thé taxes due April 1, 1940 and the.

__. interest due May 1, 1940 and later cured both-those

. defaults. Before any default, the debtor had had

some negotiations with the trustees in respect to

a modification of fhe extension agreement which

‘finally took the form of an offer by the debtor to —

buy the mortgage for $1,700,000.00 payable within

ninety days partly in cash and the /remainder. - ee

Series C-2 certificates. The trustees sought leave

of the state court to accept this offer and it was

granted on July 16, 1940. The de btor then pre- -

sented evidence that the- mortgaged property was

worth only $1,700,000.00 and it is évident that this’ .

valuation was accepted as_fair/and reasonable.

The offér was duly accepted but the debtor did not

perform. On Oct. 1, 1940 it defaulted in the pay-

ment uf taxes then at On Nov. 1, 1940 it de-

faulted in. the payment of interest and then noti- .

fied the trustees that it-was unable to purchase the

mortgage as agreed. The debtor then assigned the

rents to the trustees and they appointed its ‘presi-

deri agent to manage the property. Following

~> that fhe debtor made another offer to buy the mort-

gage and informal conferences were had with the

judge in charge of the proceedings.in the state

ee oe

court in respect to it. It was not altogether satis-

factory to the trustees and before any formal ac-

tion was taken on it the judge died. The debtor -

urged the trustees to present ‘the matter for ap-

proval to the successor judge who declined to con-

sider it. otherwise but the trustees were unwilling

to accept the offer and so took’ no steps to obtain

- leave to do so. -

After the rents were indighea to the. ‘eau

and the president of the debtor acted as manag-

. ing agent of the property theearrging charges

were not earned and the amount in arrears when

the rents were assigned had been increased dur-

" ing.the period from Nov. 1, 1940 to May ‘31, 1941

to the extent of $5,902.80 making them as of June -~

1, 1941 $86,724.80. | —>

With affairs in that situation the, trustees re-

moved the managing agent as of June 16, 1941

and notified the debtor of their intention te fore-

close the mortgage in the state éourt. There has

apparently been no accounting by the managing

_ agent for thfe period he acted ‘as such in June.

' Following the removal of the managing agent the

petition for reorganization was filed i in the district ©

court,

: The ures moved to dismiss dhe petition as

not filed -i good faith for several reasons upon

which they still rely, One of them was and is

that “the prior proceedings in the Supreme

Court of thé State of New York wi!l best suhserve

the interests of creditors and stockholders.’ The

district’ judge after consideration reached that:

conclusion. This was beyond quéstion’ an ade-

20

quat® legal ground. for the dismissal for lack of |

.filing in good faith under 4 14i since it falls pre-

cisely within’ § 146 (4) of the Bankruptey Act

and if the proof warranted the conclusion it will

be unt Hers to consider any other ground for

dismissal.

We think the tacts’ well support. the judge's

y conclusion. Though there might be a reorganiza-

tion. under Chap. X of the’ Bankruptey Act, the

value of the debtor’s property is so small com- '

pared to the amount due on the first mortgage

that under Case v. Los Angeles Lumber Products

Co. Ltd., 308 UW. 8. 106, only the certificate holders

- represented “by: the appellee trustees could have

any equity to be preserved. - See also, Consoli-

“9 Rock Products Company v. Dubois, 312

U.S. 510.. There is nothing to indicate that their

-_ interests wouid, or could, be better protected in

- the district court.. There would be increased ex- -

pense ‘and delay witheut any compensating ad-

vantages. And it would be inequitable to subject

the certificate holders to such expense in time and

3 money when their security, already inadequate, —

is being well applied to subserve their bést in-

terests in the prior staté court proceedings. ‘See,

Chapman Bros. Co: vw. . Security-F irst National

Bank, 111 F. (2) 86. At least, the district judge

so’ decided and that determination is final unless

_ dearly shown to be wrong. Tennessee Pub plishing

Co.. v. American National Bank, 299 U. 8.-18;

Wayne United Gas Co. v. Owens-Illinois Glass 7

Co., 91 F. (2) 827, :

Affirmed.

21

Caen: Cireuit Judge EO

to participate in the conflict which appears to have

. developed in this Court between bankruptcy re-

organization and state Schackno Act proceedings

with regard to concerns engaged in the certificated

mortgage business in New York. In re Blinrig

Realty Corp., su pra. There I qwereame my doubts

as to-our emerging law because of the weakness

on the faets of the case presented; indeed, we

. were. told in argument that the district court had —

already dismissed the petition, notw ithstanding its

original approval.. Now we come to another case.

which -I find far from reassuring; and I*may say

the same as to In the Matter of Marine Harbor

Properties, Inc., 2 Cir.. —— F. 24 ——-- Com-

pare Judge Frank’s werful dissent in the latter

case, as well as Juige Bright’s decision, D. C. 8S.

D. N. Y., 41 F. Supp. 814, which was, reversed ;

' also the law-review criticisms, Siegel, Chapter X

or Schackno Act Proceedings, 20 Corn. L. Q.

56-73; 18 N. Y. U. L. Q. Rev. 399, 418. I cannot

avoid the conviction that we are substituting ‘an

inadequate state. proceeding for the carefully safe-

guarded proceedings in reorganization devised by —

Congress for cases such as this, where the public —

interest may be protected by thé public agency of

the Sectrities arid Exchange Commission. And

‘ this, it seems to me, is as practically undesirable ‘ as

it is legully unjustified.

culties of our present approach. Perhaps fore-

closure is the best: way for all, but we have no

real evidence on the point save for the affidavits

_ Prior to this case I had been called on but onge .. -’

|. Here we- lk kindly Wadd He

29 So

; Ps

oh the appearing: parties. _And these show that .

the trustees are now acting as dogs in the manger; —

for they will not present the debtor’s revised plan

‘ to the state court, and that appears to be the only

_.Way it ean get there. Though we cannot be sure

without testimony, we can conclude that in the

present state of -the real-estate market, a sale;~

even at a reduced price, might easily prove to the

best interests: of all, ine luding: the certificate hold- -

ers. In other words, the matter ought to be before

‘a court for decision, not, left solely to the net

wholly disinterested trustees.

The stress placed here upon the district judge’s

finding seems to’ me not fo dispose of the prob-.

lem. He made no investigation; he had before

him only ‘the affidavits now before-us, And his

finding is most general, merely that ‘the trustees’

defenses, formally pleaded, ‘are sufficient in law

and sustained by the proof.’’ Moreover, his opin-"’

ion shows that he relied on our previous decisions,

and.was unduly concerned—as I believe we have

been—in the activities of the. debtor and how it |

may have estopped itself. This, I believe, was the.

initial error in Brooklyn Trust Co. v. Rembaugh,

: supra, since repeated in the other decisions. | For

the statute here pertinent, authorizing dismissal

of the reorganization’ petition when -it appears

. “that the interests of creditors and stockholders

would ‘be best. subserved’’ in’ the prior state pro-

ceeding, Bankruptey Act, § 14€ (4), 11 U. S.'C.‘A:

-in-

poke of creditors and ‘stockholders, not (of the

btor. I think we should limit our forme prec-.

23

duet. the ‘investigation thts. so clearly required

- (wherein, too, the assistance* of the Securities —

and Exchange Commission could be. sought: and

might well prove invaluable), and that we should

‘take the first step thereto in.a case such as this,

where. the facts already disclosed seem to call so

cleatfly for a more searching inquiry, I would

“reverse for a hearing on the facts. i

ws cobneusér PRINTING OFFICE. 1942