# Memorandum — Marine Harbor Properties, Inc. v. Manufacturers Trust Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0059%3A04 ## Record - **Collection:** Supreme Court brief - **Document type:** Memorandum - **Published:** January 1, 1942 - **Citation:** 317 U.S. 78 ## Text 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. 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Gst . « ——— 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 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 - 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0059%3A04. Public record. Not legal advice.