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In re Greyling Realty Corp.

January 7, 1935


Appeal from the District Court of the United States for the Southern District of New York.

Author: Manton

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

The Greyling Realty Corporation, the debtor, is owned, through stock ownership, by the National Surety Company, now in liquidation by the superintendent of insurance of the state of New York. Article 11 of the N.Y. Insurance Law (Consol. Laws, c. 28, § 400 et seq.).The business of the National Surety Company, among other things, was guaranteeing collateral trust bonds secured by mortgages, which it did to the extent of about $45,000,000, now outstanding. These mortgages secured collateral trust bonds issued by owners of real estate, and deposited with corporate trustees under trust indentures. The National Surety Company as guarantor, was called upon to make good defaults of mortgages. It did so through this debtor, to which it advanced some $30,000,000 for that purpose, paying taxes, insurance premiums, making repairs, and acquiring property at foreclosure, all for the purpose of maintaining the value of the security underlying the collateral trust bonds in the hands of the public. There remains unpaid to the National Surety Company about $14,000,000. The debtor Greyling Realty Corporation took over mortgages, servicing the same, and, where mortgages were foreclosed, the corporate trustee delivered the mortgage to the debtor against a letter of indemnity executed by the National Surety Company. The expenses of foreclosure were paid by this debtor, and it paid defaults in taxes, interest, and arrears of principal, using therefor the funds advanced by the National Surety Company. A new mortgage would then be executed, in respect of property acquired in foreclosure, for such amount as an appraisal of the property foreclosed warranted, and such new mortgage was deposited with the corporate trustee. Any difference between the amount of the original mortgage and the amount of the new mortgage was made good by this debtor who, in such instance, took title to the property foreclosed or did so through its nominees as security for the moneys expended in respect to each property.

On April 30, 1933, the day after the National Surety Company was taken over for rehabilitation, a suit was brought in the superior court of Georgia by holders of bonds, guaranteed by the National Surety Company, against the debtor Greyling Realty Corporation, the National Surety Company, and the corporate trustee and nominees of this debtor, and the Georgia court appointed the appellants temporary receivers. The complaint in that suit alleged a fraudulent conspiracy on the part of the defendants to conceal defaults on a material part of the mortgages. On May 3, 1933, the superintendent of insurance, as rehabilitator of the National Surety Company, brought suit against the Greyling Realty Corporation (a Delaware corporation) in the District Court for the District of Delaware. Receivers in equity were appointed April 30, 1933, in the Georgia state court.

The appellant Troutman was the attorney retained from time to time by the National Surety Company, and appellant Matthews was employed by the debtor to do abstract work in Georgia. Both knew of the proceedings in New York for the rehabilitation of the National Surety Company. Receivers ancillary to the suit in Delaware were appointed in twenty other jurisdictions. Answers were filed in the Georgia suit and an agreement reached between the appellants and defendants there for a consent order having the receivership in Georgia made ancillary to the domiciliary receivership in Delaware. This decree was entered accordingly July 29, 1933.

The order below directed appellants to turn over to the trustee of this debtor "all moneys, property * * * which are now in their custody, possession or control and/or which came into their hands by virtue of their appointment as receivers by the Superior Court of Fulton County, Georgia * * * including, but not being limited to properties standing in the name of Greyling Realty Corporation and/or Interstate Mortgage Company and/or Walton Properties, Inc., and/or Lewis Barber, including as well rents, income, issues, profits, payments for principal and interest on mortgages and other avails of or moneys flowing from the custody, possession and control of the said property as aforesaid. * * *"

All of the properties held by the appellants were the property of the debtor Greyling Realty Corporation or held by its nominees, Walton Properties, Inc., Interstate Mortgage Company, and Lewis Barber. George B. Compton, the trustee named, was also the trustee for the Walton Properties, Inc., and the Interstate Mortgage Company. The properties standing in the name of Lewis Barber were owned by the Greyling Realty Corporation.

The property which is ordered turned over to the trustee is all the property "which came into their (appellants) hands by virtue of their appointment as receivers by the Superior Court of Fulton County, Georgia."

By the Georgia state court decree, the receivers were authorized to take possession of property belonging to the debtor standing in its name and in the names of Lewis Barber, Interstate Mortgage Company, and Walton Properties, Inc. The order appealed from was consented to by all defendants and all interveners in the Georgia suit as well as the reorganization managers, who hold over 85 per cent. of the class of bonds held by the plaintiffs in the Georgia suit. Moreover the order provided that "the turning over of the property as aforesaid by the said receivers to George B. Compton, the trustee, as aforesaid, shall be without prejudice to the rights, interest or claims, if any, of any person, firm, or corporation in and to any of said property or the proceeds of any part thereof, and without prejudice to the rights of such parties to assert such claims, if any, in this proceeding upon proper application to this Court."

The apparent purpose of section 77B of the Bankruptcy Act (11 USCA § 207), which provides for proceedings in the reorganization of a corporation and its subsidiaries, is to avoid immediate liquidation of the properties involved, and to rehabilitate rather than liquidate. In equity receiverships for conservation of assets, as heretofore known, ancillary receivers were appointed in the district, other than the domiciliary district, where the corporation had property to administer. Section 77B was planned to bring such proceedings within the paramount and exclusive jurisdiction of one bankruptcy court. It was intended to provide a centralization of administration. Section 77B extended the jurisdiction of the District Court over the affairs of insolvent corporations, gathering in their assets wherever located. Jurisdiction to enjoin and stay any suit to enforce a lien was expressly conferred upon the judge approving the petition. There is no doubt Congress had the power to make the process of the District Court run throughout the United States. Indeed one of the principal reasons given for the enactment of section 77B was to eliminate the necessity of costly ancillary proceedings. In re Chicago, Rock Island & Pacific Ry. Co. (C.C.A.) 72 F.2d 443. In the Chicago, Rock Island Case it was held that the domiciliary court had power to issue process outside of its territorial jurisdiction by virtue of section 77 (a) (c), of the act (11 USCA § 205 (a, c). Congress had the right to extend the jurisdiction of any District Court to the entire United States. United States v. Union Pacific R. Co., 98 U.S. 569, 604, 25 L. Ed. 143.

Section 77B (a) of the act, 11 USCA § 207 (a), grants exclusive jurisdiction of the debtor and its property wherever located for the purpose of this section. Section 77B (c) (10) of the act, 11 USCA § 207 (c) (10), grants the power of staying the commencement or continuation of suits against the debtor until after final decree, or the staying of the commencement or continuance of any judicial proceedings to enforce any lien upon the estate until after final decree. And section 77B (i) of the act, 11 USCA § 207 (i), provides: "If a receiver or trustee of all or any part of the property of a corporation has been appointed by a Federal, State, or Territorial court, whether before or after this amendatory Act takes effect [June 7, 1934 at 12 o'clock noon] a petition or answer may be filed under this section at any time thereafter by the corporation, or its creditors as provided in subdivision (a) of this section and if such petition or answer is approved, the trustee or trustees appointed under this section, or the debtor if no trustee is appointed, shall be entitled forthwith to possession of and vested with title to such property, and the judge shall make such orders as he may deem equitable for the protection of obligations incurred by the receiver or prior trustee. * * *"

Thus the scheme of the act was to bring all the property of the debtor, wherever it may be located, into the exclusive jurisdiction of one court. By a wide sweep of power, exclusive jurisdiction of all property wherever located is given with the power to stay or enjoin "any judicial proceeding to enforce any lien upon the estate," as well as the power to stay not only the commencement, but also the continuation of suits against the debtor.

The court thus acquiring jurisdiction over the property of the debtor does so throughout the United States as against any state or federal receiver ...

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