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Manhattan Ry. Co. v. Central Hanover Bank & Trust Co.

November 7, 1938


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

Author: Chase

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

CHASE, Circuit Judge.

This appeal is from a final decree of the District Court for the Southern District of New York in an action for the foreclosure of a mortgage on property of the Manhattan Railway Company including an order for the separate sale of a portion of such property known as the Sixth Avenue Line; and also from an interlocutory order entered June 28, 1938, approving a program for the sale of a part of the mortgaged property. The appeal from the interlocutory order raises no issues not inherent in the appeal from the final decree.

The Manhattan Railway Company is a New York corporation which owns an elevated street railway system in the City of New York consisting of what are known as the Second, Third, Sixth and Ninth Avenue lines together with a power house, storage yards, cars and necessary equipment, franchises and facilities for operation.

Its principal properties are subject to the mortgage foreclosed in this action which was executed in 1890 to the Central Hanover Bank and Trust Company, as trustee, and is known as the Consolidated Mortgage which secures bonds issued and outstanding in the hands of the public to the principal amount of $40,670,000. At the time the proceedings to foreclose were begun, and ever since, the mortgage has been in default because of overdue and unpaid interest and taxes.

In 1903 the Manhattan Company leased all of its property and franchises to the Interborough Rapid Transit Company, a New York corporation, for the term of 999 years from November 1, 1875. This lease was in all respects subordinate to the terms of the mortgage; it being expressly provided that the "franchises, rights and property so leased and demised are taken by the Lessee subject to the various burdens and conditions under which they are respectively held by the Lessor". The lessor and lessee have both been in the hands of equity receivers since 1932 and the disaffirmance of this lease was authorized by order of the District Court filed July 5, 1938 which order is now pending on separate appeal here. At all times since the lease went into effect the lessor or its receiver has operated the Manhattan system in connection with that owned or otherwise leased by the Interborough. The claim is made that the Interborough is both responsible and liable for the defaults which have occurred under the mortgage but we are not presently concerned with the controversy between the lessor and lessee in that regard since the right to foreclose in this action is plain enough. We have already refused to stay the sale and we now confine ourselves to the issues raised on this appeal. They follow from the terms of the order for sale which provided that what is known as the Sixth Avenue Line, and only that part of the mortgaged property, should be sold and fixed as the upset price on the sale the sum of $12,500,000.

The bill of complaint in this action to foreclose the mortgage was filed March 16, 1934 in accordance with leave granted by the court in the receivership action; was duly answered and issue joined. A special master was appointed on February 20, 1935 who held hearings and filed his report establishing the fact of default to which no exceptions were taken. On March 29, 1938, the City of New York advertised for sale tax liens on the mortgagor's properties which were in arrears as of November 30, 1937 and, all efforts to stay the sale having failed, bid in such liens to the amount of $8,061,317 itself at the sale on June 30, 1938. Interest on them has since been accruing at the rate of 12% or nearly $2,700 per day. Meanwhile, on April 8, 1936 the mortgage trustee amended its foreclosure complaint by adding additional parties and alleging additional defaults.

The above mentioned action of the City of New York has made it a purchaser of tax liens which, under the provisions of the Administrative Code, clearly makes the purchased liens mature in three years after the date of the sale. Moreover, under Sec. 415(1)-36.0 of the Code, the maturity date may be accelerated unless current taxes and semi-annual interest on the tax liens are paid. Consequently, a large payment will have to be made in December of this year and other large payments in the first months of 1939. In order to forestall the right of acceleration and its attendant right of early foreclosure, over one million dollars will have to be paid before the end of next January. To clear the property of tax liens to which the foreclosed mortgage will be subordinate if the three year period is allowed to run, over $15,000,000 must be paid during that time.

Faced with this situation, a protective committee of Manhattan bondholders, consisting of Van S. Merle-Smith and others, mad earrangements with the City of New York for the purchase by the City of what is known as the Sixth Avenue Line for $12,500,000 and for the payment of all taxes in arrears out of the proceeds. This would do away with the danger from tax lien enforcement and leave a balance over provided the sale was made as arranged. In April, 1938, the committee filed its petition setting forth its proposals and after hearings at which the program was opposed by the mortgagor and the representatives of some bondholders and the value of the Sixth Avenue Line was made an issue concerning which a great deal of evidence was introduced, the court made an interlocutory order on June 28, 1938 approving the proposal to sell. The appeal from this order is the one which must stand or fall with the principal appeal from the foreclosure decree. That decree was entered on August 8, 1938 after a petition for instructions had been filed by the mortgage trustee and the court had directed that it proceed to take steps to secure the decree providing for the proposed sale.

The various assignments of errors may be treated under two main heads for they combine to raise (1) the question whether the Sixth Avenue Line may lawfully be sole in foreclosure without the sale of the remainder of the mortgaged property also; and (2) whether there was error in fixing the sum of $12,500,000 as the upset price at the sale.

In respect to the power to direct the sale of only a part of the mortgaged property the court below was right. There was, indeed, a provision in the mortgage providing that if the trustee should sell the property without suit to foreclose it should be sold as a whole but no such limitation was made as to a sale under a foreclosure decree. Accordingly, we need now make no broader decision on this phase of the appeal than that in the absence of such a restriction, the court had the power to enter a decree of foreclosure directing the sale of a part of the mortgaged property. See Low v. Blackford, 4 Cir., 87 F. 392. Moreover, Sec. 1086 of the New York Civil Practice Act, which is substantially the same as the provisions of Throop's Code of Civil Procedure of 1889 which was in force when the foreclosed mortgage was executed, expressly provides that: - "Where the mortgage debt is not all due, and the mortgaged property is so circumstanced that it can be sold in parcels without injury to the interests of the parties, the final judgment must direct that no more of the property be sold in the first place than is sufficient to satisfy the sum then due, with the costs of the action and expenses of the sale; * * * ".

The part of the mortgaged property ordered sold being sufficient to satisfy, at the upset price, the defaults which had accrued under the mortgage together with costs of the action and expenses of the sale, the remaining consideration on this point is whether the sale was of property in such circumstances that its separate sale could be made with due regard for the rights of all parties in interest.

It is manifestly for the best interests of all concerned that the mortgage foreclosure be terminated by satisfying existing defaults and that can only be done, the obligations of the lessee to the lessor, whatever they may be, being no bar to this action, by selling all or part of the mortgaged property. Granted that unless conditions change, the Manhattan system will be more valuable if it can be operated as a whole and that the Sixth Avenue Line has proved to be the most profitable part of it in the past, the fact remains that conditions are going to change and that a fair opportunity to make a sale of the whole is but problematical while a chance to sell the Sixth Avenue Line alone is at hand. Having of necessity to make a choice between the sale of what would wipe out the tax defaults and leave a large amount of property for other purposes and the uncertainty as to the result of an attempt to sell all the mortgaged property at whatever sacrifice that might entail, we have no doubt whatever that the court ...

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