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IN RE FRANKLIN GARDEN APTS.

March 19, 1941

In re FRANKLIN GARDEN APARTMENTS, Inc.


The opinion of the court was delivered by: GALSTON

GALSTON, District Judge.

On February 5, 1941, the debtor filed its voluntary petition for reorganization under the provisions of Chap. X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq.

The debtor is a New York corporation, the sole substantial asset of which at the time of filing of the petition was an apartment house located in Queens County, New York. The premises are subject to a building loan mortgage in the sum of $385,000 made to the Green Point Savings Bank (hereinafter to be referred to as the Bank) under date of May 24, 1940. Under this mortgage the principal sum of $382,500 had been advanced by the Bank to the debtor. On December 1, 1940, an instalment of interest in the amount of $4,488.06 became due pursuant to the terms of the mortgage. The debtor paid on account the sum of $1,000 on January 10, 1941, leaving a balance of $3,488.06 due and owing. The mortgage provided that in the event of a default in the payment of interest, the rents would be assigned to the mortgagee. In accordance therewith the debtor, on January 23, 1941, did execute an instrument wherein, after reciting the aforesaid default and aforementioned covenant in the mortgage, the debtor assigned the rents then due or thereafter to become due to the mortgagee and surrendered possession of the premises to the mortgagee. The trustee's petition recites that under the terms of the instrument of assignment it was to remain effective until the mortgaged premises were conveyed by a referee in an action for the foreclosure of the said mortgage or until the defaults existing under the mortgage were cured.

 Thereafter the Bank went into possession and since January 23, 1941, has collected and received the rents except the sum of $180.29 which the trustee collected from one of the tenants. It also appears that the Bank has paid various obligations incurred in connection with the operation of the mortgaged premises and on or about February 10, 1941, paid to itself on account of the aforesaid interest arrears the sum of $1,500.

 The land upon which the building was erected was purchased by the debtor in the year 1939 at a cost of $52,500. The building was erected by the debtor at a cost of $516,945.45, exclusive of the cost of the land. The building has not been completed though many of the apartments have been rented; a sprinkler system has not been installed and refrigerators, shower doors, medicine cabinets and miscellaneous items and hardware and some furniture are still to be supplied as well in the unrented apartments, and the lobby remains to be furnished. It appears that garages for the tenants are included as part of the premises and that no permanent certificate of occupancy for the building can be obtained from the municipal authorities until a sprinkler system is installed. Accordingly the apartments have been operated to date under a temporary certificate of occupancy. It is estimated that the amount necessary to complete the building will be approximately $16,000. At the date of the filing of the petition sixty-seven apartments out of the total one hundred twenty-three apartmnts were ready and occupied by tenants. The monthly rent roll was $4,907.50. It is estimated that if all the apartments were fully rented the aggregate monthly rent roll would be $9,237.50, to which would be added $480 per month for the garage. Since the filing of the petition six additional apartments have been rented. In the opinion of the trustee, who has been actively engaged in the erection of apartment houses in the City of New York for upwards of thirty-five years, the building is worth not less than $505,000, and with the fair value of the land at $52,500, the total value of the real estate i $557,500.

 For the protection of the very substantial equity of $175,000 the trustee seeks possession of the mortgaged premises and the right to collect and receive the rents so as to enable him to raise funds necessary to complete the building and to rent the remaining vacant apartments. The trustee has made written demand upon the mortgagee to surrender possession of the premises and to turn over to him the rents collected since February 8, 1941, but the mortgagee refuses to comply with the demand. The present application is by the trustee for an order adjudging him to be in possession of the premises and entitled to collect and receive the rents therefrom, and directing the Bank to turn over to the petitioner the amount of all rents collected and received from the mortgaged premises since February 8, 1941, less the actual operating costs of the premises since that date, but including any and all sums which may have been applied by the Bank on account of the principal and interest of the mortgage held by the Bank.

 From the debtor's petition it appears that at the time of the filing of the petition for reorganization, claims of unsecured creditors aggregated $197,107.55.

 The Green Point Savings Bank appears specially objecting to the summary jurisdiction of the court upon the ground that it is an adverse claimant in possession and asserts that the defaults under the bond and mortgage have not been cured and that as the debtor is without means or funds, the use of the rents for any purpose except payment of operating expenses of the building, payment of current and accruing taxes, accrued or accruing interest on the mortgage, will result in an impairment of the security of the mortgage debt.

 The reply affidavit submitted by the Green Point Savings Bank discloses that a further interest payment of $4,781.25 became due on March 1, 1941. It expresses the opinion that there is no likelihood that a reorganization can be effected because the debtor is without means or funds to pay administration expenses, to complete the building, and to pay chattel mortgages and conditional bills of sale; that the debtor has no equity and that the present mortgage, which is a building loan, matures October 24, 1941, and that the mortgagee has not agreed to any modification of the terms of the bond and mortgage held by it.

 The Bankruptcy Act, Title 11, Sec. 657, by virtue of the amendment of June 22, 1938, provides in part that

 "The trustee or debtor in possession shall also have the right to immediate possession of all property of the debtor in the possession of a trustee under a trust deed or a mortgagee under a mortgage."

 The language of this provision is entirely clear and since the court ha jurisdiction by virtue of the apparent good faith with which the petition was filed, it would seem that by virtue of this provision of the Bankruptcy Act it was intended that the court should in a proper case exercise summary jurisdiction. There is no reason why a plenary suit should be instituted by the trustee to obtain possession of the premises held by the mortgagee under the debtor's assignment. The provisions of the Act which is quoted was added by the Chandler Act to Subdivision i of Sec. 77B of the former statute, 11 U.S.C.A. § 207. The comment of Weinstein (a member of the National Bankruptcy Conveyance and of the drafting committee which submitted the Chandler Act) in his analysis of "The Bankruptcy Law of 1938" on this provision of the statute is: "This is a new provision which broadens the scope o the right to possession. The trustee or debtor is also given the right to possession of the debtor's property taken over by an indenture trustee or a mortgagee under a mortgage, without the aid of a court proceeding."

 The mortgagee disregards this provision of the Chandler Act and cites no cases since its enactment. In consequence, Reighard v. Higgins Enterprises, 3 Cir., 90 F.2d 569, is not applicable; but even that case cannot be reconciled with In re Park Beach Hotel Building Corporation, 7 Cir., 96 F.2d 886; and In re Greyling Realty Corporation, 2 Cir., 74 F.2d 734. These cases also were decided prior to the enactment of the provision in question, but nevertheless proceeding from the premise that upon adjudication all property of the bankrupt vests in the trustee as of the date of the filing of the petition, held that the bankruptcy jurisdiction and the court's possession and control of the estate in pursuance thereof are paramount and exclusive and cannot be affected by proceedings in other courts. See Taylor v. Sternberg, 293 U.S. 470, 55 S. Ct. 260, 79 L. Ed. 599, and Gross v. Irving Trust Co., 289 U.S. 342, 53 S. Ct. 605, 77 L. Ed. 1243, 90 A.L.R. 1215. On the other hand there are cases which hold that the bankruptcy court lacks the power to supersede a prior receiver or a mortgagee in possession where the laws of the particular state of appointment vested in such receiver or mortgagee the title to rents from the premises. In re Berdick, D.C., 56 F.2d 288, 289. The mortgagee's claim rested upon the assignment of rents after the default and commencement of foreclosure proceedings, followed up by actual collection of rents. Judge Patterson wrote: "It thus appears that the mortgagee is for all practical purposes in possession of the premises by consent of the mortgagor and is receiving the rents."

 He held therefore that the rights of the mortgagee were superior to those of the receiver in bankruptcy. He observed, however, that the mere default of the mortgagor does not work a transfer of the rents to the mortgagee, notwithstanding the terms of the assignment, Sullivan v. Rosson, 223 N.Y. 217, 119 N.E. 405, 4 A.L.R. 1400, and wrote: "So the receiver in bankruptcy here would be entitled to the future rents if the mortgagee's claim to them were based simply upon the ...


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