Appeal from the District Court of the United States for the Southern District of New York.
Before SWAN, CHASE, and FRANK, Circuit Judges.
On September 17, 1941 the debtor obtained an ex parte order approving as properly filed under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., its petition for reorganization. The Mortgage Corporation of New York, as trustee for mortgage certificate holders, forthwith applied to the district court to vacate its order of approval and to dismiss the debtor's petition as lacking the good faith required by section 141, 11 U.S.C.A. § 541. After a hearing upon supporting and opposing affidavits, the court denied the application. This order is before us on appeal by Manufacturers Trust Company, the successor by merger of The Mortgage Corporation of New York. The Securities and Exchange Commission filed its appearance in the district court pursuant to section 208, 11 U.S.C.A. § 608, and has presented in this court a brief and argument in support of the order.
So far as relevant to the present controversy section 146 of the Act, 11 U.S.C.A. § 546, provides that
"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 -
"(3) it is unreasonable to expect that a plan of reorganization can be effected; or
"(4) a prior proceeding is pending in any court and it appears that the interests of creditors and stockholders would be best subserved in such prior proceeding."
Each of these clauses, the appellant contends, requires dismissal of the debtor's petition.
The debtor's sole asset is an apartment building in Brooklyn of the value, including the land, of not more than $350,000. The premises are subject to a first mortgage in the principal amount of $370,000, with arrears of interest and taxes which bring the indebtedness secured thereby to approximately $400,000 as of October 1, 1941. There is also a second mortgage for $25,000, a third and fourth mortgage for $2,000 each, a balance of $3,000 due on equipment purchased on conditional bills of sale, and unsecured indebtedness in an amount not specified. The first mortgage was made in 1931 by a predecessor in title of the debtor to Title Guarantee & Trust Company, which issued and sold to the public participation certificates therein guardanteed by Bond & Mortgage Guarantee Company, hereafter called the guarantor. In August 1933 the guarantor was taken over by the Superintendent of Insurance of the State of New York for rehabilitation under the Schackno Act, N.Y. Laws 1933, Ch. 745, McK. Unconsol. Laws, § 1796 et seq. In this proceeding a plan of reorganization of the rights of certificate holders in the said first mortgage was approved by the Supreme Court of Kings County on December 6, 1934, with the approval of two-thirds of the certificate holders and with the consent of the debtor. Under this plan the mortgage was extended to December 1, 1937 and interest was reduced from 6% to 5%. Subsequently, by order of December 6, 1938 the state court modified the plan to the extent of appointing The Mortgage Corporation of New York as trustee of the bond and mortgage under an approved form of declaration of trust. This order provided that the court should retain jurisdiction until complete liquidation of the trust estate, and that "the trustee, or any other interested party herein" might apply for other and further relief. After the mortgage matured on December 1, 1937 the debtor continued to pay interest and taxes until April 1, 1941. On that date it defaulted, although the earnings of the property were sufficient to cover interest and taxes. Shortly thereafter foreclosure proceedings were begun and the receiver appointed therein has been in continuous possession of the mortgaged premises since May 6, 1941. The appellant and its predecessor trustee have conducted negotiations with the debtor with regard to a further extension and modification of the mortgage but no agreement was reached and no proposed modification was presented to the certificate holders or to the state court. On September 17, 1941 the debtor filed in the district court its petition for reorganization under Chapter X of the Bankruptcy Act.
Since the amount owing under the first mortgage is largely in excess of the value of the premises, it is apparent that no equity remains for junior lienors, unsecured creditors or stockholders of the debtor. The appellant, therefore, argues that it is unreasonable to expect that a plan of reorganization can be effected, and that section 146(3) of the Act, 11 U.S.C.A § 546(3), requires dismissal of the debtor's petition. But as the Supreme Court stated in Case v. Los Angeles Lumber Co., 308 U.S. 106, 131, 60 S. Ct. 1, 84 L. Ed. 110, approval of a debtor's petition is no indication that its stockholders will participate in the plan. Nor is the fact of insolvency sufficient to prove that the petition was filed in bad faith. In re castle Beach Apartments, 2 Cir., 113 F.2d 762; In re Central Funding Corp., 2 Cir., 75 F.2d 256, 261; In re Julius Roehrs Co., 3 Cir., 115 F.2d 723, 724. And this is further demonstrated by section 179, 11 U.S.C.A § 579, where the implication is clear that a plan may be effected, even though the debtor has been found to be insolvent. It is true that when the first mortgage security is inadequate and the debtor has no assets other than the mortgaged premises, it is difficult to conceive of a plan, which the court could approve as fair and equitable, that would give anything to lienors or creditors other than the first mortgage certificate holders, unless new money is put in. But even if it be unreasonable to expect that new money will be forthcoming or that any plan can be effected which will provide anything for the debtor or its shareholders, we do not think clause 3 of section 146, 11 U.S.C.A. § 546(3), requires dismissal of the debtor's petition; the reorganization may still go on in the interest of such creditors as shall be found entitled to share in the debtor's assets. No plan was, or could be, submitted by the debtor with its petition, and we see no error in the district judge's conclusion that the trustees in reorganization should have an opportunity to explore the possibilities and propose a plan before he should decide that it was unreasonable to expect that any reorganization could be effected. Cf. In re Blinrig Realty Corp., 2 Cir., 114 F.2d 100.
The second branch of the appellant's argument presents the contention that the pending state court reorganization proceedings require dismissal of the debtor's petition pursuant to section 146(4), 11 U.S.C.A. § 546(4). Primary reliance is placed on the recent decision of this court in Brooklyn Trust Co. v. Rembaugh, 2 Cir., 110 F.2d 838. In the Rembaugh case a finding of good faith was reversed on facts closely parallel to those of the case at bar.There are, however, slight differences which the debtor seizes upon as a ground for distinction.In Rembaugh, the plan of reorganization, as promulgated in the state court, provided in the same order for appointment of a trustee and for extension of the mortgage, and the mortgage had not matured when the debtor defaulted and foreclosure was commenced. Therefore, it is urged, the state proceeding was still pending when the debtor's petition was filed, while that is not the situation in the case at bar. With the latter conclusion we cannot agree. It is true that the original plan of reorganization provided only for an extension of the mortgage to December 1, 1937, but the 1938 proceeding in which a trustee was appointed was denominated a "modification" of the original plan and the court expressly reserved jurisdiction to grant other relief on the application of any "interested party." The debtor had consented in open court to the original plan, had not objected to the modification, and had made payments to the trustee in conformity with it for more than two years. We think the debtor had assented to the modified plan as fully as had the debtor in the rEmbaugh case. The two cases cannot be distinguished on this ground. The district court, 41 F.Supp. 814, 816, attempted to distinguish them on the ground that "here the debtor has endeavored on two occasions to present modified plans for relief, but on each occasion, has been rebuffed by the trustee" and given no opportunity to communicate with the certificate holders. But the debtor made no attempt to bring its proposals to the attention of the state court in the pending proceeding, as we think it was entitled to do as an "interested party"; had it done so its proposals, with the court's approval, could have been presented to the certificate holders. That proceeding provides adequate means to reorganize the mortgage and protect the rights of all certificate holders whose interests alone exhaust the debtor's property. In the Rembaugh case we held the element of good faith to be lacking because a debtor, which had voluntarily submitted to a plan for reorganization in the state court but found compliance therewith irksome, invoked federal jurisdiction instead of seeking relief in the state court. Although the debtor did not itself propose a plan, it assented to one proposed by another and was, we said, "in the position of one who voluntarily submitted the plan for the reorganization in the state court" [110 F.2d 840]; and the opinion enunciated the following rule: "After electing to have the mortgage provisions modified in the state court proceedings it could not escape from the consequences of the plan to which it had assented by simply filing a petition for reorganization in the federal court while the proceedings in the state court were still pending." Unless we are to overrule the Rembaugh case, we think the same decision must be made here.
A majority of the court is of the opinion that the Rembaugh case should be given effect here to prevent a debtor, who has assented to a plan which is being supervised by the state court in reorganization proceedings still pending there, from flouting that jurisdiction by filing a petition in the district court. The applicable principle, as was said in the Rembaugh case, is not an absence of good faith in the filing of the new petition in the broad meaning of those words but a special instance of a lack of good faith flowing from the personal disqualification of the debtor. Section 146, 11 U.S.C.A. § 546, expressly disclaims any limitation upon the generality of the meaning of good faith and subsection 4 of that section is but one special instance of what will show a disabling absence of it on the part of a debtor and is not to be confused with what controls here. Nor is it relevant that others than the debtor may have the right to file a petition in the district court regardless of the pendency of a petition in some ...