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July 13, 1956


The opinion of the court was delivered by: WEINFELD

Joaneff Realty Corporation (hereinafter called Joaneff) seeks to review an order of the Referee which approved the action of the trustee in bankruptcy of New York Investors Mutual Group, Inc. (hereinafter called New York Investors) in disaffirming a contract for the sale of real property entered into between New York Investors as seller and Joaneff as purchaser; and authorized the trustee to accept the bid of Centurion Film Sales, Inc. (hereinafter called Centurion) to pay $ 20,000 for the bankrupt's right, title and interest in the property as stipulated in its offer.

The petition for review seeks not only a reversal of the Referee's order in toto but an affirmative direction that the trustee be ordered to assume the contract between the bankrupt and Joaneff.

 On October 13, 1954 New York Investors (not then a bankrupt) agreed to sell a plot of ground together with improvements thereon consisting of five buildings located at Third Avenue and 19th Street, New York City, to Joaneff for $ 105,000, of which $ 15,000 was paid upon the signing of the contract and the balance of $ 90,000 was to be paid upon the closing of title some eighteen months later, on April 30, 1956. Title to the property was to be conveyed to Joaneff free of all encumbrances except the 'rights of statutory tenants only'. The $ 15,000 paid on account of the purchase price was made a lien on the premises by the terms of the contract which was recorded in the Office of the Register of New York County on October 18, 1954. *fn1"

 At the time of the execution of the contract the East Netherland Holding Corp. (hereinafter called East Netherland) had been the ground lessee of a portion of the property under a long term lease due to expire on April 30, 1956, and as such claimed title to three of the buildings, which the New York Investors agreed by the contract to acquire.

 On July 22, 1955, some nine months after the contract had been signed, New York Investors executed and delivered a first mortgage on the premises in the sum of $ 70,000 to its president who thereupon assigned it to three individuals referred to herein as the Brill group. The mortgage and assignment were duly recorded together with a certificate of consent of at least two-thirds of the stockholders of New York Investors and an estoppel certificate executed by its vice president and secretary certifying to the validity of the mortgage. *fn2" On the same day, New York Investors assigned to the Brill group as additional collateral for the payment of the mortgage its right, title and interest in and to the balance of the moneys due under the Joaneff contract. The consideration for the mortgage which had been assigned to the Brill group was an advance by it of $ 65,000, the proceeds of which were used by New York Investors to pay (1) a pre-existing purchase money first mortgage on the premises; (2) a judgment of record against New York Investors; and (3) existing real estate taxes.

 On October 5, 1955 an involuntary petition in bankruptcy was filed against New York Investors and following its adjudication as a bankrupt, a trustee was elected.

 The trustee instituted proceedings before the Referee challenging the validity of the $ 70,000 mortgage and the assignment held by the Brill group. He also instituted proceedings to have the rights of East Netherland as tenant under its lease determined and challenged its claim of a lien of $ 55,000 for the value of the three buildings to which it claims ownership. Both of these proceedings remain undetermined.

 During the pendency of the foregoing proceedings the trustee received an offer from Centurion, allegedly identified with the Brill group, of $ 17,000 (later increased to $ 20,000) for an assignment of the trustee's right, title and interest to the property, including an assignment of the right, title and interest which the trustee 'may have or allege or be entitled to litigate for in and to any of the foregoing properties'. In effect, the offer was for a quit claim deed and to take title subject to all encumbrances.

 The trustee petitioned the Referee urging acceptance of the Centurion offer to purchase the property subject to existing encumbrances on the ground that the estate would realize $ 20,000 net and rid itself of vexatious and expensive litigation with its uncertainty of outcome. Counterwise, he alleged that performance of the Joaneff contract which required delivery of title free of encumbrances would yield a balance of $ 90,000 to the estate, substantially less than the total of a minimum of $ 125,000 reflected by the Brill mortgage and the East Netherland claim; therefore his rejection of the Joaneff contract was justified by sound business judgment and should be affirmed.

 The Referee agreed with the trustee's general position and approved acceptance of the Centurion offer and so entered the order now under attack.

 Section 70, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. b, reads in pertinent part as follows: 'Within sixty days after the adjudication, the trustee shall assume or reject any executory contract, including unexpired leases of real property * * *. Any such contract or lease not assumed or rejected within such time, whether or not a trustee has been appointed or has qualified, shall be deemed to be rejected.'

 The trustee took no affirmative action within sixty days of his appointment either to assume or reject the Joaneff contract. Such inaction under the statute clearly constituted a rejection, and the Referee expressly found that the trustee never assumed the contract. The Referee by his order specifically approved such disaffirmance.

 Joaneff contends there is no power in the trustee to disaffirm an executory contract for the sale of real property; that as vendee under the contract it is, under New York law, the equitable owner of the property and entitled to specific performance as against the trustee.

 Apart from its general attack on lack of power in the trustee to reject an executory real property contract, Joaneff makes other objections which need to be considered. It urges, assuming arguendo power to disaffirm, that the trustee's failure to tender the $ 15,000 paid on account of the purchase price is fatal to disaffirmance. In advancing this argument Joaneff equates the trustee's power to reject under § 70, sub. b with rescission. In view of the disposition hereinafter made with respect to the $ 15,000 payment it is unnecessary to pass upon this issue. The Referee found Joaneff had paid the $ 15,000 to New York Investors without restriction, that the seller co-mingled the cash so received and that any alleged lien as to the deposit was lost in bankruptcy. The Referee ...

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