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IN RE KNOLL REALTY CORP.

June 14, 1957

In the Matter of KNOLL REALTY CORP., Debtor


The opinion of the court was delivered by: ABRUZZO

The debtor herein filed a petition under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. on July 20, 1954. On August 17, 1954, it filed an amended petition under the provisions of Chapter X and on that date a Trustee was appointed for the debtor.

The debtor was engaged in building one-family houses in Bayside, Queens County, New York. In August, 1954, 22 houses were in the process of construction. The property was subject to a first mortgage of $ 275,000 hold by the County Federal Savings & Loan Association and two other mortgages, (1) to William J. Burke in the amount of $ 46,800, dated April 7, 1954, and recorded April 9, 1954, and (2) to Grumman Village Garden Homes, Inc., dated December 11, 1953, and recorded April 14, 1954.

 An order was made after due application authorizing the Trustee to complete the 22 houses under construction upon condition that the expense of completion would constitute a preferred administration claim and a first lien on the 22 houses to be paid out of the proceeds thereof, subject only to the existing mortgage held by the County Federal Savings & Loan Association. The order further provided that all liens of any character and all others claiming a lien against said property would be subordinate to the administration expenses as ultimately allowed by the Court.

 On June 20, 1956, a motion was made by Grumman Village Garden Homes, Inc., for an order directing the Trustee to pay to it the amount due under its mortgage of $ 20,000 with interest to the date of payment. Notice of this motion was given to Burke, the holder of the $ 46,800 mortgage, and 20 other parties claiming to hold liens against the property which Grumman claimed were subordinate and inferior to its mortgage. An order was made by this Court on June 29, 1956, referring the matter to Referee in Bankruptcy as Special Master to hear and determine after an examination of any and all witnesses the issues presented by the petition of Grumman Village Garden Homes, Inc.

 The mortgagee, William J. Burke, filed his answer and a cross-petition verified June 21, 1956, to the petition of Grumman. The Trustee of the debtor filed his answer to the petition of Grumman. Hearings were held by the Referee as to the validity of both the Grumman and Burke mortgages.

 The petition of Grumman alleges that it loaned the debtor $ 20,000 on December 11, 1953, less finance charges of $ 2,000, so that the debtor received $ 18,000, and the debtor executed its note under the same date for $ 20,000, payable to Grumman, which was to become due February 11, 1954, with interest. As security the debtor delivered a mortgage dated December 11, 1953, in the sum of $ 20,000 covering the land and buildings owned by the debtor at Bayside, New York.

 This mortgage was recorded April 14, 1954.

 Burke in his answer and cross-petition alleges that he is the holder of the debtor's bond and mortgage dated April 7, 1954, for the sum of $ 46,800 which he claims was delivered to him for a valuable consideration. This mortgage was recorded April 9, 1954, five days prior to the recording of the Grumman mortgage. Burke seeks payment from the Trustee of that amount out of the proceeds of the sale of the land and buildings of the debtor covered by his mortgage. Burke claims that his mortgage is a prior lien on the proceeds and that Grumman's lien is subordinate to his.

 The answer of the Trustee resists the payment of the Grumman mortgage, claiming it is invalid and void for various reasons which will be taken up later in this opinion.

 The trustee attacks the Burke mortgage for various reasons which will also be explored later in this opinion. The Referee found that the Burke mortgage was invalid and the Grumman mortgage valid.

 Grumman seeks confirmation of the recommendation of the Referee holding its mortgage valid. Burke is asking this Court to reject the recommendations of the Referee and to declare his mortgage a valid and subsisting lien, superior to the Grumman mortgage.

 With respect to the Burke mortgage, the finding by the Referee recommending that this mortgage be held invalid should be confirmed. Findings of fact numbered 36, 37 and 38 by the Referee are amply supported by the evidence. The Court sees no reason to disturb these findings.

 Grumman loaned the debtor $ 20,000 on December 11, 1953, less finance charges of $ 2,000. This loan, with interest, was due and payable on February 11, 1954, two months later, and as security the debtor delivered the December 11, 1953, mortgage now in question. This alleged finance charge amounts to 5 per cent a month, plus 6 per cent interest, which is 1/2 per cent per month, so that Grumman was to receive a bonus, finance charge and interest of 5 1/2 per cent per month which amounts to an annual interest rate of 66 per cent on the original loan.

 When the debtor corporation was organized on April 14, 1952, Burke and Herman Axelrod were each owners of one-half of the stock of the debtor corporation. When the mortgage to Grumman was executed on December 11, 1953, the debtor did not convene a meeting of the board of directors, nor was any authorization given by the directors for the execution of this mortgage. The real seal of the corporation was not used but Axelrod purchased a new seal, a reasonable facsimile of the original, and that seal was used. Jennie Axelrod, the wife of Herman Axelrod, purporting to be the secretary of the corporation on December 11, 1953, ...


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