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July 3, 1957

In the Matter of NEW YORK INVESTORS MUTUAL GROUP, Inc., Bankrupt

The opinion of the court was delivered by: WEINFELD

The trustee of New York Investors Mutual Group, Inc., bankrupt (hereinafter sometimes referred to as landlord or lessor) seeks to review an order of the Referee in Bankruptcy which adjudged that the East Netherland Holding Co. (1) has a lease valid as against the trustee upon real property owned by the bankrupt; (2) is entitled to remain in possession of, and is not required to surrender, the premises until the value of the buildings thereon is actually paid or duly tendered to the said respondent; and (3) has a valid lien on the real property for the payment of the value of the buildings and it is not limited to filing a general claim therefor.

The East Netherland Holding Co. (hereinafter sometimes referred to either as respondent or tenant), while successful upon the merits in defeating the trustee's motion, cross-moves to review so much of the Referee's order which held that the Court of Bankruptcy had jurisdiction to determine by summary proceeding the issues posed by the trustee's motion.

 The facts are as follows:

 On October 5, 1955 when an involuntary petition in bankruptcy was filed against the bankrupt it was the fee owner of a plot of land located at 19th Street and Third Avenue New York City. The respondent, East Netherland Holding Co., was then in possession of the land and three buildings thereon under a 21-year ground lease which had been entered into in April, 1935, between the respective predecessors in interest of the bankrupt and the respondent and was due to expire on April 30, 1956 -- seven months after the filing of the petition in bankruptcy.

 The lease contained a provision under which the landlord (and its successors or assigns) had the choice either to grant a renewal for a further term of 21 years or to pay to the lessee the value of the buildings. It also provided that if the landlord should refuse to grant a renewal, the lessee (including its successors or assigns) 'shall not be compelled to surrender the premises until such payment be made or tendered'. The tenant covenanted that in the event the landlord decides to pay the value of the buildings and 'shall actually make such payment or tender the same' then it would deliver up the buildings unto the possession of the landlord, without delay. The lease contains no provision regarding bankruptcy, or the consequences of an adjudication, of either the lessor or lessee as a bankrupt.

 The trustee on December 5, 1955, notified the respondent that he elected to 'reject' the 1935 lease. The respondent thereupon demanded that the trustee pay the value of the three buildings to be determined by arbitrators as set forth in the lease and asserted a right to remain in possession until that sum was determined and paid to it. The respondent designated its appraiser and arbitrator.

 The trustee refused to make payment and failed to designate an arbitrator. Instead he brought the present proceeding before the Referee. His petition in effect asserted that the lessee's refusal to surrender possession of the premises until it received payment for the buildings constituted a cloud on the trustee's right, title and interest in the property, and prayed that the property be sold free of any asserted lien and right of possession. Essentially the trustee's position was and is that the lessee is an unsecured creditor with respect to the claimed value of the buildings.

 The 1935 lease was not recorded at the time of its execution. It was a renewal of a previous 21-year lease made in 1914, which contained identical terms for a renewal or payment of the value of the buildings. The 1914 lease was duly recorded. The 1935 lease was not recorded until after the bankruptcy. However, the tenant with whom the renewal lease was entered into in April, 1935 (upon the expiration of the 1914 lease) was the same tenant named in the 1914 lease and had been and remained in continuous possession under both leases until November, 1953 when it assigned its interest in the leasehold to the respondent in this proceeding. This assignment to the respondent which specifically referred to the 1914 lease and its recording, as well as any renewals, was recorded on December 1, 1953 -- prior to the acquisition of title by the bankrupt in August, 1954. When the bankrupt acquired title, the respondent East Netherland Holding Co. was in possession of the premises, and the bankrupt took title subject to the 1935 renewal lease which had been assigned to the respondent. Thereafter the bankrupt and later its trustee accepted the rental payments from the respondent in the amount specified in the lease.

 In limine, there is the issue of jurisdiction. The respondent contended that the Bankruptcy Court was without jurisdiction to determine the validity of the asserted lien -- it urged that the issue should be decided in a plenary action -- whether by ejectment, dispossess, a bill to quiet title or one for declaratory judgment. The Referee overruled the plea.

 He applied the law of the State of New York which holds that where the relationship of landlord and tenant has once been established, the possession of the latter and that of his grantees and assignees is the possession of the landlord and not hostile or adverse. *fn1" The Referee reasoned *fn2" that since the tenant was asserting, under the very lease which gave rise to the landlord and tenant relationship, a right to possession until it was paid the value of the buildings, such possession was not adverse. Accordingly he concluded there was constructive possession in the landlord -- bankrupt, at the time of the adjudication and that the Bankruptcy Court had exclusive jurisdiction to determine all questions of title, possession or control of the bankrupt's property, including the validity of the asserted lien. *fn3" Thus he reached the merits of the controversy.

 I am in accord with the Referee's conclusion but upon another ground. Here there can be no question that the property was in custodia legis at the time of adjudication. The tenant was in lawful possession under a lease which still had seven months before expiration and as yet no claim had been asserted as to any alleged lien, and indeed none could have been asserted, because the landlord, prior to adjudication, had not decided either to renew the lease or to take over the property. The tenant's claim that it had a lien for the value of the property and a concomitant right to remain in possession until paid arose only after the property had already been under the jurisdiction of the Bankruptcy Court.

 We next consider the basic claim -- whether the lessee, East Netherland Holding Co., has a lien for the value of the property with a right of possession until paid, or whether, as the trustee contends, the lessee must surrender possession and is relegated to the status of a general creditor for the value of the buildings as found by the arbitrators.

 When the trustee acting under Section 70, sub. b, of the Bankruptcy Act, 11 U.S.C.A. ┬ž 110, sub. b, gave notice on December 5, 1955 to the tenant that he elected to 'reject' the lease, the unexpired term was seven months.

 Section 70, sub. b, insofar as pertinent provides: 'Within sixty days after adjudication, the trustee shall assume or reject any executory contract, including unexpired leases of real property. * * * Unless a lease of real property shall expessly otherwise provide, a rejection of such lease or any covenant ...

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