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IN RE SIRE PLAN

July 23, 1963

In re the SIRE PLAN, INC., et al., Debtors


The opinion of the court was delivered by: SUGARMAN

Sire 57th Street Plan, Inc. (hereinafter referred to as the 'debtor') is a New York corporation which was incorporated on or about the 22nd day of October, 1958. It is one of a number of affiliated corporations which filed a joint petition for reorganization under Chapter X on the 16th day of February, 1963. The debtor is the owner by assignment of a leasehold on premises known as 408 West 57th Street, New York, New York, under which Fifty Seven Associates, a partnership, is the landlord. The debtor was organized for the express purpose of acquiring that leasehold. The lease is for a term of fifteen years commencing on the first day of March, 1957 and terminating on the 28th day of February, 1972. This lease, however, contains four renewal options for terms of twenty-one years each. The rent currently payable under the lease is $ 150,500.04 per annum or $ 12,541.67 per month. As additional rent, the debtor is required to pay taxes and assessments which presently approximate in excess of $ 67,000 per year. This additional rent is payable to the landlord on a monthly basis, the taxes and assessments being estimated for annual purposes and one-twelfth thereof being paid each month.

The acquisition of the leasehold by the debtor was intended to be financed by a public offering under which the debtor proposed to raise a total of $ 400,000. The offering to the public was made by a circular dated November 17, 1958 and was limited to residents of the State of New York. The debtor proposed to sell 4,000 fifteen year installment debentures, with interest ranging from 6% To 8 1/2% Per annum (depending upon income), in multiples of $ 50.00 each and 4,000 shares of 6% Cumulative non-callable participating preferred stock having a par value of $ 50.00. The preferred stock and debentures were sold in units of $ 100 each, the offering was fully subscribed and these units are now held by 337 investors.

 The original lease was made by Fifty Seven Associates, as landlord, with the 408 W. 57 St. Corp., as tenant. This lease was assigned to the debtor by the 408 W. 57 St. Corp. under an Indenture of Assignment dated December 3, 1958. The actual purchase price paid by the debtor for the leasehold seems to have been $ 267,000.

 Thereafter, and on January 20, 1960, the debtor executed and delivered a leasehold mortgage in the sum of $ 140,000 to the Pitkin Auto Exchange, Inc., as mortgagee, which mortgage was duly recorded. By assignment dated January 1, 1961, Pitkin Auto Exchange, Inc., as mortgagee, assigned the mortgage to one Moe Steinberg, which assignment was likewise duly recorded. On or about the 20th day of November, 1961, Moe Steinberg assigned the leasehold mortgage to Leo Ritter & Co., a partnership. At that time, the balance due on the mortgage had been reduced to $ 96,000. On the same day, the debtor executed and delivered to Leo Ritter & Co. an additional mortgage on the leasehold in the principal sum of $ 54,000. This latter mortgage and the assigned mortgage were then consolidated to form a single consolidated mortgage lien of $ 150,000 on the leasehold. Subsequently, and on November 27, 1962, Leo Ritter & Co. and the debtor entered into an agreement extending the time of payment of the consolidated leasehold mortgage. Thereafter, and on the 28th day of December, 1962, the debtor defaulted in the making of a payment then due under the extension agreement, and no payments have since been made on that leasehold mortgage.

 The actual consideration received by the debtor from the Pitkin Auto Exchange, Inc. for the $ 140,000 leasehold mortgage was $ 120,400. The amount received from Leo Ritter & Co. for the additional mortgage of $ 54,000 was $ 45,000. The offering circular provided, inter alia, that the debtor 'may not incur any obligation for borrowed money except for its corporate purposes, including all costs required for the proper maintenance of any property it may acquire, without first obtaining the prior written consent of the holders of a majority of the Debentures, which consent is not required in the event of (a) the creation of additional mortgage or mortgages for the purpose of applying the proceeds to the reduction or payment of the unpaid principal of the Debentures, or (b) the re-financing of any mortgage which may at any time be a lien on any property the Corporation may acquire for the purpose of obtaining a new mortgage or mortgages on more favorable terms. (Sec. 5:10).' The section reference, that is, Sec. 5:10, relates to a substantially similar provision in a Trust Agreement dated as of the 10th day of November, 1958 between the debtor, The Sire Plan, Inc. and one Carlisle Davidson as Indenture Trustee.

 The offering circular refers to a first mortgage on the fee and specifically states that the debtor 'will be under no obligation to make * * * mortgage payments because they are required to be made by * * * landlord out of the * * * specified rental it is entitled to under the leasehold.' This circular further provides that the 'leasehold will be subject and subordinate to the first mortgage and any renewals or replacement thereof and to any new first mortgage that may thereafter be placed on the property provided such first mortgage is an 'institutional' loan and the payments called for thereunder do not exceed the amount of the rent that the owner is entitled to receive under the leasehold.' In addition, the offering circular states that 'as a general policy, SIRE Plan offerings involve only the financing of acquisition of title to rental income real estate on a free and clear basis or subject only to a first mortgage.' Nowhere in the offering circular or in the Trust Agreement of November 10, 1958 is there any indication that the debtor intended to place a mortgage on the leasehold.

 It is also interesting to note that the reorganization petition herein, contents of which this court may take judicial notice, contains a specific statement to the effect that the books and records of the debtor do not reflect any leasehold mortgage indebtedness whatever either to Pitkin Auto Exchange, Inc., Moe Steinberg or Leo Ritter & Co. The trustees have advised the court that their investigation into the circumstances under which the leasehold mortgages were executed and delivered has not yet been completed but they have also intimated that at some future date appropriate action may be taken to invalidate such mortgages. It is unnecessary for the court at this time to express any opinion on the validity of the leasehold mortgages since that question is not before it. It is important, however, for the court to keep this possible challenge in mind in the light of the motions hereafter discussed.

 On or about the 31st day of December, 1962, an action was instituted in the New York State Supreme Court, County of New York, entitled Sire Plan, Inc., et al., v. Mintzer, 38 Misc.2d 920, 237 N.Y.S.2d 123. In that action John T. Cahill, Esq. was appointed receiver of the debtor and affiliated corporations which are likewise in reorganization. The order of appointment contained the usual restraint against the prosecution of any action in law or in equity against the debtor or the affiliated corporations and against the foreclosure sale or other disposition of any property held as security for loans made to any of these corporations without leave of that court.

 Subsequently, and by order to show cause, dated January 30, 1963, Leo Ritter & Co. moved in the New York State Supreme Court action for an order authorizing and permitting Leo Ritter & Co., a co-partnership, to institute, prosecute and continue to prosecute an action for the foreclosure of the leasehold mortgage then held by the co-partnership on the property in question.

 The reorganization petition of the debtor and the affiliated corporations was approved by this court on February 16, 1963 when the petition was filed. In the absence of a provision to the contrary, this order of approval operated to stay the pending equity receivership proceeding in the New York State Supreme Court. Bankruptcy Act 148. Thereafter, and on the 18th day of February. 1963, Lazarus Joseph, Esq. and David I. Shivitz, Esq. were appointed reorganization trustees for the debtor, duly qualified and are presently acting as such reorganization trustees. The order of appointment specifically provided that:

 'Until final decree or the further order of this court, all creditors and stockholders, and all sheriffs, marshals and other officers, and their respective attorneys, servants, agents and employees, and all other persons, firms and corporations be, and they hereby are, jointly and severally, enjoined and stayed from commencing or continuing any action at law or suit or proceeding in equity against said debtors or said trustees in any court, or from executing or issuing or causing the execution or issuance out of any court of any writ, process, summons, attachment, subpoena, replevin, execution or other process for the purpose of impounding or taking possession of or interfering with or enforcing a lien upon any property owned by or in the possession of the said debtors or said trustees, and from doing any act or thing whatsoever to interfere with the possession or management by said debtors or said trustees of the property and assets of the within estates, or in any way interfere with said trustees in the discharge of their duties herein, or to interfere in any manner during the pendency of this proceeding with the exclusive jurisdiction of this court over said debtors and said trustees and their respective properties; and all persons, firms or corporations owning any lands or buildings occupied by said debtors or said trustees or wherein is contained any property of the within estates be, and they hereby are, jointly and severally, stayed, pending the further order of this court, from removing or interfering with any such property. Without limiting the generality of the foregoing, and until further order of the court, the following actions, suits or proceedings be, and they hereby are, enjoined and stayed:

 '(n) Action instituted in the Supreme Court of the State of New York, New York County, entitled Leo Ritter & Co. v. Sire 57th Street Plan, Inc., et al.;'

 The order appointing the trustees also provided that the trustees should by June 4, 1963 or such later date as the court might fix, file a report as to all executory contracts of the debtor with recommendations as to assumption or rejection thereof. Further, it specifically stated that 'the continued performance of any such contract by the trustees (whatever be the nature of such performance) during said period (as it may be extended) shall not be deemed to diminish, impair or affect in any way the right of the trustees or the court to reject such contract.'

 On March 5, 1963, and based upon a petition of Leo Ritter & Co., an order was made by this court in connection with the debtor requiring the trustees to show cause on the 6th day of March, 1963, why an order should not be made directing the trustees to pay to Fifty Seven Associates (landlord) the sum of $ 18,650.92, forthwith being the rent allegedly owing on the leasehold for February 1963 and directing the trustees to pay a similar sum for rent by the tenth of each and every month during their occupancy of the premises. The hearing on this order to show cause was adjourned from the 6th day of March, 1963 to the 20th day of March, 1963. In the meantime and on the 12th day of March, 1963, based upon an application of the reorganization trustees, this court made an order requiring Fifty Seven Associates (a partnership), landlord of the premises, as aforesaid, to show cause why the court should not stay and ...


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