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In re 716 Third Avenue Holding Corp.

December 31, 1964

IN THE MATTER OF 716 THIRD AVENUE HOLDING CORP., BANKRUPT. JEREMIAH F. CROSS, TRUSTEE-APPELLANT,
v.
A.G.V. ASSOCIATES, INC., RESPONDENT-APPELLEE.



Author: Anderson

Before LUMBARD, Chief Judge, and HAYS and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

The Trustee of the Bankrupt appeals from a judgment of the District Court which affirmed the dismissal by the Referee in Bankruptcy of the petition of the Trustee which sought a declaration that an assignment by the Bankrupt of a leasehold was null and void or, in the alternative, a declaration that the assignment was a mortgage, and a determination of the amount required for its redemption. 225 F. Supp. 268 (S.D.N.Y.1964). We reverse and remand for rehearing by the Referee.

The Bankrupt, 716 Third Avenue Holding Corp., was a realty corporation whose sole asset in 1962 consisted of a thirty-three year lease*fn1 of a building containing two stores and a restaurant at Third Avenue and 45th Street in New York City. The restaurant was occupied by the Two Johns Restaurant Corp. which was experiencing serious financial difficulty. Two Johns owed the Bankrupt approximately $20,000 in rent, and its imminent collapse threatened the Bankrupt with the loss of the major portion of its rental income under the subleases and, in consequence, the possible forfeiture of the leasehold to the fee owner.

On May 12, 1962 the Bankrupt agreed in writing to assign the entire leasehold to Varveris Inc. in return for $22,000 and to use the proceeds as follows: $4500 for delinquent real estate taxes on the property; $1000 for the May rent owed by the Bankrupt to the fee owner; $2500 for attorneys' fees, including those of the assignee's attorney; $5000 to pay the conditional sales obligations of the Two Johns; $3000 to provide additional security for the fee owner; and the remaining $6000 for the Bankrupt's use. The agreement contained an option, to run for a period of nine months from the date of the assignment, under which the Bankrupt could repurchase the leasehold for $17,800 plus 6% interest. If this right were in fact exercised, it was agreed that the assignee would account for any profits received during the period but all losses incurred would be added to the repurchase price.

The only other provision of the agreement which is of significance on this appeal is the strong sanction imposed upon the assignee if, during the option period, it allowed to remain unpaid for twenty days either the rent due to the owner of the land and building or the taxes on the leased premises. If either of these events occurred, the assignee was to lose all of its interest in the lease and all "right to repayment" for the assignment. The reassignment, executed by the assignee and held in escrow pending exercise of the option, would, in the event of such default by the assignee, be delivered to the assignor.

Before the execution and delivery of the assignment Varveris transferred all of its rights under the agreement to the appellee, A.G.V. Associates, Inc. The agreement of May 12, 1962 was carried out on May 24, 1962 by the assignment of the leasehold to A.G.V., which contemporaneously executed a reassignment to the Bankrupt. Both instruments were delivered to A.G.V.'s attorneys to be held by them in escrow. On August 29, 1962 the assignment was recorded but the reassignment was not.

In the meantime, however, an involuntary petition in bankruptcy had been filed against 716 Third Avenue Holding Corp. and on December 28, 1962, it was adjudicated a bankrupt. A month later, and still within the nine-month period stipulated in the May agreement, the Trustee in Bankruptcy notified A.G.V. of his intention to repurchase the leasehold, but there was no tender of funds because the Trustee did not have on hand enough money to meet the repurchase price. On February 18, 1963, the Trustee initiated the proceedings which are the subject of this appeal.

There are four points raised by the appellant: (1) that it was error to hold the assignment of the leasehold to be an absolute sale because the evidence before the Referee clearly established that a mortgage transaction was involved; (2) that the recordation of the assignment was void under § 320 of the New York Real Property Law; (3) that the assignment was void under either § 16 or § 20 of the New York Stock Corporation Law, McKinney's Consol. Laws, c. 59, for want of the required stockholder consent; and (4) that the assignment was without fair consideration and rendered the Bankrupt insolvent, and therefore was a fraudulent conveyance.

The most important of these questions is the first, that is, whether or not the transaction was, what on its face it appeared to be, an assignment of a lease for a consideration of $22,000 with an option to repurchase within a nine months' period, or was instead a loan of $22,000 with the lease transferred to the lender for security pending repayment of the money advanced by the exercise of the so-called option. If the former, the option has expired, unexercised, and title to the lease has become absolute in the assignee. If the latter, title has not so vested, and the debtor has a right to redeem.

The appellee has argued that, because the option period under the agreement has expired, the appellant could no longer repurchase the lease in any event, but if the transaction is a mortgage, the redemption period is provided by law and cannot be abolished or limited by agreement or action of the parties. Conway's Executors and Devisees v. Alexander, 11 U.S. (7 Cranch) 218, 241, 3 L. Ed. 321 (1812); Mooney v. Byrne, 163 N.Y. 86, 57 N.E. 163 (1900).

The Referee found that there was no debt as a result of the assignment and the payment of the money and that, therefore, it was not a security transaction but an outright sale with an option to repurchase.

The District Court felt bound to affirm the Referee's order in the light of certain principles applicable to this kind of case: first, that the burden of proof is on the party asserting that a conveyance absolute in its terms is a mortgage, Charles T. Streeter Construction Co. v. Kenny, 209 App.Div. 697, 205 N.Y.S. 611 (1st Dept.1924); second, that he must sustain that burden by clear and convincing proof, Zivotosky v. Max, 190 Misc. 1044, 75 N.Y.S.2d 553 (Sup.Ct.1947), aff'd, 276 App.Div. 792, 92 N.Y.S.2d 631 (3rd Dept.1949); and third, that a finding by the Referee that the burden was not sustained will be affirmed unless clearly erroneous, In re Madelaine, Inc., 164 F.2d 419 (2d Cir.1947).

There was a paucity of oral testimony directly on the nature and purpose of the transaction. The witness Vlahakis, president of the debtor, was apparently a difficult witness because of his limited understanding of English. He testified that the dealings of the parties were ...


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