The opinion of the court was delivered by: WERKER
The Receiver and the Debtors in possession of the D. H. Overmyer Corporations (hereinafter collectively called "Overmyer") appeal to this Court from judgments and orders of the Honorable Roy Babitt, Bankruptcy Judge, made on August 6, 1974.
The Bankruptcy Judge ordered the termination of leases between Overmyer and the landlord-appellees and required Overmyer to surrender possession of leased premises to the landlords.
The organization and business activities of the Overmyer corporations are fully set forth in the opinion of the Bankruptcy Judge. For the purposes of this appeal it will only be necessary to describe them briefly.
Overmyer was in the business of long-term leasing of warehouse space from landlords and short-term subleasing of such space to subtenants.
Overmyer purchased parcels of land, arranged for financing and construction of warehouses on the properties, and then sold the warehouses to the landlords involved in this appeal under lease-back arrangements. The landlords were mainly investors content to play passive roles in the operation of the warehouses. Overmyer operated and maintained the premises, paid real estate and other taxes, and attempted to find subtenants in each case who would pay a higher rental than that which Overmyer owed to its landlord.
The leases between Overmyer and the landlords were prepared by Overmyer, and were long-term, usually over 30 years in duration. Rentals were calculated to give the landlord a fixed return on his investment. In contrast, the leases between Overmyer and the subtenants were short-term with rentals in excess of the amount paid by Overmyer. Overmyer's profits were, in each case, keyed to its ability to find subtenants.
Over a period of years, relations between Overmyer and the landlords deteriorated. A number of factors contributed to the landlord's disenchantment with Overmyer including: late rental payments, and in some cases nonpayment of rent; failure to pay real estate and other taxes; allowing insurance to lapse; and failure to make needed repairs. As a result, several landlords began proceedings in state and federal courts to recover possession of their properties. Finally, on November 16, 1973, the parent corporation and approximately thirty-six of its subsidiaries filed petitions for arrangements under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. (1970). A receiver was then appointed to operate the business of the debtor and its subsidiaries.
Since the leases between Overmyer and the landlords contained bankruptcy termination clauses, virtually every landlord began proceedings to recover his property. The Bankruptcy Judge, pursuant to his equitable powers, stayed these proceedings. After six months of testimony, he issued an opinion and orders awarding possession of the warehouse premises to the landlords, and upholding the validity of the termination clauses.
The appellants assert several arguments on this appeal. First, that the Bankruptcy Judge erred in refusing to exercise his equitable power to prevent the forfeiture of the Overmyer leases. Second, that it was error for the Bankruptcy Judge to include in his decision those cases in which the landlords did not rely on bankruptcy termination clauses to recover possession. And finally, that the Bankruptcy Judge failed to make appropriate findings of facts and conclusions of law.
I will discuss these arguments seriatim.
Section 70(b) of the Bankruptcy Act, 11 U.S.C. § 110(b), reads in pertinent part:
an express convenant [in a lease] that . . . the bankruptcy of a specified party thereto or of either party shall terminate the lease or give the other party an election to terminate the same shall be enforceable.
Overmyer in the first instance questions whether this section applies through section 302 of the Bankruptcy Act, 11 U.S.C. § 702, to a Chapter XI proceeding. This question, however, has been affirmatively answered in the Second Circuit. Queens Boulevard Wine & Liquor Corp. v. Blum, 503 F.2d 202, at p. 204 (1974). See also Speare v. Consolidated Assets Corp., 360 F.2d 882 (2d Cir. 1966); Geraghty v. Kiamie Fifth Avenue Corp., 210 F.2d 95 (2d Cir. 1954).
In addition appellants argue that even if section 70(b) is applicable to a Chapter XI proceeding, the Bankruptcy Judge has the power, in his equitable discretion, to prevent the termination of leases containing bankruptcy default provisions. It is not every corporate entity, however, that can be successfully rehabilitated under Chapter XI, and not every Chapter XI proceeding which requires such exercise of discretion. In re Webcor, Inc., 392 F.2d 893 (7th Cir.), cert. denied, 393 U.S. 837, 89 S. Ct. 113, 21 L. Ed. 2d 107 (1968). See also SEC v. American Trailer Rentals Co., 379 U.S. 594, 618, 85 S. Ct. 513, 13 L. Ed. 2d 510 (1965).
If the plan of arrangement is feasible and if it appears that there are compelling equitable and policy considerations for preventing forfeiture, then the bankruptcy default clauses may be deemed inconsistent with the rehabilitative nature of a reorganization proceeding. Queens Boulevard Wine & Liquor Co. v. Blum, supra, at 206; Weaver v. Hutson, 459 F.2d 741 (4th Cir.), cert. denied, 409 U.S. 957, 93 S. Ct. 288, 34 L. Ed. 2d 227 (1972); In re Fleetwood Motel Corp., 335 F.2d 857 (3d Cir. 1964); Smith v. Hoboken R.R., 328 U.S. 123, 66 S. Ct. 947, 90 L. Ed. 1123 (1946). While equity historically has been the forum in which forfeitures may be set aside, no one has suggested that when the equities appear to be evenly balanced or balanced on the side of the forfeiture the Court should grant such relief.
In the cases on appeal, the learned Bankruptcy Judge listened to the testimony of Overmyer and the Receiver as well as to that of the landlords in some forty cases. On the record it would appear that for a period of years prior to its filing under the Bankruptcy Act, Overmyer's conduct with respect to many of the landlords formed a pattern of consistent failure to meet its rent, repair, mortgage and tax obligations. Just prior to filing its Chapter XI petitions, Overmyer made promises with respect to remedying these defaults which could only have been made with an intention to deceive.
This modus operandi is not new to the Courts. See D. H. Overmyer Co. v. Frick, 405 U.S. 174, 92 S. ...