Opinion
No. 171.
February 28, 1946.
Appeal from the District Court of the United States for the Southern District of New York.
Proceeding in the matter of the reorganization of United States Realty Improvement Company, debtor, under chapter 10 of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., wherein James J. O'Connell was appointed the trustee of the debtor. From an order staying the enforcement by the National City Bank of New York of a pledge of the debtor's property and declaring null and void the steps theretofore taken to enforce the pledge, and denying the cross-motion of the National City Bank to vacate a temporary restraining order previously granted, the National City Bank of New York appeals.
Order affirmed.
This is an appeal from an order in proceedings for the reorganization of United States Realty and Improvement Company, debtor, under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The order stays the enforcement by the National City Bank of New York of a pledge of the debtor's property, and declares null and void the steps theretofore taken to enforce the pledge. It also denies the cross-motion of the National City Bank to vacate a temporary restraining order previously granted.
In June 1932, Realty borrowed on its promissory note the sum of $3,000,000 from the National City Bank. In order to effectuate the loan, Realty set up a whollyowned subsidiary, Whitehall Improvement Corporation, to which it transferred certain properties. In return, Whitehall delivered to Realty a purchase money bond and mortgage in the amount of $4,000,000 which Realty then assigned and delivered to the Bank as security for the $3,000,000 note. On August 23, 1940, Realty paid $100,000 on the debt and executed a new note for the remaining $2,900,000, with the Whitehall mortgage once more pledged as security.
On February 1, 1944, Realty filed its voluntary petition for reorganization. The petition was approved, and the Bankruptcy Court issued the usual general injunction restraining all creditors from interfering in any way with the exclusive jurisdiction of that court over the debtor and its properties during the pendency of the reorganization proceedings. On February 23, the Bank gave notice of its election to accelerate the maturity of the debtor's note in accordance with the provisions thereof. On the same day, the Bank set off against the debt Realty's deposit of $42,554.30. The validity of this set-off was never conceded by the trustee in bankruptcy. On April 14, 1944, a contract was entered into between the trustee, Whitehall and the Bank, subject to the approval of the court, which was obtained on April 26. Under the terms of the contract, the Bank agreed to postpone for one year the enforcement of its rights as pledgee of the mortgage, and during that year to accept interest on Realty's note at the rate of 3% per annum, instead of the 6% which it was to receive by the terms of the note after its acceleration and maturity. The trustee was to make certain payments on the principal of the note, in addition to paying the interest accrued prior to February 1, 1944. It was agreed that, if the balance of the principal was not paid at the end of the year, the Bank was to be free to enforce its rights against the mortgage. This agreement was later extended for a further three-month period, which expired on July 23, 1945. Shortly before this date, the trustee asked the Bank to agree to another 90-day extension, but the Bank refused. The balance of the principal due on Realty's note was not paid on the agreed date, and after due demand for payment, the Bank served notice that it intended to sell the mortgage at public auction to satisfy Realty's debt. In these circumstances, the trustee procured an order temporarily restraining the Bank from taking any action to enforce the pledge, and on September 25, 1945, the Bank was stayed from realizing on its security until further order of the court. The latter is the order appealed from.
In the proceedings below, it was uncontested that the value of the Whitehall properties is not less than $5,000,000. The balance due on the note was $2,293,750 as of July 23, 1945, and the Whitehall mortgage then stood at $3,900,000. The debtor owns all of the outstanding stock of Whitehall, and Whitehall has been the principal source of the debtor's earnings for many years. It was shown that the reorganization proceedings had reached the plan stage, the trustee having filed a proposed plan on September 5, 1945; provision was made therein in respect to the claim of the Bank and for the refinancing of the Whitehall mortgage.
The trustee also advised the court below that he was in the process of investigating certain other transactions between the Bank and the debtor, the details of which are not relevant here; the trustee stated in his petition that he had not completed his investigation, which might possibly have uncovered a breach of fiduciary relationship on the part of the Bank, and that he desired to complete it before the Bank was allowed to realize on its claim against the debtor and thus to escape the equitable jurisdiction of the court.
Zalkin Cohen, of New York City (Barney B. Fensterstock, Israel Akselrod, and Harry Zalkin, all of New York City, of counsel), for National City Bank.
Goldwater Flynn, of New York City (Monroe Goldwater, Harry Rodwin, and George Kossoy, all of New York City, of counsel), for James J. O'Connell.
Wagner, Quillinan, Wagner Tennant, of New York City, for United States Realty Improvement Co. Debenture Holders' Protective Committee.
Scribner Miller, of New York City, for C. Shelby Carter et al., constituting Debenture Holders Committee.
Ralph Montgomery Arkush, of New York City, for Trinity Buildings Corporation of New York First Mortgage Bondholders Committee.
Ralph Montgomery Arkush, Louis G. Bernstein, and Maurice Finkelstein, all of New York City, of counsel, for appellees.
Roger S. Foster, Sol., of Philadelphia, Pa., and George Zolotar, Atty., of New York City (Ezra Weiss, of Indianapolis, Ind., of counsel), for Securities and Exchange Commission.
Maurice B. Daniel W. Blumenthal, of New York City, for Protective Committee for Stockholders of United States Realty Improvement Co.
Before L. HAND, CHASE, and FRANK, Circuit Judges.
The agreements between the Bank and the trustee must be sharply differentiated from trustee's certificates which, issued for new and substantial consideration, must always be strictly enforced. Because the pledged asset constituted an essential ingredient of any reorganization, the original entry of the injunction order, as to the Bank, was amply justified. So, too, without the consent of the Bank, would have been its continuance for a reasonable period. In determining the length of that period, the large margin of security for the bank's debt (ensuring it against any probable loss for a considerable time) was of major importance. On the facts, there could be no abuse of discretion in continuing the injunction up to the present time, despite the Bank's objection. The Bank was thus in no position to exact a promise, such as that contained in the agreements, definitely limiting that period. For, in the circumstances, the Bank was indulging in no "forbearance"; it gave up nothing by the agreements except the stipulation for a reduced interest rate for the life of the agreements.
The same is true of other similar obligations of the trustee, approved by the court. Thus in Sword Steamship Line v. Vendramis, 2 Cir., 116 F.2d 665, 667, we said: "We think that a contract which has been so far completed as the one with the Ocean Dominion Steamship Corporation cannot be rescinded in any way that is just to it. The debtor has obtained from it a large loan as well as a large amount of charter hire. Such a loan would hardly have been made without the inducement of the charter and option and the arrangement cannot be terminated now without depriving the charterer of a substantial portion of the consideration."
Continental Illinois National Bank Trust Co. v. Chicago Rock Island Pacific R. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110; Wright v. Vinton Branch of Mountain Trust Bank of Roanoke, Va., 300 U.S. 440, 470, 57 S.Ct. 556, 81 L.Ed. 736, 112 A.L.R. 1455; Central Hanover Bank Trust Co. v. Callaway, 5 Cir., 135 F.2d 592; In re Prudence Bonds Corporation, 2 Cir., 77 F.2d 328, 330.
The fact that Whitehall is a wholly-owned subsidiary of Realty is irrelevant. Realty pledged the mortgage on Whitehall's property as collateral for the debt which it owed to the Bank. The relationship between Whitehall and Realty is incidental; the important element in the transaction is the debt owed by Realty to the Bank, secured by the mortgage, an asset of Realty. Thus analyzed, the instant case is clearly distinguishable from cases in this Circuit, cited by the Bank, which hold that the Bankruptcy Court does not acquire jurisdiction to enjoin suits or other actions against a wholly-owned subsidiary of a parent corporation merely because the reorganization of the parent corporation would be facilitated thereby, or because its financial status would be substantially affected by the result of the suit against the subsidiary. As the Bankruptcy Court would have jurisdiction to enjoin the Bank if the mortgagor were a complete stranger to Realty, the fact that it is a subsidiary of Realty has no pertinence.
Consequently, we think the court was not obliged to enforce the terms of the trustee's agreements when it became obvious that to do so might seriously jeopardize reorganization through a plan then about to be considered. Except frustration of the Bank's desire to avoid the court's summary jurisdiction (should the trustee desire to sue it), the Bank has suggested no harm to it which will result from the court's refusal to allow it to realize on its collateral. We think that the court, when the agreement recently ended, properly kept the injunction alive, pending an exploration of current efforts to work out a plan.
In In re Prudence Bonds Corporation, 2 Cir., 88 F.2d 634, 635, 636-637, we said:
"By the stipulation the pledgee gave up any attempt to assert any existing privilege during that period, and the trustees enjoyed it without contest. Good faith required the judge to honor the agreement he had approved, unless it very gravely prejudiced the interests of bondholders. [Emphasis added.]"
Whether the plan under consideration at the time of entry of the order from which the Bank appealed was one which can be validly approved as fair and reasonable we need not and do not now consider. We assume that none other than a valid plan will be approved; if that assumption should prove to be wrong, the remedy of review of course will be open to the Bank. The injunction may properly be continued in effect until it appears that there is no reasonable likelihood of effecting reorganization.
We likewise need not and do not consider a plan since then proposed, to which appellees invite our attention.
As to interest, the plan should put the Bank in the position it would have had if no agreement had been made with the trustee.
Affirmed.