Opinion
Argued October 28th, 1932.
Decided January 23d 1933.
1. The statutory authority of the court of chancery to order a sale free and clear of encumbrances in the case of an insolvent corporation owning the real estate, is found in section 81 of the General Corporation act.
2. To warrant an order to sell free and clear of existing encumbrances, two facts must exist; there must be an existing question as to the legality of the encumbrances and the property must be of a character likely to deteriorate in value. Held, that both these facts exist in the present case.
3. The contention that the income from the building has been, and will be sufficient to take care of the repairs is beside the point, even if true, where the building is such as to deteriorate in value; it is not a factor in the statutory requisites.
4. It is not necessary that the legal validity of the mortgages, as such, should be attacked; it is sufficient if there be question as to the validity, extent or priority of their liens.
On appeal from an order dated April 4th, 1932, directing sale of real estate free of encumbrances pursuant to section 81 of the Corporation act. Comp. Stat. p. 1649. Said order was advised by Vice-Chancellor Buchanan, who filed the following conclusions:
"W. Meredith Dickinson was duly appointed receiver of the above-named insolvent corporation defendant, which owned and operated the building known as 20 Nassau street, in Princeton, New Jersey, containing stores, offices and apartments. This building, and a lot in the rear, constitute the principal assets; the defendant's personal property was of small amount.
"The building itself is subject to the lien of four mortgages. First is a trust mortgage, held by Princeton Bank and Trust Company, as trustee to secure bonds of which $325,100 par value, are issued and outstanding. The lien of this mortgage, as now appears, does not include the rear eight feet of the building. Next comes a mortgage of $7,875 held by the Princeton Bank and Trust Company, individually, covering the lot in the rear of the building, but no part of the building. Next comes a mortgage of $80,000, and last, a mortgage of $100,000, both held by Twenty Nassau Street Holding Company, and both covering the entire building and rear lot.
"The mortgages are in default; large arrearages of interest are long past due.
"The receiver has been operating the building and reports that he has been, and will be unable, to find a purchaser subject to the mortgages; that the validity of the liens of the mortgages is in question; that the building was cheaply and improperly constructed and is of a character likely to depreciate in value pending litigation, and is in fact already deteriorating; and petitions for an order to sell free and clear of the mortgages.
"At the hearing all the parties in interest appeared, including the Gulick committee for bondholders, holding about thirty-nine per cent. of the outstanding bonds under the trust mortgage, and the Commonwealth Bond Corporation, a like committee, holding about fifty-nine per cent. of the outstanding bonds. The latter committee filed counter affidavits, and resists the application. The other committee, and the other parties, all favor it.
"The statutory authority of the court to order the sale free and clear of these encumbrances is found in section 81 of the General Corporation act. To warrant such order two facts must exist — there must be an existing question as to the legality of the encumbrances, and the property must be of a character likely to deteriorate in value.
"Consideration of the pleadings and affidavits leaves no doubt as to the existence of both these facts in the present instance.
"The clear weight of the evidence is that the building is of a character likely to deteriorate in value pending the litigation, and that it is in fact already deteriorating. The contention that the income from the building has been, and will be sufficient to take care of repairs is beside the point, even if true. That is not a factor in the statutory requisites; moreover it loses sight of the fact that the income has not been applied to the payment of mortgage interest, and that that interest is accruing at the rate of something like $30,000 a year.
"There is likewise no room for doubt but that the legality of the mortgages is brought in question. It is not necessary that the legal validity of the mortgages, as such, should be attacked; it is sufficient if there be question as to the validity, extent or priority of their liens. Randolph v. Larned, 27 N.J. Eq. 557. The trust mortgage does not cover the rear eight feet of the building. The two mortgages of complainant do cover this, as well as the rest of the building. The Commonwealth Bond Committee claims that the mortgagee has a right to have the mortgage reformed; but this is denied by complainant mortgagee, which intends to resist any such attempt. Obviously there is a dispute respecting the extent and priority of the liens as between the trust mortgage and the two mortgages of complainant. The order for sale free and clear will be advised — at public or private sale in the receiver's discretion.
"The Commonwealth Bond Corporation argued that it would be for the benefit of all parties in interest, as likely to produce higher bids, if bidders holding bonds and coupons under the trust mortgage were permitted to use them in part satisfaction of their bids. This contention seems sound; and there appears no reason why such a provision should not be included in the order for sale — especially since all parties in interest assented thereto in open court.
"An order to show cause was also made as to the acceptance of a bid by Cyrus H. Vail, for $160,000. This bid, as made, may not conform to all the provisions of the order for sale; and it is deemed best, in the interests of orderly procedure, that the receiver resubmit this bid, after the entry of the order for sale.
"Application was made by the Commonwealth Bond Corporation holding bonds as above mentioned, for an order granting leave to it to institute suit to foreclose the trust mortgage — alleging unreasonable refusal by the trustee-mortgagee to make such application or institute such suit.
"It would appear that the trustee — and the majority of bondholders — have the right to institute foreclosure suit; although in view of the order for sale it is at least doubtful that it still will be desired to exercise it. An order may be had, permitting the trustee to institute such suit and to make the receiver a party; and permitting the Commonwealth Bond Corporation to institute such suit, if the trustee, upon further request, continues to refuse or neglect to institute such suit.
"Application was also made by the Commonwealth Bond Corporation for the appointment of a receiver of rents, in connection with the foreclosure suit. This application will be denied — not only because the foreclosure suit has not been, and probably will not be, commenced; but also because counsel stated in open court that they were entirely content that the present receiver should continue to collect the rents."
Mr. Charles E. Scribner and Mr. Clifford I. Voorhees, for the appellants.
Mr. H. Collin Minton, Jr., for the respondents.
The order under review will be affirmed, for the reasons stated in the conclusions filed by Vice-Chancellor Buchanan on April 5th, 1932.
The order is attacked on two main grounds. The first is that it does not appear that the legality of the prior trust mortgage is brought in question. The conclusions of the learned vice-chancellor sufficiently show the contrary; and if we had any doubt on this score, the lengthy and somewhat labored argument in the appellants' brief, directed to showing that there can be no question about the status of that mortgage, would be sufficient to satisfy us that there is serious question about it.
The second principal argument is that there is nothing to show the property is of a character materially to deteriorate pending the litigation. If leaky roofs and ceilings due to improper construction both in material and design, forming puddles in time of rain and dripping into the interior, and leaky walls letting moisture through to the inside of the building, requiring to rectify the conditions an expenditure of some thousands of dollars, do not show that "the property is of a character materially to deteriorate in value pending the litigation," we have difficulty in seeing that the statute is of any practical use.
The third point made is in two parts.
(a) That the receiver has no substantial interest in the premises.
One answer is that he is backed by about forty per cent. of the first mortgage bondholders.
(b) That the sale would prejudice the first mortgage bondholders.
The court below seems to have taken rather special care to permit them to foreclose the first mortgage as against the receiver and other parties, and to use their bonds in bidding at a sale. Their application for a receiver in foreclosure was premature, as no foreclosure had been begun and, so far as we are aware, has not yet been begun.
We find no merit in the appeal, and the order under review is affirmed.
For affirmance — THE CHANCELLOR, PARKER, LLOYD, CASE, BODINE, DONGES, BROGAN, HEHER, KAYS, HETFIELD, WELLS, KERNEY, JJ. 12.
For reversal — None.