Colonial Realty Inv. Co., In re

• Decision Date: 15 May 1975
• Docket Number: No. 74-1402,74-1402
• Citation: 516 F.2d 154
• Parties: In the Matter of COLONIAL REALTY INVESTMENT CO. et al., Debtors. CHARLESTOWN SAVINGS BANK, a Secured Creditor in these Proceedings, Appellant, v. Gordon A. MARTIN, Jr., Trustee of Colonial Realty Investment Co., et al., Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 154

516 F.2d 154

In the Matter of COLONIAL REALTY INVESTMENT CO. et al., Debtors CHARLESTOWN SAVINGS BANK, a Secured Creditor in these Proceedings, Appellant, v. Gordon A. MARTIN, Jr., Trustee of Colonial Realty Investment Co., et al., Appellees.

No. 74-1402.

United States Court of Appeals First Circuit.

Argued Jan. 7, 1975.

Decided May 15, 1975.

Jon D. Schneider, Boston, Mass., with whom Henry B. Shepard, Jr., and Goodwin, Procter & Hoar, Boston, Mass., were on brief, for appellant.

Daniel M. Glosband, Boston, Mass., with whom Widett & Widett, John J. Curtin, Jr., and Bingham, Dana & Gould Boston, Mass., were on brief, for appellees.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

COFFIN, Chief Judge.

Charlestown Savings Bank appeals from an order of the District Court for Massachusetts requiring it to turn over to the trustees of the debtors five apartment complexes of which it had taken possession as a mortgagee for default in the payment of mortgage obligations.

Debtors are three limited partnerships managed and controlled by the same two general partners. They appear to be the legal or equitable owners of between seventy and eighty properties containing some 9,000 apartment units and encumbered by mortgages held by over one hundred mortgagees. ¹ More than seven thousand limited partners invested approximately $30,000,000 in debtors.

On September 20, 1974, appellant took possession of the five properties involved in the present appeal. Legal title to four of the properties was held by nominee trusts of which debtors' general partners were the trustees. Debtors held legal title to the fifth property. On September 23, 1974, debtors filed petitions for arrangement under Chapter XII of the Bankruptcy Act, 11 U.S.C. § 801 et seq., in which they requested that the court enjoin mortgagees, lessors under sale and leaseback arrangements and other secured creditors from taking possession of property alleged to belong to the debtors, and that mortgagees in possession be required to return such property to the control of the debtors. On September 24, 1974, the district court ordered tenants in property owned by debtors to pay their October 1st rent to debtors. On September 25, the district court entered a temporary restraining order enjoining the commencement or continuation of foreclosure proceedings by all secured creditors. On September 30, appellant appeared specially to move for modification of the court's order with respect to rental payments and to request that mortgagees in possession be permitted to continue in possession. In the ensuing month the district court held half a dozen hearings on the motions of various creditors regarding the immediate disposition of property legally or equitably owned by debtors. On October 31, 1974, the court entered the formal turnover order of which appellant seeks review.

Appellant contends that the summary jurisdiction of the district court under Chapter XII of the Bankruptcy Act does not encompass turnover orders directed to mortgagees in possession. Appellant's argument is in essence a challenge to the statutory power of the court, for if the Act empowers the court to order a turnover of property in the hands of a mortgagee then a dispute whether such an order is appropriate is a "controversy in bankruptcy" apt for summary disposition. Taylor v. Voss, 271 U.S. 176, 181, 46 S.Ct. 461, 70 L.Ed. 889 (1926); Katchen v. Landy, 382 U.S. 323, 327-29, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966); Continental Illinois National Bank & Trust Co. v. Chicago Rock Island & Pacific Ry. Co., 294 U.S. 648, 681-82, 55 S.Ct. 595, 79 L.Ed. 1110 (1935); 9 Collier on Bankruptcy P 3.01, at 795-96 (hereinafter, Collier).

In proceedings under Chapters I-VII of the Act, 11 U.S.C. §§ 1-112, bankruptcy courts " . . . have summary jurisdiction to adjudicate controversies relating to property over which they have actual or constructive possession." Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S.Ct. 628, 630, 84 L.Ed. 876 (1940); Cline v. Kaplan, 323 U.S. 97, 98-99, 65 S.Ct. 155, 89 L.Ed. 97 (1944). Where, as here, a mortgagee has taken possession of property of the debtor prior to filing, the bankruptcy court has no power under Chapters I-VII to order a turnover. Thompson v. Magnolia Petroleum Co., supra ; Cline v. Kaplan, supra ; 4a Collier P 70.16. The only court of appeals which has addressed the issue here presented applied, without explanation, the precedents pertinent to Chapters I-VII, ² ignoring language in Chapter XII which, at least when read literally, describes powers very different from those set forth in Chapters I-VII. § 507, 11 U.S.C. § 907; see infra. Section 402, 11 U.S.C. § 802, states that Chapters I-VII shall apply to Chapter XII proceedings, but only " . . . insofar as they are not inconsistent or in conflict with the provisions . . . " of Chapter XII. The crucial question remains whether anything in Chapter XII empowers a court to enter an order such as that from which appellant seeks relief. If there is such authority it is inconsistent with Chapters I-VII, and would displace those provisions for Chapter XII proceedings. Thus, we turn to the Act itself, and its history, to determine what powers Congress intended to confer on the Chapter XII court. United States v. New England Coal and Coke Co., 318 F.2d 138, 142-43 (1st Cir. 1963).

The Chandler Act enacted in 1938 effected a general modernization of the Bankruptcy laws. Pub.L.No.696, 75th Cong., 3d sess. The most substantial changes wrought by the Chandler Act involved not the liquidation provisions of the existing law, but those dealing with reorganizations, compositions and arrangements, §§ 12, 74 and 77B of the then existing law. ³ Congress sought both to remedy abuses prevalent under existing law, and to provide effective machinery for the rehabilitation of weakened but still viable business enterprises. ⁴ Chapter XII was enacted principally " . . . to furnish the same relief to individual debtors as is now available to corporations under Section 77B or under Chapter X of this bill." H.R.Rep.No.1409, 75th Cong., 1st sess. (1936) at 51. ⁵ Both Chapters X and XII are formulated to affect the rights of secured as well as unsecured creditors. An arrangement under Chapter XII must

" . . . include provisions modifying or altering the rights of creditors who hold debts secured by real property or a chattel real of a debtor . . . ." § 461(1), 11 U.S.C. § 861(1).

Relief under Chapter X is limited to corporations, § 106(5), 11 U.S.C. § 506(5), while Chapter XII is available to a person " . . . other than a corporation . . . .", § 406(6), 11 U.S.C. § 806(6). Each of the two Chapters contains identical language vesting the court with " . . . exclusive jurisdiction of the debtor and his property, wherever located", §§ 111 and 411, 11 U.S.C. §§ 511 and 811, and stating that the

"trustee appointed under this chapter, upon his qualification, or if a debtor is continued in possession, the debtor, shall become vested with the rights, if any, (of a receiver or trustee appointed in a prior mortgage foreclosure or equity proceeding in any other court) in such property and with the right to the immediate possession thereof. The trustee or debtor in possession shall also have the right to immediate possession of all property of the debtor in the possession of a trustee under a trust deed or a mortgagee under a mortgage." §§ 257 and 507, 11 U.S.C. §§ 657 and 907 (emphasis added). ⁶

The Senate report states that section 507 as in the case of "the analogous section 257 of Chapter X" includes "provisions dealing with the divesting of the rights and possession of a prior receiver, indenture trustee, and mortgagee in possession." Sen.Rep.1916, 75th Cong., 3d sess. (1938) at 9.

We deem the language and history we have described persuasive indicia of Congress' intent to equip courts acting under Chapters X and XII with similar powers with which to execute similar missions. We see no cause to reject in our interpretation of Chapter XII the reasoning of those courts which have held Chapter X to confer upon the court summary jurisdiction over property in the hands of a mortgagee. ⁷ The purpose of Chapters X and XII is to restore, not to dismantle, the economically distressed debtor. The power to prevent secured parties from availing themselves of their contractual remedies upon default, and to compel those creditors who have acted with sufficient celerity to be in possession at the time of filing to return the debtor's property is essential to preserve the possibility of a successful rearrangement of the debtor's affairs. Little hope of resuscitation would remain for the debtor disembowelled just prior to filing. The explicit language of section 507 affording the debtor or court appointed trustee the right to immediate possession of " . . . all property of the debtor in the possession of . . . a mortgagee under a mortgage" must be read to mean what it says, for it is an integral part of the machinery constructed by Congress in Chapter XII. ⁸

Our conclusion that a Chapter XII court has summary jurisdiction to order a turnover of property in the hands of a mortgagee also compels our rejection of appellant's argument that because Massachusetts law treats a mortgagee as legal owner of mortgaged property, Cooperstein v. Bogas, 317 Mass. 341, 58 N.E.2d 131 (1944), Section 507, 11 U.S.C. § 907, does not permit the entry of such an order in Massachusetts. A national policy enacted by Congress in the exercise of its constitutional authority to establish "uniform Laws on the subject of Bankruptcies", U.S.Const. art. I, § 8, cannot be impeded by the idiosyncracies of local property laws. John Hancock Mut. Life Ins. v. Casey, 134 F.2d 162, 163 (1st Cir.), cert. denied, 319 U.S. 757, 63 S.Ct. 1176, 87 L.Ed. 1709 (1943); 6A Collier P 14.03, at 1107.

Nor do we have any difficulty in concluding that the trustee is...