Escher v. Harrison Securities Co.

• Decision Date: 15 October 1935
• Docket Number: No. 7236.,7236.
• Citation: 79 F.2d 777
• Parties: ESCHER v. HARRISON SECURITIES CO. et al., (SPINKS REALTY CO. et al., Interveners).
• Court: U.S. Court of Appeals — Ninth Circuit

79 F.2d 777 (1935)

ESCHER v. HARRISON SECURITIES CO. et al., (SPINKS REALTY CO. et al., Interveners).

No. 7236.

Circuit Court of Appeals, Ninth Circuit.

October 15, 1935.

Barker & Keithly, Barker, Smiley & Keithly, and Donald Barker, all of Los Angeles, Cal., for appellant.

O'Melveny, Tuller & Myers and Pierce Works, and J. W. Chance, all of Los Angeles, Cal., for appellee Roberts.

Fredericks & Fredericks and John D. Fredericks, Jr., all of Los Angeles, Cal., for appellee Rivers.

Before WILBUR, GARRECHT, and DENMAN, Circuit Judges.

DENMAN, Circuit Judge.

This is an appeal from an order denying appellant's petition as intervening lessor for an order (1). terminating the receivership in the suit instituted by the plaintiff, Myrtle R. Escher, respecting the lessor's Pershing Square building and property in the city of Los Angeles, and (2) allowing appellant to enforce its rights as such lessor arising from admitted long-standing defaults in the lease legally warranting repossession.

Appellant, Spinks Realty Company, intervener, is lessor of the ground and improvements thereon known as the Pershing Square building situated at the northeast corner of Fifth and Hill streets in the city of Los Angeles. Appellee, plaintiff Myrtle R. Escher, is an unsecured creditor of defendant. Appellee, defendant Harrison Securities Company, is lessee of the property above mentioned. Appellee Ernest Roberts, defendant in intervention, is trustee under a certain indenture securing a bonded indebtedness of Fifth and Hill Building Company through means of which bonded indebtedness said improvements were constructed. Appellee Henry E. Rivers is receiver of defendant appointed by the court below in the suit instituted by the plaintiff.

The principal considerations appearing in the lease were the erection of a thirteen-story building on the land and a monthly rental of $7,500. There is no evidence of the value of the land at the time of the execution of the lease and no evidence of or method of determining how much higher the rental would have been if the lessee had not agreed that the building would become at once the property of the lessor upon its creation and also had not specifically agreed that it should be subject to the forfeiture provisions of the lease. Each of the parties to the appeal acquired his interest in or claim upon the receivership with notice of the following agreement concerning that portion of the consideration for the lease represented by the building:

"Ownership of Building.

"16. Any and every building constructed on said leased premises by the lessees as hereinbefore provided shall remain on said premises and shall be and remain the absolute property of the lessor, without cost to it, upon any termination of this lease, whether by lapse of time or by forfeiture or otherwise. Nothing in this section or in the section of this lease entitled `Forfeiture for Default,' or elsewhere in this lease, shall be construed as placing the title of any buildings or improvements constructed on said premises in the lessees; but the said buildings and improvements shall always be a part of the land, and the title to the same and every part thereof shall at all times be in the lessor, subject only to the leasehold interest of the lessees."

So far as the claimed equities of creditors or bondholders are concerned, the position of such appellees is the same as if a $1,000,000 premium had been paid for the lease; and, so far as the lessee is concerned, its claimed equity does not differ from that of a merchant lessee who, through default in rent, is threatened with the loss of a good will worth $1,000,000, based upon an advantageous business location. So far as the lessor is concerned, the extreme claim of appellees is the same as where a forfeiture of lease would enable a lessor at some future time to secure a new lease at a better rental, the record here demonstrating that, even with the building, the property for eighteen months has yielded very much less than $7,500 per month above the taxes agreed to be paid by the lessee. These analogies are suggested (a) in view of the claim of appellees that a court in restoring its property to the lessor, after months of default in the rent and in other forfeiting breaches of the contract, with no tender of the rent or provision for its payment, or curing of the other defaults in any reasonable time, would violate some equity on some theory of unjust enrichment; and (b) in view of appellant's position that its bargain was a clear one to all the present litigants, that it has waited eighteen months for its rental, and that even with the repossession of the building such repossession has not been shown to create an unjust enrichment over the values when the bargain was made.

A bond issue, provided for in the lease, secured by lessee's transfer of its interest, was created, and $1,030,000 in bonds were issued and outstanding at the commencement of the suit.

The lessee became insolvent and, on the suit of a single unsecured creditor, consented to the appointment of a receiver. The usual injunction was issued restraining, inter alios, the lessor from taking any action against the receiver or the lessee for the repossession of the leased property. The bondholders intervened through their trustee, alleged default in payment of installments of principal, interest, and breaches of covenants to pay taxes and insurance premiums, and claimed possession of and right to administer the property under a usual trust indenture provision.

After the receiver had had ten months' administration of the property, on October 17, 1932, appellant intervened and sought to modify the injunction restraining it by asking permission to make the demands on the receiver and lessee necessary to establish its rights under the lease and to commence proceedings in the California courts, or the court below, to recover possession of the property because of default in the rental, taxpaying, and insurance covenants of the lease, and to make the receiver a party to the action. Order to show cause was issued, hearing had and, on December 12, 1932, the court denied the lessor the exercise of its right to recover possession. Lessor renewed its application.

On May 8, 1933, at the hearing of the second order to show cause why the permission should not be granted, it appeared that the rent was $82,500 in arrears; that no rent had been paid in full for twelve months; that unpaid insurance amounted to $7,184.28; that the taxes were in arrears $15,000; that $5,000 taxes had been paid from a loan from the lessor; that there was a supply of building space for rent in buildings in Los Angeles competing with lessor's greatly in excess of demand, and hence no immediate prospect of an increase of rentals from the subtenants or decrease in vacancies in the building sufficient to discharge the current obligations of the lease, much less the lease arrearages on the bond obligations; and, substantially, that the only hope of an increase in assets of the receiver's estate to meet the obligations of the lease was the recovery of Los Angeles from a long real estate slump, heightened by the economic depression of the United States since 1929.

No testimony as to the value of the lease to the lessee or the receiver was offered; the statement of a balance sheet of a prior receiver, based upon some other balance sheet not appearing, of a value of $464,590 not being supported by any evidence. The claim of the brief of the bond trustee that the evidence shows such a value in the lessee or in the receiver must have been made with "tongue in cheek." The trustee asserts his right to possess and administer the lease, that is, the only asset in the receiver's estate, because of defaults sufficient to warrant demand of payment of the remaining principal. In March, 1933, these defaults amounted to $198,293.50, interest, installments of principal, and, approximately, $7,000 insurance. By August of the succeeding year 1934, through which period the search for a purchaser for a lease might well continue, the obligations would amount to at least $74,000 more.

In May, 1933, the unpaid rent and taxes were $82,500 and $15,000, respectively. The accrual of rental from May, 1933, to August 1, 1934, is $112,500. The lowest estimate of operating costs and taxes, exclusive of rental, is $71,120 per annum; extended to that date it is approximately $94,800.

The above items total as of August 1, 1934, $584,093.50. Against this total the receiver hopes to collect rentals to that date of $256,000. The net arrearage is $328,093.50; that is to say, the receiver must get from the purchaser $328,093.50 to re-establish the trust of the lease and the lease itself and, says the bond trustee, the purchaser will pay $440,636 more or in all $768,729.50 to secure a lease having bonds still outstanding against it of $827,000. It is needless to say that such an argument to a federal appellate court by the bond trustee seeking to end the receivership, by taking from it its only asset, because the income from the subtenants of the lease is so small, does not appeal. Its flavor is not bettered by the fact that the committee for the bondholders, though having at stake this alleged enormous value, announces that it cannot raise enough to pay the balance between the collections from the subtenants and the $7,500 per month.

The District Court, without finding of fact or opinion, made its order denying the second petition of the lessor appellant to modify the injunction and permit lessor to make the statutory and lease provision demands on the receiver and lessee for the establishment of its right under the lease and sue in the state court or the court below. The order reserved to the lessor the right to make a third application. Appeal here followed:

Appellant's position is (1) that, in the absence of any tender of the arrearages of rent or offer presently to perform the other...