GF Wertime, Inc. v. Turchick

• Decision Date: 14 April 1966
• Docket Number: No. 47,Docket 27913.,47
• Parties: G. F. WERTIME, INC., Appellant, v. Alexander TURCHICK, Trustee of Kinne Equipment Co., Inc., in reorganization pursuant to Chapter X of the Bankruptcy Act, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

358 F.2d 802 (1966)

G. F. WERTIME, INC., Appellant, v. Alexander TURCHICK, Trustee of Kinne Equipment Co., Inc., in reorganization pursuant to Chapter X of the Bankruptcy Act, Appellee.

No. 47, Docket 27913.

United States Court of Appeals Second Circuit.

Argued October 19, 1965.

Decided April 14, 1966.

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COPYRIGHT MATERIAL OMITTED

Ernest B. Morris, Albany, N. Y., for appellant.

Philip R. Murray, Albany, N. Y., for appellee.

Before WATERMAN, MOORE and FRIENDLY, Circuit Judges.

WATERMAN, Circuit Judge:

This proceeding was commenced by the petition of Alexander Turchick, reorganization trustee of the Kinne Equipment Co. (hereinafter Kinne Co.) for an order declaring that the assignment of a mortgage from Kinne Co. to G. F. Wertime, Inc. (hereinafter Wertime) was null and void as against the trustee, that Wertime had no claim or interest in the property so mortgaged and that an unrecorded deed from Thomas H. Kinne (hereinafter T. H. Kinne) to Wertime was null and void as against the trustee. The Referee in Bankruptcy granted the petition in all respects and was affirmed, albeit on grounds differing from those chosen by the Referee, in a memorandum decision dated October 11, 1962, by Chief Judge Foley of the Northern District of New York. For reasons given hereafter we affirm the decision of the district court.

I.

The legal puzzles presented by this case arise out of an unsuccessful attempt on the part of Kinne Co. and T. H. Kinne, the President and principal stockholder of the company that bore his name, to finance the construction of a luxurious bowling alley in upstate New York. In late February 1957 T. H. Kinne, individually, became record owner, subject to a $30,000 purchase money mortgage, of a tract in Albany County on which he planned to build the bowling alley. Construction began in March 1957 and during the spring of that year Wertime, under a contract with T. H. Kinne, provided much of the necessary labor and materials. On June 12, 1957 T. H. Kinne executed a mortgage to Kinne Co. in the face amount of $50,000 covering the real property on which the bowling alley was being constructed. Apparently this was done to give Kinne Co. additional financial stature. No consideration was paid for this mortgage, and the document remained in the possession of T. H. Kinne. By mid-June 1957 T. H. Kinne, individually, owed Wertime about $44,000 for labor and material connected with the construction of the bowling alley. To silence Wertime's insistent demands for payment T. H. Kinne gave his personal notes to Wertime which were dishonored when they were presented. Wertime then renewed its threats to file mechanics' liens. In order to induce Wertime to forbear from bringing suit or filing liens, T. H. Kinne, acting as President of the Kinne Co., executed, on July 1, 1957, an assignment to Wertime of the June 12 mortgage. It is this July 1 assignment to Wertime that has muddied the waters because it was T. H. Kinne who owed the $44,000 debt to Wertime but it was the Kinne Co. which assigned the June 12 mortgage.

The next step in this complicated financial minuet occurred on July 18, 1957, when T. H. Kinne, apparently representing himself and the Kinne Co., entered into an escrow agreement with Wertime. This agreement recited the mortgage assignment, stated that a deed to the premises with Wertime as grantee was to be drawn up, and further stated that this deed would be held in escrow by T. H. Kinne's attorney until the indebtedness had been paid in full unless default occurred and in the event of default the deed was to be delivered to Wertime. The parties have stipulated that this deed was never delivered to Wertime and should be treated as a mortgage. In a separate transaction by deed dated July 26, 1957, and duly recorded on July 29, T. H. Kinne conveyed the same premises to Kinne Co., the debtor corporation.

Further financing for this ill-starred project soon became necessary; on July 29, 1957 the original purchase money mortgagees by written instrument recorded July 31, 1957, agreed to subordinate their $30,000 interest to that of a second mortgage, which Kinne Co. planned to execute with Friedericks and Meyers to secure a loan of $115,000; by instrument dated July 30, 1957 and duly recorded July 31, 1957 the debtor executed the aforesaid mortgage to Friedericks and Meyers.

It was not until September 24, 1957 at 11:24 A.M. that Wertime recorded the June 12th mortgage from T. H. Kinne to Kinne Co. and the July 1st assignment of this mortgage by Kinne Co. to Wertime. On that same day at 1:51 P.M. Robert A. Keasbey Co. filed a $3,516 mechanic's lien against the debtor. Thereafter other liens were filed. Finally, on January 23, 1958, an involuntary petition for reorganization of Kinne Co. was filed under Chapter X of the Bankruptcy Act.

II.

The major long-run goal of a Chapter X reorganization¹ is the economic rehabilitation of a particular corporate debtor so that it may continue to operate, thereby preserving at least in part the interests of creditors both secured and unsecured and, if possible, the interests of the stockholders. The finality of ordinary bankruptcy, with the attendant loss of values through forced sales, is in this way avoided. See Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939). Toward this end, Chapter X empowers the court in which an involuntary petition is filed to appoint a disinterested trustee, who generally is authorized to operate the business of the debtor corporation. The trustee also is authorized to prepare a plan of reorganization for submission to the court. The contents of the plan will vary according to the circumstances. In some cases, a slight alteration of the capital structure or a simple moratorium will suffice. In others, major alterations may be required with a view toward reducing all the debts and charges of the business. When the debtor corporation is insolvent and the stockholders consequently have no equity, the interest of the stockholders may be eliminated entirely. See Consolidated Rock Prods. Co. v. Du Bois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982 (1941). Once completed, the reorganization plan is submitted to the court for its approval. If the plan is approved, Chapter X details a procedure whereby the interested parties may accept the approved plan. After acceptance is obtained, the court takes the remaining steps necessary to send the debtor corporation forth, cleansed, into the world. See 6 Collier, Bankruptcy (Moore ed. 1964).

The foregoing adumbration of the statutory procedures, which the trustee followed in the present case, is only by way of background. The bone of contention that is the subject of this lawsuit concerns the nature of Wertime's claim against the debtor corporation. On April 7, 1958 the trustee moved for an order declaring that the assignment to Wertime of the mortgage of T. H. Kinne to the Kinne Co. was null and void as against the trustee, pursuant to subsections 60a and b of the Bankruptcy Act and Section 273, N.Y. Debtor and Creditor Law, McKinney's Consol.Laws, c. 12. A decision on the merits of this motion was not entered until after the plan of reorganization submitted to the court was approved.² The plan, however, made provision for a decision either favoring or opposing the trustee's motion; it provided that if the court ruled that Wertime held a valid mortgage Wertime was to receive long-term debentures for the full amount of its mortgage as a creditor preferred over holders of valid mechanic's liens or general claims, but if the court ruled that Wertime's putative mortgage was null and void Wertime was to be treated as an unsecured creditor and be given a substantially diminished percentage of its claim in debentures and stock. Thereafter, the Referee in Bankruptcy did rule that Section 70c of the Bankruptcy Act rendered Wertime's mortgage null and void as against the trustee. And Chief Judge Foley affirmed this decision, although he chose to rely instead on Section 70e of the Act.

The trustee, the referee, and the district court all looked to sections of the Bankruptcy Act found in Chapters VI and VII as the source of a reorganization trustee's power to avoid preferential, fraudulent, or otherwise invalid transfers of property. And a reorganization trustee does seem to possess all the powers conferred by the Act upon an ordinary bankruptcy trustee to avoid or set aside transfers, for Section 187, found in Chapter X, states that "where not inconsistent with the provisions of this chapter, a trustee, upon his appointment and qualification, shall be vested with the same rights * * * and exercise the same powers as a trustee appointed under section 44 of this Act * * *." Additionally, Section 102, also found in Chapter X, provides that all the provisions of Chapters I through VII dealing with ordinary bankruptcy shall apply in Chapter X proceedings unless an inconsistency or a conflict is made to appear. It is settled that a reorganization trustee may move to avoid a Section 60 preferential transfer.³ Central Hanover Bank & Trust Co. v. President and Directors of Manhattan Co., 105 F.2d 130 (2 Cir. 1939). He may invoke under Section 70c the powers and status of a creditor holding a lien by legal or equitable proceedings. Nash v. Onondaga Hotel Corp., 140 F.2d 209 (2 Cir. 1944). And he may attack under Section 70e any transfer voidable for any reason under applicable federal or state law. McGirl v. Sterling Nat. Bank & Trust Co., 102 F.Supp. 1011 (SDNY 1952). Given a reorganization trustee's power to avoid or set aside transfers under subsections 60a and b, 70c, and 70e, it remains to be decided whether any or all of these sections empowered the present trustee to void the assignment to Wertime of the mortgage of T. H. Kinne to the Kinne Co.

III.

The district court held the trustee was empowered to avoid the assignment to Wertime of the mortgage of T....