In re 325 East Seventy-Second Street

• Decision Date: 11 September 1944
• Citation: 57 F. Supp. 684
• Parties: In re 325 EAST SEVENTY-SECOND STREET, Inc.
• Court: U.S. District Court — Southern District of New York

57 F. Supp. 684

In re 325 EAST SEVENTY-SECOND STREET, Inc.

District Court, S. D. New York.

September 11, 1944.

James A. Beha, of New York City, for Thomas J. V. Cullen, trustee.

Richard L. Rosenbaum, of New York City, for debtor.

Irvin C. Rutter, Regional Enforcement Atty., and Joseph Shankey, Chief Atty., Rent and Services Section, Office of Price Administration, both of New York City, and Fleming James, Jr., Director Litigation Division, and Samuel Mermin, Chief, Briefing Branch, both of Washington, D. C., for intervener.

BRIGHT, District Judge.

Thomas J. V. Cullen, as trustee of the debtor in process of reorganization under Chapter X of the Bankruptcy Law, Act July 1, 1898, Chap. 541, § 101 et seq., as added in 1938, 52 Stat. 883, 11 U.S.C.A. § 501 et seq., petitions for an order authorizing him to collect the rents presently chargeable under existing leases, directing him to abstain from filing notices of maximum rents and registration statements under the regulations of the Office of Price Administration, and adjudicating that this proceeding, this Court, and he are not controlled by the provisions of the Emergency Price Control Act of 1942, Act of January 30, 1942, Chap. 26, 56 Stat. 23, 50 U.S.C.A.Appendix, § 901 et seq., and the rent regulations for housing in the New York City defense-rental area, promulgated thereunder.

The Office of Price Administration was given notice of the application, was permitted to intervene, and is the only one who opposes. It has filed no answering affidavits. The facts alleged in the moving papers are, therefore, undisputed, and, as found by me, are:

The petition herein was filed on May 29, 1943, and on June 3, 1943, was approved and the trustee appointed. The principal asset of the debtor is an apartment house located at 325 East 72nd Street, New York City, within the defense rental area later erected by the Office of Price Administration, and contains 58 rentable apartments, a superintendent's apartment, and six maids' rooms. Twenty-three of the apartments are owned by proprietary tenants, who are stockholders of the debtor and each of whom have 99 year leases. Thirty-five of the apartments are rented on the usual commercial basis under written leases, all of which were in existence prior to the promulgation of the rent regulations mentioned.

After this proceeding was commenced, and the trustee appointed, the Office of Price Administration specified the bounds of the defense area in question, and on October 8, 1943, promulgated rent regulations for that area, effective November 1, 1943, which, insofar as we are now concerned, provided that no person, regardless of any lease theretofore or thereafter entered into, shall demand or receive any rent, for use or occupancy on and after November 1, 1943, of any housing accommodations, rented on March 1, 1943, higher than the rent charged on that date, and for such accommodations not rented on that date nor during January or February, 1943, but rented prior to November 1, 1943, higher than the first rent charged after March 1, 1943.

Ten of the apartments are rented on a commercial basis at prices higher than the maximum rental mentioned. The number of these apartments, the rental charged, the maximum rent under the regulations, and the fair rental value of the apartments are as follows:

                                                               Difference       Difference
                                                               between          between
                Apt. &     Fair                Rent 3/1/43     present          present
                Date of    Rental   Present    or 1st Rent     & 3/1/43         and
                Lease      Value     Rent      Thereafter      Rent             Fair Rent
                  8A___    $ 1400    $ 1300    $ 1200          $ 100            $  100
                   9/43
                16A___*       1550      1500       900            600                50
                   4/43
                 9B___*      1400      1200       900            300               200
                   4/43
                  3C___      1300      1041      1020             21               259
                   6/43
                  4C___      1300      1200      1020            180               100
                   6/43
                15C___*      1450      1200       720            480               250
                   4/43
                 2D___*      1200      1200       600            600               -0-
                   6/43
                  5D___      1325      1300      1200            100                25
                   6/43
                  7D___      1400      1400      1200            200               -0-
                   8/43
                 12D___      1500      1400      1320             80               100
                   6/43     _______  _______   _______        _______          _______
                            $13825   $12741    $10080          $2661             $1084
                

It thus appears that on an annual basis these present rentals exceed the maximum prescribed rentals by $2661, and are $1084 less than the fair and comparable rental value for such premises.

It is conceded that the rent regulations do not apply to or control the twenty-three apartments leased by the proprietary or cooperative tenants.

The real property is encumbered by a mortgage upon which there is due $400,000 of principal and interest thereon from April 1, 1943, upon which has been paid $2500. Shortly after the petition was approved the mortgagee commenced foreclosure which is still pending but stayed. He sought to have the order approving the petition vacated upon the ground that the petition was not filed in good faith because, as he contended, among other things, the property was worth less than the amount due upon the mortgage, and it was unreasonable to expect that a plan of reorganization could be effected because the income of the property was insufficient to pay current and fixed charges, including interest. This application was denied, the opinion being reported in, D.C., 53 F. Supp. 997. Two of the reasons for that denial were, that the property was worth more than the mortgage debt, and that the income then being earned justified a conclusion that it was not unreasonable to believe that a plan of reorganization could be effected. Those conclusions were based upon evidence of the gross rents which the property was then earning, and that there should reasonably be an increase in the receipts from the proprietary tenants of $5000 to bring them up to what those apartments were reasonably worth. It was then assumed as reasonable that the net rents, after the payment of taxes, interest and operating expenses, would be sufficient to meet the annual amortization required by the laws of New York, and this net might well be increased by a tax saving in the reduction of the assessment (which has since been accomplished), by a reduction in interest upon the mortgage, and by a contribution by the proprietary lessees.

Since the argument of this motion, a plan of reorganization has been presented to this court, amended to meet the objections of some of those appearing, which has been found to be fair, equitable and feasible, and will be presented to the certificate holders under the mortgage for their approval. The plan is based in large part upon an estimated gross rental of $85,000. It provides, also, that the "debtor and the tenant stockholders shall be empowered to charge an annual rental not in excess of the rentals set forth in Schedule `A' (the aggregate of which I have stated) hereto annexed and made a part hereof, during the period when rentals of premises are subject to control and regulation under the Emergency Price Control Act of 1942, and any amendments thereof, unless under such regulations of the Office of Price Administration higher rentals may be charged than those fixed in Exhibit `A' for the respective apartments."

It thus appears, and I so find, that the rentals now charged are essential to a successful reorganization, and that higher rentals, as contemplated by the Exhibit "A" present a better margin of safety.

We are thus presented with the question of whether or not the Emergency Price Control Act of 1942 and the regulations under it are applicable and controlling. If they are not, the motion must be granted. If they are, the income from the property must be substantially reduced and the probable success of the plan, as now declared feasible, fair and equitable, may be jeopardized and perhaps defeated.

I do not think that Act is applicable for the reasons (1) it does not repeal expressly or impliedly any portion of the Bankruptcy Act, (2) the property and its income were established and vested in and subject to the jurisdiction of this court before the rental area was erected or the regulations in question adopted; and (3) the sole jurisdiction to determine whether or not a plan of reorganization is fair, equitable and feasible is in this court, and cannot in any way be shared with any other tribunal or administrative body.

The questions presented are novel. The only authority cited in either brief or which I have been able to find, in any way analogous or controlling, is In re Freeman, D.C., 49 F.Supp. 163, which held that in a proceeding under Chapter XII of the Bankruptcy Law, 11 U.S.C.A. § 801 et seq. (relating to real property...