In re Franklin Garden Apartments, 79.

• Decision Date: 23 December 1941
• Docket Number: No. 79.,79.
• Parties: In re FRANKLIN GARDEN APARTMENTS, Inc. CRYSTAL v. GREEN POINT SAV. BANK.
• Court: U.S. Court of Appeals — Second Circuit

124 F.2d 451 (1941)

In re FRANKLIN GARDEN APARTMENTS, Inc.

CRYSTAL v. GREEN POINT SAV. BANK.

No. 79.

Circuit Court of Appeals, Second Circuit.

December 8, 1941.

Supplemental Memorandum December 23, 1941.

Louis J. Castellano, of Brooklyn, N. Y. (Samuel C. Duberstein and William Himlyn, both of Brooklyn, N. Y., of counsel), for Green Point Savings Bank, mortgagee-appellant.

Zalkin & Cohen, of New York City (Harry Zalkin and Theodore B. Wolf, both of New York City, of counsel), for Sidney Crystal, trustee-appellee.

Before L. HAND, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

Franklin Garden Apartments, Inc. (the debtor), on February 5, 1941, filed a voluntary petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S. C.A. § 501 et seq. This petition was approved by the court and Sidney Crystal was appointed trustee. The debtor was engaged in the business of owning and operating real property and improvements thereon and was the owner of a plot in Richmond Hill, Queens County, Long Island, New York, on which it had built a six story apartment house containing 123 apartments and a garage capable of accommodating 60 automobiles. The premises were subject to a mortgage made by the debtor to Green Point Savings Bank on which the latter had advanced $382,500. The rate of interest on the mortgage was 5% per annum, payable quarterly on December 1st, March 1st, June 1st and September 1st. The mortgagor defaulted in paying the instalment of interest which became due on December 1, 1940, and to the extent of $3,488.06 remained unpaid. Under a covenant in the mortgage an assignment of the rents was provided for in the event of a default in payment of interest. Likewise on January 21, 1941, the debtor executed an instrument reciting the covenant and the default and assigning to the mortgagee the rents then due and thereafter to become due. In the instrument the debtor appointed the mortgagee its agent to collect the rents and pursuant to the terms thereof the mortgagee went into possession of the premises, collected the rents and paid various operating expenses. The trustee has filed affidavits showing that the value of the land and improvements is $557,500, which amounts to $175,000 more than the $382,500 advanced upon the mortgage. In view of this the trustee applied for an order in the reorganization proceeding that he be adjudged in possession of the mortgaged premises and entitled to receive the rents in order to complete the building, which had already cost the debtor $516,945.45, by expending about $16,000 more in installing a sprinkler system, shower doors, medicine cabinets and items of hardware and other miscellaneous items not yet placed in the unrented apartments. The monthly rent from 73 of the apartments which were already rented was approximately $5,000 gross. Should the total number of 123 apartments and the garage be rented, the monthly rent roll would equal about $9,700 gross. If there be added to the principal of $382,500 due on the mortgage interest in default the amount due thereon at the present time would be more than $395,500. This total of $395,500 plus $120,000 of mechanics' liens, having priority over the mortgage, and a balance of $13,505.62 due on conditional bills of sale upon elevators and other equipment would make a total of $528,505.62. In other words, the trustee asks to divest the mortgagee of liquid assets such as rents growing out of the mortgaged property in order to build up an equity which according to the trustee's own statement will amount to less than $30,000. If the general creditors and stockholders have an equity worth saving surely they ought to have faith and financial resources sufficient to secure $16,000 needed for additional equipment without taking it out of the mortgagee's rentals.

The affidavits indicate not only that the mechanics' liens having priority over the mortgage are of the conceded amount of $120,000 but that such liens have been filed in the amount of $147,000; in other words, to the extent of $27,000 they are said to be contested. The affidavit of Legge verified March 10, 1941, filed on behalf of the mortgagee, also stated that the "rents at the present time and in the near future are insufficient to pay in full for sprinkler system and all operating expenses of the property including current taxes, the interest and arrears as well as current interest upon the mortgage held by the Bank." The value of the equity is, therefore, speculative and illusory. The trustee's statement that Adolf Mandel offered $75,000 over and above the mortgage for the property did not indicate any market value, for the offer was not made subject to mechanics' liens and conditional sales which far exceeded $75,000.

The court below made an order which not only decreed that the trustee should have the immediate possession of the mortgaged premises and the right to collect rents accruing therefrom subsequent to February 8, 1941, and enjoined the mortgagee from interfering with the trustee's possession and required the mortgagee to account for and turn over the net balance of rents subsequent to that date, after deducting actual operating costs of the premises therefrom, but also directed the mortgagee to turn over any rentals applied by it after February 8, 1941, on account of principal or interest on the mortgage, and likewise authorized the trustee out of the rentals to procure a sprinkler system, install it in the premises, purchase furniture and furnishings for the lobby, purchase such personal property and perform such work as might be necessary to complete the building and, at a cost of not more than $16,000, place all apartments therein in rentable condition. The order also authorized the trustee to pay out of the rentals all expenses of administration of this proceeding and, after the foregoing payments, to turn over the net balance of all...