In re Georgetown on Delaware, Inc., 72-1392.

• Citation: 466 F.2d 80
• Decision Date: 07 September 1972
• Docket Number: No. 72-1392.,72-1392.
• Parties: In the Matter of GEORGETOWN ON the DELAWARE, INC., Debtor. Appeal of the FIRST PENNSYLVANIA BANKING AND TRUST COMPANY.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

466 F.2d 80 (1972)

In the Matter of GEORGETOWN ON the DELAWARE, INC., Debtor.

Appeal of the FIRST PENNSYLVANIA BANKING AND TRUST COMPANY.

No. 72-1392.

United States Court of Appeals, Third Circuit.

Submitted July 11, 1972.

Decided September 7, 1972.

Norman R. Bradley, and Guy T. Moore, Saul, Ewing, Remick & Saul, Philadelphia, Pa., for appellant.

Nathan Lavine, Adelman & Lavine, Philadelphia, Pa., for appellee.

Before VAN DUSEN, ALDISERT, and MAX ROSENN, Circuit Judges.

Submitted Under Third Circuit Rule 12(6) July 11, 1972.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

The question before us is whether the district court abused its discretion in ordering turnover to the reorganization trustee of a residential apartment complex which was the sole asset of the debtor.

The First Pennsylvania Banking and Trust Company had become the mortgagee in possession on October 28, 1971, following default by the debtor corporation in various obligations under a mortgage loan dated August 19, 1968, in the principal sum of $3,050,000.00. When the bank took possession, it claimed an indebtedness of $3,480,025.50 in principal, interest, and other charges. Foreclosure proceedings had been commenced and a sale had been scheduled for April 14, 1972. Immediately prior thereto, the debtor filed a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq., and was successful in obtaining an order enjoining the sale. On April 14, 1972, the trustee petitioned for an order directing the bank to relinquish possession to the trustee. Hearing were held on April 17 and 19. On May 2, 1972, the district court granted the prayer of the petition. The bank has appealed.

"In a proceeding for corporate reorganization under Chapter X of the Bankruptcy Act, a mortgagee in possession of encumbered property of the debtor may be required to surrender that property to the court appointed trustee, as explicitly provided in section 257 of the Bankruptcy Act. 11 U.S.C. § 657.¹ * * * But there are considerations pro and con which shall be weighed in each case before such a turnover is ordered. . . . the cases properly suggesting that a court's disposition of such a matter as this should be predicated upon a determination and weighing of potential advantage of the requested turnover in facilitating corporate reorganization on the one hand, and the likelihood of loss to the secured creditor in possession on the other. In re Third Ave. Transit Corp., 2d Cir. 1952, 198 F.2d 703; cf. In the Matter of O. V. Corp., 3d Cir. 1967, 378 F.2d 361; Caplan v. Anderson, 5th Cir. 1958, 256 F.2d 416. . . . A turnover of property in which the debtor had no demonstrable equity could be confiscatory. And a turnover without prospect of reorganization would be alien to the purpose of a Chapter X proceeding." In re Riker Delaware Corp., 385 F.2d 124, 125-126 (3d Cir. 1967).

In exercising its discretion when confronted with a turnover request, a district court "should consider . . . the probability of success of the reorganization, whether the debtor has any equity in the premises, and the relationship of the trustees' possession . . . to the trustees' reorganization efforts." In re Flying W. Airways, Inc., 442 F.2d 320, 323 (3d Cir. 1971).

On review, an appellate court must decide whether, in the application of these governing principles, the district court abused its discretion in ordering the turnover of possession from the mortgagee to the trustee. This requires an examination of the operation of the enterprise before and after the mortgagee took possession, an analysis of possible reorganization plans, and a special inquiry into both the specifics of the debtor's equity and the special qualifications of the trustee.

Evidence was adduced that prior to the mortgagee's taking possession, rented units had diminished from 226 to 174, that there was general dissatisfaction with conditions in the apartments, and that the tenants had formed an association to press demands for improvements. Following possession by the mortgagee, the number of rented units had risen to 202. Testimony from the president of the tenant association disclosed they were "happier" with the bank's management of the property, and "would object to a change" preferring "that the current management continue." Another member of the association said that under bank management the morale of the tenants "is higher. There is confidence in the management and there have been specific improvements in the property."

At the time of the hearing, no specific plan of reorganization was submitted. One witness testified that although he had not personally inspected the premises he was: "Interested enough to review it and ask trustee's counsel for time to submit a possible plan on it," and that he was "very seriously considering doing that if we can get the proper...