In re J. Rosen & Sons

• Decision Date: 28 July 1942
• Docket Number: 7982,No. 7989.,No. 7948,7948,7989.
• Citation: 130 F.2d 81
• Parties: In re J. ROSEN & SONS, Inc.
• Court: U.S. Court of Appeals — Third Circuit

130 F.2d 81 (1942)

In re J. ROSEN & SONS, Inc.

Nos. 7948, 7982, No. 7989.

Circuit Court of Appeals, Third Circuit.

Argued May 5, 1942.

Decided July 28, 1942.

John Milton, Jr., of Jersey City, N. J., and Mendon Morrill, of Paterson, N. J., for Boyd, trustee.

Effingham Evarts, R. F. C., of New York City (Sol A. Liebman, of New York City, on the brief), for Reconstruction Finance Corporation.

Before BIGGS, JONES, and GOODRICH, Circuit Judges.

BIGGS, Circuit Judge.

These three appeals are concerned with two orders entered by the court below in a bankruptcy proceeding. In No. 7948 the trustee in bankruptcy appealed from an order of the District Court authorizing the foreclosure in the state court of a certain mortgage given by the bankrupt to the Reconstruction Finance Corporation. In No. 7982 the Reconstruction Finance Corporation has appealed from so much of the order of the District Court as fails "to specifically adjudicate upon the merits" that the mortgage held by the Reconstruction Finance Corporation is valid. The third appeal in No. 7989 is taken by the Reconstruction Finance Corporation from an order of the District Court authorizing the trustee not to exercise his option to renew a certain leasehold estate belonging to the bankrupt.

The facts are as follows. In June, 1940, J. Rosen & Sons, Inc., of Paterson, New Jersey, filed a petition for an arrangement pursuant to the provisions of Chapter XI of the Bankruptcy Act as amended, 11 U. S.C.A. § 701 et seq. In September, 1940, the company was adjudicated a bankrupt and a trustee was elected.

On February 3, 1939, the Rosen Company had procured a loan from the Reconstruction Finance Corporation in the sum of $65,000 which was secured by a mortgage upon substantially all of the borrower's assets. As we have indicated the Reconstruction Finance Corporation applied to the referee for leave to foreclose its mortgage in the state court of New Jersey. The trustee for his part asked the referee for permission to sell the assets of the bankrupt free and clear of liens and encumbrances. Each party opposed the other's application. The Reconstruction Finance Corporation asserted that its mortgage was valid and the trustee denied it. The referee, despite what seems to have been a full hearing, did not pass upon the validity of the mortgage but ordered the property sold free and clear of liens and encumbrances and directed that the liens and encumbrances, if any, should attach to the proceeds of the sale. He stated that there was ample evidence in the record to support a doubt as to the mortgage's validity. The learned District Judge reversed the order of the referee and granted leave to the Reconstruction Finance Corporation to foreclose its mortgage in the state court, but did not pass upon the validity of the mortgage. He held simply that the retention of jurisdiction by the referee had been "an improvident exercise of discretion". We agree, but this is not the point upon which the decision should have turned.

The trustee claims that the mortgage is invalid because the Rosen Company was insolvent when it was executed. A court of bankruptcy has summary jurisdiction to determine controversies in regard to property of which it has possession. The validity of the mortgage should have been decided promptly unless that decision required a determination of an unsettled question of New Jersey law. Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 481, 483, 484, 60 S.Ct. 628, 84 L.Ed. 876. The trustee in his argument before the referee, before the learned trial judge and before this court contended that Revised Statutes of New Jersey 14:14-2, N.J.S.A. 14:14-2,¹ rendered the assignment or transfer worked by the mortgage void as against creditors. There is nothing in the record to create a doubt (unless of a whimsical or chimerical nature) that the mortgage given by the bankrupt to Reconstruction Finance Corporation for a present consideration of $65,000 was valid. The validity of the mortgage is to be settled by the law of New Jersey. The mortgage was valid unless the bankrupt was insolvent at the time it was given. The insolvency referred to in Revised Statutes 14:14-2, N.J.S.A. 14:14-2, is a general inability on the part of a corporation to meet liabilities as they mature by means of available assets or the honest use of credit. Hersh v. Levinson Bros., 117 N.J.Eq. 131, 136, 174 A. 736, 739. It was settled by the Court of Errors and Appeals in Hoagland v. Clifford F. MacEvoy Co. and Hoagland v. United States Trust Company, 113 N.J.Eq. 29 and 30, 166 A. 196 and 197, affirming 110 N.J.Eq. 489, 160 A. 662, that a corporation may "meet" pecuniary obligations by funds obtained by the honest use of credit and not be deemed to be insolvent. On the record before us we would conclude that this was precisely what was done by the Rosen Company.

Revised Statutes 14:14-2, N.J.S. A. 14:14-2, was not modified or repealed by Revised Statutes 25:2-7 to 25:2-19, N.J.S. A. 25:2-7 to 25:2-19, the uniform fraudulent conveyance law. Such is the law of New Jersey. Vice Chancellor Berry so held in 1930 in First National Bank of Lyndhurst v. Bianchi & Smith, Inc., 106 N. J.Eq. 333, 150 A. 774. The decision of this court in Morrisville Trust Company v. Moon, 21 F.2d 716, is without effect in view of the fact that the question of the alleged repeal by implication of law has been ruled on by the Court of Chancery of New Jersey. It is contended that the decision in First National Bank of Lyndhurst v. Bianchi & Smith, Inc., is unsound. Be that as it may, it is the law of New Jersey and we must follow it. The Bank of Lyndhurst case has not been overruled by Jesselsohn v. Boorstein, 111 N.J.Eq. 310, 162 A. 254. Cf. Hersh v. Levinson, supra. On the record in this case there is no undetermined question of state law.

The petition of the Reconstruction Finance Corporation for leave to foreclose was filed on November 25, 1940. The petition of the trustee for leave to sell the assets was filed November 26, 1940. The referee held his first hearing on December 9, 1940.² After testimony had been taken and exhibits received on behalf of the trustee, the referee asked counsel for the Reconstruction Finance Corporation when he desired to present his case. Counsel replied, "About ten days from now." Accordingly, on the 19th of December there was a further hearing before the referee at which time the Reconstruction Finance Corporation presented its evidence. The referee stated that he proposed "to dispose of the whole thing at one crack". The attorneys for the parties stated they would file briefs with the referee and the hearing was "closed". About six month later, viz., on May 7, 1941, the referee filed an opinion in which he stated, "The attack upon the mortgage will involve the parties in extended litigation which cannot be speedily determined. And the expenses of preserving the property are heavy". He thereupon granted the trustee's petition for leave to sell free and clear of liens and encumbrances. From the referee's certificate of review filed in the District Court on July 11, 1941, it appears, as we have already indicated, that the referee thought that the question presented for his determination was whether or not the trustee had shown sufficient facts to raise a reasonable doubt as to the validity of the mortgage.

It was the duty of the referee promptly to dispose of the questions presented by the petitions of the trustee and the Reconstruction Finance Corporation. If the referee was unable to decide these questions, the learned District Judge should have done so. The referee made no findings of fact or conclusions of law as required by General Order in Bankruptcy No. 47, 11 U.S.C.A. following section 53. The District Judge had the power and...