In re Locust Bldg. Co., Inc.

• Decision Date: 07 April 1924
• Docket Number: 14.
• Parties: In re LOCUST BLDG. CO., Inc. Appeal of AMERICAN TRUST CO.
• Court: U.S. Court of Appeals — Second Circuit

299 F. 756

In re LOCUST BLDG. CO., Inc. Appeal of AMERICAN TRUST CO.

No. 14.

United States Court of Appeals, Second Circuit.

April 7, 1924

Henry M. Bellinger, of New York City (Morgan J. O'Brien, of New York City, of counsel), for petitioner and appellant.

Samuel Silbiger, of Brooklyn, N.Y., for trustee and respondent.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

ROGERS Circuit Judge.

This matter comes into this court on a petition to revise an order made in a bankruptcy proceeding and upon an appeal from the said order. The order in question was made on January 10 1923. The petition to revise and the appeal both appear to have been taken in time, and on April 28, 1923, an order was entered which provided that the petition to revise and the petition for leave to appeal 'be and hereby are combined into one appeal, for the purposes of the appeal herein. ' The undoubted intention of the parties was not to combine the petition to revise and the appeal into one appeal, but was to consolidate the petition to revise and the appeal into one proceeding, which could be heard upon one record. We shall so treat it, notwithstanding the failure to express that intention in more appropriate language.

The order involved, which, as stated, is that of January 10 1923, adjudged and decreed that a certain mortgage for $4,500, dated March 14, 1917, was a valid mortgage to the extent of the balance of the principal sum of $2,500, and the trustee of the bankrupt was directed to pay that sum and the accrued interest. The order also adjudged that two certain other mortgages, one dated on March 14, 1917, and the other dated on July 26, 1917, were void as against the trustee and creditors of the bankrupt. This is plainly an appeal 'from a judgment allowing or rejecting a debt or claim of $500 or over. ' The case being so plainly an appeal, we are unable to see why a petition to revise should ever have been brought, and it is hereby dismissed, and the case will be disposed of on the appeal.

This brings us to a consideration of the facts which are involved in the appeal. This appeal is brought here by the American Trust Company, a New York corporation, as the owner of three certain mortgages upon which it claims there remains due and payable in the aggregate $10,833 and accrued interest affecting premises which have been decreed to be the property of the bankrupt and were conveyed to the trustee for the creditors pursuant to an order made in the District Court of the United States for the Eastern District of New York, dated March 21, 1921.

Prior to this transfer of the properties to the trustee, the American Trust Company had commenced an action in the proper court of the state of New York to foreclose one of the three mortgages above referred to, and the trustee of the bankrupt, pursuant to an order of the court, was brought in as a party defendant in that suit. Thereafter, and on February 21, 1921, the trustee of the bankrupt obtained an order from the United States District Court for the Eastern District of New York which permitted him to sell the property of the bankrupt, including the three mortgages already referred to, free and clear of all liens and demands, and directing him to hold the proceeds arising from the sale, subject to the final order of the court, or the judgment of a court of competent jurisdiction as to the validity, bona fides, and extent of the said mortgages, liens and claims. This order of February 21, 1921, also stayed the American Trust Company until the further order of the court from proceeding further with its foreclosure suit to which we have above referred.

Thereafter upon the application of the American Trust Company the United States District Court made an order referring to a special commissioner the question as to the validity of the mortgages, the amount of the advances made on account of them, and the order of priority affecting the premises covered by them. On September 21, 1922, the commissioner reported. He found that the mortgage dated March 4, 1917, was a valid mortgage, and that the balance due thereon was $2,500, with interest, less the sum of $267.91, which had been paid on interest account; he also found that the two other mortgages were void as to the trustee and the creditors of the bankrupt; and this report the District Court, over the objection of the American Trust Company, ratified and confirmed by an order made January 10, 1923.

It appears that a petition in bankruptcy was filed on August 5, 1918, against the Locust Building Company, Inc., and it was adjudged a bankrupt on September 3, 1918, and on October 8, 1918, Frederick Kiegley was elected trustee of the bankrupt's estate. It will be hereinafter referred to as the bankrupt. One Samuel Epstein was the president and virtually the sole stockholder of the bankrupt. He was also the president and sole party in interest of the Beta Building Company, Inc., and of the Saga Building Company, Inc., in which names title to the property of the bankrupt was taken. These two corporations will be hereinafter respectively referred to as the Beta Company and the Saga Company. These two corporations were caused to be organized by Epstein. All three of these corporations were in reality other names for Epstein, he being the sole party in interest in each of them.

It also appears that three mortgages were given by the Saga Company. The first was made and executed on March 14, 1917, in the sum of $4,500. The second was also dated on March 14, 1917, and was in the sum of $5,000. The third was dated on July 26, 1917, and was in the sum of $10,000. The first of these mortgages was made to the Queens County Trust Company. The other two were made to one Rose Bernstein. The second and third mortgages were assigned by her to the Queens County Trust Company by written assignments; the second being assigned on May 10, 1917, and the third on July 26, 1917, the first assignment being recorded on May 16, 1917, and the other on August 6, 1917. The Queens County Trust Company assigned in writing the second and third mortgages to the American Trust Company; both of these assignments being dated September 21, 1920. The Queens County Trust Company is hereinafter referred to as the Trust Company.

The Locust Building Company, the bankrupt herein, was the owner of certain premises in the city of New York on which it built ten brick multi-family houses. In so doing it incurred a debt of $30,000, which remained unpaid. It then transferred the title to seven of these houses for certain lots, and the title to the lots was taken in the name of the Beta Company. Epstein, the president of the Beta Company and sole party in interest therein, in an attempt to cover up the facts, had testified that the latter company paid the Locust Company $10,000 for the lots. This testimony was made the basis of an indictment for perjury, upon which he was convicted, and his conviction was affirmed by this court. 271 F. 282.

The Beta Company in turn commenced the erection of nine multi-family houses on the lots thus acquired, and in doing so incurred debts exceeding $20,000. On both of these building operations secured loans were made by the Trust Company, in which the bank accounts of the Locust Company and Beta Company were kept. While the Beta building operation was in progress the Trust Company was apprised of the financial difficulties of the bankrupt and Beta Company, and received a statement setting forth the amount due the creditors of the Locust Company and the Beta Company and the estimated cost of the completion of this second operation, and thereupon the bank stepped in and acquired all of the stock of the Beta Company, and secured from the creditors of the Beta Company releases of any liens they had filed, and an agreement to postpone collection of their accounts until the completion of the operation, and the buildings were thereafter completed under the supervision of the bank.

In the interim the Locust Company contracted to exchange two of the first ten houses it had erected for two pieces of land owned by Henry Buser and Adam Pfundstein. After the making of the contract of exchange and prior to the closing of title, the two houses were by mesne conveyances and without consideration transferred, until title thereto of record appeared in the name of Rosa Bernstein, a sister-in-law of Epstein. The Trust Company held second mortgages aggregating $4,000 on these two houses, and agreed with Epstein to cancel said $4,000 second mortgages and accept in lieu thereof a first mortgage of $4,500 on the land being acquired. The closing of the title was adjourned several times, but the titles were finally exchanged and at the same time the bank's $4,000 mortgages were canceled. Rosa Bernstein executed the deeds conveying the houses to Buser and Pfundstein, and these two gentlemen and their wives conveyed their property to the Saga Company. At the same time the Saga Company executed a mortgage of $4,500 to the Trust Company, the validity of which mortgage has not been disputed by the trustee. Simultaneously the Saga Company executed a $5,000 bond to Rosa Bernstein, secured by a second mortgage covering the lots.

The bond and mortgage for $5,000 were on May 10, 1917, assigned by Rosa Bernstein to the Trust Company. On July 26, 1917, the Saga Company executed a bond to Rosa Bernstein in the sum of $10,000, secured by a third mortgage on the same lots, and simultaneously the bond and mortgage for $10,000 were assigned by Rosa Bernstein to the Trust Company. After the assignment of the bond and mortgage to the Trust Company, the latter advanced to Rosa Bernstein various sums of money aggregating $8,333.92, taking her promissory notes therefor.

All of the above mortgages were on ...