In re Nine North Church Street, 257.

• Decision Date: 02 March 1936
• Docket Number: No. 257.,257.
• Parties: In re NINE NORTH CHURCH STREET, Inc.
• Court: U.S. Court of Appeals — Second Circuit

82 F.2d 186 (1936)

In re NINE NORTH CHURCH STREET, Inc.

No. 257.

Circuit Court of Appeals, Second Circuit.

March 2, 1936.

Glass & Lynch, of New York City (Joseph Glass and Leslie Kirsch, both of New York City, of counsel), for appellants.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (Tom Garrett and James A. Sweet, both of New York City, of counsel), for appellant Guaranty Trust Co. of New York as trustee.

Benjamin McClung and Charles B. Sullivan, both of Albany, N. Y. (Kenneth M. Spence and Henry G. Hotchkiss, both of New York City, of counsel), for debtor-respondent Nine North Church Street, Inc.

Greenbaum, Wolff & Ernst, of New York City (Edward S. Greenbaum and Benjamin Kaplan, both of New York City, of counsel), for respondent Maryland Casualty Co.

Before MANTON, SWAN, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

Nine North Church Street, Inc., the debtor herein, owns title to a parcel of real estate of that address in Schenectady, N. Y. On June 15, 1925, Colonial Apartment Corporation had executed and delivered to the Guaranty Trust Company, as trustee, a bond secured by a trust mortgage upon these premises and the trustee had issued $310,000 principal amount of participating certificates in this bond and mortgage. The trust mortgage provided that Colonial would pay interest on the bond at the rate of 6½ per cent. per annum and the certificates bore 6 per cent. yearly. The bond was to be paid in serial principal installments and the certificates had corresponding serial maturities. July 24, 1925, the Maryland Casualty Company as surety, and the Puritan Mortgage Company and Colonial as principals, had executed and delivered to the trustee a surety bond in which they jointly and severally bound themselves to pay the principal and interest of the bond and trust mortgage, the surety's obligation to be voided on payment by either principal of the amount secured by the mortgage and the interest thereon when and as due. It was provided that no action should accrue on the guaranty for the benefit of any one other than the trustee, the sole obligee named in the guaranty. The mortgage provided that upon receiving satisfactory indemnity from the holders of certificates in default, the trustee should enforce the guaranty and only holders of defaulted certificates had the right to cause the trustee to sue Maryland on the guaranty.

In January, 1933, Colonial having defaulted, Maryland had the legal title to the mortgaged premises transferred from Colonial to the Gedex Realty Corporation, a wholly owned subsidiary of Maryland. The transfer was subject to the trust mortgage, but the transferee did not assume any obligations on the certificate or the bond and trust mortgage representing Colonial's debt or Maryland's guaranty thereof. Neither Colonial, Puritan, Gedex, nor Maryland made the payment of principal and interest payable on the bond and of the trust mortgage and certificates, as required by their respective undertakings.

In August, 1933, Gedex circulated among the holders of the certificates a letter proposing that the serial maturities of the certificates be postponed for five years and that fixed interest be reduced from 6 per cent. to 2½ per cent. for three years and 3 per cent. thereafter. It was proposed that this be effectuated pursuant to uniform written assents to be signed by the holders of the certificates. A letter of transmittal provided that the signer accepted the Gedex proposition, authorized the stamping of his certificates with a statement that the principal maturity of the certificates was postponed and the interest rate reduced accordingly. Eighty-five letters of transmittal representing $178,000 principal amount of certificates were signed and delivered. On February 15, 1935, the readjustments based on these Gedex assents were declared operative. But the appellants and other certificate holders refused to assent to the Gedex readjustment and their certificates remained unstamped and in default, and they proceeded to have the trustee sue Maryland in the state court. To forestall this, Maryland organized the Nine North Church Street Corporation, the debtor, and transferred the property to it, subject to the mortgage. One week later, this petition under Bankruptcy Act § 77B (11 U.S.C.A. § 207) was filed. After the new corporation was thus placed in section 77B proceedings, an injunction issued against the continuance of the suit against Maryland on its guaranty. The assents to the reduction procured by Gedex were used as consents to the plan of reorganization of the debtor and the plan has been confirmed. If this stands, it binds the nonassenters who are the appellants. The effect is to reduce Maryland's liability on the guaranty despite the fact that it has not secured the consent of all the guaranty creditors, nor has it come into reorganization so that the consent of two-thirds of its creditors would bind the nonassenters. This would be accomplished despite the fact that Maryland is a solvent corporation. Statements as to Maryland's difficulties on its various guaranties of other issues are unimportant, since Maryland is not a debtor in reorganization proceedings.

Section 77B is part of a general amendment to the Bankruptcy Act for the relief of debtors. Its provisions are conditioned upon a showing by the corporate debtor of facts evidencing need for relief and that the corporation is insolvent or is unable to meet its debts as they mature. By its guaranty, Maryland promised to meet certain obligations and these are not affected by reorganization of this debtor. Any modification of this contract can only be justified by the bankruptcy power which extends only to the relief of insolvent or...