In re Pine Lake Village Apartment Co., Bankruptcy No. 81-B-20737.
| Decision Date | 25 February 1982 |
| Docket Number | Bankruptcy No. 81-B-20737. |
| Citation | 17 BR 829 |
| Parties | In re PINE LAKE VILLAGE APARTMENT CO., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Burns & Fox, New York City, for debtor.
Zalkin, Rodin & Goodman, New York City, for Thomas J. Hartigan, Mortgagee.
DECISION ON DEBTOR'S APPLICATION FOR FUNDS HELD BY MANAGING AGENT
A mortgagee creditor holding a secured claim contends in this controversy that a so-called "custodian" be compelled to continue to hold pre-Chapter 11 rent proceeds and security deposits it collected, characterized conjunctively as "cash collateral" under Code § 363(c) and as a contractual assignment contained in the consolidated mortgage and in a separate Management Agreement. The Chapter 11 debtor-in-possession claims that the consolidated mortgage contains no condition or covenant granting to this creditor an absolute right to the cash, which the debtor-in-possession declines to call "cash collateral."
The debtor's principal asset consists of an apartment complex located in Lindenwold, New Jersey, which is encumbered by a consolidated first mortgage held by the creditor, securing an indebtedness of approximately $14,000,000, against property valued in the debtor's schedules at $5,540,082. The Consolidation and Modification Agreement, dated May 12, 1975, requires that all rental income from the premises be applied solely to operating expenses and the payment of the outstanding principal, plus interest at the rate of 9% per annum, payable out of the net cash flow, as defined therein, until March 1, 1982, when all unpaid principal and accrued interest will be due and payable.
In October of 1976, the debtor, its mortgagee and an independent managing agent who was the predecessor to John Erickson Co. (the displaced managing agent now in question) entered into a managing agreement whereby the managing agent was given all operational control of the premises and the collection and distribution of all rental income so as to assure the mortgagee that the monthly net cash flow, after operating expenses, repairs and maintenance would be remitted to the mortgagee in reduction of interest and principal and that no funds would be received by the debtor without the mortgagee's prior approval. The management agreement was consistent with the Consolidation and Modification Agreement whereunder the debtor committed the entire rental and other income from the premises exclusively to the payment of operating expenses and debt service until the mortgage indebtedness was fully repaid. The debtor was also required under the consolidated mortgage to enter into a management agreement for the mortgaged property on terms and conditions and with a managing agent satisfactory to the mortgagee.
In September, 1981, the debtor directed the managing agent, John Erickson Co., to withhold all further payments of net cash flow to the mortgagee's assignee, Thomas J. Hartigan, as Trustee of the Twenty Seven Trust. The debtor also demanded that John Erickson Co. turn over to it all accumulated net cash flow in Erickson's possession. When John Erickson Co. refused to comply with the debtor's demand, the debtor terminated the management agreement and advised the tenants to make rent payments directly to the debtor. The reason given by the debtor for Erickson's termination is that not enough money was expended for repairs and maintenance by the managing agent and that allegedly large amounts were siphoned off to the mortgagee under the label of net cash flow after the payment of operating expenses.
In December, 1981, the mortgagee commenced two actions in the Superior Court of New Jersey, Camden County, Chancery Division, against the debtor and others, seeking to foreclose the mortgage on the premises and to require the reinstatement of John Erickson Co. as manager. The mortgagee sought to have all rent collected by the debtor turned over to Erickson for application in accordance with the management agreement.
On December 14, 1981, the Superior Court entered a provisional order enjoining the debtor and others from expending any rent proceeds collected from tenants of the premises. Additionally, it was proposed that the Superior Court enter an order on December 23, 1981, reinstating John Erickson Co. as manager of the premises. However, the entry of such order was stayed by the debtor's filing of its petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. 1101 et seq., on December 23, 1981.
The mortgagee thereafter made an application to this court pursuant to Code § 305(a)(1) that it abstain from entertaining the debtor's Chapter 11 petition and to condition the debtor's use of post-petition rents collected from the premises on the ground that such funds constitute cash collateral for which adequate protection is required under Code § 363(c)(2). The mortgagee's motion for an order under Code § 305(a)(1) was denied, as was its alternative request to prevent the debtor's use of post-petition cash collateral, except that the debtor was directed to submit a proposal as to the manner in which it will apply the post-petition funds for operating expenses, repairs and maintenance so as to protect the mortgagee's interest in the premises. In re Pine Lake Village Apartment Co., 16 B.R. 750 (Bkrtcy.1982).
The debtor then commenced this proceeding for a turnover of certain pre-petition funds collected and held by the former managing agent, John Erickson Co., on the ground that these funds constitute property of the estate within the meaning of Code § 541 and that the mortgagee has no perfected lien upon the funds, or any absolute assignment of the proceeds beyond their pledge as security, because the debtor claims that there has been no default under the mortgage.
The funds in issue consist of the following prepetition items:
The mortgagee claims to have title to the funds which the debtor seeks to compel John Erickson Co. to turn over to it and, in the alternative, asserts that the funds constitute "cash collateral" as described in Code § 363(c) that may not be used by the debtor unless the mortgagee is provided adequate protection for his interest in the proceeds. Additionally, the mortgagee urges that the interests of creditors will be better served by John Erickson Co. retaining the funds as a custodian, pursuant to Code § 543(d), so as to maintain the status quo.
The turnover of property of the estate by a custodian, as required under Code § 543(a)(b) and (c), may be excused under subsection (d) if the following conditions are met:
The mortgagee maintains that John Erickson Co., the managing agent, is a custodian who was at all times since 1976 in possession of the debtor's property for the purpose of managing it and enforcing the mortgagee's right to payment of the net cash flow under the consolidated mortgage. Hence, the mortgagee reasons that since the debtor is concededly insolvent, the court should exercise its discretion to permit the erstwhile managing agent to retain possession of the pre-petition funds now held by it in order to protect the mortgagee's interest in the funds pending the mortgagee's adjourned adversary proceeding seeking relief from the automatic stay against lien enforcement. The mortgagee asserts that it has a substantial interest in the funds because the indebtedness to it exceeds 99.6% of the debts in this case.
As the former managing agent of all of the debtor's premises, John Erickson Co. was an "agent . . . under a contract . . . authorized to take charge of property of the debtor . . . for the purpose of general administration of such property for the benefit of the debtor's creditors;" within the meaning of the definition of a "custodian" under Code § 101(10)(C). Erickson was required to pay all of the trade creditors from the rent proceeds including expenses for repairs and maintenance, and remit all of the cash now to the mortgagee in payment towards interest and principal. However, Erickson's contract was terminated by the debtor before the Chapter 11 petition was filed. The mortgagee contends that such termination was without justification. The debtor disputes this. Nevertheless, the propriety of such termination is not now at issue. What is significant is that, rightly or wrongly, Erickson's contract to manage the debtor's premises was terminated by the debtor. Therefore, Erickson was not the managing agent when the Chapter 11 petition was filed and is not now functioning as an agent for the purpose of general administration of the property for the benefit of the debtor's creditors.
In the earlier decision in this case, dated January 20, 1982, this court noted that even if Erickson had not been displaced by the debtor prior to the Chapter 11 petition, the debtor nevertheless, would be entitled to reject the management agreement pursuant to Code § 365(a) as an executory contract. Therefore, this court denied the mortgagee's request to reinstate Erickson as the managing agent of the debtor's premises. Having previously decided that the debtor was entitled to seek the services of another...
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