Marine Harbor Properties v. Manufacturer Trust Co

• Citation: 317 U.S. 78,87 L.Ed. 64,63 S.Ct. 93
• Decision Date: 09 November 1942
• Docket Number: No. 24,24
• Parties: MARINE HARBOR PROPERTIES, Inc., v. MANUFACTURER'S TRUST CO. et al
• Court: U.S. Supreme Court

317 U.S. 78

63 S.Ct. 93

87 L.Ed. 64

MARINE HARBOR PROPERTIES, Inc.,

v MANUFACTURER'S TRUST CO. et al.

No. 24.

Argued Oct. 16, 17, 1942.

Decided Nov. 9, 1942.

Rehearing Denied Dec. 7, 1942.

See 317 U.S. 710, 63 S.Ct. 254, 87 L.Ed. —-.

[Syllabus from pages 78-80 intentionally omitted] Mr. Arthur E. Friedland, of New York City, for petitioner.

Chester T. Lane, of Washington, D.C., for respondent S.E.C.

Charles E. Hughes, Jr., of New York City, for respondent Manufacturer's Trust Co., Trustee.

Benjamin Heffner, of New York City, for The People of the State of New York as amici curiae, by special leave of Court.

Mr. Justice DOUGLAS delivered the opinion of the Court.

The question in this case is whether the Circuit Court of Appeals was in error in holding that a debtor's petition filed by petitioner under Ch. X of the Bankruptcy Act, 52 Stat. 883, 11 U.S.C. § 501 et seq., 11 U.S.C.A. § 501 et seq., was not filed in 'good faith'.

The debtor's sole asset is an apartment building in New York City which is subject to a first mortgage of $370,000. This mortgage is held by the respondent, Manufacturer's Trust Co. (successor to The Mortgage Corporation of New York) as trustee for certificate holders. There are also junior mortgages and other claims, including an unspecified amount of unsecured indebtedness. Concededly the property of the debtor is worth less than the amount of the first mortgage debt. The first mortgage was originally created in 1931 and was held by Title Guarantee and Trust Co. which issued and sold to the public certificates of participation, guaranteed as to principal and interest by Bond and Mortgage Guarantee Co. The latter company became involved in financial difficulties in 1933 and was taken over by the Superintendent of Insurance of New York for rehabilitation.¹ Pursuant to provisions of the Schackno Act, N.Y.Laws 1933, c. 745, McK.Unconsol.Laws, § 1796 et seq., the Superintendent of Insurance promulgated in 1934 a plan for the readjustment of the rights of the certificate holders in the mortgage by which the mortgage was extended to December 1, 1937 and the interest reduced. Over two-thirds of the certificate holders consented to the plan and the debtor joined in the extension agreement. The New York court approved it. In 1935 the New York Mortgage Commission succeeded the Superintendent of Insurance as administrator of certificated bonds and mortgages. N.Y.Laws 1935, c. 19, c. 290, McK.Unconsol.Laws § 1751 et seq. That Commission² in 1938 proposed the designation of the Mortgage Corporation of New York as trustee of the bond and mortgage in the instant case under a declaration of trust granting the trustee broad and comprehensive powers. This proposal was consented to by over two-thirds of the certificate holders and approved by the New York court. The order of the court provided 'that this Court, having assumed jurisdiction of this proceeding, shall retain jurisdiction hereof until the complete liquidation of the Trust Estate and the termination of the trust; and the Trustee, or any other interested party herein, may apply at the foot of this Final Order upon such notice as the Court may direct for such other and further relief as to the Court may seem just and proper.'

The principal of the first mortgage was not paid at its extended maturity in 1937. But until April 1, 1941, the debtor made all other payments due under the 1934 extension agreement. At that time the debtor defaulted in payment of interest and taxes. Both before and after that default the debtor and the trustee negotiated for an agreement of further extension and modification. But no agreement between them could be reached and no further proposal for a modification or extension of the mortgage was presented to the state court or to the certificate holders. On May 1, 1941, the trustee instituted foreclosure proceedings in the state court. A receiver was appointed who took possession. In September 1941 the debtor filed its voluntary petition under Ch. X of the Bankruptcy Act. An ex parte order approving the petition and appointing trustees was obtained. Shortly thereafter the mortgage trustee moved to vacate that order and to dismiss the debtor's petition on the ground that it was not filed in 'good faith'. That motion was denied. D.C., 41 F.Supp. 814. The Circuit Court of Appeals reversed, one judge dissenting, 2 Cir., 125 F.2d 296. We granted the petition for certiorari because of the importance in the administration of the Bankruptcy Act of the problems involved.

Every petition under Ch. X must state, inter alia, 'the specific facts showing the need for relief under this chapter.' § 130(7), 11 U.S.C.A. § 530(7). Sec. 141 provides that the judge shall enter an order approving a debtor's petition 'if satisfied that it complies with the requirements of this chapter and has been filed in good faith, or dismissing it if not so satisfied.' Sec. 146 defines 'good faith' and provides in part:

'Without limiting the generality of the meaning of the term 'good faith', a petition shall be deemed not to be filed in good faith if—

'(4) a prior proceeding is pending in any court and it appears that the interests of creditors and stockholders would be best subserved in such prior proceeding.'

The federal bankruptcy power is, of course, paramount and supreme and may be so exercised by Congress as to exclude every competing or conflicting proceeding in state or federal tribunals. Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370. In fashioning Ch. X Congress, however, did not go so far. While the pendency of prior proceedings in state or federal courts does not bar the filing of a petition under Ch. X (§ 256), Congress in effect directed the bankruptcy courts not to approve petitions under Ch. X in such cases unless it appeared that the interests of creditors and stockholders would not be best subserved in the prior proceedings. And it put the burden on the petitioner to make that showing. The Report of the House Judiciary Committee states that the purpose of § 146(4) was to 'stop the removal of prior pending cases from other courts where the interests of creditors and stockholders would be better served by retaining and continuing the prior proceedings.' H.Rep. No. 1409, 75th Cong., 1st Sess., p. 42. Sec. 146 represents a codification of some of the interpretations which the courts had given the words 'good faith' in proceedings under § 77B, 11 U.S.C.A. § 207. S.Rep.No. 1916, 75th Cong., 3d Sess., p. 27. Thus the necessity of showing 'a need for the machinery of § 77B as an essential in accomplishing a reorganization because other procedures were either unavailable or more cumbersome and expensive' led courts to find an absence of 'good faith' in the sense that no 'need for relief' had been established, where 77B was sought to be employed by a debtor as 'a mechanism for preserving equities at the expense of creditors.' See Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees, Securities and Exchange Commission, Pt. VIII, p. 94 (1940).

In view of that history it seems clear that when a prior proceeding is pending, a petitioner's showing of 'need for relief' under Ch. X, required to be contained in every petition by the express provisions of § 130(7), must demonstrate that at least in some substantial particular the prior proceedings withhold or deny creditors or stockholders benefits, advantages, or protection which Ch. X affords. In absence of such a showing the 'need for relief' has not been established and the District Court is not enabled to make an informed judgment on the 'good faith' issue.

The Circuit Court of Appeals in this case, as in Brooklyn Trust Co. v. Rembaugh, 2 Cir., 110 F.2d 838, held that the debtor's petition was not filed in 'good faith' since it was seeking to escape the jurisdiction of the state court to which it had voluntarily submitted itself. But that is not the test which Congress has provided in § 146(4). That provision requires the bankruptcy court to inquire whether 'the interests of creditors and stockholders' would be better subserved in the prior proceedings or under Ch. X. That the desire of the petitioner to escape the prior proceedings is immaterial to that inquiry is supported not only by the language of § 146(4) but also by the fact that § 256 expressly sanctions the filing of petitions under Ch. X although prior proceedings are pending. To disqualify a petitioner under Ch. X merely because he had in some way participated in the prior proceeding would effect a substantial impairment of § 146(4), since it would be the exception rather than the rule where both the debtor and the creditors had not taken some part in the prior proceedings. Furthermore, the issue as to the adequacy of the prior proceedings as compared with Ch. X is the same whether the petition is filed by creditors or by the debtor. All petitions...