St. Louis Union Trust Co. v. Jolliffe
| Decision Date | 10 December 1934 |
| Docket Number | No. 125.,125. |
| Citation | 74 F.2d 247 |
| Parties | ST. LOUIS UNION TRUST CO. v. JOLLIFFE. |
| Court | U.S. Court of Appeals — Second Circuit |
John E. Donnelly, of New York City, for appellant.
David W. Peck, of New York City, for appellee.
Before MANTON, L. HAND, and SWAN, Circuit Judges.
The trustee in bankruptcy appeals from an order of the judge affirming an order of the referee, which over the trustee's objection allowed in full a claim against two bankrupt corporations, one of Illinois, the other of Delaware, a holding company. The facts are as follows: In July, 1927, one, Hills, borrowed $500,000 from the First National Company of St. Louis, for which he executed a series of bonds and as security a mortgage upon a warehouse in Chicago of which he held the fee. The lender insisted that the warehouse should be put upon a presently paying basis and for this reason Hills let it to the Illinois company for a term of years at a monthly rental of $5,000, the lease being subject to the mortgage. As part of the same transaction, Hills then assigned the lease to the trustee of the mortgage, the assignment reciting that Hills was to collect the rents so long as he did not default in his payment of the bonds, and that if he did, the mortgagee might "enter upon and take possession of said premises under said lease, and exercise all the rights herein conferred upon it, and * * * collect all rents and revenues under said lease, pay all expenses of the operation and management of the property out of such revenues, and shall apply the net rentals thus obtained from said property to the payment of the indebtedness." The Delaware corporation guaranteed performance of the lease by the Illinois company. In June, 1929, Hills conveyed his equity of redemption in the warehouse to the Illinois company, and continued making the prescribed payments on the bonds until July 15, 1932, when he defaulted as to $7,500 of an instalment of $25,000 due that day. There was then unpaid $382,500 of the principal; and the property had been appraised at $847,000 in 1927. On August 5, 1933, the default having continued for over a year, the trustee under the mortgage accelerated the principal of the bonds, and a petition in bankruptcy was filed against both companies on August twenty-fourth following. The claim is for the thirteen months' unpaid rent which accrued after Hills' default and before petition filed, together with the unpaid taxes for the years 1930-1931, a total of about $96,000. The trustee in bankruptcy contends that after Hills' conveyance of the equity of redemption to the Illinois company in 1929, the warehouse was a security not only for the claim against Hills, but for the rents to which the claimant became entitled after Hills' default; and that for this reason its value must be deducted from Hills' debt, under section 57h, Bankr. Act (11 USCA § 93(h), and the claim proved against both companies only for the balance.
Had Hills merely conveyed the reversion to the Illinois company, there being no mortgage of the fee and no assignment of the reversion, the term would have merged with the fee and the rents would have ceased. Carroll v. Ballance, 26 Ill. 9, 79 Am. Dec. 354. The mortgage and assignment prevented this, being interposed between the term and the equity of redemption. However, both were only security for the debt, and would disappear as soon as it was paid, in which case the term and the fee would merge as though they had never been interposed; this indeed quite independently of the provision in the assignment which expressly revested Hills with the reversion as soon as the debt was paid. But we are not concerned with a putative payment of the debt by Hills, for the result in that event will not determine whether the property was security for the rents, the only material inquiry. We must find out whether the payment of the debt by the sale of the warehouse would discharge past instalments of rent. We need not say what would have been the situation if the mortgage had been subject to the term; it was not, the term was subject to the mortgage. This meant that any...
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