United States v. Neiwirth, Civ. No. 1603-73.

• Decision Date: 19 February 1974
• Docket Number: Civ. No. 1603-73.
• Citation: 370 F. Supp. 929
• Parties: UNITED STATES of America, Plaintiff, v. Leo NEIWIRTH, Esq., Receiver in Bankruptcy for Mid-Center Redevelopment Corp., Defendant.
• Court: U.S. District Court — District of New Jersey

370 F. Supp. 929

UNITED STATES of America, Plaintiff, v. Leo NEIWIRTH, Esq., Receiver in Bankruptcy for Mid-Center Redevelopment Corp., Defendant.

Civ. No. 1603-73.

United States District Court, D. New Jersey.

February 19, 1974.

Jonathan L. Goldstein, U. S. Atty. by William A. Carpenter, Jr., Asst. U. S. Atty., Newark, N. J., for plaintiff.

Kleinberg, Moroney, Masterson & Schachter by James E. Masterson, Newark, N. J., for defendant.

OPINION AND ORDER

LACEY, District Judge:

This is an action by the United States against a Chapter XI Receiver for the debtors Mid-Center Redevelopment Corporation (Mid-Center), Arthur H. Padula Construction Corporation and Arthur H. Padula. The plaintiff seeks an accounting of the source and distribution of $664,000 deposited with the Receiver pursuant to the order confirming the Plan of Arrangement in Chapter XI on December 18, 1972. Sought too is the imposition of a constructive trust upon funds in the amount of $262,700, allegedly wrongfully transferred by the Receiver, as hereinafter discussed, from Gregory Park Section II, Inc. (GP 2), a New Jersey corporation, to the estate in his name.¹

The instant action is only a single strand in the complex web of litigation pending in the bankruptcy court and before me, involving the aforesaid debtors. See this court's prior opinions in Gregory Park Section 3, Inc. v. Lynn, Civil No. 1562-73 (motion to dismiss) (December 10, 1973) and In re Mid-Center Redevelopment Corp., B. 1115-70 (petition for review in bankruptcy) (January 3, 1974, 1 F.B.A. 567). See also opinions in United States v. Gregory Park Section II, Inc. (proceedings concerning appointment and powers of a temporary receiver of rents and profits) (September 21, 1973; and October 1, 1973, 1 F. B.A. 351).

After the United States moved herein for a preliminary injunction prohibiting the Receiver's disbursement of the disputed funds, and before determination of that motion, the Receiver in turn moved under Fed.R.Civ.P. 12(b)(1) to dismiss for lack of subject matter jurisdiction. The United States has invoked this court's jurisdiction under 28 U.S.C. § 1345 (suits by the United States as a plaintiff); however, the Receiver seeks to dismiss the action as one dealing with property within the exclusive summary jurisdiction of the bankruptcy court. Thus, although not elucidated in the Receiver's papers, he apparently contends the instant action is within the "except as otherwise provided by Act of Congress" exception of § 1345.² The Receiver does not oppose entry of a preliminary injunction should this court find it has subject matter jurisdiction.

On this motion to dismiss, the Complaint's well pleaded allegations will be accepted as true. Walling v. Beverly Enterprises, 476 F.2d 393, 395 (9th Cir. 1973); Lasher v. Shafer, 460 F.2d 343, 344 (3d Cir. 1972); Sabolsky v. Budzanoski, 457 F.2d 1245, 1249 (3d Cir.), cert. denied, 409 U.S. 853, 93 S.Ct. 65, 34 L.Ed.2d 96 (1972). I will consider as well, on the motion, to the extent they are not inconsistent with the Complaint, the facts embodied in the affidavit of the Receiver, Leo Neiwirth, Esq., filed in support of his motion on December 21, 1973, and in his testimony before me on the same date, in United States v. Gregory Park Section 3, Inc., Civil No. 1734-73.

Mr. Neiwirth was appointed a Receiver in the aforesaid Chapter XI proceeding on September 18, 1970. Because the debtors owned all the stock in GP 2 and, as well, Gregory Park Section 3, Inc. (GP 3), he proceeded after and on the basis of his appointment to oversee the receipts, disbursements and operations of the Gregory Park apartments, even though GP 2 and GP 3 were not themselves debtors or the property of debtors. (See also Complaint ¶ 8).

The Complaint alleges that on or about May 27, 1971, GP 2, "which had defaulted on the HUD held mortgages" on its buildings 1 and 2, entered into Provisional Work-Out Arrangements (hereinafter agreement) with the Secretary of HUD which relieved GP 2's default and established a new payment schedule delaying amortization payments. Paragraph 4 of the agreement prohibited commingling of funds among the various Padula projects or advances to affiliates, which would include GP 2, GP 3, and others, and provided that such action would result in cancellation of the agreement. The same paragraph also contains an inserted typewritten clause providing that "any excess funds over and above those herein required may be used to implement the Chapter 11 proceedings." Mr. Neiwirth states that he, purporting to act on behalf of GP 2, authorized and directed negotiation of the agreement and that the aforesaid typewritten clause was negotiated by one of the debtors, Mr. Padula, with HUD, after discussion with him.³ Mr. Neiwirth further states that it was under and pursuant to this added clause that he, acting as Receiver for the debtors, made the challenged transfer of $262,700 of GP 2's funds to the debtor Mid-Center upon confirmation of the Plan of Arrangement on December 18, 1972, in order to fund the Plan.

Prior to this transfer the Receiver, presuming to act for both Gregory corporations (GP 2 and GP 3), had had certain of their funds put into certificates of deposit in the respective corporate names. To accomplish the transfer, he caused these certificates to be surrendered and replaced by new certificates issued in his name as Receiver for Mid-Center. Thus did the funds of GP 2 go into the estate.

The Receiver contends that the funds transferred were in excess of those required to be paid to HUD under the agreement, and that he thus was authorized by said agreement to act as he did. However, the pertinent allegations in the Complaint which at this point must be accepted as true read:

34. In December 1972, defendant, Leo Neiwirth, Esq., knew, or should have known, that Gregory Park Section II, Inc. was indebted to plaintiff under the terms of the applicable Provisional Work-Out Arrangements in an amount exceeding $262,700.

35. The payment of $262,700 by Gregory Park Section II, Inc. to defendant in December 1972 violated paragraph 4 of the Provisional Work-Out Arrangements . . . in that the aforesaid sum was not an excess over and above the amount needed to meet the monthly payments required under the Work-Out Arrangements, and thereby also violated the applicable mortgages, Regulatory Agreements, and the National Housing Act.

Thus there is charged a violation of the agreement and a default under the mortgage.

Apparently in anticipation of the United States filing its action for foreclosure, see n. 1, supra, on August 2, 1973 the Chapter XI debtors had obtained an order from the Referee temporarily restraining such action. That order, however, was vacated on September 10, 1973, the Referee ruling that he lacked jurisdiction over the property of GP 2, since it was not a debtor, nor the property of a debtor, in the Chapter XI proceeding, notwithstanding all the GP 2 stock was owned by the debtors. Review of this decision was never sought by either the debtors' attorney or the Receiver.⁴

Although the Complaint challenges the Receiver's transfer of GP 2's funds to the debtor Mid-Center as violative of the agreement, the Receiver's motion to dismiss raises more fundamental questions concerning his power to act.⁵ First, did the Receiver have authority by virtue of his appointment to act on behalf of GP 2 in taking its funds? If so, did he have the authority under his appointment to borrow the sum of $262,700 and put it in the estate, all without an order from the Referee?⁶ It is only after resolving these questions of the Receiver's basic power to act on behalf of (1) GP 2, and (2) the debtors, that the issues then focus on the propriety of that action under the agreement: that is, did the Receiver violate any fiduciary obligation, analogous to that of an officer, director, or controlling stockholder to a corporation or its creditors, in depriving GP 2 of substantial liquid assets;⁷ and was the agreement breached by the transfer? Since I resolve the jurisdictional motion on the basis of the first of the above questions, that is, the Receiver's authority to act on GP 2's behalf, I shall refrain from discussing and deciding the remaining issues on this motion.

The Receiver's simplistic approach on his application is to argue, as has been stated, that since the disputed funds are within his possession, any suit in connection therewith is within the exclusive summary jurisdiction of the bankruptcy court, and cannot be maintained here as a plenary action. Although not analytically developed, it is also implied in the notice of motion that this court is even without jurisdiction to decide the question of its jurisdiction. That implication is of course rejected.⁸

The Receiver's moving papers and brief reflect a misconception of the nature of this suit. He views it as if GP 2, the mortgagor, is a debtor in the Chapter XI proceeding. His Memorandum's factual statement avers that he, the Receiver, acting for GP 2, entered into a "workout" arrangement with HUD, the mortgagee, and that HUD is now claiming that he, the Receiver, is in default under the agreement and contending, therefore, that HUD's funds are being improperly held by him. Put another way, this recital is founded upon the erroneous assumption that the Receiver entered into an agreement with HUD, while acting for a debtor, or in connection with property of a debtor, and that this suit is simply one for breach of contract. GP 2 is not a debtor, and, as the Referee ruled, its property is not that of a debtor.

The Receiver's misconception is totally bared by his mistaken invocation of what is of course black letter law from 2 Collier on Bankruptcy ¶ 23.04 1, at 450 (14th ed. 1971):

Once the petition has been filed, the bankruptcy court's jurisdiction is paramount and no other court may by order or decree deprive it of this jurisdiction. With respect to all proceedings in bankruptcy

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