Court Opinion

ID: 4472185
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:19:19.932669+00
Date Added: 2024-06-11T14:53:49.107274
License: Public Domain

HaRlan, J., dissenting: In January of 1941 the petitioner, as mortgagee-trustee for the first mortgage bondholders of the Penn Athletic Club Building, was confronted with a problem. The mortgagor, the Penn Athletic Club, had been in default under the terms of the mortgage for a period in excess of a year, and it owed real estate taxes on the mortgaged premises for the years 1939, 1940, and 1941 in the amount of $317,869.28 and was unable to meet even the minimum interest requirements under the mortgage. The Securities and Exchange Commission wanted to make a long term lease of the club building and was insisting that it be given immediate possession and that any lease be executed by petitioner as lessor. Petitioner knew that in order to make such a lease it would have to acquire ownership of the premises, inasmuch as it was the practice of the Court of Common Pleas of Philadelphia and the United States District Court not to permit a mortgagee in possession to make a lease for a period in excess of one year. Foreclosure could not be resorted to because of the time element required to obtain title by proceedings in equity or scire facias. Petitioner was, therefore, faced with a choice of either abandoning its efforts to negotiate the lease with the Securities and Exchange Commission or of inducing representatives of the club to make a voluntary conveyance that would permit it to lease the building for a long term. While the petitioner wrote, the club under date of January 13, 1942, requesting a conveyance pursuant to paragraph 14 of the supplemental mortgage agreement, the evidence indicates that thereafter it became necessary to enter into extended negotiations because a substantial number of the club’s board of directors and members believed that the club was under “no legal compulsion” to remove itself and turn over the property to petitioner, and they felt “if it did so it would, for all practical purposes, result in the end of the Penn Athletic Club of Philadelphia as a needed and desirable Philadelphia institution,” and, to avoid such a result, they “offered serious resistance to the demands of the petitioner and its counsel that the property be abandoned by the Club.” During these negotiations the suggestion was made by the president of the club that conveyance of the property would be made and possession given at once if the petitioner, as trustee for the bondholders, would release the club from all indebtedness and allow it to retain certain personal property. “Being of the opinion that the only way in which immediate possession of, and a deed of conveyance of the mortgaged premises could be secured by it from the * * * Club * * * would be through compliance with these conditions insisted upon by the * * * Club,” the petitioner, acting upon advice of counsel and with the approval of representatives of the bondholders, decided to agree to these conditions. Agreement was finally reached between petitioner and the club on January 19, 1942, and it is apparent that the club demanded a high price for the conveyance to petitioner pf “all property subject to lien of said mortgage, including all real estate, buildings, machinery, furniture and furnishings, and the delivery of possession thereof by January 21,1942.” In consideration therefor the petitioner released and forever discharged the club “of and from all indebtedness due by the club under said Mortgage” (the principal indebtedness amounted to $2,580,000), “together with all interest accrued or accruing thereon” (interest for 1939 and 1940 amounted to approximately $200,000), “and all liability in connection with real estate taxes, past, present, or future, assessed against the said premises” (taxes assessed and unpaid at time of transfer amounted to $317,869.28). As additional consideration the petitioner also agreed to deliver to the club furniture, fixtures, and equipment having a value of $25,000, which was necessary to equip a new athletic club building, and to pay unsatisfied current indebtedness due by the club to other creditors, so far as might be found necessary, out of proceeds of the rest of the furniture and equipment after all other assets, including collectible receivables as of the date of the transfer, had been used for such purposes. The conveyance was made on January 21,1942, by deed in fee simple form which contained all the wording which the Pennsylvania statutes prescribe as necessary to pass fee simple title and to convey the entire estate of the club, as grantor. Purdon’s Penna. Stats. Ann., title 21, ch. 1, secs. 2-3. It included “all the estate, right, title and interest, property, claim and demand whatsoever of it, the said Grantor, as well at law as in equity, of, in and to the same and every part and parcel thereof.” The release executed the following day stated that this action was taken to permit the trustee to become the owner of the mortgaged premises. I shall make no attempt to discuss the principles involved in the many cases cited by the majority other than to point out that in none of those cases do we have a transaction, such as we have here, where a mortgagor transferred to a mortgagee-trustee for first mortgage bondholders all of its interest in the mortgaged premises for an adequate consideration, consisting in part of a complete release and discharge of all indebtedness under the mortgage. That the consideration was adequate and fair is shown by the statement attached to the deed “that the premises are worth less than the mortgage, and therefore there is no equity over mortgage indebtedness.” If the conveyance had been made to petitioner as provided in paragraph 14 of the supplemental mortgage agreement, I would have no hesitancy in agreeing with the majority view that, petitioner became a mortgagee in possession and, as such, was liable to account to the club. That paragraph contemplates a conveyance merely so that the mortgagee may have possession after default as additional security. It does not contemplate and was never intended to embrace a purchase of the mortgaged premises by the mortgagee from the mortgagor for an adequate consideration, and the deed does not state that the conveyance was made pursuant to paragraph 14. It is true that petitioner requested such a conveyance, but after that request was made the club saw the opportunity to drive a hard bargain and took advantage of that opportunity. It sold its interest in all of the property subject to the lien of the mortgage, with the exception of the $25,000 in furnishings and equipment which it was permitted to retain. Under such circumstances the question of intention, which is so important where a mortgagor makes an absolute conveyance for no consideration or for a nominal or inadequate consideration, is not a decisive factor because, “even though his intention or interest is to keep alive the debt and its incidental lien, he cannot do so, it is evident, if the conveyance of the mortgaged premises to such holder of the mortgage debt was made and accepted as a payment of the debt. In such case the debt is discharged, not as having been merged but as having been paid.” Tiffany, Real Property (3d Ed.), vol. 5, p. 486. It is well settled that after the making of a mortgage the mortgagor and the mortgagee may deal with each other as other individuals, and the mortgagor may, for an adequate consideration, convey to the mortgagee his interest in the mortgaged premises. Tiffany, Real Property (3d Ed.), vol. 5, p. 358. That is what happened in this proceeding. When the transaction was consummated the relationship of debtor and creditor between the club and the petitioner, as trustee for the first mortgage bondholders, ceased to exist. Moreover, there was no other debtor, inasmuch as C. Benton Cooper and the Rittenhouse Square Corporation had been eliminated in section 7 (a) of the modified plan of reorganization approved by the Federal District Court on January 30, 1940, which provided that “All past, present and future indebtedness or obligations of C. Benton Cooper or of the Subsidiary Debtor [Rittenhouse Square Corporation] * * * of any kind or nature whatsoever, including Trustee’s fees and commissions, under and by virtue of the terms of said First Mortgage, shall be waived and cancelled and said First Mortgage shall be satisfied of record.” There being no debt existing to support the mortgage at the time of the conveyance to petitioner, it could not have been made as additional security. Swinson v. Sodaman, 20 N. E. (2d) 623, 626; 300 Ill. App. 31; Holmburg v. Hardee, 90 Fla. 787; 108 So. 211, 220. Inasmuch as the conveyance was not made as additional security, there seems to be no possible escape from the conclusion that it vested in petitioner, as trustee for the first mortgage bondholders, the ownership of all the property which had theretofore been subject to the lien of the mortgage, including the club building and excepting the $25,000 of furnishings and equipment which the club was permitted to retain. As owner, it negotiated leases with the Securities and Exchange Commission and with occupants of stores on the ground floor of the building. The majority opinion would relieve it from tax on rental income which amounted to $178,509.37 in 1942 and $209,-084.78 in 1943. I think the respondent correctly determined that this rental income should be included in the gross income of petitioner. Arundell, Murdock, Leech, and Hill, JJ., agree with this dissent.