Appeal from the District Court of the United States for the District of New Jersey; Phillip Forman, Judge.
Before BUFFINGTON, DAVIS, and BIGGS, Circuit Judges.
Upon the 8th day of July, 1937, the appellant, Herbert V. Apartments Corporation, filed a petition for reorganization pursuant to the provisions of Section 77B of the Bankruptcy Act, as amended, 11 U.S.C.A. § 207, and thereafter the District Court approved the petition of the appellant and temporary trustees were appointed. Upon August 3, 1937, the appellant filed a petition stating that it was the owner of the Biarritz Apartments in Atlantic City, New Jersey, which was subject to a first mortgage in the sum of $250,000 given by its predecessor in title to Mortgage Guarantee Company; that the Mortgage Company had sold participating interests in this mortgage to persons whose names and addresses were unknown to the appellant. The petition concluded with the prayer that the Mortgage Company be ordered to file a list of the names and addresses of these persons so that they might be given notice of the pending proceedings.Upon the same day the District Court entered an order, ex parte, requiring the filing of such a list.
The Mortgage Company then moved to vacate this order. The motion was accompanied by the affidavit of Blanchard Randall, Jr., its president, stating in substance that in the depression period the Mortgage Company had worked out a plan of co-operation between itself and the owners of mortgaged premises, including the appellant. This plan, a copy of which is attached to the Randall affidavit and is referred to as a "Plan of Readjustment", is dated February 14, 1933, and provided among other things that the holders of the beneficial interests in mortgages held by the Mortgage Company, including the $250,000 mortgage in the suit at bar, should authorize the Mortgage Company, in its discretion but within certain limits, to act upon their behalf in extending the maturity dates of mortgages, to reduce the interest rates payable thereon, to purchase the properties sold on foreclosure, and to modify the terms of the guarantee of the Mortgage Company to the certificate holders. This plan of readjustment was agreed to by more than ninety per centum of the holders of the participating certificates and became operative.
An axamination of the certificates issued by the Mortgage Company to the investing public in respect to the $250,000 mortgage upon the Biarritz Apartments shows that each purchaser of the certificates received an undivided share in the whole mortgage and that the Mortgage Company was constituted an agent for the collection of the interest and principal of the mortgage for the benefit of the certificate holders.
Upon the filing of the 77B petition by the appellant a form of power of attorney with an accompanying letter was sent by the Mortgage Company to the certificate holders. By this power of attorney, which the appellee contends is irrevocable, the certificate holders who executed it appointed the Mortgage Company or Blanchard Randall, Jr., as their attorneys in fact " * * * to the same extent as if the said attorneys were the owners in their own right of the participation in said mortgage * * * ", and in particular authorized these attorneys to represent them in the 77B proceeding of the appellant, to accept or reject on their behalf any proposed plan of reorganization, and to vote for the appointment of trustees and upon any and all matters relating to the 77B proceeding in respect to which the certificate holders might be entitled to vote.
Answering affidavits were filed by Joseph Varbalow, president of the appellant and a certificate holder. From these it appeared that the appellant had sustained substantial losses during the years 1932 to 1936, inclusive, that the Mortgage Company had reduced the rate of interest upon the mortgage to 5 1/4%, and that the Mortgage Company itself was in voluntary liquidation and process of rehabilitation under the supervision of the Insurance Department of the State of Maryland; that the Mortgage Company has not been licensed to perform any class of business except such as might be incidental to its liquidation.
It appears from the record that the Mortgage Company has received powers of attorney from 157 holders of the participation certificates. The certificates of these 157 holders represent the sum of $179,750.
Upon August 13, 1937, the learned District Judge entered an order providing among other things that temporary trustees should be made permanent trustees, for the filing of schedules, and for the filing, allowance and disallowance of claims. The fourteenth paragraph of this order provides that the trustees shall give notice of its making and entry to the creditors and stockholders of the debtor " * * * as the same may appear on the books of the Trustees and/or the debtor * * * ".
On September 8, 1937, the District Judge vacated and set aside the order of August 3, 1937, requiring the filing by the Mortgage Company of the list of the names and addresses of the participating certificate holders, but provided by the vacating order that the Mortgage Company should file with the Clerk of the Court within ten days a list of the names and addresses of all holders of participating certificates who had not authorized the Mortgage Company by execution of powers of attorney to act for them. This order also provided that the Mortgage Company should produce before one of the Masters of the United States District Court for the District of New Jersey, the original powers of attorney executed by the participating certificate holders in favor of the Mortgage Company and should leave with the Master copies of these powers of attorney. The order further provided that these powers of attorney should be impounded by the Master in his files and not disclosed to any person except upon the express order of the court. The order further provided that upon the filing of the plan of reorganization by the appellant, the Mortgage Company should mail a copy of the plan to all the holders of participation certificates for whom it is acting and should file proof of mailing with the Master, such proof also to be impounded and not disclosed to any person save by the express authority of the court.
It will be observed from the foregoing that the holders of the participation certificates who have executed powers of attorney in favor of the Mortgage Company are guarded from any influence which might disturb their relation with the Mortgage Company. The order of August 13, 1937, requiring the trustees to give notice of the time for filing claims, limits the giving of that notice to creditors and stock-holders of the debtor as the same appear on the books of the trustees or the debtor. Since neither the trustees nor the debtor possess any list of the 212 persons who have purchased and are the true owners of the $250,000 mortgage, such holders will not receive any notice to file claims. While it is true that the order of September 8, 1937 provides that the 157 certificate holders who are represented in the proceeding by the Mortgage Company shall receive a copy of the plan of reorganization, that plan is to be sent to them through the conduit of the Mortgage Company. So far as is apparent from the record before us there is no provision made by order of court that those holders of participation certificates who have not give powers of attorney to the Mortgage Company, shall receive copies of the plan of reorganization or indeed any of the notices ordinarily given in 77B proceedings.
The result of the restrictions which have been placed around those certificate holders who have given powers of attorney to the Mortgage Company, is to place them in a position where any information which may come to them of necessity comes through the hands of the Mortgage Company and may be colored with its mind. Such conditions do not tend to enhance opportunity for the exercise of independent judgment upon the part of the certificate holders. They are in fact isolated from the ordinary influences which operate in proceedings of this nature. They cannot be circularized by the appellant, by one of their own number who has not executed a power of attorney to the Mortgage Company or by any other creditor of the appellant. This court realizes that frequently there are disturbing influences in reorganization proceedings which may militate against a successful reorganization of the corporation, but we also believe that there must be full opportunity for discussion and exchange of ideas between parties in interest in a 77B proceeding. The present position of the 157 certificate holders who have entrusted their affairs to the Mortgage Company is one of comparative isolation from any influence, good or bad, and from any information except that which comes to them through the appellee. All the certificate holders must glean their knowledge of the contents of the order of August 13, 1937, from two publications in newspapers of general circulation published in Atlantic City, New Jersey.
The appellee contends that under paragraph 6 of the plan of readjustment, the agency of the Mortgage Company to act for the certificate holders is irrevocable, except as it may be revoked as provided in paragraph 3 of the plan. This paragraph provides that a certificate holder may withdraw the agency which he has conferred upon the Mortgage Company by reimbursing it for any advances made and relieving the Company of its liability upon its guarantee. The plan of readjustment also provides that the Mortgage Company shall be vested with the sole and entire control of the respective mortgaged premises, but we can find nothing in the provisions of the plan of readjustment or in the mortgage certificates themselves which tends to make the Mortgage Company the master of the obligation held by the certificate holders. In this connection the appellee ...