Before STALEY, HASTIE and GANEY, Circuit Judges.
These cross appeals are from an order entered by the district court in reorganization proceedings under Chapter X of the Bankruptcy Act, 11 U.S.C.§§ 501-676 (1958 ed). The district court affirmed two orders of the referee in bankruptcy, one denying the petition of the debtor's landlord, Joseph F. Bradway*fn1, for possession of premises leased to the debtor, and the other granting the petition of the debtor's trustee for the imposition of an equitable lien on the leased premises but denying the other relief sought by the trustee. Both the landlord and the trustee have appealed, and the Securities and Exchange Commission, a party to this reorganization proceeding under § 208 of Chapter X, 11 U.S.C. § 608, has filed a brief in support of that portion of the order denying the landlord's petition for possession of the premises.
On September 26, 1958, the debtor, Fleetwood Motel Corporation, and the landlord's predecessor in interest entered into an option agreement for the lease of premises at 3100 Boardwalk, Atlantic City, New Jersey. The salient terms of the option acknowledged the desire of Fleetwood to secure a 99 year lease of the premises provided it could secure the necessary financing for the construction of a hotel and improvements thereon; required Fleetwood, upon the exercise of the option, to construct a hotel or motel consisting of 125 bedrooms and 125 private baths, a restaurant, cocktail lounge, coffee shop, swimming pool, elevator, five stores and parking facilities; and included an agreement on the part of the lessor to subject the land and subordinate the lease to a 10 to 15 year mortgage not to exceed 75 per cent of the actual construction cost of the buildings referred to, provided Fleetwood first expended $250,000 of its own funds for construction costs before using any of the proceeds of the mortgage. The latter provision also required that the plans and specifications for the hotel or motel be submitted to and approved by the lessor. The penultimate paragraph of the agreement provides:
"Party of the second part [Fleetwood] expressly agrees that if it receives a mortgage commitment pursuant to its application, and provided further that it secures the consent of the S.E.C. and is successful in raising at least fifty (50%) per cent of the amount to be secured by public subscription, that it shall then be deemed to have exercised this option and will thereupon execute the lease attached hereto and will perform all the terms and conditions contained in this agreement and in said lease."
The lease attached to the option agreement contains many of the same terms and conditions. Rent is therein specified at $40,000 per year payable on the 1st of October of each year with Fleetwood obligated to pay as additional rent all taxes assessed against the real and personal property, water rents, sewer charges, and any other levies on the property*fn2 The lessor retains the right to cure any default under the mortgage and a default under the mortgage not cured within thirty days is deemed a default under the lease. Upon the expiration of the term, Fleetwood is required to surrender and deliver up to the lessor not only the premises but the improvements, furniture and furnishings contained therein. That clause of the lease critical to the determination of these appeals is paragraph 17, which provides in relevant part:
"If the Lessee shall fail to pay within fifteen days after the same shall become due and payable and after notice to the Lessee, any installment of rent, or additional rent reserved hereunder, taxes, water and sewer, insurance premiums or principal or interest under the mortgage upon the demised premises, * * * or if any petition or proceeding under the provisions of the Act of Congress relating to bankruptcy has been filed by or against the Lessee in possession and such petition or proceeding is not dismissed within sixty days, or if the Lessee in possession shall make an assignment for the benefit of its creditors, or if a Receiver or Trustee be appointed of the property of the Lessee in possession and such Receiver or Trustee be not discharged within sixty days after his appointment, * * * then this lease shall be terminated and void, the Lessors shall have the right to enter into and upon the demised premises for any part thereof and to repossess and enjoy the same as in and by its former estate * * *."
The option was exercised and the lease signed on October 1, 1958. A six-story, 129-room motel known as La Concha was thereafter constructed, and it commenced operations in June 1959. Shortly thereafter financial difficulties arose in the operation of the motel, and the debtor instituted these reorganization proceedings on September 27, 1960. The landlord then filed with the referee in bankruptcy a petition for permission to take possession of the property. In denying that petition the referee made the following findings, which are not disputed except for those relating to his valuation of the property:
"Fleetwood erected a six-story motel on the premises with 129 rooms and baths, stores, and facilities and a swimming pool. The cost of the construction was $1,274,553.29. In addition, Fleetwood installed furniture and fixtures on the premises at a cost of $276,566.23. The motel commenced operation in June 1959. As of January 31, 1962, two-and-one-half years later, the depreciated cost of the building is $1,192,238.38, and the depreciated cost of the furniture and fixtures is $206,460.19 or a total present book value of $1,398,698.57.
"The mortgage placed on the real estate by Fleetwood was originally $800,000.00 payable in 10 years. This mortgage has been reduced to $560,000.00 and in addition Bradway had advanced on account of the mortgage principal and interest and taxes, the sum of $62,942.79. In effect, therefore, there is due on the mortgage $622,942.79. As of January 31, 1962, there was due $108,405.97 to conditional sales vendors on the furniture and fixtures. (I have heretofore held hearings to determine the sums due them as secured creditors commensurate with the value of the security. That issue, however, is not involved in the issue now before me which is - shall the landlord have possession of the assets.)
"Fleetwood did invest far more than the $250,000.00 in the erection of the building as required by the agreement to lease and by the lease. In order to raise a large portion of the funds necessary to erect the building and equip it, stock was sold by public offering after compliance with regulations of the United States Security Exchange Commission. The value of such shares is $118,867.77. In addition, capital contributed in excess of par value of the common stock was $179,913.28. Also in addition to the sale of stock and capital contributions in excess of the stock, Fleetwood sold debentures in the sum of $274,700.00. The total of all of these sums is $573,481.05. After the motel commenced doing business, it incurred trade accounts payable of $74,673.87; unpaid construction costs of $68,435.00; Withholding Taxes; Atlantic City Treasury Taxes, and debts to others. I realize these claims do not come ahead of the secured claims, but set them forth to show the entire financial picture.
"Bradway knew public offering of stock was going to be made. They knew that the principal officers of Fleetwood were not handling the transaction for themselves as the true owners.
"The motel ran into difficulty right from the beginning. The work was not completely finished in June 1959, when the motel opened. Leaks developed in the building and various other defects occurred. Management was not the best and it is evident that much man power was wasted.
"A mortgage installment of $27,000.00 fell due on August 31, 1960, and Bradway gave notice to Fleetwood on September 17, 1960, that it would terminate the lease if Fleetwood did not make payment of the $27,000.00 within fifteen days of the notice. Fleetwood paid a part of the sum on September 26, 1960, leaving $8,081.68 unpaid. Then on September 30, 1960, Fleetwood failed to pay $26,000.00 plus interest ...