APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA D.C. Nos. 74-955 and 74-956 In Bankruptcy
Aldisert, Gibbons and Rosenn, Circuit Judges.
The Union Commerce Bank ("Bank") appeals from orders approving two petitions filed under Chapter X of the Bankruptcy Act, 11 U.S.C. § 501 et seq. (1971).*fn1 At issue is the finding of the United States District Court for the Eastern District of Pennsylvania that each petition was filed in "good faith." The Bank urges that this finding in each case was clearly erroneous. We agree that the petitions were not filed in good faith and reverse the orders approving the petitions.
The two debtors and appellees are Treward Realty, Inc. ("Treward"), which holds a lease to a Holiday Inn located at 8900 Roosevelt Boulevard, Philadelphia, Pennsylvania, and Holi-Penn, Inc. ("Holi-Penn"), the sublessee which holds a Holiday Inn franchise and manages the hotel. The issued and outstanding stock of both debtors is owned in its entirety by Treward Associates, a Pennsylvania limited partnership.
In September 1973, Treward and Treward Associates mortgaged the premises at 8900 Roosevelt Boulevard and an adjacent leasehold in consideration for a loan from the Bank of $4,500,000. At that time, Treward owned the real estate, which it promptly sold to Republic Mortgage Investors ("Republic"), a third appellee. Republic, a real estate investment trust, leased back the land upon which the Holiday Inn is located to Treward which lease is subordinated to the Bank's mortgage.
Within six months, Treward ceased making payments on its debt to the Bank. The Bank therefore began an action to foreclose its mortgage in the Court of Common Pleas of Philadelphia County, which resulted in the scheduling of a sheriff's sale for November 1974. Treward and Holi-Penn then filed petitions under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. (1971).
As both debtors failed to produce plans of arrangement, they were adjudicated bankrupts pursuant to 11 U.S.C. § 776 (1971). The Bank thereupon assumed possession of the property as mortgagee in possession and entered into a management agreement with Penny Wise Motor Inns of America, Inc. ("Penny Wise"), to operate the Holiday Inn. The debtors sought to be reorganized in Chapter X and filed petitions for reorganization on April 30, 1975.
On June 24, the Bank filed a controverting answer to the petitions pursuant to 11 U.S.C. § 544 (1971), attacking the good faith of the petitions on the ground that "it is unreasonable to expect that a plan of reorganization can be effected." After a number of documents were submitted and considered, the district court by order of July 2 approved both petitions, appointed a trustee for the debtors, and enjoined all creditors from enforcing liens on any property owned by or in possession of the debtors or trustee. The Bank was prevented from proceeding with a foreclosure sale on the property which it had scheduled.
The trustee did not take possession immediately. Instead, in his first report to the court filed on August 26, 1975, he stated that he found no objection to the continued management of Penny Wise.
In October 1975, the Bank agreed to allow the trustee to assume possession on or about November 1. The trustee then entered into an agreement with Penny Wise for continued management of the Holiday Inn on substantially the same terms as before.
The Bank has appealed the district court's July 2nd order approving these Chapter X petitions, reiterating its contention that "it is abundantly clear that, on the basis of the appraisals submitted to the court below, there was no possibility that a plan of reorganization could be effected." It is true that no reorganization plan has as yet been developed and no payments have been made to the Bank thus far, bringing the amount owed to it over $5,000,000.*fn2 Treward and Holi-Penn argue that "the evidence shows a potential property value in excess of ...