In The Matter of PITTSBURGH-DUQUESNE Development Co., A Limited Partnership. Appeal of Prudential Insurance Company of AMERICA, Appellant

482 F.
2d 243
In the Matter of PITTSBURGH-DUQUESNE

DEVELOPMENT CO., a
limited partnership.
Appeal of PRUDENTIAL INSURANCE COMPANY OF
AMERICA, Appellant.
No. 72-1768.
United States Court of Appeals,

Third Circuit.
Argued May 17, 1973.
Decided June 29, 1973.
William T. Coleman, Jr., Carl H. Hanzelik, Dilworth, Paxson, Kalish,

Levy & Coleman, Philadelphia, Pa., Stanley G. Makoroff, Morris, Safier
& Makoroff, Pittsburgh, Pa., for appellant.
Stanley V. Ostrow, Elliott W. Finkel, Kaplan, Finkel, Lefkowitz, Roth &
Ostrow, Pittsburgh, Pa., for trustee.
Before HASTIE, VAN DUSEN and ROSENN, Circuit Judges.
HASTIE, Circuit Judge.
This controversy arose in a proceeding under Chapter XII of the Bankruptcy

Act, 11 U.S.C. Sec. 801 et seq., instituted by Pittsburgh-Duquesne
Development Co., a limited partnership for an arrangement of its real property.
This appeal has been taken by Prudential Insurance Co., a mortgagee of an
improved parcel of the debtor's property, from an order of the reorganization
court that denied its "Petition for Restitution of Liened Rents".1
The debtor had two parcels of income-producing real property, both in

Pennsylvania: "Cricklewood", a large residential apartment building upon
which Prudential held a multi-million dollar first mortgage, and the "Geyer
Building", in which Prudential had no interest. The Cricklewood mortgage
provided that in the event of default, all leases and rents would stand assigned
to Prudential and that Prudential would have the right to take possession,
collect rents and apply them to the mortgage debt, taxes and operational
expenses.
3
On May 29, 1969, with the Prudential mortgage in default, the debtor initiated
this proceeding for a Chapter XII real property arrangement. The district court
promptly entered an order that prohibited enforcement of any lien upon the
debtor's real property. On August 14, 1969, the court appointed a trustee to
conduct the debtor's business and manage its property. The trustee was
expressly authorized "to collect and receive all rents" and "to pay . . . all debts,
obligations, charges and taxes incurred in the operation of the said business and
the preservation and maintenance of the said property".
The trustee collected the Cricklewood rents and out of the fund thus generated
paid the current expenses of the Cricklewood operation other than real property
taxes. Although the trustee permitted Cricklewood taxes to accrue during his
administration and to remain unpaid in the amount of $124,368.05, it has been
stipulated that, without receiving the court's particular approval, he diverted
$83,333.48 of Cricklewood rental income to expenses incurred in the operation
of the Geyer Building.
Early in 1971, Prudential petitioned the reorganization court to permit it to

foreclose its Cricklewood first mortgage. This petition alleged and the trustee
admitted that there was no equity in Cricklewood above Prudential's first
mortgage claim of more than $4,600,000. Accordingly, the court granted the
petition and on May 3, 1971 Prudential foreclosed. At the sheriff's foreclosure
sale Prudential bid the exact amount of unpaid real property taxes, charges and
costs, to which in law its first mortgage was subordinated. This included about
$120,000 of real property taxes that had accrued during the trustee's
management of the property. There was no other bid and Prudential became the
purchaser. Thus, to protect its security, in which the trustee had admitted there
was no equity above the mortgage, Prudential had to pay all overdue real
property taxes, including those which had accrued and remained unpaid while
the trustee was collecting rents and diverting the proceeds to expenses
unrelated to Cricklewood.
It is the theory of the present "Petition for Restitution of Liened Rents" that the
legal effect of the mortgage was to give Prudential a security interest in all rents
collected after the mortgagor defaulted; that the rents collected by the trustee
were impressed with that security interest; that the reorganization court's order
authorizing the trustee to pay taxes out of rents empowered him to dispose of
this security in a manner that would respect this interest; and that, absent any
judicial direction that included some provision for substituted security, the
trustee could not lawfully make any disposition of the rent that would deprive
the mortgagee of the benefit of the security bargained for. Accordingly,
Prudential is asking that the reorganization court require the trustee to
reimburse Prudential now for the amount it has paid for taxes that the trustee
should have paid out of the rents, or that the court impose an equitable lien in
favor of Prudential upon the rental income of the Geyer Building.
7
In our view the above outlined reasoning is sound. Prudential's duly granted
lien upon Cricklewood rents that issued after mortgage default persisted in
equity during the Chapter XII reorganization, though at the outset the
reorganization court could and did properly restrain it from enforcing that lien
pending an effort to achieve an arrangement. Bindseil v. Liberty Trust Co., 3d
Cir. 1917, 248 F. 112; Mortgage Loan Co. v. Livingston, 8th Cir. 1930, 45 F.2d
28. From a different approach, taxes that accrue on property while a trustee in
bankruptcy or reorganization is utilizing that property in the conduct of a
business are an expense of administration and a first priority debt under Section
64(a) of the Bankruptcy Act, 11 U.S.C. Sec. 104(a). In this case the judicial
authorization to pay real property taxes as they became due during the period of
the trustee's economic use of Cricklewood comports with a statutory mandate to
accord first priority to these obligations. Cf. Northumberland County v.
Philadelphia & Reading C. & I. Co., 3d Cir. 1942, 131 F.2d 562. In these
circumstances, payment of current Cricklewood taxes out of rental income of
that property would have respected both the equitable interest of Prudential in
those rents and the prescribed priority of claims in bankruptcy. To divert those
rents to the Geyer Building operation was to deprive Prudential of its lawful
security without serving any public interest, or for that matter any private
interest to which Prudential's security could equitably be subordinated. The
interest of the debtor's general creditors in whatever benefit might accrue to
them from successful operation of the Geyer Building did not justify depriving
Prudential of its security interest in Cricklewood rents. Bindseil v. Liberty Trust
Co., supra.
Separately, the trustee urges that some concept of laches should be applied to
defeat Prudential's present claim because, during the eighteen month period
that elapsed between the beginning of the trustee's management of Cricklewood
and the filing of Prudential's petition for leave to foreclose, Prudential did not
take affirmative action to prevent the diversion of Cricklewood rents to pay
Geyer Building expenses. We have pointed out that the court had enjoined all
secured creditors from acting to enforce their liens. Moreover, nothing
happened during or as a result of the trustee's diversion of Cricklewood rents
that would make the presently requested restitution unfair to any interested
party, if the trustee's action was incorrect. Indeed, only the trustee appears to be
complaining that the filing of Prudential's petition has been unduly delayed. We
see no reason to treat this request for restitution differently from a similar
petition that might have been filed more promptly. Accord, Associated Co. v.
Greenhut, 3d Cir. 1933, 66 F.2d 428.
9
Finally, the district court deemed its decision warranted by a stipulation that
had been filed by Prudential in connection with its petition for leave to
foreclose its mortgage. During the course of argument on that petition the court
had inquired of counsel for Prudential whether "the foreclosure will also entail
a deficiency judgment". After a brief colloquy counsel replied that "we would
not be entitled to a deficiency judgment". The court then asked counsel to
stipulate to that effect. Accordingly, counsel stipulated in writing as follows:
10 is hereby stipulated and agreed by the Prudential Insurance Company of

"It
America, Mortgagee of the captioned Debtor, that in event of foreclosure upon its
Mortgage, it will not Petition for a Deficiency Judgment, for the collection of its
debt against any other property of the Debtor including the leasehold interest of the
Debtor in the property known as the Geyer Property, and leased by Debtor from
Urban Redevelopment Authority, adjoining the mortgaged property."
11
A deficiency judgment is an imposition of personal liability upon a mortgagor

for an unpaid balance of a secured obligation after foreclosure of the mortgage
has failed to yield the full amount of the underlying debt. Thus, a proceeding
for a deficiency judgment is an attempt to recover something more than and
distinct from the security provided by the debtor.
12
In this case the basic question is whether the rents that issued from the
mortgaged property were in equity part of the agreed security. If they were, as
we now hold, the secured creditor's present effort to recover them, whether
directly or through the recognition and enforcement of a lien on the property in
which they have been invested, is part of an appropriate effort to vindicate its
own right of property. It is not an effort to enforce liability for debt beyond the
agreed security, for which an approriate legal remedy would be a deficiency
judgment. Accord, Mortgage Guarantee Co. v. Sampsell, 1942, 51 Cal. App.2d
180, 124 P.2d 353. By the same token, in legal contemplation Prudential is not
attempting to satisfy its claim out of the debtor's beneficial interest in the Geyer
Building, an undertaking that it stipulated to forego. Rather, it is seeking to
follow and retrieve the Cricklewood rents which in equity remained its security
and did not become the debtor's property when they were inapproriately
diverted to pay costs of the Geyer Building.
13
The judgment will be reversed.
We find no merit in a motion by the trustee to dismiss this appeal for want of
jurisdiction. Section 416 of Chapter XII, 11 U.S.C. Sec. 816, provides generally
that "the jurisdiction of appellate courts shall be the same as in a bankruptcy
proceeding". Section 24(a) of the Bankruptcy Act, 11 U.S.C. Sec. 47(a), invests
the courts of appeals "with appellate jurisdiction from the several courts of
bankruptcy in their respective jurisdictions in proceedings in bankruptcy, either
interlocutory or final . . . ." See our discussion in In re Imperial "400" National,
Inc., 3d Cir. 1968, 391 F.2d 163, 167-168

In The Matter of PITTSBURGH-DUQUESNE Development Co., A Limited Partnership. Appeal of Prudential Insurance Company of AMERICA, Appellant

Uploaded by

Copyright:

Available Formats

In The Matter of PITTSBURGH-DUQUESNE Development Co., A Limited Partnership. Appeal of Prudential Insurance Company of AMERICA, Appellant

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

In The Matter of PITTSBURGH-DUQUESNE Development Co., A Limited Partnership. Appeal of Prudential Insurance Company of AMERICA, Appellant

Uploaded by

Copyright:

Available Formats

482 F.

In the Matter of PITTSBURGH-DUQUESNE

United States Court of Appeals,

William T. Coleman, Jr., Carl H. Hanzelik, Dilworth, Paxson, Kalish,

This controversy arose in a proceeding under Chapter XII of the Bankruptcy

The debtor had two parcels of income-producing real property, both in

Early in 1971, Prudential petitioned the reorganization court to permit it to

10 is hereby stipulated and agreed by the Prudential Insurance Company of

A deficiency judgment is an imposition of personal liability upon a mortgagor

The judgment will be reversed.

You might also like