Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; Charles E. Woodward, Judge.
Before SPARKS, MAJOR, and TREANOR, Circuit Judges.
This appeal involves an order of the District Court in proceedings for reorganization of the debtor under section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. The facts relevant to the order are set forth here, chronologically:
The debtor owned an eighteen story hotel in Chicago, known as the "LaSalle Towers." On February 28, 1929, the debtor issued bonds in the principal sum of $575,000, secured by first mortgage deed to the trustee therein named upon the real estate in question, and the building thereafter constructed thereon. The bond issue was intended to cover the cost of the construction. Before the building was completed, a default occurred in payment to the contractors and constructors. A bill to foreclose a mechanics' lien was filed on February 19, 1931, in the state court, and other contractors intervened and sought to enforce like liens.
On November 23, 1931, an order was entered in the mechanics' lien proceedings, appointing one Horwich as receiver of the premises with all improvements thereon. He was ordered to take immediate possession with authority to issue receiver's certificates, subject to further order of the court, which should be a first lien upon the premises, and in an amount to be thereafter fixed by the court. The order further provided that the amount of the certificates should be sufficient to pay for the completion of the building and costs of administration, with full power granted to the receiver to enter into contracts to complete the building, and to collect the rents, issues and profits of the premises during the pendency of that action.
A default having occurred in the payment of principal and interest of the bonds, the trustee under the trust deed, on January 12, 1932, filed in the same state court a bill to foreclose it, and later that action was consolidated with the mechanics' lien actions. At that time there was outstanding of the bonds the principal sum of $563,000.
On February 26, 1932, an order was entered in the mechanics' lien suit authorizing the receiver to enter into a rental purchase contract with appellant for the installation, use and possession of furniture, furnishings, equipment, and the like, at a cost not to exceed $65,459.45, including the cost of carpets, linoleums, and floor coverings in the sum of $18,386.80, "which the said receiver was heretofore authorized to purchase and pay for by the issuance of receiver's certificates." The order further provided that the receiver should pay to appellant a sum equal to fifteen per cent of the gross rents, profits and income derived from the operation of the premises, "for the use and possession of the aforesaid furniture, furnishings, and equipment," beginning after a gross income of $20,000 should be collected, and ending when the aggregate amount so paid should equal the purchase price as provided in appellant's contract, with six per cent interest per annum on past due unpaid amounts.
The order also provided that the receiver might deposit with appellant his receiver's certificates of indebtedness in the aggregate principal sum of $20,000, as additional collateral security for the indebtedness due appellant; that the receiver, however, should not pay interest on the certificates of indebtedness held by appellant so long as he should make payment of the monthly rental to appellant, as provided in the rental purchase contract; that when payment should be made in full to appellant, pursuant to the contract, appellant should execute and deliver to the receiver, or to whomsoever the court might direct, "a warranty bill of sale, transferring and assigning to the said receiver title of all of said furniture, furnishings, carpeting, linoleum and other equipment delivered to and installed upon the premises involved herein pursuant to the authority contained in this order; that until payment shall be made as aforesaid title to said personal property shall not be vested in the receiver." On the same day the identical order was entered in the foreclosure proceedings, and a separate order was entered therein ratifying and adopting the orders in the mechanics' lien cause with respect to the authorization and issuance of the receiver's certificates for the completion of the building.
On the same day these orders were entered, appellant as lessor and Horwich, the state court receiver, as lessee, entered into a rental lease of the personal property here involved. By its terms the lessee agreed to pay to lessor as rental, the purchase price agreed upon, by monthly installments and in the manner as set forth in the court's order of that day. It contained this clause: "To secure the payment of the rentals herein reserved the lessee agrees to and does hereby irrevocably grant to the lessor a first and prior lien on and against the first fifteen per cent of the gross rents, issues, profits and income derived monthly from the aforesaid premises, and the lessee further agrees to, and does hereby deliver, assign and deposit with the lessor, as additional collateral security his receiver's certificates of indebtedness in the aggregate principal sum of twenty thousand dollars * * * ."
It further provided that title to the personal property delivered was retained by the lessor, and was not to pass to lessee until the payment of rent, and interest if any, should equal the stipulated purchase price; that in case of default in payment of any rentals reserved the lessor should have the right of immediate repossession, and to retain all moneys theretofore paid by lessee as and for the rental, use and depreciation of the property so delivered.
On April 19, 1932, Horwich resigned as receiver. He was succeeded by one Spencer, who was removed, and he was succeeded by one Weiner on May 15, 1934. The state court ordered Weiner, as receiver, to assume all unpaid contracts and obligations of the prior receivers, after the approval of Spencer's final report, but only to the extent that they be paid out of subsequent net income.
During the pendency of the foreclosure proceedings, on October 24, 1934, the debtor filed a voluntary petition for reorganization under section 77B. On July 5, 1935, the District Court approved its petition as properly filed and appointed Weiner, the state court receiver, as temporary trustee.
On September 9, 1935, at a hearing in the bankruptcy proceedings, an attorney claiming to represent the temporary trustee, though not of record and who later acted as the debtor's attorney, presented a petition to the court on behalf of trustee Weiner, and advised the court that the petition sought the approval of a lease and rental purchase agreement, dated February 26, 1932, between Horwich as receiver and appellant; that the agreement was for the rental of certain furniture installed in debtor's premises; that the temporary trustee desired to accept that lease and to proceed with its required payments. He said there was no objection to such order and that all parties were in agreement. No evidence relative thereto was submitted, nor was the court advised concerning the making of the lease and rental agreement, or the history of the proceedings in the state court, or as to the value or condition of the leased property. The attorney, however, did advise the court that Weiner had previously been the receiver in the foreclosure proceedings, and as temporary trustee in bankruptcy was in possession of the personal property. The court thereupon, relying upon such statement of counsel, entered an order approving the agreement, and directed Weiner as temporary trustee to accept the rental lease and continue to pay appellant in ...