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In re Bankers Trust

October 31, 1968

IN THE MATTER OF BANKERS TRUST, REAL ESTATE INVESTMENT TRUST OF INDIANA, EQUITABLE REAL ESTATE INVESTMENT TRUST, FIDELITY REAL ESTATE INVESTMENT TRUST, REAL ESTATE INVESTMENT TRUST OF FLORIDA, KINGS CROWN TALLY-HO INN, INC., REAL ESTATE INVESTMENT SECURITY COMPANY, INC., AND SOUTHWAY UTILITY CORPORATION, DEBTORS


Kiley, Cummings and Kerner, Circuit Judges.

Author: Cummings

CUMMINGS, Circuit Judge.

This case involves the authority to file and propriety of retaining the Chapter X reorganization petition of Real Estate Investment Trust of Florida ("R.E.I.T.") in the United States District Court for the Southern District of Indiana, instead of dismissing it for want of proper venue or transferring it to the United States District Court for the Southern District of Florida.

On October 8, 1966, Bankers Trust, an Indiana real estate investment trust, R.E.I.T. and five subsidiaries of Bankers Trust filed petitions for reorganization under Chapter X of the Bankruptcy Act (11 U.S.C. ยง 501 et seq.) in the United States District Court for the Southern District of Indiana. Later that month, Southway Utility Corporation, another subsidiary of Bankers Trust, filed its reorganization petition. In the same month, the District Court entered orders approving all eight petitions, consolidated them in the Bankers Trust proceeding, and appointed American Fletcher National Bank and Trust Company of Indianapolis as trustee for the debtors. On November 22, 1966, the court entered an order turning over the assets of twenty-four of the debtors' subsidiary corporations to the reorganization trustee. Similar turnover orders were subsequently entered with respect to two other subsidiary corporations.

R.E.I.T.'s reorganization petition described R.E.I.T. as a business trust organized and existing under the laws of the State of Florida. R.E.I.T. likened its status to that of a corporation. It claimed that its principal place of business was in Kokomo, Indiana, and that it was a subsidiary of Bankers Trust. Its principal assets were described as the King's Crown Inn of Fort Lauderdale, Florida, the Colony Shopping Center of St. Petersburg, Florida, and the Medical Towers Building of Fort Lauderdale, Florida. R.E.I.T. was also said to have an interest in assets of five other subsidiaries of Bankers Trust. Its principal liabilities were stated to be mortgages on the King's Crown Inn, the Colony Shopping Center and the Medical Towers Building. According to the petition, R.E.I.T. had about 111,893 shares of stock or certificates of beneficial interest outstanding. The petition was filed by Sigmund J. Beck, Matthew E. Welsh and William E. Shumaker, claiming to be R.E.I.T.'s trustees.

R.E.I.T. was organized under a declaration of trust dated February 1, 1962, executed in Indiana and filed in Florida. According to this instrument, the principal office of R.E.I.T. was in St. Petersburg, Florida, which is within the territorial district of the United States District Court for the Southern District of Florida.

In December 1966 and January 1967, appellants Morgan H. Hundley of St. Petersburg, Florida, and First Federal Savings and Loan Association of Miami, Florida, respectively filed motions to dismiss the reorganization petition of R.E.I.T., asserting that the District Court had no jurisdiction because R.E.I.T.'s property and principal place of business were in Florida and because it was not a subsidiary of Bankers Trust.*fn1 Hundley was a holder of beneficial interests in R.E.I.T., and First Federal was the mortgagee of its Medical Towers Building.

In May 1967, the District Court held an evidentiary hearing with respect to the motions to dismiss. The evidence showed that R.E.I.T.'s three original trustees resigned on September 12, 1966, and purportedly elected Messrs. Beck, Welsh and Shumaker as successor trustees. R.E.I.T.'s original trustees had organized Bankers Trust and three other Indiana real estate investment trusts, all of them debtors in the consolidated reorganization proceeding. They directed the business of the eight debtors and twenty-six subsidiaries from their Kokomo, Indiana, offices.

In late September 1966, appellant Hundley, owning 1,350 R.E.I.T. shares, wrote the other shareholders of that trust, requesting their proxies to elect trustees to replace Messrs. Beck, Welsh and Shumaker. At a meeting on October 6, 1966, the proxies obtained by Hundley and other shares (assertedly totalling 62,498 shares in all) were voted to remove said trustees and to elect Hundley, Donald McCaffrey and Peter K. Barskis as the trustees.

At the conclusion of the evidentiary hearing, the District Court found that the September 12, 1966, election of the original trustees' successors was ineffective for want of compliance with some of the terms of the declaration of trust. The court found that the original trustees had "abdicated and abandoned their position as trustees" and that the successor trustees had acted in good faith in filing the reorganization petition in Indiana. The District Court also found that Messrs. Beck, Welsh and Shumaker exercised the powers and duties of R.E.I.T. trustees between their ineffective election on September 12, 1966, and the filing of the Chapter X petition on October 8, 1966. The court pointed out that the successor trustees were faced with great difficulties in managing R.E.I.T.'s affairs during this period. He found that they had successfully deferred the execution sale of R.E.I.T.'s Medical Towers Building in Fort Lauderdale, and that they had received correspondence from R.E.I.T.'s mortgagees threatening the immediate institution of foreclosure proceedings against its properties. The court also found that under the terms of the trust Messrs. Hundley, Barskis and McCaffrey were not properly elected on October 6, 1966.

The findings as to the invalidity of both purported elections are not contested on this appeal. The court concluded that Messrs. Beck, Welsh and Shumaker were never validly removed as trustees and were de facto trustees of the trust and were authorized to file the reorganization petition.

In addition, the court found that R.E.I.T.'s original trustees had not effectively changed its principal place of business from St. Petersburg, Florida, to Kokomo, Indiana, but that R.E.I.T.'s business affairs were carried on from Kokomo after April 1964. Its principal assets were determined to be in Florida. The court found that R.E.I.T. was not a subsidiary of Bankers Trust, being "an independent, separate Trust set up under the laws of the state of Florida." It found that the original trustees breached their fiduciary duties to R.E.I.T.'s shareholders through control of R.E.I.T.'s affairs by means of subsidiaries owned and controlled by Bankers Trust and the other three Indiana trusts involved in this reorganization proceeding, and that the operating subsidiaries of Bankers Trust were running the daily affairs of R.E.I.T. The court said that any alleged operating agreement between Bankers Trust and R.E.I.T. was not in conformity with Florida law and was therefore illegal. Thus the court concluded that venue did not lie in Indiana under either Section 128 or 129 of the Bankruptcy Act (note 1, supra). However, noting that a transfer of R.E.I.T.'s reorganization petition to the Southern District of Florida would entail dual administration, additional expense, and further delays, the court held that R.E.I.T.'s reorganization petition, as filed by the de facto trustees, should continue in the Southern District of Indiana. Accordingly, the motions to dismiss R.E.I.T.'s petition were denied.

The Securities and Exchange Commission participated in the hearing below and urged that R.E.I.T.'s petition be retained by the District Court. In this Court, the Commission filed a brief and participated in the oral argument, urging affirmance.

The de facto Trustees Had the Power to File R.E.I.T.'s Reorganization Petition

Appellants contend that Messrs. Beck, Welsh and Shumaker were not de facto trustees and that in any event they were not empowered to file R.E.I.T.'s reorganization petition. We disagree.

The parties concede that two elements are essential before these trustees can be deemed de facto trustees:

1. The office or position must be assumed under color of right or title.

2. Those claiming de facto status must exercise the duties ...


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