United States Court of Appeals, First Circuit

516 F.
2d 154
In the Matter of COLONIAL REALTY INVESTMENT CO. et

al., Debtors.
CHARLESTOWN SAVINGS BANK, a Secured Creditor in
these
Proceedings, Appellant,
v.
Gordon A. MARTIN, Jr., Trustee of Colonial Realty
Investment
Co., et al., Appellees.
No. 74-1402.
United States Court of Appeals,

First Circuit.
Argued Jan. 7, 1975.
Decided May 15, 1975.
Jon D. Schneider, Boston, Mass., with whom Henry B. Shepard, Jr., and
Goodwin, Procter & Hoar, Boston, Mass., were on brief, for appellant.
Daniel M. Glosband, Boston, Mass., with whom Widett & Widett, John J.
Curtin, Jr., and Bingham, Dana & Gould, Boston, Mass., were on brief,
for appellees.
Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit
Judges.
COFFIN, Chief Judge.
Charlestown Savings Bank appeals from an order of the District Court for
Massachusetts requiring it to turn over to the trustees of the debtors five
apartment complexes of which it had taken possession as a mortgagee for
default in the payment of mortgage obligations.
Debtors are three limited partnerships managed and controlled by the same two
general partners. They appear to be the legal or equitable owners of between

seventy and eighty properties containing some 9,000 apartment units and
encumbered by mortgages held by over one hundred mortgagees.1 More than
seven thousand limited partners invested approximately $30,000,000 in debtors.
3
On September 20, 1974, appellant took possession of the five properties

involved in the present appeal. Legal title to four of the properties was held by
nominee trusts of which debtors' general partners were the trustees. Debtors
held legal title to the fifth property. On September 23, 1974, debtors filed
petitions for arrangement under Chapter XII of the Bankruptcy Act, 11 U.S.C.
801 et seq., in which they requested that the court enjoin mortgagees, lessors
under sale and leaseback arrangements and other secured creditors from taking
possession of property alleged to belong to the debtors, and that mortgagees in
possession be required to return such property to the control of the debtors. On
September 24, 1974, the district court ordered tenants in property owned by
debtors to pay their October 1st rent to debtors. On September 25, the district
court entered a temporary restraining order enjoining the commencement or
continuation of foreclosure proceedings by all secured creditors. On September
30, appellant appeared specially to move for modification of the court's order
with respect to rental payments and to request that mortgagees in possession be
permitted to continue in possession. In the ensuing month the district court held
half a dozen hearings on the motions of various creditors regarding the
immediate disposition of property legally or equitably owned by debtors. On
October 31, 1974, the court entered the formal turnover order of which
appellant seeks review.
Appellant contends that the summary jurisdiction of the district court under
Chapter XII of the Bankruptcy Act does not encompass turnover orders directed
to mortgagees in possession. Appellant's argument is in essence a challenge to
the statutory power of the court, for if the Act empowers the court to order a
turnover of property in the hands of a mortgagee then a dispute whether such an
order is appropriate is a "controversy in bankruptcy" apt for summary
disposition. Taylor v. Voss, 271 U.S. 176, 181, 46 S.Ct. 461, 70 L.Ed. 889
(1926); Katchen v. Landy, 382 U.S. 323, 327-29, 86 S.Ct. 467, 15 L.Ed.2d 391
(1966); Continental Illinois National Bank & Trust Co. v. Chicago Rock Island
& Pacific Ry. Co., 294 U.S. 648, 681-82, 55 S.Ct. 595, 79 L.Ed. 1110 (1935); 9
Collier on Bankruptcy P 3.01, at 795-96 (hereinafter, Collier).
In proceedings under Chapters I-VII of the Act, 11 U.S.C. 1-112, bankruptcy

courts " . . . have summary jurisdiction to adjudicate controversies relating to
property over which they have actual or constructive possession." Thompson v.
Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S.Ct. 628, 630, 84 L.Ed. 876
(1940); Cline v. Kaplan, 323 U.S. 97, 98-99, 65 S.Ct. 155, 89 L.Ed. 97 (1944).
Where, as here, a mortgagee has taken possession of property of the debtor
prior to filing, the bankruptcy court has no power under Chapters I-VII to order
a turnover. Thompson v. Magnolia Petroleum Co., supra ; Cline v. Kaplan,
supra ; 4a Collier P 70.16. The only court of appeals which has addressed the
issue here presented applied, without explanation, the precedents pertinent to
Chapters I-VII,2 ignoring language in Chapter XII which, at least when read
literally, describes powers very different from those set forth in Chapters I-VII.
507, 11 U.S.C. 907; see infra. Section 402, 11 U.S.C. 802, states that
Chapters I-VII shall apply to Chapter XII proceedings, but only " . . . insofar as
they are not inconsistent or in conflict with the provisions . . . " of Chapter XII.
The crucial question remains whether anything in Chapter XII empowers a
court to enter an order such as that from which appellant seeks relief. If there is
such authority it is inconsistent with Chapters I-VII, and would displace those
provisions for Chapter XII proceedings. Thus, we turn to the Act itself, and its
history, to determine what powers Congress intended to confer on the Chapter
XII court. United States v. New England Coal and Coke Co., 318 F.2d 138,
142-43 (1st Cir. 1963).
6
The Chandler Act enacted in 1938 effected a general modernization of the

Bankruptcy laws. Pub.L.No.696, 75th Cong., 3d sess. The most substantial
changes wrought by the Chandler Act involved not the liquidation provisions of
the existing law, but those dealing with reorganizations, compositions and
arrangements, 12, 74 and 77B of the then existing law.3 Congress sought
both to remedy abuses prevalent under existing law, and to provide effective
machinery for the rehabilitation of weakened but still viable business
enterprises.4 Chapter XII was enacted principally " . . . to furnish the same
relief to individual debtors as is now available to corporations under Section
77B or under Chapter X of this bill." H.R.Rep.No.1409, 75th Cong., 1st sess.
(1936) at 51.5 Both Chapters X and XII are formulated to affect the rights of
secured as well as unsecured creditors. An arrangement under Chapter XII must
"7 . . . include provisions modifying or altering the rights of creditors who hold debts
secured by real property or a chattel real of a debtor . . . ." 461(1), 11 U.S.C.
861(1).
8
Relief under Chapter X is limited to corporations, 106(5), 11 U.S.C. 506(5),

while Chapter XII is available to a person " . . . other than a corporation . . . .",
406(6), 11 U.S.C. 806(6). Each of the two Chapters contains identical
language vesting the court with " . . . exclusive jurisdiction of the debtor and
his property, wherever located", 111 and 411, 11 U.S.C. 511 and 811,
and stating that the
"trustee appointed under this chapter, upon his qualification, or if a debtor is

9continued in possession, the debtor, shall become vested with the rights, if any, (of a
receiver or trustee appointed in a prior mortgage foreclosure or equity proceeding in
any other court) in such property and with the right to the immediate possession
thereof. The trustee or debtor in possession shall also have the right to immediate
possession of all property of the debtor in the possession of a trustee under a trust
deed or a mortgagee under a mortgage." 257 and 507, 11 U.S.C. 657 and 907
(emphasis added).6
10
The Senate report states that section 507 as in the case of "the analogous
section 257 of Chapter X" includes "provisions dealing with the divesting of the
rights and possession of a prior receiver, indenture trustee, and mortgagee in
possession." Sen.Rep.1916, 75th Cong., 3d sess. (1938) at 9.
11
We deem the language and history we have described persuasive indicia of

Congress' intent to equip courts acting under Chapters X and XII with similar
powers with which to execute similar missions. We see no cause to reject in our
interpretation of Chapter XII the reasoning of those courts which have held
Chapter X to confer upon the court summary jurisdiction over property in the
hands of a mortgagee.7 The purpose of Chapters X and XII is to restore, not to
dismantle, the economically distressed debtor. The power to prevent secured
parties from availing themselves of their contractual remedies upon default, and
to compel those creditors who have acted with sufficient celerity to be in
possession at the time of filing to return the debtor's property is essential to
preserve the possibility of a successful rearrangement of the debtor's affairs.
Little hope of resuscitation would remain for the debtor disembowelled just
prior to filing. The explicit language of section 507 affording the debtor or
court appointed trustee the right to immediate possession of " . . . all property of
the debtor in the possession of . . . a mortgagee under a mortgage" must be read
to mean what it says, for it is an integral part of the machinery constructed by
Congress in Chapter XII.8
12
Our conclusion that a Chapter XII court has summary jurisdiction to order a
turnover of property in the hands of a mortgagee also compels our rejection of
appellant's argument that because Massachusetts law treats a mortgagee as legal
owner of mortgaged property, Cooperstein v. Bogas, 317 Mass. 341, 58 N.E.2d
131 (1944), Section 507, 11 U.S.C. 907, does not permit the entry of such an
order in Massachusetts. A national policy enacted by Congress in the exercise
of its constitutional authority to establish "uniform Laws on the subject of
Bankruptcies", U.S.Const. art. I, 8, cannot be impeded by the idiosyncracies
of local property laws. John Hancock Mut. Life Ins. v. Casey, 134 F.2d 162,
163 (1st Cir.), cert. denied, 319 U.S. 757, 63 S.Ct. 1176, 87 L.Ed. 1709 (1943);
6A Collier P 14.03, at 1107.

13
Nor do we have any difficulty in concluding that the trustee is entitled to

receive the rents from the subject properties. There is nothing in Chapter
XIIfrom which one may infer an intent to distinguish between property and the
income derived therefrom, and indeed such a distinction would be an anomaly
in a chapter designed to enable the court to preserve the debtor's property while
efforts to secure an arrangement continue. The cases decided under Chapter X
support this view. In re Franklin Garden Apartments,124 F.2d 451 (2d Cir.
1941); John Hancock Mut. Life Ins. v. Casey, supra ; In re Philadelphia &
Reading Coal & Iron Co., 117 F.2d 976 (3d Cir. 1941).
14
Even though the trustee is entitled to receive rents, however, this does not end
our inquiry. Appellant objects to the district court's order which, while
requiring accounting by specific properties, and preventing expenditures for
other properties, permits the expenditure of income derived from the mortgaged
properties
"15. . . in accordance with an allocation subsequently determined by this court, for

expenses of administration related to these proceedings, including . . . without
limitation, centrally incurred overhead, general and administrative expenses."
16
Appellant's fear is that rentals from mortgaged properties may be siphoned off
in what may prove to be futile efforts to secure a satisfactory arrangement.
While it has no objection to applying rental income to operating costs, taxes,
maintenance, and mortgage payments objectives of direct benefit to secured
creditors its position is that to permit rental income to be used for other
purposes is to treat it "as part of the general assets in the trustee's hands", which
we have forbidden in John Hancock Mut. Life Ins. v. Casey, 139 F.2d 207, 209
(1st Cir. 1943).
17
We think there is a tolerable middle ground, going beyond the use of rental
income for the immediate and direct benefit of several creditors, but not
approaching a treatment as "general assets", which serves the rehabilitative goal
of Chapter XII while respecting the property rights of the secured creditors.
The cases which have grappled with the problem of ascertaining the costs
which may be paid out of income from mortgaged property have not given us
any clear or consistent principle.9 We do find suggestive the approach of First
Western Savings and Loan Ass'n v. Anderson, 252 F.2d 544 (9th Cir. 1958).
Although appellees have urged that this case teaches that the precise allocation
should be left to the district court, we do not read it so expansively. While the
court describes in expansive terms the discretion of the district court to do what
is "reasonable and fair", 252 F.2d at 548, it hedges that language with a list of
factors to be considered by the district court, including anticipated and actual
benefit resulting to the secured creditors from the activities for which the costs
are incurred. 252 F.2d at 548 n. 8.
18
While we find ourselves sympathetic with our reading of the approach in First
Western, the order here appealed from raises issues not there considered. For
First Western dealt with a cost allocation at the end of reorganization efforts,
when all the facts were known. Here we deal with an order entered in the early
stages of reorganization efforts when it is impossible to predict with assurance
the outcome of such efforts. The issue confronting us is the extent to which the
interests of secured creditors may be affected to further the possibilities of
rehabilitation of debtors.
19
The policy of Chapter XII is rooted in society's interest in substituting

arrangement for liquidation where possible and confers powers on the court to
insure a fair chance to realize a viable arrangement. It seems to us, consistent
with the general scheme of Chapter XII, that if, at this threshold stage, a
determination of probable benefit (or, at least, likely absence of injury) to
secured creditors is made, subject to revision in the light of changing
circumstances, secured creditors are protected against serious irreversible harm
while permitting arrangement explorations to go forward.
20
We therefore hold that if it is contemplated that income from secured properties

be chargeable with expenses of administration (other than operating costs,
taxes, maintenance and mortgage payments), including efforts to work out an
arrangement, there be a preliminary inquiry at the earliest possible time into the
probability of benefit and detriment to secured creditors from proposed
proceedings and an explicit preliminary finding of probable benefit or, at least,
no probable injury. The court's inquiry, necessarily a narrow one at this
preliminary stage, need proceed only so far as is necessary to assure that the
cost of activities which cannot reasonably be expected to benefit a secured
creditor and which he has not caused to be incurred are not to his detriment
charged to the income from property securing his claim.10 The finding should
precede any diversion of rents and should be open to reconsideration and
revision in the light of changing circumstances. In the instant case, since we
only now announce this holding, the only course open to us is to direct the
district court, which has continuing oversight of these proceedings, to make
such a determination expeditiously.11
21
Appellant next argues that the district court should not have entered its order
without first conducting full evidentiary hearings and making findings.
Appellant, to hasten appellate review, chose to proceed without a transcript of

the proceedings in the district court. Without such a record we will not review
the sufficiency of those proceedings. F.R.A.P. 10(b); Chernack v. Radlo, 331
F.2d 170, 171 (1st Cir. 1964); 9 J. Moore, Federal Practice P 210.05. There can
be no doubt of the court's power to act with dispatch in entering orders to
protect the debtor's property during the pendency of arrangement proceedings.
It would be inimical to the purposes of Chapter XII to require that the district
court become embroiled in comprehensive evidentiary hearings at the inception
of the proceedings. Section 428, 11 U.S.C. 828, automatically stays
proceedings to enforce any lien on the real property of the debtor upon the
filing of a Chapter XII petition. Meyer v. Rowen, 181 F.2d 715, 716 (10th Cir.
1950). Section 507, 11 U.S.C. 907, gives the debtor or court appointed trustee
an immediate right to possession of property in the hands of a mortgagee.
22
Within a reasonable time, however, upon motion of a secured creditor, the court
should conduct hearings adequate to determine whether the petition of the
debtor has been filed in good faith, and whether there is a sufficient possibility
of a successful arrangement to justify whatever risk to the collateral of secured
parties may be entailed.12 In re Franklin Garden Apartments, supra ; Ruskin v.
Griffiths, 250 F.2d 875, 877 (2d Cir. 1958).13
23
Finally, appellant argues that four of the five properties which it was compelled
to turn over to the trustees were not property of the debtors at all, as they were
owned of record by trusts not debtors in the proceedings. Here again review is
hampered by the abbreviated record on appeal. We proceed only so far as to say
that we deem it implicit in 507, 11 U.S.C. 907, that other than legal
ownership is sufficient to confer jurisdiction upon the Chapter XII court.
24
Affirmed.
Appellant has pursued its appeal on the basis of a skeletal record rather than
countenance the delay entailed in securing a transcript of the limited hearings
held by the district court. Our statement of the facts is drawn chiefly from the
briefs
In re Decker, 465 F.2d 294 (3d Cir. 1972). Both appellant and appellees
acknowledge that the extent of the power of a Chapter XII court over
mortgagees in possession is not wholly self-evident, particularly in light of the
astounding paucity of authority on Chapter XII, and they have assisted us
greatly by submitting thoughtful and straightforward briefs
Section 77B had been enacted as an emergency measure only four years earlier.
Act of June 7, 1934, 48 Stat. 911
See 6 Collier PP 0.05-0.08; 9 Collier P 2.01(4), for a detailed analysis of the

history of the relevant provisions of the Chandler Act. See also National
Bankruptcy Conference Analysis of H.R. 12889 (the Chandler Act), Committee
Print, 36-101 passim. Gerdes, Corporate Reorganizations Changes Effected by
Chapter X of the Bankruptcy Act, 52 Harv.L.Rev. 1, 2-3
The draftsmen of the Chandler Act viewed Chapter XII as a provision which
would become increasingly important as the growth of corporate tax burdens
encouraged non-corporate property ownership, a pattern then prevalent only in
Chicago. Weinstein, The Bankruptcy Law of 1938, A Comparative Analysis at
296
Sections 187 and 442, 11 U.S.C. 587 and 882, describe in identical terms the
general duties and powers of trustees appointed under Chapters X and XII
In re Franklin Garden Apartments, 124 F.2d 451, 454 (2d Cir. 1941); John
Hancock Mut. Life Ins. Co. v. Casey, 134 F.2d 162, 163 (1st Cir.), cert. denied,
319 U.S. 757, 63 S.Ct. 1176, 87 L.Ed. 1709 (1944); Reconstruction Finance
Corp. v. Kaplan, 185 F.2d 791, 793-95 (1st Cir. 1950)
We are unaware of any Chapter X precedent to the contrary, although there is
disagreement regarding the findings required prior to the entry of a turnover
order. Compare In re Riker Delaware Corp., 385 F.2d 124 (3d Cir. 1967) with
Ruskin v. Griffiths, 250 F.2d 875 (2d Cir. 1958). Ambiguity has been injected
into the situation by use of the term "plenary" to describe the hearing necessary
before the entry of a turnover order where the context indicates use of the term
in a descriptive rather than a jurisdictional sense. See, e. g., In re Flying W
Airways, Inc., 442 F.2d 320, 323 (3d Cir. 1971).
For all the similarities between Chapters X and XII appellant would have us
abjure the analogy between the two. There are, appellant notes, important
powers described in Chapter X absent from Chapter XII. It is true that the two
chapters are different. Chapter X is a palimpsest bearing myriad traces of older
provisions. 6 Collier PP 0.01-0.08. Chapter XII, though lineally descended
from earlier law, was essentially new in 1938. See note 5, supra. The history of
the Chandler Act and the context of the parallel provisions diminish, in our
view, the significance of the differences
See, e. g., In re Franklin Garden Apartments, 124 F.2d 451, 454 (2d Cir. 1941)
(administrative expenses payable out of rents only if mortgaged property "has
received benefit through the proceeding . . . ."); John Hancock Mut. Life Ins. v.
Casey, 139 F.2d 207, 209 (1st Cir. 1943) (rents not part of "general assets"); In
re Philadelphia & Reading Coal & Iron Co., 117 F.2d 976, 978 (3d Cir. 1941)
(costs of operation and administration of debtor's estate payable out of rents);
United States v. Henderson, 274 F.2d 419, 423 (5th Cir. 1960) ("costs and
expenses from which the mortgagee benefited or which might reasonably be
expected to benefit" him chargeable to mortgaged property in discretion of
district court); First Western Savings and Loan Ass'n v. Anderson, 252 F.2d
544, 548 (9th Cir. 1958) (" . . . court should balance the misfortune of having
some allowances go unpaid against the possible inequity of charging them all
against mortgaged property.")
All the cited cases deal with allowances in Chapter X proceedings. The relevant
provisions in Chapter XII are, however, almost exact replicas of similar
provisions in Chapter X. Compare 241, 242, 244 and 246, 11 U.S.C. 641,
642, 644 and 646 with 491, 492, 493 and 495, 11 U.S.C. 891, 892, 893
and 895.
10
The considerations set forth in First Western Savings and Loan, 252 F.2d at
548, which we have discussed, supra, seem to us appropriate to the
determination which the district court must make
11
Here, where six months have passed since the entry of the district court's order,
time in which the trustees have surely collected extensive data on debtors'
status, the court should have little difficulty in making that determination
12
This is the standard determination which the district court already

contemplates. It is not to be confused with the earlier determination we have
called for, supra, concerning the prospective impact of administrative costs on
secured creditors
13
A contrary view has been expressed with regard to Chapter X, principally by

the Third Circuit. In re Riker Delaware Corp., 385 F.2d 124, 125-26 (3d Cir.
1967); In re Flying W Airways, Inc., 442 F.2d 320, 323-24 (3d Cir. 1971); n. 7,
supra. But see Murphy, Restraint and Reimbursement: The Secured Creditor in
Reorganization and Arrangement Proceedings, 30 Bus. Lawyer 15, 31

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516 F.

In the Matter of COLONIAL REALTY INVESTMENT CO. et

United States Court of Appeals,

general partners. They appear to be the legal or equitable owners of between

On September 20, 1974, appellant took possession of the five properties

In proceedings under Chapters I-VII of the Act, 11 U.S.C. 1-112, bankruptcy

The Chandler Act enacted in 1938 effected a general modernization of the

Relief under Chapter X is limited to corporations, 106(5), 11 U.S.C. 506(5),

"trustee appointed under this chapter, upon his qualification, or if a debtor is

We deem the language and history we have described persuasive indicia of

6A Collier P 14.03, at 1107.

Nor do we have any difficulty in concluding that the trustee is entitled to

"15. . . in accordance with an allocation subsequently determined by this court, for

The policy of Chapter XII is rooted in society's interest in substituting

We therefore hold that if it is contemplated that income from secured properties

Appellant, to hasten appellate review, chose to proceed without a transcript of

See 6 Collier PP 0.05-0.08; 9 Collier P 2.01(4), for a detailed analysis of the

This is the standard determination which the district court already

A contrary view has been expressed with regard to Chapter X, principally by

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