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Francis Shunk Brown 3 RD Esq. Trustee v. Presbyterian Ministers Fund

decided: September 7, 1973.



Biggs, Hastie and Gibbons, Circuit Judges.

Author: Biggs

BIGGS, Circuit Judge.

This is a suit brought by Francis Shunk Brown, 3rd, Esquire, Trustee in Bankruptcy for I. J. Knight Realty Corporation (Knight), against Presbyterian Ministers Fund, Inc. (Presbyterian) to recover $97,789.45, together with interest and costs for the benefit of the estate. The following facts are largely undisputed, appearing from the record or stipulated by counsel, or appearing from letters of counsel, or from admissions at a post-argument conference.*fn1


In December, 1955, Presbyterian loaned Knight $200,000, secured by a mortgage on the latter's sole physical asset, real estate known as the Fretz Building, located at 10th and Diamond Streets in Philadelphia. Between 1959 and 1962, Knight was in default in amortizing the mortgage, and when in September of 1962, Knight defaulted on the interest due as well, Presbyterian became mortgagee in possession.

The shares of stock of Knight were at this time held as follows: Nathan Hoffman, 325 shares; Jacob Hoffman (Nathan's son), 150 shares; Marvin Hoffman (Nathan's son), 112 1/2 shares; Seymour Hoffman (Nathan's son), 112 1/2 shares. Nathan Hoffman was President of the corporation and Seymour Hoffman was Secretary. Both Nathan and Seymour were directors.*fn2

On November 16, 1962, when the principal balance remaining on the mortgage was $149,000, Presbyterian agreed to sell the mortgage to Nathan Hoffman for $65,000. This agreement was entered into with the knowledge and approval of all of Knight's officers, directors, and shareholders.*fn3 Later on that same day, Knight filed a petition in bankruptcy stating that the corporation was unable to meet its debts as they matured and proposing an Arrangement pursuant to Chapter XI of the Bankruptcy Act. Brown was appointed Receiver and authorized by then District (now Circuit) Judge Van Dusen to conduct the business of Knight. Still later on the same day, Presbyterian gave to Seymour Hoffman a letter reflecting the agreement and acknowledging receipt of $2,500 on account of the $65,000. An additional $2,500 was to be paid no later than November 26, 1962, and settlement was to be made by January 15, 1963.*fn4 Presbyterian knew of Knight's bankruptcy petition and that Nathan and Seymour Hoffman were officers and shareholders of Knight. Receiver Brown, on the other hand, was unaware of the agreement between Presbyterian and the Hoffmans.

On November 26, 1962, Presbyterian acknowledged receipt of another $2,500 payment from Seymour Hoffman toward the purchase price.*fn5

On January 1, 1963, the Fretz Building was totally destroyed by fire. With the advent of insurance proceeds (which amounted to $800,000), Presbyterian deemed itself to be in an excellent position to receive full payment on its mortgage loan if it could avoid its contractual commitment to settle the mortgage for $65,000. J. B. Millard Tyson, Esq., attorney for Presbyterian, testified at an October 16, 1963 hearing before the Referee in Bankruptcy that "then on the first of January the fire occurred. I promptly told Mr. Hoffman that the basis for having given him this agreement was now over. We did not intend to go through with any sale of the mortgage. * * * So the letter [of November 16, 1962, from Presbyterian to Seymour Hoffman] was still outstanding, but we refused to go through with it. The Ministers' Fund discussed it and decided the purpose was to take this white elephant off our hands, and now we would just be exchanging really two and a half dollars for one dollar. So we wouldn't go through with it at that point."*fn6 On May 13, 1963, in consideration of the return of the $5,000 "and other considerations,"*fn7 Nathan and Seymour Hoffman agreed to and purported to release Presbyterian from its obligation to sell the Hoffmans the mortgage.

On May 14, 1963, Knight was declared bankrupt and Receiver Brown was elected Trustee of the bankrupt corporation. Brown was still not aware at this time of the contract to purchase the mortgage, nor its purported cancellation. An insurance settlement of $800,000 was reached with the insurers, Lloyd's of London and other British companies, and on August 23, 1963, Brown petitioned the bankruptcy court for leave to compromise the insurance claims. Hearings were held on this matter on October 16, October 28, and November 7, 1963, and it was then that Brown first learned of the Presbyterian-Hoffman deal and its purported recision. Thereafter, on February 3, 1964, Brown filed an Amended Petition for Leave to Compromise Claim stating in part:

7. Against this background the British Carriers have agreed to pay the full compromise figure of $800,000.00 to your Petitioner upon the following terms and conditions: * * *

(c) That Presbyterian Ministers' Fund release all claims which it may have against the British Carriers under insurance policy No. 83872.

8. * * * The Presbyterian Ministers' Fund refuses to give such a release to the British Carriers unless it is paid the current amount due on such mortgage or unless some other arrangement is made which will insure that it will be paid in full in the event that your Petitioner is unsuccessful in asserting his ...

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