of income, operating expenses (including management fees), and, under the heading "Estimated Replacement Cost", a section for carrying charges, financing, and Builders' and Sponsors' profit and risk.
On February 4, 1965, the FHA agreed to insure all advances to the defendant by the State Bank of Albany for construction of GP 2 (St. 16a); and on that same date the State Bank of Albany loaned $6,790,000 to the defendant, taking defendant's mortgage note (St. 17, J.E. 10) and a mortgage (St. 18, J.E. 11), covering GP 2, and dated February 4, 1965. Also on the same date, defendant entered into a regulatory agreement with the Federal Housing Commissioner (St. 20a, J.E. 15), the defendant agreeing to abide by the restrictions and regulations recited therein in exchange for the FHA's issuance of mortgage insurance to the mortgagee. The mortgagee, the State Bank of Albany, obtained further security for its loan to the defendant in the form of a security agreement and financing statement covering all personal property of GP 2 (St. 19, J.E. 12, 13, 14).
On December 20, 1966 defendant, pursuant to the New Jersey Limited Dividend Housing Corporations Act, entered into an agreement with the City of Jersey City to have GP 2 exempted from all municipal property taxes for 20 years, upon the condition that it pay an annual service charge in lieu of taxes (service charge) within 60 days after the end of each calendar year, which generally equals 15 percent of the gross shelter rents (St. 21a, J.E. 16). This agreement was to result in substantial savings for defendant and relieved it of property taxes equivalent to approximately 30 to 40 percent of gross rents.
On January 19, 1967 defendant received a third Project Income Analysis and Appraisal on FHA form 2264 covering GP 2 (St. 115, J.E. 97) but listing no replacement value because it was issued as part of a rental increase authorization, authorized on or about July 21, 1967. In June 1968 the mortgage covering GP2 was assigned to the Comptroller of the State of New York as Trustee of the Common Retirement Fund, and pursuant to an option exercised by that mortgagee in January 1971, it is now held by HUD (St. 22-24).
Approximately nine months after defendant gave its mortgage note and mortgage for GP 2, the FHA, on November 2, 1965, issued a Project Income Analysis and Appraisal on form 2264 for GP 1, estimating the replacement cost, before rehabilitation, at $7,061,043 (St. 5a, J.E. 1). Then, on December 30, 1966, defendant entered into an agreement to buy GP 1 from the FHA for $100,000 and a note and mortgage for $6,625,000 (St. 6, J.E. 2). The contract of sale required Mr. Padula to guarantee personally any operating deficits of both GP 1 and GP 2 for a period of two years from the closing, to pledge the stock of GP II and GP 3
as security, and to assign to the FHA all dividends from GP 3 for a three-year period for this purpose. FHA, as the seller, disclaimed all representations as to the physical condition or valuation of the building.
On February 10, 1967 defendant took title to GP 1 from HUD pursuant to the aforesaid terms and conditions (St. 8), and gave to HUD its mortgage note, mortgage, and security agreement covering GP 1 (St. 9, 10, 11, J.E. 4-7). On the same date, defendant entered into a regulatory agreement for GP 1 with the Federal Housing Commissioner (St. 12a, J.E. 8) and entered into an agreement with Jersey City to have GP 1 exempt from all property taxation for 20 years upon the condition that it pay within 60 days after the end of each calendar year an annual service charge, again amounting to approximately 15 percent of the gross shelter rent (St. 7a, J.E. 3).
On September 18, 1970 Mid-Center, AHPCC, and Arthur H. Padula, individually, filed a Petition for Arrangement under Chapter XI of the Bankruptcy Act and Leo Neiwirth, Esq. was appointed receiver (St. 26, 27).
The defendant itself was not made a debtor in the Chapter XI proceeding; however, because of the estate's ownership of the defendant's stock, Mr. Neiwirth immediately commenced overseeing defendant's operations, and those of GP 3, and continued to do so until December 18, 1972, when the Plan of Arrangement was confirmed by the bankruptcy court and the debtors were revested with their assets.
Mr. Padula continued to act for defendant in a managerial capacity during the term of the Receivership (T. 94) and no action was taken by the Receiver without Mr. Padula's knowledge and consent. As of the filing of the Chapter XI proceeding, defendant and GP 3 had outstanding and unpaid bills to general creditors of approximately $500,000 (St. 71). Moreover from September 18, 1970 until April 10, 1971 defendant defaulted on the mortgage notes and mortgages held by HUD covering GP 1 and GP 2 by not making a single required payment (St. 35, 70), while it accumulated large sums of cash which were converted to certificates of deposit.
On or about November 16, 1970, negotiations with the Government were commenced by Mr. Padula to persuade HUD to forego action on the existing defaults and defer principal payments for one year. Thus, on November 16, in confirmation of an earlier telephone conversation, Mr. Padula wrote to Julian B. McKay, Acting Director, Loan and Contract Servicing Division of HUD, and advised that he, and his related corporations, with the exception of the defendant, had filed a Chapter XI petition, and that the debtors were prepared to submit a plan to the bankruptcy court, to fund it, and be discharged on or about December 31, 1970 (St. 31a, J.E. 90). He asked that HUD agree to a workout agreement whereby the amortization and reserve for replacement payments due under the GP 1 and GP 2 mortgages would be waived for one year. Extensive discussions were then held between Mr. Padula and various HUD representatives. Mr. Padula stressed the loss the Government would suffer if forced to sell the buildings after foreclosure, and that foreclosure would mean loss of the property tax exemption from Jersey City. Thereafter, on February 23, 1971 Mr. Neiwirth wrote a letter to Mr. McKay in which he said that, as Mid-Center's bankruptcy receiver, he was managing the defendant and that on February 9, 1971 the bankruptcy court had approved a Plan of Arrangement (St. 31b, J.E. 24). Mr. Neiwirth advised that Mr. Padula needed $1,500,000 to fund the approved Plan and requested that HUD recast the five mortgages it held on GP 1, 2 and 3 and the Weequahic Park Tower and Plaza by increasing them a total of $1,425,502 and waiving the amortization payments until April 1972. Discussions continued between Mr. Padula and HUD officials until April 1971. On April 1, 1971 Mr. McKay addressed a letter to Mr. Padula questioning his good faith in his offer of November 16, 1970 (J.E. 91). Nevertheless, on April 16, 1971 Robert P. Kalish, the Deputy Director of the Loan and Contract Servicing Division of HUD, wrote to Mr. Padula setting forth the minimum conditions which HUD insisted would be required before it would agree to forebear on foreclosing the mortgages (St. 33, J.E. 26):
1. Delinquent service charges to the date of any Work-Out Agreement must be brought current by a lump sum cash payment. We calculate this figure to be $42,530 as of March 31, 1971.
2. All real estate taxes must be current.