Stephan v. Merchants Collateral Corp. , 256 N.Y. 418 ( 1931 )

Plaintiff commenced this representative action on behalf of himself and all other stockholders of the Merchants Collateral Corporation by the service of the summons on January 28, 1929. He seeks a judgment that the other defendants pay to the defendant Merchants Collateral Corporation the damages sustained by reason of alleged misconduct of defendant officers and directors of the corporation, and that a receiver be appointed of the property of the corporation.

The defendant Merchants Collateral Corporation was adjudicated a bankrupt on the 25th day of January, 1928, by the United States District Court of the Eastern District of Pennsylvania, and a trustee was appointed on February 17, 1928. The trustee accounted and was discharged of his trust on September 24, 1928. Thereafter on January 28, 1929, this action was instituted.

Generally speaking, the title to all the property of the bankrupt passed to the trustee. The question is whether the stockholder's action will lie.

Section 2 (8) of the Bankruptcy Act (11 U.S.C.A. § 11 [8]) invests courts of bankruptcy with jurisdiction to "close estates, whenever it appears that they have been fully administered * * * and reopen them whenever it appears they were closed before being fully administered." Section 11-d (11 U.S.C.A. § 29 [d]) provides that "suits shall not be brought by or against a trustee of a bankrupt estate subsequent to two years after the estate has been closed." But section 11-d was never meant to allow the bankrupt to appropriate property which the trustee should have taken possession of before the estate was closed, and a motion to reopen the estate may at any time be addressed to the sound discretion of the District Court (Matter of Schreiber, 23 Fed. Rep. [2d] 428) and in any event two years had not elapsed before the estate was first closed.

A new trustee should be elected for the purpose of administering the unadministered assets. (Matter of Minners, 253 Fed. Rep. 300.) The application to reopen should be made by the creditors. There must be not only a reasonable prospect of unadministered assets but also evidence that creditors or other parties in interest would be benefited by the success of the reopening. (Matter of Graff, 250 Fed. Rep. 997.)

A claim against directors of a bankrupt corporation for damages due to their misconduct passes to and may be enforced by the trustee. (Bynum v. Scott, 217 Fed. Rep. 122.)

In these circumstances, how may a stockholder maintain a derivative action in the right of a bankrupt corporation?

Trustees in bankruptcy are not bound to accept property which in their judgment is of an onerous and unprofitable nature calculated to burden rather than benefit the estate but they should make such election with knowledge of the nature of such property so that the bankrupt court may compel a different course. (Dushane v. Beall, 161 U.S. 513.) But here it does not appear that the claim was brought to the attention of the trustee or that any such election was made by him. Therefore, it cannot be said that the trustee elected not to accept the claim in suit. (Sessions v. Romadka, 145 U.S. 29.)

This right of action of the corporation against the directors passed to the trustee in bankruptcy. The trustee might have declined to accept it. If such election had been made, the bankrupt could assert title thereto. If it in turn did not elect to proceed to enforce it the stockholder might maintain its action. "But that doctrine can have no application when the trustee is ignorant of the existence of the property and has had no opportunity to make an election. It cannot be that a bankrupt, by omitting to schedule and withholding from his trustee all knowledge of certain property, can, after his estate in bankruptcy has been finally closed up, immediately thereafter assert title to the property on the ground that the trustee had never taken any action in respect to it. If the claim was of value (as certainly this claim was according to the judgment below) it was something to which the creditors were entitled, and this bankrupt could not, by withholding knowledge of its existence, obtain a release from his debts and still assert title to the property." (First Nat. Bank v. Lasater, 196 U.S. 115,119.) If the corporation could not assert title to this claim the stockholder could not for his right is of a derivative character.

It follows that the action will not lie.

The judgment of the Appellate Division should be reversed and that of the Special Term affirmed, with costs in this court and in the Appellate Division.

CARDOZO, Ch. J., CRANE, LEHMAN, KELLOGG, O'BRIEN and HUBBS, JJ., concur.

Judgment accordingly.