Wood v. Fisk , 141 N.Y.S. 342 ( 1913 )

McLaughlin, J.:

Action to recover damages for the alleged conversion of certain certificates of stock of the plaintiff pledged as collateral to secure the payment of a note for $39,000. The defense was a discharge of the defendants in bankruptcy. The complaint was dismissed after trial at Trial Term and from the ' judgment entered upon a decision to that effect plaintiff appeals.

There is little or no dispute as to the facts involved. They are, in substance, that on the-20th of January, 1910, the defendants loaned to the plaintiff $39,000, for Which he- gave to them his promissory note for that .amount, payable to their order on the twenty-first of March following; that at the same, time he delivered to them, as collateral security for the payment of the note, certificates representing 100 shares of the common stock of the Baltimore and Ohio Railroad Company and 201 shares of the common stock of the Union Pacific Railroad Company, under an agreement which formed part of the note, to the effect that the defendants might rehypothecate the collateral for a sum not greater than the amount of the indebtedness owing by the plaintiff at the time of the rehypothecation; that' intermediate the giving of the note and the 1st of February, 1910, they did rehypothecate the- certificates for an amount in excess of the plaintiff’s indebtedness; that on the latter date a petition in involuntary bankruptcy was filed against the defendants and a receiver appointed; that 'one month later they were adjudicated bankrupts, and on the 12th of July, 1910, were discharged from .ah provable claims; that this plaintiff did not prove, in the bankruptcy proceeding, a. claim for the collateral pledged, but instead, on the date of the maturity of the note (March 21, 1910), tendered to the defendants personally $39,000, and demanded the return of his note and .the certificates; - that at the time the demand was made the receiver in the bankruptcy proceeding was acting and all of the defendants’ rights to the note and the collateral had, prior to. such demand, passed to and were then, held by the receiver, so that defendants were physically unable to comply with the demand; and that no tender of payment of the note was ever "made to the receiver or demand made upon him for the return of the collateral, and the note still remains unpaid.

Upon the foregoing facts the plaintiff claims he was entitléd to recover for a conversion of the certificates by reason of the defendants’ failure to return the same.on demand; that his damages were the market value of the stock at the time the demand was made,, together with -the dividends, which had been made thereon after the same were pledged, amounting in all to $49,214.25, besides interest. The trial court, as indicated, dismissed the complaint and the question presented is whether, in any view of the evidence, the plaintiff was entitled to recover. The answer to this question necessarily turns upon whether plaintiff’s claim, as now presented, or the defendants’ liability therefor, were discharged by the bankruptcy proceeding.

It appears that the plaintiff had actual knowledge of the proceeding and could have proved his claim had he so desired. It was, therefore, discharged (Bankr. Act [30 U. S. Stat. at Large, 550], § 17, as amd. by 32 id. 798, § 5) if “provable.” Was it provable ? Any cause of action which the plaintiff may. have had, arising out of the wrongful rehypothecation, is, as it seems to me, barred by the discharge in bankruptcy. The claim -for such rehypothecation, though perhaps in the nature of conversion, would necessarily have to be predicated upon the breach of a contract, and if so, it was provable. (Crawford v. Burke, 195 U. S. 176; Fechter v. Postel, 114 App. Div. 776; Maxwell v. Martin, 130 id. 80.) The plaintiff, doubtless appreciating this fact, does not base the claim here sought to be enforced upon the rehypothecation, but instead solely upon defendants’ refusal to return the certificates when demanded. The' Bankruptcy Act (30 U. S. Stat. at Large, 562, § 63, subd. a) provides that, “Debts of the bankrupt may be proved and allowed against his estate which are (1) a fixed liability, as evidenced by a judgment oran instrument in writing, absolutely owing at the time of the filing of the petition against him, whether then payable or not, * * * (4) founded upon an open account, or upon a contract express or implied * *

It is settled by numerous authorities that under this section a claim for breach of contract may he'proved, even though the time for performance had not arrived when the petition was filed. This is upon the theory that the bankruptcy proceeding may be considered as an anticipatory breach and a complete disablement on the part of the debtor, thus rendering him liable for damages immediately upon filing the petition. {Matter of Neff, 157 Fed. Rep. 57; Matter of Swift, 112 id. 315; Matter of Pettingill & Co., 137 id. 143; Phenix National Bank v. Waterbury, 197 N. Y. 161.) Where one party to an executory contract puts it out of his power to perform, there is an anticipatory breach which gives the other party an immediate right of action for the damages which he suffers thereby. (Roehm v. Horst, 178 U. S. 1; Pennsylvania Steel Co. v. N. Y. City Ry. Co., 198 Fed. Rep. 721, 743.)

Here the bankruptcy proceeding made it impossible for the defendants to perform the contract—the legal effect of which was an out and out repudiation óf the contract by the defendants or a complete disablement — and in either case the contract itself was broken. If this conclusion be correct, then it follows the plaintiff could have proved his claim in the bankruptcy proceeding. Plaintiff, however, contends that even though he could have proved his claim, he was not obliged to do so; that he had an election either to take that course or to wait until the note matured and then hold defendants personally liable—a tender having been made for the amount due — in not returning the certificates upon demand. Phenix National Bank v. Waterbury (supra) is cited in support of this contention. That authority is clearly distinguishable from the case before us. There, the plaintiff had made a contract to sell, at a future, time, certain- shares of stock. Before the arrival of the time for the completion of the contract by the delivery of the stock, defendants were adjudicated bankrupts and the plaintiff having omitted to prove its claim in the bankruptcy proceeding, thereafter sought to recover from the defendants the damages sustained for the breach of the contract in failing to deliver. The court held that even though the claim were provable in bankruptcy it could also be reserved and sued on thereafter; that the existence of the obligation under the agreement to deliver was postponed until 'after the date of the filing- of the petition; and it said: “The agreement of each party was one which had relation exclusively to the future, whether' as to obligation, or as to payment.” In the case before us at the time the petition was filed defendants were, under a specific obligation to retain the collateral (subject to the right to rehypothecate) and return it to the plaintiff when the note was paid, or if a sale were had and the proceeds derived therefrom exceeded the amount due, then to. return the balance. The proceeding in bankruptcy, immediately upon the petition being filed, not only transferred to the receiver title to the note and any claim based thereon, but also the right to the possession of the collateral which had been pledged as security for its payment. By operation of law it had become impossible for the defendants, at the time the demand was made, to perform their part of the contract. This the plaintiff knew when he made the tender and demand. A tender and demand never have any legal effect when the party making them knows that the law renders it impossible for the other party tó accept the tender or comply with the demand, in other words, legal rights never grow out of an impossibility. A claim for conversion is predicated upon' a wrongful assumption of ownership or interference with the owner’s right to possession. (Industrial & General Trust v. Tod, 170 N. Y. 233.)

I am unable to see how, in any possible aspect of the case, it can be said that the defendants’ failure to return the certificates of stock at the time the demand was made therefor, constituted a conversion of them. The law had made it impossible for them to make the return. They were then in the possession of the receiver, and only by paying to him the amount due upon the note could a return be obtained. The receiver clearly had the right to retain such certificates until the amount of the note was paid.

My conclusion, therefore, is that any cause of action which the plaintiff may have had against the defendants for a failure to return the certificates on payment of the note was not only provable, but that such claim did not survive the discharge in bankruptcy. ' If I am right about this, then it follows that the judgment appealed from is right and should be affirmed, with costs.

Ingraham, P. J., Laughlin and Clarke, JJ., concurred; Scott, J., dissented.