American Woolen Co. v. Cohen

Clarke, J.:

This action was begun on or about the 31st day of August, 1909, by the filing of a summons'and complaint and a notice of pendency of action to foreclose a mortgage made by appellant and his wife to secure payment of the sum of $60,000, with interest thereon, bearing date the loth day of October, 1906, given as collateral security for the payment of a bond bearing even date therewith. The summons- and complaint were personally served on the appellant on September 23, 1909.

Appellant did not answer or appear in this action, either in person or by attorney. '

On May 6, 1910, a judgment of foreclosure and sale was entered which provided, among other things, that if the proceeds of. the sale be insufficient to pay the amount found' due to the plaintiff, with interest and costs, the referee-shall specify the amount of such deficiency in his report of sale, and that the appellant pay the same to the plaintiff and that plaintiff have execution therefor.

On July 1, 1909, prior to the commencement of this action to foreclose, an involuntary petition in bankruptcy was filed in the United States District Court for the southern district of New York against appellant by certain of his creditors, and on July 29, 1909, he was adjudged a bankrupt by said court.

On October 18, 1909, the appellant filed, pursuant to the requirements of the Bankruptcy Act, schedules of his property and a list of his creditors and the payments due to each of them. In such schedules the plaintiff herein appeared as a secured creditor upon the bond and mortgage set forth in the complaint' herein, and also as a creditor for goods sold and delivered.

On February 16, 1910, appellant made and filed in the United States District Court an offer of composition with his creditors, and on March 15, 1910, an order was made by the said court, confirming the said composition and directing, among other tilings, payment to the plaintiff herein of the sum of $591.10 upon its claim for goods sold and delivered. Such composition was duly carried out and plaintiff received and accepted the said sum. The composition was.upon a basis of twenty per cent. The plaintiff neither proved nor made any claim in the- said bankruptcy proceeding for the indebtedness secured by the said mortgage and it was not taken into consideration in the composition.

The answering affidavit states that it was impossible for the plaintiff to ascertain what the exact personal liability of Jacob Cohen was by reason of any deficiency which might occur upon the bond and mortgage, and in paying the creditors under the composition no provision was made for payment to plaintiff of its proportionate share of -the dividend upon its $60,000 claim; that plaintiff was also a creditor upon a promissory note of Cohen’s for $2,954,29, and the $591.10 referred' to was a dividend upon said claim for which plaintiff held no security whatever.

The moving affidavit was verified June 8, 1910, about a month after the judgment of foreclosure was entered, and states that deponent was in ignorance of the fact that said judgment contained a provision for a deficiency judgment “until about ten days ago, deponent relying all along upon the assumption that the plaintiff, which was fully cognizant of all the proceedings in said bankruptcy matter and of the said composition and discharge, would not seek for a deficiency judgment in this action. That the time allowed to deponent by law to interpose an answer herein expired in the month of October, 1909, but it was only upon the confirmation of the composition hereinbefore set forth, on the 15th day of March, 1910, that deponent was discharged from the indebtedness secured by the bond and mortgage set forth in the complaint herein, and it was only then that deponent acquired the defense of such discharge against liability for the deficiency judgment in this action and he prayed for an order that the judgment “be opened, vacated and set aside in so far as the same adjudges and directs that the defendant, Jacob Cohen, pay any deficiency herein to the plaintiff, and that the plaintiff have execution therefor, and that deponent may be permitted to interpose an answer herein to so much of the cause of action set forth in the complaint herein as sets forth a claim or cause of action for a deficiency judgment therein against deponent, without prejudice, however, to all other proceedings heretofore had herein, or which may hereafter be had herein under and in pursuance of the remaining portion of" said judgment and foreclosure and sale.” The Special Term denied the motion, and from the order entered thereon this appeal is taken.

The question is whether the composition duly confirmed and carried out is a bar to the recovery of a deficiency judgment on foreclosure, the holder of the bond and mortgage having been duly scheduled as a secured creditor thereon, but not having proved its claim.

It is necessary to compare the provisions of the Bankruptcy Act of 1867 (14 U. S. Stat. at Large, 517, chap. 176), as amended by the act of June 22, 1874 (18 id. 178, chap. 390), with the present Bankruptcy Act of 1898 (30 id. 544, chap. 541), for if they are substantially similar there are what I regard as controlling decisions in the United States courts. Section 19 of the act of 1867 (14 U. S. Stat. at Large, 525) provides that “all debts clue and payable from the bankrupt at the time of the adjudication of bankruptcy and all debts then existing but not payable until a future day * * * may be proved against the estate of the bankrupt,”

Section' 63 of the act of 1898 (30 U. S. Stat. at Large, 562, 563) provides: “ a Debts of the bankrupt may be proved and allowed against his estate which are (1) a fixed liability, as evidenced by a judgment or an instrument in writing, absolutely owing at the time of the filing of the petition against him, whether then payable or not. * * * b Unliquidated claims against the bankrupt may, pursuant to application to the court, be liquidated in such manner.as it shall direct and may thereafter be proved and. allowed against his estate.”

So far as the debt now under consideration is concerned, namely, ■ that evidenced by a bond secured by a mortgage and resulting in a deficiency on a sale of the mortgaged property, there is no difference between the two statutes.

By section 32 of the act of 1867 (14 U. S. Stat. at Large, 532) the order of the court discharged the bankrupt from all debts and claims which, by .said act, are made provable against his estate, excepting such debts, if any, as áre by said act excepted from the operation • of a discharge in bankruptcy. Section 17 of the act of 1898 (30 U. S. Stat. at Large, 550, as amd. by 32 id. 798, § 5) provides that “A discharge in bankruptcy shall' release a bankrupt from all of .his provable debts,”, with certain exceptions not material here.

By the act of 1874 (18 U. S. Stat. at Large, 182, 183, § 17, , adding to 14 id. 538, § 43) composition with creditors was provided for. Among other tlfings it was provided that “In calculating a majority for the purposes of a composition under this section, creditors whose debts amount to sums not exceeding fifty dollars shall be reckoned in the majority in value,-but not in • the majority -in number; and the value of the debts of secured- creditors above the amount of such security,, to be determined by the court, shall, as nearly as circumstances admit, be estimated in the same way. And creditors whose debts are fully secured shall not be entitled to vote upon or -to sign such resolution without. first relinquishing such security for the benefit of the . estate. The debtor * * * shall produce to the meeting a statement showing the whole of his assets and debts, and the names and-addresses of the-creditors to whom such debts respectively are due. * * * The provisions of a composition accepted by such resolution in pursuance of this section shall be binding on all the creditors whose names and addresses and the amounts of the debts due to whom are shown in the statement of the debtor produced at the meeting at which the resolution shall have been passed, but shall not affect or- prejudice the rights of any other creditors. * * * Every such composition shall, subject to priorities declared in said act, provide for a pro rata payment or satisfaction, in money, to the creditors of such debtor in proportion to the amount of their unsecured debts, or their debts in respect to which any such security shall have been duly surrendered and given up.”

Section 12 of the Bankruptcy Act of 1898 (30 U. S. Stat. at Large, 549, 550) provides: “a A' bankrupt may offer terms of composition. to his creditors after, but not before, he has been examined in open court or at a meeting of his creditors and filed in court the schedule of his property and list of his creditors, required to be tiled by bankrupts, b An application for the confirmation of a composition may be filed in the court of bankruptcy after, but not before, it has been accepted in writing by a majority in number of all creditors whose claims have been allowed, which number must represent a majority in amount of such claims, and the consideration, to be paid by the bankrupt to his creditors, and the money necessary to pay all debts which have priority and the cost of the proceedings, have been deposited in such place as shall be designated by and subject to the order of the judge. * .* * d The judge shall confirm a composition if satisfied that (1) it is for the. best interests of the creditors; (2) the bankrupt has not been guilty of any of the acts of failed' to perform any of the duties which would be a bar to his discharge; and (3) the offer and its acceptance are in good faith and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden, e Upon the confirmation of a composition, the consideration shall be distributed as the judge shall direct; and the case dismissed.”

Section 56 (30 U. S. Stat. at Large, 560). “* * * b Creditors holding claims which are secured or have priority shall not, in respect to such claims, be entitled to vote at creditors’ meetings, nor shall such claims be counted in computing either the number of creditors or the amount'of their claims, -unless the amounts of such claims exceed the values of such securities or priorities, and then only for such excess.” Section 57 (30 U. S. Stat. at Large, 560). “ e Claims of secured creditors and those who have priority may be allowed to enable such creditors to participate in the proceedings at creditors’ meetings held prior to the determination of the value of their securities or priorities, but shall be allowed for such sums only as to the courts seem to be owing over and above the value of their securities or priorities. * * * h The value of securities held by secured creditors shall be determined by converting the same into money according to the terms of the agreement pursuant to which such securities were delivered to such creditors or by such creditors and the trustee, by agreement, arbitration, compromise or litigation, as the court may direct, and the amount of such value shall, be credited upon such claims, and a dividend shall be paid only .on the unpaid balance.” Section 14 (30 U. S. Stat. at Large, 550). “ c The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge.”

It will be seen that the practical difference between the two statutes is that under the act of 1874 the offer of composition might precede examination of the bankrupt, did not require a preliminary deposit, and called for an assent of two-thirds in number and one-half in value of the creditors; while under the act,of 1898 the offer could not be made before the examination of the bankrupt and the filing in court of the schedule of his property and the list of his creditors, and it could not be confirmed before the money necessary to pay the consideration had been deposited and the consent of a majority of the creditors representing a majority in amount of the claims.' In other respects the provisions of the two statutes are substantially the same.

■ In Paret v. Ticknor (18 Fed. Cas. No. 10,711; 16 Nat. Bank. R. 31) Paret was a scheduled creditor of Ticknor, the bankrupt.. He was named in the schedule, had notice of the meeting of creditors and the proposition of compromise. It was stated in the schedule that the secured creditor was fit!ly secured. He made no objection to the composition and gave no consent thereto. Afterwards the security was sold and applied on the debt, and there remained an unpaid balance for which this suit was brought. It was contended that- the debt was discharged by the composition proceedings. Mr. Justice Miller of the Supreme Court of the United States, sitting with Judge Dillon, Circuit Judge, said :“It is contended by his counsel that he is entitled to recover all of the debt that was not covered by the sale of the property which was his security. It is contended by counsel for Ticknor & Company, that they were fully discharged by the composition pi’oceedings of any claim on account of that debt. We are of opinion that the law of the case lies between them. I am of opinion, myself, that the compromise provisions of the bankruptcy act design that every creditor shall receive the same proportion of his debtj and I am of opinion.as regards the parties who shall receive, that the secured creditor is a creditor for that purpose for all that is not satisfied by his security; and I am of opinion that whenever this fact is ascertained, even after the compromise, that remainder constitutes a debt against the bankrupt of which he shall pay the same proportion to that creditor that he has paid to the unsecured creditors. * * * He can foreclose whenever the proper time comes or whenever by law lie will be obliged to do it, and if the property sells for less than his debt, he can make Ticknor pay, not the whole of the difference, but twenty-five per cent of it, if the composition is carried out and if it sells for more than the debt, Ticknor & Company will be entitled to the surplus.” There is a note to that casé that subsequently, before Dillon, Cir. J., and Treat. D. J., the plaintiff took judgment for the full amount of the note with a provision that it might be satisfied by the payment of the twenty-five per cent, if the composition was carriedxout; if not, then the judgment to stand for the full amount.

This was followed in Cavanna v. Bassett (3 Fed. Rep. 215) by the United States Circuit Court for the northern district of Illinois, where the court said : “ The question, therefore, is how was the complainant as a secured creditor of Bassett and Beaver, affected by the composition proceedings? Did those proceedings,"in connection with the action of complainant in relation thereto, operate to release the bankrupts from any liability on any balance which might be due to complainant after exhausting her security ? I think the question must be answered in the negative. * * * Complainant had a right to hold her security and as a secured creditor she could not properly participate in the composition jiroceedings. She could not be compelled to surrender her security and then come in and prove her claim. Dor was it incumbent on her to have her security valued and then to make proof of any balance. Dor should her failure to do this be taken as evidence that she intended to rely wholly for payment of her demand upon her security. * * * In the present aspect of the.case, it must be held that the composition proceedings did not operate to deprive complainant of the right, after exhausting her security in- ascertaining the amount unpaid, to assert against the bankrupt a claim for such'deficiency, and I think such claim, may be enforced through' the instrumentality of an execution issued against the property of the- debtors upon the deficiency judgment. Complainant’s right being limited to the collection of such a percentage of her judgment as has been paid to other creditors upon the composition, and at a subsequent stage of any proceedings that may be taken on execution to enforce payment of the same, it may be the duty of.the court to provide for a suitable order for enforcement of the execution only to the extent which has been indicated. As the. case now stands, the exceptions to the answer must be sustained.”

To the same effect Flower v. Greenbaum (50 Fed. Rep. 190), and in our courts, by Van Vorst, J., in Cohn v. Colby (57 How. Pr. 168).

It is argued by the respondent that the matter has been decided under the act of 1898 by Matter of Kahn (9 Am. Bank. Rep. 107). But in that case the referee had under consideration the question whether a composition could be carried out as the bankrupt was liable on mortgage bonds, lis pendens had been filed and actions for foreclosure commenced, the secured creditors not having been made parties to the proceeding, assented thereto or appeared therein. He held that the mortgage creditors were not either proper or necessary parties to the composition proceeding. “ It is very evident that such mortgage creditors have no present provable claims and are not, therefore, creditors within the true meaning of section 12 of the Act, because, as already shown, section 57, subd. E, only provides for the allowance of claims of secured creditor’s upon the deter-' ruination of the value of their security and the amount of which claim to be allowed only as the court finds is owing over and above the value of such security.” Adams, X>. J., said : “ I am satisfied that the referee has correctly answered the questions in his careful opinion, and I adopt it in deciding that the secured creditors mentioned are not necessary or proper parties to this composition proceeding, and that it should not be refused approval because they are not parties.”

There are two questions presented for consideration, as it seems to me, and they should not be confused. The one is the bankrupt estate and the right to participate in the distribution thereof. The other is the right of the secured creditors. To participate in the bankrupt estate, which by the act of bankruptcy has passed out of the bankrupt and to the trustee, the creditor must come in and prove 1ns claim. If he has a provable, claim which has been scheduled he has a right to- participate in the preliminaries, and must, when a composition is offered, have the amount of his claim fixed, if capable of being fixed, or estimated, for the purpose of deciding whether the necessary number of creditors and the necessary proportion of their claims have consented to the composition, and then, upon confirmation, he can only receive from, the estate his proportionate dividend.

An interesting case on this point is Matter of Sampter (170 Fed. Rep. 938). It there appeared that in July, 1904, the firm of M. Sampter & Co., and the parties composing it, of whom Arnold Sampter was one, were ad judicated bankrupts. One Marks was the owner of three mortgages on three lots of land belonging to Arnold Sampter, to secure the payment of his three bonds, aggregating some $36,000. These mortgages were foreclosed and judgment entered April 4, 1905. In the summer of 1907 the sale of other premises mortgaged by Sampter to Marks, to secure the repayment of advances made to the firm, pi-oduced a large surplus which, his individual creditors being paid in full, would go to the firm creditors. In this state of things Marks filed, August 16, 1907, more than two years after the adjudication, his claim against.the individual estate of Arnold Sampter for the deficiency resulting in the foreclosure actions, amounting to $8,666.36. The Circuit Court of Appeals, sitting in the southern district of New York, affirmed an order expunging this claim, upon the ground that it had not been filed within the time limited' by subdivision n of section 57 of the Bankruptcy Act (30 U. S. Stat. at Large, 561), after the adjudication, saying: “ Under §§ 57-aand 57-e of the Bankruptcy Act^* Marks could have proved his claim, though it was secured and not liquidated. Besides this, it was liquidated within. year of the adjudication.”

In that case there had been no composition, and the attempt was made to procure, payment of the deficiency judgment from the bankrupt estate still in the hands of the trustee. What was decided was that while the debt was provable, it had not been proved in time, and so could not share in the assets of the estate.

If th@ secured.creditor follows this course, that is, of proving.his claim, however, he must give up his-security, and he is treated for all purposes upon an equality with the other creditors. But if he chooses to demand nothing from the.estate lie'is entitled to retain his security and the lien created thereby solely for his own benefit. It is a valid pre-existing lien and cannot be taken away or affected by any subsequent proceedings. To be sure,.the trustee can compel ■ its surrender if he thinks it more valuable than, the debt secured by payment of that debt in full, and then apply the surplus for the benefit of the general creditors. But if not compelled to surrender upon payment in full, the creditor may proceed to foreclose or. otherwise realize upon his security. The question then arises, what happens if there is a deficiency 1 ITe cannot claim anything therefor from the estate in the hands of the trustee, because ■ that has been applied equally for the benefit of the creditors who came in and proved their claims. Has he> however, a right to a personal > judgment against the debtor who by the composition has received back his property u pon his carrying out the terms, of his composition Í The Kahn case, it seems to me, does not answer this question. It was, however, answered by Paret v. Ticknor and the other cases cited supra.

The order appealed from should,, therefore, be reversed and the motion granted to the extent of opening the judgment' so far as relates to personal judgment for the deficiency and permitting the interposition of an answer; for we think that the defendant has a good defense to at least so much of the deficiency as exceeds the percentage of payment of the debts under the composition.

The-order appealed from- should be reversed, with ten dollars ■costs and disbursements, and the motion granted.

. Ingraham, P. J., McLaughlin, Miller and Dowling, JJ., concurred.

Order reverséd,with ten dollars costs and disbursements, and motion. granted to extent stated in the opinion. -Settle order on notice.

* See 30 U. S. Stat. at Large, 560, § 57, subds. a, e.— [Rep.