Case ID: ad_120/html/0211-01.html
Source: Caselaw Access Project
Author: {"author": "Clarke, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

J. Quintus Cohen, as Trustee of the Estate of John T. Lee, Bankrupt, Appellant, v. Charles T. Small, Respondent.
    First Department,
    June 21, 1907.
    Bankruptcy — action to recover preferential payment—jurisdiction of Municipal Court of city of New York.
    An action by a trustee in bankruptcy to recover payments alleged to be preferential is an action at law, and the Municipal Court of the city of New York has jurisdiction.
    Prior decisions which seem to have held such action to be in equity were based upon the fact that in those cases it was necessary to set aside a written instrument conveying real or personal property sought to be reached. Such action to recover preferential payments is at law, no matter what method was adopted by the bankrupt in making payment. -It makes no difference whether the payments were made by him or by one acting for him.
    The fact that the alleged preferential payment was made by a stock exchange, of which the bankrupt was a member, pursuant to its rules and regulations, does not make the action equitable in its nature on the theory-that it is necessary to set aside the rules and regulations of the exchange. This, because.if such rules are contrary to the Bankruptcy Law, they are absolutely void and do not need to be set aside.
    A trustee’s action to recover preferential payments is an action upon an implied or quasi contract, created by the Bankruptcy Act. ■ It is not an'action for a penalty or in tort, and hence the Municipal Court of the city of New York has, jurisdiction. . ’’
    Appeal by the plaintiff, J. Quintus Cohen, as trustee, etc., from an order of the Appellate Term of the Supreme Court, entered in the office of the clerk pf the.county of New York on the 16th day ■ of Hay, 1907,- affirming a judgment of the Municipal Court of the city of New York, borough of Manhattan, in favor of the defendant, rendered on the 9th day of February, 1907.
    
      Michel Kirtland, for the appellant.
    
      Henry Bennett Leary, for the respondent.
   Clarke, J.:

This is an apjreal from a determination of the Appellate Term affirming a judgment of the Municipal Court sustaining a demurrer to the complaint. The plaintiff, as trustee in bankruptcy of theestate of John T. Lee, brought an action in the Municipal Court of the city of Mew York against the defendant wherein-he alleged that within four months prior to the filing of the petition in bankruptcy, the Consolidated Stock and. Petroleum Exchange, purporting to act under its rules and regulations in such case made and provided, collected, had and received for and on behalf of said Lee, who was a member of said exchange', from divers persons then indebted to said Lee, certain sums of money aggregating the sum of $13,287.09, and for and on behalf of said Lee paid, transferred and delivered therefrom to the defendant, who was also a member of said exchange, certain moneys aggregating the sum of .$188.52 on account of his claim' against said Lee, being about twenty-nine per centum of said claim; that the defendant by said payments, transfers arid delivery made for and on behalf of said Lee, was enabled to and did obtain as a creditor of the said.Lee a greater percentage of his debt from said Lee than other creditors, not members of said exchange, of the same class, wherefore the plaintiff demanded judgment against .the defendant for the sum of §188.52.

The demurrer was interposed, first, upon the ground that upon the face of the complaint the court liad no jurisdiction of the subject of the action, and, second, that tlié ■ complaint did not state facts sufficient to constitute a cause of action.

Two questions are here presented: First, whether an action by a trustee in bankruptcy, where the complaint asks a money judgment only to cover an amount alleged to have been paid in violation of subdivisions a and b of section 60 of the Bankruptcy Law (30 U. S. Stat. at Large, 562) as a preferential payment is an action at law or an action in equity. Of course, if it is an action in equity the demurrer was properly sustained, because the' Municipal Court has no equitable jurisdiction.

Although the opinions in Houghton v. Stiner (92 App. Div. 171) and in Dyer v. Kratzenstein (103 id. 404),. which followed it, seem upon casual examination to go to the extent of declaring that an action by a trustee in bankruptcy to recover a preferential payment is. an equitable action, yet the underlying ground of that decision was that as the transfer of the bankrupt’s property was voidable at the election of the trustee and not void ab initio, it became necessary to first set aside either a conveyance, where real estate was involved, or a written instrument transferring title, where personal property was sought to be reached.,

That this is the correct interpretation of the effect of the decisions in those cases appears by the decision in Stern v. Mayer (99 App. Div. 427), where in an action by a trustee in bankruptcy to recover a sum of money as the value of a quantity of merchandise delivered by the bankrupt to the defendant -as security for ah alleged indebtedness as an illegal preference, the question presented was, whether the action was one at law triable at Trial Term or in equity triable at Special Term, this court decided that it was properly triable at the Trial Term ■ and reversed an order granting leave to strike it from the Trial Term, calendar and to renotice the case for the Special Term.

In Merritt v. Halliday (107 App. Div. 596), upon' an appeal from the City Court of Yonkers, in an action brought by a trustee in bankruptcy to recover a sum of money as an.illegal'preference, the Appellate Division of the second department, after stating that the City Court of Yorkers had only a limited equitable jurisdiction and if the action was one of equitable cognizance, the demurrer should be sustained, said: If we consider the intent and purpose of the Bankruptcy Law, and view the money and property of the bankrupt as constructively in the hands of t-lie trustee at .the. time it is improperly paid over to the creditor, there would seem to be no good reason why the trustee might not bring a simple action at law to recover the amount so improperly paid over. There is in this case no public record to be reformed, no deed or conveyance to be set aside; all that is desired is the- recovery of a sum of money which constructively belongs to the trustee of the bankrupt. It is in form and Substance an action atrlaw; ” and affirmed the judgment overruling the demurrer to the complaint. , . ■

Whatever doubt may have existed has now, however, been set' at rest by the decision of the Court of Appeals in Coudert v. Jarvis (188 N. Y. 584). An examination of the record in that case shows that it was an action to recover a payment to a creditor by which the creditor received a preference made within four months of the ■bankruptcy. This court (114 App. Div. 913) affirmed an order denying a motion to transfer the action from the Trial Term to the Special Term calendar and certified this, question, “ Whether on the facts shown by the record herein the. cause of action is one maintainable in equity or at law ? ” which question the Court of Appeals answered, “ At law,” and affirmed the order.

The respondent attempts-to avoid the effect of these decisions in two ways, first,¡ by asserting that in the-cases cited the money or tlie property was paid or transferred directly by the bankrupt to the defendant, while it is averred in the complaint in the case at bar that the exchange collected the debts due to the bankrupt and paid the • amount sued for to the defendant.

There is no such distinction. It cannot make any difference in the determination of whether .the action is in equity or at law what-method was adopted by the debtor in making the payment. The complaint alleges that the. exchange received for and'on behalf of said Lee certain sums of money and for and on behalf of said Lee paid to the defendant the amount sued for. This is an allegation of agency, and upon the facts presented the result is the same as if the debtor had delivered the money to his bookkeeper or a clerk or a third person to pay the creditor. “It is the result or effect of the act done which is declared against, not tile manner or method by which it is done. Ho matter how circuitous the method may be, if the effect of a transfer of property made within four months before the filing of a petition in bankruptcy is to enable any of the bankrupt’s creditors to obtain a greater percentage of his debt than others of the same class, then such transferís voidable, if theperson receiving it or to be benefited thereby had reasonable cause to believe that it was intended thereby to give a. preference.” (Crooks v. People's National Bank, 46 App. Div. 335; cited with approval in Mathews v. Hardt, 79 id. 581.) .

The second ground urged to sustain the equitable nature of this action is that there is a necessity for declaring void or setting aside the. constitution, by-laws, rules and. regulations of the exchange. There' is no such necessity. The complaint simply sets forth the agency of the exchange in collecting the money due Lee and paying a portion of it to the defendant purporting to act under its rules and regulations. The agency is the same and the effect thereof is the same whether it purported to act under rules and regulations or not. If there are any rules and regulations of the exchange which interfere with the operation of the Bankruptcy Law, and make members of the exchange preferred creditors of the bankrupt members thereof, those rules and regulation's do” not need to be set aside for they are absolutely void as in contravention of the bankruptcy statutes of the United States.

Second. It is claimed that the demurrer was properly sustained because the Municipal Court had no jurisdiction of the action as it was not upon a contract^ express or implied. What is the nature of the action at law given to the trustee in bankruptcy by the, provisions of subdivision b of section 60 of the Bankruptcy Law (supra, as amd. by 32 U. S. Stat. at Large, 800, § 13) to recover a sum of money from a creditor of the bankrupt as an. illegal preference. It is clear that it is not an action to recover'a penalty. If it was, under subdivision 7 of section 1 of the Municipal Court Act, as the amount was less than $500, the Municipal Court would-have jurisdiction.

.The Appellate Division in the second department .said, in Merritt v. Halliday (supra):If we consider the intent and purpose of - the Bankruptcy Law.and view the money and property of the-bank rnpt as constructively in the hands of the trustee-at tlie time it is improperly paid over- to the creditor, thére would seem to be-no good- reason why the trustee might not bring a simple action at law. to recover the amount so, improperly paid over.” -■

It seems to me -that it is an action to enforce a contract imposed by law upon - t-lie creditor who accepts payment from an. insolvent . debtor.- - The Bankruptcy La.w enters into the contract between a debtor and a creditor and gives a right to the trusted in bankruptcy to recover from the creditor any payment made in violation of the Bankruptcy Law. It is not for. a penalty, nor upon -a tort. A-contract is-implied .based upon the provisions .of the law under which the trustee in bankruptcy proceeds.. It is a cause of action given, by the statute -to the trustee, which statute renders invalid the preference and the.’payment by the insolvent debtor to the creditor. It comes within the class of implied -contracts wherein an obligation ' to repay.is imposed bylaw, irrespective- of .the purpose of the parties. Analogous to the obligation -imposed by- statute upon stockholders to answer for the debts of the corporation to the-amount of -stock held by them, of which obligation the United ' States Supreme Court in Whitman v. Oxford National Bank (176 U. S. 559) said : “ The liability, which by the Constitution and statutes is thus declared to-rest upon the: stockholder, though-statutory in its origin, is contractual in its nature. ' * * * ' In other words, they entered into a contract authorized by statute.- • * * * And as this liability is one which is contractual in. its nature .it is also clear that an action therefor can bemaintainedin.any court of competent jurisdiction.” And as the Court of Appeals-said .in Howarth v. Angle (162 N. Y. 181): While the liability is for convenience frequently called statutory because the statute, which is the constitution of the- bank, affixed the obligation to the ownership of stock, it is in fact contractual and springs from an implied promise, *. *■ * 'The-implied pronlise runs to the creditors and may, according to the common law of the State where it was made, be enforced for the benefit of creditors by a receiver of the corporation appointed to wind up its affairs.”

In Dechen v. Dechen (59 App. Div. 166) the Appellate Division in the second department held that the-Municipal Court had jurisdiction in a case for money had and received under subdivision 1 of section 1364 of the charter (Laws of 1897, chap. 378) giving'that court jurisdiction to entertain an action to recover damages upon or for breach of contract, express or implied, other than a promise to marry.

This court said in Pache v. Oppenheim (93 App. Div. 221), Mr. Justice Patterson writing : “ Whether the obligation arising from a ■■■quasi contract is one imposed by statute or arising from some general principle of law is immaterial. Assuming that the whole relation is one quasi contractual .and- that no contract, as matter of fact exists at all, yet, for the purpose of a remedy, the quasi contract is considered as if it were an actual contract, and when an action within the limitation of $500 is brought in a Municipal Court on such an obligation it is an action for damages upon contract and the jurisdiction attaches.”

It follows, therefore, from decisions which we regard as controlling, that tills is an action at law brought to recover a judgment for a sum of money only upon an implied contract within' the meaning of the New York Municipal Court Act (Laws of 1902, chap. 580, § 1, as amd. by Laws of 1905, chap. 513).

' The determination of the Appellate Term and the judgment of the Municipal Court should, therefore, be reversed and the demurrer to the complaint overruled, with costs in this court and in the court below to the appellant, with leave to the respondent, upon payment thereof, to withdraw the demurrer and answer over within eight days. '

Ingraham, McLaughlin, Laughlin and Scott, JJ., concurred.

Determination and judgment reversed, with costs, arid demurrer overruled, with costs, with leave to defendant to withdraw demurrer and to answer on payment of said costs.