#### J. Quintus Cohen, as Trustee of the Estate of John T. Lee, Bankrupt, Appellant, *v.*American Surety Company of New York, Respondent.

First Department,

January 24, 1908.

Bankruptcy — prior assignment for creditors — right of trustee to sue surety.

A trustee in bankruptcy lias capacity to sue the surety on the bond of a bankrupt’s assignee for the benefit of creditors to recover a sum found to be due from the assignee upon a judicial accounting in the Federal covirt brought by him when the trustee is unable to collect from the assignee after judgment against him.

Although an assignment for the benefit of creditors is avoided when the assignor subsequently goes into bankruptcy, his trustee, claiming the property under a decree of the Federal court adjudging that the property be turned over, is not claiming in hostility to the assignment so as to discharge the surety of the assignee from liability.

As the assignee’s bond was given when the Bankruptcy Act was in force, the surety was charged -with knowledge that on the bankruptcy of its principal ■ the jurisdiction of the estate -would pass to the Federal court, anti that the principal might there account. Hence, such contingency must be written in as part of the obligation.

Scott, J., dissented; Houghton, J., dissented, with opinion.

Appeal by the plaintiff, J. Qnintns Colien, as trustee, etc., from a judgment of.the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of New York on the 10th day of December,- 1907, upon the decision of the court, rendered *520after a trial at'tlie New York Special Term,-sustaining tlie defendant’s demurrer to the complaint.

*Michel Kirtland,*for the appellant.

*Charles M. Demond*of *counsel [Henry*C. Willcox, attorney], for the respondent.

Clarke, J.:

. This is ,an appeal.from a final judgment'sustaining defendant’s demurrer and dismissing the complaint, with costs.’

The action was brought by plaintiff, as trustee in. bankruptcy of John T. Lee, to recover from defendant as surety on the bond of' George Buckmaster, as assignee under a. general assignment for the benefit of creditors of. .said Lee, $4^3.66,64;, with interest,, beiiig. the-amount of a judgment recovered by plaintiff against said Buck-, master, as such assignee,- founded upon a final, order or'judgment, in accounting proceedings, instituted by said Buckmaster in the United States District Court for the Southern District of New York, praying that his ..accounts as such assignee--be taken, stated and allowed.

The complaint alleges tile filing of a - petition in-, bankruptcy by Lee on August ' 27, 1901, and' adjudication .on. .September ;23, 1901,- and the appointment, and qualification of .the plaintiff' as trustee; that on May 9, 1901, said Lee made- and delivered ail-assignment for the. benefit. of his creditors of all his property to. George Buck-master, then and since a non-resident of Dew York, and a resident of New Jersey,,who accepted the. trust, and s.ucli assignment was duly, filed and recorded in tlie office of the" clerk of the ■ county of. New York; that the time' for filing the, schedules was extended from time- to time,, and the schedules were, filed on August'7, 1901'-; and thereupon, the amount' of - the -bond to .he filed by him was 'fixed at $7,-()00.; that on August 14,1901, Buckmaster as principal, and defendant, as surety,-made and delivered tlieir- bond dated August 13, 1901, whereby they bound themselves jointly and severally to the People of the State of New York in the penal sum' of. $7,Q00, with the condition that if said George Buckmaster should faithfully - execute and discharge, the duties of . such-assignee, and -duly account, for ,all' moneys received by him as such, assignee, then, tlie obligation ,to, be void, else to remain, in full force and virtue, which ' bond was duly *521approved and filed; that Buckmaster, as assignee for the benefit of creditors as aforesaid, received and took possession of a large amount of property, and assets of said Lee, and no accounting has ever been had with respect thereto, except as alleged in the complaintthat on or about January 22, 1902, Buckmaster duly filed in the United States District Court for the Southern District of Dew York a petition praying that his account as assignee for the benefit of creditors of said Lee be taken, stated and allowed, and such proceedings were duly had therein that on or about January 24, 1903, a final order or judgment was duly made and entered in said court, requiring and directing him forthwith to transfer and pay to this -plaintiff, or his successor, as trustee of the estate of said Lee,' the sum of $3,502.97, the. amount found due from him to this plaintiff upon said accounting proceedings; that said order or judgment was not complied with and no part of such sum has been paid, and that the defendant herein-had notice and knowledge of all these proceedings; that on December 5, 1906, plaintiff commenced an action in the Circuit Court of the United States for the District of Dew Jersey, in which State said Buckmaster then resided and now resides, and in February, 1907, judgment was duly entered and docketed against Buckmaster in favor of the plaintiff for $4,366.64, and execution- was duly issued thereon and returned unsatisfied, and is still unpaid ; that on March 20, 1907, on application of the plaintiff, an order was duly made and entered in this court authorizing and permitting plaintiff to - maintain this action upon said bond given by Buckmaster and the defendant herein.

The defendant demurred, *first,*because it appeared upon the face of the complaint that the plaintiff had no legal capacity to sue; *second,*because it appeared upon the face of the complaint that it did not contain facts sufficient to constitute a cause of action. The Special Term sustained the demurrer upon both grounds and dismissed the complaint.. .

There is no merit in the objection that the plaintiff had no legal capacity to sue. He had legal capacity to sue, because he had been appointed trustee in bankruptcy by the United States District Court, and as such stood in the shoes of the. creditors, and as such was entitled to take all legal and equitable steps to reduce to possession the estate of the bankrupt.- The difference *522between legal capacity to sue and facts sufficient to constitute a' cause of action was pointed out in *Ward*v. *Petrie*(157 N. Y. 301), where the court said: “There is a difference• between capacity to . sue, which is the right to come into court, and a 'cause-.of- action, . which is tile right to relief in court. Incapacity to sue exists when there is some legal disability, such as infancy or lunacy, Or a want of ■title in the plaintiff to the character i,n which he sues; The plaintiff was duly appointed receiver and has a legal, capacity to’ sue. as such, .and hence could bring the defendants into court by the service of a summons upon ' them, even if he had no cause of action against them.” That Case was cited with approval in *Ullman*v. *Cameron*(186 N. Y. 339).

As to the second ground, of demurrer, that the complaint did not state a cause of "action, the respondent claims that the trustee-in bankruptcy is a person occupying ,'a position in. hostility to the assignment under bankruptcy proceedings which have destroyed -. the assignment; that the surety,-therefore, is not bound to respond to any orders or judgments against the assignee recovered by- the trustee in such hostile proceedings;. that it was not within tlie contempla- • tion of the surety when the bond was signed that it would be hablé unless appropriate proceedings were takéii under the assignment . law fixing liability upon the assignee. ;

The respondent relies upon *People*v. *Chalmers*(60 N. Y. 154). In that casé the question as stated by the court was, whether a surety' upon a bond given by an assignee Under a. voluntary assign-: ment for the benefit Off creditors in pursuance Of the statute (Laws of 1860, -chap. 348) is" liable for the default of the : principal to account for'assets in his hands upon judgments in' favor of certain-creditors declaring the assignment void as to them and directing the assignee to pay over the funds in liis hands to apply on the same. . The court pointed out that section 4" of tli'e act referred to provides" for an accounting before .the county judge, and section' 5' provides when the-bond may be prosecuted and said :'“ This, language clearly, refers to the order or decree provided for in the fourth section fib be made by the county judge on accounting, or by. aii appellate court- upon the appeal from- such order or decree.”. .

The act of 1860 was repealed by chapter- 466 of the Laws of 18,77. Section. 9 of. this chapter provides, simply that an action *523brought upon an assignee’s bond may be prosecuted by a party in interest by leave of the court. In considering this change in the statute, and in view of the- decision in *People*v. Chalmers, Judge Shipman, in *Adams*v. *Hyams*(19 Blatchf. 487), said: *“*Whatever construction may be given to the fifth section of the act of 1860, I do not think that an accounting before any specified court was made, by the act of 1877 a prerequisite'to an action against a surety.”

In the *Chalmers*case the court also said that “ the statute was intended to protect the interests of creditors under valid assignments made for their benefit. * * * But it was not intended to secure the payment of assets upon judgments obtained in-hostility to the assignment. The judgments obtained in behalf of the creditors prosecuting the bond declared the assignment void for fraud. As to them, the assignment was a nullity, and the judgments obtained by them are conclusive. It follows that they were not and could not be prejudiced by the assignment. It never for an instant placed the property beyond the, reach of legal process. They might have levied upon it by execution, and the process of injunction and the appointment of a receiver were open to them. The remedies of creditors against a void assignment were ample, and no necessity existed for the intervention of the Legislature for the purpose of adding to them.”

The respondent also cites *Matter of Cantor*(31 App. Div. 19), where this court lield that moneys collected from a surety of an absconding assignee were not impressed with the lien of a judgment obtained by creditors setting aside the assignment for fraud, and that a substituted assignee who had collected said sums and had paid them over to said-judgment creditors must account for said sum to-the general creditors, and that the bond was.not created for the. benefit of such creditors, but the money collected thereunder must be applied under the assignment in satisfaction of all the debts of the assignor. There again was a case where creditors proceeded against an assignor as for fraud and attempted by their judgment to obtain special advantage' in preference to the rest of the general creditors upon a bond given for the benefit of all the creditors.

It seems to.me that neither of these cases applies to the case at bar. Here there is not a judgment creditor who has procured the setting aside of an assignment upon the ground of fraud, seeking a *524personal advantage to himself in preference to the general creditors. The plaintiff is a' trustee for all the creditors, who made no attack, upon the assignment and who seeks to collect for the benefit of all the creditors. liis title, his right of action, do not depend upon the determination that the assignment ivas fraudulent. As said by the Supreme Court of the United States *iw Randolph*v. *Scruggs*(190 U. S. 533): “It is admitted that a general assignment for the benefit of creditors made within four months from the filing' of a petition in bankruptcy is void as against the trustee- in bankruptcy, *so far as it interferes with his administering the property assigned.*This could not be denied. * * * The assignment was not illegal. It was permitted by the law of the State and cannot be taken to'have-been prohibited by the Bankruptcy Law absolutely in every event whether proceedings were instituted or not. * * * It had no general fraudulent intent. It was voidable only in case bankruptcy proceedings should be begun. At the time when, it was made the institution of such proceedings was uncertain. It' seems to us that it would be a hard-and subtle construction to say, as seems to have been thought in *Bartlett*v. *Bramhall*(3 Gray, 257, 260), that when they were instituted' they not only avoided the assignment, but made it illegal by relation back to its date, when, if they had not been started, it would have remained perfectly good. No doubt the corporation had notice of the Bankruptcy Law, but it could not go into bankruptcy by voluntary petition, and there is no objection to a debtor’s distributing his property equally among liis creditors of his own motion, if bankruptcy proceedings do not intervene. * * * The assignee is acting lawfully in what he does before proceedings in bankruptcy are begun, and although it may be assumed that the avoidance of the assignment relates back to the date of the deed, still so far as liis services, or services procured by him, tend to the preservation or benefit of- the estate, the mere fiction of relation is not enough to. forbid an allowance for'them. * - * * If beneficial services are allowed for, they, are to be regarded as deductions from the property which the assignee is required to surrender, and in that- .Avay. they gain a preference. * "" * We are-not - prepared to go further than to' allow compensation for services which were beneficial to the estate.”

In *Adams*v. *Hyams (supra)*the assignee *for*benefit of the *525creditors of a bankrupt, was required to render an accounting of his proceedings in the United States District Court. A decree was entered therein requiring him to. pay the assignee in bankruptcy about $15,000, from which no appeal was taken and no part thereof paid. ^Execution having been returned unsatisfied, the assignee having gone to parts unknown, upon petition of the plaintiff as assignee in bankruptcy, an *ex parte*order ivas made by the chief judge of the Court of Common Pleas for the city and county of Dew York, granting leave to plaintiff, as assignee in bankruptcy, to ptrose'cute the bond of the assignee for benefit of the creditors. Thereupon the plaintiff sued the surety in the United States Circuit Court, and the defendants insisted that they were not liable, that an .accounting by the-assignee before the Court of Common Pleas was a prerequisite to bringing an. action against the surety, relying upon the case of *People*v. *Chalmers (supra).*Judge Shipman said : “ In this case the assignment was not void as against creditors, it was valid when made, but by the decree in bankruptcy it became void as against the assignees in bankruptcy. By virtue of the assignment, a good title to the assigned property passed to the assignee, subject to be defeated by anassignee in bankruptcy, provided the assignment was made within the respective periods prior to the filing of the petition for an adjudication specified in the Bankrupt Act in the cases of voluntary or involuntary bankruptcy. * * * The title of Bamberger had come to an end and it was his duty, certainly, after he had ascertained that fact by a judicial decree, to -transfer the assets to -the assignee in bankruptcy, in whom the title had become vested. For his default in not paying to the plaintiffs the balance of the trust funds in his hands, after deducting his fees and expenses, the sureties Were responsible, provided the amount which was due had been found by the proper court. It seems to be clear that as between the plaintiffs and Bamberger, the District Court had jurisdiction and having held that the District Court was the proper court, gave judgment for the plaintiffs.

Applying the principle laid down in the foregoing cases to the case at bar, here was an assignment, legal when made, under which the defendant gave a bond that the assignee should faithfully execute and discharge the duties of such assignee and duly account for *526all moneys received by him as such assignee. The bond did not in terms provide in what court the accounting should be had, nor did the statute under which it was given. By virtue of the assignment and the bond he took possession of the property for the benefit of all the creditors. He thereafter voluntarily sought the United States District Court and asked the said court to take and state his account. That account was taken and he was ordered by said court to turn over the amount found in his hands to the trustee" in bankruptcy, who represented all the creditors, and-in whose hands alone the estate could legally be lodged, and in whom alone was vested any right to recover any portion of the estate. He failed to obey the order of the court. He,'therefore, failed to duly account for all moneys received by him as such assignee. The giving of the bond was the means by which he got possession of the property. It was the promise of the defendant to answer for . his conduct which allowed him to take such possession. The amount due has been judicially determined in a court of competent jurisdiction, and it does not seem to me that a liability could only be predicated upon an accounting in a State court. The provisions of law governing the subject-matter are to be read into the provisions of the bond. “ The fact that the pleadings were amended did not change the condition of the undertaking, because the surety must have contracted with reference to the right of the plaintiff to amend his complaint (after the defendant had served an answer) within the time specified in section 842 of the Code of Civil Procedure, as well as with reference to the power which the court liad to permit an amendment. The undertaking was given subject to the exercise of this right- and power.” *(Doon*v. *American Surety Co.,*110 App. Div. 215; affd., 186 N. Y. 598.) When the bond was given the Bankruptcy Law was in force, and the-defendant must be held to have known that by the act of assigning for the benefit of creditors a situation arose -under which bankruptcy proceedings could be instituted, and that if" instituted, jurisdiction of the estate passed to the United States court, and that the assignee might there account, and, therefore, that contingency must be written in as part of the obligation which it assumed.

'It seems to me, therefore, that the complaint states facts sufficient to constitute a cause of action, and, therefore, that the judgment *527appealed from should he reversed, with costs, and the, demurrer overruled, with costs, with leave to the respondent, upon payment of such costs, to withdraw its demurrer and to interpose an answer within twenty days after service of notice of entry of the judgment to be entered herein.

Patterson, P. J., and Ingraham, J.,. concurred; Houghton and Scott, JJ., dissented.

Houghton, J. (dissenting):

I agree' that, the plaintiff has capacity to sue, and that he has a cause of action as trustee against the defendant as surety for any misappropriation of the assigned estate by the assignee. I do not agree to the proposition that the defendant surety is bound by the decree of the bankruptcy court made upon the voluntary accounting of the assignee in that court.

Very likely the bankruptcy court had sufficient jurisdiction so that an accounting in that court bound the parties who voluntarily appeared and submitted themselves to its jurisdiction. The defendant, however, was not made a legal party to the accounting proceeding. The notice given • was not sufficient to bind it. The complaint herein is not framed as for an' accounting of the funds coming to the hands of the assignee for whom the defendant was surety. Such an action would lie notwithstanding the lack of a decree of any State court. An accounting in a State court and the rendering of a decree therein is not a prerequisite to an action for an accounting against the surety. An accounting could be had in the present action if the complaint were framed upon that theory. It is framed, however, upon the theory that the decree of the bankruptcy court upon the voluntary accounting of the assignee therein, is binding and conclusive upon this defendant as surety. The cause of action set forth is upon the decree alone and the action is in effect a suit upon a judgment.

When the defendant gave its undertaking to answer for the acts of the assignee, I think all it agreed to dó, so far as being conclusively bound by decrees, was to abide, without question, any decree made by any State court having jurisdiction over assignments. These courts were' the Supreme Court and the various County Courts of the State. Assignments for the benefit of creditors were *528. and are regulated by State statutes. I do not think.it can be said that' the defendant by giving its undertaking, into which these statutes must be fairly read, consented that any court,- foreign or Federal, into which the-assigneo chose to go.and account, might make a bind- ■ ing and conclusive .decree against it as surety. It is true the ■ functions of the-assignee ceased when bankruptcy was adjudged; but the assignment was good when made.'. The fact of 'its being superseded by the bankruptcy proceedings-did not throw the assignment into .the bankruptcy court. Nor did the assignment, get into .. that court because the property in the Bands of the assignee passed ■, to the hankruptcy trustee.- For the purposes of a binding ..accounting upon the surety, the assignment was still in the State court.

The real contention in *Adams*v. *Hyams*(19 Blatchf. 487) seems to have been that an accounting and decree in a State court was a ■ prerequisite to the maintaining, of an action' against the'-surety. ' To the holding that it was not, I agree,, To the. further discussion and holding that the bankruptcy court could make a decree conclusive and binding upon the''surety, I. do not agree.

Nor' was the judgment obtained', against' the 'assignee in the New Jersey court .binding upon the defendant- The plaintiff - cannot sue the surety upon that judgment as a- binding’ of 'conclusive ' adjudication of the amount due. '

For these reasons, I think- the demurrer to the complaint was properly .sustained and should be .affirmed: -

Judgment reversed', with costs, and- demurrer', overruled, with . costs, with- leave to defendant to withdraw demurrer and to answer . on payment of .costs. ' .