#### Elias N. Mallouk, Plaintiff, *v.*The American Exchange National Bank et al., Defendants.

(Supreme Court, New York Trial Term,

January, 1912.)

Bankruptcy — Validity of transfers and preference by bankrupt and proceedings to annul such transfers — Eight of creditor to sue to set aside fraudulent conveyance — Proof and payment of claim — Eights of creditor who has obtained an invalid preference—Fraudulent conveyance.

A composition agreement between a bankrupt firm and its creditors to be effectual must provide that every creditor who signs and agrees to accept the payment offered does so on condition that every other creditor shall do likewise.

If one creditor receives more than another, or if he receives security which another does ■ not rfeceive, the composition agree*286ment becomes fraudulent and whatever is unfairly acquired in excess of the other creditors may be recovered back by the injured creditors.

Where, in an action by the. assignee of certain judgment creditors of a bankrupt firm to set aside as fraudulent a transfer to defendant, another creditor, of the equity that the bankrupts formerly owned in certain . ‘eal estate, it' is undisputed that defendant, a bank, in consideration of and prior to its signing a composition agreement, duly confirmed, in the bankruptcy proceedings, actually received an additional note for twenty-five per cent, more on its claim than did the other creditors and also accepted, as collateral security for the payment of said note and the notes received by it under the composition agreement, a conveyance of said real estate to a third person for defendant’s benefit, but the deed was withheld from record for about a month after its delivery, the plaintiff is entitled to judgment for the value of his property at' the time of its conveyance plus its rental value during the time it was held in trust for the defendant. *

A claim of defendant, that as a consideration for the secret transactions with the bankrupts it surrendered to them their notes aggregating a sum in excess of the value of their equity in the real estate as shown by the testimony, is untenable, as defendant had included in its proof of claim in bankruptcy the liability of the bankrupts as indorsers of the surrendered notes.

Action to set aside an alleged fraudulent transfer.

Ferris & Dannenberg, for plaintiff.

Cardozo & Rathan, for defendants.

Cohalan, ■ J.

TKe plaintiff, as the assignee of certain judgment creditors, sues to set aside as fraudulent a transfer of the equity that defendants Yamin and Rahaim formerly owned in the premises Ro. 74 Greenwich street, in the borough of Manhattan, city of Rew York. On August 11, 1909, Alexander Yaníin and Tanius Rahaim, who had conducted business under the firm name of Rahaim and Malhami, were adjudicated bankrupts. In October, 1909, a composition agreement- was effected. It provided for the settlement of the debts of the bankrupts by the payment to the creditors of ten per cent, in cash and fifteen per cent, in two notes, one to become due in six months, and the other to *287become due in twelve months. The composition was confirmed by the United States District Court for the Southern District of Mew York, and the cash and the notes were delivered by the trustee in bankruptcy to the creditors, including the creditor American Exchange Mational Bank, the principal defendant in this action. The plaintiff offered evidence to show that, when the defendant American Exchange Mational Bank was asked to sign the composition agreement, it refused. Thereupon, it was agreed between the bankrupts and the defendant bank that, if the bank would sign the composition agreement, the bankrupts would give to the bank an additional note for twenty-five per cent, of its claim, and would secure all the notes by a conveyance of the equity of the bankrupts in the premises Mo. 74 Greenwich street. The bank then signed the. composition agreement. Thereafter, and after the other creditors had signed the composition, the bankrupts delivered to the bank an additional note for twenty-five per cent, of its claim, and secured all the notes by a conveyance to the defendant Bush, who was acting for and on behalf of the bank, of the equity possessed by them in the Greenwich street premises. I think that there is sufficient evidence in the case to support the plaintiff’s theory thereof. It is not disputed that the bank actually received twenty-five per cent, more in notes than did the other creditors; that it actually accepted, as collateral security for the payment of this note, a conveyance of the property, and that the deed was not recorded until about a month after it was delivered. There is proof that these arrangements were made prior to the signing of the composition agreement by the bank. The bank concedes that the bankrupts executed and delivered the deed of 74 Greenwich street to the defendant Bush for its benefit, and that, notes for the additional twenty-five per cent, were also received, for its benefit, and for the benefit of the Market and Eulton Mational Bank. The bank, however, declared that as-a" consideration for these transactions it surrendered to the bankrupts notes aggregating over $9,500. It is needless to assert that a "composition agreement, in order to be effectual, must essentially provide that every creditor who signs and agrees *288to take the reduced payments offered does so on condition that every other creditor shall do likewise. If one creditor receives more than another creditor, or if he receives security which another creditor does not receive, then the, composition agreement fails of its purposes; it becomes fraudulent, and whatever is unfairly acquired in excess of the other creditors may be recovered back by the injured creditors. Hanover National Bank v. Blake, 142 N. Y. 404. In that case the court said: - *“*The general principle has been long settled in England and here that a secret agreement, which induces a creditor to agree to a composition by the promise of a preference, or of some undue advantage, over the other creditors, is utterly repugnant to the composition agreement, and, from its fraudulent nature, is avoided by the law. The very essence of.a composition agreement is that all creditors come in upon terms of equality,; and that equality would be destroyed, if the secret agreement were given effect.” In that case the composition agreement was upheld, but it was conclusively established that, where one creditor secretly received more than the other creditors or received security for the same, what he received was void, and could be set aside, and recovered. The bank’s claim, that its delivery of the notes of $9,500 constituted a new and valuable consideration for its preference, lacks substanoe and is wholly insufficient. Union National Bank v. Warner, 12 Hun, 306.

It appeared that these notes, were overdue, and no effort had been made to collect them from the maker. ' There are, besides, two significant features adduced in the evidence which are damaging to the defendant’s case: (a) The bank in proving its claim in bankruptcy included the liability of the bankrupts as indorsers of these notes in its claim; and (b) the deed of trust in evidence shows that the real estate was held both as security for the composition notes and for the additional note of twenty-five per cent, which the bank received. It is undoubted that the bankrupts at the time of the transfer were insolvent. The property has been sold under foreclosure proceedings. The plaintiff, therefore, is entitled to a judgment for the value of the property at the *289time it was conveyed to the defendant Rush, plus its rental value during the time it Avas held in trust for the bank. Fox v. Erbe, 100 App. Div. 343; affd., 184 N. Y. 542; Salt Springs National Bank v. Fancher, 92 Hun, 330. The case of Fullerton v. Viall, 42 How. Pr. 294, is authority for the proposition that creditors are entitled to the value of the property in the hands of the fraudulent grantee at the time of the conveyance, irrespective of whether or not the grantee gained a profit or sustained a loss by his transaction. There was testimony offered that the equity in the premises was worth at the time of the transfer the sum of $9,000. I am not satisfied that it was worth this amount. The defendant claims that the equity had no valúe whatsoever. Before findings ar.e submitted, I will hear counsel in regard to the submission of additional testimony as to the value of the equity.

Judgment for plaintiff.