#### The Broadway Trust Company, Plaintiff, *v.*Julius Manheim, Defendant.

(Supreme Court, Kings Trial Term,

June, 1905.)

Bankruptcy — Confirmation of composition operates as a discharge — Subsequent action on dischargeable debt not properly scheduled — Burden of proof — Bankrupt Act, 1898, § 12, strictly construed — Negotiable Instruments Law, § 96.

While a discharge in bankruptcy to be available must be pleaded, either the facts showing jurisdiction in the Bankrupt Court of the parties and of the subject-matter must also be pleaded, or there must be some allegation equivalent thereto. An allegation in an answer that defendant was duly adjudged a bankrupt in the District Court of the United States for the Eastern District of New York, is a sufficient allegation of jurisdiction in that court of the defendant and of the subject-matter.

When jurisdiction is established, the legal presumption is in ' favor- of the regularity of subsequent proceedings.

An order confirming a composition in bankruptcy discharges , the bankrupt from a debt represented by his promissory notes where he schedules the same in good faith in the name of the original payee if a transferee thereof had notice or actual knowledge of the bankrupt proceedings and in a suit against the maker who pleads his discharge in bar, thé burden of proof is upon the plaintiff to show why he should not be bound thereby.

As section 12 of the Bankruptcy Act, 1898, relating to compositions with creditors, compels dissenting creditors to accept the per*416centage accepted by the majority and deprives them of their remedy on the balance of their claims thereafter, it should be strictly construed.

Where a bankrupt in good faith schedules a debt upon his promissory notes in the name of the original payee and within a month of adjudication files an application for the confirmation of a composition with his creditors, an order confirming the composition is inoperative as against the holder of the notes in due course who had no knowledge or notice of the bankruptcy proceedings until after the maturity of the second note and is no defense to an action by him upon the notes.

Under section 96 of the Negotiable Instruments Law a holder for value in due course takes the same free from any defenses available to prior parties among themselves.

Action upon a promissory note against defendant as maker, to which his discharge in bankruptcy was pleaded in. bar. The opinion states the case.

Ira Leo Bamberger, for plaintiff.

David 0. Myers, for defendant.

Burr, J.

I think that the answer .is sufficient to admit evidence of the defendant’s proceedings in the Bankruptcy Court. It is true that a discharge in bankruptcy to be available must be pleaded as a defense (Revere Copper Co. v. Dimock, 90 N. Y. 33; aff’d, 117 U. S. 559), and either the facts showing jurisdiction in the Bankruptcy Court of the parties and the subject-matter must also be pleaded, or there must be some allegation equivalent thereto. Under the Code an allegation that a judgment was “ duly rendered” is sufficient to admit proof of these facts, if the allegation is contro Averted. Code Civ. Pro., § 533.

The answer in this case alleges that on the 11th day of April, 1904, the defendant was *“*duly adjudged ” a bankrupt in the District Court of the United States for the Eastern District of ¡New York. This was a sufficient allegation of jurisdiction in that court of the defendant and of the subjectr-matter. The proof sustains the allegation. When jurisdiction is established, the legal presumption is in *417favor of the regularity of subsequent proceedings. McCormick v. Pickering, 4 N. Y. 276. The answer further alleges that on the 14th day of October, 1904, by an order of discharge in said bankruptcy proceedings, the debt represented by the notes in suit in this action was discharged. The proof is that on that day an order was entered in the Bankruptcy Court confirming a composition with his creditors proposed by the defendant. Such an order is in effect a discharge in bankruptcy and may be pleaded as such. Collier Bank. (5th ed.) 159; Bank. Act, §§ 12, 14; Glover Grocery Co. v. Dorne, 8 Am. Bank. Rep. 702. By force of this order and the statute in question the defendant was released from all his provable debts, except, among others, such debts as had not been duly scheduled in time for proof and allowance with the name of the creditor if known to the bankrupt, unless such-creditor had notice or actual knowledge of the proceedings in bankruptcy.

Plaintiff’s debt being on promissory notes was a provable debt. The name of the plaintiff was not included in the defendant’s schedule of liabilities as the owner of the debt. The debt was scheduled in the name of the original payee of the notes, but there is no evidence that at the time of the filing of the schedules the defendant knew of the transfer to the plaintiff, or that the defendant was guilty of bad faith in the omission. TfesS omission will not prevent the discharge from becoming operative if the plaintiff had notice or actual knowledge of the bankruptcy proceedings (Id., § 17, subd. 3). The burden is on the plaintiff to attack the discharge in bankruptcy and show cause why he should not be bound by it. Stevens v. King, 16 App. Div. 377. I find from tire evidence in "the case that the plaintiff had no formal notice of the various proceedings in the Bankruptcy Court, but I aláb find that it did have actual knowledge of the existence of such proceedings by the middle of July, 1904.! Was that knowledge sufficient to make the discharge effectual as to it ? The Bankruptcy Court does not in express terms provide how long before the discharge is granted such knowledge must be acquired, but the purpose of the provision is manifest. It was intended to remedy a defect, in the previ*418ous Bankruptcy Act by which a debt was discharged, even though the name of the creditor was omitted from the schedules, provided such omission was not willful nor fraudulent, even though the creditor had no notice nor knowledge of the proceedings. Tyrrel v. Hammerstein, 33 Misc. Rep. 505 ; 6 Am. Bank. Rep. 430. It would seem to be reasonable that before a party is deprived of his remedy to enforce his debt, by a discharge in bankruptcy, he should receive notice of some kind or have actual knowledge of the proceedings tending to that end, in time to participate therein. Birkett v. Columbia Bank, 195 U. S. 345. In that case the court say, “Actual knowledge of the proceedings contemplated by the section is knowledge in time to avail a creditor of the benefits of the law — in time to give an equal opportunity with other creditors — not a knowledge that may come to him so late as to deprive him of participation in the administration of the affairs of the estate.”

In the case of discharge in bankruptcy as distinguished from, a composition it might be the case that if such knowledge were acquired in time to enable the creditor to prove his claim and have it allowed, to- participate in the dividends of the bankrupt estate, or to be heard in opposition to the application for discharge, it would be sufficient. Fider v. Manheim, 81 *N.*W. Rep. *2.*But in the case of composition agreement it seems to me a different rule should apply. I think the unscheduled creditors should have notice or actual knowledge of the bankruptcy proceeding prior to the time when the application for the confirmation of the composition agreement is filed. Before such application can be filed, the proposed agreement must he 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. Bank. Act, § 12. In this case the first of the notes sued upon matured June 11, 1904, and the second July 11, 1904, and plaintiff’s actual knowledge of defendant’s bankruptcy proceedings was subsequent to the latter date. But the defendant was adjudicated a bankrupt on April 11, 1904, and prior to May 4, 1904, he had obtained the consent of a majority of the creditors whose claims had *419been allowed and approved, and on that day he filed his application for a confirmation of the composition agreement. If the plaintiff had had knowledge or notice of the proceedings prior to that time- it might have proved its claim and withheld its consent from the proposed composition and prevented the bankrupt from obtaining the required majority. Since the proceeding compels dissenting creditors to accept the percentage accepted by the majority and deprives them of their remedies on the balance thereafter, this section' of the Bankruptcy Act should be strictly construed. Collier Bank. 149; Matter of Monroe, 7 Am. Bank. Rep. 706. The knowledge of the plaintiff came too late to enable it to “ have an equal opportunity with other creditors ” in participating *“*in the administration of the affairs of the estate.” The fault was the fault of the defendant in not properly preparing his schedules as to the name of the creditor, or in failing to amend the same after he had learned who the real owner of the debt was. I think the order of the Bankruptcy Court confirming the proposed composition, so far as the plaintiff is concerned, is inoperative, and affords no defense to the action.

As to the defense of usury, it is sufficient to say that I find from the evidence that the notes in suit were valid obligations in the hands of the original payees. But if otherwise, the plaintiff in this action was a holder for value in due course and took the notes free from any defenses available to prior parties among themselves. Neg. Inst. Law, § 96. (L. 1897, chap. 612.)

There should be judgment in favor of the plaintiff, with costs.

Judgment for plaintiff, with costs.