Case Name: John Morrison, as Sole Surviving Partner, etc., Respondent, v. William W. Vaughan, Appellant
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1907-05-10
Citations: 119 A.D. 184
Docket Number: 
Parties: John Morrison, as Sole Surviving Partner, etc., Respondent, v. William W. Vaughan, Appellant.
Judges: 
Reporter: Appellate Division Reports
Volume: 119
Pages: 184–189

Head Matter:
John Morrison, as Sole Surviving Partner, etc., Respondent, v. William W. Vaughan, Appellant.
First Department,
May 10, 1907.
‘Bankruptcy—unscheduled claims discharged when creditor has ,notice of bankruptcy proceedings.
Under section'17 of the Bankruptcy Act contract, debts.not scheduled are dis- . charged if the creditor had notice or actual knowledge of the proceedings in bankruptcy.
Thus; liability on a guaranty of performance of a building contract is discharged by bankruptcy although' the claim was not scheduled, if the claimant had . actual knowledge of-the proceeding.
. Laughlin, J., dissented, with opinion.
Appeal by the defendant, William W. Vaughan, from a judgment of the Supreme-Court in favor of the plaintiff, .entered in the •office of the cleric of the county of Mew-York on the 9th day of 'October, 1906, upon the verdict of a jury rendered by direction of the court after a trial at the Mew York Trial Term.
H. B. Olosson of counsel [Parsons, - Olosson <& McLlvaine, ¡attorneys], for the appellant. .
John H. Mulohahey, 8. B. Livingston with him on the brief, <of counsel [James A. <& Richard T. Lynch, attorneys], for the respondent. .

Opinion:
Clarke, J.:
This action was brought upon a written guaranty of the performance of a building contract. The contract was made on the 3d day •of July, 1899, between one Hoagland and the plaintiff's firm,-under • which said firm agreed to finish all the stone work for the fronts of four certain buildings on One Hundred and Seventeenth street, "then unfinished, and to supply the necessary stone therefor-for the ¡sum of $2,000. The party, of the first part, agreed . to pay the party of the second party for such labor, work, services and materials "the sum of $2,000, to be paid $1,000 when the platforms and steps •of the stoops were all Up and' $1,000 when the - doorways and -columns were tip and the stone work on the fronts completed..
On the same day and under seal the defendant agreed to guarantee the performance of said contract on the part of the party of the first part and guaranteed the prompt payment of the money becoming dué to said John Morrison & Go. on account of -the work to be -done by him on premises specified in said contract in accordance with the terms thereof, the amount of'such guaranty being the sum of $2,000 in payments of $1,000 each as in said contract provided, which specific sums he ' guaranteed to pay as in said contract provided. ' -
It appeared in evidence that on the 13th of. January, 1900, the work had been completed to the point' where the first payment of $1,000 was required. ' This payment was never made. This action upon the guaranty was commenced on January 20, 1905, upwards of five years thereafter. The defendant, in his answer and for a separate defense, alleged that " on the 7th day of February, 1900, at the City of New York in. the State of New York a decree in ' bankruptcy was duly made and entered in the United States Dis- trict. Court for the Southern District of New York discharging this defendant from all his debts. The contract of guarantee made by the defendant set forth in paragraph Fourth of the complaint was made and the default, if any such there was on the.part of the said Charles B. Hoagland in. the performance of his contract with the said John Morrison .& Co., set forth in paragraph Second of said complaint, occurred before the granting of said discharge and before "the filing by .the said defendant in the said bankruptcy proceedings of his petition'to be adjudicated a bankrupt, and any. liability, obligation, claim or indebtedness of this defendant to this plaintiff's said firm was provable against the estate of this defendant . in such proceedings and-was not, nor was .any part thereof, created. by his fraud, embezzlement, misappropriation or. defalcation' while . acting as an officer or in any fiduciary capacity. The members of the said firm of John Morrison & Co.-had actual knowledge of the said proceedings inbankruptcy in time to avail themselves of the . benefits of the United States Bankruptcy Law, for .such case made . and provided, equally with the other creditors of this defendant." ' .
The contract Of guaranty was made on the 3d day of July, 1899. On the 4th day of November, 1899, the defendant duly filed in the office of the clerk of the District Court of the United States for. the- • Southern District of New York a petition.to be adjudged a bankrupt, together with the schedules in triplicate required by the rules, andón the same day-was duly adjudged a'bankrupt. The liabilities of the bankrupt-* according to such schedules, amounted to $224,934.51, and^his assets', collectible and uncollectible, $188,516.
• There were forty-six secured and unsecured creditors and he was contingently liable on twenty-eight negotiated bills and notes accord- . ing to said schedules. The debt here sued on was not scheduled. ' It is not permissible to infer that the omission to schedule a debt of -$1,000, when debts to the amount of upwards of $224,006 had been scheduled, was intentional or- fraudulent. The reasonable inference is as this debt was a contingent liability upon.a guaranty . for the performance of a contract by another in regard to which there had-been at that time no 'breach, and which Was-not as. matter .of fact breached until- two months and a half thereaf ter, that this- . contingent liability not appearing in the books of the bankrupt, from which the schedules were made up, was overlooked. Although this debt was not scheduled and no written notice was sent to the plaintiff's firm of any of the proceedings. in the bankruptcy court, either by the defendant or the receiver or trustee in bankruptcy, yet nevertheless it appears from the uncontradicted testimony in this case that the plaintiff had actual knowledge of the proceedings in bankruptcy. He testified that he read in the papers of the defendant's bankruptcy and that that was the reason why he had waited five years to bring this suit; that he.thought there was no use going after him then. He further testified that when' he obtain ed information from the same source, that is, by reading in the newspapers, of the defendant's, father having retired from Wall street with a large amount of money, the' schedules were then examined to make sure that his debt was not included therein and then lie brought this action. The defendant and another witness, who was his clerk, testified positively that in Novémber or December, 1899,. they both had a conversation with the plaintiff in which they informed the plaintiff that the defendant was then in bankruptcy and was working for the receiver. The plaintiff did not deny the testimony of either of these witnesses. " ' •
The fact, then, that plaintiff did have actual knowledge of the defendant's bankruptcy in November or December, 1899, is established without contradiction. It appears that the meetings of creditors were held and the examinations of'the bankrupt were had and continued from the 24th of November, 1899, to the 10th of January, 1900; that .the bankrupt was discharged on the 7th day. of February, 1900, and that the first dividend was declared .and paid on April 17,. 1900.
The liability under the guaranty, as' claimed by the plaintiff, became fixed on the 13tli of January,. 1900. Section 17 of the Bankruptcy Act (30' IT. S. Stat.. .at. Large, 550, chap. 541; U. S. Comp. Stat. 1901, p. 3428) provides that: "A discharge in bankruptcy shall release a bankrupt' from- all of. his provable debts, except such as * . have 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."
In Birkett v. Columbia Bank (195 U. S. 345) the Supreme Court, of the United States, in interpreting section 17 (supra), said: "Actual knowledge of the proceedings contemplated by the section is a knowledge in time to avail a creditor of- the benefits of the law—in' time to give him an equal opportunity with other creditors — not a knowledge that may come so late as to deprive him of' participation in the administration of the affairs of the estate or to deprive him of dividends."
While the plaintiff had no written notice of the bankruptcy proceedings, he had notice derived from reading the newspapers /and from the verbal communication of the defendant and his clerk, which gave him actual knowledge of the proceedings in bankruptcy within a short time after- the filing of the petition, with opportunity to' have filed and proved his own claim, to have participated in the meetings of the creditors, to have joined in the examination of the bankrupt and his father, and also to have participated in the first and subsequent dividends declared and paid; in short, to have participated in all the proceedings taken, with the exception of the choice of the trustee. In consideration of the relative value of plaintiff's claim as against the $224,000 of scheduled claims, the representatives of which exercised that choice, this cannot be considered to have been a very material- deprivation" of any of his rights. That - is, he received notice and actual knowledge in time to have participated in all of the material proceedings and to have secured his proportional share of the bankrupt's assets.
This being so, it seems to me that the language of the Bankruptcy. Act (supra)- precisely covers this case, and that this debt was discharged by the discharge in bankruptcy.
It follows, therefore, that the verdict should' have been directed for the defendant and not for the plaintiff, and that -the judgment-appealed from should be reversed and a new trial ordered, with costs to the appellant to abide the event.
Patterson, P. J., Ingraham and Scott, JJ., .concurred; Iaughlin, J., dissented.'-