Case Name: MASON & HAMLIN ORGAN CO. v. BANCROFT
Court: New York Supreme Court
Jurisdiction: New York
Decision Date: 1876-01
Citations: 1 Abb. N. Cas. 415
Docket Number: 
Parties: MASON & HAMLIN ORGAN CO. v. BANCROFT.
Judges: 
Reporter: Abbott's New Cases
Volume: 1
Pages: 415–421

Head Matter:
MASON & HAMLIN ORGAN CO. v. BANCROFT.
N. Y. Supreme Court, First Department; Special Term,
January, 1876.
Bankruptcy.—Composition.—Surety.
A composition under section 17 of the bankrupt act (1874, c. 390, p. 182), only exonerates the bankrupt, and does not discharge his co-obligors or sureties.
Demurrer to complaint.
The complaint, after stating the incorporation of the plaintiff, and that the defendants, Edward W. Bancroft and T. F. Tracy, were sureties on a lease made by it to Morris Reiman, and Albert Friedlander, composing the firm of M. Reiman & Co., in December, 1872, for five years and two months from January 1, 1873, at the yearly rent of $17,000, payable monthly, alleged that in August, 1874, a petition in bankruptcy was filed in the district court of the United States against Reiman & Friedlander, and at that time there was due to plaintiff for rent $2,957.64. “ That the plaintiff duly filed its proof of debt against said debtors for said sum, and that thereafter such proceedings were had in the said court upon said petition, that said debtors offered, and their said creditors accepted, a compromise of their indebtedness, in pursuance whereof said plaintiff has received on account of the said sum, $850.”
It further alleged that “due notice ” of the default of Reiman & Friedlander in paying the said rent as the same matured, from time to time, was given to defendants.
This action was brought to recover $2,107.64, the balance of the rent due from Reiman & Friedlander at the time of their failure after deducting the $850, obtained by the compromise.
The defendants demurred to the complaint, on the ground that it did not state’facts sufficient to constitute a cause of action.
Samuel Boardman (Boardman & Boardman), for the demurrer.
I. The complaint, while setting up a cause of action against the defendants as sureties, also shows a compromise of the debt on which the cause of action arose with the principal debtors. It does not state that this compromise was made with the consent of the defendants. It is well settled that the interference of the principal parties with the contract, without the consent of the surety, discharges the latter from liability (Coleman v. Wade, 6 N. Y. 48; Gahn v. Niemcewicz, 11 Wend. 312; Colemard v. Lamb, 15 Id. 329 ; Bangs v. Strong, 7 Hill, 250; S. C., 4 N. Y. 315 ; Hayes v. Ward, 4 Johns. Ch. 123 ; King v. Baldwin, 2 Id. 555). As to right of subrogation of surety, Boyd v. McDonough (39 Hbzo. Pr. 389).
II. The only compromise by debtors with creditors authorized by the bankrupt act, is one which if accepted, must provide that the same “shall be accepted in satisfaction of the debts due to them from the debtors ” (Section 43 of the Bankrupt Act, as amended, 18. U. JS. Stat. at L. p. 182, c. 390, § 17).
III. The plaintiff, ás a creditor of the bankrupt firm,, was a party to the compromise made by it with their-creditors ; and being the principal debtor, and the defendants merely sureties, it must be conceded that the defendants have been discharged from their liability.
IV. The provision of the United States Revised1. Statutes, page 993, section 5118,—which provides .that “no discharge shall release, discharge or affect any person liable for the same debt, for or with the bankrupt,, either as partner, joint contractor, surety or otherwise, ”■—relates only to the discharge provided for by section 5115, and has no reference to proceedings of' compromise between debtors and their creditors.
V. A discharge in bankruptcy does not satisfy or extinguish the debt of the bankrupt. Its only effect is to exonerate the debtor and his future acquisitions from liability therefor (Bowery Savings Bk. v. Clinton, 2 Sandf. 113 ; U. S. Rev. Stat. p. 993, § 5119).
VI. The composition by debtors with their creditor^, provided for under section 17 of the amendatory and. supplementary bankruptcy act, approved June 22, 1874, satisfied the debt (In re Bechet, 12 Bank Reg. 201; 18 U. S. Stat. at L. pp. 182, 183).
VII. As the plaintiff voluntarily became a party to' the composition proceedings and did not obtain the assent of the sureties this court is bound to hold that it intended the consequences o£ its own act and discharged the sureties.
Charles Edward Souther (MeDaniell, Lummis & Souther), opposed.
I. Proceedings in bankruptcy, under United States Revised Statutes, section 4972, et seq., are in effect a suit between a debtor and his creditors (In re Farrell, 5 Bank. Reg. 125, Nixon, J., at p. 127; In re Adams, 2 Id. 92 ; In re Bush, 6 Id. 179, Hall, J., p. 180).
II. A discharge in bankruptcy is therefore a judgment, since it determines finally the rights of the parties and protects the debtor against all claims which were or might have been asserted in the proceedings (U. S. Rev. Stat. § 5119 ; Platt v. Parker, 13 Bank. Reg. 14, and cases cited at p. 16).
■III. A composition between the debtor and his creditors under section 17 of the amended bankrupt act (TI. S. Stats. 1873-4, c. 390, p. 178) in effect settles such a suit upon specified terms and operates as a discontinuance thereof upon consent before judgment. It is “a substitute for the ordinary proceedings and discharge under the bankrupt act” {In re Bechet, 12 BanJc. Reg. 201, 202).
IY. The effect of a discharge is declared by United States Revised Statutes, § 5119, but it does not extend to collateral remedies ( U. S. Rev. Stat. § 5118 ; In re Levy, 1 Bank. Reg. 66. And see Bowery Savings Bank v. Clinton, 2 Sandf. 113; Phillips v. Solomon, 42 Geo. 192, McKay, J., at p. 195, and cases cited). A debt, therefore, is not extinguished by the judgment in the suit in any such sense that collateral remedies are not preserved ; and if not by a judgment, then, a fortiori, not by a discontinuance before judgment, through a composition.
Y. Congress could not have intended, by section 17 of the amendment, that the debt should be satisfied more effectively than by a discharge under the act itself. The whole question is one of statutory construction ; and upon the principle of in pari materia, the bankrupt act and all its amendments will be considered as one statute, although enacted at different times (Sedgw. on Construction of Constit. c& Stat. Law, 2nd Ed. 209-212, notes and cases. See also Perkins v. Perkins, 62 Barb. 531). Its provisions will therefore be construed harmoniously, and if collateral remedies upon the debt survive the proceedings in one part, they will not in another part be held to have perished by them. And being statutory, the question is of course removed from the operation of general principles which control the relations of principal and surety ; but upon these even, it would be plaintiff’s duty to collect its claim so far as possible from the debtors themselves, and laches in doing so might be available to the sureties as a defense.

Opinion:
Barrett, J.
The effect of a composition confirmed by the bankrupt court, under section 17 of the. act of June 22, 1874, is substantially the same as a discharge under section 32 of the act of March 2, 1867. In the one case the creditors resolve that a composition proposed by the debtor shall be " accepted in satisfaction of the debts due to them from the debtor; " 'in the other, the court grants the bankrupt "a discharge from all his debts." It is said that in the latter case the debt remains, and that the discharge merely operates against the remedy, while in the former case the debt itself is satisfied and extinguished. The language used must, however, be read in connection with the context, and in the light of the general purpose and spirit of the bankrupt act. For instance: the proceeding therein referred to is clearly a very different thing from an ordinary composition agreement. In general, a promise by a single creditor to accept less than the full amount of his debt in complete satisfaction, cannot be enforced; and, to extinguish the debt without payment in full, a release under seal is required. Ordinary composition deeds between a debtor and his creditors are only binding on those executing them. Here, however, the creditors generally,—proper notice, be it assumed, having been given,—are bound by the terms of the composition. It has the same effect upon those voting against it, or not appearing at all, as upon the prime movers ; and the statutory minority are bound thereby, whether they accept the pro rata payment or not. As to the latter, are their debts, too, satisfied and extinguished, in the broad sense contended for, although they have opposed the entire arrangement and refused all pro rata payments % Evidently not. As against these creditors, the bankrupt could not ¡dead a mere accord and satisfaction or an extinguishment of the debt. He would be bound specially to set forth the completed composition proceedings under the act, and to rely upon the effect to be given to them, quite as much as if he had been discharged by the court, and were compelled to set that fact up. The composition is really a mere substitute for the discharge. It is simply a part of the general bankruptcy scheme—permissible only where proceedings are actually pending, and subject to be rejected or set aside by the court.
Again: provision is made in connection with the composition proceedings for determining the value of the debts of secured creditors, and it is declared that those who are fully secured are not entitled to vote upon the composition resolution without first relinquishing such security.
If the construction contended for by the defendants be correct, the debt of a secured creditor is absolutely extinguished by the acceptance of the composition, and thus the provision with respect to the relinquishment of security must be surplusage. Congress evidently thought otherwise, and that, but for the provision in question, the secured creditor could have accepted his pro rata, and then proceeded to realize from the security the balance of his debt.
Clearly, then, the word "satisfaction" in section 17 is not to be construed in the broad sense .contended for, but as qualified by its surroundings, and the evident intent of the legislative body. The fair and reasonable construction of the provision in question is not that the debts are satisfied in the sense of absolute extinguishment for all purposes, but—in analogy to our State act as to compromises by partners and joint debtors—that the debtor himself is exonerated and released from all further liability thereon, while the remedy as to partners, indorsers and sureties is reserved and preserved. For these reasons, the court is of opinion that the defendants, as the bankrupts' sureties,' were not released by the offer and acceptance of the compromise, nor by the receipt by the plaintiffs of their pro rata share thereof, although, as averred in the complaint, such receipt was "in full satisfaction of claims against principals."
The demurrer must, therefore, be overruled with costs, but with leave to the defendants to answer over with twenty days, after payment of such costs.
Ordered accordingly.
No appeal was prosecuted.