Court Opinion

ID: 5320806
Source: CourtListenerOpinion
Date Created: 2022-01-08 04:30:45.551481+00
Date Added: 2024-06-11T08:29:19.590520
License: Public Domain

Sherman, J.
Defendants’ motion to dismiss the complaint under rule 107 of the Rules of Civil Practice has been denied.
The substantial question presented is whether the court possesses jurisdiction of the subject-matter of the action.
Defendants Levi S. Chapman and Charles R. Chapman were duly adjudged bankrupts in the United States District Court for the Northern District of New York, on February 14, 1929. On February 9, 1929, five days prior to that adjudication, plaintiff recovered a judgment in the Supreme Court, Kings county, against those defendants based upon a promissory note.
A trustee was elected for both bankrupts for the administration of their estates in bankruptcy. The final meeting of the creditors to pass upon the accounts of the trustee was held on January 20, *2801930; about which time he filed his report and was discharged. Subsequently the bankrupts made application for their discharge, which was scheduled for hearing in the District Court on February 1, 1930. The bankrupts did not appear at that time, in person or by counsel, but plaintiff filed a petition and notice of objection, and on February 1, 1930, an order was made by the District Court “ that the general examination of the above named bankrupts be re-opened and be continued ” before the referee, and that the time of plaintiff and another creditor to file specifications of objections to the discharge of the bankrupts be extended until thirty days after the completion of the general examination.
The bankrupts then moved to vacate the order “ opening the examination of the bankrupts for the discovery of unadministered assets,” and the District Court handed down a decision modifying that order of February 1, 1930, and in the course of the opinion accompanying this decision the court stated: “ The showing [that some new assets will be revealed] made by the creditors seeking the reopening is not very persuasive.” (55 F. [2d] 965.)
Another order was made as of March 1, 1930, and entered on July 22, 1930, “ that the creditors of the above named bankrupts for the purpose of discovering unadministered assets may have an examination of each of the above named bankrupts ” upon three certain specified subjects, which order recited that its prior order was a “ reopening of the estates of each of said bankrupts.”
Plaintiff and another objecting creditor applied for a modification of that order, and the District Court handed down a decision stating, 111 have decided to vest in the Special Master the discretion to control the Scope of the examination,” upon which a third order was made as of April 7, 1931, by that court providing for the continued examination of the bankrupts and of any other witnesses who might be produced, and that the objecting creditors might also examine the bankrupts and any other witnesses on any subjects or matters which would “ aid in the determination of the bankrupts’ right to discharge in bankruptcy, or seem reasonably to or likely to lead to the discovery of assets of the bankrupts not heretofore disclosed.”
At the close of a hearing before the referee on April 30, 1931, plaintiff’s attorney moved for an order enjoining and restraining all the parties from disposing of the assets which are the subject of this action; the bankrupts were directed by the referee not to sell or disturb such assets and to procure from the defendant Maxwell (residing in California) an agreement to that effect. Maxwell’s agreement accordingly was obtained and filed with the referee.
These hearings were concluded before the referee on July 10, *2811931, and at the close of the taking of testimony on that day, but before the referee could report to the District Court, this action was commenced by the service of the summons and complaint, together with a notice of motion for the appointment of a receiver, upon the four defendants (other than Maxwell).
Plaintiff claims that the trustee in bankruptcy, who received his discharge about January 20, 1930, was then aware of the facts and circumstances showing the fraudulent disposition of the assets sought to be recovered in this action, and with such knowledge had failed to institute any proceeding to reduce those assets to his possession. The complaint and the affidavit submitted by plaintiff's attorney do not clearly set forth more than plaintiff’s “ belief ” that the trustee had such knowledge.
The motion papers before us in support of defendants’ motion present undeniable proof that plaintiff’s position in this respect is contradicted by the plain facts appearing in the record. It is clear that the information said to disclose the alleged fraudulent transfers was unknown to the trustee at or prior to his discharge. It appears likewise to have been unknown to plaintiff’s attorney prior to the trustee’s discharge. Plaintiff makes no allegation that he ever petitioned the District Court for relief upon the trustee’s alleged refusal to institute an action to recover any of the assets described in the complaint.
It conclusively appears that the original trustee did not abandon the claim, and from the documentary evidence it is clear that the information concerning the alleged fraudulent transactions was ascertained since the bankruptcy hearings were reopened and the further examinations held.
Nor is there under such circumstances concurrent jurisdiction. It is well established that once the jurisdiction of the bankruptcy court has attached and proceedings are still pending, as here, its jurisdiction is exclusive. (U. S. Code, tit. 11, §§ 75, 107 and 110; Bankruptcy Act, §§ 47, 67 and 70, respectively.) “ The exclusive jurisdiction of the bankruptcy court is so far in rem that the estate is regarded as in custodia legis from the filing of the petition.” (Acme Harvester Co. v. Beekman Lumber Co., 222 U. S. 300, 307.) The disputed ownership of the property in question must await determination by that court, as its jurisdiction cannot be disturbed by a State court action. Meanwhile plaintiff has no independent right of action whereby he may secure for himself as a single creditor a preference which is forbidden by the bankruptcy statutes.
The judgment secured by plaintiff against the bankrupts is one which can be barred by the bankrupts’ discharge. Whether it shall be so barred is one of the issues of which the Federal court has sole *282jurisdiction. So long as that issue is pending, plaintiff must seek his relief in that court which has exclusive jurisdiction over the bankrupts and their assets for the benefit of all creditors. Plaintiff here is not remediless, for he may apply to that court for the appointment of another trustee in bankruptcy and thereupon take proper steps to cause that trustee to institute the proceeding which plaintiff insists will increase the bankrupts’ estate.
Under the Federal statutes relating to bankruptcy, the trustee is under a positive duty to recover and reclaim all assets of the bankrupt; the rights, remedies and powers of creditors are vested in the trustee who may avoid fraudulent transfers. While bankruptcy. proceedings are pending, the trustee alone can maintain an action to avoid a fraudulent transfer. (Matter of Gray, 47 App. Div. 554.) Here plaintiff obtained his judgment against the bankrupts four days before the filing of the petition in bankruptcy. As stated in Acme Harvester Co. v. Beekman Lumber Co. (222 U. S. 300, 306), “ the fifing of the petition is a caveat to all the world, and in effect an attachment and injunction; * * * and on adjudication, title to the bankrupt’s property became vested in the trustee.” Again, in Isaacs v. Hobbs Tie & Timber Co. (282 U. S. 734, 737) title to the bankrupt’s property “ vests in the trustee as of the date of the fifing of the petition in bankruptcy, no matter whether situated within or without the district in which the court sits. * * * It follows that the bankruptcy court has exclusive jurisdiction to deal with the property of the bankrupt estate.”
Two years have not expired since the trustee in this case was discharged, and, therefore, the language of the Court of Appeals in Stephan v. Merchants Collateral Corp. (256 N. Y. 418, 421) is applicable here: “ Section 11-d (11 U. S. C. A. § 29 [d]) provides that ‘ suits shall not be brought by or against a trustee of a bankrupt estate subsequent to two years after the estate has been closed.’ * * * A motion to reopen the estate may at any time be addressed to the sound discretion of the District Court (Matter of Schreiber, 23 Fed. Rep. [2d] 428) and in any event two years had not elapsed before the estate was first closed.
“ A new trustee should be elected for the purpose of administering the unadministered assets. (Matter of Minners, 253 Fed. Rep. 300.) The application to reopen should be made by the creditors.”
Creditors are accorded full and complete protection under the bankruptcy statutes. (Glenny v. Langdon, 98 U. S. 20.) The method of procedure to compel a trustee to proceed when informed of the existence of property of the bankrupt, is well established. (Trimble v. Woodhead, 102 U. S. 650; Matter of Barnes, 18 Fed. 158.)
*283If the trustee, without sufficient reason, refuse to proceed, the court by its order may compel him to do so or may remove him for disobedience. (Matter of Lewensohn, 121 Fed. 538.)
Under the present law, the two-year limitation begins to run from the date when the estate of the bankrupt has been closed; but where an estate has been closed and is subsequently reopened, the two-year period would begin to run from the subsequent closing. (Bilafsky v. Abraham, 183 Mass. 401.) When this action was commenced the two-year period had not expired.
It is urged that the bankrupts may soon be discharged and that plaintiff’s judgment will then become, barred, so that his right to maintain a suit to recover these diverted assets would fall, and in the event that no new trustee shall be appointed to seek these assets, he could not then proceed even though he should then have discovered further convincing proof of the fraudulent diversion. But a discharge goes only to the remedy against the debtor personally; it does not cancel the debt, and, therefore, does not affect the right of the trustee or creditors of the bankrupt to have property previously transferred in fraud by the bankrupt, applied to the payment of debts. (Matter of Groves, 244 Fed. 197; Matter of Levy, 261 id. 432; affd., sub nom. Levy v. Schorr, 266 id. 207; Matter of Margolles, Id. 203; Matter of Iskovitz, 13 F. [2d] 473; Blick v. Nimmo, 121 Md. 139; 88 Atl. 116.) The discharge is personal to the bankrupt and does not release bis fraudulent grantees from liability for the fraud committed by them, and in no way precludes the recovery of property of the estate thus fraudulently transferred. (Stephenson v. Bird, 168 Ala. 363.)
On the record before us, showing that the estates of the bankrupts have been reopened and that proceedings are pending in the United States District Court, the court below was without jurisdiction to entertain this action, and the order appealed from should be reversed, with ten dollars costs and disbursements, and the motion granted, with ten dollars costs.
Finch, P. J., and McAvoy, J., concur; Merrele and Martin, JJ., dissent.