Court Opinion

ID: 9447340
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:32:28.759738+00
Date Added: 2024-06-11T17:30:59.979136
License: Public Domain

*147FRIENDLY, Circuit Judge
(concurring) .
Appellant’s contention is that whether the trustee’s claim for the $1,750 deposit and appellant’s claim under its judgment against the bankrupt are “mutual debts or mutual credits” should be determined as the New York courts would determine this and that New York would hold the claims “mutual debts” in the practical sense of allowing the latter to be set off against the former. I agree with appellant’s first proposition; but I join in the judgment of affirmance because I do not think appellant has established the second.
Appellant’s first proposition raises an issue which the courts do not seem as yet to have been required to decide. Under the new “way of looking at law” embodied in Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, see Guaranty Trust Co. of New York v. York, 1945, 326 U.S. 99, 101, 65 S.Ct. 1464, 1466, 89 L.Ed. 2079, is the question whether two claims, both created by the state of the bankrupt’s residence, are “mutual debts or mutual credits,” to be determined as the state court would do or by the federal court on the basis of views with respect to setoff arrived at on general theories as to what constitutes a debt, see Libby v. Hopkins, 1881, 104 U.S. 303, 26 L.Ed. 769, independently of the law of the particular state? See, generally, Hill, The Erie Doctrine in Bankruptcy, 66 Harv.L.Rev. 1013 (1953). I should suppose the former, where, as here, no policy of the Bankruptcy Act would be offended by treating the trustee in the same way the bankrupt would have been treated in a state court. Of course, any allowance of a setoff works a financial advantage, and in that general sense a preference, to the creditor who obtains it; but I cannot think this offends the Bankruptcy Act if the state that created the claims would have permitted a setoff dehors insolvency proceedings.
Of course, Congress is not required to direct the federal courts to look to state law for the definition of state-created rights asserted in bankruptcy, as it is when federal jurisdiction rests solely on diversity of citizenship. The question is of intent, not of power. The Bankruptcy Act must be read today in the light of the policy of Erie and the 1948 revision of the Judicial Code, 28 U.S.C. § 1652, wherein the application of the Rules of Decision Act, previously 28 U.S.C. 1940 ed. § 725, was expanded to include all “civil actions in the courts of the United States” rather than only “trials at common law.” Absent any overriding bankruptcy policy, it seems to me far more likely that Congress would wish the “mutuality” of state-created claims to be determined by reference to the law that gave them birth than by an attempt to ascertain “what Reason, and therefore Law, required wholly independent of authoritatively declared State law * * * ” Guaranty Trust Co. of New York v. York, supra, 326 U.S. at page 102, 65 S.Ct. at page 1466.
I find no controlling authority to the contrary. McCollum v. Hamilton National Bank, 1938, 303 U.S. 245, 58 S.Ct. 568, 82 L.Ed. 819, argued on the same day as Erie and decided two months earlier, dealt with an attempt to set off a state-created against a federally-created claim; clearly the nature of the latter was federal law and the case is thus not an authority against appellant even if we were to make the unrealistic supposition that the full implications of Erie were understood while it was still in the womb. Prudence Realization Corp. v. Geist, 1942, 316 U.S. 89, 97, 62 S.Ct. 978, 983, 86 L.Ed. 1293, held that a New York rule of subordination based on general equitable considerations, “a general rule of law governing insolvency proceedings,” would not prevail against the general bankruptcy rule of equality; there was no indication that a bankruptcy court should refuse to recognize state decisions characterizing the nature of the right apart from insolvency proceedings. Vanston Bondholders Protective Committee v. Green, 1946, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162, related *148to the consequences of an order forbidding the payment of interest upon unpaid interest; allowance of this was held improper, despite state law, because “under the circumstances shown by this case [it] would not be in accord with the equitable principles governing bankruptcy distributions.” 329 U.S. at page 163, 67 S.Ct. at page 240. If New York should consider the landlord’s sin in commingling the deposit with his general funds, contrary to the command of § 233 •of the Real Property Law, not to be so irredeemable as to prevent his applying the deposit against unpaid rent, as it was intended to be, I can see no basis for a federal bankruptcy court’s insisting on a more rigorous construction of the New York statute creating the trust relationship than New York would give. Such a holding by the New York courts would not be “a general rule of law governing insolvency proceedings,” but a definition of the relationship created by § 233, outside insolvency as well as within it.1
However, I find no sufficient indication that New York would have allowed the landlord to make a set-off here. Appellant’s contention that it would rests solely on Pollack v. Springer, 196 Misc. 1015, 95 N.Y.S.2d 527 (Supreme Court, Appellate Term, 1st Dept.1949). The court which rendered that decision stands two levels below the highest court of the state and the decision is without supporting reasons. The research of my brother Moore has unearthed a recent decision of a lower New York court, Freedman v. Washington Square Management Corp., 19 Misc.2d 46, 187 N.Y.S.2d 888 (Municipal Court of New York City, 1959), which looks the other way although without mention of Pollack v. Springer. So long as the indication from the New York courts on the precise point remains thus dubious, I would consider that the general New York rule, announced by one of its greatest judges, prohibiting “A wrongdoer who has misapplied the subject of a trust” from applying “a credit that belongs to him in his own right in cancellation of his liability as a fiduciary,” Morris v. Windsor Trust Co., 1914, 213 N.Y. 27, 29-30, 106 N.E. 753, 754 would have prevented the landlord’s set-off in the New York courts on the facts here, Pollack v. Springer to the contrary notwithstanding. See the references in Hart and Wechsler, The Federal Courts and the Federal System, 629-30. And so I reach the same conclusion as my brothers, although by a somewhat different route.

. Sommers v. Timely Toys, Inc., 2 Cir., 1954, 209 F.2d 342, did not raise this issue. There the District Court had allowed the landlord to set-off the converted deposit against rent owing at the date of the petition, D.C.E.D.N.Y.1953, 110 E. Supp. 844, 847, and the trustee had not appealed from that allowance. The appeal which we rejected was by the landlord, from the District Court’s refusal to permit him to retain the balance against a wholly speculative claim for future damages.