Court Opinion

ID: 5309756
Source: CourtListenerOpinion
Date Created: 2022-01-08 03:44:47.932486+00
Date Added: 2024-06-11T08:29:11.330534
License: Public Domain

Proskauer, J.
(dissenting). The plaintiff appeals from a judgment entered upon a verdict directed by the court in favor of the defendant.
The State Bank was a creditor of the firm of Siff Bros., against whom a petition in bankruptcy had been filed. Ninety-two of one hundred and eight creditors of the firm accepted an offer of composition of twenty per cent, of which ten per cent was to be in cash and ten per cent in two notes of five per cent each, payable in three' and six months respectively. The State Bank, however, refused to accept the offer and filed objections to its confirmation. *12Thereafter the State Bank sold its claim, through a dummy, to the defendant, a near relative of the bankrupts. The bank received therefor promissory notes made by the dummy and indorsed by the bankrupts and the defendant for an amount equivalent to what the bank would have received under the composition agreement. It also received five notes made by the dummy and indorsed by the bankrupts, two of which had the additional indorsement of the defendant. The claim was assigned to the dummy and on the same day the dummy assigned the claim to the defendant, Ephraim Siff. Both assignments were filed with the referee in bankruptcy and the objections to the composition were withdrawn by the ultimate assignee, the defendant herein. This action against the defendant is upon one of the promissory .notes indorsed by him.
The verdict in his favor was directed upon the ground that the transaction was tainted with illegality. The learned trial court relied in reaching this conclusion upon the opinion of Mr. Justice McAvoy in Klaw v. Famous Players-Lasky Corp. (207 App. Div. 211). But there the creditor who received an advantage did not assign his claim; he continued to be a creditor of the bankrupt and by joining in the composition agreement with his fellow-creditors led them to suppose that all the creditors were upon a parity. McAvoy, J., there wrote: “ The measure of propriety is disclosure, and not the comparative injury from non-disclosure.” He rests his opinion fundamentally upon the authority of Almon v. Hamilton (100 N. Y. 527), where it was said: “ The law exacts of all the parties to a composition the most scrupulous good faith.”
In the present case, however, the State Bank was not a party to the composition. The filing of the assignments with the referee in bankruptcy was notice to all the other creditors that the State Bank had sold its claim to a relative of the bankrupts bearing their name. The other creditors were not misled by any concealment. Here there was an open recorded sale of the bank’s claim. It may well be that if any creditor had objected to the voting of the assigned claim thus coming into the hands of the bankrupts and their relative, the referee in bankruptcy might have excluded the claim from being voted to coerce other creditors into a statutory composition. (Matter of Weintrob, 240 Fed. 532.) But no creditor took such position even after the filing of the assignments and the withdrawal of the objections by the assignee.
I see no consideration of public policy which should cause the court to condemn the transaction here under review. A recalcitrant creditor who objects to a composition in bankruptby has a perfect right to sell his claim. The purchase of such claim by the *13bankrupts or those associated with them may frequently be of great advantage to the creditors who wish to accept the composition. What the creditor may not do is secretly to take a larger proportion of the bankrupt estate than is distributed to his fellow-creditors; nor may he continue to pose as a creditor after he has ceased to be one and thus misled his fellow-creditors into the belief that he is sharing ratably with them; nor may he sign a composition agreement and secretly secure an advantage for himself. The State Bank here did none of these things. Fraud is the essential nature of the defense which attacks composition agreements on the ground that a creditor has received a special benefit. It rests upon the theory that the creditors are misled by the silence of the preferred creditor into the belief that all are being treated alike. There is no such factor in the present case.
As to the claim that a creditor may not receive a consideration for withdrawing objections to a composition, I find in a review of the bankruptcy authorities no case which goes to the length of holding that a creditor is forbidden to sell his claim merely because he has filed objections to a composition. The filing of the assignments, operating as a complete notice to the other creditors of the sale of the claim, furnished them with opportunity to safeguard their rights in any way they saw fit. They had a right under the Bankruptcy Act, if they so desired, to oppose the composition further and to adopt and prosecute the objections which had theretofore been filed by the State Bank. In point of fact, however, a very large majority of the creditors desired to accept the composition and apparently no one of them wished to prosecute the objections to the composition.
In my opinion to hold this transaction illegal would be to lay down a rule so strict as seriously to embarrass the administration of insolvent estates and make it almost impossible even for creditors in their own interest openly to purchase the claim of a creditor who was engaged in tactics of obstruction. Such a course is sometimes necessary in the interest of all concerned and is not essentially unlawful.
The circumstances relied upon by the respondent to give a sinister aspect to this transaction (under the authority of Meyer v. Price, 250 N. Y. 370) raise no bar to a recovery. That the plaintiff demanded more than the composition would yield to it, that it insisted that its counsel could legally carry through such an arrangement, that a dummy was used as a part of the mechanism of the agreement, are all facts which would be important if the plaintiff, while remaining a creditor, agreed not to oppose the bankrupt’s discharge. In Meyer v. Price (250 N, Y. 370) Crane, *14J.; writes: “All agreements, however, by a bankrupt to pay a creditor in full are not illegal. The illegality exists in the creditor undertaking to refrain from making some move in the bankruptcy proceedings or to withdraw from some action already taken which may impede or prevent the discharge of the bankrupt. The law desires and encourages a full and free exposure and revelation of all the bankrupt’s acts, conduct and property. Any agreement whereby a creditor undertakes to keep silent or inactive when his word or deed might assist the purposes of the bankruptcy proceedings is illegal.” There is implicit in this statement the assumption that the offending creditor remains a creditor. In my view the actuality of the open and recorded sale and assignment of the claim cannot be regarded as a mere form to cloak an illegal agreement to refrain from pressing the objections to the composition. The creditor has a right to sell his claim and the mere fact that he sells it puts it out of his power to press the objections to the composition. A different question would arise if the fact of sale had been concealed.
For these reasons the judgment appealed from should be reversed, with costs, and judgment directed for the plaintiff, with costs.
Judgment affirmed, with costs.