Wood v. Fisk

Action to recover damages for the alleged conversion of certain certificates of stock of the plaintiff pledged as collateral to secure the payment of a note for $39,OCX). The defense was a discharge of the defendants in bankruptcy. The complaint was dismissed after trial at Special Term, and from the judgment entered upon a decision to that effect plaintiff appeals.

There is little or no dispute as to the facts involved. They are, in substance, that on the 20th of January, 1910, the defendants loaned to the plaintiff $39,000, for which he gave to them his promissory note for that amount, payable to their order on the 21st of March following; that at the same time he delivered to them, as collateral security for the payment of the note, certificates representing 100 shares of the common stock of the Baltimore & Ohio Railroad Company and 201 shares of the common stock of the Union Pacific Railroad Company, under an-agreement which formed part of the note, to the effect that the defendants might rehypothecate the collateral for a sum not greater than the amount of the indebtedness owing by the plaintiff at the time of the rehypothecation; that intermediate the giving of the note and the 1st of February, 1910, they did rehypothecate the certificates for an amount in excess of the plaintiff’s indebtedness; that on the latter date a petition in involuntary bankruptcy was filed against the defendants and a receiver appointed; that one month later they were adjudicated bankrupts, and on the 12th of July, 1910, were discharged from all provable claims; that this plaintiff did not prove, in the bankruptcy proceeding, a claim for the collateral pledged, but instead on the date of the maturity of the note (March 21, 1910) tendered to the defendants, personally, $39,000, and demanded the return of his note and the certificates; that at the time the demand was made the receiver in the bankruptcy proceeding was acting and all of the defendants’ rights to the note and the collateral had prior to such demand passed to and were then held by the receiver so that defendants were physically unable to comply with the demand; and that no tender of payment of the note was ever made to the receiver, or demand made upon him, for the return of the collateral, and the note still remains unpaid.

Upon the foregoing facts, the plaintiff claims he was entitled to recover for a conversion of the certificates by reason of the defendants’ failure to return the same on demand; that his damages were the market value of „the stock at the time'the demand was made, together with the dividends, which had been made thereon after the same were pledged, amounting in all to $49,214.25, besides interest. The trial court, as indicated, dismissed the complaint and the question presented is whether in any view of the evidence the plaintiff

[1] It appears'that the'plaintiff had actual'knowledge of 'the proceeding, and could have proved his claim had he so desired. It was therefore discharged (section 17, Bankr. Act [Act July 1, 1898, c. 541, 30 Stat. 550 , 551 (U. S. Comp. St. 1901, p. 3428)]) if “provable.”- Was it provable? Any cause of action which the plaintiff may have had arising out of the- wrongful rehypothecation is, as it seems to me, barred by the discharge in -bankruptcy.- The claim for such rehypothecation, though perhaps -in the nature of conversion, would necessarily have to be predicated upon the breach of a contract; and, if so, it was provable. Crawford v. Burke, 195 U. S. 176 , . 25 Sup. Ct. 9 , 49 L. Ed. 147 ; Fechter v. Postel, 114 App. Div. 776 , 100 N. Y. Sppp. 207;. Maxwell v. Martin,. 130 App. Div. 80 , 114 N. Y. Supp. 349 . The 'plaintiff, doubtless appreciating this fact, does not base the claim here sought to be enforced upon the- rehypothecation, but instead solely upon defendants’ refusal to return the certificates -when demanded. The Bankruptcy Act (section 63a) provides that:

• “Debts of the bankrupt may be proved and allowed against his estate which are (1) a fixed liability as evidenced by a judgment or an instrument in writing, absolutely owing at the time of the filing of the petition against him, whether then payable or not, * * * (4) founded, upon ah open account or .upon a contract express or implied. * * * ”

[2] It is settled by numerous authorities that under this section a.claim for breach of -contract may be proved, even though the time for performance had not arrived" when the'petition was-filed. This is -upon the'theory that, the bankruptcy proceeding may be considered as an anticipatory breach and a complete disablement on the part 'of the .debtor, thus rendering him liable for damages immediately upon filing the petition. In re Neff, 157 Fed. 57 , 84 C. C. A. 561 , 28 L. R. A. (N. S.) 349 ; In re Swift, 112 Fed. 315 , 50 C. C. A. 264 ; In re Pettingill & Co. (D. C.) 137 Fed. 143 ; Phenix National Bank v. Waterbury, 197 N.- Y. 161 , 90 N. E. 435 .

[3] Where'one party to an executory contract puts it out of his power to perform, there is an anticipatory -breach which gives the other party an immediate right of action for the damages- which he suffers -thereby. Roehm v. Horst, 178 U. S. 1 , 20 Sup. Ct. 780 , 44 L. Ed. 953 ; Pennsylvania Steel Co. v. N. Y. City Ry. Co., 198 Fed. 743 , 117 C. C. A. 503 .

• Here, the bankruptcy proceeding made it impossible for the defendants to perform the contract-, the ■ legal effect of which was an out and out repudiation of the contract by the defendants or a complete disablement, ‘and in either case the contract itself was broken. If this conclusion be correct, then it-follows the plaintiff could have proved- his claim in the bankruptcy proceeding. Plaintiff, however, contends that, even though he -could -have proved his claim, he was not obliged.to do so; -that he had-an election-either-to take that-'

“The agreement of each party was one which had relation exclusively to the future, whether as to obligation or as to payment.”

In the case before us at the time the petition was filed defendants were under a specific obligation to retain the collateral (subject to the right to rehypothecate) and return it to the plaintiff when the note was paid, or if a sale were had, and the proceeds derived therefrom exceeded the amount due, then to return the balance. The proceeding in bankruptcy, immediately upon the petition being filed, not only transferred to the receiver title to the note and any claim based thereon, but also the right to the possession of the collateral which had been pledged as security for its payment. By operation of law it had become impossible for the defendants, at the time the demand was made, to perform their part of the contract. This the plaintiff knew when he made the tender and demand.

[4] A tender and demand never have any legal effect when the party making them knows that the law renders it impossible for the other party to accept the tender or comply with the demand; in other words, legal rights never grow out of an impossibility. A claim for conversion is predicated upon a wrongful -assumption of ownership or interference with the owner’s right to possession. Industrial & General Trust, Ltd., v. Tod, 170 N. Y. 233 , 63 N. E. 285 .

I am unable to see how in any possible aspect of the case it can be said that the defendant’s failure to return the certificates of stock at the time the demand was made therefor constituted a conversion of them. The law had made it impossible for them to make the return. They were then in the possession of the receiver, and only by paying to him the amount due upon the note could a return be obtained. The receiver clearly -had the right to retain -such certificates until the amount of the note was paid.

My conclusion, therefore, is that any cause of action which the plaintiff may have had against the defendants for a failure to return the certificates on payment of the note wás not ‘only provable, but that such claim did not survive the discharge in bankruptcy. If I

INGRAHAM, P. J., and LAUGHLIN and CLARKE, JJ., concur.

In my opinion this judgment should be reversed. I am unable to distinguish the case in principle from Phenix National Bank v. Waterbury, 123 App. Div. 453 , 108 N. Y. Supp. 391 , affirmed 197 N. Y. 161 , 90 N. E. 435 . In that case the dissenting opinion in this court presented forcibly all of the arguments which are now urged in support of the present judgment, including those based upon the theory of a supposed “anticipatory breach.” It failed, however, to convince the majority of the court or any member of the) Court of Appeals. The whole question is whether or not the plaintiff held a claim on February 1, 1910, the date of the filing of the petition in bankruptcy, which was provable in the bankruptcy proceedings for “the date of filing the petition in bankruptcy is intended to mark the line of demarkation between debts that are provable and debts that are not provable against the’ bankrupt’s estate. Those that are not provable remain subsisting obligations of the bankrupt, and he is not released therefrom by his discharge.” Colman Co. v. Withoft, 195 Fed. 250 , 115 C. C. A. 222 ; Bankr. Act, § 63a. To be so provable, the debt must be one which is absolutely owing by the bankrupt at' the time of filing the petition.' Bankr. Act, § 63a. It is clear that at the time the petition in bankruptcy was filed against these defendants they owed nothing to the plaintiff. He owed them $39,000, which, however, was not presently payable. They held his securities, and were entitled to hold them and even to rehypothecate them; and, until his indebtedness was paid, they owed him no duty to return the securities or to account to him for their value, nor could any such duty arise until he had paid or tendered payment of his debt which he was not bound to anticipate. Even if, uiider any circumstances, the petitioning of the defendants into bankruptcy had entitled the plaintiff to anticipate the date of the maturity of his debt to them, so as to establish an anticipatory breach by them of the duty to return his securities when the debt was paid, he was under no obligation so to anticipate, but wa^ entitled to wait until his indebtedness fell due in accordance with the terms of the note which evidenced it. It is only when the creditor so elects that he may prove an indebtedness arising out of the anticipatory breach of a contract which by its terms extends beyond the date of the filing of the petition in bankruptcy. Phenix National Bank v. Waterbury, supra; Ames v. Moir, 138 U. S. 306 , 11 Sup: Ct. 311, 34 L, Ed. 951 .

The case at bar differs radically from the ordinary cases of stockbrokers who hold collateral for debts owing to them by their customers. Ordinarily in such cases there is no time obligation, but the debt is' always due' so that the debtor may démand payment at any time, and the creditor may likewise tender payment at any time. It is in such cases that it has been held that no tender and demand is necessary on the part of the creditor, but that his claim for the value of his securities over the ¿mount of his debt becomes due immediately

The judgment should be reversed; and, since the facts are undisputed and cannot be changed upon a new trial, judgment should be ordered for plaintiff, with costs.