Broadway Trust Co. v. Manheim

I think that the answer is sufficient to admit evidence of the defendant’s proceedings in the bankruptcy court. It is true that a discharge in bankruptcy, to be available, must be pleaded as a defense (Revere Copper Co. v. Dimoclc, 90 N. Y. 33 , affirmed 117 U. S. 559 , ' 6 Sup. Ct. 855 , 29 L. Ed. 994 ), and either the facts showing jurisdiction in the bankruptcy court of the parties and the subject-matter must also be pleaded, or there must be some allegation equivalent thereto. Under the Code an allegation that a judgment was "duly rendered” is sufficient to admit proof of these facts,, if the allegation is controverted. Code Civ. Proc. § 532.

The answer in this case alleges that on the 11th day of April, 1904, the defendant was “duly adjudged” a bankrupt in the District Court of the United States for the Eastern District of New York. This was a sufficient allegation of jurisdiction in that court of the defendant and of the subject-matter. The proof sustains the allegation. When jurisdiction is established, the legal presumption is in favor of the regularity of subsequent proceedings. McCormick v. Pickering, 4 N. Y. 276 .

The answer further alleges that on the 14th day of October, 1904, by an order of discharge in said bankruptcy proceedings, the debt represented by the notes in suit in this action was discharged. The proof is that on that day an order was entered in the bankruptcy

Plaintiff’s debt, being on promissory notes, was a provable debt. The name of the plaintiff was not included in the defendant’s schedule of liabilities as the owner of the debt. The debt was scheduled in the name of the original payee of the notes, but there is no evidence that at the time of the filing of the schedules the defendant knew of the transfer to the plaintiff, or that the defendant was guilty of bad faith in the omission. This omission will not prevent the discharge from becoming operative, if the plaintiff had notice or actual knowledge of the bankruptcy proceedings. Bankr. Act July 1, 1898, c. 541, § 17, subd. 3, 30 Stat. 550 [U. S. Comp. St. 1901, p. 3428]. The burden is on the plaintiff to attack the discharge in bankruptcy and show cause why he should not be bound by it. Stevens v. King, 16 App. Div. 377 , 44 N. Y. Supp. 893 .

I find from the evidence in the case that the plaintiff had no formal notice of the various proceedings in the bankruptcy court, but I also find that it did have actual knowledge of the existence of such proceedings by the middle of July, 1904. Was that knowledge sufficient to make the discharge effectual as to it? The bankruptcy act does not in express terms provide how long before the discharge is granted such knowledge must be acquired, but the purpose of the provision is manifest. It was intended to remedy a defect in the previous bankruptcy act, by which a debt was discharged, even though the name of the creditor was omitted from the schedules, provided such omission was not willful or fraudulent, even though the creditor had no notice nor knowledge of the proceedings. Tyrrel v. Hammerstein, 6 Am. Bankr. Rep. 430, 67 N. Y. Supp. 717 . It would seem to be reasonable that, before a party is deprived of his remedy to enforce his debt by a discharge in bankruptcy, he should receive notice of some kind, or have actual knowledge of the proceedings tending to that end, in time, to participate therein. Birkett v. Columbia Bank, 195 U. S. 345 , 25 Sup. Ct. 38 , 49 E. Ed. 231. In that case the court say:

“Actual knowledge of the proceedings contemplated by the section is knowledge in time to avail a creditor of the benefits of the law, in time to give an equal opportunity with other creditors, not a knowledge that may come to him so late as to deprive him of participation in the administration of the affairs of the estate.”

In the case of discharge in bankruptcy, as distinguished from a composition, it might be the case that if such knowledge were ac

In this case the first of the notes sued upon matured June 11, 1904, and the second July 11, 1904, and plaintiff’s actual knowledge of defendant’s bankruptcy proceedings was subsequent to the latter date. But the defendant was adjudicated a bankrupt on April 11, 1904, and prior to May 4, 1904, he had obtained the consent of a majority of the creditors whose claims had been allowed and approved, and on that day he filed his application for a confirmation of the composition agreement. If the plaintiff had had knowledge or notice of the proceedings prior to that time, it might have proved its claim and withheld its consent from the proposed composition, and prevented the bankrupt from obtaining the required majority. Since the proceeding compels dissenting creditors to accept the percentage accepted by the majority, and deprives them of their remedies on the balance thereafter, this section of the bankruptcy act should be strictly construed. Collier on Bankruptcy, 149; In re Monroe (D. C.) 7 Am. Bankr. Rep. 706, 114 Fed. 398 . The knowledge of the plaintiff came too late to enable it to “have an equal opportunity with other creditors” in participating “in the administration of the affairs of the estate.” The fault was the fault of the defendant in not properly preparing his schedules as to the name of the creditor, or in failing to amend the same after he had learned who the real owner of the debt was. I think the order of the bankruptcy court confirming the proposed composition, so far as the plaintiff is concerned, is inoperative, and affords no defense to the action.

As to the defense of usury, it is sufficient to say that I find from the evidence that the notes in suit were valid obligations in the hands of the original payees; but, if otherwise, the plaintiff in this action was a holder for value in due course, and took, the notes free from any defenses available to prior parties among themselves. Negotiable Instruments Law, Laws 1897, p. 732, c. 612, § 96.

There should be judgment in favor of the plaintiff, with costs.