In re Buchanan

219 F. 492 | 2d Cir. | 1914

UACOMBE, Circuit Judge.

Charles P. Buchanan, upon his voluntary petition, was adjudged a bankrupt on July 29, 1913. At the time of such adjudication, he was entitled to an income for life from trusts created by the wills of his father and mother. This income .was in excess of $18,000 a year, and it is sought to sequestrate part of it under section 98 of Real Property Uaw of New York, which reads as follows :

“Tbe surplus income of trust property liable to creditors. When a trust is created to receive the rents and profits of real property, and no valid direction for accumulation is given, the surplus of such rents and profits, beyond the sum necessary for the education and support of the beneficiary, sháll be liable to the claims of his creditors in the same manner as other personal property, which cannot be reached by execution.”

[1] Prior to bankruptcy four suits were begun by creditors of Buchanan in the state courts to reach the alleged surplus of income. To recover in these suits it would be necessary to prove the amount of indebtedness, which is disputed, and also to prove that there was a surplus of income. Upon the initiation of the bankruptcy proceedings, an order of the District Court was entered, staying the further prosecution of these suits. Subsequently an order was made vacating such stay order. This vacating order is brought here on petition to revise. The question- presented seems to be academic because these original suits are practically temporarily abandoned, and suits, brought with the assent of the trustee in bankruptcy, are being prosecuted instead. However, if this were not so, there would be no impropriety in the District Court allowing these original suits to be prosecuted to judgment; it would be a convenient way of liquidating the claims of the creditors, which claims have been filed in the Bankruptcy Court. Beyond judgment, however, they should not be prosecuted for the present, and a modification of the order sought to be revised to that extent will be made. As so modified it is affirmed.

[2] The next two orders, which are brought here on petition to revise, authorize the bringing of actions against the respective trustees of the two trust funds to reach the alleged surplus. In Butler v. Baudouine, 84 App. Div. 215, 82 N. Y. Supp. 773, it was held that a trustee in bankruptcy did not come within the class of persons who could avail themselves of the remedy conferred by section 98 supra. Subsequent to that decision section 47 of the Bankrupt Act was amended so as to vest a trustee in bankruptcy as to all property not in the bankruptcy court, with all the rights, remedies, and powers of a judgment creditor holding an execution duly' returned unsatisfied. Since that amendment was passed in 1910, there has been no adjudication in the state courts passing upon the effect of that amendment, or holding that the additional rights and powers conferred upon the trustee entitled him to the remedy provided by section 98. Conceiving that he is entitled to such remedy, the trustee in this case undertook to obtain the consent of the creditors to his bringing suit in the state courts. A majority of the creditors in number and amount voted against authorizing him to bring such action, upon the ground that they did not believe such action could be maintained. The trustee then entered into negotiations with the creditors who had brought suits in the state courts before bankruptcy and as a result of such negotiations the orders complained of were entered. They give leave to these creditors to ^institute and prosecute in the name and on behalf of the trustee in bankruptcy such action or actions as they may be advised are necessary and proper and as may be approved by the trustee to enforce the application of the surplus of the bankrupt’s income under the two wills: (1) To the payment of the costs and expenses of such action or actions, including such counsel fee as may be allowed therein. (2) Any residue remaining to be turned over to the trustee in bankruptcy for distribution among the creditors whose claims have been duly proved and allowed or may be hereafter proved and allowed within such time as may be fixed by the court. (3) The bankrupt estate, in the event of nonsuccess not tq be called upon to defray in whole or in part costs and expenses. We think these orders are entirely proper; in view of the attitude of the majority of the creditors, it was a wise course for the trustee to take. Certainly no creditor can complain of his doing so; nor should the bankrupt^ the trustee is entitled to his day in court to have the question determined whether he can take the surplus, if there be any, under the amendment of 1910.

[3] Further objection is made to one of these orders because it contains a provision that such order shall be without prejudice to any rights of the creditors, who brought suit before bankruptcy, under certain assignment. It seems that before bankruptcy Buchanan had assigned to them certain specified portions of his income from one of the testamentary trusts. The objection is without merit. If, as bankrupt contends, the assignment be void, invalid, or inoperative, the provision in the order becomes of no effect. If, however, the assignment did give these creditors rights superior to those of the trustee, it would be unfair to prejudice those rights by this order, to which these creditors assented for the convenience of all parties.

[4, 5] The really important question presented here — by appeal— is whether the court erred in denying bankrupt his discharge. The specification of objections sets forth these grounds of objection:

(1) Making a false oath and rendering a false account (section 14, subd. b (1) of the Bankruptcy Act) because he failed to set forth in his sworn schedules the. income during his life derived from these trust funds.

(2) Concealing and failing to turn over to the trustee on demand, his interest or property right in and to the income from these trust funds.

As to the first of these objections, there is nothing as yet to show what the amount of the alleged surplus is, or indeed that there is any surplus. Moreover, as stated above, it is still an open question whether or not such surplus, if there be one, passed to the trustee. Presumably the bankrupt was advised by his counsel that it did not so pass, and a majority of the creditors in number and amount, also presumably advised by counsel, have reached the conclusion that the chance of an affirmative answer to the question was too uncertain to risk spending the funds of the estate in securing a judicial answer-to it. Under these circumstances, it would be a very harsh construction of the Bankruptcy Act to refuse discharge because the bankrupt did not include this trust income in his schedules.

As to the second objection: If the surplus passes to the trustee, under the amendment, an assignment by the bankrupt to the trustee is wholly unnecessary. If, however, the amendment has not the effect contended for, and the bankrupt makes an assignment, he probably thereby seriously prejudices the rights which the law gives him. To coerce an assignment, under these circumstances, through refusal of discharge, seems to us grossly unfair and we find the objection wholly without merit.

Out of the income accrued under one of these trusts there is an accumulation of $3,460.38 due him at the date of adjudication. The writer is inclined to consider this as if it were money in bank, subject to the bankrupt’s draft, and that it should have been scheduled and turned over. The majority of the court, however, are satisfied that it is not distinguishable from the income generally; the will expressly providing that no part of the income shall be liable “prior to the actual receipt thereof by the beneficiary.” From this conclusion I shall not dissent.

The order denying the discharge is reversed; on the application for discharge, there may be a new hearing.