New York Institution for Instruction of Deaf & Dumb v. Crockett

The judgment sought to be discharged is a deficiency judgment obtained in an action to foreclose a mortgage given by the defendant Crockett, the petitioner, and one John S. Roddy. The moving papers show that on the 5th day of August, 1902, more than one year prior to the application for cancellation of the judgment, the petitioner, in voluntary bankuptcy proceedings duly instituted by him in the month of June, 1902, in the United States District Court for the Southern District of New York, where he had resided for more than six months, was duly discharged from all debts and claims which

First. The decisions in the federal courts on some of these questions are conflicting, and the decisions in the state courts, while tending toward the doctrine that a discharge in bankruptcy of an individual, who was a member of a firm, discharges him from both individual and copartnership debts, are not decisive on facts such as are here presented. Neither in the petition in bankruptcy, nor in the schedules of assets and liabilities, is there any reference to a copartnership. That petition showed that the petitioner owed debts which he was unable to pay in full, and that he was willing to surrender all of his property for the benefit of his creditors, except such as was exempt by law, and that he desired to obtain the benefits of the acts of Congress relating to bankruptcy; that schedule A, thereto annexed, showed, among other things, a full and true statement of all his debts, the names and places of residence of his creditors; and that schedule B contained an accurate -inventory of all his property, both real and personal. Schedule A showed three debts—the first to the plaintiff, whose residence is given, and that it is a deficiency judgment for $1,414.58, after foreclosure of a mortgage. The second is a similar judgment to another creditor for $1,420.70, and the third is to another creditor for moneys advanced. Schedu’e B showed no property, except property of the value of $30, which was therein claimed to be exempt’from the operation of the bankruptcy statute. The order of the District Court, granted on the 5th day of August, 1902, discharging the petitioner, recites that, whereas, he “has been duly adjudged a bankrupt under the acts of Congress relating to bankruptcy, and anpears to have conformed to all the requirements of law in that behalf, it is therefore ordered by this court that said William F. Crockett be discharged from all debts and claims which are made provable by said acts against his estate, and which existed on the 9th day of June, A. D. 1902, on which day the petition for adjudication was filed by him, excepting such debts as are by law excepted from the operation of a discharge in bankruptcy.” The proceedings in bankruptcy, intermediate the fifing of the petition and schedules and the order discharging the petitioner, were not presented either in support of or in opposition to the motion. The petitioner, however, showed by affidavit that the plaintiff had notice of the bankruptcy proceedings in accordance with the provisions of section 58 of the bankruptcy act of 1898 (Act July 1, 1898, c. 541,

The plaintiff showed, in opposition to the motion, by the affidavit of the widow of Roddy, the other joint debtor in the deficiency judgment, that the defendants were, as she believed and understood, engaged in building operations “for two or three years as copartners under the name of Roddy & Crockett.” She specifies one building operation, and says that they conducted some others; but she gives no dates as to when their business commenced or ended. She also says that “she does not know of any property belonging at this time to the debtor, William F. Crockett, or of any money owing to him; that she is not at all acquainted with his affairs.” The plaintiff further presented an examination of the petitioner on proceedings supplementary to execution on this judgment on the 26th day of November, 1901. His examination showed that his only business then was working for a corporation on a salary; that he had previously been in business with Roddy, commencing in 1895 or 1896, as speculative builders, but that the firm had ceased operations and wound up its business on or about the 6th day of October, 1901, and was “no longer in existence”; that the firm books were destroyed by fire on said 6th day of October, 1901; that all the debts of the firm, save this judgment and the other similar judgment scheduled bj' the petitioner, have been paid; that the firm, in the course of its building operations, purchased the premises upon which, from the complaint, it appears that the mortgage, which was foreclosed, was given. The complaint and judgment in foreclosure and deficiency judgment form part of the moving papers. They contain no reference to the firm, and show that a bond and the mortgage were executed by the defendants Crockett and Roddy jointly, for the purpose of securing the payment to the plaintiff of the sum of $28,000, and that Roddy’s wife joined in the mortgage. It does not appear therefrom that the mortgage and bond were given to secure an indebtedness of the firm, or that the judgment was on a firm liability. It does not appear that the petitioner was indebted to the plaintiff otherwise than on this judgment, and, in view of his petition and schedules in bankruptcy and affidavit here presented, it must be assumed that he was not. The judgment was properly scheduled as a debt against the petitioner, even though recovered on a partnership obligation, because the members of the firm were jointly and severally liable for its debts, I think, in the circumstances, since the creditor could not have been misled, that it was not essential that it should have been scheduled as an obligation of the old firm. Loomis v. Wallblom, 13 Am. Bankr. Rep. 687, 102 N. W. 1114 , 69 L. R. A. 771 . See, also, West Philadelphia Bank v. Gerry, 106 N. Y. 467 , 13 N. E. 453 ; Bernheimer v. Rindskopf, 116 N. Y. 428 -440, 22 N. E. 1074 , 15 Am. St. Rep. 414 .

The record does not show whether or not the plaintiff appeared in the bankruptcy proceedings or proved its judgment therein. I regard that, however, as quite immaterial, because, by virtue of the provisions of section 39 of the bankruptcy act ( 30 Stat. 555 [U. S. Comp. St.

Support for this contention is found in some of the authorities, which, while conceding that a member of a copartnership firm may on his individual petition in bankruptcy obtain a discharge from the copartnership, as well as from his individual debts, yet maintain that it is essential, to accomplish this result, that "the firm debts should be scheduled as copartnership obligations, and that the notice to the firm creditors should be notice to them as such, and that the petition in bankruptcy and the application for the discharge should show that the petitioner sought a discharge from firm as well as individual obligations. In most of the cases in which this view is expressed, the question as to the effect of a discharge was not before the court for adjudication, and the question before the court arose on an application m the bankruptcy proceedings for a discharge of the bankrupt, to amend by giving notice to his partners, or by proceedings for an adjudication against the firm as an entity. See In re Little, Ted. Cas. No. 8,390; In re Noonan, Ted. Cas. No. 10,292; In re Laughlin, 3 Am. Bankr. Rep. 1, 96 Ted. 589; In re McTaun, 3 Am. Bankr. Rep. 66, 96 Ted. 592; In re Wilkens, Ted. Cas. No. 17,875; In re Morrison, 11 Am. Bankr. Rep. 498, 127 Ted. 186; Matter of Treund, 1 Am. Bankr. Rep. 25; In re Meyers, 3 Am. Bankr. Rep. 260, 97 Ted. 757; In re Levy, 2 Am. Bankr. Rep. 21.

In Re Levy, supra, doubt is expressed as to whether a discharge of an individual would discharge him from firm debts, even though there were no firm assets. In Matter of Treund, supra, the opinion of the referee, which was adopted 'by the United States District Court, Northern District of Iowa, in January, 1899, shows that the question presented for decision was whether the bankrupt had complied with the law and was entitled to a discharge. That was a voluntary proceeding by an individual partner, and the only debts scheduled were firm obligations, although they were not scheduled as such. There had been no request to have the firm adjudged bankrupt, and thé other

Rule 8 of the general orders in bankruptcy, adopted by the Supreme Court at the October term, 1898, is as follows;

“Any member of a partnership, who refuses to join in a petition to have the partnership declared bankrupt, shall be entitled to resist the prayer of the petition in the same manner as if the petition had been filed by a creditor of the partnership, and notice of the filing of the petition shall be given to him in the same manner as provided by law and by these rules in the case of a debtor petitioned against; and lie shall have the right to appear at the time fixed by the court for the hearing of the petition, and to make proof, if he can, that the partnership is not insolvent or has not committed an act of bankruptcy, and to make all defenses which any debtor proceeded against is entitled to take by the provisions of the act; and in case an adjudication of bankruptcy is made upon the petition, such partner shall be required to file a schedule of his debts

and an inventory of his property in the same manner as is required by the-act in cases of debtors against whom adjudication of bankruptcy shall be" made.”

It is manifest that this rule has no application to a petition by an individual who is a member of a firm to have himself, and not the firm, adjudicated a bankrupt. See Collier’s note to Matter of Freund, 1 Am. Bankr. Rep. 31-33. Tut is evident that an individual may be a member of a solvent firm and at the same time be insolvent himself. This rule shows quite clearly that the firm cannot be declared insolvent unless it is such in fact. In such circumstances, unless, therefore, the individual may by his own petition obtain a discharge in bankruptcy, even though insolvent, he could obtain no relief under the bankruptcy act. Where a firm is solvent, and an individual member thereof is inso’vent and desires to be discharged in bankruptcy, it is manifest that he is entitled to such discharge, and that the business of the firm should be wound up, and his surplus interest applied in liquidation of his individual debts. This is fairly contemplated and provided for by subdivision “h” of section 5 of the bankruptcy, act ( 30 Stat. 547 , 548 [U. S. Comp. St. 1901, p. 3424]), which reads as follows:

“In the event of one or more, but not all, of the members of a partnership being adjudged bankrupt, the partnership property shall not be administered in bankruptcy, unless by consent of the partner or partners not adjudged bankrupt; but such partner or partners not adjudged bankrupt shall settle the partnership business as expeditiously as its nature will permit, and account for the interest of the partner or partners adjudged bankrupt.”

See Collier’s notes to Matter of Freund, supra.

There are fed'eral decisions under the present bankruptcy law holding, but without referring specifically to said subdivision “h” of section 5, as was held under the act of 1867, which did not contain a sinTar provision, that the copartnership assets cannot be reached on an individual proceeding in bankruptcy, and that it is essential that the firm should be proceeded against directly. In re Shepard, Fed. Cas. No. 12,754. If by this is meant that they cannot be directly reached, the doctrine is doubtless sound; but the statute clearly contemplates that they shall be reached indirectly by the other- members of the firm accounting to the trustee in bankruptcy. It has been held by the Circuit Court of Appeals of the United States in the Third Circuit (In re Mercur, 10 Am. Bankr. Rep. 505, 122 Fed. 384 , 58 C. C. A. 472 ), on an application to consolidate and amend individual petitions of all members of a firm by asking that the firm be adjudicated a bankrupt, that, where each member of a firm individually applies for an adjudication in bankruptcy, the firm assets cannot be administered by the bankruptcy court; but that difficulty may be readily overcome by having the firm adjudged bankrupt.

Section 70 of the bankruptcy act ( 30 Stat. 565 , 566 [U. S. Comp. St. 1901, p. 3451]) provides, among other things, that the title of the bankrupt to any property “which prior to the filing of the petition he could by any means have transferred, or which might have been levied upon and sold under judicial process against him,” vests in the trustee as of the date of the adjudication in bankruptcy. It is well settled that the interest of an individual member of a

In Curtis v. Woodward, supra, the court, in discussing the question as to the property passing to the assignee in bankruptcy under the act of 1867, say:

“The bankrupt thus became divested and stripped of all his estate, property, and rights of property, and' ail actions and rights of action relating to property or rights of property, whether in law or in equity, which by operation of law were thus vested- in the assignee in bankruptcy. This complete separation of the bankrupt from his former estate, property, and rights of property and of action seems to render the question relating to the distribution of such estate and the marshaling of such assets immaterial to the question of his discharge.”

It would therefore seem clear that an individual member of a firm, may, on his own independent application, made in his own right, obtain a discharge, not only from his individual debts, but from his firm liabilities, - and that the existence or nonexistence of firm assets is immaterial to the decision of this question. This view was expressed by the Supreme Court of Wisconsin in Curtis v. Woodward, supra; but it is opposed by many cases in the federal District Courts, and some in this district, which appear to be to the effect that the discharge

It is difficult to reconcile this view, if it relates to a discharge granted in the general language of the statute, with the plain mandatory language of section 17 of the bankruptcy act ( 30 Stat. 550 [U. S. Comp. St. 1901, p. 3428]) that “a discharge in bankruptcy shall release a bankrupt from all of his provable debts,” with certain exceptions not here involved. Since partnership debts are provable against a bankrupt’s individual estate, it is difficult to see why they are not discharged by a discharge which follows the language of the statute. It appears to me to be a question of jurisdiction, and that where, as in this case, the bankruptcy court acquired jurisdiction and granted a complete discharge' under the statute, without attempting to make any reservation, it should be given effect as such. It may well be that, if the adjudication and discharge in bankruptcy are expressly limited to the individual debts, the discharge would not relieve the bankrupt from liability on firm obligations; and, if that is what is meant by the decisions on that subject to which reference has been made, they are doubtless sound. Here, however, the discharge is complete, without qualification or limitation, and in the absence of the decree it must be assumed that the discharge is in accordance with the decree.

I find nothing in the bankruptcy act which requires, as a condition precedent to the right of the bankrupt to be discharged, that his estate shall have been completely administered and the accounts of the trustee finally settled. The discharges are sometimes, if not usually, granted before the estate has been completely administered. A discharge in bankruptcy has not been construed as a cancellation of the debts, which precludes the appropriation of the property in the hands of the trustee to the payment thereof. The discharge is designed to enable the debtor to start anew in the business world, without being embarrassed by his former obligations which were provable and dischargeable in bankruptcy. It would seem that the same rule would apply to the appropriation of the partnership assets to the payment of the partnership debts, even after an individual discharge in bankruptcy of a member of the firm, although the partnership assets in such case are not administered directly by the bankruptcy court. The discharge of the indebtedness and cancellation of the judgment could not, I think, deprive the creditor of the right to prove the judgment against the

It was doubtless competent for the Supreme Court of the United States, by virtue of the authority conferred by section 16 of the bankruptcy act ( 30 Stat. 550 [U. S. Comp. St. 1901, p. 3428]), to prescribe that a petitioner should state in his petition whether or not he is a member of a copartnership the business of which has not been finally settled, and, if só, his interest therein, and whether there are firm creditors from whom he seeks a discharge and firm assets unadministered, which could then be reached under subdivision “h” of section 5; and doubtless the bankruptcy court could adopt rules on the same subject not inconsistent with those adopted by the Supreme Court. The Supreme Court has prescribed forms for petitions by individuals and for petitions by copartnership firms; but I find no provision in those forms requiring that in an individual petition it must be set forth whether the applicant is a member of a copartnership ■ firm, and I find nothing in the rules prescribed by the Supreme Court on the subject, or dealing with the subject of whether in any circumstances the discharge may be partial and not complete. I am of opinion, therefore, that no question of jurisdiction is presented, and 'that, at most, a suspicion is cast on the regularity of the petitioner’s bankruptcy proceedings according to some of the federal decisions; but even that depends upon there being a partnership business which has not been finally settled and on this judgment being a partnership obligation. In these circumstances, I think the true rule is, and that the tendency of the decisions in the state courts, at least, is toward holding, that, where the court acquires jurisdiction and grants a full discharge in the language of the statute from all provable debts properly scheduled not specially excepted, joint as well as individual debts are discharged. Curtis, v. Woodward, supra; West Philadelphia Bank v. Gerry, supra; Loomis v. Wallblom, supra; Jarecki Mfg. Co. v. McElwaine, supra; Wilkins v. Davis, supra; Berry Bros. v. Sheehan, supra.

Second. I am also of opinion that, even though the foregoing rule be unsound, the petitioner was entitled to have the judgment canceled; for it does not satisfactorily appear that this was a firm obligation or that the firm has any remaining assets. It has been seen that the obligation on which the deficiency judgment was recovered was a joint obligation of the petitioner and Roddy; but that alone does not make it a firm debt, although the firm property might have been sold

The claim that this was a fir.m obligation is based upon the fact that the firm at one time owned the mortgaged property, and that the petitioner answered in the affirmative two leading questions with respect to whether there were any other judgments against the firm, or whether it owed any other debts; but it is manifest that that is wholly insufficient. Moreover, if it were a firm obligation, it does not satisfactorily appear that the firm owns any undistributed assets. This copartnership business was of such a nature that it could have been readily settled, and doubtless was practically settled, as they parted with each piece of property in which they invested. It might fairly be inferred from the evidence that the firm is not only not in existence, but that its assets have been distributed and a final settlement made between the partners; and, if these facts are fairly established, the court would have had no authority to entertain bankruptcy proceedings against the firm. Section 5a. No property was discovered on the plaintiff’s examination of the petitioner in supplementary proceedings before his bankruptcy. The plaintiff, on subsequently receiving notice of the bankruptcy proceedings, had notice that he still claimed to have no property, except two items, of the value of $30, which he claimed to be exempt. The plaintiff had an opportunity in the bankruptcy proceedings to further examine him, and to ascertain whether he had any other property than that embraced in his- schedules in bankruptcy. Bankr. Act, § 55, subd. “b,” 30 Stat. 559 [U. S. Comp. St. 1901, p. 3442]. This was a proper subject of inquiry by the bankruptcy court. There, perhaps, the burden was on the petitioner; but after the discharge I think it would be on the creditor. Loomis v. Wallblom, supra; Crompton v. Conlcling, Fed. Cas. No. 3,408.

It follows that the order should bé reversed, with $10 costs -and disbursements, and motion granted, with $10 costs.

INGRAHAM, J., concurs. CLARKE and SCOTT, JJ., concur in result.