Appeal from the District Court of the United States for the Eastern District of Pennsylvania.
Before WOOLLEY and DAVIS, Circuit Judges, and JOHNSON, District Judge.
ALBERT W. JOHNSON, District Judge.
This is an appeal from a decree of the United States District Court for the Eastern District of Pennsylvania, ordering Bernard R. Cohn, receiver, to pay Herman Moskowitz and Ralph Mitchell certain funds deposited for the purpose of a composition settlement in bankruptcy.
John Rosenfeld operated two stores, trading in jewelry, the one in Philadelphia, the other in Reading, Pa. On January 31, 1928, an involuntary petition in bankruptcy was filed against him. The bankrupt requested the receiver to allow the business to be continued, and several days after the petition in bankruptcy was filed, the bankrupt made an offer of composition of 20 per cent. accompanied by a deposit of $1,000. On February 15, the court below authorized the receiver to continue the bankrupt's business for 30 days.
The creditors accepted the bankrupt's offer of composition on March 1, 1928. On March 10, 1928, the receiver notified the bankrupt that his authority to continue operating the business had expired and that he would not consider continuing the business because of losses. The court below granted an order to continue the business for another period of 30 days provided an indemnity of $2,000 be deposited with the receiver to protect the estate against loss by reason of continuing the business after February 15, 1928. The deposit was made.
On April 5, 1928, the attorney for the bankrupt deposited the sum of $5,256.15 with the receiver to be applied in carrying out the composition; such sum, together with the other moneys in the hands of the receiver, the bankrupt believed to be sufficient to pay the composition and costs.
On April 14, 1928, the bankrupt found that the moneys were not sufficient to effect the composition, and filed an amended offer of composition.
Thereafter the bankrupt was evicted from the premises of the Philadelphia store and withdrew his offer of composition and its amendment. Thereupon, the bankrupt's attorney presented a petition for the return of the deposits on the composition, the sums totaling $6,256.15.
The special referee refused to order the return of the deposits on the ground that they were subject to deduction for the losses sustained by the estate in attempting to carry out the composition. The District Court held that the court was without power to impose the costs of the composition on the fund, and that the recommendation of the referee must be disallowed.
The question before the court is whether the District Court has power to charge a fund deposited as a result of an offer of composition with the expenses of the composition and the expenses incurred in operating the bankrupt's business during the time of the attempted composition.
No question arises before this court as to the right of the bankrupt to withdraw his offer of composition after acceptance by his creditors. Nor is there any question of good faith here. The offer was sufficient as evidenced by the acceptance of the creditors. Likewise, the attempt to amend the offer and the subsequent withdrawal of the offer are consistent with good faith since the bankrupt was evicted and lost the valuable lease to the Philadelphia store.
Offers of composition are expressly authorized by the Bankruptcy Act of July 1, 1898, § 12, as amended June 25, 1910, c. 412, § 5, 36 Stat. 839, as amended May 27, 1926, c. 406, § 5, 44 Stat. 663 (11 USCA § 30).
In the present case, it appears that the bankrupt obtained the money from a friendly creditor to deposit for the purpose of carrying out the composition. These funds were in no sense a part of the bankrupt's estate as they were property acquired by the bankrupt after the filing of an involuntary petition in bankruptcy against him. The fund was subject to the claims of ...