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IN RE STARKS

April 28, 1944

In re STARKS


The opinion of the court was delivered by: KALODNER

This matter comes before this court on a referee's certificate of review, the question being the correctness of the referee's order of February 4, 1944, confirming and reinstating the referee's opinion and order of December 2, 1943, as amended by the referee's opinion and order of December 9, 1943.

It appears that on January 2, 1942, the Northwestern National Bank entered into a contract *fn1" with the bankrupt, Joseph A. Starks, jeweler, trading as Starks and Company, Philadelphia. On April 27, 1942 Starks disappeared, taking with him, according to the referee's finding, $27,259.40 of jewelry which had been entrusted to him for sale by the Bank, admittedly as its agent.

 On May 7, 1942, a creditors' petition was filed, and on July 9, 1942, an adjudication of bankruptcy was entered against Starks.

 The controversy here was precipitated by the fact that the Bank originally filed a proof of claim in the amount of $62,884.07 as a general claim for money loaned or advanced to the bankrupt, the amount claimed including the aforementioned $27,259.40. The trustee and certain creditors objected to inclusion of the $27,259.40 on the ground that the Bank had entrusted the jewelry in question to the bankrupt as its own agent. In apparent recognition of the validity of that objection, the Bank seeks to file an "amended" proof of claim setting forth separately its claim of $27,259.40 premised on a conversion by the bankrupt. This is objected to on the ground that the amended claim asserts a new cause of action and as such is barred by Section 57, sub. n of the Bankruptcy Act, 11 U.S.C.A. § 93, sub. n.

 First, as to the contention that credit must be given for the value of the jewelry entrusted to the bankrupt by the Bank:

 There is no doubt that the Bank, having turned over to the bankrupt the $27,259.40 of jewelry, must give credit in that amount on its indebtedness claim against the bankrupt estate. It is clear that where a bank holds a pledge as collateral to that bank's note which it delivers to the bankrupt to sell and apply the proceeds on the note thereby makes the bankrupt its agent, and where he sells the pledge for sufficient to pay the note but retains the proceeds, the note is extinguished as relates to other creditors and cannot be proof against the estate of the bankrupt. In re Hurley, D.C. Minn.1926, 18 F.2d 363. The rule is stated as follows in 8 Corpus Juris Secundum, Bankruptcy, Section 421 on page 1277:

 "If the creditor has permitted the bankrupt to sell collateral securities as his agent to apply the proceeds on the debt the former must credit the proceeds received on the amount of the debt in extinguishment thereof, although the bankrupt has failed to account for the proceeds as required." (Emphasis supplied.)

 That brings us to the objection of the trustee and the creditors that the amended proof of claim constitutes a new cause of action and thus is barred by Section 57, sub. n of the Bankruptcy Act, 11 U.S.C.A. § 93, sub. n, since it was admittedly filed after expiration of the statutory period. This objection should be sustained.

 The original claim was based on the indebtedness of the bankrupt to the Bank, while the amended claim is based on Starks' failure to account to the Bank for the jewelry entrusted to him for sale.

 Clearly the amended claim sets up a new cause of action. It is true that the Bank, and perhaps the other creditors, as well as the trustees in bankruptcy, knew of the existence of this cause of action, but at no time prior to the date of the petition to amend does it appear that the Bank asserted or gave intention of asserting this claim. The words of Judge Buffington, in the case of In re Thompson, 3 Cir., 1915, 227 F. 981, 983, are particularly in point:

 "In some from the substance of a claim must have been made within the proper time, but if this has been done amendments may be made afterward. Whether formal or informal, a claim must show (as the word itself implies) that a demand is made against the estate, and must show the creditor's intention to hold the estate liable. And this is especially the duty of a secured creditor * * *."

 The Bank points to many cases stating that much liberality has been shown in permitting amendments after the statutory period has expired. However, the limitations on this notion are so widely accepted it is unnecessary to list the cases. An excellent statement in this respect is found in the case of In re G.L. Miller & Co., 2 Cir., 1930, 45 F.2d 115, 116:

 "It is urged by appellant that the trend of modern decisions is to allow great liberality in the amendment of claims in bankruptcy. So it is; but it is to be noted that the authorities cited as indicating this liberal tendency deal with situations which fall short of that here presented. They permit amendments to correct defects of form, or to supply greater particularity in the allegations of fact from which the claim arises, or to make a formal proof of claim based upon facts which, within the statutory period, had already been brought to the notice of the trustee by some informal writing or some pleading in the bankruptcy proceedings. See Globe Indemnity Co. v. Keeble, [4 Cir.], 20 F.2d 84; In re Fant, D.C.W.D.S.C., 21 F.2d 182; In re Atlantic Gulf & Pac. S.S. Corp., D.C. Md., 26 F.2d 751; In re Kardos, 2 Cir., 17 F.2d 706, 708; In re Kessler, 2 Cir., 184 F. 51; Scottsville Nat. Bank v. Gilmer, 4 Cir., 37 F.2d 227. It is quite another matter to use an 'amendment' as a device for filing after the statutory period a claim based upon a cause of action of which no notice whatever had been given the trustee by anything previously filed. The distinction has been recognized by high authority. In Hutchinson v. Otis, 190 U.S. 552, 555, 23 S. Ct. 778, ...


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