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IN RE STARKS

DISTRICT COURT, E.D. PENNSYLVANIA


April 28, 1944

In re STARKS

The opinion of the court was delivered by: KALODNER

KALODNER, District Judge.

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, 47 L. Ed. 1179. * * * If the limitation imposed by section 57 n, as amended * * * is to be given any reasonable meaning, we think it must be true that the right to amend can go no further than to permit the bringing forward and making effective of that which in some shape was asserted in the original claim. * * *"

 To the same effect are Tarbell v. Crex Carpet Co., 8 Cir., 1937, 90 F.2d 683; Matter of Keck, D.C., 23 F.Supp. 121; Id., 3 Cir., 1938, 98 F.2d 589; Matter of Skidmore, D.C.N.D.Ala., 1939, 29 F.Supp. 293; cf. In re Rothert, 7 Cir., 1932, 61 F.2d 1; Ebeling v. Bobeng, 7 Cir., 1941, 123 F.2d 520; In re Lipman, 2 Cir., 1933, 65 F.2d 366; In re Fiegel, D.C.S.D.N.Y., 1937, 22 F.Supp. 364.

 As to the two lesser issues involved: the objecting creditors claim additional credit in the amount of $1,660, which represents the difference between the sale price and the "stated value" of the items sold by the Bank, and in the amount of $2,679.14 which represents the difference between the sale price and the "stated value" of items sold by the pawnbrokers.

 The substance of these claims is that the agreement between the Bank and Starks, together with Schedule "A", amount to an agreement within the terms of Section 57 sub. h of the Bankruptcy Act, 11 U.S.C.A. § 93, sub. h, and hence the Bank could not sell the items in its possession for less than the amount listed and that the Bank, under the terms of the agreement, was obligated to redeem all the jewelry from the pawnbrokers, and having failed to do so, it should be required to give credit for the difference between the sale price and the "stated value" in the agreement.

 On the issue of the items sold by the Bank, I am of the opinion that the bankruptcy rule applies and the Bank need give credit only for the amount it actually received. The objecting creditors' argument that the contract and the schedule operate to come within Section 57, sub. h of the Bankruptcy Act, is without merit. However, I do not consider it necessary to assume the burden of discovering the intentions of the parties in respect to this matter when, by the very terms of the contract itself, the Bank's conduct was permitted. Paragraph 5 of the contract reads:

 "5. * * * should the Debtor suffer or permit any mortgage, incumbrance or other lien to be placed upon his assets, or make any conveyance or transfer or his assets, or any part thereof, out of the ordinary course of his business, or should there be instituted any proceedings for the voluntary or involuntary liquidation, reorganization or consolidation of the assets of the Debtor, or an assignment for the benefit of creditors, receivership or bankruptcy, by or against the Debtor, or should there be a default under the terms and conditions of said agreement between Debtor, Bank and certain other creditors, bearing even date herewith, then and in such case, the whole of the claim of the Bank against the Debtor shall immediately become due and payable and the Bank may proceed to enforce collection as provided by law." (Emphasis supplied.)

 By its own terms, the agreement for sale through Starks came to an end, at the Bank's option, on July 9, 1942, and possibly earlier. The sales by the Bank to which the creditors object were made on July 30, 1942, and October 15, 1942. In this case, the Bank sought to enforce collection under the law of pledges. The sales were made in accordance with the security agreement between Starks and the Bank wherein Starks waived notice and gave the Bank authority to sell at public or private sale. Such agreements are valid in Pennsylvania. Jeanes' Appeal, 1887, 116 Pa. 573, 11 A. 862, 2 Am.St.Rep. 624; Englert v. First National Bank at Pittsburgh, 1939, 333 Pa. 297, 5 A.2d 136; Read v. Pennsylvania Co., 1940, 338 Pa. 389, 12 A.2d 925; Jones v. Costlow, 1944, 349 Pa. 136, 36 A.2d 460; and cf. Hiscock v. Varick Bank, 1907, 206 U.S. 28, 27 S. Ct. 681, 51 L. Ed. 945. While a sale of this sort might be set aside where a fair price was not obtained, it has not been shown here that the prices obtained by the Bank were not the fair market value of the items at the time of the sales. It should be noted here that the agreement between the creditors, the Bank, and Starks whereby the creditors agreed to stand by for six months, also came to an end by its own terms before the sale.

 As to the controversy with respect to the items sold by the pawnbrokers, I am of the opinion that the Bank is not to be required to give credit for the difference between the sale price and the "stated values" in Schedule "A". The objecting creditors base their argument on the ground that the contract executed in January 2, 1942, obligated the Bank to redeem all items pawned by Starks. Considering the agreement as a whole and the conduct of the parties while the agreement was in operation, it seems to me that the agreement contemplated the redemption first of those items in which there was an equity and for which there was a prospective sale. It was an agreement whereby both parties were co-operating to reduce Starks' obligations to the Bank. The custom, during the four months the agreement was in effect, was for the Bank to redeem an item when and if Starks thought he could sell it. The Bank can hardly be said to be obligated to increase Starks' debt to it after the failure of Starks, amounting to a breach of contract, to carry out the terms of the agreement.

 An order may be submitted in accordance with this opinion.


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