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PATTON v. FIDELITY-PHILADELPHIA TRUST CO.

October 27, 1965

Charles W. PATTON, Jr.
v.
FIDELITY-PHILADELPHIA TRUST CO.



The opinion of the court was delivered by: DAVIS

 The plaintiff, a citizen of Colorado, instituted this diversity action against the defendant bank for damages arising from the breach of an oral contract. The suit proceeded to trial but after the plaintiff rested his case, the defendant moved for a directed verdict under Rule 50(a) of the Federal Rules of Civil Procedure. After full argument out of the presence of the jury, the court granted the defendant's motion and announced that it would file an opinion setting forth the reasons for its decision. For the purposes of this motion, there was no dispute as to the plaintiff's factual allegations.

 The plaintiff was the owner and operator of a machine shop in Haverford, Pennsylvania, and was indebted to the defendant bank in the amount of $94,804.55 by reason of four loans secured by accounts receivable, equipment and life insurance policies. After plaintiff had defaulted on an installment on his equipment loan on April 26, 1955, he and the defendant bank entered into an oral agreement that if plaintiff would terminate his business operation and proceed to liquidate it in an orderly manner, the defendant would refrain from seizing the collateral. In compliance with the terms of the oral agreement, the plaintiff began to make certain arrangements for liquidation; however, on April 29, 1955, defendant bank took possession of the plaintiff's physical assets in violation of the oral contract and sold them for $35,500. Subsequently, the bank demanded and received payment of the cash surrender value of plaintiff's paid-up policies of life, endowment and retirement insurance in the amount of $63,910.20. The plaintiff in the meantime had been adjudicated a bankrupt in proceedings commenced May 3, 1955 in the Eastern District of Pennsylvania.

 The plaintiff claimed as damages as a result of the bank's breach of contract the following: (1) $71,924.82 representing the difference between the alleged market value of his physical assets of $107,424.82 and the actual sale price of $35,500; (2) $106,959, representing the replacement value of his insurance policies surrendered by the bank; and (3) $100,000 representing the damage to his credit and reputation from being forced into bankruptcy by defendant bank as a result of its breach of contract.

 While accepting the plaintiff's recitation of the facts for the purposes of this motion, the defendant asserts that under the circumstances of this case, the law denies the plaintiff the right to recover on any of the three elements of damages.

 I.

 The defendant argues first of all that the plaintiff may not recover the difference between the alleged market value of the physical assets and the amount for which it was actually sold because any rights that the plaintiff might have had for such damages became vested in the trustee in bankruptcy as the date of the filing of the petition in bankruptcy.

 Section 70, sub. a of the Bankruptcy Act, 11 U.S.C. § 110, sub. a, provides inter alia :

 
"The trustee * * * shall * * * be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition * * *, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located * * * (6) rights of action arising upon contracts, or usury, or the unlawful taking or detention of or injury to his property.

 The complaint avers that the plaintiff is entitled to recover the difference between the fair market value of his machinery and other tangible property and the price for which it was sold by the defendant bank "by reason of the unlawful seizure and sale of plaintiff's assets." From these words, and from the complaint as a whole, it appears that this element of damages arises because of the breach of oral contract and the unlawful taking of his property, and thus comes squarely within the provision of § 70, sub. a(6) of the Bankruptcy Act above cited which passed the plaintiff's chose in action to the trustee in bankruptcy as of the date of the filing of the petition. See, 4 Collier, Bankruptcy § 70.28(5).

 Tamm v. Ford Motor Co., 80 F.2d 723 (8th Cir. 1935), was a case similar to the instant suit. There the plaintiff brought an action against the defendant alleging that it had induced the plaintiff to enter into a contract by fraud and misrepresentation resulting in the plaintiff's becoming insolvent and being forced into bankruptcy. The Court held that the cause of action came within the provisions of § 70 sub. a(6), first because the action was in contract and secondly because the word "injury" in the phrase "injury to his property" encompassed "an actionable wrong", not just physical harm. In reaching its conclusion that the cause of action had vested in the trustee in bankruptcy, the court stated:

 
"Surely Congress never intended that a bankrupt could lose his property to the extent of utter insolvency as here pleaded, and then go into bankruptcy for an immunity bath, and then emerge freed from his creditors and vested with all he had lost. For if the trustee has no title and therefore no right to sue, obviously, the bankrupt retains the title to the chose and may sue * * *."

 There is no contention in the instant case that the trustee abandoned or rejected this cause of action so as to revest title in the plaintiff. See Brown v. O'Keefe, 300 U.S. 598, 602-603, 57 S. Ct. 543, 81 L. Ed. 827 (1937); Colson v. Monteil, 226 F.2d 614, 611-618 (8th Cir. 1955); United States for Use and Benefit of Allen Const. Corp. v. Verrier, 179 F. Supp. 336, 343 (D.Me.1959); In re S. F. Brothers Co., 151 F. Supp. 153, 156 (E.D.Mich.1956), aff'd sub nom. S. F. Brothers Co. v. Wiseman, 244 F.2d 73 (6th Cir. 1957). In fact, by an Order dated January 16, 1956, the referee, pursuant to § 27 of the Bankruptcy Act, 11 U.S.C. § 50, authorized the trustee to settle all claims against the defendant bank. The release, which was concluded on January 23, 1956, read in part:


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