First Nat. Bank v. Haymes

• Decision Date: 01 April 1966
• Citation: 268 N.Y.S.2d 820,49 Misc.2d 939
• Parties: FIRST NATIONAL BANK, Plaintiff, v. Gary HAYMES, Defendant.
• Court: New York City Court

Page 820

268 N.Y.S.2d 820

49 Misc.2d 939

FIRST NATIONAL BANK, Plaintiff, v. Gary HAYMES, Defendant.

Civil Court of the City of New York, Trial Term, New York County, Part 34.

April 1, 1966.

Anthony C. Christy, New York City, for plaintiff, Doris B. Keeley, New York City, of counsel.

SAMUEL A. SPIEGEL, Judge.

Plaintiff sues defendant for fraud in obtaining a loan for which defendant executed a promissory note. The defendant listed plaintiff's claim in his schedule in the United States District Court, Eastern District, New York, in bankruptcy proceedings wherein he filed a petition on the 29th day of December, 1964, and was discharged as a bankrupt on the 26th day of February, 1965. Thereafter, on the 28th day of July, 1965, this action was instituted against the defendant. The plaintiff presented evidence to this court that in the defendant's application submitted to plaintiff for a loan on August 25, 1964, defendant omitted to list many pre-existing debts and one judgment. The testimony indicates that due to the omission of these obligations the plaintiff was misled into approving this loan, and, further, had these obligations been shown the loan would never have been approved. Subsequent to this loan, the defendant listed all of these pre-existing debts in his bankruptcy schedule.

Plaintiff contends that it relied on the defendant's application and was deceived into extending him credit and that the loan was thereby fraudulently obtained by the defendant. In addition, plaintiff asserts that this loan is not dischargeable in bankruptcy and that it has a right to proceed and to prevail in this court.

Many questions arise, including whether the plaintiff is estopped from proceeding in this court because it did not take appropriate action to oppose the discharge of the defendant in the Bankruptcy Court. Does the Civil Court have jurisdiction to award a judgment after the Federal court has discharged the defendant as a bankrupt based on a petition which included this claim? Does the Civil Court have jurisdiction concurrent with the Federal court to entertain an action disputing the dischargeability of the debt? Does any right exist to institute suit in any court for the payment of this debt after the discharge is granted? What is the remedy of the creditor of the bankrupt who attempted in Bankruptcy Court to discharge an alleged fraudulently-created obligation? May a creditor who alleges he has been so defrauded institute suit in the state court, or as a condition precedent must he have opposed the discharge in bankruptcy? Must the relief sought herein be in the Federal court prior to the time that the bankrupt is discharged or can the state court exercise jurisdiction after the discharge in bankruptcy?

Subdivision (a) of section 17 of the Bankruptcy Act as amended, 11 U.S.C.A. § 35(a), reads in part as follows:

'A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as * * * (2) are liabilities for obtaining money or property by false pretenses or false representations.'

It is clear by this section that a discharge in bankruptcy will not release a bankrupt from liability, if he obtained money by a false representation or by false pretenses.

However, is the Civil Court the proper forum for such a claim? On the surface, it would appear that since jurisdiction of bankruptcy proceedings is in the Federal court, any claim against a discharged bankrupt should be made in that court.

At first blush, it would also appear that the plaintiff may have waived its rights to bring an action in the Civil Court if it did not oppose the discharge in the Bankruptcy Court.

The court, in its independent research, finds that the questions posed herein involve many interesting viewpoints advanced by various courts throughout the United States. In the case of Schwartz v. Horowitz, 131 F.2d 506, the Circuit Court of Appeals reversed an order in bankruptcy in the District Court, Southern District, New York, which issued an order restraining the state court from proceeding with a chose in action against the bankrupt. This case decided the proposition that a state court in an in personam action against obligors could not be enjoined by a bankruptcy court wherein, after commencement of the state court action, the bankruptcy trustee sued obligors on the claims, on the theory that the action was against a bankrupt and could be enjoined under a Bankruptcy Act provision relating to staying all actions. The Bankruptcy Act, the court held, Is intended to protect bankrupts against liabilities from which they will be discharged. Bankruptcy Act, § 11(a), 11 U.S.C.A. § 29(a).

Collier's Bankruptcy Manual, 1965 edition, pages 160, 161, concerning stay of pending suits, states 'The power of the federal courts to stay state court proceedings has always been limited, except in the field of bankruptcy. In the administration of the bankrupt's estate the power to stay certain suits against the bankrupt is necessary to implement and give effect to the purposes of the Act and to allow the bankrupt to obtain his discharge.

'* * * The stay of suits Pending in other courts against the bankrupt at the time of the filing of the petition, provided for in § 11a, is primarily for the benefit of the bankrupt, that he may avoid being harassed in both courts at the same time with regard to the same debt. The power created under § 2a(15), on the other hand, is to be used by the courts of bankruptcy in staying proceedings which will primarily effect the bankrupt's estate and its administration or custody. Matter of S. W. Straus & Co., Inc. (D.C.N.Y.), 24 Am.B.R. (N.S.) 349, 6 F.Supp. 547.'

Further, 'Section 11a provides that a suit may be stayed which 'is founded upon a claim from which a discharge would be a release.' This dischargeability of the debt, as covered by § 17 of the Act, is made the basis of jurisdiction and there should be no stay granted unless the debt or claim involved will be discharged under the provisions of the Act, even though the claimant is listed as a creditor in the bankrupt's schedule.' (Collier Bankruptcy Manual, p. 162)

It is therefore obvious that the purpose of the stay is to prevent the harassment of a bankrupt or the dissipation of his assets. A stay cannot be obtained for a debt which is not dischargeable, or where a discharge is even debatable. Thus, one could not be available to the bankrupt, in the case at bar, before, during, or after his bankruptcy petition had been filed.

Does the Bankruptcy Court have exclusive jurisdiction over a debt which is listed in the bankrupt's petition, as in the case at bar? The answer is no. Courts have said in this connection that the right to a discharge and its effect 'are wholly distinct propositions.' In In re Lowe, 36 F.Supp. 772, the court said:

'Section 14 of the Bankruptcy Act, 11 U.S.C.A. § 32, fixes the right to a discharge, and Section 17 of the Bankruptcy Act, 11 U.S.C.A. § 35, states the effect of a discharge. * * * There is nothing in Section 14 which prevents the discharge of a bankrupt * * *. It may be true that her claim is not barred by the discharge which is obtained by the bankrupt and she can take proper steps to enforce it in subsequent proceedings in the state court; on the other hand, it may be a claim which is barred by the discharge in bankruptcy. It is not for the bankruptcy court to determine in the bankruptcy proceedings whether a particular claim is discharged or not discharged by the bankruptcy proceedings. That is a matter for another court to determine when and if steps are taken by the particular creditor to enforce the claim under consideration. The discharge in bankruptcy does not adjudicate that question or prejudice in any way the later decision of that question by another court. In re Bernard, 2 Cir., 280 F. 715; Teubert v. Kessler, 3 Cir., 296 F. 472; In re Kolsrud, D.C.Minn., 34 F.2d 831; In re Andrews, D.C.Cal., 47 F.2d 949; In re Millkofsky, D.C.N.Y., 17 F.Supp. 127; In re Sutton, D.C.N.Y., 19 F.Supp. 892.' In re Lowe, supra. (Emphasis supplied.)

Collier's Bankruptcy Manual, page 302, dealing with section 23 of the Bankruptcy Act, indicates that the Bankruptcy Court and the District Court classify jurisdictional questions in two categories: '(1) those dealing with the bankruptcy court's power to adjudicate all matters relating to the administration of the bankrupt's estate and The property in the court's possession, and (2) the jurisdiction of federal district courts sitting either as district courts at law or in equity or as courts of bankruptcy over independent suits brought by the bankruptcy receiver or trustee against third persons concerning Property not in the possession of the bankruptcy court.' In the first instance, the cases dealing with the property in the court's possession are classified'Jurisdiction of Bankruptcy Court in Summary Proceedings'. The second type of cases, where property is not in the possession of the Bankruptcy Court, are 'Jurisdiction of Federal Courts in Plenary Actions.'

Summary proceeding and plenary suit differ in many respects, and it is important to point out that proceedings before a referee in bankruptcy are always summary. The referee has no jurisdiction over a plenary action. In Central Republic Bank & Trust Co. v. Caldwell, (C.C.A.8th Cir.) 58 F.2d 721, 731--732, the court said:

'The main characteristic differences between a summary proceeding and a plenary suit are: The former is based upon petition, and proceeds without formal pleadings; the latter proceeds upon formal pleadings. In the former, the necessary parties are cited in by order to show cause; in the latter, formal summons brings in the parties other than the plaintiff. In the former, short time notice of hearing is fixed by the court; in the latter, time for pleading and hearing is fixed by statute or by rule of court. In the former, the hearing is quite...