In re Bacon

• Decision Date: 03 June 1912
• Docket Number: 1,782.
• Citation: 196 F. 986
• Parties: In re BACON.
• Court: U.S. District Court — Western District of New York

196 F. 986

In re BACON.

No. 1,782.

United States District Court, W.D. New York.

June 3, 1912

Bacon &amp Huff, of Waterloo, N.Y. (W. S. O'Brien, of Geneva, N.Y of counsel), for petitioner.

Charles E. Opdyke, of Waterloo, N.Y., for bankrupt.

George E. Zartman, of Waterloo, N.Y., in pro. per.

HAZEL District Judge.

This proceeding comes here upon the petition of the First National Bank of Waterloo to review the decision of the referee in bankruptcy, contending inter alia that the referee had no jurisdiction in the matter. The material facts are as follows:

The bankrupt, Bacon, before his adjudication on May 4, 1904 pledged to the Exchange National Bank of Seneca Falls, N.Y certain stocks as collateral security, and afterwards pledged the identical stocks to the First National Bank of Waterloo, N.Y., as collateral security subject to the rights of the prior pledge which, since the stock was pledged, has had the physical possession thereof. The agreements pledging the stocks were dated, respectively, February 20, 1899, and February 15, 1902. On August 22, 1910, the trustee in bankruptcy petitioned the referee for an order requiring the pledgees to show cause why they should not prove their liens, and why the trustee should not pay to them the respective amounts due, and redeem such stocks and securities pursuant to General Orders in Bankruptcy No. 28. On the return day of the order to show cause, the Waterloo Bank and the Seneca Falls Bank appeared; the latter filing an unsecured claim for $7,327.98 and waiving its lien against the said stocks in its possession. Prior thereto on May 2, 1905, the Waterloo Bank filed, with the referee, a claim against the estate in bankruptcy for $4,010 on a promissory note, to the allowance of which objection was made by the trustee. Afterwards the said claim was withdrawn by claimants, and the same was expunged from the list of claims previously filed against the bankrupt estate.

The trustee in bankruptcy contended before the referee, in 1905 when the bank sought to enforce payment of the debt out of the stocks, that the pledge or transfer by Bacon of the securities to the Waterloo Bank was invalid, and thereupon an action was brought by the Waterloo Bank to reform the instrument, and later a decree was entered deciding that the bank held and owned such stocks and securities as collateral security for any indebtedness from Bacon existing on or prior to February 15, 1902.

On the return day of the heretofore mentioned order to show cause, the Waterloo Bank challenged the jurisdiction of the court, claimed that it had title to the stocks, and asserted its right to have the controversy determined in a plenary action. The answer to the jurisdiction also contained a plea to the merits. The referee substantially held that as the Waterloo Bank never had possession of the stocks, and as it had pleaded to the merits, the objection of want of jurisdiction was waived. The Waterloo Bank, again before the hearing on June 3, 1911, renewed its objection to the jurisdiction of the court claiming ownership of the stock adversely to the trustee in bankruptcy, and upon the overruling of such objection filed a statement of its claims against the bankrupt, but in so doing disclaimed any intention of submitting to the referee for determination the controversy arising on the facts. The statement on its face showed an aggregate indebtedness from Bacon to the bank of $17,836.20. Subsequently the referee decided, on evidence susceptible of different inferences, that the Waterloo Bank was not an adverse claimant in good faith, and that the lien against said stocks pledged to it by Bacon amounted to only $390.58 with interest. He disallowed the claims on the promissory note above specified, on various other notes of lesser amounts, and on 15 bonds of the Waterloo Organ Company, upon which Bacon was claimed to be liable.

Had the referee jurisdiction? Prior to the amendment of 1910, no suit could be maintained by a trustee in bankruptcy under section 70, subd. 'e' of the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 566 (U.S. Comp. St. 1901, p. 3451)), without the consent of the opposed defendant if the claim asserted was adverse. Concededly the right of the trustee to proceed herein was under section 70, subd. 'e' as read in connection with section 23, subd. 'b' and therefore I think the question of jurisdiction depended entirely upon whether an adverse claim in good faith was made. If the claim is found to have been adverse, the proceeding was not strictly one in bankruptcy-- as, for example, a proceeding to prove the amount due from the bankrupt to the bank-- but seems to have been a controversy which arose in bankruptcy asserting a right of ownership in the stocks, and of such a proceeding the referee had not the jurisdictional right to make a summary disposal requiring the transfer of the stocks to the trustee unless the adverse claim was colorable or fictitious. Matter of Friedman, 20 Am.Bankr.Rep. 37, 161 F. 260, 88 C.C.A. 306. That the securities were actually in the possession of the Seneca Falls Bank-- the first pledgee-- is not thought of material importance in view of the fact that the right of the Waterloo Bank to such possession was subject thereto. In my opinion, it is reasonably clear from the evidence that an adverse claim existed. Indeed, the referee decided on disputed testimony that the Waterloo Bank held a valid lien on the stocks in an amount less than the aggregate amount claimed to be due and owing. The litigations pending between the trustee in bankruptcy and the Waterloo Bank ever since the appointment of the former, in which such stocks have prominently figured, abundantly prove that the latter had rights of possession to the securities for the indebtedness or liability of any kind of Bacon or of the Waterloo Wagon Company, Limited. The rights of the trustee who never actually had possession of the stocks were subordinate to those of the bank.

In First National Bank of Waterloo v. Bacon, 113 A.D. 612, 98 N.Y.Supp. 717, an action between this petitioner and the bankrupt in this proceeding, Justice Williams of the Appellate Division, Fourth Department, who wrote the opinion in the case involving a reformation of the agreement, said:

'Even if delivery of the scrip to the Seneca Falls bank and the possession thereof by it could be regarded as possession in that bank of the

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