In re Nuttall

• Decision Date: 27 December 1912
• Citation: 201 F. 557
• Parties: In re NUTTALL et al.
• Court: U.S. District Court — Southern District of New York

201 F. 557

In re NUTTALL et al.

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

December 27, 1912

Thomas S. Fagan, of Troy, N.Y., for the motion.

J. S Carter, of Cohoes, N.Y., opposed.

RAY District Judge.

The defendants in an action in the Supreme Court of the state of New York, John A. Nuttall and Lillian M. Herrick, were duly adjudicated bankrupts on the 8th day of January, 1912 individually and as copartners of the firms of Empire Knitting Mills and John A. Nuttall & Co. They have applied for a discharge in bankruptcy, and such application specifications of objection having been filed thereto, is now pending undetermined. Long delay in such proceedings is unnecessary. The claim of the plaintiffs in said action Leonard Paulson, Cortland Linkroum, and James Hooker, amounting to $998.95, was duly scheduled, and a discharge therefrom prayed, and the said plaintiffs have proved their said claim in said bankruptcy proceedings, still pending, and same was allowed. Shortly after the petition was filed, said claimants, Paulson, Linkroum, and Hooker commenced an action in the Supreme Court of the state of New York on the same indebtedness so scheduled and later proved and allowed. The defendants allege and claim that the said debt and demand is of such a character and nature that a discharge in bankruptcy will be a full release to them therefrom. The said plaintiffs contend, however, that the claim or cause of action sued upon is a liability for obtaining property by false pretenses or false representations, and that the complaint so show on its face, and that there can be no recovery at all unless such a cause of action is made out on the trial. The plaintiffs claim that under section 17 (2) a discharge in bankruptcy will not be a release. All this the defendants deny. The claim proved was in contract and contained no charge of obtaining property by false pretenses or false representations. This proof of claim has not been withdrawn.

It is settled law that the bankruptcy court may restrain the further prosecution of all actions pending against the bankrupt when the bankruptcy proceeding is instituted or commenced thereafter during the pendency of such bankruptcy proceedings, provided the claim or demand sued upon is one from which a discharge in bankruptcy will be a release. Section 11a, Bankruptcy Act, relating particularly to suits begun before bankruptcy proceedings are instituted, and section 2 (15), which specifically authorizes the bankruptcy court to 'make such orders * * * in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this act. ' In the latter class of cases it is not essential that the suit be founded on a claim of such a nature that the judgment or debt represented thereby will be released by the discharge. If the prosecution of the suit to judgment and the enforcement of the judgment during the pendency of the bankruptcy proceedings will interfere with the proper and speedy enforcement of the provisions of the act or tend to embarrass the court, its prosecution may be enjoined. Collier on Bankruptcy (9th Ed.) 262, 263; In re Basch (D.C.) 3 Am.Bankr.Rep. 235, 97 F. 761; In re Gutman & Weak (D.C.) 114 F. 1009, 8 Am.Bankr.Rep. 252.

But it has been decided that the claim sued upon must be clearly dischargeable or a stay should be granted. In re Sullivan, 2 Am.Bankr.Rep. 30. In Collier on Bankruptcy (9th Ed.) 266, it is said:

'The stay should usually be granted if the bankrupt is threatened with arrest or will be needlessly harassed.'

In this case, at bar, it is not at all clear that the complaint states a cause of action for obtaining property by false pretenses or false representations within the meaning of the act. The sum and substance of the complaint is:

(1) That defendants prior to December 27, 1911, had purchased goods of plaintiffs, and, so far as appears, paid for them, and had not disclosed any financial embarrassment or insolvency.

(2) That on or about December 27, 1911, the defendants by letter requested plaintiffs to quote their best prices for 50,000 pounds of white cotton yarn, deliveries to commence at once, 5,000 pounds weekly, and that December 30, 1911, plaintiffs visited the defendants at their mill, and, on information and belief, that for the purpose of inducing plaintiffs to deliver said yarn the defendants then and there made to plaintiffs the false and fraudulent representations and statements in substance following:

'We will pay you 20 1/2 cents a pound for 20,000 pounds of 30s white cotton yarn to be shipped at once, and we will pay you 20 1/2 cents a pound for 30,000 pounds of such yarn to be shipped, 5,000 pounds a week commencing February, 1912.'

These are mere promises to pay for goods which they seek to purchase. These are all of the false representations alleged to have been actually made.

(3) That plaintiffs refused this offer, but offered to sell same at 21 cents a pound, and that thereupon the defendants agreed to purchase 20,000 pounds at 21 cents per pound, shipment made at once, and 30,000 pounds at same price per pound, shipments in parcels of 5,000 pounds each commencing February, 1912.

(4) On information and belief that the defendants then contemplated filing a petition in bankruptcy, and the ordering of such goods and the agreement to pay for same was in furtherance of a deceptive and fraudulent scheme on the part of the defendants to induce plaintiffs to ship a part or all of said first lot of 20,000 pounds before filing their petition in bankruptcy and to enable them to transfer the warehouse receipts for same to certain relatives.

(5) That, relying on the supposed good faith and honesty of the defendants in ordering and agreeing to pay for such goods, same were shipped and delivered in part on the 2d and 3d days of January, 1912.

(6) That on the delivery of such goods the defendants placed same in warehouse and procured warehouse receipts for same and executed transfers of same, but retained same until after their bankruptcy.

(7) That on learning of defendants' insolvency the plaintiffs demanded such goods but same were not returned.

(8) On information and belief that defendants knew, or should have known, of their insolvency when they ordered the yarn and that they could not pay for same.

(9) That defendants were not in need of the yarn when ordered.

(10) On information and belief that defendants had been conducting business at a loss for three years, and knew, or should have known, they were insolvent when they ordered the goods.

(11) That the defendants' purpose was to get such property and use same in the manner stated to protect their relatives on alleged antecedent debts. There is no allegation that defendants made any representation or statement whatever in connection with the purchase of such yarn, except that they promised to pay for same, and the substance is that the defendants knew, or ought to have known, of their inability to pay and then intended to go into bankruptcy and not pay.

The complaint alleges that the plaintiffs have not filed and proved their claim; but the moving papers allege that such claim has been filed and proved, and this was conceded on the argument.

There is a difference between mere fraud and false pretenses and false representations. The complaint, in substance, states that defendants intending to get property from plaintiffs with which to pay certain relatives, and intending to go into bankruptcy, when it ought to have known they were insolvent, offered to purchase goods and pay for them. It is not alleged that plaintiffs made any inquiries as to defendants' financial condition, or that defendants made any representations or concealed any fact on inquiry made, express or implied. There was no relation of trust or confidence. There is no allegation of conduct calculated to mislead or prevent inquiry.

In Dambmann v. Schulting, 75 N.Y. 55, and again in 85 N.Y. 622, where the case came again before the court, it was held that a party can commit a legal fraud in a business transaction with another other, only by fraudulent misrepresentations of fact, or by such conduct or artifice for a fraudulent purpose as will mislead the other party, or throw him off his guard and cause him to omit inquiry or examination which he would...