In re Pal-Playwell, Inc.
| Decision Date | 13 July 1964 |
| Docket Number | No. 395,Docket 28620.,395 |
| Citation | 334 F.2d 389 |
| Parties | In the Matter of PAL-PLAYWELL, INC., Bankrupt, Leonard Siegel, Trustee-Appellant, William Saloy and Herbert J. Clark, Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Samuel A. Arutt, New York City (Handelsman, Arutt & Knox and Charlotte P. Arutt, New York City, of counsel), for trustee-appellant.
Eli N. Horin, Jamaica, N. Y., for appellees.
Before LUMBARD, Chief Judge, and MOORE and SMITH, Circuit Judges.
The Trustee in Bankruptcy of Pal-Playwell, Inc. appeals from so much of an order of the District Court for the Eastern District of New York as reversed the order of the Referee in Bankruptcy granting summary judgment in favor of the trustee upon his counter-claim for the return of a lease security deposit. The facts are not disputed.
In 1959, Playwell Products, Inc. signed a fifteen year lease and deposited with the landlords $6,990 as security for the performance of the terms thereof. Thereafter, a written assignment of the lease and security was made to the bankrupt. The lease stated:
"The Tenant has this day deposited with the Landlord the sum of $6,990.00 as security for the full and faithful performance by the Tenant of all the terms, covenants and conditions of this lease upon the Tenant\'s part to be performed, which said sum shall be returned to the Tenant after the time fixed as the expiration of the term herein, provided the Tenant has fully and faithfully carried out all of said terms, covenants and conditions on Tenant\'s part to be performed * * *"
The rent due on August 1, 1962 was not paid and the landlords, on August 16, 1962, instituted non-payment summary proceedings. On August 22, 1962, the bankrupt filed a petition for an arrangement under Chapter XI of the Bankruptcy Act and on September 13, 1962 it was adjudicated a bankrupt. The trustee vacated the leased premises and on May 17, 1963 the landlords then moved for an order directing the trustee to pay use and occupation and rubbish removal in an amount not here disputed. The trustee counterclaimed to recover the $6,990 security deposit.
The Referee reasoned that since the security had not been applied towards the payment of the landlords' claim as of the date of the filing of the petition and since the New York statute (New York Real Property Law, McKinney's Consol. Laws, c. 50, § 233) declared that until so applied the money remained the property of the lessee, the landlords were not entitled to a set-off under section 68, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 108, sub. a.1 Accordingly, he ordered the landlords to turn over the deposit to the trustee subject to an agreed amount for use and occupation, rubbish removal and cleaning. On the landlords' petition to review, the district court reversed the turn-over order.
The question posed on this appeal is whether the trustee may recover the bankrupt's security deposit. To defeat the landlords' right to apply the deposit to satisfy the bankrupt's contractual obligations, the trustee argues that since section 233 made the landlords trustees of the deposit for the benefit of the bankrupt, there was no mutuality of debts and, therefore, there was no right to set-off under section 68a of the Bankruptcy Act. We agree with the district court that this argument is without merit.
The purpose of a lessee's deposit is clear, namely, "as security for performance of the contract * * *." N. Y. Real Property Law, § 233. That statute further provides that the money so deposited is to continue to be the money of the depositor until repaid or applied to payments due under the rental contract. Although section 233 states that the deposit shall not become an asset of the person (the landlord) receiving it and shall not be mingled with his personal moneys, the section does not abrogate the landlord's right to apply the fund whenever necessary to insure fulfillment of the lessee's contractual obligations. Despite the depositor's continued ownership, it is an ownership burdened by the landlord's right to hold and use the money when required to secure performance. Since the trustee could acquire no greater rights to the deposit than possessed by the lessee, he was not entitled to its return until the lessee had satisfied its obligations to the landlord. See In re Sherwoods, Inc., 210 F. 754, 760 (2d Cir. 1913).
The trust established by the provisions of section 233 operates to protect the lessee against misappropriation by the landlord of the...
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In re Drexel Burnham Lambert Group Inc.
... ... Nor do the Banks claim that they hold the debtor's property in a segregated account with color of lien, evidencing a debtor-creditor relationship, and that they, therefore, can realize upon the lien. See In re Pal-Playwell, Inc., 334 F.2d 389 (2d Cir.1964) (where state law and the agreement of the parties permitted a landlord to retain a lessee's deposit "as security for performance of the contract," and state law required that the deposit remain segregated and property of the lessee, the deposit was not held in ... ...
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... ... S & W Holding Co. v. Kuriansky. Cf. In re Pal-Playwell, Inc., 334 F.2d 389 (2d Cir. 1964) ... The crucial question in this case, however, is whether Plywood is entitled to the return of ... ...
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... ... Russo v. Texaco, Inc ., 808 F.2d 221, 225 (2d Cir. 1986). "Once having ascertained that an event is encompassed by one of the twelve enumerated events, a court need make ... See In re Pal-Playwell, Inc ., 334 F.2d 389, 391-92 (2d Cir. 1964) (describing a landlord's "otherwise clear right" to set off a deposit); accord Coulston v. Teliscope ... ...
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