DISTRICT COURT, S.D. NEW YORK
October 13, 1932
In re SOLOMONS
The statute of limitations, if it may be considered, is a good defense to the bank's claim. In re German-American Improvement Co. (C.C.A.) 3 F.2d 572, 575. As I see it, there is a single determinative question, and that question is whether, within the meaning of section 57d of the Bankruptcy Act (11 USCA § 93 (d), the bankrupt is a party in interest who has the right to interpose the defense.
Pursuant to my memorandum of September 20, 1932, additional briefs have been submitted. All agree that the wife of the insured is not an essential party to the present proceedings. The taking of this definite position by counsel would warrant disregard at this stage of the wife, who is named in the policies as beneficiary. Moreover, the view that, for the purposes of the instant case, she may be ignored, is sustained by the decisions of the Supreme Court of the United States and of the Circuit Court of Appeals for this circuit. Cohen v. Samuels, 245 U.S. 50, 38 S. Ct. 36, 62 L. Ed. 143; Cohn v. Malone, 248 U.S. 450, 39 S. Ct. 141, 63 L. Ed. 352; In re White (C.C.A.) 174 F. 333, 26 L.R.A. (N.S.) 451; In re Samuels (C.C.A.) 254 F. 775; In re Greenberg (C.C.A.) 271 F. 258, 20 A.L.R. 253; Cf. In re Reiter (C.C.A.) 58 F.2d 631, 633.
By the decisions last cited it is also settled that reservation to the insured of the right to change the beneficiary had the effect of retaining in him beneficial ownership of the policies during his life; hence, that the policies or their surrender values constitute assets of the bankrupt's estate. It follows that, in the litigation now under consideration, the trustee must prevail as to the insurance, unless the bankrupt can establish that it is exempt to him.
Under sections 6 and 70 of the Bankruptcy Act (11 USCA §§ 24, 110), whether there is an exemption to the bankrupt depends upon state law. Cf. In re Reiter (C.C.A.) 58 F.2d 631. The matter has been discussed upon the assumption -- which I think is correct -- that the law which governs is that of the state of New York. It is not suggested that there is any exemption apart from statute, and plainly there is not. The only statutes relied on as establishing an exemption are section 52 of the New York Domestic Relations Law (Consol. Laws N.Y. c. 14) and section 55-a of the New York Insurance Law (Consol. Laws N.Y. c. 28). It has been squarely determined that the former relates only to the wife and that it confers no benefit on the bankrupt. In re White (C.C.A.) 174 F. 333, 26 L.R.A. (N.S.) 451. The inquiry therefore turns exclusively upon the insurance law provision mentioned.
The record discloses (paragraph 3 of affidavit of the attorney for the bankrupt verified April 20, 1932) that all claims against the bankrupt estate, except that of the bank, arose after the enactment on March 31, 1927, of section 55-a of the Insurance Law. The result is that, by force of the section, there is an exemption of the life insurance, which indisputably is valid, in favor of the bankrupt so far as concerns claims of creditors other than the bank. In re Messinger (C.C.A.) 29 F.2d 158, 160, 68 A.L.R. 1205. We are concerned now, therefore, only with the claim of the bank. Is there an exemption good as against that claim?
As pointed out in my September 20 memorandum, ordinarily the bankrupt has no interest in what claims are allowed in a bankruptcy proceeding against him and, therefore, is in no position to interpose a defense to them. Nevertheless, as I remarked in substance at the oral argument, if the bankrupt be entitled to assert an exemption to himself of the insurance policies, he is an interested party within in meaning of section 57d of the Bankruptcy Act and, in consequence, has a standing in these proceedings to defend against the bank claim on the ground that it is barred by the statute of limitations. In so far as I have discovered any authority on the point, the proposition appears to be supported. In re Sloan (D.C.) 135 F. 873, 875; Cf. Resenbaum v. Dutton (C.C.A.) 203 F. 838, 841.
The indebtedness to the bank arose in 1915. No payment has been made on it since 1916. It still continues and was in existence long prior to the passage in 1927 of section 55-a of the Insurance Law. On that account, though in terms on its face and in words showing an exemption in favor of the bankrupt as against the bank's claim, in order to avoid constitutional invalidity, the statute must be interpreted as not intended to create that exemption or, as otherwise put, as not having retroactive effect. Bank of Minden v. Clement, 256 U.S. 126, 41 S. Ct. 408, 65 L. Ed. 857; In re Messinger (C.C.A.) 29 F.2d 158, 161, 68 A.L.R. 1205, certiorari denied sub nom. Reilly v. Messinger, 279 U.S. 855, 49 S. Ct. 351, 73 L. Ed. 996. Cf. Matter of Czarniak's Estate, 140 Misc. 754, 251 N.Y.S. 536.
The bankrupt says that the Court of Appeals of New York has held otherwise. He relies on Chatham Phenix Nat. Bank & Trust Co. v. Crosney, 251 N.Y. 189, 167 N.E. 217, and United States Mortgage & Trust Co. v. Ruggles, 258 N.Y. 32, 179 N.E. 250, 79 A.L.R. 802. Without going into those cases, even if applicable, it is enough to reply that I am bound to follow the decisions of the Supreme Court of the United States and of the Circuit Court of Appeals for the Second Circuit.
As the bankrupt has no exemption, I see no escape from the conclusion that he is not a party in interest, within the meaning of section 57d of the Bankruptcy Act. If not a party in interest, for reasons given and on the authority of cases cited in my previous memorandum, he is not competent to interpose the bar of the statute of limitations as a defense to the bank claim. The defense not having been made by the trustee or by any other creditor, it was waived and, in the absence of some other obstacle, the claim must be allowed. The record affords no basis for any other possible objection to the claim.
The case will be remitted to the referee for further proceedings not inconsistent with my former memorandum, as supplemented and modified by this memorandum. I think that, in the light of the scantiness of the record in some respects, that course is better than for me to undertake to make a final disposition of the controversy.
In addition, the lines of demarcation in the decisions I rely on are narrow. Some were rendered by divided courts. There will probably be an appeal. If so, everything which is pertinent should be before the appellate court. It seems fairer to let the parties have opportunity to supplement the papers before the referee if there be anything they deem material which has been omitted.
Referee's order reversed. Settle order on two days' notice.
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