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IN RE BENEVOLENT & PROTECTIVE ORDER OF ELKS

February 14, 1935

In re BENEVOLENT AND PROTECTIVE ORDER OF ELKS, BROOKLYN LODGE NO. 22


The opinion of the court was delivered by: BYERS

BYERS, District Judge.

This is a petition to review an order of the referee in bankruptcy, expunging the claim of Manufacturers Trust Company, in the sum of $2,711,649.98, based upon a deficiency judgment recovered in the New York Supreme Court, in foreclosure bearing date May 12, 1933. On May 2, 1933, a petition in bankruptcy was filed against the mortgagor, and that was one day after the sale pursuant to judgment of foreclosure bearing date of January 16, 1933.

Promptly upon the filing of the petition, a receiver was appointed, who qualified on May 2, 1933, and on June 1, 1933, he was appointed and qualified as trustee.

 The trustee was not made a party to the action in foreclosure.

 The mortgage was given December 1, 1926, to the claimant, in the sum of $2,900,000.00, to secure an issue of bonds, and the amount due at the time of the foreclosure judgment was $2,687,771.20.

 The sale was had as stated on May 1, 1933, by public auction in accordance with the usual practice, and after due advertisement; and the plaintiff was the only bidder, and thus became the purchaser.

 The figures entering into the computation of the deficiency appear in the referee's report of May 12, 1933, and need not be here recited. The fact is that the deficiency was stated and judgment entered as above set forth, twelve days after the filing of the bankruptcy petition.

 The trustee asserts that the claim should not be allowed, and that he is not concluded from making this objection by the mere fact that the deficiency judgment has been docketed as above set forth. In this contention the referee agrees, and it is that conclusion which is assailed by the creditor as a matter of law. Its position is that the trustee may not be heard to attack the judgment collaterally, and that the debt is provable under section 63 of the Bankruptcy Act (11 USCA § 103), being a fixed liability, evidenced by a judgment, absolutely owing at the filing of the petition, whether then payable or not.

 From what has been said concerning the dates of filing the petition and the entry of the deficiency judgment, it is apparent that the latter was not a fixed liability on the 2nd day of May, 1933.

 This must be so, because, when the petition was filed on that day, it was not known what the deficiency amounted to in dollars and cents; in fact, the referee's extra allowance was not fixed until May 11, 1933. It was open to the mortgagee not to file and docket any deficiency judgment whatever, and until it did so on May 12, 1933, there was no debt evidenced by a judgment, within the fair meaning of section 63 of the Bankruptcy Act.

 The right and duty of the trustee to seek such relief on behalf of the unsecured creditors, as has been accorded to him by the referee, has been recognized in many cases. See: In re Soltmann (D.C.) 238 F. 241, affirmed Id. (C.C.A.) 249 F. 455; In re Dix (D.C.) 176 F. 582; In re Davis (C.C.A.) 174 F. 556; Matter of Tietenberg, 15 A.B.R. (N.S.) 580; In re Kenwood Storage & Warehouse Corp. (D.C.) 4 F. Supp. 561.

 In the Davis and Tietenberg Cases, the trustee was made a party to the foreclosure proceedings, which would render his position, in objecting to the claim on deficiency, more vulnerable, perhaps, than if he had not been so joined.

 The claimant relies upon In re Falsone (D.C.) 247 F. 607, which involved a similar claim arising out of a foreclosure to which the trustee was a party. That is not the case here; moreover the decision is at variance with that in the Tietenberg Case, supra, decided in this circuit, so far as the right of the trustee is involved, to have the value of the mortgage determined in order that the unsecured amount owing, if any, to the creditor be established.

 It is distinctly stated in the Soltmann Case that the failure to join the trustee in the foreclosure action so operated that the deficiency judgment was not binding upon him, and was not therefore proof of the amount of the unsecured claim of the mortgagor. The affirmance of that decision established the rule which is binding upon ...


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