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May 28, 1937


The opinion of the court was delivered by: KNIGHT

KNIGHT, District Judge.

This action was commenced on March 16, 1934, for the purpose of subjecting to the lien of a judgment recovered by the plaintiff the cash surrender value of a policy of insurance issued upon the life of Frank T. Sullivan. The insured having died on June 6, 1935, a supplemental bill was filed substituting his administratrix as a party and praying that the principal amount payable under the policy be made subject to the lien of the judgment.

On March 5, 1923, plaintiff brought suit in the Supreme Court of the District of Columbia against Frank T. Sullivan and others to recover on account of alleged fraud in connection with a certain contract between the plaintiff and J. L. Phillips and John Stephens for the sale of war materials and the resale by said Phillips and Stephens of a portion of such materials to Frank T. Sullivan and to secure an accounting of profits, if any, realized by Sullivan in connection therewith. The action resulted in the entry of a judgment against Sullivan and others on July 25, 1929, in the amount of $947,610.73. As the result of an action commenced in this court on February 2, 1933, based upon said judgment of the Supreme Court of the District of Columbia, a judgment was rendered in this court on July 31, 1933, in favor of the plaintiff and against Sullivan in the same amount. The Fidelity & Deposit Company of Maryland, by reason of having executed a surety bond, was held liable in the amount of said bond, namely, $500,000, which amount it paid. This is the only payment on the judgment.

 The policy of insurance in question was issued December 31, 1921, in the principal amount of $50,000 by the Mutual Benefit Life Insurance Company of Newark, N.J., and by its terms was payable to the estate of the insured. The policy by its terms reserved to Sullivan the right to change the beneficiary at any time. On March 23, 1923, his wife, Ednah Mabie Sullivan, was designated as beneficiary, the right to make any further change of beneficiary and to procure loans on said policy without the consent of the beneficiary being reserved.

 Pursuant to such reserved right, and in consequence of a trust agreement with the Buffalo Trust Company, said Trust Company was substituted as beneficiary under the policy on April 29, 1925. The purpose of the trust was recited as follows: "the grantor desires to make provision for the maintenance and support of his wife, Ednah Mabie Sullivan, and for the support and education of their son, Peter Mabie Sullivan, and for the maintenance and support of his daughter, Florence Sullivan McNeil, and for the payment of certain of his obligations following his death," and provided that the "Trustee may, in its discretion, out of said proceeds pay any notes or other obligations of the Grantor or any notes or other obligations endorsed by the Grantor at Buffalo Trust Company or at the State Bank of Kenmore." After providing that the trustee might loan or give outright to the executor or administrators the amount required for payment of estate inheritance and transfer taxes, the agreement directed the disposition of the income and principal between his wife, son, and daughter. The agreement provided that it might be modified, supplemented, and/or revoked by the grantor at any time. At the same time Sullivan delivered to the Buffalo Trust Company a letter covenanting not to exercise the right to modify, supplement, or revoke the trust agreement so long as any notes or obligations made or indorsed by him should be held by the banks, except with the written consent of said banks.

 The Buffalo Trust Company was subsequently merged with the Marine Trust Company of Buffalo, and thereafter and on February 5, 1926, the agreement was modified in respect to the distribution of the balance of the trust remaining after payment of any notes or other obligation indorsed by the grantor at the Marine Trust Company of Buffalo or at the State Bank of Kenmore. The agreement provided that, except as modified, the trust indenture of April 29, 1925, is "ratified, confirmed and continued in full force and effect including the provision therein contained that the same be modified, supplemented and/or revoked at any time by the Grantor during his lifetime provided, however, that no such modification shall deprive the Trustee of the right therein conferred upon it to pay from the proceeds of such life insurance policies any notes or other obligations of the Grantor or any notes or other obligations endorsed by the Grantor at the Marine Trust Co. of Buffalo or at the State Bank of Kenmore." On March 18, 1926, request was made by Sullivan of the insurer that the Marine Trust Company, as trustee, be made beneficiary under the policy. Two supplemental indentures related only to withdrawal of a portion of the insurance coverage and the making of a policy loan to the insured by the insurer.

 On April 29, 1925, when the trust agreement was first executed, Sullivan was indebted to the Buffalo Trust Company as indorser on notes of the Sullivan-McNeil Lumber Company in the amount of $102,193.44. This amount was subsequently paid. He became further indebted to the Marine Trust Company on May 6, 1927, when he guaranteed payment of a bond and mortgage given by the Frank T. Sullivan Lumber Company, Inc. to secure a loan of $50,000. By virtue of an action instituted on January 6, 1932, the mortgage was foreclosed and the property sold for the sum of $25,000, and a deficiency judgment in the amount of $36,330.68 was entered on August 17, 1932. This judgment remains wholly unpaid.

 The indebtedness of Sullivan to the State Bank of Kenmore at the time of the original trust agreement consisted of direct liability in the amount of $25,000, liability as indorser in the amount of $25,000, and contingent liability on customers' paper in the amount of $7,365.83. Liability to the State Bank of Kenmore has been continuous to the present time, the balance remaining due being $20,395.54, with interest from February 1, 1936. The State Bank of Kenmore was not made a party to the action at the time it was commenced but was granted leave to intervene on March 16, 1936.

 After issue of execution upon plaintiff's judgment and its return unsatisfied, supplementary proceedings were instituted, and on February 2, 1934, the court upon an ex parte application entered an order directing the Marine Trust Company to pay over to the plaintiff the cash surrender value of the policy. The order was set aside on March 15, 1934, and this action was commenced when defendant Marine Trust Company refused to turn the cash surrender value to plaintiff.

 On August 31, 1936, the insurer was ordered to pay into court the amount payable under said policy, to wit: $40,066.66, subject to the rights of the parties as subsequently determined by the court.

 Under the terms of the trust agreement, the defendants Ednah Mabie Sullivan, Peter Mabie Sullivan, and Florence Sullivan McNeil are entitled to share in the proceeds of the insurance only after payment of all of the indebtedness of the insured to the Marine Trust Company and the State Bank of Kenmore. Inasmuch as the indebtedness of the insured to the banks is greater than the entire proceeds of the insurance, in view of the decision hereinafter made, further consideration will be given as though the issue were solely between the government and the defendant banks. It is unnecessary to consider the questions raised between the government and the individual defendants.

 In its final analysis, plaintiff's contention is based on these three grounds: (1) That its claim, asserted in 1923 and ripened into a judgment on July 25, 1929, was a continuing debt of Sullivan from the commencement of the action on March 5, 1923; (2) that the defendants Marine Trust Company and State Bank of Kenmore obtained no vested interest by virtue of any trust agreement; and (3) that plaintiff is entitled to priority in payment over such banks.

 Plaintiff's claim was based on fraud claimed to have arisen out of a contract between the United States government and third parties. The complaint alleged acts committed by Sullivan and others in fraud of the government and to the personal enrichment of Sullivan and such others. Following a determination of the question of fraud, an accounting was had, and a decree awarding judgment was entered July 25, 1929. In fixing the time when a claim of this nature becomes a debt, reference may be had to the laws relating to insolvency and bankruptcy. Until final fixation of the amount of liability, the claim was unliquidated. People v. Metropolitan Surety Co., 205 N.Y. 135, 98 N.E. 412, Ann.Cas.1913D, 1180. An unliquidated claim for damages occasioned by fraud is not a provable debt under the Bankruptcy Law (section 63 [11 U.S.C.A. § 103]); and tort claims not reduced to judgment are not provable in bankruptcy. In re Kroeger Bros. Co. (D.C.) 262 F. 463; In re Cunningham (D.C.) 253 F. 663. The rule is the same even though the claim was reduced to judgment after the filing of the petition in bankruptcy. In re Crescent Lumber Co. (D.C.) 154 F. 724. An exception is made, however, when the tort is waived and proof can be made on a contract, express or implied. Crawford v. Burke, 195 U.S. 176, 25 S. Ct. 9, 49 L. Ed. 147; Kreitlein v. Ferger, 238 U.S. 21, 24, 35 S. Ct. 685, 59 L. Ed. 1184; In re E.J. Arnold & Co. (D.C.) 133 F. 789; In re Filer (D.C.) 125 F. 261. In cases of fraud not involving an express contract, but resulting in unjust enrichment, an implied obligation to pay may be created. Schall v. Camors, 251 U.S. 239, 40 S. Ct. 135, 64 L. Ed. 247. As stated in Clarke v. Rogers (C.C.A.) 183 F. 518, 522, affirmed 228 U.S. 534, 33 S. Ct. 587, 57 L.Ed 953: "This, of course, is a mere fiction of law; but, like all other such fictions, it is effectual when it will accomplish the ends of justice." Thus, apart from the question of liquidation or contingency, the government had a provable claim in 1923. The fact that it was unliquidated would not bar its existence as a provable debt in bankruptcy, since section 63b (two subsections are designated b) of the Bankruptcy Act (11 U.S.C.A. § 103(b) provides for liquidation of claims. The debt was not contingent, since all of the facts were in existence of which proof would be required to settle the liability. It is thus found that under the Bankruptcy Act a debt upon which a claim could have been filed did exist in favor of the government in 1923.

 Prior to the effective date of section 55-a of the Insurance Law of the State of New York, Consol.Laws, c. 28 (March 31, 1927) which made the avails of an insurance policy payable to a beneficiary named therein exempt from debts of the insured, they were liable for such debts where the insured had the right to change the beneficiary. Section 55-a did not affect debts incurred prior to its effective date. In re Messinger (C.C.A.) 29 F.2d 158, 68 A.L.R. 1205; In re Sturdevant (D.C.) 29 F.2d 795; In re Firestone (D.C.) 2 F.Supp. 96; Addiss v. Selig, 264 N.Y. 274, 190 N.E. 490; Cecilian Operating Corp. v. Berkwit, 151 Misc. 814, 272 N.Y.S. 291. When that section became the law, Sullivan owed debts to the government and the State Bank of Kenmore. While Sullivan originally did have the right to change the beneficiary, he deprived himself of such right as regards the banks by the trust agreement. There is nothing to show, nor is it pleaded or claimed, that Sullivan was insolvent when the trust agreements were made. While it may be significant that the trust agreements were all made prior to the decree on the original suit against Sullivan and others, no fraud is asserted. No case is called to the court's attention in which it is held that an insured does not have the right, when solvent, to prefer one creditor over another and to relinquish his right to change a beneficiary. Indeed, cases cited by the plaintiff, in effect, hold that he had such right. In re Greenberg (C.C.A.) 271 F. 258, is authority only for the rule that a ...

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