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In re Gordon

June 14, 1937

IN RE GORDON; BROWN
v.
GORDON



Appeal from the District Court of the United States for the Eastern District of New York.

Author: Hand

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The questions before us on this appeal are whether the cash surrender values of four life insurance policies of which the wife of the bankrupt is the beneficiary, but in all of which the bankrupt reserved the right to change the beneficiary, are exempt from the claim of the trustee under section 55-a of the Insurance Law of the State of New York enacted on March 31, 1927 (Consol. Laws N.Y. c. 28).

Three of the policies (two issued by the Metropolitan Life Insurance Company and one by the Northwestern Mutual Life Insurance Company), having a total cash surrender value of $1,230.47, were issued prior to the enactment of section 55-a of the New York Insurance Law. If at that time there were creditors having valid claims, the policies were, to the extent of the above cash surrender value, assets which the trustee is entitled to collect for the benefit of those creditors. In re Messinger, 29 F.2d 158, 68 A.L.R. 1205 (C.C.A. 2).

The remaining policy was issued by the New York Life Insurance Company under date of January 8, 1930, which is subsequent to the enactment of section 55-a supra, and had a cash surrender value of $1,330 at the date of bankruptcy.

The District Court held that the first three policies to the extent of the total cash surrender value of $1,230.47 were estate assets not within the exemption provided by the state statute, but that the policy of the New York Life Insurance Company, because issued after the enactment of section 55-a supra, was within the statutory exemption.

The bankrupt has appealed from so much of the order as denies exemption in respect to the cash surrender value of the first three policies, claiming that all four policies are exempt under section 55-a, and the trustee has appealed from so much of the order as held the policy issued by the New York Life Insurance Company exempt.

Appeal of the Bankrupt.

The bankrupt appeals from the portion of the order directing him to turn over the first three policies to the trustee or to pay the latter $1,230.47 as the cash surrender value thereof.He contends that the claim of the creditor Patchogue Citizens Bank & Trust Company was not such as to render the cash surrender value of $1,230.47 an asset which could not under our decision of In re Messinger, 29 F.2d 158, 68 A.L.R. 1205, lawfully be exempted by section 55-a supra. The reason given for taking this position is that neither the proof of claim nor the evidence shows an indebtedness of the bankrupt to the creditor antedating the enactment of section 55-a.

We are met at the outset with the objection to the bankrupt's argument that the question before us is one of fact which was resolved against the bankrupt by the court below. We are permitted by section 24b of the Bankruptcy Act, as amended, 11 U.S.C.A. § 47(b), under which this appeal was allowed, to review only questions of law. It is said, however, that the following considerations require a decision of the appeal in the bankrupt's favor: (1) The proof of debt sets forth no indebtedness antedating the statute; (2) the note relief on in the proof of debt succeeded other notes but they had been paid by the bankrupt; (3) the Patchogue Bank was a secured creditor and the trustee could not maintain a turnover proceeding without liquidating the security pursuant to section 57h of the Bankruptcy Act, 11 U.S.C.A. § 93(h).

There was evidence sufficient to justify the District Court in finding that the note held by the creditor for $23,847.65 succeeded earlier notes given for indebtedness which accrued prior to the enactment of section 55-a. The fact that these prior notes, except to the extent of $5,150, were marked "paid," does not require us to hold that the earlier indebtedness represented by these notes was extinguished. No agreement to cancel it was established, nor was such an agreement at all probable. Indeed, we think it was disproved. All the notes were simply evidence of loans, and the creditor was, therefore, entitled to take the position that the claim it relied on existed prior to the enactment of section 55-a. Jagger Iron Co. v. Walker, 76 N.Y. 521; Cohen v. Rossmoore, 225 App. Div. 300, 306, 233 N.Y.S. 196. The four notes marked "paid" were so marked merely to guard against future negotiation and not to extinguish pro tanto existing obligations. While the proof of claim contained a list of notes outstanding, the evidence disclosed the earlier origin of the indebtedness upon which the Patchogue Bank relies, and its claim may be treated as amended to conform to the proof. In re International Match Corporation, 69 F.2d 73 (C.C.A. 2); Lewith v. Irving Trust Co., 67 F.2d 855 (C.C.A. 2); In re Lynan, 127 F. 123 (C.C.A. 2); In re Kessler, 184 F. 51 (C.C.A. 2); and In re Basha, 200 F. 951 (C.C.A. 2). The objection that the creditor was bound to liquidate its security and, as it has not done this, has failed to prove a valid claim for any excess is met because the claim relied on apparently is not one of the secured obligations and also because liquidation under section 57h, 11 U.S.C.A. § 93(h), is only necessary to prove claims in order to obtain a dividend. A creditor may resort to the cash surrender value of any life insurance policies of his debtor merely by proving that he was a creditor before any exemption statute was enacted.

The trustee can reach the cash surrender value of the first three policies, even though the proceeds after collection will ultimately pass to a particular creditor having claims antedating the enactment of section 55-a of the New York Insurance Law for the reason that the trustee represents all creditors. Theoretically there might be many such creditors whose claims against the cash surrender ...


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