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May 17, 1948


The opinion of the court was delivered by: LEIBELL

On January 13, 1922, the petitioner herein, Vulcan & Reiter Co., Inc., was adjudicated a bankrupt. Thereafter, pursuant to Section 12 of the Bankruptcy Act of 1898, 11 U.S.C.A. § 30, a composition was approved and a sum of money was deposited with the Equitable Trust Company for distribution to creditors pursuant to the order of compromise. On July 18, 1925 a balance of $ 818.50 remained of the funds so deposited by the petitioner. This balance, after having been paid into the registry of the Court, was transferred to the United States Treasury.

In 1945, the Attorney General of the State of New York commenced an escheat proceeding under the Abandoned Property Law of the State of New York, Consol. Laws, c. 1, Secs. 1200-1212, Chap. 697, Laws of 1943, against certain undistributed funds of old bankruptcy estates, including this balance of $ 818.50 in the above matter.

 In 1946, another claimant, one of the creditors of the bankrupt, filed an application for payment of this balance of $ 818.50 on the grounds that the balance of unpaid dividends should enure to the benefit of diligent creditors whose claims had not been paid in full. This was the practice in ordinary bankruptcy cases where there had been no composition and where all the assets of the debtor were applied to the payment of claims of creditors. In such cases unclaimed dividends did enure to the benefit of diligent creditors who applied for payment thereof. In re Searles, 2 Cir., 1948, 166 F.2d 475; In re Raabe, Glissman & Co., Inc., D.C.S.D.N.Y. 1947, 71 F.Supp. 678. The Circuit Court of Appeals for this Circuit has held that the same rule does not apply to compositions effected under Section 12 of the Bankruptcy Act of 1898, and that the creditors who had been paid under the composition were not entitled to payment of unclaimed sums payable to other creditors under the composition. In re Vulcan & Reiter Co., Inc., 2 Cir., 1947, 162 F.2d 92. Quoting in full the opinion of the Special Master, the Court held, 162 F.2d at page 94: 'The money on deposit with the Treasury of the United States is money that was originally put up for the purposes of the composition and was at the time, in legal effect, property of the bankrupt. * * * Creditors, including petitioner, having received what they bargained for or what was bargained for in their behalf as the case may be, have no further claim to receive the balance of their original claims from any source.'

 On October 29, 1947, the bankrupt applied for an order, pursuant to Section 852 (now Section 2042) of Title 28 U.S.C.A., reopening the bankruptcy proceedings to determine the interest of the bankrupt in the unclaimed balance of $ 818.50. On October 30, 1947 an order was signed granting the application and referring the matter to a referee in bankruptcy, to take proof and report as to the interests of the bankrupt in the balance of $ 818.50. The State of New York opposed the application, appearing as amicus curiae in the proceedings before the referee. On April 5, 1948 the referee submitted his report wherein he found that the bankrupt was entitled to the balance of $ 818.50 on deposit in the Treasury of the United States.

 On April 21, 1948 the State of New York was permitted to formally intervene in these proceedings, after the bankrupt had moved on April 14, 1948 to confirm the referee's report of April 5th.

 The State of New York contends that title to the funds deposited by the bankrupt vested irrevocably in the creditors and that since certain of the creditors have not claimed their dividends and cannot be found, they have abandoned the funds which are now subject to escheat by the State. The State bases its contention upon the rule that in a composition the 'rights of each creditor are fixed by the terms of the debtor's offer, subject only to its confirmation and the judge's order of distribution'. Nassau Smelting & Refining Works v. Brightwood Bronze Foundry Co., 1923, 265 U.S. 269, 273, 44 S. Ct. 506, 507, 68 L. Ed. 1013. Such circumstances, it asserts, indicate that title to the funds vests in the named creditors.

 Some courts have indicated a contrary rule in favor of the contention that title to the funds deposited by the bankrupt under the composition offer remains in the bankrupt until the creditor receives the payment. In Re Lane, D.C. Mass. 1902, 125 F. 772, 773, the Court stated: 'Section 66 of the act (30 Stat. 564, U.S.Comp.St. 1901, p. 3448 (11 U.S.C.A. § 106) has the same purpose, and does not apply to composition. But if the composition is paid the creditors have no further claim upon the debtor or his property. In a composition the creditor gets, not his share of the bankrupt's estate, but what he bargained for, and he has no right to claim more. If he does not enforce his bargain, his failure should enure to the bankrupt's benefit, not to the benefit of another creditor.'

 In the case of In re Kelley, D.C. Mass. 1915, 223 F. 383, 384, the Court held that the bankrupt was entitled to accumulated interest on the fund deposited up to the time of confirmation of the composition and also stated that 'until such confirmation the creditors had no fixed right to the fund'. The court, in the discussion part of its opinion, approved the doctrine of the Lane case. ' * * * It is not uncommon for a bankrupt offering composition to deposit with the clerk something beyond the amount actually required. Such surplus is returned to the bankrupt at the conclusion of the proceedings. The same disposition is made of unclaimed dividends, as was decided in this district. In re Lane, D.C., 125 F. 772. I am unable to see any sound distinction in this respect between a surplus originally deposited by the bankrupt, a surplus arising out of unclaimed dividends, and a surplus created by accumulated interest on the fund in the clerk's hands.'

 The case of In re Hammon, D.C.N.D. Calif. 1935, 12 F.Supp. 228, considered a bankrupt's interest in such a fund and held that in the absence of a showing by the bankrupt that all of the claims allowed were paid in full in the distribution of the composition monies, the bankrupt was not entitled to the funds that remained unclaimed. But the court, in reaching this conclusion, mistakenly applied the provisions of Section 66, Bankruptcy Act, 11 U.S.C.A. § 106, and stated that the remaining creditors, unless their claims had been paid in full, might be entitled to an additional payment on their claims out of whatever remained. This case in its holding that creditors might share in the unclaimed composition funds, has been rejected by the Circuit Court of Appeals for the Second Circuit. In re Vulcan & Reiter Co., Inc., supra, 162 F.2d at page 94.

 I am of the opinion, however, that where the State steps in and claims the fund as having escheated under a state statute because of lapse of time, the bankrupt's claim to the fund is not superior to that of the State. The State's claim is based upon the right of the creditor who has failed to receive his proper amount to which he became entitled on the confirmation of the composition.

 This conclusion rests upon the nature and effect of a composition. A composition under Section 12 of the Bankruptcy Act of 1898 had 'many attributes peculiar to itself' (In re Goldberg, 6 Cir., 1931, 53 F.2d 454, 456, 80 A.L.R. 399) and is 'in some respects exceptional' (In re Lane, supra, 125 F. at page 773). In Myers v. International Trust Co., 273 U.S. 380, 383, 47 S. Ct. 372, 374, 71 L. Ed. 692, the Court stated that: ' * * * a 'composition partakes of the nature of a contract.' It is settled by the decisions of this court in Cumberland Glass Mfg.Co. v. De Witt, 237 U.S. 447, 453, 454, 35 S.Ct 636, 59 L. Ed. 1042, and Nassau (Smelting & Refining) Works v. Brightwood (Bronze Foundry) Co., 265 U.S. 269, 271, 273, 274, 44 S. Ct. 506, 68 L. Ed. 1013, that a composition is 'a settlement of the bankrupt with his creditors' -- in a measure superseding and outside the bankruptcy proceedings -- which originates in a voluntary offer by the bankrupt, and results, in the main, from voluntary acceptance by his creditors; that the respective rights of the bankrupt and the creditors are fixed by the terms of the offer; and that upon the confirmation of the composition they get what they 'bargained for,' and no more.'

 The creditor's proof of claim in a composition is not against the bankrupt's estate but is a "* * * claim against funds deposited by the debtor pursuant to a bargain with his creditors." In re Mirsky & Co., 2 Cir., 1929, 32 F.2d 676, 678.

 In re Kornbluth, 2 Cir., 1933, 65 F.2d 400, 401, the Court, stating that upon confirmation of a composition the debtor becomes reinvested with the title to his property, pointed out that such reinvesting of title does not apply to the property which is deposited as consideration for the composition. The Court said: 'In the usual proceedings, the debtor is adjudicated a bankrupt, and divested of his property. But, where the proceedings result in the confirmation of an offer of composition, the case is dismissed, even though the debtor has not yet been adjudicated a bankrupt. * * * The debtor is reinvested with all his property except such as may have been deposited with the court to secure performance of the composition.

 The distinctive nature of a composition was explained by the court in In re Realty Associates Securities Corporation, 2 Cir., 1934, 69 F.2d 41, at page 43, the Court stating, as follows: 'In composition there is distributed not the bankrupt's 'estate', but a fund required by section 12 consisting of the consideration for creditors and the money necessary to pay prior debts and costs. * * * The rights of each creditor are ...

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