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IN RE FALK

April 13, 1949

In re FALK


The opinion of the court was delivered by: RYAN

Three petitions have been filed to review an order of the Referee in Bankruptcy. The Referee, by this order, dismissed the bankrupt's objections to the claim filed by claimants, Agnes Falk, Helen M. Steen and Iverna Buskerud (the widow and children of Peter H. Falk, deceased), reduced the claim and as so reduced allowed it in the amount of $ 14,600.33, and denied the Trustee's application for an order directing the bankrupt to execute and deliver to the Trustee the necessary consent to enable the latter to collect and obtain the cash surrender value available as of February 5, 1948 (the date of adjudication), on two life insurance policies issued on the life of the bankrupt.

The bankrupt, the claimants and the trustee have each filed a petition to review. The bankrupt is aggrieved because the claim was allowed at all; the claimants, because it was not allowed in full; and the trustee and claimants, because the former was held not entitled to receive the cash surrender value of the life insurance policies.

 The referee found, upon ample evidence, that Peter H. Falk, a deceased brother of the bankrupt and a resident of Minnesota, 'loaned and advanced to the bankrupt on twenty occasions between October 15, 1923 and October 7, 1929 divers sums of money aggregating $ 7,850, evidenced by separate non-interest bearing promissory notes made and mailed by the bankrupt in New York to his brother, each payable one year after date at * * * Sherman, South Dakota;' that of this total 'the amount loaned and advanced prior to March 31, 1927 aggregated $ 5,300;' that no part of this debt had been paid on January 1, 1931, when 'the bankrupt in New York executed a promissory note bearing that date to his brother for $ 10,000, payable one year after date with interest at 6% at the First National Bank at Garretson, South Dakota, together with his check for $ 400, and mailed both instruments to his brother who received and accepted them and returned to the bankrupt eighteen of the previous notes which were all the brother then had;' that the total of the note and check so given to meet the demand of the brother, 'was the equivalent of the principal amount of the indebtedness with interest at 6% compounded annually from the dates of the prior notes, and the bankrupt thereby intended to meet the demand of his brother;' and that 'the interest on the prior notes from the respective dates of maturity to January 1, 1931 amounted to $ 1,735 which with the principal of $ 7,850 aggregated a total debt of $ 9,585, reduced on that date to $ 9,185.'

 The referee also found that the bankrupt's brother, Peter H. Falk, died on February 13, 1935; that 'the bankrupt's note dated January 1, 1931 was assigned to and vested in the claimants;' and that 'in January, 1932 and again in January 1933 the bankrupt paid to his brother the sum of $ 600, such amount being the equivalent of interest at 6% for one year upon the note dated January 1, 1931, and in March, 1936 the bankrupt paid to his brother's estate the sum of $ 300 on the indebtedness.'

 In addition, the referee found that on February 1, 1937, 'the bankrupt made and mailed in New York to the claimant Agnes Falk, widow and administratrix of the decedent's estate, his promissory note for $ 11,500 payable one year after date with interest at 6% at the First National Bank, Garretson, South Dakota, together with his check payable to said estate in the sum of $ 878.25 and such check was the equivalent of the principal sum of the note dated January 1, 1931 with interest at 6% compounded annually from January 1, 1933, less the payment made in March, 1936;' and that, 'thereafter, between February 9, 1938 and April 28, 1941 the bankrupt paid an aggregate amount of $ 2,190 on account of the indebtedness.'

 The referee found that 'the bankrupt is the owner of two insurance policies on his life each payable to a third party beneficiary, one issued by the Metropolitan Life Insurance Company on December 8, 1931 and the other by the Equitable Life Assurance Society on December 10, 1938, and those policies had an aggregate cash surrender value of $ 5,870.85 at the date of bankruptcy.'

 Upon these findings the referee concluded that '1. the claim should be allowed in the sum of $ 14,600.33,' and '2. the trustee's petition should be dismissed.'

 1. We shall first consider the referee's ruling with respect to the allowance of the claim --

 The proof of claim alleges that the bankrupt is indebted to the claimants in the sum of $ 11,500 plus interest from February 1, 1938, less the sum of $ 2,190 paid on account, upon a promissory note made by the bankrupt to the order of Peter H. Falk, the claimants' predecessor in interest, dated February 1, 1937, in the face amount of $ 11,500. As consideration for the note it is alleged that between October 15, 1923, and October 7, 1929, Peter H. Falk loaned sums of money to the bankrupt aggregating $ 7,850 and that each loan was evidenced by a promissory note made by the bankrupt. On January 1, 1931, the bankrupt 'substituted for the said notes, which were returned to the debtor,' a note in the sum of $ 10,000 made by the bankrupt payable to the order of Peter H. Falk and at the same time paid $ 400 in cash. On February 1, 1937, the bankrupt substituted for the aforesaid note dated January 1, 1931, a new note dated February 1, 1937, payable to the order of the 'Peter H. Falk, Estate' in the amount of $ 11,500 and at the same time paid $ 878.25 in cash to said estate.

 The bankrupt moved to disallow and expunge the claim upon the ground that the claim did not 'set forth with sufficient particularity the consideration for the promissory note described in said proof of claim,' that the claim was on its face 'barred by the Statute of Limitations of the State of New York,' and that the claim is based upon a transaction tainted with usury and therefore illegal. The amended proof of claim has met the objection as to sufficiency. It also sets forth that payments on the note were made up to April 18, 1941. The referee has found that the bankrupt was in military service in the United States Navy from June, 1942 to July, 1946; clearly, the claim is not barred by the Statute of Limitations. Civil Practice Act N.Y. § 48; Cf. Shoemaker v. Benedict, 11 N.Y. 176, 62 Am.Dec. 95; Hoover v. Hubbard, 202 N.Y. 289, 95 N.E. 702. We are only concerned then with whether the claim as alleged arises out of a usurious transaction.

 On the hearing of the objections to the claim, the referee permitted the bankrupt to give testimony relating to the circumstances surrounding the making of the 1931 note and to conversations allegedly had between the bankrupt and his deceased brother, Peter. The claimants urge that the referee erred in admitting this evidence since, relating as it did to a personal transaction had with a deceased person -- claimants' predecessor -- the testimony was inadmissible under Section 347 of the New York Civil Practice Act. This section provides that a witness is incompetent to testify to a personal transaction except (1) 'where the * * * survivor (of the deceased) * * * is examined in his own behalf'; or (2) 'the testimony of the * * * deceased is given in evidence.'

 Since the proof of claim is not testimony of the deceased, the issue is whether it constitutes an examination of the claimants on their own behalf.

 Claimants urge that although a proof of claim is of a dual nature serving as a pleading, as well as partaking 'of the characteristics of evidence,' it is not an 'examination of the survivor in his own behalf,' so as to 'open the door' to testimony from the bankrupt concerning the transaction had with the deceased.

 The Bankruptcy Act, 11 U.S.C.A. § 1 et seq., requires that a proof of claim include evidence supporting the claim, including a detailed statement of the consideration and other particulars to enable the referee to pass upon it intelligently. In re Century Silk Mills, Inc., D.C., 296 F. 713; Orr v. Park, 5 Cir., 183 F. 683; Collier on Bankruptcy, 14th Ed., V. 3, p. 125. When the proof of claim complies with these requirements it is 'prima facie evidence of all its allegations.' In re Arthur E. Pratt Co., D.C., 252 F. 917, 918. A proof of claim does more than merely shift the burden of going forward with proof on the objectant, it has probative force and 'the formal proof is evidence even when put in issue.' Witney v. Dresser, 200 U.S. 532, 26 S. Ct. 316, 317, 50 L. Ed. 584. It is received as a sworn deposition of the claimant and is to be accepted as affirmative testimony given by him in support of the claim. It has a greater scope than a pleading in the usual case. The proof of claim gives evidence on behalf of the claimants relating to the transaction and therefore 'the door is open to the survivor (the bankrupt, here) to testify fully in his own behalf in regard to ...


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