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February 17, 1964

In the Matter of George B. SCHATZ, d/b/a The Tides, Bankrupt. In the Matter of David KAHN, Bankrupt

The opinion of the court was delivered by: RAYFIEL

These are two petitions, one filed by each of the bankrupts herein, to review two orders, dated August 23, 1963, made by Hon. William J. Rudin, Referee in Bankruptcy, wherein he sustained Specification '1' of each of the objections to their discharges filed by a creditor. The proceedings before the Referee were consolidated and were tried together. The objector has petitioned for the review of said orders on the ground that the Referee erred in dismissing the remaining specifications of objection.

Prior to the bankruptcy George B. Schatz, a lawyer, and David Kahn were co-partners doing business as 'The Tides'. They operated a nursing home under that name at 640 West Broadway, Long Beach, New York, under a lease for twenty years, eleven months and twenty-one days, dated July 10, 1957, between the owners of the premises and Neptune Shore Corporation, which had been assigned to the bankrupts on July 10, 1957.

 On August 30, 1957 the bankrupts executed and delivered an assignment of the said lease to Jacob Sohmer, Alexander Sohmer and Morris Sohmer as security for the repayment of a loan of $ 66,000 made by them to the bankrupts. On the same day the bankrupts also executed and delivered to the Sohmers a mortgage on the said lease to further secure the payment of the aforesaid amount on February 28, 1958. The parties agreed that the mortgage would not be recorded.

 On January 3, 1958 the bankrupts and Alexander Schaffer, a lawyer and the objector herein, entered into an agreement under the terms of which Schaffer agreed to 'advance' to the bankrupts the 'further' sum of $ 20,000 on the signing thereof. He had theretofore advanced the sum of $ 5,000 to them. The agreement further provided that he was to advance an additional sum of $ 25,000 when 'he wishes or when called upon by Kahn and Schatz to do so on five days notice', and he agreed to obtain 'further' bank credits for them in the sum of $ 20,000. He had previously obtained bank credits of $ 30,000 for the partnership.

 The agreement of January 3, 1958 listed the liabilities of the partnership, including an item designated as follows: 'Due to loan creditors, including the Sohmer loan, approximately $ 70,000', and also provided that 'Schaffer agrees that if it becomes necessary to reduce the Sohmer loan on February 28, 1958 that he will provide bank credits or cash of an additional $ 25,000 therefor.'

 The said agreement also contained the following provision '1. Kahn and Schatz hereby represent and warrant so Schaffer as follows:

 '(a) That they are and have been doing business as co-partners under the firm name and style of The Tides at 640 West Broadway, Long Beach, New York, and as such co-partners, are the owners of a certain indenture of lease dated the 10th day of July, 1957, made between BENJAMIN DUHL and LEWIS LUBITZ as lessors and NEPTUNE SHORE CORPORATION as lessee, affecting the building and premises known as The Tides, also known as 640 West Broadway, Long Beach, New York, by assignment from said Neptune Shore Corporation dated the 10th day of July, 1957, which lease has not been further assigned and has not been modified, or encumbered.' (Emphasis mine) The underlined portion of the quoted paragraph was incorporated in the agreement at the insistence of Schaffer's attorney.

 The agreement further provided, in paragraph 1d.) 5 thereof, that 'An itemized list of all of the liabilities as of 12/31/57 is annexed hereto and made a part hereof.' and went on to say '(e) That there have been no changes in the aforesaid debts and obligations since December 1, 1957 except in the ordinary course of operation of the business and except monies advanced by Schaffer and certain bank credits obtained through Schaffer, which monies and credits have been used to make payments on the obligations above set forth.'

 In accordance with the said provision the bankrupts delivered to Schaffer a separate handwritten statement of the liabilities of the partnership which contained the following certification: 'This is a complete statement as reflected in the books and I represent that there are no other liabilities outstanding which can exceed $ 1500 -- (signed) G. B. Schatz and David Kahn attached to contract dated Jan. 3, 1958 G.B.S.D.K.'

 No mention is made in the agreement or the list of liabilities of the assignment of the lease to the Sohmers or of the mortgage thereon which they held as security for their loan, both of which had been executed and delivered by the bankrupts some four months prior thereto.

 Pursuant to the terms of the agreement, and in reliance thereon, Schaffer advanced the additional sum of $ 20,000 to the bankrupts and obtained bank credit of $ 20,000 in their behalf from the Franklin National Bank on a note endorsed by him. On February 10, 1958, he learned of the assignment of the lease and the mortgage thereon and thereupon refused to advance the further sum of $ 25,000 provided for in the agreement.

 Thereafter there was an exchange of letters among the parties in which Schaffer insisted that at the time of the execution of the agreement he had no knowledge of either the assignment or the mortgage, and that he had relied on the bankrupts' representation that they were the owners and holders of the lease and that it was unencumbered.

 The parties subsequently entered into various agreements modifying the agreement of January 3, 1958, the last of which, dated December 29, 1959, provided that 'All previous agreements made between Schatz and Kahn on the one hand and Schaffer on the other hand are hereby cancelled and terminated.'

 The 'Tides' Nursing Home continued to have financial difficulties and ultimately the landlord dispossessed it from the premises. On July 14, 1961 Schatz filed a voluntary petition in bankruptcy and was adjudicated a bankrupt on the same day. On November 17, 1961 Kahn ...

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