The opinion of the court was delivered by: BRUCHHAUSEN
BRUCHHAUSEN, District Judge.
The Trustee in Bankruptcy seeks a review of the order of Hon. William J. Rudin, Referee in Bankruptcy, dated October 21, 1965.
The issue before the Referee was whether the landlords, lessors, of premises leased to the bankrupt were justified in retaining moneys deposited by the bankrupt as security for the performance of the provisions of the lease.
The Referee ruled in favor of the landlords.
a) The Lessors, Michael Adamowicz and Mary Adamowicz, entered into a written agreement, dated June 22, 1962, whereby they leased the subject premises to the predecessor of the bankrupt for the term of five years, commencing on July 1, 1962.
b) The lease provided that the sum of $4240.62 paid by the lessee, the tenant, to the lessors was to be held "as security for the faithful performance of all of the covenants and conditions of the lease by the said tenant."
c) The lessors deposited the security in a joint account in their names in the Franklin National Bank of Long Island.
d) The joint account included funds of the lessors, other than the security deposit. There was a commingling of funds. The security deposit was never segregated or placed in a separate or special account.
e) During the period from September 7, 1962 to on or about May 13, 1963, the balance on deposit was generally less than the said security fund of $4240.62. Thereafter the said balance at various times exceeded the security fund. Between September 25, 1963 and December 14, 1964 the balance exceeded $10,000.00.
f) The lessee defaulted in the payment of rent for the months of July, August, September, October and November 1964. The lessors did not apply any portion of the security in payment thereof.
The Referee found that where a lease continues, with the tenant remaining in possession, a prior commingling of the security which has since been corrected does not work a conversion resulting in forfeiture of the security, citing 160 Realty Corp. v. 162 Realty Corp., Sup., 113 N.Y.S.2d 618, affirmed 280 App.Div. 762, 113 N.Y.S.2d 678.
The Trustee urges that Section 7-103 of the General Obligations Law, formerly Section 233 of the Real Property Law provides in part:
"Whenever money shall be deposited or advanced on a contract * * * for the use or rental of real property as security for performance of the contract * * * such money, * * * until repaid or * * * applied (to payments on such contract) shall continue to be the money of the person making such deposit * * * and shall be held in trust by the person with whom such deposit * * * shall be made and ...