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IN RE H. S. DORF & CO.

August 4, 1967

In the Matter of H. S. DORF & CO., Inc., Bankrupt


The opinion of the court was delivered by: MANSFIELD

MANSFIELD, District Judge.

 This is a petition by Beol, Inc. ("Beol" herein) to review an order of the Referee in Bankruptcy Herbert Loewenthal, dated September 30, 1966, adjudging the bankrupt's Trustee to be entitled to monies collected by Beol pursuant to a judgment dated February 15, 1960 recovered by it against one Herman S. Dorf ("Dorf" herein) in the Supreme Court, New York County, in the sum of $78,681.97, and directing The American Insurance Company, which is the surety company holding security in connection with an appeal bond filed by Dorf therein, to turn over to the Trustee all funds and security collectible by Beol on the said judgment. The history of the proceedings leading to the Referee in Bankruptcy's said order, as revealed in his Findings and Conclusions, dated September 14, 1966, and in papers submitted by the parties, is as follows:

 On June 26, 1950, Beol, an exporter, recovered a judgment in the sum of $38,317 against H. S. Dorf & Co., Inc. ("Dorf, Inc." herein), a factor and freight, insurance and customs house broker, owned and controlled by Dorf, after a jury trial of an action brought in the Supreme Court of the State of New York, New York County. This judgment was set aside on appeal, and on January 2, 1952, Beol recovered a second judgment against Dorf, Inc. in the sum of $53,176, after retrial of the action before a jury.

 On March 12, 1952, Beol instituted an action in the same court (New York County Supreme Court) to enforce its judgment against Dorf, Inc. (the debtor), Dorf, and Dorf International, Ltd., claiming that they had transferred the debtor's assets to Dorf International in defraud of Beol as a judgment creditor and in violation of Beol's rights under various New York laws, including § 15 of the Stock Corporation Law, McKinney's Consol. Laws, c. 59, § 60 of the General Corporation Law, McKinney's Consol.Laws, c. 23, and §§ 276 and 278 of the New York Debtor and Creditor Law, McKinney's Consol.Laws, c. 12. The latter action ("judgment creditor's action" herein) was tried before Special Referee Isidore Wasservogel of the New York County Supreme Court and resulted in the entry on February 15, 1960 of the aforementioned judgment in the sum of $78,681 in favor of Beol against Dorf and the other two named defendants. Upon appeal the judgment was unanimously affirmed, Beol, Inc. v. Dorf, et al., 22 Misc.2d 798, 193 N.Y.S.2d 394, aff'd 12 A.D.2d 459, 209 N.Y.S.2d 267 (1960), appeal dismissed, 9 N.Y.2d 963, 218 N.Y.S.2d 43, 176 N.E.2d 499 (1961). Execution of the judgment against Dorf individually was stayed as a result of his filing a bond, on which The American Insurance Company as surety, secured by his own personal assets.

 On September 10, 1957, while Beol's judgment creditor's action was pending in the New York County Supreme Court, Beol filed in this Court an involuntary petition in bankruptcy against Dorf, Inc., the debtor, which was at first opposed by the debtor. On June 17, 1959, this Court denied the debtor's motion for a stay of Beol's prosecution of its judgment creditor's action in the New York state court until this Court determined whether the debtor should be adjudicated a bankrupt. The debtor had based the motion on its contention that the recovery in the state court judgment creditor's action would represent as asset of the debtor's estate.

 After the Appellate Division, First Department, affirmed Beol's $78,681 judgment against Dorf, an order adjudicating Dorf, Inc. a bankrupt was consented to and entered in this Court on May 4, 1961. Thereupon the bankrupt applied to the Bankruptcy Court for an order staying Beol from taking steps to collect the state court judgment on the ground that the judgment represented an asset of the bankrupt's estate and should be collected by the estate for the benefit of all creditors; and on May 11, 1961, this Court signed an order staying Beol from collection of the state court judgment pending determination of the bankrupt's application. James B. Kilsheimer, III, was elected Trustee in Bankruptcy of the bankrupt on June 6, 1961, and intervened in the application previously made by the bankrupt to the Bankruptcy Court to stay Beol's collection of its state court judgment.

 On December 5, 1961, the Bankruptcy Referee denied the application for a stay, stating in his opinion:

 
"It was within the competence of the state court to decide all the issues there litigated that could be litigated by evidence or by stipulation, and it is very clear from the judgment and opinion of that court that the judgment it rendered was not for the benefit of the bankrupt's creditors, but solely for the benefit of Beol, Inc.
 
"The real thrust of the argument of the trustee and bankrupt is that the state court judgment is based on facts erroneously found, and that the bankruptcy court may review the issues and in effect modify the findings of fact and conclusions of law of the state court. I am unable to agree with such a contention.
 
"The bankruptcy court may not review, correct or modify the judgment of the state court in any respect in the circumstances here shown. The fact that Beol, Inc. filed a petition in bankruptcy some three years before it obtained its judgment in the state court is no indication that it consents to retry the issues disposed of by the state court.
 
"The petitions as to the surety bond are denied."

 The Trustee thereupon moved for reargument, which resulted in the granting of reargument and in a continuation of the stay. Beol's petition for review of the order granting reargument was denied on the ground that the order was interlocutory and the denial affirmed on appeal. See In re H. S. Dorf & Co., 309 F.2d 151 (2d Cir. 1962).

 In the meantime Dorf and Dorf, Inc., the defendants in Beol's judgment creditor's action, moved to vacate the state court judgment in favor of Beol on the ground of fraud, and on June 19, 1962, by order of Justice Arthur Markewich, the issues were referred to Special Referee Leo J. Mullen to hear and report and to submit his recommendations. On August 28, 1963, the Trustee, pursuant to authority granted ex parte by the Bankruptcy Court on August 23, 1963, moved to intervene in the state court proceeding to vacate and set aside the state court judgment and for a new trial, on various grounds, including the following:

 
"(a) that the cause of action upon which the judgment [referring to Beol's judgment against Dorf] was recovered was and is an asset of the bankrupt estate of the defendant H. S. Dorf & Co., Inc.; * * *
 
* * *
 
"(c) that there was a lack of jurisdiction to render said judgment and make it binding upon the bankrupt estate; * * *."

 and "for an order referring the issues raised upon this motion to Special Referee Leo J. Mullen by enlarging or amending the previous order of reference made to him of a previous application made by the defendant Herman S. Dorf now pending before the aforenamed Special Referee to set aside the judgment, * * *". *fn1" In his affidavit in support of his application the Trustee sought the foregoing relief on the ground that if the trial court had been advised of the pending bankruptcy proceedings and of the bankrupt estate's alleged right to the cause of action and assets involved, it would not have entered a judgment for the benefit of Beol, Inc. alone, and the Trustee urged the state court to exercise its general and inherent power to reopen and set aside the judgment in the interest of doing substantial justice. Said the Trustee:

 
"19. Since this Court was not advised of the pending bankruptcy proceeding, and in addition, since no application for the appointment of a receiver in bankruptcy was made to protect the interest of creditors of the bankrupt, and since the interests of the bankrupt estate were not represented or protected at the trial, the resulting judgment, recovered after the commencement of the bankruptcy proceeding, in favor of the plaintiff, Beol, Inc., for the full amount, instead of a pro rata share, is not and should not be deemed binding upon me, as trustee in bankruptcy. Had the bankrupt estate been represented and protected at the trial, I strongly doubt that the trial court would have held that the judgment was collectible by and for the benefit of Beol, Inc. alone.
 
* * *
 
"I have therefore contended and now contend that Beol, Inc. acquired no lien whatsoever with respect to its action despite, as alleged by Herman S. Dorf, its misrepresentation or its misleading claims made on its behalf to the Appellate Division and Court of Appeals.
 
"22. My right and title to any and all assets of the bankrupt, inclusive of the cause of action sued on by Beol, Inc. against Herman S. Dorf, president of the bankrupt, upon my appointment and qualification as the trustee in bankruptcy, relates back to the time that the involuntary petition in bankruptcy was filed on September 10, 1957 (Section 70a of the Bankruptcy Act), at which time, of course, this action had not yet been tried and there had been no recovery of the judgment in this action.
 
"23. This application is made to this Court to set aside the judgment obtained by Beol, Inc. against Herman S. Dorf in this action to which the bankrupt estate was not a party nor was it represented therein. It is respectfully submitted that the Supreme Court has general and inherent power to set aside judgments for sufficient reason and in the interests of doing substantial justice both under the statutes as well as under its own inherent power.
 
"24. For the foregoing reasons, it is respectfully submitted that this application, made by me as trustee in bankruptcy, should be granted in the ...

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