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MCNELLIS v. RAYMOND

July 14, 1969

Phillip J. McNELLIS, Trustee of Donald S. Potter and Jackson M. Potter, Bankrupts, Plaintiff,
v.
Isadore RAYMOND, Defendant



The opinion of the court was delivered by: TIMBERS

TIMBERS, District Judge:

QUESTION PRESENTED

 In this action to recover moneys paid out by a bankrupt on allegedly usurious loans, the question presented following trial on the usury cause of action (as distinguished from the fraudulent conveyance cause of action, previously tried) is whether plaintiff trustee in bankruptcy may recover from defendant Raymond, a money lender, certain payments of principal and interest made to Raymond by the bankrupt, Donald S. Potter, in repayment of earlier loans from Raymond to Donald and to Potter Real Estate Company (Donald's sole proprietorship), on the ground that such payments were null and void as against the trustee because the loans were usurious, having been made at rates of interest in excess of 6% per annum. More specifically, the narrow question here is whether the trustee's usury cause of action is barred by the applicable one year statute of limitations pleaded by defendant. N.Y.Gen. Obligations Law § 5-513 (McKinney 1964).

 Upon the undisputed facts controlling this question, the Court holds that the trustee's usury cause of action is barred by the statute of limitations. Defendant accordingly is entitled to judgment dismissing the first cause of action alleged in the complaint.

 PRIOR PROCEEDINGS

 Following an earlier trial on the trustee's fraudulent conveyance cause of action (the second cause of action), the Court held that, since the bankrupt, Donald S. Potter, had benefited directly from Raymond's loans, there was valuable consideration for Donald's payments to Raymond and the transfers therefore were not fraudulent. The Court accordingly ordered that judgment be entered dismissing the second cause of action alleged in the complaint - the only cause of action pressed at the earlier trial. *fn1"

 For reasons more fully set forth in the Court's opinion following the first trial, *fn2" leave was granted to the trustee to pursue his abandoned usury cause of action, in the light of certain information which first became available to him at the first trial:

 
". . . [Plaintiff] did not pursue at the trial his first cause of action, based upon the alleged usurious character of the loans, in reliance upon defendant's representation that his transactions were solely with Potter Securities Corporation and not with the bankrupt, Donald S. Potter, or Potter Real Estate Company, his sole proprietorship. Contrary to defendant's answers to certain of plaintiff's interrogatories, defendant produced at the trial checks drawn by him to the order of Donald S. Potter and Potter Real Estate Company. Since plaintiff's abandonment of his usury cause of action appears to have been induced by defendant's failure to disclose prior to trial that he had had such transactions with Donald S. Potter or Potter Real Estate Company, plaintiff is granted leave . . . to move for trial upon his first cause of action, . . . ." 287 F. Supp. at 234.

 The Court, in granting the trustee leave to pursue his usury cause of action, expressed no opinion on its merits:

 
"In granting the trustee an opportunity for his day in Court on his usury cause of action, in view of Raymond's failure to disclose prior to trial what he was duty-bound to disclose, the Court wishes to emphasize that it is expressing no opinion whatever on the merits of such claim. The problems confronting the trustee in proving such a usury claim are well known to counsel. See, e.g., In re Potter, 367 F.2d 513 (2 Cir. 1966), and particularly Judge Feinberg's observations at 516-17. Nevertheless, whether the trustee, acting upon the advice of counsel, as a practical matter wishes to pursue or abandon his usury cause of action is for him to determine in the exercise of his business and fiduciary judgment. All this Court holds, in the exercise of its inherent equitable powers, is that the trustee is entitled to make that determination in the light of the information withheld from him by Raymond prior to trial and which Raymond was duty-bound to disclose." 287 F. Supp. at 244-45.

 STATUTE OF LIMITATIONS APPLICABLE TO USURY CAUSE OF ACTION

 At the earlier trial on the fraudulent conveyance cause of action, defendant pressed the one year statute of limitations provided in N.Y.Gen. Obligations Law § 5-513 (McKinney 1964), which he had pleaded as a special defense. The Court held that this statute of limitations was not applicable to the fraudulent conveyance cause of action. *fn3"

 Section 5-513, *fn4" however, clearly is applicable to the usury cause of action. The payments which the trustee here seeks to recover are reflected in 294 checks drawn by Potter Real Estate to defendant between January 10, 1958 and March 1, 1962. The bankruptcy petition was filed May 28, 1963. *fn5" The instant action was commenced February 8, 1965.

 Commencement of an action within two years subsequent to adjudication of bankruptcy is timely only so long as the action itself was not barred as of the date of adjudication. Section 11(e) of the Bankruptcy Act, 11 U.S.C. § 29(e) (1964). This grace period does not authorize the trustee to resurrect an otherwise time-barred cause of action; it grants to him a period of two years within which to familiarize himself with the estate he has been appointed to administer and to decide which actions available to the ...


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