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LIMAN v. BANK OF NOVA SCOTIA

April 5, 1971

Arthur LIMAN, Trustee in Bankruptcy of Seatrade Corp., et al., Plaintiff,
v.
BANK OF NOVA SCOTIA, Defendant


Motley, District Judge.


The opinion of the court was delivered by: MOTLEY

OPINION ON MOTION OF DEFENDANT FOR SUMMARY JUDGMENT

MOTLEY, District Judge.

 This is an action by the trustee of the bankrupt, Kulukundis Maritime Industries, Inc. (KMI), to recover alleged voidable preferences under the Bankruptcy Act. 11 U.S.C. §§ 96(a)(1), (b) and 110(e). *fn1" Defendant, Bank of Nova Scotia, has moved for summary judgment dismissing the claim as barred by the applicable statute of limitations. 11 U.S.C. § 29(e).

 The complaint alleges that in August and September 1962, defendant made loans to KMI totaling $500,000. In December 1962, within four months of the filing on March 15, 1963 of a Chapter XI petition by KMI under the Bankruptcy Act, KMI made payments to defendant on the loans in amounts aggregating $125,000, leaving a balance of $375,000. On January 11, 1963, within the same four month period, KMI executed, as mortgagor, a second preferred mortgage on a vessel owned by it, the SS SOUTHHAMPTON, in favor of the Chase Manhattan Bank, as trustee for defendant. This was done to secure three 6% serial bonds issued to defendant by KMI in the aggregate amount of $375,000, the balance of the debt. The mortgage was foreclosed by its trustee on May 15, 1963. The balance of the loan, plus interest, totaling $382,687.56 was paid by the trustee to defendant from the proceeds of the sale of the ship.

 Prior to this payment, as noted above, the bankrupt had filed a petition for an arrangement under Chapter XI on March 15, 1963. That proceeding was superseded by the filing of a petition for reorganization under Chapter X of the Bankruptcy Act on May 21, 1963, which was approved by order of this Court (Croake, J.) on May 23, 1963. Almost five years later, by order of this Court (Croake, J.) on March 22, 1968, both proceedings were ordered terminated. It was also ordered that bankruptcy be proceeded with.

 The complaint in the instant action further alleges, as required by 11 U.S.C. §§ 96(a)(1), (b) and 110(e), that on and after December 11, 1962, KMI was insolvent; that this was known to defendant or that defendant had reasonable cause to so believe; and that the effect of the payments by KMI to defendant and the execution of the mortgage was to enable defendant to obtain a greater percentage of its debt than other creditors of KMI similarly situated. The complaint was filed on January 26, 1970, just short of two years after the order of March 22, 1968, directing that bankruptcy be proceeded with.

 This court holds that the cause of action under the Bankruptcy Act, 11 U.S.C. §§ 96(a)(1), (b) and 110(e) is timely.

 The applicable period of limitation with respect to the bringing of this action by the trustee in bankruptcy is found in 11 U.S.C. § 29(e). That statute provides:

 
"A receiver or trustee may, within two years subsequent to the date of adjudication or within such further period of time as the Federal or State law may permit, institute proceedings in behalf of the estate upon any claim against which the period of limitation fixed by Federal or State law had not expired at the time of the filing of the petition in bankruptcy. . . ."
 
This appears to be a case of first impression.

 In the case of In Re Ira Haupt & Co., 390 F.2d 251 (2d Cir.) cert. denied, 391 U.S. 916, 88 S. Ct. 1811, 20 L. Ed. 2d 655 (1968), an ordinary petition in bankruptcy had been filed. Before Haupt had been adjudicated a bankrupt, however, a petition for an arrangement under Chapter XI was filed by some of the Haupt partners and subsequently dismissed. Haupt was thereafter adjudicated a bankrupt. Almost two years later, Haupt's trustee in bankruptcy filed an objection to the claim of one of Haupt's creditors. He asked that the claim be disallowed unless the creditor surrendered money received from the bankrupt within four months of the filing of the involuntary petition in bankruptcy. The creditor opposed the trustee's objection on the ground that the two year period within which the trustee could sue to recover any alleged preferential payment under § 29(e) had expired. Since the Chapter XI petition filed by the Haupt partners had been filed in a pending bankruptcy proceeding, 11 U.S.C. § 721, the court affirmed the lower court's holding that the date of adjudication for the purposes of § 29(e) must be taken to be the date on which Haupt was actually adjudicated a bankrupt, there being nothing in § 778(a)(1) to suggest otherwise. Title 11 U.S.C. § 778(a)(1) provides that when a Chapter XI proceeding has been filed in a pending bankruptcy proceeding and an order is entered upon the dismissal of that proceeding directing that bankruptcy be proceeded with, "the bankruptcy proceeding shall be deemed reinstated and thereafter shall be conducted, so far as possible, as if such petition under this chapter had not been filed."

 However, on the facts of the instant case, the governing provision is 11 U.S.C. § 778(a)(2) and not § 778(a)(1). Title 11 U.S.C. § 778(a)(2) provides that in the case of the dismissal of an original petition filed under Chapter XI, followed by an order that bankruptcy be proceeded with (as happened in this case) "the proceeding shall be conducted, so far as possible, in the same manner and with like effect as if a voluntary petition for adjudication in bankruptcy has been filed and a decree of adjudication had been entered on the day when the petition under" Chapter XI was filed.

 There is a similar provision with respect to dismissed original Chapter X proceedings. 11 U.S.C. § 638. That provision reads:

 
". . . the proceeding shall thereafter be conducted so far as possible, in the same manner and with like effect as if an involuntary petition for adjudication has been filed at the time when the petition under this chapter was filed, and a decree of adjudication had been ...

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