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IN RE MORRIS KETCHUM

December 12, 1975

In re MORRIS KETCHUM, JR. AND ASSOCIATES, Bankrupt. CLARKE & RAPUANO, INC., Plaintiff,
v.
MORRIS KETCHUM, JR. AND ASSOCIATES, Defendant. In re Morris KETCHUM, Jr., Bankrupt. CLARKE & RAPUANO, INC., Plaintiff, v. Morris KETCHUM, Jr., Defendant



The opinion of the court was delivered by: GAGLIARDI

MEMORANDUM DECISION

 GAGLIARDI, District Judge.

 This case arises out of two applications by plaintiff Clarke & Rapuano, Inc. ("C & R") in the Bankruptcy Court for a determination of the dischargeability of certain debts owed to it by the bankrupts-defendants Morris Ketchum, Jr. and Morris Ketchum, Jr. and Associates ("Ketchum").*

 According to C & R, Ketchum entered into a contract with the New York Zoological Society ("Zoo") for the performance of certain architectural, engineering, and landscape architectural services in connection with the development of a Zoo exhibit. Ketchum then subcontracted some of the work to C & R and this work was performed in full.

 C & R claims that during 1974 the defendants received payments from the Zoo upon the representation that the subcontractor, C & R, had substantially completed all of its work and that the payments would be transmitted to the subcontractor. No such payments were ever made or tendered by the defendants. On August 30, 1974 Ketchum was adjudged bankrupt. C & R timely filed its applications to determine the dischargeability of the debts owed to it by the defendants; the applications were dismissed** and the debts declared dischargeable by the Bankruptcy Court. Appeal was taken to this court.

 Plaintiff contends that the debts are not dischargeable under Sections 17(a)(2) and 17(a)(4) of the Bankruptcy Act, 11 U.S.C. §§ 35(a)(2), (4), which provide that:

 
A discharge in bankruptcy shall release a bankrupt from all of his provable debts . . . except such as . . .
 
(2) are liabilities for obtaining money or property by false pretenses or false representations, . . . or for wilful and malicious conversion of the property of another . . . or . . .
 
(4) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity

 The Bankruptcy Court rejected these contentions. This court concludes that under § 17(a)(4) the debt is not dischargeable and reverses the decision of the Bankruptcy Court; the court therefore, does not reach the other issues raised.

 The non-dischargeability of the instant debt arises out of the interaction of § 17(a)(4), supra, and Article 3 - A of the New York Lien Law which provides that funds "received by a contractor under or in connection with a contract for an improvement of real property . . . constitute assets of a trust," New York Lien Law § 70(1) (McKinney 1966), "for payment of claims of subcontractors . . .," New York Lien Law § 71(2)(a). Thus, the money allegedly received by Ketchum from the Zoo was held in trust for C & R and use of these funds for purposes other than payment to the subcontractor or toward other claims permitted by Article 3 - A resulted in a debt "created by his embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity" which is not dischargeable.

 Defendants contend that § 17(a)(4) is inapplicable to the instant case as the debt was not "created" by the breach of fiduciary duty. Rather, they claim, the liability of the defendants was grounded in a contract between it and C & R. Ketchum argues, as the Bankruptcy Court concluded, that the New York Lien Law provided another remedy but not a new debt. In support of this position, defendants rely on Upshur v. Briscoe, 138 U.S. 365, 11 S. Ct. 313, 34 L. Ed. 931 (1890) and Bloomingdale v. Dreher, 31 F.2d 93 (3d Cir. 1929) which contain language to the effect that "section 17(a)(4) applies only to debts created by a person who was already a fiduciary when the debt was created," Id. at 94.

 An analysis of the facts and holdings of these two cases, however, indicates that the rules enunciated there are not dispositive of the instant matter.

 In Upshur v. Briscoe the plaintiff alleged that her former husband had given the defendant's predecessor in interest the sum of $10,000 and the donee had agreed to pay plaintiff $700 annually. The donee subsequently was adjudged bankrupt. The court held that notwithstanding certain agreements which recited that the donee accepted the "trust" and that the plaintiff accepted the donee as her "trustee" the real relationship between the donee and the plaintiff was one of debtor-creditor. This was evidenced by the fact that the donee was permitted to use the money in any way he thought proper, was not required to keep the money separate from his other holdings, and agreed to pay "interest" of $700 per year. 138 U.S. at ...


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