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November 13, 1978

In the Matter of PAUL R. DEAN CO., INC., Bankrupt

The opinion of the court was delivered by: ELFVIN


The City of Rochester ("the City") appeals from two decisions of the bankruptcy court, the first denying its motion to amend a proof of claim filed by Great Lakes Dunbar Rochester ("GLDR") and the second disallowing the City's claim.

The two appeals are an outgrowth of the City's construction contract with GLDR. Under the terms of the contract, the City was authorized to withhold ten percent of each periodic payment due GLDR. GLDR's performance of the contract is not in dispute. Paul R. Dean Co., Inc. ("Dean") offered certain services to GLDR whereby Dean would substitute securities for the retainages, without GLDR having to pay for the securities in advance. GLDR agreed to accept the services of Dean and sent a letter to the City stating that Dean was authorized to act as its agent for the deposit of municipal securities in lieu of its retained percentages. The letter also stated that the City was empowered to pay over the retentions to Dean upon receipt of securities by the City. Unknown to GLDR, the City had an arrangement with Dean that allowed Dean to hold the securities for the City by placing them in a safe deposit box. Dean periodically sent letters to the City stating that it had purchased securities in the account of GLDR, that it was holding them "as agent for the City * * *" and asking that the City forward Dean a check in an amount equivalent to the value of the purchased securities. During April, 1973 it became apparent that the securities were not in existence. Although GLDR took the position that the City was liable to it for the retainages, it filed a claim in the bankruptcy proceeding. The City, although a scheduled creditor, did not file a claim in the bankruptcy proceeding.

 May 1977 Appeal

 An application to amend GLDR's claim ("claim 31") was filed by the City. Bankruptcy Judge Hayes denied the City's application on two grounds: (1) that the City did not have the authority to amend the claim because it belonged to GLDR and had never been assigned or transferred to the City; and (2) that the application was an unliquidated claim.

 In its application to amend claim 31 the City stated: "Claim P 31 describes the contentions of the claimant that the aforesaid amount may ultimately prove to be owing to the City of Rochester instead of to itself." A review of claim 31 shows that it was filed by the attorney for GLDR solely on behalf of GLDR. The claim does describe the conflict existing between the City and GLDR as to who (the City or Dean) owed GLDR the money withheld from the contract, but the language of the claim does not manifest any intent on the part of the claimant to file on behalf of the City. As the Trustee points out in his brief, GLDR's claim is conditional; it states that the bankrupt is liable to GLDR only if GLDR is unable to recover from the City. In addition, only a creditor or its authorized agent may file a claim against a bankrupt's estate. Bankruptcy Rule 301(a); Hoos v. Dynamics Corp. of America, 570 F.2d 433 (2d Cir. 1978). GLDR was not an authorized agent of the City; therefore, it could not have filed a claim in the City's behalf.

 The City argues that it has a right to amend the claim because it may turn out to be the actual owner of the claim. At the time the City moved to amend, GLDR had been granted summary judgment against the City in the New York State Supreme Court. The City appealed the state court decision, but argued that if it lost the appeal it would be the owner of the claim.

 The bankruptcy court has jurisdiction to determine the rightful owner of a claim. In re United Cigar Stores Co. of America, 75 F.2d 290 (2d Cir. 1935). A proof of claim may be amended in order to substitute parties, where the amendment would make the real party in interest the holder of the claim. In re Ingersoll Co., 148 F.2d 282 (10th Cir. 1945); In re Levinson, 1 F.2d 851 (9th Cir. 1924), Cert. denied sub nom. Greene v. Booth, 267 U.S. 598, 45 S. Ct. 354, 69 L. Ed. 806 (1925); In re Ellis, Inc., 252 F. 483 (3d Cir. 1918); McDonald v. State of Nebraska, 101 F. 171 (8th Cir. 1900); In re McCarthy Portable Elevator Co., 205 F. 986 (D.N.J.1913). The cases cited by the City are factually distinguishable from the instant case. In each such case, the person seeking the amendment contended that he was the sole rightful owner of the claim. In each of those cases wherein the courts permitted substitution, the amendment resulted in there being only one claimant. Here, the City is not arguing that it is the real party in interest; the City wants the claim amended to read that Dean is liable either to GLDR or to the City. Such an amendment would not be a mere substitution of parties, but would be a substantive amendment of the claim. The City is trying to use the device of amendment to inject its claim into the bankruptcy proceeding.

 Although both the City's claim and GLDR's claim are an outgrowth of the City's contract with GLDR, their rights are based on different sets of facts and their own contractual relations with the bankrupt. GLDR's claim against the bankrupt is bottomed on its agreement with Dean that Dean would substitute bonds for the retainages earned by GLDR. Any claim that the City would have against Dean would be founded on its agreement with Dean whereby Dean held the purchased bonds as an agent for the City.

 The bankruptcy court determined that GLDR was the rightful owner of claim 31 and this conclusion is amply supported by the evidence before the court.

 The contentions of the parties as to the effect of the assignment of claim 31 to the City will be discussed below.

 October 1977 Appeal

 The City filed suit against the Chemical Bank of New York and Great Lakes Dredge & Dock and Dunbar & Sullivan Company, d/b/a GLDR in the New York State Supreme Court. GLDR moved for summary judgment on its counterclaim against the City for the balance owing on its contract with the City and for the interest that would have accrued on the municipal bonds supposedly held by Dean. Justice Emmett Schnepp of the New York State Supreme Court, Monroe County, decided in favor of GLDR on its counterclaim for the retainages. The City appealed and on February 18, 1977 the Appellate Division, Fourth Department, affirmed Justice Schnepp's decision. Judgment was entered against the City February 28, 1977 and on March 9, 1977 the City tendered payment to GLDR of the full amount of the judgment. Thereafter, on March 21, 1977, GLDR assigned all right, title and interest in its claim in bankruptcy to the City. On the same day, the trustee in bankruptcy filed an objection to claim 31, arguing that GLDR no longer had a claim against the bankrupt.

 A copy of the assignment was forwarded to Judge Hayes April 4, 1977. The City then applied for permission to amend claim 31, stating that its ownership had been disputed in the state courts, that judgment had been rendered against the City in the Appellate Division, that the City had made full payment to GLDR and "that by virtue of said payment, the City of Rochester became subrogated and succeeded to the rights of GLDR in and to claim No. 31." The City also cited the assignment dated March 21, 1977 as a further ground for allowing it to amend the claim. The trustee objected to the City's application. Judge Hayes rejected the City's contention concerning its status as a surety. In addition, Judge Hayes stated that assignment of the claim only gave the City such rights as were held by GLDR and that payment by the City to GLDR terminated GLDR's claim. The court also ...

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