Brown v. Leo

Full title: BROWN v. LEO

Court: Circuit Court of Appeals, Second Circuit

Date published: Jun 17, 1929

34 F.2d 127 (2d Cir. 1929)

Opinion

No. 267.

June 17, 1929.

Appeal from the District Court of the United States for the Southern District of New York.

In the matter of the bankruptcy of John Petrilli, wherein proceedings were had to set aside a mortgage and a deed given by bankrupt to Fannie Leo. From that part of the decree disallowing interest on claims after date on which they were proved, and on money advanced by trustee to pay expenses incurred in the administration of the estate, Harry K. Brown, as trustee, appeals. Modified, and, as modified, affirmed.

The trustee in bankruptcy succeeded in having set aside as fraudulent a mortgage and subsequent deed of land given by the bankrupt to the appellee. Proceedings were than had to determine the fair value of the use of this property during the time the appellee had the benefit of it, and she was ordered to pay so much of this amount as would, with the other assets in the bankrupt estate, pay in full the expenses of administration and claims of creditors proved and allowed. From this part of the decree no appeal was taken.

In determining the amount of such expenses and creditors' claims, however, the United States District Court for the Western District of New York disallowed interest on claims after the date on which they were proved, and disallowed interest on money advanced by the trustee to pay expenses incurred in the administration of the estate. From such disallowance of interest the trustee appealed.

The petition in bankruptcy was involuntary and was filed July 22, 1916; adjudication took place July 26, 1917, and the trustee was appointed. The decision of the District Court setting aside the mortgage and deed was rendered in June, 1918, and after reargument was modified in September of the same year. On November 13, 1919, an order was made allowing a writ of error to the Circuit Court of Appeals, but there was an unexplained delay of over six years before the case was there argued in April, 1926. The opinion was handed down the next month on May 3, 1926. See Brown v. Leo (C.C.A.) 12 F.2d 350. The assets in the estate, together with the fair value of the use of the property for which recovery may be had of the appellee, are more than sufficient to pay the expenses of administration and the claims of creditors in full, regardless of whether the interest involved in this appeal is allowed or not.

Harry L. Allen, of Hornell, N.Y., for appellant.

John Griffin, of Hornell, N.Y., for appellee.

Before MANTON, L. HAND, and CHASE, Circuit Judges.

CHASE, Circuit Judge (after stating the facts as above).

The long and unexplained delay by the trustee in administering this estate was ample warrant for the disallowance of interest on money he advanced to pay expenses he incurred. There is nothing in the record to indicate that the estate lacked funds which could not under proper order have been applied to the payment of all necessary expenses, and, though we do not question the right of the trustee to be reimbursed for necessary expenses he paid out of his own funds, no reason has been made apparent why such advances should be made an interest-bearing investment for the years required by his dilatory conduct to settle this estate. On the record before us the decision of the court below respecting this interest claim will not be disturbed.

The disallowance of interest on claims of creditors presents a different question. It is true that ordinarily the creditors of a bankrupt cannot be paid in full, and that interest on unsecured claims stops when the petition is filed. With the exception of after-accruing interest on the security held, this applies to secured claims as well. Board of Com'rs of Shawnee County v. Hurley et al. (C.C.A.) 169 F. 92; Sexton v. Dreyfus and Sexton v. Lloyds Bank, 219 U.S. 339, 31 S. Ct. 256, 55 L. Ed. 244. The manifest reason for this is that on that date each creditor has an equitable interest in the bankrupt estate, which is that proportion of the net assets that the amount of his provable claim bears to the total of the provable claims. If his claim is proved and allowed, he is entitled to share in the net assets to the extent of the proportion it bears to the total amount of claims proved and allowed. The assertion that a result broadly as equitable could be reached if interest were allowed to the date of distribution cannot, perhaps, be denied as a matter of fact; but the time when interest stops had to be established as of some date, and it has already been fixed as a matter of law as the date of the filing of the petition. Bankruptcy Act, § 63 (11 USCA § 103), and cases supra.

But this estate will be solvent, and neither the rule nor the reason for stopping interest at the date of the filing of the petition applies to an estate which turns out to be solvent. Johnson v. Norris (C.C.A.) 190 F. 459, L.R.A. 1915B, 884, and cases there cited. It is said, however, that the appellee should not be made to pay interest on creditors' claims, as in effect she will, if interest is allowed. That seems quite beside the point. The recovery by the trustee of the property deeded to her and the recovery of the use of that property is what makes the estate solvent. She was a party to the transfer that resulted in the bankrupt's inability to pay his debts in full, and the use she has had of that property during the time she participated in the fraud upon creditors has been found to be worth more than she will be called upon to pay after the interest on these claims is allowed. She does nothing but return to creditors what she has wrongfully helped to take from them.

The decree of the District Court is modified, to allow interest in full on claims of creditors in conformity with this opinion, and, as so modified, is affirmed.