were paid when the insured was in good financial condition. There is no suspicion that his estate was being covered into insurance on his life with any purpose to depreciate it or defraud creditors, or that it had such effect. Has the referee erred in fixing the amount of the lien or the amount that should be paid the children. The original loan and indebtedness. was $10,000. The loan from the Fidelity Trust Company to the now bankrupt was made January 7, 1903, amounted to $12,000, and was represented by two notes, of $6,000 each, indorsed by D. B. Cooper. One of these notes was secured by collateral, policy No. 165,383, payable to insured or his legal representatives, and assigned January 7, 1903, to said Trust Company. This same policy was assigned by the insured, the bankrupt, to David B. Cooper, on the 30th day of June, 1904, as collateral security for the payment of an indebtedness of $2,000, of which the claimants had no knowledge. This policy, under direction of the court, was surrendered to the Insurance Company May 8, 1908, on payment of its cash surrender value, $7,430, to the trustee in bankruptcy. The other note mentioned was secured by collateral, policy No. 181,526, payable to the claimants here, but assigned by them to the insured, the bankrupt, under the agreement hereinbefore mentioned, on or about January 3, 1903, and by him assigned as collateral to said Trust Company January 7, 1903. This policy was also assigned by said insured, the bankrupt, to said D. B. Cooper, June 30, 1904, to secure the said indebtedness to him of $2,000. May 8, 1908, by the direction of the court, it was surrendered to the Insurance Company on payment to the trustee of its cash surrender value, $7,430, and later a dividend of $98.90 was paid thereon, making its proceeds $7,528.90. The proceeds of both policies was $14,958.90. The assignments to Cooper were subject to the assignments to the Trust Company. The amount due Cooper, and for which the two policies stood as collateral at the time of payment, was $797.13. One-half is $398.56. As this last amount, $398.56, went to Cooper to pay his claim, and was a pledge of policy No. 181,526 by the bankrupt in violation of the agreement and for another and an independent debt of the bankrupt, I do not see that the claimants have any recourse in equity, or that this amount can be paid them from the proceeds of the farm or policy payable to the estate. This amount of the proceeds of the policy was not used directly or indirectly to release the farm, pay the mortgage, or any part of the loan of $12,000 made by the Trust Company, the proceeds of which were used, mostly at least, to pay the mortgage debt. This was an outside debt, not within the terms of the agreement or the contemplation of the parties. In no event have the claimants a lien for more than $7,130.34, being the proceeds of policy No. 181,526, less the $398.56, necessarily used therefrom to pay the Cooper debt. The farm was to stand as first security for the $12,000 loan. Next the policy payable to the insured or to his representatives. The loan was divided into two notes. The amount of each, with interest, was $6,298.66; that of both, $12,597.32. Deducting the policy payable to the estate, $7,430, and the balance is $5,167.32. But the mortgage was to stand as first security for both at $10,000, and the policy payable to the estate as second, $7,430, making $17,430. This would have more than paid both notes. But the farm having been released, and the first policy, payable to the estate, pledged to one note only, $6,298.66 was left unpaid, and as the policy of claimants was pledged for that it has been so used, viz., $6,298.66 thereof. Deducting from its proceeds, $7,528.90, the amount used to pay Cooper's debt, $398.56, we have $7,130.34 remaining. Deducting the $6,298.66 used to pay the Trust Company's note, and we have a surplus of $831.58, that should be returned to claimants in any event. Add this to the amount necessary to pay the Trust Company's debt that should have been paid from the mortgage, or farm, and we have $7,130.34 to be returned or paid over. In short, the claimants never lost their right to that surplus. It has remained theirs. They did lose their right to the $398.56 that went to Cooper, so far as any lien is concerned. It could have been presented as a claim. As to the balance, $6,298.66, which should have been paid from the farm, they do have a lien. As the proceeds of the policy were $7,528.90, less $398.56 paid Cooper, or $7,130.34, and it paid $6,298.66, when it should have paid. only $5,167.32, if the first policy had been pledged and applied as agreed, it paid $1,131.34 more than it should, and instead of having a balance on hand of $1,963.02, we have a balance of $831.68. The difference is $1,131.34. The claimants should have a lien: For what their policy should have paid on the note.. For what it paid more than it should.... And should have the actual balance on hand.. Total Proceeds of policy........ Deduct amount paid Cooper.. Balance Debt Apply policy 165,383.. $5,167 32 1,131 34 831 68 $7,130 34 $7,528 90 398 56 $7,130 34 $12,597 32 Balance for policy 181,526.. True balance that should be on hand... Actual balance.... Paid more than should if first policy applied to whole debt. $5,167 32 $1.963 02 831 68 $1,131 34 Should have paid..... Actual balance.. Amount claimants entitled to...... 5,167 32 831 68 $7,130 34 I know of no theory on which interest can or should be allowed claimants, unless the fund has been drawing interest. The fund is in court, and has been, and the estate cannot be charged interest, unless the fund itself has earned it. The claimants are entitled to such interest as the fund has actually earned since it was received, and no more. There will be an order modifying the order under review accordingly, and, as modified, it will be affirmed. In re HARPER. (District Court, N. D. New York. January 4, 1910.) 1. BANKRUPTCY (§ 327*)—CLAIMS-NECESSITY OF FORMal Proof. An allegation in a petition in involuntary bankruptcy that a petitioner is a creditor of the bankrupt to an amount stated, and the failure of the bankrupt to answer and controvert the allegation, does not make the fact of such indebtedness res judicata as to the creditors or the trustee; but such petitioner must still file and prove his claim, which may be contested by the trustee or any creditor. [Ed. Note. For other cases, see Bankruptcy, Dec. Dig. § 327.*] 2. BANKRUPTCY (§ 145*)-PROPERTY PASSING TO TRUSTEE-RIGHTS OF ACTION. False representations, inducing another to enter into a contract, in carrying out which, owing to the falsity of such representations, he lost money, constitute an injury to property, within Code Civ. Proc. N. Y. § 3343, subd. 10, which defines an injury to property for which an action will lie as "an actionable act whereby the estate of another is lessened, other than a personal injury or the breach of a contract"; and under Bankr. Act July 1, 1898, c. 541, § 70a (6), 30 Stat. 565 (U. S. Comp. St. 1901, p. 3451), which provides that rights of action arising from an injury to a bankrupt's property shall pass to his trustee, the right of action to recover for such false representations passes to the trustee in bankruptcy of the person injured thereby. [Ed. Note.-For other cases, see Bankruptcy, Dec. Dig. § 145.*] 8. SET-OFF And CounterCLAIM (§ 29*)-NEW YORK STATUTE-CLAIM FOR FALSE REPRESENTATIONS. In an action to recover the price of goods furnished under a contract, a right of action by the plaintiff against the defendant for false representations inducing such contract is one "connected with the subject of the action," which under Code Civ. Proc. N. Y. § 501, may be pleaded as a counterclaim. [Ed. Note.--For other cases, see Set-Off and Counterclaim, Cent. Dig. §§ 49-51; Dec. Dig. § 29.*] 4. BANKRUPTCY (§ 326*)-CLAIMS-SET-OFF. Under Bankr. Act July 1, 1898, c. 541, § 68a, 30 Stat. 565 (U. S. Comp. St. 1901, p. 3450), which provides that "in all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid,” a trustee in bankruptcy may set up as a set-off against a claim filed by a creditor a claim for unliquidated damages existing in favor of the bankrupt against such creditor which passed to the trustee, and which under the law of the state the bankrupt, but for his bankruptcy, might have pleaded as a counterclaim in an action by the creditor, and the trustee may have such claim liquidated by the referee, unless some other mode of liquidation is directed. [Ed. Note. For other cases, see Bankruptcy, Dec. Dig. § 326.*] For other cases see same topic & § NUMBER in Dec. & Am. Digs. 1907 to date, & Rep'r Indexes IN RE HARPER. BANKRUPTCY ( 4*)-CONSTRUCTION OF ACT--DEFINITION OF TERMS—“IN CLUDE. In the definition of words and terms in Bankr. Act July 1, 1898, c. 541, § 1a, 30 Stat. 544 (U. S. Comp. St. 1901, p. 3418), a provision that a word shall "include" a certain thing does not exclude other meanings. · [Ed. Note.-For other cases, see Bankruptcy, Dec. Dig. § 4.* For other definitions, see Words and Phrases, vol. 4, pp. 3499-3500; vol. 8, p. 7685.] 6. BANKRUPTCY (§ 326*)-CONSTRUCTION OF ACT-DEFINITION "DEBTS." OF TERMS In Bankr. Act July 1, 1898, c. 541, § 68a, 30 Stat. 565 (U. S. Comp. St. 1901, p. 3450), providing that mutual debts between the estate of a bankrupt and a creditor shall be set off against each other and the balance only allowed or paid, the word "debts" should be construed to include a right of action against the creditor for injury to the bankrupt's property, which passed to the trustee under .section 70a (6), although unliqidated. [Ed. Note.--For other cases, see Bankruptcy, Dec. Dig. § 326.* For other definitions, see Words and Phrases, vol. 2, pp. 1864-1886; vol. 8, p. 7628.] 7. BANKRUPTCY (§ 250*) -ADMINISTRATION OF ESTATE-DUTY OF TRUSTEE. It is not the privilege of a trustee in bankruptcy to use the estate committed to his charge to settle questions of law which may arise, and if success is doubtful in case of a claim alleged to be due the estate, and the result, if successful, will not enhance the value of the estate after paying the expense, it is his duty as a general rule to abandon the claim, unless at least a substantial majority of the creditors desire the litigation to proceed. [Ed. Note. For other cases, see Bankruptcy, Dec. Dig. § 250.*] 8. BANKRUPTCY (§ 340*)-PROOF OF CLAIMS-SET-OFF-Burden of PROOF. Where the debt of a creditor against the estate of a bankrupt has been duly proved, the burden of proof rests upon the trustee to establish a setoff pleaded by him. [Ed. Note. For other cases, see Bankruptcy, Dec. Dig. § 840.*] In the matter of Howard E. Harper, bankrupt. On review of order of referee denying the motion of Peninsular Paint & Varnish Company to quash and overrule the objections filed to its claim by East Side Club and other creditors, and to quash, dismiss, and disallow the petition of the trustee in bankruptcy appointed herein, praying that said claim of said paint and varnish company be disallowed and expunged. Affirmed. John J. Mackrell (James Farrell, of counsel), for trustee and objecting creditors. Thomas H. Guy (H. D. Bailey, of counsel), for claimant. RAY, District Judge. On the 26th day of February, 1908, an involuntary petition in bankruptcy was filed against the above-named bankrupt, Howard E. Harper, by Peninsular Paint & Varnish Company, and this petition alleged that such company was a creditor of said Howard E. Harper. March 12, 1908, said Harper filed a voluntary petition in bankruptcy, and filed schedules in which he states that said Peninsular Paint & Varnish Company is a creditor to the amount of about $3,500, but also sets forth that the said company is indebted to him in the sum of $6,500. The nature of this last-mentioned alleged For other cases see same topic & § NUMBER in Dec. & Am. Digs. 1907 to date, & Rep'r Indexes indebtedness will be referred to later. On his voluntary petition Harper was adjudicated a bankrupt on the 16th day of March, 1908, and thereafter, and on the 27th day of March, 1908, the two proceedings were consolidated, and Harper was adjudicated a bankrupt under the involuntary petition, also without answer or objection. No issue was raised as to the validity of the claim of the Peninsular Paint & Varnish Company by Harper or any of his creditors. After adjudication and consolidation such proceedings were had that a trustee was duly appointed. He qualified and entered on the discharge of his duties. Thereafter the said company, hereafter called the "Peninsular Company," filed its duly itemized and verified claim with the referee. It is in due form, and is a valid proof of claim on its face. Certain creditors, at the first meeting of creditors, filed objections thereto; but, for the purpose of electing a trustee, it was temporarily allowed, with the understanding that later the trustee should file objections, so as to test the validity of the claim. On the 29th day of July, 1908, the trustee filed his petition for the re-examination of such claim of the Peninsular Company. September 23, 1908, said company moved for an order quashing the objection filed by such creditors and dismissing the said petition of the trustee. The motion was based upon the petitions and proceedings for adjudication, the schedules of the bankrupt, the proof of claim of the Peninsular Company, the objections thereto, the said petition of the trustee, certain testimony given by the bankrupt on his examination in the proceedings, and on the petition filed by the trustee for a settlement of the estate of such bankrupt. The referee denied the motion to quash the objections and dismiss the petition of the trustee to re-examine the claim of said Peninsular Company, and this proceeding for a review of that decision follows. The claim of the Peninsular Company, amounting to $3,391.17, after deducting payments and credits for discount, shortage, and merchandise returned between October 10, 1906, and October 23, 1907, is for goods, wares, and merchandise sold and delivered to said Harper between October 13, 1906, and July 18, 1907, "of the reasonable value and stipulated price of $6,272.87, no part of which has been paid, except the sum of $2,881.70, leaving a balance due, owing, and unpaid of $3,391.17, a statement of which account is hereto annexed and made a part of this proof; that said debt exists upon an open account and became due on the 5th day of June, 1907, that day being the average due date of the items of said account." The claim then proceeds as follows: "This deponent further alleges that heretofore, and in the month of November, 1907, an account was stated between the said Howard E. Harper and the Peninsular Paint & Varnish Company, Limited, and that upon such accounting it was fixed, determined, and agreed that the said Harper was indebted unto the said Peninsular Paint & Varnish Company in the sum of $3,391.17, together with the interest thereon, from the 5th day of June, 1907, which said sum and the interest thereon said Harper promised and agreed to pay; that no part of said debt has ever been paid; that there are no set-offs or counterclaims to the same; that no note has been received for said account; that no judgment has been rendered thereon; that said corporation has not, nor has any person by its order or, to the knowledge or belief of this deponent, for its use, had or received any manner of security for said debt whatever." |