Bankruptcyeffect of composition.

of a composition, and by § 21g (Comp. Stat. § 9605, 1 Fed. Stat. Anno. 2d ed. p. 757), a certified copy of the order of confirmation shall constitute evidence of the revesting of title. Thus, the order of confirmation becomes, in effect, a discharge, and is pleaded in bar with like effect. Cumberland Glass Mfg. Co. v. De Witt, 237 U. S. 447, at page 452, 59 L. ed. 1042, 1044, 35 Sup. Ct. Rep. 636. This citation is complete justification for the common dictum that a composition is a discharge pro tanto; i. e., the bankrupt is discharged from all those debts which have been properly treated in the composition order, except that fraction thereof which he has agreed to pay.

-effect of con

position.

Under § 12e (Comp. Stat. § 9596, 1 Fed. Stat. Anno. 2d ed. p. 651), upon the confirmation of a composition, "the consideration shall be distributed as the judge shall direct, and the case dismissed." Only when the composition is firming com- not confirmed shall the estate be further administered in bankruptcy; and this court has held that with the signing of the order of confirmation the bankruptcy court loses jurisdiction. Re Hollins, 151 C. C. A. 637, 238 Fed. 788. The only power left in the bankruptcy court, after signing the confirmation order, is to set the composition aside within six months, for the reasons, and only the reasons, set forth in § 13 (Comp. Stat. § 9597, 1 Fed. Stat. Anno. 2d ed. p. 652). Re Eisenberg (D. C.) 148 Fed. 325.

It is now urged that a composition regular in form, not produced by fraud, wherein the consideration has been deposited and distributed as required by law, and where the original bankruptcy proceeding has accordingly been dismissed, is nevertheless imperfect and in a sense inoperative (if the consideration consist in part of promissory paper), unless promises of deferred payment are made good. It is further said that such failure to make

good the promise to pay in futuro revives the original debt, i. e., the very debt that is the subject-matter of composition.

The argument in favor of this proposition has two parts: (a) That a composition is to be treated as at common law; or (b) that the true construction of the statute produces a result identical with that of the Bankruptcy Act of 1867 (14 Stat. at L. 517, chap. 176). It is undoubted that a common law, where a debtor and his creditors agreed to discharge the claims of the latter in consideration of a partial payment, the debtor was only discharged upon performance; and this was true, whether the performance was to be in præsenti or futuro. The transaction was a kind of accord and satisfaction; wherefore, if satisfaction was absent, the original debt revived. But the promisee could elect whether to sue on his original cause of action or on the new contract. This is pointed out admirably in Beck v. Witteman Bros. 185 App. Div. 643, 173 N. Y. Supp. 488, where the court expressed the opinion that this doctrine was applicable to bankruptcy compositions under the Act of 1898. We have no doubt that the court intended to express the foregoing as its view of the whole matter, although the exact question was whether a plea of composition was a good bar, when it was not shown

that there had been either a distribution of the consideration or an order of confirmation.

That a composition not carried. out according to its terms revived the original debt under the Act of 1867 is true, though it would be more accurate to say that such incompleted composition never canceled, discharged, or barred the original debt. This was a necessary consequence of the language of that act, which, as originally enacted, contained no provision whatever for compositions. They came into the statute by the Amendment of 1874. 18 Stat. at L. 182, chap. 390.

Cf. Re Scott, Fed. Cas. No. 12,519, 15 Nat. Bankr. Rep. 73.

Under this amendment, literally construed, cash only could be the consideration of a composition; but business necessities compelled a somewhat astute construction of the statutory language, so that compositions payable by instalments, with the instalments secured by notes, raised questions similar to the one at bar. Re Langdon, 2 Low. Dec. 387, Fed. Cas. No. 8,058, 13 Nat. Bankr. Rep. 60. But over such compositions with deferred payments the court never lost jurisdiction. It retained, until composition had been completed in respect of payment, what Wallace, J., well called "supervisory jurisdiction," and could "enforce the composition as against creditors or as against the debtor." Ransom v. Geer (C. C.) 12 Fed. 607. If at "any time" it appeared to the court that such composition could not "proceed without injustice or undue delay to the creditors," the court could "refuse to accept and confirm such composition, or set the same aside," in which case the bankruptcy proceeded. Act of 1874, supra. In other words, such a thing as a confirmed composition prior to its actual fulfilment by payment was an impossibility under the Act of 1867.

Under the present statute the case is wholly different, as above shown. The duty of the court is fulfilled, and the power of the court is exhausted, with the entry of the order of confirmation, and under the specific language of § 12d (Comp. Stat. § 9596, 1 Fed. Stat. Anno. 2d ed. p. 648), the judge "shall confirm a composition" if circumstances are made to appear such as existed in this matter of Mirkus under the first petition; i. e., that the debtor had made an offer of cash and notes, that the creditors were satisfied therewith, that the cash and notes had been deposited, that the matter was done in good faith, and that the bankrupt had done nothing which would "bar his discharge."

This last phrase is a powerful ar

gument in favor of the similitude between a confirmed composition and a discharge granted; the tests for barring discharges are identical with those barring compositions. It follows that, if the reasons against confirming a composition are the same as those against granting a discharge, the effect of avoiding such reasons for refusal is also the same. Consequently, the statute, in § 1 (12), being Comp. Stat. § 9585, 1 Fed. Stat. Anno. 2d ed. p. 511, defines "discharge" as meaning "the release of a bankrupt from all of his debts which are provable in bankruptcy, except such as are excepted by this act;" and § 14c (Comp. Stat. § 9598, 1 Fed. Stat. Anno. 2d ed. p. 703) specifically declares that the confirmation of a composition "shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge.

The

This narrows the inquiry to asking what is meant by the phrase, debts "agreed to be paid by the terms of the composition." statute does not say those which are actually paid in cash, but those which are "agreed to be paid;" and this is but another way of saying (especially in respect of the acceptance of promissory paper) that the agreement to pay is fulfilled by the delivery of the paper-the paper is the agreed method of paying.

The similitude between discharges and compositions is utterly destroyed, if the original debt revives upon failure to pay promissory paper. We pay no attention to the point that in this instance the paper was indorsed, so that there was an additional consideration for the composition. It is undoubted that a discharge loses none of its efficacy if, after the time for revocation. thereof has passed (§ 15 [Comp. Stat. § 9599, 1 Fed. Stat. Anno. 2d ed. p. 703]), fraud is discovered which would have barred the discharge if found out in time, or that a composition loses its value if, after the time for setting it aside has

passed (§ 13 [Comp. Stat. § 9597, 1 Fed. Stat. Anno. 2d ed. p. 652]), fraud is discovered; yet it is thoroughly set aside and held for naught by the present contention, merely by the misfortune of a second insolvency,

Finally, if the policy of the act, or perhaps the spirit of the times, be regarded, the argument for this appeal fails. It is a commonplace that the Act of 1898 is far more generous to debtors than any previous bankruptcy statute; it intends to encourage a hopeful continuance in business. A failing debtor who finds sufficient favor with his creditors to effect a composition under the act is thereby, in the opinion of every business man, rehabilitated, with a markedly diminished mass of liabilities. He is encouraged to go on, to obtain new credit, and incur new indebtedness. If thereafter that occurs which has occurred in this case, and the debtor finds himself unable to pay both the instalments of his old indebtedness represented by composition notes, and his obligations to new and confiding creditors, it is not in accord with the spirit of the act, or the business

made a composition on time, to count as a possible creditor for the full amount everyone who had come into the composition.

The foregoing considerations appealed to the court in Jacobs v. Fensterstock, 118 Misc. 266, 193 N. Y. Supp. 827, and are set forth in the able opinion of Gavegan, J., on which opinion the case was affirmed in 202 App. Div. 795, 194 N. Y. Supp. 947. With the reasoning and conclusion of this decision we agree; also, with the views expressed by the latter court in Wood & Selick v. Vanderveer, 55 App. Div. 549, at 552, 67 N. Y. Supp. 371.

It may be observed of certain cases cited by appellant, or in the Beck Case, that Re Kinnane Co. (D. C.) 221 Fed. 762, discusses the matter obiter, with reference solely to decisions under the Act of 1867. With the opinion of Mr. Loveland on this subject, contained in his work on Bankruptcy, we do not agree, and think it well treated in the opinion in the Jacobs Case. Re Carton (D. C.) 148 Fed. 63, and Re Eisenberg (D. C.) 148 Fed. 325, relate to entirely different matters; Carton to a common-law composition, and Eisenberg to an effort, in substance, to set aside a composition after the expiry of six months. The references there made to the question now at bar are hypothetical dicta only; that the hypothesis implied debatable legal matter is perhaps shown by this case, and the history of decisions above given. Order affirmed, with costs.

As to binding effect of promise to pay debt discharged in bankruptcy, where compromise was made by bankrupt with creditors, see annotation in 1 A.L.R. 1704.

Although, under the Federal Bankruptcy Act of 1867, as amended in 1874, the fact that a composition was

not carried out by payment of the consideration, in effect, revived the original obligation, it seems, as is held in the reported case (RE MIRKUS, ante, 435), that the situation as presented by the Act of 1898 is so different that the decisions under the earlier act should not be regarded as authorita

tive under the later act, the phraseology of which differs materially from the prior provisions. However, the later act leaves the question open to some doubt, which has not as yet been definitely determined by the Supreme Court of the United States. In fact there is a decided conflict of authority upon the question, some courts maintaining that noncompliance upon the part of the bankrupt with the terms of the composition agreement has the effect of reviving the original debt, while other courts, with equal positiveness, maintain that a failure to comply with the terms of the composition does not revive the original debt, but merely gives him a right of action based on the composition. However, it is worthy of note that the judicial statements and decisions which support the revival rule either consist largely of obiter, or else have been in effect overruled by later and more authoritative decisions of the courts of the same jurisdictions.

To the effect that the failure of a bankrupt to carry out a confirmed composition agreement does not revive an original debt discharged pursuant to

14c of the Federal Bankruptcy Act of 1898, which declares that the confirmation of a composition "shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition, are RE MIRKUS (reported herewith) ante, 435; Re Maytag-Mason Motor Co. (1915) 223 Fed. 684, 35 Am. Bankr. Rep. 160; Kobre Assets Corp. v. Baker (1917) 178 App. Div. 62, 164 N. Y. Supp. 597, affirmed in (1917) 221 N. Y. 616, 116 N. E. 1056; Jacobs v. Fensterstock (1923) 236 N. Y. 39, 139 N. E. 772, 1 Am. Bankr. Rep. N. S. 14, affirming (1922) 202 App. Div. 795, 194 N. Y. Supp. 947, which affirmed on opinion below (1922) 118 Misc. 266, 193 N. Y. Supp. 827; Wood & Selick v. Vanderveer (1900) 55 App. Div. 549, 67 N. Y. Supp. 371, 3 N. B. N. Rep. 345, reversing (1900) 31 Misc. 557, 65 N. Y. Supp. 521; and American Can Co. v. Schenkel (1920) 110 Misc. 345, 180 N. Y. Supp. 102.

Thus, in a number of instances, it has been stated that, if the considera

tion for a confirmed composition which acts as a discharge has not been paid by the bankrupt, the remedy of the creditor for the recovery thereof is against the bankrupt, as on a new cause of action which is not affected by the discharge. Re Maytag-Mason Motor Co. (1915) 223 Fed. 684, 35 Am. Bankr. Rep. 160; Kobre Assets Corp. v. Baker (1917) 178 App. Div. 62, 164 N. Y. Supp. 597, affirmed in (1917) 221 N. Y. 616, 116 N. E. 1056; Wood & Selick v. Vanderveer (1900) 55 App. Div. 549, 67 N. Y. Supp. 371, 3 N. B. N. Rep. 345, reversing (1900) 31 Misc. 557, 65 N. Y. Supp. 521; American Can Co. v. Schenkel (N. Y.) supra.

And in Jacobs V. Fensterstock (1923) 236 N. Y. 39, 139 N. E. 772, 1 Am. Bankr. Rep. N. S. 14, affirming (1922) 202 App. Div. 795, 194 N. Y. Supp. 947, which affirmed (1922) 118 Misc. 266, 193 N. Y. Supp. 827, in holding that a failure to pay composition notes does not revive the original debt, the court of appeals said: "The plaintiff argues, first, that the words in § 14, those agreed to be paid by the terms of the composition,' mean the original debts which are to be settled by the composition, and, second, that on general and familiar principles a debtor's note given to settle a debt does not operate as a payment unless it is actually paid. The defendant, on the other hand, claims, and it has thus far been held, that the words 'those agreed to be paid by the terms of the composition' mean, in such a case as this, the notes which are given on the composition, and that the composition acts as a settlement and discharge of all the old debts. While the language may be somewhat ambiguous, we think that, construed in the light of the well-known purposes of a bankruptcy law, the contention of the defendant is correct. As we all understand, the purpose of a bankruptcy law is to give a debtor relief from his debts, and to enable him to 'start over' in business, provided he is honest and turns over all of his property not exempt for the benefit of his creditors. Then there has been ingrafted on this theory the idea that many times it will be better to let the

debtor keep his business and property rather than to liquidate it, provided he will pay to his creditors, either in cash or by obligations, all that he can afford to; and hence the provisions for a composition. The underlying thought is always that the debtor, either by turning over all of his property, or by making a composition, shall be relieved of the incubus of his old debts, and shall be permitted to face the future in business from the situation which is created by the Bankruptcy Law, and this would plainly mean, in the case of a composition, that he would be relieved of his old debts and would simply have the burden of paying the notes which were given under the composition. The composition thus would operate as an absolute settlement and discharge of his old debts, and leave hanging over him only the new ones which were created by the composition, and the failure to pay these would not revive the original debts, as would be the case in an ordinary settlement, or common-law composition."

And the trial court, in this case, in discussing the question as affected by the rights of subsequent creditors, argued as follows: "Assume that under a composition in bankruptcy it has given long-term notes. Should not those who extend it credit, thus making possible the continuation of business and earnings, for the benefit of the holders of the composition notes as well as of all others concerned, have the assurance absolute that its old indebtedness has been reduced to the total of the note issue? Or should they be entrapped, if the business is again unsuccessful, and find that the assets are to be applied not merely upon the new indebtedness and the notes, but upon the new indebtedness and the old indebtedness, less the amount of the cash paid in the composition proceedings? It is only fair that the new creditors should be allowed to deal with the debtor on the safe assumption that the total amount of its indebtedness has been reduced, as indicated by the proceedings in the bankruptcy court. Otherwise, it could not obtain new credit, and the entire

plan would be faulty and doomed to failure. With practically all its old indebtedness contingently outstanding, and interest charges thereon accumulating, and in view of the injurious effect of its failure, there would seldom be any promise for the future success of the debtor. With that prospect a composition would hardly be favored, excepting where the debtor's business is not to be continued, in which case the composition might be adopted as a short method of liquidation. These observations indicate that it is by no means always in the contemplation of the parties that the failure to pay composition notes will revive the old indebtedness. I believe they also indicate the erroneous reasoning of many discussions on this subject. Debtors in bankruptcy are frequently allowed to resume business by creditors who take composition notes where, in view of the assets and the debts, it is evident that the creditors intend to accept the composition settlement in full and final payment. If they rely on the language of the statute, they will find nothing to encourage any other view."

And in the reported case (RE MIRKUS, ante, 435) the court, in support of its conclusion that failure to pay promissory notes which were a part of the consideration of a composition in bankruptcy did not revive the debt discharged by the confirmance of the composition, pointed out not only that § 14c is not in terms confined to debts which are paid in cash, but specifically relates to those which are "agreed to be paid," as by the giving of notes, but also that the policy of the act would be violated by a holding which would subject property which the bankrupt has accumulated on his new credit, to the payment of his old indebtedness, which his new creditors had good reason to believe was discharged by the confirmation in bankruptcy of the composition.

But, as above stated, there is some authority to the effect that failure to carry out a confirmed composition agreement revives the original debt. Re Kinnane Co. (1915) 221 Fed. 762, 34 Am. Bankr. Rep. 119 (dictum, cit