4. BANKRUPTCY 386-COMPROMISE OF CLAIMS-FAILURE TO CARRY OUTRESTORATION.

Where, pursuant to a proposed compromise of a controversy over stock, which a bankrupt claimed to have transferred to his wife, under which $40,000 was to be paid to the trustee, the wife was to withdraw a claim against the estate, the trustee to discontinue an action to recover the stock, and creditors to withdraw their objections to the bankrupt's discharge, the payment was made, and the wife's claim released in reliance on the trustee, or the person who proposed the compromise, being able to secure the withdrawal of the objections to the discharge, but such objections were not withdrawn, equity required that such payment and release should be returned.

[Ed. Note. For other cases, see Bankruptcy, Cent. Dig. § 606; Dec. Dig. 386.]

Petition to Revise and Appeal from Orders of the District Court of the United States for the Western District of New York.

This cause comes here in two aspects: First, on petition to revise an order of the District Court, Western District of New York, approving a proposed compromise; and, second, on appeal from an order granting bankrupt's discharge.

See, also, 199 Fed. 247.

W. F. Lynn, of Rochester, N. Y., for petitioner and appellant.

H. W. Rippey and W. W. Armstrong, both of Rochester, N. Y., for appellees.

Before LACOMBE, COXE, and ROGERS, Circuit Judges.

LACOMBE, Circuit Judge. [1, 2] At the time of the bankruptcy, August 7, 1908, 275 shares of the stock of the Mohawk Condensed Milk Company stood in bankrupt's name on the books of the company. Bankrupt contends that these were conveyed to his wife by written assignments dated December 24, 1897 (270 shares), and January 6, 1908 (5 shares). There was conflicting evidence as to the authenticity of these assignments. Apparently the certificates of stock had been transferred in blank, because prior to August 8, 1908, they had been deposited with the Genesee Valley Trust Company as collateral to a loan of about $47,000 to Robert A. Badger, a friend of the bankrupt, who was endeavoring to assist him in his financial difficulties. It does not seem to be disputed by any one that the value of the stock greatly exceeds the sum for which it was pledged as collateral. Mrs. Doyle, the bankrupt's wife, filed a claim against his estate for upwards of $76,000. The bankrupt made application for discharge (July 5, 1909), to which specifications of objections were filed. Subsequent to bankruptcy the Milk Company increased its stock and 68 shares were allotted to Badger as holder of the 243 shares. Badger borrowed $10,200 additional from the Trust Company to pay for them, pledging the 68 shares as collateral. Still later the Milk Company declared a stock dividend, of which 343 shares was received by Badger as holder of the other 343 (275 plus 68) and turned over to the Trust Company as collateral to its loans.

On October 7, 1912, the trustee commenced an action in the Supreme Court of the state against the Trust Company to recover the 686 shares

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

of stock, claiming that it was property of the bankrupt and offering to pay the indebtedness to the Trust Company. The special master, to whom the matter had been referred, reported against discharge on February 21, 1912. Upon application for review in the District Court, Judge Hazel filed an opinion sustaining the special master as to two of the specifications and refusing discharge on September 12, 1912. Before order was entered on such opinion, application was made on affidavits for a rehearing. Subsequent to September 12, 1912, and before rehearing was ordered on August 26, 1913, the proposed compromise was prepared and submitted at a meeting of the creditors. The special master reported that 44 claimants did not vote at all, although some of them were present; that of those who voted 26 favored the compromise, and 11 rejected it; that "the amount of money represented by those in favor of the compromise is far in excess, several times the amount of money represented by those who were present and voted 'no,' and the number who voted 'yes' also exceeds in amount the number who have failed to vote, with the exclusion of Mrs. Doyle."

The proposed compromise, which the District Judge approved, provided as follows:

(1) Badger, who proposed the compromise, for the expressed reason that he was "desirous of compromising and settling the trustee's action and procuring the discharge of the bankrupt and the distribution of his bankrupt estate," was to pay the trustee $40,000 in cash.

(2) Mrs. Doyle was to withdraw her claim against the estate and execute all necessary releases thereof.

(3) The trustee was to discontinue the action to recover the stock which Mrs. Doyle claimed she owned.

(4) There should be an approval of the proposed settlement by a majority of the creditors.

(5) Such creditors as have heretofore filed objections to the discharge of said Michael Doyle shall waive and withdraw the same, and no further objection to his discharge shall be made.

This seems to us an entirely proper adjustment, if it can be carried out in its entirety, and we find no error in the court's approval.

The appeal from the order of discharge presents a more complicated situation. There were specifications of objections to discharge. filed by various creditors, who, as the special master states, "represented more than half of the valid claims filed, with the exception of the claim of the bankrupt's wife." There were six different specifications of objection, and the special master sustained them all. The District Court reversed the master as to all except Nos. 4 and 5, as to which on September 13, 1912, it sustained him. These specifications dealt with two alleged assignments of property, the Milk stock being one of them. The master discussed the testimony at considerable length, and so did the court, which gave its reasons for holding upon the facts proved that the averments of objectors had been proved.

Subsequent to decision, and before order was signed, the court granted an order to show cause why there should not be a rehearing. On the return day, the proposed settlement being before the court, a rehearing was ordered upon condition that the action by the trustee to recover the stock be compromised and settled upon the terms and

conditions "hereinafter stated"; such statement enumerating all the provisions of the proposed settlement, except No. 5.

Upon the rehearing there was presented a petition showing that the "trustee has received said money and said papers"-i. e., the $40,000 and release of Mrs. Doyle's claim-provided for in clauses 1 and 2. It also appeared that a large majority of the creditors had voted approval of the proposed settlement. Thereupon the court made an order overruling all objections to the discharge and granting the same. It appears that the proposed settlement was not carried out according to its terms. Clauses 1, 2, 3, and 4 were carried out, but 5 was not. No creditor, who had filed objections to discharge, withdrew them. From the language of the orders granting rehearing and granting discharge, it might be inferred that the court was under the impression that the proposed settlement had been fully carried out. If it had been, further consideration of the objections would, of course, be unnecessary, there would be none left to consider, and an order of discharge would be proper. It is, of course, possible that the 'court made its order, not because it supposed the proposed settlement had been fully carried out, but because upon reconsideration of the evidence before the special master it was satisfied that the stock in question did not belong to the bankrupt. If the former of these postulates be correct, the order should be reversed, for there certainly was evidence, referred to in Judge Hazel's opinion, to sustain the original finding of the master and the court that the stock was the property of the bankrupt, and the record shows that objections were not withdrawn, as clause 5 of the compromise assumed they would be.

[3] If the other postulate be correct, then this court should examine the testimony to see if the court was in error in reversing the master's findings as to this specification (and also specification 5). But we should not be required to make this examination until we are advised whether the master and the court are in accord or not as to the merits of these specifications. An objecting creditor, who has filed specifications against discharge and not withdrawn them, is entitled to be heard here on their merits. His rights cannot be prejudiced, on that branch of the case, by the vote of a majority of the other creditors expressing satisfaction with a proposed compromise of conflicting claims.

[4] The case is further complicated by the circumstance that the bankrupt and his wife, who claims to own the stock, have never received the full consideration they bargained for when they agreed to the proposed settlement. It is hardly to be assumed that they would have procured a payment of $40,000 cash to the trustee and released the wife's claim, if they still had to persuade the court that specifications of objections to discharge were unsound. If, contrary to the provisions of clause 5, they have to make that fight here, equity requires that the cash and releases they turned over in reliance on the trustee or Badger being able to secure performance of clause 5 should be returned; the trustee's suit being reinstated.

The order is reversed, and the cause remanded to the District Court, with instructions to amend its order by inserting findings whether or

not the specifications of objections Nos. 4 and 5 are sustained by the proofs, and then to make such order touching petition for discharge as it may be advised. When this is done, the precise question to be decided here will be presented, without the uncertainty which now obscures it.

(220 Fed. 438)

SMYTH v. SUPREME LODGE, K. P.

(Circuit Court of Appeals, Second Circuit. January 12, 1915.)

No. 68.

1. INSURANCE 718-MUTUAL BENEFIT INSURANCE-CONSTITUTION AS Part OF CONTRACT.

A provision in an application for membership in a fraternal benefit society that the contract should be controlled by all the laws, rules, and regulations of the order then in force or thereafter enacted did not make a constitution adopted shortly prior to the contract a part of the contract, unless it had been promulgated and was called to the attention of applicants for insurance, or at least such applicants as asked to be shown the laws, rules, and regulations by which they were agreeing to be controlled.

[Ed. Note. For other cases, see Insurance, Cent. Dig. § 1854; Dec. Dig. 718.]

2. INSURANCE 819-MUTUAL BENEFIT INSURANCE-CONSTITUTION AS PART OF CONTRACT-EVIDENCE

In a suit to enjoin the cancellation of a benefit insurance certificate, evidence held to show that complainant was asked to contract and did contract on printed representations that a constitution, which provided that the assessments for a person of complainant's age were $3 a month, was the basis of the contract; and hence a later constitution, providing that the assessments were $3 a month unless otherwise provided by the Supreme Lodge, was not a part of the contract.

[Ed. Note. For other cases, see Insurance, Cent. Dig. §§ 2006, 2007; Dec. Dig. 819.]

3. INSURANCE

719-MUTUAL BENEFIT INSURANCE-CHANGE IN LAWSAMOUNT OF ASSESSMENTS.

A provision of a benefit insurance contract that insured would be controlled by all the laws, rules, and regulations then in force or thereafter enacted did not authorize a change in assessments from $3 to $14.70 a month.

[Ed. Note. For other cases, see Insurance, Cent. Dig. § 1855; Dec. Dig. 719.

Mutual benefit insurance contracts as affected by subsequent provisions and amendments of charter, constitution, or by-laws, see note to Supreme Council, A. L. H., v. Champe, 63 C. C. A. 285.]

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

This cause comes here on appeal from a decree of the District Court, Northern District of New York, holding that a certain policy of insurance issued by defendant to complainant was in full force and effect and enjoining defendant from canceling the policy. The opinion of the District Court will be found in 198 Fed. 967.

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

J. P. Goodrich, of Indianapolis, Ind., and J. J. McCall, of Albany, for appellant.

R. J. Sanson, of Amsterdam, for appellee.

Before LACOMBE, COXE, and ROGERS, Circuit Judges.

LACOMBE, Circuit Judge. The policy in question was issued November 8, 1889, for $3,000, complainant to pay assessment of $3 each month. It is that kind of policy under which the fund to pay death losses consists of the assessments on survivors of the insured's class and contains a provision that if at the time of death the proceeds of one assessment on all members of the class shall not be sufficient to pay the endowment stipulated for in full, then the amount paid shall be equal to the proceeds of one full assessment on all remaining members of the class, less 10 per cent. for expenses.

Complainant paid his monthly $3 assessments as they came due, until December, 1910, when defendant notified him that unless he surrendered his policy and accepted another containing different terms and agreements, and paid $14.70 per month, instead of $3, his policy would be canceled. This notification was based on a clause in complainant's application, which was made a part of the contract, providing that the "contract shall be controlled by all the laws, rules, and regulations of the order governing this Rank, now in force, or that may hereafter be enacted by the Supreme Lodge." The increase of assessment was provided for in amendments to the constitution and by-laws adopted some years after complainant's insurance was effected.

The facts are stated at great length and in minute detail by Judge Ray and need not be repeated here. In the constitution as it stood in 1886, article IV provided that each member of the Endowment Rank (insurance class) shall pay the assessment provided in a table included in the article ($3 for a person of complainant's then age) "each month thereafter as long as he remains a member of the Endowment Rank." It is contended that in 1888 the article was amended by adding after the passage quoted supra the words "unless otherwise provided for by the Supreme Lodge." The argument is that because the constitution, which was made a part of the contract, provided that another sum than $3 a month might be assessed on each member at the option of defendant, and because the assessment had been increased as above stated, complainant was bound to pay at the increased rate or forfeit his policy.

[1] The difficulty with this syllogism is found in its major premise. In the first place, the testimony offered to prove that the constitution was amended in 1888 is very unsatisfactory. The sole witness, examined in 1912, was at the time secretary of the defendant. In 1888 he was not secretary, and was 13 years old; he had no personal knowledge of its affairs at that time. The original constitution provided that the constitution might be "altered or amended at any regular session of the Supreme Lodge by a two-thirds vote." The witness was examined in Indianapolis, where the office of defendant was located. He stated that he had in his possession the original minutes, records, and journal, but no part of the minutes of the session June 12 to 23, 1888, at which 137 C.C.A.-3