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Salitan v. Magnus

Decided: October 6, 1958.

SAMUEL S. SALITAN, ET AL., T/A CREDIT INDUSTRIAL COMPANY, PLAINTIFFS-RESPONDENTS,
v.
FINN H. MAGNUS AND ELSIE A. MAGNUS, DEFENDANTS-APPELLANTS



On appeal from the Superior Court, Appellate Division.

For affirmance -- Chief Justice Weintraub, and Justices Heher, Burling, Jacobs, Francis and Proctor. For reversal -- None. The opinion of the court was delivered by Proctor, J.

Proctor

The Law Division of the Superior Court denied the defendants' motion for an order permitting them to file a third-party complaint. The Appellate Division affirmed. 48 N.J. Super. 168 (App. Div. 1957). We granted defendants' petition for certification. 26 N.J. 303 (1958).

On January 26, 1956 Samuel S. Salitan et al., trading as Credit Industrial Company, a partnership, instituted an action in the Law Division of the Superior Court against the defendants, Finn H. Magnus and Elsie A. Magnus, his wife, as guarantors for certain secured debts of the Magnus Harmonica Corporation. Prior to this action, on December 15, 1955 the corporation had filed a chapter X reorganization petition in the Federal District Court for New Jersey, and on June 25, 1956 was adjudged a bankrupt.

Mr. and Mrs. Magnus were respectively president and secretary of the corporation. The debts, which are the subject of this suit, stem from loans by the plaintiffs to the corporation secured by chattel mortgages, and from advances by the plaintiffs to the corporation on a factoring agreement secured by assignment to the plaintiffs of the corporation's accounts receivable. Since the commencement of this action the bankrupt's assets pledged pursuant to the factoring agreement and secured by the chattel mortgages have been liquidated by the trustee in bankruptcy, and the proceeds thereof

have been applied by him to discharge the principal due plaintiffs under the guaranteed obligation. However, the referee in bankruptcy disallowed the plaintiffs' claim to approximately $29,000 in post-bankruptcy interest and counsel fees, although the assets of the bankrupt estate subject to the plaintiffs' liens are more than sufficient to pay the above amount.

The referee found that the plaintiffs had overcharged the corporation on interest payments due under the factoring agreement. But because the corporation had not objected to this practice and since no fraud was present, the referee concluded that the trustee could not object and thus permitted the plaintiffs to recover interest to December 15, 1955, when the bankruptcy petition was filed. The referee denied the plaintiffs any interest or other charges accruing subsequent to that date, holding that "this matter seems to qualify for a balancing of the equities" and that it would be inequitable to allow "interest on interest items." On review, the Federal District Court affirmed the referee's findings as to the questions relating to interest. The court held that the awarding of interest in bankruptcy proceedings is a matter to be determined by the referee under federal law, consonant with a balancing of the equities between the creditors and debtor. In re Magnus Harmonica Corporation, 159 F. Supp. 778 (D.C.N.J. 1958). However, the matter was remanded to the referee to determine the question of counsel fees. Appeals by the plaintiffs and the trustee from the judgment of the District Court are now pending in the United States Court of Appeals. At the oral argument before this court it was agreed that counsel fees are no longer in controversy before us and that the amount claimed by the plaintiffs is now the same as they are seeking in the federal courts, approximately $23,000. Plaintiffs allege that this amount "represents a calculated balance after crediting defendants with all payments made to plaintiffs under the contracts from which liability springs."

On April 12, 1956 the Federal District Court, pursuant to defendants' application, enjoined the plaintiffs from further

prosecuting the present action. The United States Court of Appeals stayed the injunction on May 31, 1956, In re Magnus Harmonica Corporation, 233 F.2d 803 (3 Cir. 1956), and on October 31, 1956 reversed the judgment of the District Court, thus permitting plaintiffs to proceed in this action. 237 F.2d 867 (3 Cir. 1956). In the meantime, on July 18, 1956, the referee authorized the defendants to apply to make the trustee and the bankrupt estate third-party defendants in the Superior Court action. The order permitted the defendants "to allege therein [third-party complaint] that the bankrupt and its estate are primarily liable on the suretyship obligations forming the basis of the said suit and for such incidental relief as may be proper." However, the order contained the following limitation: "* * * process of execution shall not issue and no levy shall be made against the estate of the said bankrupt, on any judgment entered in said action in the State court, without the prior approval of this [bankruptcy] court, on notice to the Trustee in bankruptcy of the Bankrupt." The defendants then moved on August 7, 1956 before the Superior Court for an order granting them leave to make the trustee and the bankrupt estate third-party defendants to a third-party complaint and for an order staying all proceedings in the plaintiffs' action.

The proposed third-party complaint which accompanied the motion joined the bankrupt corporation, its trustee, and the plaintiffs as third-party defendants. It alleged that "defendants [third-party plaintiffs] are sureties on the plaintiffs' claims and as such are entitled to be exonerated and discharged therefrom by the third party defendants [bankrupt corporation and its trustee] * * * out of the assets in his [trustee's] possession pledged to secure plaintiffs claims * * * and that the plaintiffs be compelled to first resort to such pledged assets before seeking satisfaction from the defendants." The defendants also asserted that the plaintiffs' ...


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