The opinion of the court was delivered by: MADDEN
This matter is before the Court on a Petition for Review filed by the New Jersey Bank and Trust Company, a judgment-creditor of the above named bankrupts, respondents herein. The petitioner (hereinafter referred to as the 'bank') seeks a review of an Order of the Referee in Bankruptcy, dated September 19, 1961, which restrains the bank from proceeding with the enforcement of the judgment it recovered against the respondents in the Law Division of the Superior Court of New Jersey prior to bankruptcy.
Briefly, the facts are as follows:
On May 20, 1955, the respondents, William T. Johnson and Grace B. Johnson, executed and delivered a promissory note in the amount of $ 2,860.20 to the Atlas Building Corp. for a home improvement loan. The note was payable at the Passaic Clifton National Bank and Trust Company (now known as the New Jersey Bank and Trust Company, petitioner herein) in monthly installments of $ 47.67 for 60 months commencing on June 20, 1955. On January 31, 1957, the respondents executed and delivered a second note in the amount of $ 329.52 to the American Home Service Co., Inc. also for a home improvement loan, which note was payable at the Passaic Clifton National Bank and Trust Company in monthly installments of $ 13.73 for 24 months commencing on April 5, 1957.
Shortly thereafter, the respondents became in default on both notes whereupon the bank instituted suit in the Law Division of the Superior Court of New Jersey. Service of the summons and complaint was made upon the respondents on September 24, 1957. The complaint consisted of four counts. On the first count, the bank sought recovery for money due in the sum of $ 344.75 on the note of January 31, 1957; on the second count, the bank sought recovery for money due in the sum of $ 1,936.22 on the note of May 20, 1955; on the third count, the bank alleged the respondents had made certain untrue representations to the bank in order to secure in monies loaned and sought recovery for legal services in the sum of $ 450.00 in addition to the aforementioned sums; and on the fourth count of the complaint, the bank alleged the respondents were the owners of certain land and building which they were about to sell and convey with intent to hinder, delay and defraud the bank in the recovery of its claim and in asserting its lien against the property for the monies loaned which were used in the construction and improvement of the property. The complaint contained a demand for a judgment for $ 3,000.00, costs, a judgment in fraud, a lien upon the property and an injunction against the sale thereof.
The respondents, through counsel, filed an answer to the complaint wherein they admitted that the bank was a holder in due course of the notes but denied the remaining allegations of the complaint. Thereafter, the bank sent a notice, dated December 26, 1957, by certified mail, to the respondents advising them that it intended to apply on January 10, 1957 (sic), to the court:
'(a) To strike the answer to the first and second counts, upon the grounds that the same is sham and filed for the purpose of delay; and
'(b) For entry of judgment in fraud on the complaint filed herein.
'AND TAKE FURTHER NOTICE, that in support of said motion the following affidavit and the papers on record will be used.'
On the return date of the motion the respondents failed to appear and the court set down May 20, 1958, as the date the matter would be heard. On May 20, 1958, the bank appeared before the court and presented its proof in the matter as a result of which a judgment based in fraud was entered in favor of the bank and against the respondents in the sum of $ 2,080.97, together with interest from September 10, 1957 in the amount of $ 83.20, making a total of $ 2,164.17. The respondents were neither present nor represented at this hearing.
On May 20, 1960 and on May 23, 1960, the respondents, William T. Johnson and Grace B. Johnson, respectively, filed voluntary petitions in bankruptcy wherein the bank was listed as a creditor and given notice thereof. On September 16, 1960, the Referee in Bankruptcy entered orders discharging both respondents from all debts and claims which, by the Bankruptcy Act, are made provable against their estates except such debts as are, by said Act, excepted from the operation of a discharge in bankruptcy. The bank neither filed a claim with the Referee nor objected to the respondents' discharge, but, instead, pursued proceedings in the State Court for the enforcement and payment of its judgment.
On May 19, 1961, the respondents filed a petition with the Referee in Bankruptcy for an order to show cause why the bank should not be restrained from pursuing state court proceedings to enforce its judgment and the respondents granted further relief that may be just and equitable. In their petition the respondents allege, inter alia, that they listed the judgment debt owing to the bank in the schedules of their bankruptcy petitions; that the bank had notice of the bankruptcy proceedings; that they were ultimately granted discharges in bankruptcy; that the judgment debt owing to the bank was discharged; and that the bank harassed them and continued to harass them after discharge.
The Order to Show Cause was granted and a hearing thereon was held before the Referee in Bankruptcy on June 12, 1961. At the hearing the bank objected to the jurisdiction of the Referee not only to hear the matter but to look behind the judgment of the state court and determine the dischargeability of the same.
The Referee, nevertheless, carefully inquired into the prior proceedings before the State Court, including the record and the transcript of the hearing, and into other facts relevant to the proceeding before him. As a result of this inquiry the Referee determined he had jurisdiction to hear the matter and to determine the dischargeability of the State Court judgment. In the Opinion of the Referee, dated September 15, 1961, it was ultimately concluded:
'I am satisfied that this court should exercise its authority to restrain action by the Bank under the judgment rendered against the bankrupts in the State Court and permit determination through this court as to whether the debt is one of a non-dischargeable nature under the provision of Section 17 of the Bankruptcy Act (11 U.S.C. 35). Local Loan Company v. Hunt, supra (292 U.S. 234, 54 S. Ct. 695, 78 L. Ed. 1230).
'The Bank may, if it believes it is the holder of such an obligation, file with this court a petition and order to show cause directed to the bankrupts why the debt to it should be declared not discharged, and the matter will be heard.
An order was entered on September 19, 1961, in conformity with the Opinion of the Referee but no further application was made by the bank until September 28, 1961, when ...