Opinion
Argued April 14, 1890
Decided June 3, 1890
William Kernan for appellant. A.M. Mills for respondent.
The only question presented for our consideration and determination by this appeal is, whether the creditor of this insolvent corporation was entitled to prove and receive a dividend upon the full amount of the debt due from the insolvent estate; or, whether the receivers, as the personal representatives of the insolvent, could reduce the claim of the creditor, for the purposes of a dividend, by compelling a deduction, from the amount of the proved debt, of the value of collateral securities, or of any proceeds thereof. There are conflicting decisions upon this question in the courts of the United States, and in England, if we look back, up the current of opinions, we may find some differences in views. But the preponderance of authority is in favor of the view that the creditor has the right to prove and have dividends upon his entire debt, irrespective of the collateral security. In this state the precise question is without any controlling precedent. Two cases decided by the Special Term of the Supreme Court are to be found in the reports which, perhaps, bear upon the question. They arose under general assignments for the benefit of creditors, and are conflicting. It may be said, therefore, that the field is open to us for review and determination. I think we must conclude that the view which I have mentioned as having the weight of authority in its favor, is the one best according with the principles and established rules of equity jurisprudence, to which department of legal science the question pertains. Some confusion of thought seems to be worked by the reference of the decision of the question to the rules of law governing the administration of estates in bankruptcy; but there is no warrant for any such reference. The rules in bankruptcy cases proceeded from the express provisions of the statute, and they are not at all controlling upon a court administering, in equity, upon the estates of insolvent debtors. The bankruptcy act requires the creditor to give up his security, in order to be entitled to prove his whole debt; or, if he retains it, he can only prove for the balance of the debt, after deducting the value of the security held. The jurisdiction in bankruptcy is peculiar and special, and a particular mode of administration is prescribed by the act. To administer, in cases of insolvency coming within the jurisdiction of courts of equity, by analogy with the modes of bankruptcy courts is not required, and such precedents are not to be deemed as affecting any change in the rules established by courts of equity, for the marshalling and distribution of assets.
Suggestion is also made of a principle of equity as controlling upon the question. It is, that where the creditor has two funds of his debtor, to which he can resort for payment, and another creditor has a lien on one fund only, equity will compel a resort by the first creditor to that fund to which the lien of the other does not extend. But that is not exactly this case, nor is the principle, if it were, decisive. The author, whose statement of the principle is quoted from, has limited its application to such cases, where to compel the first creditor to resort to the one fund will not operate to his prejudice, or trench upon his rights. (Story's Eq. Jur. § 633.)
Judge STORY assigns as a reason for the application of the principle, that by so compelling the creditor to satisfy his claim out of one of the funds, no injustice is done to him in point of security or payment. The learned author's reason negatives the proposition that a secured creditor shall lose, or forego, any advantage, which he may have by reason of his security, and through which the fullest satisfaction of his debt can be obtained. In Evertson v. Booth (19 Johns. 485), SPENCER, Ch. J., held, with reference to the equitable rule invoked by the appellants here, that it is not to be enforced, if it will "in the least impair the prior creditor's right to raise his debt out of both funds." And he emphatically remarked: "I know of no principle of equity which can take from him any part of his security until he is completely satisfied." Where could any such principle have its origin? The agreement between the debtor and the creditor was that the debt should be paid. That debt is a definite quantity, and nothing less than its full amount can be said to be the debt. It is not altered or affected in its amount because the creditor may hold some collateral security. That is not a factor of the debt, but merely an incident to the debt. The very force and meaning of a collateral security are in the idea of a guaranty of the performance of the principal agreement, which was to pay the debt. The property, which a creditor holds as collateral to the indebtedness of his debtor, secures him to that extent, in case his debt is not paid in full by the debtor, or by his estate.
As between the creditor and his debtor, the latter could not compel the former to resort first to his collaterals before asserting his claim by a personal suit. The debtor has no control over the application of the collaterals. It is a general rule of equity that the creditor is not bound to apply his collateral securities before enforcing his direct remedies against the debtor. (Story's Eq. Jur. § 640; Lewis v. United States, 92 U.S. 618.) Then, on what principle can we hold that, because the debtor becomes insolvent, the contract with his creditor is changed, and that the creditor cannot, under those circumstances, enforce his direct claim against the debtor until he has realized on his securities? Is the rule capable of such inversion? I cannot see any reason in the proposition. I do not see why, in the absence of intervention by positive or statutory law, the engagements of the parties should be varied. If in bankruptcy another method was prescribed by the statute for the proof and payment of debts, it was a matter purely within the discretion of the federal legislature. Its constitutional right to establish uniform laws on the subject of bankruptcies throughout the United States, obviously, included the power to prescribe the mode of marshalling the insolvent's assets for distribution among creditors, and being the law of the country, it becomes a part of every contract. But this furnishes no reason why the established rules of courts of equity should be changed in the administration of the estates of insolvents.
In Kellock's Case (L.R. [3 Ch. App.] 769), decided in 1868, it was held that in the winding up of a company, under the Companies Act of 1862, a creditor holding security might prove for the whole amount due to him, and not merely, as in bankruptcy, for the balance remaining due after realizing upon or valuing his security. In Greenwood v. Taylor (1 R. M. 185), decided in 1830, it had been held that the practice in bankruptcy furnished a precedent which should be followed in the administration of assets; but in Mason v. Bogg (2 M. C. 448), decided in 1837, Lord Chancellor COTTENHAM said "that the principle which the decision in Greenwood v. Taylor professes to follow cannot be the principle of a court of equity, is further proved by the circumstances that in bankruptcy a particular mode is prescribed. A creditor may there prove, but then he must give up his security, or he may obtain an order that his security should be sold, and that he should prove for the difference. In equity, however, a party may come in and prove without giving up or affecting his securities, except so far as the amount of his debt may be diminished by what he may receive." Mason v. Bogg was a case of the administration of the insolvent estate of a deceased person, and Lord COTTENHAM further remarked, as to the rights of a mortgage creditor, "a mortgagee has a double security. He has the right to proceed against both, and to make the best he can of both. Why he should be deprived of this right because the debtor dies and dies insolvent is not very easy to see." Then Sir WM. PAGE WOOD, speaking in Kellock's Case ( supra) of the decision in Greenwood v. Taylor, said: "This court is not to depart from its own established practice, and vary the nature of the contract between the mortgagor and mortgagee by analogy to a rule which has been adopted by a court having a peculiar jurisdiction, established for administering the property of traders unable to meet their engagements, which property the court found it proper and right to distribute in a particular manner, different from the mode in which it would have dealt with in the Court of Chancery. * * * We are asked to alter the contract between the parties by depriving the secured creditor of one of his remedies, namely, the right of standing upon his securities until they are redeemed."
In this country we find that rule more generally prevailing, which allows the creditor holding securities to prove and to receive his dividend on the whole debt. It is asserted in Judge STORY'S work on Equity Jurisprudence (§ 524), and in the following cases: In re Bates ( 118 Ill. 524); West v. Bank of Rutland ( 19 Vt. 403); Moses v. Ranlet ( 2 N.H. 488); Findlay v. Hosmer ( 2 Conn. 350); Logan v. Anderson, (18 B. Monroe, 114). In Patten's Appeal (45 Penn. St. 151) it was held, in relation to an assignment made for creditors, that the unsecured creditor has no right to the benefit of the securities held by another creditor until that other's whole debt was paid. In Allen v. Danielson ( 15 R.I. 480), which was a case arising under an insolvent assignment, DURFEE, Ch. J., delivering the opinion of the court, said: "According to the decided weight of authority the rule is to allow creditors to bring in their claims in full and have dividends accordingly." That opinion is both well considered and able, and it deliberately overruled a prior decision of the court in the case of Knowles' Petition ( 13 R.I. 90). The learned chief justice admitted the error into which they had previously fallen, and remarked that they would have decided the case differently if they had then, as now, the same array of authorities presented, and that, in adopting the other view, not only the correct rule would be established, but a rule which was generally prevalent elsewhere.
The counsel for the appellants finds decisions by the courts of Massachusetts, Iowa and Maryland, which, undoubtedly, conflict with the views we incline to. But I think that, whether we look at this question in the light of reason, or of the adjudged cases, the rule which best commends itself to our judgment is that which leaves the contractual relations of the debtor and his creditors unchanged, when insolvency has brought the general estate of the debtor within the jurisdiction of a court of equity for administration and settlement. The creditor is entitled to prove against the estate for what is due to him, and to receive a dividend upon that amount. If the collateral securities are more than sufficient to satisfy any deficiency in the payment of the debt from the dividends, the personal representatives may redeem them for the benefit of the estate.
The order appealed from should be affirmed, with costs.
All concur (RUGER, Ch. J., in result) except EARL and O'BRIEN, JJ., taking no part.
Judgment affirmed.