73 N.J. Eq. 205 | New York Court of Chancery | 1907
The defendant corporation was adjudged insolvent and Jerome Taylor appointed its receiver, October 17th, 1904, on which date the company owed the Consolidated National Bank of New York $53,440.18, to secure the payment of which it held as collateral security, pledged to it by 'the debtor, warehouse receipts for tobacco in storage.
An order made in the cause required all creditors to make proof of their respective claims before the receiver not later than March 9th, 1905, and the appellant, on March 5th, 1905, presented its claim for the frill amount of the indebtedness as it stood on the day the defendant corporation was decreed to be insolvent, and a receiver appointed. The claim disclosed that after insolvency, and before the claim was presented, $21,020.24 has been realized from a portion of the collateral. Three dividends have been declared by the receiver, one of seven per cent., April 11th, 1905, another of three per cent., June 6th, .1905, calculated upon the balance due this appellant after deducting the amount realized from the collateral. Between the date of the second dividend and the declaration of the third, August 9th, 1906, the appellant had realized from the collateral the further sum of $16,416.53, the aggregate of receipts from the collateral being $37,436.77, leaving a deficit of $16,003.41, upon which latter sum the receiver based his calculation in ascertaining the amount to be clue to the appellant on account of the third dividend. The appellant protests against this method of distribution, insisting that its dividend should be based upon the total amount of its debt on the day insolvency was decreed, claiming that the collateral was given to secure, not a portion, but the whole of the debt, and that it is entitled to withhold the application of its collateral until the general as
This question has been carefully considered and passed upon by the federal courts of this country, and the rule has been established there, that a creditor, proving its debt against an insolvent estate, is entitled to dividends thereon without being subject to any deduction for the proceeds of any collateral held as security therefor, received after the date of adjudicated insolvency.
In the well-considered case of Chemical National Bank v. Armstrong, 59 Fed. Rep. 372, Judge Taft carefully reviews the whole subject, holding that the rule in bankruptcy which required a creditor, if he would prove his claim in full, to surrender his collateral, was not the rule in equity, because it ignored the rights belonging to secured creditors before bankruptcy, and modified and reduced the advantage over unsecured creditors which, by the original contract of pledge, the debtor had intended to secure to him, and that it was well settled that the holding of collateral does not prevent a creditor from enforcing his claim, before insolvency, in the ordinary way by judgment and execution, without any deduction for the collateral, while after insolvency the right to satisfy his judgment by execution is gone, and for it substituted a fixed and definite interest in the assets, as a security for the payment of his debt, and that there was no reason why this did not apply as well to creditors who hold collateral as to those who are unsecured, and that the rule in equity requiring a creditor, with two funds as security, one of which he shares with others, to ex
This case was cited with approval in Merrill v. National Bank, 173 U. S. 131. Chief-Justice Fuller, reading the opinion of the court, said: “We concur with that court in the proposition that the assets of an insolvent debtor are held under insolvency proceedings in trust for the benefit of all his creditors, and that a creditor, on proof of his claim, acquires a vested interest in the trust fund.” And in another part of the opinion: “The fourth rule is that ordinarily laid down by the chancery courts, to the effect that, as the trust created by the transfer of the assets by operation of law or otherwise, is a trust for all creditors, no creditor can equitably be compelled to surrender any other vested right he has in the assets of his debtor in order to obtain his vested right under the trust. It is true that, in equity, a creditor having a lien upon two funds may be inquired to exhaust one of them in aid of creditors, who can only resort to the other; but this will not be done when it trenches on the rights, or operates to the prejudice of the paity entitled to the double fund. And it is well established that in marshaling assets, as respects creditors, no part of his security can be ■ taken from a secured creditor, until he is completely satisfied.”
In People v. Remington, 121 N. Y. 328, Judge Gray, speaking for the court of appeals, concludes a very interesting opinion on this question, as follows: “In this country, we find that rule more generally prevailing which allows the creditor holding securities to prove and receive his dividend on the whole debt.”
A careful examination of the decision in England and the United States cannot fail to convince that the rule is almost universally established, that in the administration of an insolvent estate, by a court of equity, a creditor may prove, and is entitled to a dividend on, his whole debt, notwithstanding he may be holding collateral as an additional security therefor. One of the cases often cited in support of a contrary rule is Amory v. Francis, 16 Mass. 308, but the ruling in this case was largely rested upon the authority of Greenwood v. Taylor. 1 Russ. & M. 185, a case long since overruled by the English
Therefore, unless the principle approved by the English, and generally by the federal and other courts of the United States, is in conflict with the determination of the precise question by the court of last resort in New Jersey, or affected by statutory enactment, we should, in the interest of a consistent administration of the law, endeavor to follow them, for it would be unseemly to have the administration of the assets of one of our corporations administered by the federal court in the district of New Jersey, upon one principle, and by the courts of New Jersey upon another.
The earliest case in this state where this question has been considered is that of State Bank v. Receiver of Bank of New Brunswick, 3 N. J. Eq. (2 Gr. Ch.) 266. In that case the New Brunswick bank was declared insolvent prior to which the State bank received, in the regular course of business, and then held, bank bills of the defaulting corporation for $3,097, and as collateral security for the payment of them, two drafts of $1,000 each, which matured and were paid about two months after the insolvency. The State bank presented claims to the receiver for the full amount of $3,097, claiming a right to a dividend on that sum, which the receiver refused to admit. It appeared that one of the drafts had been- specifically pledged for $900 of the bills, being all that was in the hands of the State bank when the pledge was made. This, it was determined, could only be
In Vander Veer v. Conover et al., 16 N. J. Law (1 Harr.) 487, Chief-Justice Hornblower, speaking of the situation of a judgment creditor, who had proved his claim under general assignment proceedings, said: “If, therefore, the plaintiff in this case, apprehending that the property actually bound by his judgment or execution, might not be sufficient to satisfy him, thought proper to come in under the assignment, he had a right to do so. By doing so, he did not waive his priority as a judgment creditor, so far as respected the property bound by the judgment or execution, but he became entitled to a dividend, upon any balance that might remain due to him, after exhausting that property; and consequently by the very terms of the statute, barred himself from ever proceeding by suit at law, or, in equity against the defendant, for such balance of his. debt.” But whatever may have been intended by the learned .chief-justice, when he said that the judgment creditor was entitled
Moses v. Thomas, 26 N. J. Law (2 Dutch.) 124, a case sometimes cited, in support of the claim that a debtor may only have dividends after exhausting his collateral, is not the point, for there the claim filed with the assignee was for the balance due only, and the question was not presented for determination.
The case most often cited on this subject is that of Bell v. Fleming’s Executors, 12 N. J. Eq. (1 Beas.) 13, but in that case the issue to be determined was the effect upon the rights of a creditor, proving his mortgage debt under an assignment for the equal benefit of creditors. . The question whether the secured creditor was entitled to a dividend upon his whole debt, or only upon that part which remained unpaid after his security was exhausted, was not seriously argued, for the chancellor, in his opinion, states “that it was conceded by counsel on both sides, that the creditor was entitled to a dividend upon any balance/’ and then proceeds: “This, certainly, is the most unfavorable position in which the mortgagee can be placed. It cannot be contended that because a creditor has a mortgage, or other security, for his debt, he is thereby deprived of all benefit under the assignment, or that he must abandon his security, and throw it into hotch poich. The only question that has ever been raised, as to the rights of the mortgagee in reference to his interest in the assigned property, has been whether he could obtain a dividend upon his whole debt and look to his security for the balance, or whether the security must be first appropriated, and the
The case last referred to came before our court of errors and appeals, and is reported in 12 N. J. Eq. (1 Beas.) 490, and Chief-Justice Green, in delivering the opinion of that court, said: “But admitting the provisions to bear a different construction, has the creditor demanded a dividend upon its mortgage debt so as to subject him to the loss of his security? The statute expressly provides for the priority of mortgage debts (section 1). It authorizes the assignee to redeem all mortgages and conditional contracts. The assignment does not impair the mortgage security. It is well settled at this day that the mortgage.creditor is entitled to have the mortgage debt first satisfied out of the proceeds of the sale of the mortgaged premises, and if that prove insufficient, he is entitled to come in .as a general creditor for a dividend upon the balance. But, unfortunately, the statute has provided no mode in which that object shall be accomplished, unless the assignees see fit to redeem the mortgage. The creditor is required to present his security within a' limited time — too soon to allow him .to foreclose the mortgage and ascertain the value of the security. He may not sell the security, as may be done under the English Bankrupt law. He cannot safely deduct the amount of the mortgage debts from his claim, for the value
It seems to me quite clear that the court of errors and appeals, in determining the question before it, as it is said in Bish. Insolv. Dr. (3d ad.) 533, “Left the question open.” It was not necessary to determine the amount upon which the dividend of a creditor holding a collateral should be based, the matter under consideration being whether a creditor holding a mortgage as collateral to his debt released it because he came in and exhibited his claim for a dividend out of the assets of his debtor who had made an assignment thereof for the general benefit of his creditors, and all that was said by the court regarding the question now under consideration was not necessary to the determination of the question then presented, the judgment of the court being “the mortgage security is neither discharged by the mode in which the claim was presented, nor by the will of the testator.” I find nothing in this case establishing a principle regarding the right of a secured creditor of an insolvent debtor to a dividend, without crediting a collateral, differing from that which appeals to- the judgment and reason of the great majority of the judges of courts, entitled to the most respéctful consideration, and whose- opinions establish that judicial authority upon which we may safely rest.
In the case of Whittaker v. Amwell National Bank, 52 N. J. Eq. (7 Dick.) 400, Vice-Chancellor Bird expressed the opinion; that while creditors with collateral might prové their debts for the' whole amount due without releasing their collateral, they were "only entitled, as against general creditors, to a'dividend upon the balance remaining due after having received the value
The rule, as I understand it to be, is that if the assets of the debtor are not sufficient to satisfy all of his debts, a creditor having a right to resort to a fund open to himself alone will not be prevented from claiming, from the assets of his debtor, a dividend on the full amount of his debt, and while the total received cannot exceed the sum due, he is not limited to' a dividend on the balance remaining after deducting the value of the collateral, and that marshaling will not be enforced against him if any part of' his debt remains unsatisfied. The security is for his whole debt and not for a part of it, and he cannot be required to surrender it until the whole debt is liquidated. If, after receiving his dividend, the proceeds of his collateral exceed the amount due, the general creditors are entitled, by subrogation, to the unapplied collateral.
The only other question to be considered is whether section 86 of our Corporation act (P. L. '1896 p. 801/.) is in the nature of bankruptcy proceedings subjecting creditors to the rules applied in that court. My conclusion is that it is not, for the dissolution of a corporation and the distribution of its assets are, by the act, committed to the jurisdiction of the court of chancery, whose powers are equitable, and we must assume that the legislature intended the distribution of the assets of an insolvent corporation, according to equitable rules as distinguished from proceedings in
Admitting that the course of judicial action in the past, in tliis state, may not have been so clear and distinct upon the question presented as to leave our minds entirely free from doubt, it nevertheless appears to me that the rule now generally adopted and followed by other jurisdictions, that the creditor of an insolvent corporation may prove and receive a dividend upon his whole debt, as it existed when the insolvency was declared, without regard to the amount and value of the collateral held by him, has not been so decidedly repudiated by our courts as to prevent us from following it, if harmonious judicial action be wise and desirable, and that it is so I have no doubt. Many corporations have come into existence under the laws of this state, and the distribution of their assets among creditors is administered by the federal courts of this district as well as by the court of chancery, and it appears to me that to have two courts with concurrent jurisdiction sitting in the same city, administering the assets of our insolvent corporations, according to different principles, is unwise, and to be avoided if possible. If by adopting the rule laid down by the supreme court of the United States, which is necessarily to be followed by all inferior federal courts, we are required to abandon, to some degree, a doubtful procedure in the interest of a uniform administration of justice, we should not hesitate to do so in a case like the present.
The conclusion I have reached is that as the dividends on the whole amount due the creditor, together with the full par value of the collateral, will not sufficiently extend to satisfy the whole