8 N.Y.S. 34 | N.Y. Sup. Ct. | 1889
The main question presented by this appeal is whether a creditor of an insolvent debtor, who has received from the debtor collateral secu
It is true the rule for which the appellants contend gives to the creditor the benefit of his security to the full amount thereof, but it deprives him of his standing as a creditor, in .relation to his claim against the residue of the debt- or’s estate. Suppose the security be sufficient to satisfy 50 per cent, of the creditor’s debt, and a dividend of the insolvent’s general estate, estimated upon the creditor’s whole debt, would pay the other half. Evidently, if he be allowed to prove against such estate but one-half of his debt, he is compelled to lose a portion thereof for the benefit of others; but, if he may prove his whole debt, and collect from the general estate his pro rata share thereof, he stands, in relation to that fund, equal with other creditors, but not more than equal, and the advantage which he has of resorting to his security to make up any deficiency is no more of an advantage than his contract with his debtor and his legal rights entitled him to. The principle which allows a creditor to retain such an advantage is well settled in analogous cases in this state. Thus, when a creditor has a right to resort to two funds for the satisfaction of his debt, and another creditor has a right to resort to only one of them, equity will not require the former to first resort to the fund on which the ■other has.no claim, if such resort would operate to prejudice the rights of the
Referring to the authorities upon the precise question before us, it appears that the courts of Massachusetts sustained the appellant’s position, on the ground that it is a reasonable one, and more consistent with the nature of the contract under which security is taken. They proceed upon the theory that, by taking security, the creditor relies upon the general credit of the debtor only to the extent of the balance remaining after applying the security to the satisfaction of the debt. Amory v. Francis, 16 Mass. 308; Farnum v. Boutelle, 13 Metc. 159. But in our judgment such is not the nature of the contract. The creditor still relies upon the whole estate of his debtor for his full debt, and looks to his, collateral to supply any deficiency. In the English cases which sustain the appellant’s position, the rule is said to be grounded on the principle that when one creditor has two funds to which he may resort, and another has only one of them, the first creditor should first resort to the one to which the other cannot apply. Greenwood v. Taylor, 1 Russ. & M. 185; Brooklehurst v. Jessop, 7 Sim. 438. But manifestly this overlooks the well-settled exception above referred to, that in no case will such rule be applied when it would operate to’the prejudice of the creditor who is asked to make such an application. In Wurtz v. Hart, 13 Iowa, 515, the court followed the general bankrupt law as being a just and reasonable rule, without giving the subject much consideration. In Rhode Island, the rule contended for by the appellants was first held to be the correct one, (see In re Knowles, 13 R. I. 90;) but subsequently, in Allen v. Danielson, 15 R. I. 480, 8 Atl. Rep. 705, that conclusion was directly overruled as being manifestly unjust, and as having been made hastily, and without due consideration; and in Maryland, (see Bank v. Lanahan, 66 Md. 461, 7 Atl. Rep. 615,) as in Midgeley v. Slocomb, 2 Abb. Pr. (N. S.) 275, the decision turned on the language of the assignment rather than on the application of any rule of equity. On the other hand, in the supreme court of the United States, it is said to be “a settled principle of equity that a creditor holding collaterals is not bound to apply them before enforcing his direct remedies against the debtor,” and such rule was there applied in favor of a creditor holding collaterals against an insolvent debtor’s estate. Lewis v. U. S., 92 U. S. 618. See, also, the following authorities to the same effect: Mason v. Bogg, 2 Mylne & C. 443; Putnam v. Russell, 17 Vt. 54; West v. Bank, 19 Vt. 403; Moses v. Ranlet, 2 N. H. 488; Findlay v. Hosmer, 2 Conn. 350; Logan v. Anderson, 18 B. Mon. 114; Patten’s Appeal, 45 Pa. St. 151; Graeff’s Appeal, 79 Pa. St. 146; Bates v. Paddock, 9 N. E. Rep. 257, 118 Ill. 524; Jervis v. Smith, 7 Abb. Pr. (N. S.) 217. We conclude, therefore, that both the weight of authority and the better reasoning sustain the rule adopted by the referee in these proceedings.
A portion of the securities held by the bank were derived from parties other than the insolvent debtor. As to those, it is well settled that no part of them need be applied or deducted before proving the debt. Ex parte Bennet, 2 Atk. 528; Bish. Insolv. § 356. A small part of the security held by the bank had been converted into money by a sale thereof prior to the hearing before the referee, but after the appointment of the receivers; and the appellants contend that, as to such portion, the money received should be deemed a payment pro tanto, and the balance only of the claim be allowed as a debt against this insolvent. But we think that the condition of the parties in re-i lotion to the insolvent’s estate at the time it passed into the custody of the
It does not appear that any of the money received from the sales of the pledged property has been applied as a payment upon the debt, either by agreement with the receivers, or by any claim to that effect made by the bank alone. We think, therefore, that it should be considered as still held as collateral to the debt, rather than be deemed a payment thereon. The referee adopted the proper rule, and the order of the special term should therefore be affirmed. All concur.