In re Ives

It is insisted by Mr. Wood, representing the Miners’ Savings Bank of Wilkes-barre, that he is entitled to prove against the insolvent estate of Ives & Co. the full amount of the note, without first resorting to the collateral, and without surrendering or accounting for such collateral prior to the payment of the note.

The strict terms of the promise contained in this note seem to entitle the payees to enforce the obligation of that promise to its full extent until fully satisfied, primarily against the promissors, and secondarily against the collateral fund. It is, however, insisted by the assignee that this natural order of procedure cannot apply in respect of "the insolvent estate of the promissors who have become insolvent since the making of the note. It is said by the assignee that this natural order must be reversed; that the payee of the note must proceed first against the special fund pledged as collateral; and that no claim can be made against the estate of the promissors until such fund has been exhausted; and, further, that the dividend to which such payees may ultimately be entitled must be computed upon the amount of the note, after deducting therefrom the proceeds of the collateral, and not upon the face amount of the note.

In this contention I agree with the counsel for the payee of the note, and disagree with the assignee.

While the law upon this point has been variously stated, in different jurisdictions and at different periods, I am of the opinion that the rule is properly stated by Mr. Bispham in his “ Principles of Equity ” (§ 343), as follows :

“ The result of throwing a creditor, who has two securities for his debt, upon the singly-charged fund, is of course, to effect a payment of the debt so far as that fund will extend. Suppose, now, the general assets of the debtor are insufficient to meet all his liabilities, the question will then naturally

arise, whether the creditor who has realized a portion of his debt shall be entitled to a dividend on the whole amount of his claim, or only upon the balance remaining after the appropriation of the fund, which has been exclusively under his control.

“ The rule in bankruptcy was that the creditor was only entitled to prove for the residue ; the right to resort to the prior security being treated, pro tanto, as payment. But this rule is peculiar to the bankrupt law, and the better doctrine is that it is not applicable to cases outside of that law. Therefore the rule would seem to be that the circumstance that the creditor had a right to resort to a fund which is open to him alone, shall not preclude him from coming in upon a fund of an insolvent estate which is common to all creditors, and obtaining a dividend on the full amount of his debt, subject to the common-sense qualification that the total so received by him shall not exceed the sum due.

“ There has, indeed, been some difference of authority upon this point. But the case of Greenwood v. Taylor, where the doctrine was laid down that the rule in bankruptcy applied also to the administration of insolvent estates, cannot now be considered as law; and the decisions in the American courts, which have assumed - the same position, will perhaps be reconsidered when the point comes up again in the tribunals where they were rendered. In several of the States the courts have refused to follow that decision.”

This view is also recognized as sound by Mr. Jones in his treatise on Pledges, in which he says (§ 587):

“ The pledgee may prove his whole claim against the pledgor’s estate in insolvency, without deducting the value of his security. This is the rule more generally adopted in the absence of a statutory requirement. If the dividend so reduces the debt that the collateral security will more than pay it, the security must be redeemed for the benefit of the general creditors. This rule gives effect to the equitable principle that a creditor’s diligence shall be rewarded by giving him his full legal rights. Aside from the acci

dents of the insolvency or death of the debtor, a creditor holding a mortgage or a pledge has a double security. He has the right to proceed against both, and to make the most he can of both; why he should be deprived of this right is not very easy to see.” (See also 3 Pomeroy Eq. Jur. § 1414.)

The law as thus stated is that which has been long established in Vermont, New Hampshire, Connecticut, New Jersey, Pennsylvania and Illinois (Mason v. Bogg, 2 My. & Cr. 443-446; Putnam v. Russell, 17 Vt. 54 ; West v. Bank of Rutland, 19 Vt. 403 ; Walker v. Barker, 26 Vt. 710 ; Moses v. Raulet, 2 N. H. 488 ; Friday v. Hosmer, 2 Conn. 350 ; VanMator v. Ely, 13 N. J. Eq. 271 ; Shunk’s Appeal, 2 Barr. 304; Morris v. Olame, 22 Penn. St. 441 ; Miller’s Appeal, 35 Penn. St. 481 ; Graff’s Appeal, 79 Penn. St. 146 ; Logan v. Anderson, 18 B. Monroe, 114), the grounds of this rule having been recently clearly stated by Magbudeb, J., in the Matter of Bates ( 118 Ill. 524 ; 59 Am. Rep. 383 ). The different rule prevailed in Massachusetts, Maryland and Iowa; and was at first adopted in the Bhode Island courts (Petition of Knowles, 13 R. I. 90 ), but in the recent case of Allen v. Danielson, decided March 5, 1887 ( 15 R. I. 480 ), the supreme court of Bhode Island, through Chief Justice Duefee, carefully considering the whole matter, overruled the previous decision, and established the law in accordance with the decisions generally prevailing as above stated.

In New York it was long assumed that the creditor was obliged to proceed first against the fund upon which he alone had a lien, and that he could claim from the insolvent estate dividends only upon the residue, after applying his special security (Besley v. Lawrence, 11 Paige, 581; Strong v. Skinner, 4 Barb. 546 -560; Midgeley v. Slocomb, 32 How. Pr. 423 -426). These cases, however, after a careful consideration, have been considered as insufficient support for the rule which they were supposed tb establish, and the right of the creditor holding security to prove for the full amount of his claim, and to receive dividends upon that amount,

This rests upon the well-established principle that though “ where a party has two funds out of which he can satisfy his debt, and another creditor has a lien posterior in point of time to one of the funds only, the first creditor will in equity be compelled to resort to that fund which the junior creditor cannot touch, in order that the junior creditor, may avail himself of his only security. Yet such marshalling of assets is to be adopted only where it can be done without injustice or injury to the debtor or creditor ” (Evertson v. Booth, 19 Johns. 486 -493).

Eor, as was observed by Chief Justice Spencer, in the case last cited, “ A court of equity will take care not to give the junior creditor this relief, if it will endanger thereby the prior creditor, or in the least impair his prior rights to raise his debts out of both funds. The utmost that equity enjoins in such a case is that the creditor who has a prior right to two funds, shall first exhaust that to which the junior creditor cannot resort; but where there exists any doubt of the sufficiency of that fund, or even where the prior creditor is not willing to run the hazard of getting payment out of that fund, I know of no principle of equity which can take from him any part of his security until he is completely satisfied.”

As these views commend themselves to my judgment, I must hold that the note of the Miners’ Savings Bank of "Wllkesbarre may be proved, and that any dividend payable thereon is to be computed upon the amount of the note, without reference to the collateral.

II. Claim of John C. Coombs and associates, under an agreement dated May 23, 1887.

John G. Goomls and William Faxon, Jr., attorneys for the claimants.

W. J. Gurtis, for the assignee (Wm. X. Cromwell).

The circumstances and conditions of this claim, as presented by Mr. Coombs, representing a minority group of the preferred stockholders of the Dayton Iron ton Railroad Company, of Ohio, are sufficiently involved to suggest at the outset doubt as to whether the claim is one properly within the cognizance of a referee appointed upon a proceeding under the Insolvency Statute of 1877 to pass upon the accounts of an assignee for the benefit of creditors.

The assignee and two of the creditors (The Cincinnati, Hamilton & Dayton Railroad Company and the Mineral Range Railroad Company) insist that the claim is one not provable before this referee, who has nevertheless received all the evidence that the claimant desired to offer upon the subject, which may be generally and summarily stated as follows:

Late in the year 1886, Henry S. Ives and associates, then being in control of the Dayton & Chicago railroad, acquired about 16,000 of the shares of the capital stock of the Dayton & Ironton Railroad Company, which had a total issue of about 25,000 shares. Ives and associates then proposed to consolidate the two roads, but were opposed by John C. Coombs, William Faxon, Jr., and others owning or controlling at least 5062.8 shares. This opposition much embarrassed the proposed consolidation, which could be effected only upon condition of providing payment for these dissenting shares at the market value, which was then about $40 per share.

But notwithstanding such opposition and the formal written refusal of such minority stockholders through William Faxon, Jr., at Dayton, Ohio, May 24, 1887, the consolidation was then and there carried through, and a new corporation organized called the Dayton, Fort Wayne & Chicago R. R. Co. This result, however, was thus accomplished largely in consequence of the transaction carried

It was proposed by Ives, who, with his partners,, employees and associates, then controlled the Dayton & Ironton Company, and were to control the consolidated company, that the Dayton & Ironton Company should acquire all of this minority stock, paying therefor the then market price of $40 per share, and should then retire or cancel such stock.

Mr. Coombs hesitated to accept this proposition, expressing doubt as to the power of the Dayton and Ironton Company so to bind itself in view of the impending consolidation, which would substantially extinguish all power of these minority stockholders. Ives thereupon agreed that his firm should contract to buy the stock and that the Dayton & Ironton Company should guarantee the contract.

Accordingly, upon May 23, 1887, John C. Coombs and associates as vendors, and Henry S. Ives & Co. as purchasers, entered into an agreement whereby the vendors agreed to sell, and the purchasers agreed to take within three months, at the price of $40 per share, all the shares of the preferred stock of the Dayton & Ironton Company which should within that time be offered by Coombs. This agreement expressly reserved to the vendors the right under the statutes of Ohio to refuse to accept the terms of the proposed consolidation, which right (as observed before) was exercised the next day at Dayton by William Faxon, Jr. But no further steps in opposition seem to have been taken. The performance of this agreement of Ives & Co. was simultaneously guaranteed by the Dayton & Ironton Company under Ives’ direction.

On June 20th, Mr. Coombs wrote to Ives & Co., advising them that he then held on deposit in Boston 5062.8 shares, subject to the agreement of May 23, 1887.

The principal contract therefore is to be considered as being on June 20,1887, the positive agreement of Ives &

Before the expiration of the period in which the purchasers were to take this stock, they became insolvent, and on August 11, 1887, made to William Nelson Cromwell an assignment for the benefit of creditors as therein stated.

Twelve days later the contract matured, and Mr. Coombs tendered the stock to the assignee and demanded payment of the agreed price, amounting to $202,512. The tender was declined and payment refused.

Thereafter Faxon and Coombs applied to the courts of Ohio, under the statutes of that State to assess the value of the stock as against the constituent companies at the price of $90 per share (two and one half times the price to Ives & Co.). These proceedings were not pressed to conclusion but were indefinitely continued in view of the agreement hereafter mentioned of October 27, 1887.

They also proceeded in the courts of Massachusetts against the firm of Ives & Co. to enforce their claim, but without material effect up to this time.

They also took another step in Ohio which seems entitled to special consideration in the estimate of the legal value of their claim as against the insolvent estate of Ives & Co. They entered into a contract, dated October 27, 1887, with the consolidated company, ydiieh acknowledging and ratifying as its own the previous guaranty of the Dayton & Ironton Company, expressly agreed to pay to Faxon and associates the agreed purchase price of such 5062.8 shares and $5000 ■ additional; and Faxon thereby specifically promised upon such payment to deliver such stock to the consolidated company. A few months later the consolidated company went

It appears that since August 23, 1887, there has been substantially no market for this stock of the Dayton & Iron-ton Company, which has ceased to exist as a separate company, such stock being now held in two or three large blocks, and that the only proved sale is one of about twenty shares for fifty cents a share, and now Faxon, Coombs and associates make their claim against the assigned estate for $202,512 and interest from August 23, 1887, stating this to be the precise amount of damages resulting to them by reason of the breach-of Ives & Co.’s promise to pay on that day the purchase price of 5062.8 shares of this stock at $40 per share.

To this the objecting creditors answer that notwithstanding the variety and volume of the claims and statements of Mr. Coombs, his claim is simply and merely one for the recovery of unliquidated damages for the breach of Ives & Co.’s executory contract of purchase, which was not broken until after the day of the assignment. I accept this contention of the objecting creditors.

They further submit that the claim, being for unliquidated damages, is one which in its nature cannot be proved against the assigned -estate, and in Support of this position they cite the decision of the General Term of the N. Y. court of common pleas, in the matter of Adams ( 15 Abb. N. C. 61 ). I have disregarded these views of the objectors so far as to receive all the testimony offered, upon the question, not thereby expressing any opinion as to the effect of the proof so received.

They finally say that upon these proofs it appears that even now Coombs, Faxon and associates present no well defined legal or liquidated claim against the assigned estate; and that by their dealing with the Consolidated Company in October, 1887, they finally elected to abandon the claim against Ives & Co. as vendees ; to reassert their unrestricted power of dealing with those shares; and to sell the same to the Consolidated Company.

The Matter of Adams ( 15 Abb. N. C. 61 ) does not tome seem to be wholly controlling. The learned and venerable judge who delivered the opinion accurately states the conditions and reasons for rejecting proof of unliquidated claims against bankrupt and insolvent estates, as not being debts. In bankruptcy these reasons were (1) “ that as the bankrupt under the act was to be discharged from his debts, the proceeding was to be strictly confined to what was regarded as a debt /” and (2) that “the creditors whose claims were ascertained and fixed when the bankrupt went into or was brought into bankruptcy, were entitled to share in the distribution of this estate as soon as it was gathered in, and were not to be delayed by claims against him sounding in damages which it might take years to determine.”

Of course the first of these reasons has no applicability in respect of an insolvency system such as that of Hew York, under which no discharge is usually practicable; but that neither such reason, nor the second, resting upon the convenience of administration, are always prevalent even in bankruptcy appears from a consideration of express statutory provision to the contrary under the U. S. Bankruptcy Act of 1867 (R. S., § 5067) and the Massachusetts Statute (Chap. 293 of the laws of 1881) (Bowditch v. Raymond, 5 New Eng. Rep. 584. See, also, Loring v. Kendall, 1 Gray, 305 ; Petition of Church, 6 New Eng. 498).

Such express statutory disregard of these two reasons indicated that they are not inherently essential to proper administration in insolvency, and justifies the conclusion of the learned court that under our system of assignments “ The question is one to be gathered from a fair construction of the instrument and not the provisions of any statute.”

Finding it thus to be a question of construction, he turned to the case for a description of the assignment there in ■question (which was not set forth at length), and assumed it to be an assignment only “ for the payment of the just debts of the assignors.” This assumption I find to be correct, hav

But in the Ives assignment there is no such restriction to debts alone. The assignment is to pay “ all debts and liabili tiesDo these words “ and liabilities ” extend the scope of the assignment ? I think that they do. They cannot be disregarded as meaningless or as being merely synonymous with debts. In the case of a business situated as was that of Ives & Co., it would have been substantial injustice to appropriate the assets to’ the exclusion of the various equitable claims which largely affected the situation of the firm. Judge Daly points out ( 15 Abb. N. C. 65 ) that under an insolvent statute concerning debts and demands, provision must be made for a larger constituency than under an act concerning debts only. So I hold that the term “ liabilities ” enlarged the scope of the Ives assignment. It is sufficient to note the excellent definition of “ Liability ” in Rapelye and Lawrence’s Law Dictionary as follows: “ The condition of being actually or potentially subject to an obligation—is used either generally as including every kind of obligation or in a more special sense to denote inchoate future, unascertained or imperfect obligations, as opposed to debts the essence of which is that they are ascertained and certain,” and to cite the decision of Judge Dillon in Re Hook (2 Dillon, 92). Ho claim therefore is to be excluded from my consideration merely because it is not strictly speaking a “ debt.”

Proceeding then to consider the Coombs claim I find that it is for breach of contract made by Ives & Co., in aid of railway corporation, accompanied by that corporation's guaranty for the purchase of certain stock at a certain price. I find that there was no breach of the contract until eleven days after the assignment, and that during these eleven days

Ilad Coombs and associates chosen to proceed upon the first course, above stated, I should consider their claim to recover the purchase price to be fairly provable against the assigned estate. But Mr. Coombs distinctly declines to take this position, and asserts that the stock has been at all time and now is the property of himself and his associates, having gone so far in this direction that in October, 1887, he contracted to sell the stock to the Consolidated Company, which as to Ives & Co., was then certainly a third party. I therefore find that Coombs and associates have finally elected not to hold the contract stock for Ives & Co. or their assignee. This election has been made and is adhered to up to the present time with such unvarying persistency that it cannot be hereafter withdrawn (Moller v. Tuska, 87 N. Y. 166 ).

The second course above indicated, i. e., a sale after notice and a claim for difference, has also been resolutely and intentionally disregarded and rejected by Mr. Coombs and calls for no further consideration at present.

Therefore, upon the whole statement and completed proofs of the claimants, I grant the motion of the assignee and the two objecting creditors, and without receiving their opposing proofs reject and dismiss as not enforceable before me on this proceeding, the claim of John C. Coombs and associates upon the agreement of May 23, 1887.

The claim of John 0. Coombs and associates for breach of the agreement of May 23, 1887, is therefore disallowed and dismissed.