In re the Accounting of Preston — 26 N.Y. St. Rep. 38

Majority

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In the Matter of the Accounting of Charles M. Preston, Assignee of William B. Fitch.

(Supreme Court, General Term, Third Department,

Filed September 21, 1889)

Headnote

1. Payment — Application of.

A debtor making a payment may apply it as lie chooses.

£. Same — Effect of assignment by obeditob,.

A general assignment by the creditor, in which he prefers the assignee of one of the claims, does not affect the debtor’s light of application of a payment.

2. Same.

Mrs. A., who had given several notes to F., executed a mortgage to his assignee for creditors to secure all said notes. F. had previously indorsed all the notes but one to banks, one of which he preferred in the assignment. Held, that the proceeds of the mortgage when foreclosed belonged to all the holders of the notes, and that the assignee should distribute them among them pro rata.

Appeal from decree on final accounting of assignee.

Fitch made a general assignment to Preston in November, 1884. Before that time Mrs. Anderson had given Fitch several promissory notes in payment of goods sold, amounting to over $13,000. One of these notes, of the amount of $1,169, remained in his hands at the time of the assignment The others had previously to the assignment been discounted by banks, and were held by them with Fitch’s indorsement, amounting as follows: by National Bank, $4,194; by National City Bank of Brooklyn, $1,200; bv State of New York National Bank of Kingston, $5,861.

Fitch’s assignment, after wages to employees, preferred notes held by the National Bank of Rondout, on which he was liable as indorser or otherwise.

A few days after the execution of the assignment Fitch procured from Mrs. Anderson a mortgage on the real estate. It was given to Preston, assignee of the estate of Fitch. It recited that Mrs. Anderson was indebted to the estate of Fitch in the sum of $8,000, and was conditioned to pay that sum February 2, 1885. This mortgage was given to secure the aforesaid notes, amounting to over $13,000. It was made for $8,000, because that was all the property was worth. The mortgage was given in pursuance of' a prior understanding between Fitch and Mrs. Anderson that she was to secure these notes on that property.

At the time the mortgage was given Mrs. Anderson did not know by whom the notes were held, but supposed they were held by Fitch. The notes were spoken of when the mortgage was given, and there was no other indebtedness of Mrs. Anderson to Fitch than these notes.

Preston, the assignee, subsequently foreclosed the mortgage and obtained $4,284.46 as the net proceeds.

Of that sum he applied $1,169 to the discharge of that note of Mrs. Anderson which Fitch had at the time of the assignment and which passed to the assignee.

On the accounting this application was approved by the court,

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and he was directed to apply the residue, so far as it would go, to the payment of those notes of Mrs. Anderson which weft held by the National Bank of Bondout, the first preferred creditor of Fitch.

The State of New York National Bank of Kingston, a creditor in a subsequent class, appeals.

F. L. Westbrook, for app’lt; Newton Fiero, for resp’t.

There can be no question that Mrs. Anderson gave this mortgage to secure all the notes which she had given to Fitch. Such is the testimony of Fitch and such is the evident' meaning of the transaction. She had no intention to secure one rather than another of all these notes, and the reason why the mortgage was not made for the whole amount of the notes was explained to be because the property was not worth more than $8,000.

The property was hers, and she had a right to apply it as she chose. She did apply it to the payment of all these notes. Therefore, it was the right of each holder of these notes to share pro rata in the avails. No one of these several holders of these notes had a right to take more than his pro rata share of the net avails.

Mrs. Anderson was the debtor, and she had a right to secure one debt, or all, as she might prefer. There is not any evidence that she desired to prefer one above another. Indeed she supposed that all the notes belonged to Fitch. Her appropriation, therefore, of her own property settled the rights of her several creditors. And each became at once entitled to share pro rata in the proceeds.

The previous assignment of Fitch, by which, as to his own property, he preferred the National Bank of Bondout, did not affect Mrs. Anderson’s mortgage. Fitch had no right to control Mrs. Anderson’s property. And he did not attempt to control her property. For when he made the assignment the mortgage had not been executed.

It is suggested that there had been a previous understanding that she would secure these notes, that is, all of them, on this subsequent mortgaged property. H this gave Fitch any equity, such equity would equitably pass to the several owners of the notes to» whom he had transferred them.

It is not material to the proper disposal of this case that the mortgage was in form to Preston, assignee. It was given to secure these notes, and Preston cannot be permitted to apply the proceeds in any other way than as the mortgagor determined. It is fully in the power of the court, under the statute, to make a proper and just disposition, and to cause these net avails to be applied pro rata among all who are entitled. All the persons entitled to share are before the court, and the person in possession of the property is here also.

The respondents urge that if Preston took the property as assignee, then he should distribute it according to the preferences of the assignment; that if it took it in any other capacity, it cannot

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be brought into this accounting. But this is not sound. As assignee, Preston is entitled to the pro rata share belonging to the note which was in Pitch’s possession when he assigned. But the mortgage belonged in equity to all the holders of the notes pro ■rata. And as he is in possession of the avails the court can, under the equity powers given by the statute, prevent the assignee from misappropriating to the use of the assignment property which is not subject thereto.

It is a settled rule that the debt is the principal and the security is the collateral. The debts in this case consist of the several notes and of all of them. The mortgage is but the collateral. The holders of the notes are the equitable holders of the collateral. And the person who has possession of the avails of the collateral must distribute those avails among all the holders of the notes in proportion to their claims.

The decree appealed from must be modified so that Preston, the assignee, shall retain only his pro rata share of the avails of the mortgage and shall distribute all of the said avails pro rata among all of the Anderson notes, without regard to the preferences of the assignment.

The appellants are entitled to costs of their appeal against the respondents, except assignee.

Putnam and Fish, JJ., concur.