p. 339SEXTON, AS TRUSTEE IN BANKRUPTCY OF KESSLER & COMPANY, v. DREYFUS. SAME v. LLOYD’S BANK, LTD.Syllabus
APPEALS FROM THE CIRCUIT COUR't. OF APPEALS FOR THE SECOND CIRCUIT.Submitted January 6,1911.Decided January 23, 1911.Under the Bankruptcy Act of 1898, a secured creditor selling his securities after the filing of the petition must apply the proceeds, other ■ than interest and dividends accrued since the date of the petition, first to the liquidation of the debt with interest to the date of the petition; he cannot first apply such proceeds to interest accrued since the petition.
A secured creditor of a bankrupt can apply interest and dividends accruing on the securities after the date of the petition to interest on ^the debt accruing after such date.
The English rule and authorities discussed and approved.
180 Fed. Rep. 979 , reversed.
The facts, which involve the construction of certain provisions of the Bankruptcy Act of 1898, are stated in the opinion.
Mr. Wallace Macfarlane and Mr. George H. Gilman for appellant:
The bankruptcy law forbids the allowance of interest on provable debts after the date of the filing of the petition. Sections. 57, 57h, 63; and see corresponding provision,. § 19, law of 1867; Collier on Bankruptcy, 7th edi, 701.
Interest accruing after petition filed is obviously not a debt existing at the time of filing, .and so by. the express provisions of the act is excluded-from proof. See official forms Nos., 31 and 32, for proof of debt.
As long as the secured creditor stays outside the Bankruptcy Act, or as the English court puts it, “sits on his
p. 341dends on an unpaid balance. Ex parte Wardell, 1787; Ex parte Hercy, 1792, cited in Cooke’s Bankruptcy Law, 4th ed., 1799, p. 181; see also 2 Montague & Ayrton, Appendix A; Ex parte Badger, 4 Ves. 165, decided in 1798; Ex parte Ramsbottom, 2 Montague & Ayrton, 80; see also In re Savin, Law Rep. VII, Chan. App. Cas. 760; Quartermaine’s Case, [1892], 1 Ch. Div. 639; In re Bonacino, 1 Manson, 59; Ex parte Lubbock, 9 Jur. (N. S.) Pt. 1, 854.
The dividends or interest collected on the security subsequent to the date of the receiving order should not be applied against interest after that date notwithstanding the ruling in In re Penfold, 4 DeG. & Sm. 282, and Ex parte Ramsbottom, 2 Mont. & A. 80; see In re Quartermaine [1892], 1 Ch. Div. 639.
Mr. Frederic R. Coudert, for appellees in No. 662.
The cases on which appellant relies are certain English adjudications which are inconsistent, illogical, unsoupd and hence non-persuasive. In re Talbott (King v. Chick) cited in In re Savin, 7 Chan. App. 761.
The French law is similar to the law as laid down by the court below. See French Code Civil, § 1254; Code of Commerce, § 445, and see Credit Agricole C. Syndic Bom> son.-Cass. Civ. 12, July, 1876, Sirey, Lois et Arrets (1878), p. 68, and also Société Generale C. Synd. Courtignon, Cass. Civ. 13 July, 1896, Sirey, Lois et Arrets (1896), p. 395.
There is no reason why the British rule should prevail over the clear cut, symmetrical rule, sanctioned by the. French codes and the highest French tribunal.
Mr. Rufus W. Sprague, Jr., for appellee in No. 663 i,
The Bankruptcy Act expressly recognizes and preserves valid liens existing at the time of the filing of the petition.
Hiscock v. Varick Bank, 206 U. S. 28 . Nor does it deny to a partially secured creditor, the right under' its agreement to apply the proceeds of the security first to interest ac
p. 343the rule relied upon by appellant, viz.: When the assignee disputes the security interest is allowed to the claimant. Ex parte Pollard, 1 Mont. D. & D. 264. When there are two debts, the one provable, the other not, and the security was given to cover debts in general, the security may be applied in payment of the debts not provable. Ex parte Kensington, 2 M. & A. 300, 304. The income of the security earned since the bankruptcy may be set off against interest on the debt accrued for the same period. Ex parte Penfold, 4 De Gex & Smale, 282.
delivered the opinion of the court.
In both , of these cases secured creditors selling their security some time after the filing of' the petition in bankruptcy and finding the proceeds not enough to pay the whole amount of'their claims, were allowed by the referee to apply the proceeds first to interest accrued since the filing of the petition, then to principal, and to prove for the balance. The referee certified the question whether the creditors had a right to the interest. The District Judge answered the question in the affirmative, giving the matter a very thorough and persuasive discussion, and declining to follow the English rule. In re Kessler, 171 Fed. Rep. 751 . On appeal his decision was affirmed by a majority of the Circuit Court of Appeals. 180 Fed. Rep. 979 .
The argument certainly is strong. A secured creditor could apply his security to interest first when the parties were solvent, Story v. Livingston, 13 Pet. 359 , 371, and liens are not affected by the statute. Section 67d. The law is not intended to take away any part of the security that a creditor may have, as it would seem at first sight to do if the course adopted below were not followed. Some further countenance to that course is thought to be found in § 57h, which provides that the value of securities shall
p. 344be determined by converting them into monéy ‘according to the terms of the agreement,’ for it is urged that by construction the right to apply them to interest is as much part of the agreement as if it had been written in. Nevertheless it seems to us that on the whole the considerations on the other side are stronger and must prevail.
For more than a century and a half the theory of the English bankrupt system has been that everything stops at a certain date. Interest was not computed beyond the date of the commission. Ex parte Bennet, 2 Atk 527. This rule was applied to mortgages as well as to uns cured debts; Ex parte Wardell, 1787; Ex parte Hercy, 192, 1 Cooke, Bankrupt Laws, 4th ed., 181; (1st ed., Appendix), ánd notwithstanding occasional doubts it has been so applied with the prevailing assent of the English judges ever since. Ex parte Badger, 4 Ves. 165. Ex parte Ramsbottom, 2 Mont. & Ayrt. 79. Ex parte Penfold, 4 De G. & Sm. 282. Ex parte Lubbock, 9 Jur. N. S. 854. In re Savin, L. R. 7 Ch. 760, 764. Ex parte Bath, 22 Ch. Div. 450, 454. Quartermaine’s Case [1892], 1 Ch. 639. In re Bonacino, 1 Manson, 59. As appears from Cooke, sup., the rule was laid down not because of the words of the statute but as a fundamental principle. We take our bankruptcy system from England, and wé naturally assume that the fundamental principles upon which it was administered were adopted by us when we copied, the system, somewhat as the established construction of a. law goes with the words where they are copied by another State. No one doubts that interest on unsecured debts stops. See §63 (1). Board of County Commissioners v. Hurley, 169 Fed. Rep. 92 , 94.
The rule is not unreasonable when closely considered. It simply fixes the moment when the affairs, of the bankrupt are supposed to be wound up. If, as in a well known illustration of Chief Justice Shaw’s, Parks v. Boston, 15 Pick. 198 , 208, the whole matter could be settled in a
p. 345day by. ^ pie-powder court, the secured creditor would be called upon to sell or have his security valued on the spot, would receive a dividend upon that footing, would suffer no injustice, and could not complain. If, under § 57 of the present aet, the value of the security should be determined by agreement or arbitration the time for fixing it naturally WOilld be the date of the petition. At that moment the ctódltore acquire a right
in rem against the assets.
Chemical National Bank v.
Armstrong, 59 Fed. Rep. 372 , 378, 379
Merrill v. National Bank of Jacksonville, 173 U. S. 131 , 140. When there is delay in selling because of the bop© dF getting a higher price it is more for the advantage OÍ til© secured creditor than of any one else,, as he takes the. Whole advance and the others only benefit by a percentage, which does not seem a good reason for allowing him to prove for interest by indirection. Whenever the creditor proves, his security may be cut short. That is the necessarily possible result of bankruptcy. The rule under discussion fixes the moment in all cases at the date which the petition is filed, but beyond the fact of being compelled to realize his security and look for a new investment there is no other invasion of the secured creditor’s contract rights, and that invasion is the same in kind whatever moment may be fixed.
It is suggested that the right of a creditor having security for two claims, one provable |tnd the other unprovable, to marshal his security against- the unprovable claim, (see Hiscock v Varick Bank, 206 U. S 28 , 37), is inconsistent with, the rule ¡applied in this cese. But that right is not affected by fixing a time for winding up, and the bankruptcy law does not touch securities otherwise than in this unavoidable particular. The provision in § 57h for converting, securities into money according to the terms of the agreement has no appreciable bearing on the question. Apart from indicating, in accordance with § 67d, that liens are not to be affected, it would seem rather to
p. 346be intended to secure the right of the trustees and, general creditors in cases where the security may be wortfi more than the debt. The view that we adopt is well presented in the late Judge Lowell’s work on. Bankruptcy, § 419; seems to have been entertained in
Coder v.
Arts, 152 Fed; Rep. 943, 950-, (affirmed without touching this point,
213 U. S. 223 ), and is somewhat sustained by analogy in the case of insolvent banks.
Merrill v. National Bank of Jacksonville, 173 U. S. 131 , 140.
White v.
Knox, 111 U. S. 784 , 787.
Interest and dividends accrued upon some of the securities after the date of the petition. The English', cases allow these to be applied to the after accruing interest upon the debt. Ex parte Ramsbottom, 2 Mont. & Ayrton, 79. Ex parte Penfold, 4 De G. & Sm. 282. Quartermaine’s Case [1892], 1 Ch. 639. There is no moré reason for allowing the bankrupt estate to profit by the delay beyond the day of settlement than there is for letting the creditors do so. Therefore to apply these subsequent dividends, &c., to subsequent interest seems just. pt
Decrees reversed.