Argued March 15, 1907. Decided May 13, 1907.
Individual policies on the life of a partner held as collateral security for his individual indebtedness can be sold by the creditor and applied to the payment of such individual debt although the debtor was also liable for partnership debts; and if the policies are fairly sold by the creditor he can prove for the balance of the individual debt and the whole of the partnership debt. The extent and validity of a pledge are local questions and the decisions of the state court are binding on this court. Under the law of New York a pledgor may waive strict performance of the common law duties of the pledgee and if so waived a sale may be held without notice, demand or advertisement. The bankruptcy act does not deprive a lienor of any remedy with which he is vested by the state law. 134 F. 101, affirmed.
Mr. Will B. Crowley, with whom Mr. Ceylon H. Lewis was on the brief, for appellant:
Between the time of filing the petition and the adjudication, the bankruptcy proceedings themselves were an injunction against any sale of the policies in question. After filing the petition, no sale could be held without leave of the court. Whitney v. Wenman, 198 U.S. 539; Bryan v. Bernheimer, 181 U.S. 188; Mueller v. Nugent, 184 U.S. 1. See also Lee v. Franklin Sav. Inst., Fed. Cases, 8188; Conner v. Long, 104 U.S. 244; McHenry v. La Societe Francaise, 95 U.S. 60; Wiswall v. Sampson, 14 How. 66; State Bank v. Cox, 143 F. 93; In re Reynolds, 127 F. 762; In re Brooks, 91 F. 509; In re Antigo, 123 F. 254; In re Gutman, 114 F. 1010; In re Krinski, 112 F. 975.
The pretended sale of the insurance policies held as collateral was a sham and was invalid at common law. It constituted no liquidation nor evidence of the value of the policies, which, it appeared, were worth more.
A pledgee cannot become the purchaser of pledged securities except by the express permission of the pledgor; a pledgee is a trustee for the benefit of the pledgor. Pauly v. State Loan Co., 165 U.S. 620. See also: Easton v. German American Bank, 127 U.S. 537; Perry on Trusts, 4th ed., sec. 602, o.x.; Laclede Bank v. Richardson, 156 Mo. 275; Dana v. Buckeye Co., 38 Ill. App. 371; Jones on Pledges, sec. 648; Story on Bailments, secs. 318-345.
The $6,000 deposit and the value of the policies should also be applied in reduction of the amount of the partnership claim. The express terms of the promissory notes so require. It did not appear that the policies belonged to J.M. Mertens.
In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor, the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.
If the bank waived the terms of the notes and relied upon its legal rights to offset this deposit, then the time when the set-off was required to be made was at the time of the filing of the petition. Collier on Bankruptcy, 4th ed., 496; In re City Bank, Fed. Cases, 2742; Drake v. Rollo, Fed. Cases, 4066.
No liquidation of securities which is binding upon the bankruptcy court, can be made by a creditor except as directed by the court. The "value" of the securities was not determined and the referee had the right under § 57 d to refuse to be bound by the alleged sale. Whitney v. Wenman, 198 U.S. 539; McHenry v. Societe Francaise, 95 U.S. 60.
Whether the court must direct the manner of liquidation or not, sec. 57 h provides that before having a claim allowed a secured creditor must deduct "the value of securities" held by him.
The referee had some discretion; he had a conscience to satisfy; he was required to ascertain the value and deduct it, and sec. 57 d, which provides that the consideration of claims may "be continued for cause by the court upon its own motion," was ample authority for him to require further evidence of the value of the policies before allowing the claims. This court has recently held that this power can be exercised. Whitney v. Dresser, 200 U.S. 536.
Mr. Frederick M. Czaki, with whom Mr. Louis Marshall was on the brief, for appellee:
The bank was not a secured creditor within the meaning of the term "secured creditor" as defined by the bankrupt act.
That "secured creditor" has a limited meaning in bankruptcy must always be remembered. In effect, no creditor is secured in bankruptcy unless there is a lien held by him, or accruing to his benefit, upon the property of the bankrupt.
The copartnership estate is entirely distinct from that of the individual. The assets must be separately administered, and can in no way be so commingled as to deprive a creditor holding security upon the individual estate of a partner from proving the full amount of his debt against the copartnership estate, irrespective as to whether he has or not filed a claim against the individual estate. In re Noyes Bros., 127 F. 286; Gorman v. Wright, 136 F. 164; Swarts v. Fourth Natl. Bank of St. Louis, 117 F. 1; In re Swift, 106 F. 65; In re Heyman, 95 F. 800; In re Bingham, 94 F. 796; In re Headley, 97 F. 765-771; In re Coe, Powers Co., 1 Am. Br. Rep. 275; Collier on Bankruptcy, 3d ed., 321; Madison Sp. Bank v. Pierce, 137 N.Y. 444.
The filing of the verified proof of debt established the appellee's prima facie case, and entitled it, in the absence of proof under the objections, to the allowance of the claim. Sec. 57, Sub. Div. G, Act of 1898; Whitney v. Dresser, 200 U.S. 532.
The appellant's failure to offer any evidence of the facts and circumstances attending the sale, or the value of the policies, affords a presumption that such evidence, if adduced, would operate to the prejudice of his contentions that the sale was fraudulent, and the prices paid inadequate.
The appellant was content to rest his case upon the mutual concessions made, and therefore his failure to call the witnesses concerned in the transaction raises the presumption, that had he done so, their testimony would have negatived the slightest inference of fraud or bad faith. Kirby v. Tallmadge, 160 U.S. 379; Runkle v. Burnham, 153 U.S. 216-225; Graves v. The United States, 150 U.S. 118, 120; Clifton v. The United States, 4 How. 242, 244; Choctaw M.R. Co. v. Newton, 140 F. 225-238; Gulf, C. S.F. Ry. Co. v. Ellis, 54 F. 481, 483.
The contract of pledge expressly granted to the appellant an absolute power of sale, coupled with an interest, which would have survived the death, and did survive the insolvency of the pledgor. Dixon v. Ewart, 3 Merivale's Rep. 322; Corder v. Morgan, 18 Vesey, 344; Knapp v. Alvord, 10 Paige Ch. Rep. (N.Y.) 205; Houghtaling v. Marvin, 7 Barb. (N.Y.) 412; Hutchins v. Hebbard, 34 N.Y. 24, 27; Weber v. Bridgman, 113 N.Y. 600.
The errors assigned question the conclusions of law.
We need spend no time on the objection that the referee's order did not amount to the rejection of the claims. What the referee said was: "As the proof now stands, I shall, therefore, decline to allow either claim as established against the estate or estates."
The District Judge recited the action of the referee as disallowing both claims, and entering "an order prescribing the method for ascertaining the value of such policies," and concluded: "The orders of the referee disallowing the claims are approved and affirmed." 134 F. 102, 104. And entered an order accordingly.
The Circuit Court of Appeals held "that the order appealed from was, in substance and effect, a rejection of the claims," and said: "The bank insisted that its claims were for a definite amount, the amount stated in its proofs of debt less the sum which it had already derived from the sale of the securities. The decision not only disallowed these claims, but left the bank remediless, unless it should consent to allow a different reduction."
We think it perfectly clear that the policies did not belong to the partnership estate. They insured the life of J.M. Mertens, and were payable, one to him or his legal representatives, and the other to his wife or children, or to him in the event of their death before his. And they had been assigned to the bank by him individually and the members of his family, as early as March, 1901, as collateral security, as well as by the collateral notes before mentioned. The fact that Mertens individually was the owner was in effect conceded, and the objections to the claims raised no issue in regard to it. That the partnership on some occasion may have pledged the policies in conjunction with Mertens' separate individual pledge had no special significance.
The notes provided that the holder might apply the proceeds of a sale to "pay one, or more, or all of the liabilities due it, as it shall deem proper, whether due or not." And it had the right according to the settled rule in equity and in courts of bankruptcy to apply the proceeds of the collateral in extinction of the individual debts. If the sale was a good and valid sale and the value of the policies was properly liquidated thereby, and applied on the individual indebtedness, it follows that the claim against the partnership should have been allowed in full.
And also the claim against the individual estate of Mertens for the balance, after deducting the $10,250 and the $6,000.
The contracts of pledge were made, executed and to be performed in the State of New York, and the rights of the parties were governed by the law of that State. No preference under the bankruptcy act was alleged or proved, nor was there any allegation or proof that the pledge of the securities was in fraud of the rights of the creditors or trustee. The questions of the extent and validity of the pledge were local questions, and the decisions of the courts of New York are to be followed by this court. York Manufacturing Company v. Cassell, 201 U.S. 344; Thompson v. Fairbanks, 196 U.S. 516, 522; Humphrey v. Tatman, 198 U.S. 91. Here there was an absolute power of sale coupled with an interest. The bank had had both title and possession of the policies for a period of more than two years before the filing of the petition. It had a valid debt against both the copartnership and individual estates, which is not questioned. It could, therefore, make a sale under the power granted, and transfer title in its own name. Numerous decisions of the Court of Appeals of the State of New York sustain contracts of pledge waiving the right of the pledgor to exact strict performance of the common law duties of a pledgee. In the absence of fraud, the pledgee may buy at his own sale held without notice, or demand, or advertisement, when power so to do is expressly granted by the pledgor. Baker v. Drake, 66 N.Y. 518; Williams v. Trust Company, 133 N.Y. 660; Toplitz v. Bauer, 161 N.Y. 325. And see National Bank v. Baker, 128 Ill. 533; McDowell v. Chicago Steel Works, 124 Ill. 491; Farmers' National Bank v. Venner, 78 N.E. 540.
It must be remembered that the Circuit Court of Appeals found that there was no fraud in fact in the sale. In respect of that Judge Wallace, delivering the opinion, said:
"The court below regarded the sale made by the bank as a fraudulent sale. There was no evidence of fraud, unless the facts which have been referred to justify the inference of fraud. We are at a loss to understand how fraudulent conduct can justly be imputed to a pledgee when it appears that whatever was done in executing the power of sale was done in full compliance with the terms of the pledge, and when there is no evidence that any unconscionable advantage was taken of the pledgor or his creditors. Doubtless the pledgee cannot avail himself of his authority, however unlimited, to sacrifice the property wantonly, or to purchase it himself at a valuation so inadequate as to suggest a fraudulent purpose. If the valuation in this case was unfair, the burden was on the trustee to prove the fact."
The trustee did not offer to prove that others were prepared to purchase and might have done so but for want of information, or that the policies had a greater value than was realized at the sale, or that he was prepared to redeem the pledge for the benefit of the estate, nor did he offer to do so. There was nothing in the evidence tending to show a wanton sacrifice or an intention to buy in at so inadequate a price as to justify the inference of a fraudulent purpose.
Counsel for the trustee contends that the policies were worth more than was obtained at the sale, because the bank's agent, after having borrowed on the strength of the policies the exact amount of his bid immediately after the sale, subsequently borrowed thereon $2,622.75; and also that from the terms of the $50,000 policy it appeared that on the completion of the Tontine dividend period, February 15, 1909, the assured had the privilege to withdraw in cash $18,823, and in addition the surplus which might then be apportioned. And counsel called attention in his brief filed herein, February 26, 1907, to the case of Hiscock, Trustee, v. Mertens then pending in this court as demonstrating that the $50,000 policy was worth more than was realized at the sale. But the $2,622.75 loan covered the next ensuing premiums on the policies with interest; and the $7,000 paid for the $50,000 policy with interest and the premiums of February, 1904, 1905, 1906, 1907 and 1908, with interest, and the last premium, would appear to have aggregated a total cost of $21,346.50; while if resort could be properly had to the record in another case to piece out the evidence in this the opinion in Hiscock v. Mertens, decided March 25, 205 U.S. 202, states that the evidence showed that this particular policy had a surrender value of $6,574. And as to the $10,000 policy no suggestion was made that the $3,250 was not a full price or even more, nor could there be in reason, for as Ray, J., said, In re Mertens et al., 131 Fed. Rep. 972, "it had become a simple life policy, payable to the wife of the assured, if living at his death; if not living, to his children, if any; and in default of child or children to the personal representatives of the assured. This policy concededly is so conditioned and incumbered, and the interest of the trustee therein, if any, is so remote and uncertain that it is of no practical value to the estate." Clearly there is nothing on the face of the record to justify a charge of fraud on account of inadequacy.
Section 57 h provides: "The value of securities held by secured creditors shall be determined by converting the same into money according to the terms of the agreement pursuant to which such securities were delivered to such creditors or by such creditors and the trustee, by agreement, arbitration, compromise, or litigation, as the court may direct, and the amount of such value shall be credited upon such claims, and a dividend shall be paid only on the unpaid balance."
The court was by this subdivision empowered to direct a disposition of the pledge, or the ascertainment of its value, where the parties had failed to do so by their own agreement. It is only when the securities have not been disposed of by the creditor in accordance with his contract that the court may direct what shall be done in the premises. Of course where there is fraud or a proceeding contrary to the contract the interposition of the court might properly be invoked.
According to the terms of the bankrupt act, the title of the bankrupt is vested in the trustee by operation of law as of the date of the adjudication. Act of 1898, § 70, a.e. By the act of 1867, it was provided that as soon as an assignee was appointed and qualified the judge or register should, by instrument, assign or convey to him all of the property of the bankrupt, and such assignment shall relate back to the commencement of the proceedings in bankruptcy, and by operation of law shall vest the title to such estate, both real and personal, in the assignee." But § 70 a of the act of 1898 omits the provision that the trustee's title "shall relate back to the commencement of the proceedings in bankruptcy," and explicitly states that it shall vest "as of the date he was adjudicated a bankrupt." When the petition in the present case was filed the bank had a valid lien upon these policies for the payment of its debt. The contracts under which they were pledged were valid and enforceable under the laws of New York where the debt was incurred and the lien created. The bankruptcy act did not attempt by any of its provisions to deprive a lienor of any remedy which the law of the State vested him with; on the other hand, it provided, § 67 d: "Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this act."