Carter v. Tanners' Leather Co.

• Decision Date: 20 June 1907
• Citation: 81 N.E. 902,196 Mass. 163
• Parties: CARTER v. TANNERS' LEATHER CO. et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

196 Mass. 163

81 N.E. 902

CARTER v. TANNERS' LEATHER CO. et al.

Supreme Judicial Court of Massachusetts, Suffolk.

June 20, 1907

COUNSEL

Edward F. McClennen, for First Nat. Bank, Freeman's Nat. Bank and J. B. Moors & Co.

A. E Denison, for Atlantic Nat. Bank.

OPINION

SHELDON J.

The petitioner is the assignee under a common-law assignment for the benefit of creditors, made in March, 1903, by the Tanners' Leather Company, a corporation organized in March, 1902. The petitioner has converted all or nearly all the assets so assigned to him into cash, and asks the instructions of the court as to its distribution. The case has been sent to a master, and he has found and reported to the court the names of the creditors of the corporation and the amounts of their several demands. Among these demands are seven promissory notes of the corporation to the amount of $30,000, each of which was indorsed by one Kimball and one Van Tassel. There was evidence, which the master received de bene only, that these notes were issued by Kimball, its treasurer, without its authority; but they are now in the hands of holders who took them before maturity in good faith, for value, and in the belief that their proceeds were for the use of the corporation. It is not denied that these notes can be enforced against the corporation. This evidence tended to show also the following facts: Each one of these notes was really issued and its proceeds were used solely for the benefit of Kimball and Van Tassel, in a mining operation in which they were engaged. Other similar notes of the Tanners' Company were issued by Kimball, in the same way, for the benefit of Van Tassel and himself, and indorsed by them, which have been found not to be held by takers in due course, and so have not been allowed against the corporation. Van Tassel held an agreement with one Dubois, dated October 23, 1901, by which Dubois agreed to pay to Van Tassel the market price, less certain deductions, of the bark which should be cut and peeled in the future on certain lands in Pennsylvania, this market price to be fixed by agreement or arbitration from year to year. Van Tassel assigned this contract, hereinafter called the 'bark contract,' directly to his wife, by assignment dated December 24, 1901. Immediately after the Tanners' Leather Company made its assignment to the petitioner as aforesaid, Van Tassel and his wife assigned the bark contract to trustees, to be 'held by them in trust for the payment of the principal and interest of' the notes signed by the Tanners' Leather Company and indorsed by Van Tassel, amounting to $50,000. It was also provided that 'any dividend or payment received' by the holders upon said notes 'from the said Tanners' Leather Company or from said Wm. F. Kimball shall be duly credited upon the same.' The agreement containing these provisions was executed by the holders of the seven notes aforesaid. The present trustees under this assignment have now, about four years after the assignment to them, received about $30,000, a large part of which, however, is an advance to be repaid from the proceeds of future cuttings; and it is estimated that the contract will yield them, if the cutting is made at the same rate as heretofore, a total sum of about $60,000; but nothing has yet been paid to the beneficiaries under the trust.

The Atlantic Bank, one of the creditors of the Tanners' Leather Company, claims that upon these facts the holders of the seven notes indorsed by Kimball and Van Tassel should not be permitted to participate in any distribution of the general assets in the hands of the petitioner until they shall have exhausted their security under the Van Tassel bark contract, and then only for the balance of their several claims after deducting such amounts as they shall have received from that security; and this claim raises the questions which are presented before use.

There are doubtless here two classes of creditors: First, the general creditors of the Tanners' Leather Company, who can hold only the general assets of the company in the hands of the petitioner; and, second, the holders of the seven notes indorsed by Kimball and Van Tassel, who can hold both these assets and the funds that have been and hereafter shall be realized upon the bark contract. In behalf of the former class, it is claimed that the assets should now be marshaled, so as to require the holders of the Van Tassel notes to look first to the latter fund, upon the equitable rule stated in Chesebrough v. Millard, 1 Johns. Ch. (N. Y.) 409, 7 Am. Dec. 494, 'that a person having a right to satisfy his debt or claim out of two funds, to but one of which another person can resort, shall be compelled first to exhaust the fund to which the other cannot resort before coming upon the one available to both. Thus the person having an interest in the double fund is prevented by a court of equity from exercising his right to enforce that interest to the prejudice of the person having an interest in the single fund only.' It is not worth while to attempt to refer to the numerous cases in which this general principle has been declared and recognized. Nor is it disputed that, as a general rule at any rate, it is not to be applied where the two funds to which the creditors or sets of creditors may resort are not derived from a common source, or are not in the hands of a common debtor.

There is no question here that the holders of these seven notes, being holders in due course, have a right to hold both the Tanners' Leather Company as promisor and Van Tassel as indorser. They have a right to look to each one of their debtors until they shall have received full satisfaction. If they held no security from either, they could prove in bankruptcy against the estates of each, and receive full dividends from each until they should have obtained complete payment. Mercantile Bank v. Macfarlane, 71 Minn. 497, 74 N.W. 287, 70 Am. St. Rep. 352; In re Baxter (U. S.) Fed. Cas. No. 1,120; Moch v. Market Street Bank, 107 F. 897, 47 C. C. A. 49. Nor would the right to prove in full and receive dividends against the estate of one party be abridged by the fact that the creditor held security from the other party. Hale v. Leatherbee, 175 Mass. 547, 56 N.E. 562; Gorman v. Wright, 136 F. 164, 69 C. C. A. 76; In re Headley (D. C.) 97 F. 765; In re Dunkerson (U. S.) Fed. Cas. No. 4,157; In re Cram (U. S.) Fed. Cas. No. 3,343. These are illustrations of the general principle that the rule of marshaling assets will not be enforced to the prejudice of the creditor against whom it is sought to be applied.

The Atlantic Bank, however, rests its demand upon its claim that as between the debtors, the burden of paying these notes ought to be thrown upon Van Tassel, for the relief of the Tanners' Leather Company. It contends that when it appears that between the two debtors there are equities whereby one ought to pay the debt for the relief of the other, there is an exception to the general rule that assets will be marshaled only among creditors of a common debtor, and that marshaling may be resorted to to give effect to the equities in favor of the creditors of that debtor who is only secondarily liable for the debt, or ought to be called upon only after the exhaustion of the other's means. This was the rule adopted in Newson v. McLendon, 6 Ga. 400. Although we are not aware of any other decision in which it has been actually applied, it has been frequently declared both in text-books and in the judicial opinions, following the statement of Lord Eldon in Ex parte Kendall, 17 Ves. 514, that the doctrine of marshaling will not be carried to this extent unless founded on some equity giving to one debtor the right for his own sake to compel the creditor to seek payment from the other debtor. Dorr v. Shaw, 4 Johns. Ch. (N. Y.) 171; Ayres v. Husted, 15 Conn. 504; Wise v. Shepherd, 13 Ill. 41. So Story, Eq. Jur. § 642, after stating the general rule that equity will not marshal...