Chemical Nat. Bank of City of New York v. Armstrong

• Decision Date: 13 November 1893
• Docket Number: 56.
• Citation: 59 F. 372
• Parties: CHEMICAL NAT. BANK v. ARMSTRONG. [1]
• Court: U.S. Court of Appeals — Sixth Circuit

59 F. 372

CHEMICAL NAT. BANK v. ARMSTRONG. ^[1]

No. 56.

United States Court of Appeals, Sixth Circuit.

November 13, 1893

William Worthington, for Chemical Nat. Bank.

John W Herron, for David Armstrong, receiver.

Before BROWN, Circuit Justice, and TAFT and LURTON, Circuit Judges.

TAFT Circuit Judge.

These are cross appeals from a decree of the circuit court for the southern district of Ohio directing the receiver of the insolvent and defunct Fidelity National Bank of Cincinnati to allow a claim of the Chemical National Bank of New York against the assets in his hands for $205,450. The Chemical Bank, the complainant below, objects to the decree on the ground that the claim should have been allowed for $300,000 and interest, while the receiver objects to the decree because the claim as allowed was not reduced by about $10,000.

On March 2, 1887, the Chemical Bank placed to the credit of the Fidelity Bank $300,000, the proceeds of a call loan, as collateral for which a number of bills receivable had been pledged. E. L. Harper, vice president of the Fidelity Bank who secured the loan, directed that this credit be transferred on the books of the Fidelity Bank to his individual account. This was done, and the money was checked out by Harper.

On June 21, 1887, the Fidelity Bank suspended payment. Its doors were closed by order of the comptroller of the currency upon that day, and on the 27th of the same month, the comptroller appointed the defendant, Armstrong, its receiver. None of the collaterals on the $300,000 loan had been collected by the Chemical Bank before the receiver took possession of the Fidelity Bank. Subsequently three notes made by J. W Wilshire, and indorsed by John V. Lewis, for $25,000 each, which were among the collaterals for the $300,000 loan, were collected by the Chemical Bank; and another note, having the same maker and indorser, for another $25,000, could have been collected, had the Chemical Bank not been negligent in failing to demand payment and to notify the indorser, for, though Wilshire the maker was insolvent, Lewis the indorser was able to pay. The Chemical Bank had made other advances to the Fidelity Bank upon which it had received other collateral. In the belief that it was entitled to use all the collateral in its hands to pay all the obligations of the Fidelity Bank to itself without regard to the particular loans upon which particular collateral had been deposited, the Chemical Bank had gone on making collections, and had applied the proceeds of the collateral indiscriminately to the aggregate debt, so that it had paid the entire indebtedness of the Fidelity Bank owing to it, and had on hand a balance of $33,000, which it turned over to the receiver. The receiver objected to the 'massing' of the collateral, and insisted that the Chemical Bank could not use collateral, given to secure one obligation, to pay another. This resulted in litigation, in which the receiver was successful, and obtained $286,000 from the Chemical Bank.

And so it happened that on the 25th of April 1890, and not until then, the Chemical National Bank presented its claim for $300,000 on the loan already referred to. The receiver objected to the claim, on the ground that $75,000 which the bank had collected on the collateral before proving its claim, and about $9,000 thereafter collected, and the $25,000 which, through its negligence, it had failed to collect, should be credited on the claim.

The answer of the receiver made the defense that the Fidelity Bank could not be held liable for the $300,000 loan, because Harper had negotiated it without the knowledge of the other officers of the bank, and had fraudulently appropriated the proceeds of the loan to his own uses. The defense has not been pressed on us by counsel for the receiver, and certainly cannot be sustained. The evidence is undisputed that the Chemical National Bank had no knowledge that Harper was engaged in defrauding the Fidelity Bank, and dealt with him as an authorized officer of that bank, and the money was placed to its credit. The debt was, therefore, the debt of the Fidelity Bank.

The next question is, shall creditors of an insolvent national bank, in proving their claims, be required to allow any credit for collections from collateral made subsequent to the declared insolvency, and before proof of claim? If so, shall the claims as proven be also subsequently reduced by collections from collateral made, after proof, and before dividends are declared, thus varying the basis of distribution from dividend to dividend? Or shall the rule in bankruptcy be followed, by which the creditor holding collateral shall be required to reduce his claim by the actual collections and the estimated value of his uncollected collateral?

The court below held that the creditor should be required to allow a credit of all collections made before filing his proof of claim, but not of those made thereafter. The receiver contends that the rule in bankruptcy is the proper one, while the complainant bank maintains that it should be allowed to prove its claim as it existed at the moment of declared insolvency.

It is singular that in the years during which the national banking act has been in force the foregoing questions have not been settled by a decision of the supreme court. It is, for the federal courts, a new and important question, and has received at our hands the consideration it deserves. We have been greatly assisted by the elaborate and able written and oral arguments of counsel for both parties, in which all the many decided cases presenting the same or analogous questions have been industriously reviewed and discussed.

By section 5234, Rev. St., and section 1 of the act of June 30, 1876, (19 Stat. 63,) it is made the duty of the comptroller of the currency to appoint a receiver to wind up a national banking association whenever the comptroller shall, after examination, have become satisfied of its insolvency. It is the duty of the receiver thus appointed to take possession of the books and effects of the bank, liquidate its assets, and pay the money thus realized into the treasury of the United States.

Section 5235 makes it the duty of the comptroller thereupon to give notice by public advertisement for three months, calling on all persons having claims against the association to present the same, and to make legal proof thereof.

Section 5242 declares void all transfers of its property by the national bank after the commission of the act of insolvency, or in contemplation thereof, to prevent distribution of its assets in the manner provided in said national banking act, or with the view to prefer any creditor, except in payment of its circulating notes. And it further provides that no judgment or injunction shall be issued against the bank or its property before final judgment in any suit, action, or proceeding in any state, county, or municipal court.

Section 5236 provides that, after making full provision for the redemption of the circulating notes of the association, 'the comptroller shall make a ratable dividend of the money so paid over to him by such receiver on all such claims as may have been proved to his satisfaction or adjudicated in a court of competent jurisdiction, and as the proceeds of the assets of such association are paid over to him, shall make further dividends on all claims previously proved or adjudicated, and the remainder of the proceeds, if any, shall be paid over to the shareholders of such association or their legal representatives in proportion to the stock by them respectively held.'

The suspension of the bank, and its seizure by the comptroller and his appointee, the receiver, work, by operation of law, a transfer of the title to the assets of the bank from the bank to the comptroller and receiver, in trust to reduce the assets to money, and apply them, as directed by the national banking act--first, to the redemption of the circulating notes of the bank; and, second, in ratable distribution to the creditors of the bank. Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148; White v. Knox, 111 U.S. 784, 4 S.Ct. 686.

It is manifest that it would utterly defeat the object of the banking act if, after the suspension, the assets remained subject to levy, execution, or attachment and, therefore, that the passing of the assets into the hands of the receiver removes all the property of the bank from liability to process to secure satisfaction of judgments. Bank v. Colby, 21 Wall. 609.

The right which a creditor of the bank had before suspension of levying an execution to satisfy his judgment is gone, and for it is substituted a fixed and definite interest in the assets as a security for the payment of his debt, which it is the purpose of the banking act to reduce to money, and apply on his debt, with all convenient speed. We see no reason why this does not apply as well to creditors who hold collateral as to those who are unsecured. It is well settled that the holding of collateral does not prevent a creditor from enforcing his claim in the ordinary way by judgment and execution against a debtor without any deduction for his collateral. Lewis v. U. S., 92 U.S. 618.

When the secured creditor is required by the transfer of the assets in trust for winding-up purposes to forego his right to satisfy his entire debt out of the property of the bank by levy and execution, why should there be substituted for that right anything less than that which the unsecured creditor gains by yielding up the same right? Take the case of two creditors of the bank for $1,000 each, one with collateral and the other unsecured. Before suspension, the one has two modes of collecting his debt--first, by levy and execution for $1,000; and,...