First Nat. Bank of Freehold v. Thompson

• Decision Date: 02 February 1901
• Citation: 48 A. 333,61 N.J.E. 188
• Parties: FIRST NAT. BANK OF FREEHOLD v. THOMPSON et al.
• Court: New Jersey Court of Chancery

48 A. 333

61 N.J.E. 188

FIRST NAT. BANK OF FREEHOLD

v. THOMPSON et al.

Court of Chancery of New Jersey.

Feb. 2, 1901.

Bill by the First National Bank of Freehold against John I. Thompson, administrator of the estate of Joseph I. Thompson, deceased, and others, praying that the administrator might be decreed to account in the court of chancery for proceeds of property sold in partition proceedings in the orphans' court. Decree settling certain accounts, and ordering a reference.

Eusebius W. Arrowsmith, for administrator of Joseph I. Thompson. Fred'k W. Hope, for Second Nat Bank of Redbank.

W. H. Vredenburgh, for First Nat. Bank of Freehold. Frank P. MeDermott, for Wade T. Little. Edmund Wilson, for W. A. French. James E. Degnan, for Allaire & Son.

STEVENS, V. C. Joseph I. Thompson died intestate in January, 1893. He was the owner of several parcels of land, and, among other things, of a hotel property at Atlantic Highlands. His personal property consisted chiefly of farm stock and implements and of the furniture of the hotel. He left four children, —John I. Thompson, Cornelius J. Thompson, Margaret M. Riker, and Eleanor S. Benton. John I. Thompson took out letters of administration. When Joseph I. Thompson died, and for some time afterwards, it was thought that his estate was solvent it has since proved to be insolvent. The personalty on the farm sold for $877.19; the residue of the personalty sold for $2,109.64. In September, 1898, a partition bill was filed. On March 29 and on April 26, 1899, sales in the partition suit were had, from which the net sum realized was $10,582.50. Soon afterwards the administrator presented a petition, under rule 155, asking for the proceeds of the land sold to he applied to the payment of the debts of the decedent On June 17, 1899, the First National Bank of Freehold, claiming to be one of the creditors of the estate, filed its bill against the administrator and heirs at law, praying that the administrator might be decreed to account for the personalty and for the proceeds of the realty in this court, instead of in the orphans' court it was conceded by the counsel representing the conflicting interests of the various creditors that such an accounting would be proper, in view of the intricacy of the case, and on February 21, 1900, a decree was made accordingly. The administrator filed an account and a statement of claims. Exceptions were taken thereto. A hearing was had, at the same time, on the petition in the partition suit on the answers in the administration suit and on the exceptions.

The questions requiring solution are numerous and complicated.

1. The decedent had for many years prior to his decease conducted a hotel at the Highlands known as "Thompson's Pavilion Hotel." After his death, apparently by consent of all the heirs, his son and administrator, John I. Thompson, conducted this same business up to, or nearly up to, the time when the property was sold. The decedent had contracted a large number of debts, and at the time of his decease owed, inter alia, money to the Atlantic Highlands Bank, the First National Bank of Redbank, and the Second National Bank of Redbank. John I. Thompson shortly thereafter opened an account, as administrator, in the Second National Bank of Redbank. On February 24, 1893, he transferred from the account standing in his father's name to his account as administrator $29.92, and on the same day he deposited to the credit of this account, of his own money, $2,521.87. After that he continued to make deposits, principally of money received in the hotel business. Out of the moneys thus deposited he paid hotel bills of his own and debts of the estate. Among the decedent's creditors was, as I have said, the Second National Bank, to which the sum of $3,555.04 was owing on various discounted notes. In July, 1893, the administrator saw the cashier of that bank, and told him that there were debts pressing the estate; that he had some money on hand, but that he needed it all in the running of. the business; that if, however, the bank would agree to discount a note for him later, he would pay, out of the money then in hand, the claim of the First National Bank, and the claims of some other creditors of the estate who were annoying him. The bank agreed to do this, and the administrator paid, out of the moneys thus deposited, several of these creditors, and, among others, the First National Bank and the Atlantic Highlands National Bank. On November 3, 1893, the Second National Bank, in accordance with its agreement, put to the credit of his account the sum of $7,855.39, the proceeds of a note of $8,000, which he had presented for discount a few days before. When the bank placed this sum to his credit it charged him, however, with the amount of his father's indebtedness ($3,555.04), and so, in fact, he only got the difference, viz. $4,300.35. He had at this time, in addition, a bank balance between $500 and $600. He does not appear to have made any other deposit until March, 1894, except a deposit of $125 made in January. Out of the moneys thus placed to his credit he paid the First National Bank, in addition to what he had already paid it $496.92, and the Atlantic Highlands National Bank $727.05. He also paid other claims against his father's estate and various debts of his own. The note of $8,000 was subsequently reduced to $7,500, the principal now owing. The bank claims to be subrogated to the rights of the creditors whom Thompson paid out of the proceeds of the $8,000 note.

The creditors actually paid were of two classes,—unsecured creditors, like the banks and others, and creditors secured by mortgage or tax lien. As to the unsecured creditors, the claim is that the banks are entitled to stand in their place, not, indeed, to the extent to which they have been paid, but to the extent to which they ought to have been paid; for it is conceded that, the estate being insolvent, no unsecured creditor was entitled to be paid in full. As to the secured creditors, the claim is that, as they were entitled to be paid in full, the banks are entitled to whatever was actually paid to them. As will be seen hereafter, these two kinds of claims rest upon entirely different grounds.

The law on the subject is entirely settled in this state. Subrogation is either legal, —that is, given by the law,—or it arises out of convention or contract. Legal subrogation is allowed only in cases where the person advancing money to pay the debt of a third person stands in the situation of a surety or is compelled to pay the debt to protect his own rights. Shinn v. Budd, 14 N. J. Eq. 238; Bigelow v. Cassedy, 26 N. J. Eq. 558. Conventional subrogation results from an agreement, made either with the debtor or creditor, that the person paying shall be subrogated. Receivers v. Wortendyke, 27 N. J. Eq. 660; Kocher v. Kocher, 56 N. J. Eq. 547, 39 Atl. 536. In the case in hand the bank did not pay any creditor. When it lent the money it dealt with the debtor only, and did not bargain for subrogation. It lent money to pay debts of the estate, but it did not agree with the administrator that it should be substituted to the place of the creditors as against the estate. If the claim of the banks rested here, it would consequently fail. I think it is clear however, that they are entitled to subrogation on another ground. The principle is thus stated by Mr. Sheldon (Subrogation, § 206), and the text is borne out by the cases cited: "Though creditors who have made advances or rendered services to a trust estate must ordinarily look to the trustee personally for their payment, yet if the trustee would be entitled to reimbursements from the estate for his payment, and he is insolvent or a nonresident, equity will substitute the creditors to the rights of the trustee, and allow them to be paid directly out of the estate." And the reason for this rule obviously is that the creditor's money has gone into the estate, and he should be permitted to follow it there, and if the estate is liable to reimburse the executor for it, as between the insolvent executor and the creditor, the creditor is the one who should have it; for his equity is superior to that of the general creditors of the executor. The case of De Concillio v. Brownrigg, 51 N. J. Eq. 532, 25 Atl. 383, fully supports this view, and, indeed, appears to go a step further. Upon much the same equity, it is held that the proceeds of a business carried on by executors as trustees constitute a fund in their hands for the payment of trade creditors, as cestuis que trustent, and that, therefore, a court of equity will pursue the fund and reclaim it from any one whose title does not depend upon an innocent purchase for value. Laible v. Ferry, 32 N. J. Eq. 791, 800. It has also been held that if the personal assets prove insufficient, and the executor has paid debts out of his own money to the value of the land, he may, if the land is ordered to be sold, retain the proceeds for his own indemnity. Livingston v. Newklrk, 3 Johns. Ch. 312.

These principles control the case in hand. The money was lent to John I. Thompson, who is proved to be insolvent. It was lent to him to pay the debts of the estate. To the extent that it has been rightfully used for this purpose, the banks are entitled to be subrogated to the position of the administrator. But it must be remembered that, by virtue of this subrogation, it has the administrator's right, and nothing more. The question then arises, how far is the administrator entitled? In the first place, he is only entitled to reimbursement to the extent that he ought to have paid the claims. As the estate is insolvent, it will have to be determined what dividend each unpreferred creditor is entitled to, and the administrator will be entitled to reimbursement only to the extent of that dividend. In the second place, the banks can only claim such proportion of the money lent as was actually used in paying the...