In re Waddell-Entz Co.

• Decision Date: 21 February 1896
• Citation: 35 A. 257,67 Conn. 324
• Court: Connecticut Supreme Court
• Parties: In re WADDELL-ENTZ CO.

35 A. 257

67 Conn. 324

In re WADDELL-ENTZ CO.

Supreme Court of Errors of Connecticut.

Feb. 21, 1896.

Case reserved from superior court, Hartford county; Elmer, Judge.

Application by the receiver of the Waddell-Entz Company for instructions as to the proper distribution of the funds of the estate in payment of a dividend on certain claims proven.

Morris W. Seymour and Howard H. Knapp, for receiver.

John H. Perry and George E. Hill, for claimant.

William A. Procter. Antonio Knauth. for claimants John C. Brown and Margaret B. Smith.

HAMERSLEY, J. When the law takes possession of the property of an insolvent debtor, that property becomes a trust fund to be divided among such creditors as may present their claims in the prescribed manner; and the respective interests of the creditors in the fund are, as between themselves, of an equitable nature, to be determined on a basis of equality. This is true of the property of an insolvent corporation when it is taken possession of by a receiver under the statute providing for the winding up of a corporation as truly as when it is taken possession of by a trustee under the statute regulating insolvent estates. New Haven Wire Co. Cases, 57 Conn. 352, 387, 18 Atl. 266. The questions submitted by this reservation present little difficulty when it is remembered that the real question is, not what remedies each creditor may have had against the solvent corporation, but simply what is the amount of actual debt due from the insolvent estate to him? Such debt, and such only, can be proved, as the basis for an equitable distribution of the trust fund. A consideration of the disputed claims of William A. Procter and Knauth, Nachod & Kuhne will dispose of all the others.

Procter's claim (aside from the 13 bonds, Nos. 32 to 44, about which no question arises) is based on a loan to the Waddell-Entz Company of $4,500. As evidence of the debt, he received a demand note for that amount (Exhibit C). He also received 10 notes or bonds (in the form of Exhibit D) for $1,000 each, and claims that the debt on which he is entitled to a proportionate dividend from the trust fund is $14,500. If he had received a demand note for $14,500, or if he had received 145 notes under seal for $100 each, it would hardly be claimed that he could prove more than his actual debt of $4,500. Whatever advantages possession of evidences of debt in such form might secure to him in enforcing his rights against his debtor, the possession of such advantages does not alter the fact that his real debt is $4,500, and that fact must control his right to a dividend from the insolvent estate. The amount of his debt is not altered because in the demand note the 10 bonds delivered to him are called "collateral security." They are not collateral security for the payment of the original debt. The demand note itself is, in a sense, a security, dependent for its value on the credit and property of the borrower. Another note, or 50 other notes, furnish a similar security. They might aid the creditor in enforcing speedy payment by the debtor, but in case of insolvency it is the actual debt, and not the multiplication of evidences of debt, that defines the creditor's interest in the trust fund. "Collateral security" necessarily implies the transfer to the creditor of an interest in some property, or lien on property, or obligation, which furnishes a security in addition to the responsibility of the debtor. The law regulating this subject rests on the assumption of such transfer to the creditor of property, in some form, on which property he relies for security, and which he is entitled to apply, instead of resorting to the debtor's own property, towards the satisfaction of his debt, by virtue of a contract, implied or express, as the case may be, but collateral to the contract of indebtedness. A debtor's additional promises to pay cannot, from the very nature of the case, be treated as collateral security for his debt, unless such additional promises are themselves secured by a lien on property, or by the obligations of third persons. Under such circumstances, they may be treated as collateral security, so far as is necessary to obtain the benefit of the lien or obligation. This self-evident proposition has rarely been discussed in reported cases. The principle, however, has been clearly stated by the courts of New York and Massachusetts. People v. Remington, 54 Hun, 480, 8 N. Y. Supp. 31, affirmed 121 N. Y. 675, 24 N. E. 1005; Third Nat. Bank v. Eastern R. Co., 122 Mass. 240. See, also, Merchants' Nat. Bank v. Eastern R. Co., 124 Mass. 518. In the case of In re Litchfield Bank, 28 Conn. 575, it was apparently conceded by all parties that the currency of a state bank, pledged as security for the payment of its promissory notes, is pledged as money. The case turned on a claim of tort in selling the money so pledged, and the question now at issue was not considered.

The amount of Mr. Procter's debt is not altered by the sale from himself to himself of the bonds. Such bonds were not "collateral security" for the demand note, and their sale to himself or others would not be governed by the law...