Metompkin Bank, Etc., Co. v. Bronson

• Decision Date: 10 April 1939
• Docket Number: Record No. 2052.
• Citation: 172 Va. 494
• Court: Virginia Supreme Court
• Parties: METOMPKIN BANK & TRUST COMPANY, RECEIVER, ETC. v. BRONSON AND MOORE, RECEIVERS, ETC.

Page 494

172 Va. 494

METOMPKIN BANK & TRUST COMPANY, RECEIVER, ETC. v. BRONSON AND MOORE, RECEIVERS, ETC.

Record No. 2052.

Supreme Court of Virginia, Richmond.

April 10, 1939.

Present, All the Justices.

1. PLEDGE AND COLLATERAL SECURITY — Insolvency of Pledgor — Right of Pledgee to Dividend on Full Amount of Debt. — A creditor of an insolvent estate is entitled to receive a dividend on the full amount of his proved debt, irrespective of any collateral security held for the debt where the collateral is insufficient to pay the debt, until the amount received both from the sum of the dividends and of collateral collected is sufficient to satisfy the entire debt.

2. BANKS AND BANKING — Insolvency — Secured Creditor — Right to Apply Proceeds of Collateral to Payment of Interest — Case at Bar. — In the instant case, a bank, which was the secured creditor of an insolvent bank, after filing proof of claim, was itself placed in the hands of receivers. Thereafter the creditor bank began liquidation of the collateral held to secure the debt, crediting the major portion of the sum collected against the principal, but crediting a certain proportion against interest. The receivers for the debtor bank claimed that the creditor bank had no right to apply proceeds from the collateral held by it to the payment of interest on the debt after the date of insolvency, since upon receivership the creditor changed its position to that of a part-owner in the assets in the receivers' hands; that is, to the extent of its claim at the date of insolvency.

Held: That there was no merit in the contention, since a creditor who holds collateral is not confined to a mere right to share in the receivership assets.

3. BANKRUPTCY AND INSOLVENCY — Interest on Claims after Insolvency — Unsecured Claims. — Interest ceases upon unsecured claims against assets insufficient to pay all claims in full on the date of the declaration of insolvency, and the same rule is applicable when all claims are of equal rank or dignity.

4. BANKRUPTCY AND INSOLVENCY — Unsecured Creditor — Sources of Payment. — In receivership proceedings, a general or unsecured creditor has two possible sources of payment, (1) from the debtor himself, should he ever acquire more property — a right in personam — and (2) a right in rem as to the assets in the hands of the receiver.

5. BANKRUPTCY AND INSOLVENCY — Secured Creditor — Sources of Payment. — The secured creditor in receivership proceedings has a source of payment in addition to the right to collect from the debtor, should he ever acquire more property, and a right to the assets in the hands of the receiver. This additional source is the fund arising from the liens which he holds, or from collateral in his hands, and arises from the contract between the parties. The contract is for the payment of the entire debt, and the entire debt includes not only the principal but interest as an incident of the debt.

6. PLEDGE AND COLLATERAL SECURITY — Purpose of Giving Collateral. — The purpose of giving collateral is to favor the creditor and to give to him an advantage in the collection of the debt.

7. PLEDGE AND COLLATERAL SECURITY — Insolvency of Pledgor — Right of Insolvent Estate or Other Creditors to Collateral. — In case of a creditor holding collateral security of an insolvent debtor, neither the insolvent estate nor other creditors have any claim upon the collateral or any part thereof until the entire debt of the secured creditor is satisfied, or thereafter, except as to so much as may prove to be in excess of the amount required to satisfy the secured creditor's claim in full.

8. PLEDGE AND COLLATERAL SECURITY — Insolvency of Pledgor — Right of Insolvent Estate or Other Creditors to Collateral. — Within the meaning of the rule that neither the insolvent estate nor other creditors have any claim upon the collateral held by a secured creditor of an insolvent debtor until the entire debt of the secured creditor is satisfied, the entire debt is the amount the creditor is entitled to collect from the debtor at the time of payment and not the amount due at the date of insolvency.

9. PLEDGE AND COLLATERAL SECURITY — Insolvency of Pledgor — Effect of Receivership. — The effect of a receivership upon a creditor holding collateral security is to give to him, in addition to his right of action in personam, a substitute for his right of action in rem, theretofore existing, a right to a proportionate share of the impounded assets — a right to receive such a part thereof as his total proved demand bears to the total of all demands against the insolvent estate, unaffected by the fact that he holds security for a part of his debt.

10. PLEDGE AND COLLATERAL SECURITY — Insolvency of Pledgor — Right to Collect both Principal and Interest from Collateral. — Although a secured creditor's claim against an insolvent estate, for the purpose of receiving dividends from the assets, is fixed as of the date of the receivership, he still has, by virtue of the special contract by which he obtained the collateral, the right to collect, through liquidation of the collateral, the full amount of his debt, principal and interest.

11. PLEDGE AND COLLATERAL SECURITY — Insolvency of Pledgor — Right of Pledgee to Dividend on Full amount of Debt. — The words "entire debt," "whole debt," and "full amount of the debt," as used in the rule that a secured creditor of an insolvent estate is entitled to receive a dividend on the full amount of his proved debt, until the amount received both from dividends and the collateral collected is sufficient to satisfy the entire debt, mean all that the debtor owes, and, therefore, necessarily include principal and interest.

12. BANKRUPTCY AND INSOLVENCY — Secured Creditor — Right to Dividends until Principal and Interest of Claim Are Paid. — A secured creditor is entitled to receive dividends on the amount of his claim as it stands at the time of receivership, plus the amount he receives from the lien or the collateral he holds, until the aggregate net amount received by him equals the amount of the entire debt, principal and interest.

Appeal from a decree of the Circuit Court of Accomac county. Hon. John E. Nottingham, judge presiding.

The opinion states the case.

B. Drummond Ayres, for the appellant.

E. Almer Ames, Jr., and David J. Mays, for the appellees.

SPRATLEY, J., delivered the opinion of the court.

This case requires a consideration of the rules dealing with the rights of a creditor holding collateral security in the distribution of an insolvent estate.

The Accomack Banking Company, Inc., engaged in a general banking business, finding itself in financia straits, on December 21, 1931, closed its doors and suspended business. At that time, it was indebted to the American Bank and Trust Company in the principal amount of $125,297.46, evidenced by notes and overdrafts of the debtor. The American Bank and Trust Company held as collateral security for the said indebtedness various receivables of the debtor, aggregating in face value approximately twice the amount of the said indebtedness, in addition to a guarantee of payment by certain directors of the debtor corporation.

Upon the petition of the State Corporation Commission of Virginia, the Metompkin Bank and Trust Company, on the 4th day of February, 1932, was duly appointed and immediately qualified as receiver for the Accomack Banking Company, Inc.

The American Bank and Trust Company, in April, 1932, filed with the receiver of the Accomack Banking Company, Inc., a sworn statement and proof of claim for the principal sum of $125,297.46, with interest on several portions thereof from various dates.

Subsequent to the filing of its claim, the American Bank and Trust Company likewise suspended business, and was placed in receivership, Sherlock Bronson and T. Justin Moore duly qualifying and acting as its receivers.

After the filing of its claim, and before the 4th day of December, 1937, the American Bank and Trust Company or its receivers began the sale and liquidation of the collateral held for the debt aforesaid, and collected and received therefrom the sum of $118,915.21, net. All of this was credited on the principal of said indebtedness except the sum of $8,703.40, which sum was credited on interest accruing on the principal indebtedness both before and after the date of the receivership of the debtor.

A dividend of 7% was ordered by the trial court to be paid to the general creditors by decree of December 4, 1937. Questions then arose, — (1) whether the American Bank and Trust Company was entitled to receive a dividend on the full amount of the debt proved, irrespective of the collateral security held for the debt, or was entitled to be allowed a dividend only upon the difference between the proved debt and the amount realized from a sale of the collateral after the debt had been proven, and (2) whether the creditor had the right to credit upon interest rather than upon the principal any of the funds received from the sale or liquidation of its collateral.

The trial court held that the dividend should be paid on the basis of the full amount of the claim as originally filed until the sum of all such dividends, together with collections already made, or which might thereafter be made from the said collateral, should equal the sum of $125,297.46, exclusive of the amount applied to interest upon the principal indebtedness by the creditor from the sale or liquidation of the collateral held by it.

While there is considerable conflict in the several jurisdictions of this country over the correct rule dealing with the rights of creditors holding collateral security in the distribution of insolvent estates, the majority of the State courts and all the Federal courts, so far as we are advised, have adopted the so-called old English or chancery rule. While authority, therefore, is not wanting for the adoption of either of the four rules mentioned in...