Metompkin Bank & Trust Co v. Bronson

• Decision Date: 10 April 1939
• Citation: 2 S.E.2d. 323
• Court: Virginia Supreme Court
• Parties: METOMPKIN BANK & TRUST CO. v. BRONSON et al.

2 S.E.2d. 323

METOMPKIN BANK & TRUST CO.

v.BRONSON et al.

Supreme Court of Appeals of Virginia.

April 10, 1939.

Appeal from Circuit Court, Accomack County; John E. Nottingham, Judge.

Proceedings in the matter of the receivership of the Accomack Banking Company, Inc., wherein the Metompkin Bank & Trust Company was appointed receiver and wherein the American Bank & Trust Company filed a claim but was thereafter placed in receivership, Sherlock Bronson and T. Justin Moore duly qualifying as receivers of the American Bank & Trust Company. From a decree in favor of the claimant, the Metompkin Bank & Trust Company, receiver of the Accomack Banking Company, Inc., appeals.

Affirmed.

Argued before CAMPBELL, C. J., and HOLT, HUDGINS, GREGORY, BROWNING, EGGLESTON, and SPRATLEY, J J.

B. Drummond Ayres, of Accomac, for appellant.

E. Aimer Ames, Jr., of Onancock, and David J. Mays, of Richmond, for appellees.

SPRATLEY, Justice.

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 ageneral banking business, finding itself in financial 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 Metomp-kin 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 the decisions, the decisions are dependent upon the rule applied in the respective jurisdictions.

The chancery rule holds that 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.

In Virginia preference was expressed for the application of the chancery rule in Pace v. Pace's Administrator, 95 Va. 792, 793, 30 S.E. 361, 44 L.R.A. 459. In Bank v. Trigg Co., 106 Va. 327, 56 S.E. 158, this rule was adopted and applied, and in Greenbrier Joint Stock Land Bank v. Opie, 1935, 165 Va. 334, 182 S.E. 255, a case similar in many respects, and involving practically the identical question here, the chancery rule was clearly, definitely and expressly adopted.

In Greenbrier Joint Stock Land Bank v. Opie, supra, a first lien creditor was brought into the suit by the executor of the lien creditor's debtor for the settlement of the estate. The first lien creditor contended that it was entitled to stand upon its deed of trust and to request a foreclosure of the same as it deemed advisable. The trial court ordered a sale of the lien property, and the sale brought an insufficient amount to satisfy the first lien. It then sustained the contention of the general creditor that the first lien creditor was entitled to prove and be allowed a dividend only upon the difference between the entire debt and the amount later realized from the sale of the collateral. Upon appeal, we held that the first lien creditor should have been allowed to receive a dividend out of the general fund being administered in the suit, on the basis of the full amount of its claim at the time of the death of the decedent, irrespective of the amount received from the sale of the collateral.

Mr. Justice Gregory in an able and learned opinion reviewed the history and application of the four rules dealing with the distribution of insolvent estates which are variously applied in the several jurisdictions. He cited many pertinent cases and authorities, and reached the conclusion adopted by this court, that the chancery rule is, and has been for many years, effective in Virginia. The reasoning for the conclusion is correctly and concisely stated and supported by ample and sound authority. We are unable to improve upon the language used and, for the sake of avoiding repetition, are content to reaffirm the principles therein expressed.

In addition to the authorities cited in the above case, there are many other well considered cases of like import from other jurisdictions. The rule appears undoubtedly to be supported by the greater weight of authority. The cases hereinafter cited and the following are in point and approve the doctrine: Kellogg v. Miller, 22 Or. 406, 30 P. 229, 29 Am.St.Rep. 618; Corbett v. Joannes, 125 Wis. 370, 104 N.W. 69; Merchants' National Bank v. Flippen, 158 N.C. 334, 74 S.E. 100; People v. Remington & Sons, 121 N.Y. 328, 24 N.E. 793, 8, L.R.A. 458; Allen v. Danielson, 15 R.I. 480, 481, 8 A. 705; In re Bates, 118 111. 524, 9 N.E. 257, 59 Am.Rep. 383; Paddock v. Bates, 19 Ill.App. 470; Walker v. Baxter, 26 Vt. 710; Moses v. Ranlet, 2 N.H. 488; Graeff's Appeal, 79 Pa. 146; Detroit Trust Co. v. Detroit City Service Co, 262 Mich. 14, 247 N.W. 76; State v. State Bank of Ala-mogordo, 1934, 38 N.M. 338, 32 P.2d 1017; Washington-Alaska Bank v. Dexter Horton National Bank, 9 Cir, 263 F. 304; Hendrie v. Graham, 14 Colo.App. 13, 59 P. 219; Williams v. Overholt, 46 W.Va. 339, 33 S.E. 226.

Plaintiff in error further contends that even though the chancery rule be in effect in this State, a creditor has no right to apply proceeds from the collateral held by him to the payment of interest on the debt secured by the collateral after the date of the insolvency. It is argued that upon a receivership a creditor changes his position, in a limited sense, to that of a part-owner in the assets in the receivers' hands; that is, to the extent of his claim at the date of insolvency; and that if any payment or part-payment is made from other sources, such payment must be treated as having been made upon the fixed amount of that claim with reference to the right to share in the receivers' assets.

The fallacy of this argument is apparent. The status of a creditor Who holds collateral as security for the debt by virtue of his contract with the debtor has been overlooked. The secured creditor is not confined to a mere right to share in the receivership assets.

Interest ceases upon unsecured claims against assets insufficient to pay all claims in full on the date of the declaration of insolvency. The same rule is applicable when all claims are of equal rank or dignity. The reasons for that principle do not apply where there are sources...