Nolte v. Hudson Nav. Co.

• Decision Date: 18 March 1929
• Docket Number: No. 234.,234.
• Citation: 31 F.2d 527
• Parties: NOLTE et al. v. HUDSON NAV. CO. et al., and Three Constituent Causes.
• Court: U.S. Court of Appeals — Second Circuit

31 F.2d 527 (1929)

NOLTE et al. v. HUDSON NAV. CO. et al., and Three Constituent Causes.

No. 234.

Circuit Court of Appeals, Second Circuit.

March 18, 1929.

Boardman Wright, of New York City, for appellant Rockwood.

Alexander & Ash, of New York City (Mark Ash and Edward Ash, both of New York City, of counsel), for appellants Conron Bros. Co. and others.

Stuart G. Gibboney, of New York City, for appellants Barber, Watson & Gibboney.

George Pfeil, of New York City (Ambrose C. Hindman, of counsel), for appellants National Surety Co. and others.

Charles H. Tuttle, U. S. Atty., of New York City (Samuel C. Coleman, Asst. U. S. Atty., of New York City, of counsel), for the United States.

Mansfield Ferry, of New York City, for appellees Farmers' Loan & Trust Co. and others.

Taylor, Blanc, Capron & Marsh and Graham, McMahon, Buell & Knox, all of New York City, for appellees Fuller and others.

Murray, Aldrich & Roberts, of New York City, for appellee committee of holders of collateral trust 5's.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge (after stating the facts as above).

The decree of December 1, 1925, provides that the free assets fund shall be applied to the payment of (a) allowed claims of creditors not secured by liens upon parcels A and B (whom we shall refer to as the unsecured creditors); and (b) the bonds "hereinbefore found to be outstanding and unpaid." The decree then proceeds as follows:

"Such payments shall be made ratably and proportionately to the aggregate amount of said claims and bonds among the persons holding the same, provided, however, that when and if the amount of said ratable payments so made upon said bonds, shall, together with * * * the proceeds of the sale of the mortgaged property herein directed to be made applicable to and upon said bonds respectively, pay off and satisfy said bonds in full, any balance that may remain of the free assets fund shall be applied ratably upon said claims until the same shall be paid in full."

The controversy between the bondholders and the unsecured creditors is whether or not a bondholder may marshal the payments he receives so as first to apply what he collects out of his security to the payment of interest which has accrued upon his bond. If he may, the free assets fund will pay a dividend of 14 per cent. to bondholders and unsecured creditors alike. If, on the other hand, all that the bondholder receives from his security must be applied upon the principal of his bond, he will require less than a 14 per cent. dividend out of the free assets fund to pay the principal of his bond in full, and a much larger dividend may be paid to the unsecured creditors. The special master allowed the bondholders the privilege of applying collections from their security, so as to pay interest accruing both prior and subsequent to the appointment of receivers.

Most of the argument has revolved about the precise meaning of Merrill v. National Bank, 173 U. S. 131, 19 S. Ct. 360, 43 L. Ed. 640. That case decided that in an equity receivership a secured creditor may prove against the general assets of the debtor for the full amount of his claim, regardless of the value of his security, and without deducting any sums collected therefrom after the date of the receivership. It further decided that "the full amount of his claim" means the principal of the debt, plus interest thereon, if it bears interest, up to the date of the receivership. In the instant case, however, the bondholders concede that they may prove only for the principal amount of their bonds, because, under the decree of December 1, 1925, the item of interest to the date of the receivership (a relatively insignificant amount) was ignored. As already stated, this decree directed that the free assets fund be distributed between the unsecured claims and the bonds "hereinbefore found to be outstanding and unpaid" — the reference being to a finding which recited the face amount of the unpaid bonds, without including interest accrued prior to the receivership. As to the quantum of the bondholders' provable claims there is no dispute, except on the part of the appellants who are represented by Mr. Pfeil. He contends that the rule of proof should be the New Jersey rule, because the debtor corporation was organized under the laws of that state — a contention which is not sustainable for reasons to be stated later.

Thus far there is substantial agreement as to the meaning of the Merrill Case. But the Supreme Court's opinion goes on to say that the secured creditor may receive dividends upon his claim, "provided that he shall not receive more than the full amount due him." To the appellants this means that he may not receive, both from his security and from his dividends, more than the full amount of his provable claim. The appellees, on...