State v. Moberly

• Decision Date: 20 April 1939
• Docket Number: 35614
• Citation: 127 S.W.2d 431,344 Mo. 565
• Parties: The State and Richard R. Nacy, State Treasurer, Appellants, v. O. H. Moberly, Commissioner of Finance of the State; Richard Johnson, Special Deputy Commissioner of Finance in Charge of the Affairs and Assets of the Bank of Aurora, a Corporation; and Bank of Aurora
• Court: Missouri Supreme Court

127 S.W.2d 431

344 Mo. 565

The State and Richard R. Nacy, State Treasurer, Appellants, v. O. H. Moberly, Commissioner of Finance of the State; Richard Johnson, Special Deputy Commissioner of Finance in Charge of the Affairs and Assets of the Bank of Aurora, a Corporation; and Bank of Aurora

No. 35614

Supreme Court of Missouri

April 20, 1939

Appeal from Lawrence Circuit Court; Hon. Emory E. Smith Judge.

Affirmed.

Roy McKittrick, Attorney General, and Covell R Hewitt, Assistant Attorney General, for appellants.

The court erred in its finding that all accrued dividends, payable to the State Treasurer, by the insolvent Bank of Aurora should be calculated on the amount due, namely, $ 36,211.13, the unpaid balance after the sale of the collateral, instead of being based on the $ 273,091, as contended by the appellant, the amount due on the claim as originally allowed by the circuit court before credit was given by the State Treasurer from the proceeds of the sale of the pledged collateral. Merrill v. Natl. Bank of Jacksonville, 173 U.S. 136; Aldrich v. Chemical Natl. Bank of New York, 44 Law. Ed. 619, 176 U.S. 638; Chemical Natl. Bank v. Armstrong, 59 F. 378, 28 L. R. A. 231; Law Rep. Ann. 1918B, p. 1042; First Wisconsin Natl. Bank of Milwaukee v. Kingston, 216 Wis. 681, 252 N.W. 153, 94 A. L. R. 465; Simms v. Button, 3 P.2d 790; Greenbrier Joint Stock Land Bank v. Opie, 182 S.E. 260; State v. State Bank of Almagorda, 32 P.2d 1017; Barnett v. Board of Education, 65 P.2d 984; U.S. Fidelity & G. Co. v. Centropolis Bank of Kansas City, 17 F.2d 913, 53 A. L. R. 295; Tanana Valley Railroad Co. v. Washington Natl. Bank, 6 Alaska, 15; In re Bank of Oakley, 21 P.2d 164; Mark v. Amer. Brick Mfg. Co., 84 A. 889; Haner v. Appalachian Gas Corp., 167 A. 240; Levi v. Chicago Natl. Bank, 158 Ill. 88, 42 N.E. 131; Michigan Natl. Bank v. Haug, 82 Mich. 612; In re Bement's Sons, 150 Mich. 545; Detroit Trust Co. v. Detroit City Serv. Co., 262 Mich. 45; Agricultural Credit Corp. v. Scandia Natl. Bank, 184 Minn. 68, 237 N.W. 823; State v. State Bank, 32 P.2d 1017; McGrath v. Carnegie Trust Co., 221 N.Y. 92, 116 N.E. 787; Andes Cooperative Dairy Co. v. Baldwin, 263 N.Y. 578, 189 N.E. 705; People v. Remington, 121 N.Y. 328, 24 N.E. 793; Winston v. Biggs, 117 N.C. 206, 23 S.E. 316; Central Bank & Trust Co. v. Jarrett, 195 N.C. 798, 143 S.E. 827; Kellogg v. Miller, 22 Ore. 406, 30 P. 229, 29 Am. St. Rep. 618; Allen v. Danielson, 15 R.I. 480, 8 A. 705; Green v. Jackson Bank, 18 R.I. 779, 30 A. 963; In re Burke, 55 A. 826; Walker v. Baxter, 26 Vt. 710; Whitesel v. Harman, 11 W.Va. 171, 161 S.E. 15; Harrison v. Gilchrist, 121 Wis. 127, 99 N.W. 975; 3 Michie on Banks & Banking, p. 216, sec. 158; 7 Amer. Juris., p. 535; Jones on Collateral Securities (3 Ed.), sec. 587; 3 R. C. L., p. 682, sec. 313.

Farrington & Curtis for respondents.

The correct rule to follow in liquidation of insolvents is as follows: "The value of securities held by secured creditors shall be determined by converting the same into money according to the terms of the agreement pursuant to which such securities were delivered to such creditors or by such creditors and the trustee, by agreement, arbitration, compromise, or litigation, as the court may direct, and the amount of such value shall be credited upon such claims, and a dividend shall be paid only on the unpaid balance." Title 11, U.S.C. A., sec. 93 (h). See also dissenting opinions in the case of Merrill v. Natl. Bank of Jacksonville, 173 U.S. 179, 43 L.Ed. 658; Bank v. Alexander, 92 S.E. 868, 1918-B, L. R. A. 1021; Earl v. Lane, 22 Colo. 273, 44 P. 591; Bank v. Bank, 80 Md. 371, 27 L. R. A. 476, 30 A. 913; In re McCune, 76 Mo. 200; State v. Bank, 40 Neb. 342, 58 N.W. 976; In re Wise, 121 Iowa 359, 96 N.W. 487; Bank v. Bank, 138 Mass. 515; 94 A. L. R. 475; Bank v. Green, 221 Ala. 201, 128 So. 394; Bank v. Taylor, 181 Ark. 356, 21 S.W.2d 1048; Jamison v. Commission Co., 59 Ark. 548, 28 S.W. 35; Guaranty Co. v. Bank, 49 P.2d 945. The statute to which the bankruptcy rule was applied by Judge Sherwood in the case of In re McCune, 76 Mo. 200, will be found in 1 Wagner, Statutes of 1872, Chapter 2, Section 29, which is as follows: "All demands against any estate shall be paid by the executor or administrator, as far as he has assets, in the order in which they are classed; and no demand of one class shall be paid until all previous classes be satisfied; and if there be not sufficient to pay the whole of any one class, such demands shall be paid in proportion to their amounts."

Bohling, C. Cooley and Westhues, CC., concur.

OPINION

BOHLING

What amount constitutes the basis for the computation of dividends payable to the State of Missouri, a creditor holding security, out of the free assets of an insolvent State bank is the question presented for determination. On June 13, 1930, the Finance Commissioner of the State of Missouri took possession of the Bank of Aurora, one of the duly selected State depositories. A claim on behalf of the State of Missouri, filed November 14, 1930, in the principal amount of $ 308,109.10 was duly allowed on December 18, 1930, in the sum of $ 273,091. Thereafter, the State of Missouri converted all collaterals securing its deposit into cash, realizing $ 236,879.87 and leaving a balance due of $ 36,211.13. Two dividends, amounting in the aggregate to fifteen per centum, have been declared out of the free assets. The foregoing epitomizes the material facts insofar as they are definitely detailed of record. The State contends said dividends should be reckoned upon the sum of $ 273,091; whereas the Commissioner of Finance says and the court nisi held they should be computed upon the sum of $ 36,211.13.

Generally, one of four rules has been applied to the right of a secured creditor to share in the free assets of an insolvent estate. [Merrill v. National Bank of Jacksonville, 173 U.S. 131, 135, 19 S.Ct. 360, 362, 43 L.Ed. 640, 642; Annotations, L. R. A. 1918B, 1024; 94 A. L. R. 468; 9 C. J. S., p. 1078, sec. 537; 7 Am. Jur., p. 534, sec. 734; 3 Michie, Banks and Banking (1931 Ed.), p. 216, sec. 158. Cf. 7 C. J., p. 750, sec. 545; 24 C. J., p. 727, sec. 1795, p. 729, sec. 1799; 32 C. J., p. 884, sec. 177; 3 R. C. L., p. 682, sec. 313; 14 R. C. L., p. 659, sec. 33; Jones on Collateral Securities (3 Ed.), sec. 587 et seq.; Glenn, Creditors' Rights and Remedies (1915 Ed.), sec. 535 et seq.; 34 Mich. L. Rev. 309; 15 Ill. L. Rev. 170; 20 Va. L. Rev. 234.] Applicable statutory directions control; but, absent statutory provisions more specific than a direction for ratable or pro rata distribution, the chancery or equitable rule has been adopted in a greater number of jurisdictions than any of the other rules. The rules are:

(1) The creditor is required first to exhaust his security and credit the proceeds on his claim or to credit its value on his claim and prove for the balance, it being optional for him to surrender his security and prove for his full claim; commonly known as the bankruptcy rule.

(2) The creditor can prove for and receive dividends upon the full amount of his claim regardless of any sums received from his security after the transfer of the assets from the debtor in insolvency; commonly known as the chancery or equitable rule.

(3) The creditor can prove for and receive dividends on the amount due him at the time of proving or filing his claim, being required to credit as payments all sums received from his security prior thereto; commonly known as the Illinois or Montana rule.

(4) The creditor can prove for the full amount, but shall receive dividends only on the amount due him at the date of distribution of the fund; that is, he is required to credit on his claim as proved all sums received from his security and may receive dividends only on the balance due him; commonly known as the Maryland rule.

Under the last three rules it is possible for a secured creditor to be paid in full; and said rules are subject to the limitation the secured creditor shall receive from all sources no more than the debt.

A rule has been applied in Kentucky which prevented the secured creditor sharing in the general assets until the unsecured creditors received an amount equal pro rata with the secured creditor. [Bank of Louisville v. Lockridge (1892), 92 Ky. 472, 18 S.W. 1; and Kentucky cases cited in L. R. A. 1918B, 1032, n. 63.]

The so-called chancery or equitable rule proceeds upon the theory the legal rights arising from the debtor's obligation and the security are not one and the same; that secured creditors have two sources of payment; i.e., the liability of the debtor, in common with unsecured creditors, and the liability of the security arising out of a lawful contract with the debtor; that the one is personal; the other is in rem; that the personal liability gives rise to a claim against the debtor's general or free assets while the liability of the security continues as a claim in rem; that the security stands as security for the whole debt, every dollar of it; that, absent statutory provisions affecting said rights at the time of the contract, insolvency effects no change in the legal status existing between the creditors and the insolvent debtor or gives unsecured creditors greater rights than they theretofore possessed; and that if inequality of distribution results, it is an inequality according to legal right. [Among others Merrill v. National Bank (1899), 173 U.S. 131, 138, 140, 141, 146, 19 S.Ct. 360, 363, 364, 366; 43 L.Ed. 640, 643, 644, 646; (a five to four ruling involving a statute providing for "a ratable dividend"); followed by the full court in Aldrich v. Chemical National Bank (1900), 176 U.S. 618, 638(2), 20 S.Ct. 498, 506(2), 44 L.Ed. 611, 618(2); Chemical National Bank v....