State v. State Bank of Alamogordo.

• Decision Date: 22 May 1934
• Docket Number: No. 3936.,3936.
• Parties: STATEv.STATE BANK OF ALAMOGORDO.
• Court: New Mexico Supreme Court

38 N.M. 338

32 P.2d 1017

STATE

v.STATE BANK OF ALAMOGORDO.

No. 3936.

Supreme Court of New Mexico.

May 22, 1934.

Appeal from District Court, Otero County; Numa C. Frenger, Judge.

Proceeding by the State against the State Bank of Alamogordo. From an adverse judgment, the Reconstruction Finance Corporation, a creditor and claimant of the defendant, appeals.

Reversed and remanded.

On insolvency of state bank, secured creditor was entitled to prove for and receive dividends on full amount of its claim regardless of any sums realized on collateral after adjudication of insolvency, but not more than full amount due. Comp.St.1929, § 32-194.

Turney, Burges, Culwell & Pollard and Edward C. Wade, Jr., all of El Paso, Tex., for appellant.

E. K. Neumann, Atty. Gen., and Quincy D. Adams, Asst. Atty. Gen., for the State.

SADLER, Justice.

Reconstruction Finance Corporation, as appellant, complains of an order of the district court of Otero county, directing the manner of its participation, as a secured creditor in the assets of State Bank of Alamogordo in liquidation before the court under the act for the winding up of insolvent corporations. John Bingham, as state bank examiner, and Lewis N. Gillis, as coreceiver of the bank, are the real appellees, although the state appears nominally as such.

The bank closed its doors on November 12, 1932, and on the agreed statement of facts upon which the question involved is submitted for our determination, that date must be taken as the time of declared insolvency. On such date the bank was indebted to appellant in the sum of $28,226.97 for money borrowed evidenced by two notes aggregating in amount the total indebtedness named above. Securing this indebtedness, appellant held as collateral certain notes owned by the bank for an aggregate principal amount of $23,720.12 and a real estate mortgage covering properties of an estimated value of $24,470.45. The face amount of the notes held as collateral plus estimated value of the real estate security is thus seen to be $48,190.57.

Through collections made on the notes held as collateral and from the proceeds of the sale of certain of the real estate, appellant between date of closing and date of trial had reduced its indebtedness to $20,550.27, which amount remained secured by the uncollected collateral and the real estate mortgage aforesaid. The question arose whether appellant should be permitted to participate in dividends upon the basis of the amount due it when the bank suspended business, notwithstanding its security; or, upon some other basis.

The trial court, denying appellant's claim for participation in the general assets on the basis of the amount of its claim as it stood upon adjudication of insolvency, entered its order, and adhered to it in the face of a motion to amend, as follows:

“That the amount of said claim, to-wit, $28,226.97, represents the correct amount due the Claimant on the 12th day of November, A. D. 1932; that since November 12, 1932, the Claimant has been paid a considerable sum as the proceeds from collection of the notes receivable which it holds as security and from the sale of real estate included in its mortgage. That other payments are being made to the Claimant from time to time as its securities are liquidated. That the claimant should be permitted to participate in any dividend paid herein to the extent only of the amount due it on the date of the order authorizing such dividend.”

It is this ruling which is assailed upon appeal and its correctness presents the only question for review. The matter is one of first impression with us, although fortunately for our consideration of it, the point at issue has been frequently and exhaustively dealt with by some of the ablest jurists of other states and of the federal courts.

The leading case in the United States upon the subject is Merrill v. National Bank of Jacksonville, 173 U. S. 131, 19 S. Ct. 360, 362, 43 L. Ed. 640, in which Mr. Chief Justice Fuller in a thorough and masterful opinion written for the majority adopted what is known as the equity rule for the distribution of dividends from an insolvent estate. That opinion states the four different rules applicable in the distribution of insolvent estates, as follows:

“Counsel agree that four different rules have been applied in the distribution of insolvent estates, and state them as follows:

“‘Rule 1. The creditor desiring to participate in the fund is required first to exhaust his security, and credit the proceeds on his claim, or to credit its value upon his claim, and prove for the balance, it being optional with him to surrender his security and prove for his full claim.

“‘Rule 2. The creditor can prove for the full amount, but shall receive dividends only on the amount due him at the time 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.

“‘Rule 3. The creditor shall be allowed to prove for, and receive dividends upon, the amount due him at the time of proving or sending in his claim to the official liquidator, being required to credit as payments all the sums received from his security prior there to.

“‘Rule 4. The creditor can prove for, and receive dividends upon, the full amount of his claim, regardless of any sums received from his collateral after the transfer of the assets from the debtor in insolvency, provided that he shall not receive more than the full amount due him.”’

The rule first stated is what is known as the bankruptcy rule whereas the one last stated is known as the equity rule. The other two represent variations from the first and last. Not often do we have presented a question which has so engaged the best judicial minds of the country as is the case with this one. It would therefore be profitless for us to enter into a prolonged discussion or restatement of the reasons supporting the conflicting views. Suffice it to say that after a mature weighing of the comparative merits of the two principal rules, we are convinced the equity rule is the better supported by logic and basically sound reason.

Mr. Mirhie in volume 3 (§ 158, p. 216) of his work on Banks and Banking, published as late as 1931, writes concerning the several rules, as follows:

“English Chancery Rule. Although there is irreconcilable conflict in the cases, the better rule, and that sustained by the great weight of authority is that collateral security, by mortgage or otherwise, held by the claimant, does not affect the claimant's right to prove up for the full amount of his claim; nor does the fact that he has realized a part of his claim from the subjection of such collateral, since the date of receivership; but he is entitled in such case to receive distributions or dividends from the general estate, until such dividends, added to the amount realized from the collateral, are equal to or sufficient to satisfy his debt. This rule, which was adopted in this country in Connecticut in 1817, is frequently referred to as the English chancery rule, though, in that form, it is said never to have been enforced in England at any time.”

“Bankruptcy Rule. In some jurisdictions it is held that the rule in equity is the same as the rule in bankruptcy, and that the...