State v. Yellowstone Valley Bank & Trust Co. of Sidney
| Decision Date | 09 December 1925 |
| Docket Number | 5757. |
| Parties | STATE ex rel. RANKIN, Attorney General, v. YELLOWSTONE VALLEY BANK & TRUST CO. OF SIDNEY. WAR FINANCE CORPORATION v. YELLOWSTONE VALLEY BANK & TRUST CO. et al. |
| Court | Montana Supreme Court |
Appeal from District Court, Richland County; Frank P. Leiper, Judge.
Suit by the State of Montana, on the relation of Wellington D Rankin, Attorney General, against the Yellowstone Valley Bank & Trust Company of Sidney to wind up the affairs of the bank. From an order refusing the claim of War Finance Corporation a creditor, until certain conditions had been complied with it appeals. Reversed and remanded.
Stewart & Brown, of Helena, for appellant.
L. V Ketter, of Sidney, for respondents.
On March 22, 1922, the Yellowstone Valley Bank & Trust Company, a domestic corporation, failed in business and was closed by the state superintendent of banks and, in October following, was placed in the hands of a receiver appointed to wind up its affairs. At the time it failed, the bank was indebted to its depositors whose claims were not secured, and it was indebted also to the War Finance Corporation (hereinafter called the corporation) to the extent of $125,653.83 for borrowed money, which claim was secured by a pledge of sundry promissory notes, executed by individuals who had borrowed from the bank. Immediately after the bank failed, the corporation collected approximately $27,000 from these pledged notes, and in January, 1923, presented its claim for $99,376.19, the balance then due, but before the claim was acted upon it was amended so as to demand the full amount due at the time the bank failed. After the claim was presented but before any dividend was declared, the corporation collected from the pledged security the further sum of $27,000 in round numbers. Claims of unsecured creditors aggregating about $280,000 were presented and approved, and in April, 1924, a dividend of 20 per cent. was ordered and was distributed to those holding approved claims, but at that time the claim of the corporation had not been passed upon-neither allowed nor disallowed.
On March 20, 1925, the court in which the receivership proceeding was pending entered an order refusing to allow the claim of the corporation unless and until it either surrendered to the receiver the collateral held by it, or exhausted the security and applied the proceeds in reduction of the amount of its claim. If the latter alternative were chosen, the court indicated that the claim would then be allowed for the balance and the same dividends paid thereon from the general assets, as had been paid or should be paid upon other claims. From that order the corporation appealed and now insists that it should be paid dividends computed upon the amount due to it at the time the bank failed, without reference to the amounts collected from its security, either before or after it presented its claims.
The question for determination is: Upon what basis should the corporation share in the distribution of the general assets of the failed bank?
A like question has been before the courts of this country repeatedly during more than a century, arising out of voluntary assignments, the administration of estates of deceased insolvents or winding up proceedings. Speaking generally, the question arises under one of three sets of circumstances: (a) Where the secured creditor has not collected anything from his security. (b) Where, after the insolvency has occurred, but before he presents his claim, he realizes a part of the amount of his claim, from the collateral held by him. (c) Where, after he presents his claim, but before a dividend is paid, he collects a part of the amount of his claim, from his security. Differences in the language employed in deeds of assignments, the influence of local statutory provisions, and different theories of the law applicable, have led to particular differences in judicial decisions and to some confusion.
The trial court adopted the bankruptcy rule, so called because it has been applied in bankruptcy generally and is the rule prescribed by our National Bankruptcy Act (30 Stat. at Large, 544 [U. S. Comp. St. §§ 9585-9656]), though the courts are unable to agree as to the origin of the rule. It was invoked in this country first in 1820 (Amory v. Francis, 16 Mass. 308) and has been followed in Iowa (Wurtz v. Hart, 13 Iowa, 515; Doolittle v. Smith, 73 N.W. 867, 104 Iowa, 403), in Washington (In re Frasch, 31 P. 755, 32 P. 771, 5 Wash. 344; First Nat. Bank v. Bank, 221 P. 595, 127 Wash. 475); in Kansas (Bank of Kansas City v. Branch, 45 P. 88, 57 Kan. 27; Investment Co. v. Richmond Nat. Bank, 49 P. 521, 58 Kan. 414; Bank v. State, 54 P. 510, 8 Kan. App. 468), in Mississippi (Bank v. Duncan, 36 So. 690, 84 Miss. 467), and in Georgia (Citizens' & Southern Bank v. Alexander, 92 S.E. 868, 147 Ga. 74, L. R. A. 1918B, 1021). It was approved by the dissenting Justices in Merrill v. Nat. Bank, 19 S.Ct. 360, 173 U.S. 131, 43 L.Ed. 640, and in effect has been reduced to statutory form in Idaho (Blackman v. Pettengill, 137 P. 182, 25 Idaho, 307), in Minnesota (Swift v. Fletcher, 6 Minn. 550 [Gil. 386]), and in New Hampshire (Bank Commissioners v. Security Trust Co., 49 A. 113, 70 N.H. 536). Statutes, somewhat similar, though of more restricted application, prevail in California (In re Levin, 63 P. 335, 73 P. 159, 139 Cal. 360), and in New Jersey ( State Bank v. Receivers, 3 N. J. Eq. 266; Buttler v. Tobacco Co., 70 A. 319, 74 N. J. Eq. 423).
This rule proceeds upon the theory that the amount of the secured creditor's claim against the general assets of the insolvent estate cannot be determined until he either surrenders his security or converts it into cash and applies the proceeds towards the discharge of his claim. It denies to the secured creditor, as such, the right to participate in the distribution of the general assets. If he surrenders his security, he participates as an unsecured creditor, and if he converts his security into money and applies the proceeds upon his claim, he participates only upon the basis of the remainder and as an unsecured creditor. In so far as the rule requires the secured creditor to surrender his security, it robs him of the benefit of the contract under which he obtained the security and deprives him of the fruits of his prudence and foresight. In so far as it requires him to convert his security into cash and apply the proceeds to his claim before he is permitted to receive a dividend from the general assets of the estate, it is impracticable of application in this case. The corporation cannot sell the notes which it holds as collateral. Section 8312, Revised Codes, declares:
"A pledgee cannot sell any evidence of debt pledged to him, except the obligations of governments, states, or corporations; but he may collect the same when due." If that rule be applied in this case, the corporation must either surrender the advantage it gained by obtaining security for its debt, or it must wait for a dividend from the general assets until, if ever, if collects every one of the 92 pledged notes which it held at the time the bank failed. This is not a proceeding in bankruptcy, and we are not disposed to adopt the rule which is opposed by the great weight of authority and, in our opinion, by the better reasoning. The other courts which have considered the question, all concede to the secured creditor, as such, the right to participate in the distribution of the general assets of the insolvent estate, but they do not agree as to the basis upon which his dividends should be computed.
Many of the courts follow the rule which authorizes the secured creditor to receive dividends computed upon the amount due to him at the time his debtor's insolvency occurs, without deducting any amounts which he may have realized from his security after that date, provided only that the dividends received and the amounts realized from his security shall not exceed the amount of his claim. This rule is frequently referred to as the English chancery rule, though, in that form, it was never enforced in England at any time. It was adopted in this country in Connecticut in 1817 (Findlay v. Hosmer, 2 Conn. 350), and has been adhered to in Delaware (Mark v. Brick Manufacturing Co., 84 A 887, 10 Del. Ch. 58), Kentucky (Logan v. Anderson, 18 B. Mon. 114; Hibler v. Davis, 13 Bush, 20; Citizen's Bank v. Patterson, 78 Ky. 291), Michigan (Third Nat. Bank v. Haug, 47 N.W. 33, 82 Mich. 607, 11 L. R. A. 327; In re Bement's Sons, 114 N.W. 327, 150 Mich. 530), New York (People v. Remington, 24 N.E. 793, 121 N.Y. 328, 8 L. R. A. 458), North Carolina (Brown v. Merchants' & Farmers' Nat. Bank, 79 N.C. 244; Winston v. Biggs, 23 S.E. 316, 117 N.C. 206; Merchants' Nat. Bank v. Flippen, 74 S.E. 100, 156 N.C. 334), Oregon ( Kellogg v. Miller, 30 P. 229, 22 Or. 406, 29 Am. St. Rep. 618), Pennsylvania (Skunk's Appeal, 2 Pa. 304; Miller's Appeal, 35 Pa. 481; Boyer's Appeal, 29 A. 1001, 163 Pa. 143), Rhode Island (Allen v. Danielson, 8 A. 705, 15 R.I. 480, overruling Knowles, In re, 13 R.I. 90; Greene v. Jackson Bank, 30 A. 963, 18 R.I. 779; In re Burke, 55 A. 825, 25 R.I. 302), Tennessee (Bank Cases, 21 S.W. 1070, 92 Tenn. 437), Vermont ( West v. Bank, 19 Vt. 403), Virginia (Bank v. Trigg Co., 56 S.E. 158, 106 Va. 327), West Virginia ( Williams v. Overholt, 33 S.E. 226, 46 W.Va. 339; Price v. Hosterman, 73 S.E. 55, 70 W.Va. 12), and Wisconsin (Harrigan v. Gilchrist, 99 N.W. 909, 121 Wis. 127; Corbett v. Joannes, 104 N.W. 69, 125 Wis. 370). It has been enforced generally by the federal courts since the decision in Chemical Nat. Bank v. Armstrong, 59 F. 372, 8 C. C. A. 155, 28 L. R. A. 231, and was adopted by the manjority of the United States...
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