United States Nat Bank In Johnstown v. Chase Nat Bank of New York City

• Decision Date: 14 April 1947
• Docket Number: No. 371,371
• Citation: 91 L.Ed. 1320,67 S.Ct. 1041,331 U.S. 28
• Parties: UNITED STATES NAT. BANK IN JOHNSTOWN et al. v. CHASE NAT. BANK OF NEW YORK CITY et al
• Court: U.S. Supreme Court

331 U.S. 28

67 S.Ct. 1041

91 L.Ed. 1320

UNITED STATES NAT. BANK IN JOHNSTOWN et al.

v CHASE NAT. BANK OF NEW YORK CITY et al.

No. 371.

Argued Feb. 7, 1947.

Decided April 14, 1947.

Mr. Robert I. Rudolph, of Washington, D.C., for petitioners.

[Argument of Counsel from page 29 intentionally omitted] Mr. William Dean Embree, of New York City, for respondents.

Mr. Justice MURPHY delivered the opinion of the Court.

A problem arising under the Bankruptcy Act, 11 U.S.C.A. § 1 et seq., is presented by the unique facts of this case.

On June 10, 1926, Harvey C. Stineman was adjudicated a bankrupt upon a voluntary petition and the case was referred to a referee. The principal asset of the bankrupt estate was an undivided one-sixth interest in a large acreage of valuable coal lands, a large portion of which was operated by lessees and was producing substantial royalties. The value of the interest of the bankrupt estate in this asset is alleged to have been appraised at $90,000.

More than four months prior to the date when the petition was filed and the adjudication made, the United States National Bank of Johnstown, Pa., and the First National Bank of South Fork, Pa., had procured judgments against Stineman. These two judgments constituted first and second liens, respectively, on Stineman's interest in the coal lands. This interest had no other encumbrances upon it.

On January 8, 1927, the Johnstown bank filed its secured claim in the bankruptcy proceedings in the amount of $10,000, reciting as its security the first lien on the interest in the coal lands. This claim was allowed Subsequently, in 1932, the Johnstown bank filed an amended claim in the amount of $13,685, interest accruing after bankruptcy having been added to the original claim. The amended claim was allowed in the amount filed and formed the basis for the bank's participation in the dividends from the general fund, mentioned hereinafter. A court order in 1944 reduced this claim to $10,000.

The South Fork bank, on June 29, 1926, filed its secured claim with the referee for $11,290, reciting the second lien as its security, along with unsecured claims for $7,173.45. Dividends from the general fund were subsequently paid to the bank on the basis of the full amount of all its claims, $18,463.45.

Numerous general, unsecured claims were filed by other creditors, approximating $225,000 in amount. Included among these was the claim of the Chase National Bank of the City of New York, a claim which was allowed in the amount of $55,231.98.

The referee held a meeting of the creditors on December 31, 1929, more than three and a half years after the adjudication. The motive for this meeting appears to have been the fact that the Johnstown and South Fork banks, the judgment lien creditors, were pressing for payment of their secured claims. This meeting was attended by the bankrupt, the trustee in bankruptcy and representatives of the two judgment creditors, the Chase National Bank and certain other general creditors. Apparently not all of the general creditors appeared at this meeting. The consensus of opinion among those present was that the real estate had a value in excess of the liens but that 'if the lien creditors foreclosed upon their liens, little, if anything, would be left for general creditors.'

One of the attorneys present, P. J. Little, then made a suggestion. Mr. Little at this time was serving as counsel for the trustee, the Chase National Bank and several other general creditors. His suggestion was 'that under the law the estate should be divided into two items; one item showing funds arising wholly from real estate which does not include any of the leases or the funds from any of the leases; the other fund should be made u of all royalties, rentals, or dividends on stocks or bonds. The first fund to go to the first judgment creditor, the second fund to be divided pro rata among all the creditors.'

The parties apparently agreed to this proposal. Although no supporting order of the referee appears in the record, the administration of the bankrupt estate proceeded as if a supporting order had been entered. The two judgment lien creditors assented to this course of events and it is asserted that all the creditors understood that the liens were to remain intact until the underlying claims had been paid in full.

Thereafter, four dividends were declared and distributed from the real estate fund, while seven dividends were declared and distributed from the general fund. The Johnstown bank received at least $1,364.76 from the real estate fund; the South Fork bank appears to have received nothing from that fund. Both of these banks shared with the other creditors in the seven distributions from the general fund, the Johnstown bank receiving $2,435.06 and the South Fork bank, $3,285.35. No exceptions were ever taken to any of the various orders of distributions. In addition, these two banks have carefully received their judgments during each five year period, making the trustee in bankruptcy a party to the proceedings.

In October, 1942, the Chase National Bank filed petitions for a decree to the effect that the two banks had waived their liens by sharing in the distributions from the general fund along with the general creditors and that the Johnstown bank should be compelled to return the $1,364.76 it had received from the real estate fund. The referee, however, held that both the Johnstown and South Fork banks were entitled to maintain their positions as lien creditors and at the same time participate in the distributions from the general fund. The District Court reversed the referee's decision, feeling that participation in distributions from both the real estate and general funds was contrary to accepted bankruptcy practice. In re Stineman, 56 F.Supp. 190. On rehearing, the District Court changed its mind; it became convinced that the Chase National Bank had recommended the arrangement, had acquiesced in its execution and was now estopped from objecting. In re Stineman, 61 F.Supp. 151. The Third Circuit Court of Appeals reversed, holding that the parties had completely disregarded the pertinent provisions of the Bankruptcy Act and that the Johnstown and South Fork banks had waived their liens and were entitled to share in the bankruptcy estate only as general creditors. In re Stineman, 155 F.2d 755.

Sections 65, sub. a, and 57, sub. h of the Bankruptcy Act are the ones pertinent to this case. Section 65, sub. a, provides: 'Dividends of an equal per centum shall be declared and paid on all allowed claims, except such as have priority or are secured.' 11 U.S.C. § 105, sub. a, 11 U.S.C.A. § 105, sub. a. Section 57, sub. h provides: '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. Such determination shall be under the supervision and control of the court.' 11 U.S.C. § 93, sub. h, 11 U.S.C.A. § 93, sub. h.

Under these provisions, there are several avenues of action open to a secured creditor of a bankrupt. See 3 Collier on Bankruptcy (14th Ed.) pp. 149—157, 255—259. (1) He may disregard the bankruptcy proceeding, decline to file a claim and rely sole upon his security if that security is properly and solely in his possession. In re Cherokee Public Service Co., 8 Cir., 94 F.2d 536; Ward v. First Nat. Bank of Ironton, Ohio, 6 Cir., 202 F. 609. (2) He must file a secured cla m, however, if the security is within the jurisdiction of the bankruptcy court and if he wishes to retain his secured status, inas- much as that court has exclusive jurisdiction over the liquidation of the security. Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 51 S.Ct. 270, 75 L.Ed. 645. (3) He may surrender or waive his security and prove his entire claim as an unsecured one. In re Medina Quarry Co., D.C., 179 F. 929; Morrison v. Rieman, 7 Cir., 249 F. 97. (4) He may avail himself of his security and share in the general assets as to the unsecured balance. Merrill v. National Bank of Jacksonville, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640; Ex parte City Bank of New Orleans, 3 How. 292, 315, 11 L.Ed. 603.

Section 57, sub. h, is a codification of this fourth possibility. It permits the secured creditor to receive dividends along with the general creditors only on the balance remaining after the value of the security has been determined and deducted from the claim. This rule, commonly known as the bankruptcy rule, is designed to preclude any unwarranted advantage from accruing to the secured creditor. Grounded upon the statutory principle of equality and ratable distribution, it prohibits the secured creditor from reaping the whole benefit of his security while simultaneously taking dividends from the general assets on the basis of his entire claim as if he had no security. This rule differs from the one in equity, which allows the secured creditor to receive dividends on the full amount of his claim, crediting all dividends received and reserving the security against any deficiency. Merrill v. National Bank of Jacksonville, supra. And see 3 Collier on Bankruptcy (14th Ed.) p. 153; Hanson, 'The Secured Creditor's Share of an Insolvent's Estate,' 34 Mich.L.Rev. 309; 12 Ford.L.Rev. 77.

It is argued that the plan adopted in this case cannot be sanctioned under the foregoing principles. This plan allegedly called for the use of something similar to the equity rule of distribution. The judgment lien creditors were to retain...