Estate of Levin Brothers

On the previous submission of this case in Bank an opinion was prepared by the late Justice Temple, signed by a requisite number of concurring justices, and filed. It appearing, however, that such opinion was not signed by the requisite number of justices who had heard the oral argument in the case, and no stipulation having been entered into that any of the justices not hearing such oral argument might participate in the decision, and the attention of the court having been directed to that fact, the opinion so filed was withdrawn. That opinion was as follows: — "The above-named firm, composed of Isidor Levin, Julius Levin, and David Levin, were adjudged insolvents, January 7, 1897, as were also the individual members of the firm. It does not appear that there were any individual creditors. "The Anglo-Californian Bank, appellant here, holds a mortgage to secure its indebtedness upon the homestead of Isidor Levin, one of the copartners. Appellant's allowed claim amounts to $33,500, and the value of the homestead is $6,000. The homestead is the individual property of Isidor Levin, and was his domicile, but was set apart as a homestead in the proceedings in insolvency, not having been previously a statutory homestead. "In the decree, settling the final account of the assignee, the court held that the bank should first deduct from its proven debt the value of the homestead, and should be allowed dividends only on the residue of its claim. From that portion of the decree such creditor appeals. "The appellant contends that it has a right to dividends upon the full amount of its proven claim, without regard to the security which it holds upon the homestead of the individual partner, which it may exhaust after receiving full dividends from the assets of the firm. It is conceded that, even in such a case, its demand will not be paid in full. Both sides rely with apparent confidence upon the words of the statute. As a guide to its interpretation, we are referred to *Page 352 the rule of equity, and to that laid down in the Civil Code applicable to the case, where one creditor is able to reach a fund which the others cannot. There are two sections in our Civil Code in relation to this matter. Section 2899 relates to liens, where one creditor has a lien on several things, and other creditors have subordinate liens on some but not upon all of these things; the person having the prior lien may be compelled to resort first to the exclusive security held by him, `when he can do so without risk or loss to himself, or of injustice to other persons.' Section 3433 states the general equitable principle, and its application is also expressly limited to cases where the doubly secured creditor can have complete payment of his debt, from the funds to which he may alone resort. Otherwise, he may share equally with the general creditors in the common fund, to the extent necessary to his payment in full. These rules, however, prevailed only in cases where assets were marshaled by courts of equity, in cases of actual insolvency, as, for instance, of insolvent partnerships, corporations, and the like. The bankrupt laws, both in England and the United States, have always treated the secured creditor less favorably than courts of equity did. In equity the rule has been, that a creditor who is secured upon assets of the debtor himself, may prove his entire demand and receive his full dividends, and then resort to his securities, provided he only gets full payment. Under the bankruptcy laws, both here and in England, the rule has always been, that in such a case, he could not get dividends upon his full demand without surrendering his securities. "The difference between the practice in equity and in bankruptcy was elaborately discussed in People v. Remington,121 N.Y. 328; also, Story's Equity, sec. 640; Greenwood v. Taylor, 1 R. M. 185; Merrill v. National Bank, 173 U.S. 134. In these cases it is said that to refuse to a secured creditor the right to prove his full demand against the insolvent estate without deducting his security, when the result would be that he would not be fully paid, would be to deprive him in part of his security. Before the insolvency he had a right to collect what he could, first from the general assets of his debtor, and then to realize upon his securities. The insolvency did not change his contract rights, but the proceeding *Page 353 was a mode of enforcing them. The difference between the result of the equity rule, and the bankruptcy rule, is illustrated by an instance suggested in the case from the supreme court of the United States. A creditor has a debt of $10,000, secured by a lien upon property belonging to his debtor, worth $5,000. The insolvent estate will pay fifty cents on the dollar. The rule in equity would allow the creditor to prove his whole demand against the insolvent estate, from which he would get $5,000, which with his security would pay his demand in full. In the bankruptcy proceedings, he could have proved only for the difference between the value of his security and his debt, which would have been $5,000, and he would have been paid from the insolvent estate only $2,500, losing a like amount of his claim. The appeal to the rule in equity, therefore, as to the marshaling of assets in cases of insolvency cannot help the respondent. "The rule in bankruptcy proceedings, however, as already stated, has always been that a creditor having security upon the goods of his debtor, which, but for his lien, would have gone to swell the amount to be divided among the creditors, must, before he can prove his claim, either surrender his security to be administered in the proceeding for the benefit of the creditors, or prove only for the balance after deducting the value of his security. Upon this point, all bankrupt and insolvency proceedings have been similar from the time of the first English Bankrupt Act (34 Henry VIII); but it has always been held that the creditor is not required to make a deduction, but may prove his whole claim, although he has security given by third parties, or upon the separate estate of one of the partners. (Story on Partnership, sec. 389, and authorities cited in note.) This last proposition is universally recognized in this country and in England, with the exception of a single case in Tennessee and some cases in Massachusetts, which the high reputation of that court, and the indorsement of Chief Justice Shaw, failed to make current elsewhere, and which, I believe, are now repudiated, even in Massachusetts. "But respondent's counsel contends, that since it does not appear that there were individual creditors, the question is to be regarded as though the assets of the partnership and of the individual partners, were being administered together. Appellant *Page 354 had a right to participate in the partnership assets to the full amount of his debt. If it were true that before he could participate in the individual assets of one of the partners, he would be required to give up security which he held upon property, which, but for his lien, would increase that estate, how that fact could affect his right to partnership assets I cannot understand. The right to a ratable share of the partnership recoveries is his property, of which he cannot be thus deprived. And the equities are all in favor of the doubly secured creditor. The partners are entitled to demand that the partnership funds shall be first applied to the payment of partnership debts before the estate of the individual partner is resorted to. Regarded as the grantee of the estate of the individual partner, upon which he has security, the doubly secured creditor now has that equity. Why not? If he were the purchaser, no one would dispute that proposition. Is it not as obvious when he takes a conveyance by way of security? The mortgage was executed three years before the insolvency, but recorded just before. Counsel say it was to enable the appellant to make the points urged by him here. If the transaction was not in fraud of the Insolvency Act, and assailable on that ground, or for any other reason, it was a proper motive, but one with which, proper or improper, we have no concern. "This question has been settled in favor of appellant in the bankruptcy courts of the United States. As far as affects this question, the National Bankruptcy Act is identical with our insolvent law. In re Thomas Sivyer, 17 Nat. Bank Reg. 54, Fed. Cas. No. 13886, the matter was elaborately considered, in a case in all essential respects the counterpart of this, and it was held that the fact that there was no individual indebtedness of the partners could make no difference, and did not change the rule that a creditor of the partnership could receive dividends from the partnership recoveries, although he was in part secured by a mortgage upon the property of one partner. And it could make no difference whether there were individual creditors or not, if the individual estates were sufficient to pay them. Such a question would never be of interest to partnership creditors, except where there was a surplus after satisfying the claims of the individual creditors. "The language of the act itself calls for this construction. *Page 355 All admit that the partnership and individual estates, though having a common assignee, are administered as separate estates. Section 39 speaks of the creditors of the firm, and of the creditors of the individual partners. Of course, the debtor of the firm creditors must be the firm, and the debtor of the creditors of the individual partners must be the individual partners. The only case under the law where a creditor cannot prove his entire debt is where he has a mortgage, pledge, or lien on the property of his debtor. The debtor of appellant is the partnership upon whose property he has no lien. "For still another reason the contention of the respondent must be overrruled. The lien in question is upon exempt property which did not pass to the assignee. It is in the precise position of a lien upon property of third persons. The lien has not diminished the amount to be distributed to the general creditors, and its release would not add to that fund. Under any view, all the creditor would have to do to entitle him to prove his entire demand against the partnership assets would be to release his security, and to do this would not benefit the other creditors. They are therefore not interested in the fact that he has such an advantage. The only purpose of the rule is, that a fair and equal distribution may be made of the estate being administered by the court. The retention of the security does not prevent an equal distribution of that estate. Its surrender would not add to it, but to deny to appellant a dividend upon his full demand would make the distribution unequal as to him. As said by Bump on Bankruptcy, 11th ed., p. 496: `Every line of the law relating to this matter points most distinctly and directly to property of the bankrupt, and only to property of the bankrupt, with which the district court in bankruptcy can deal.' "In the following cases a cognate question is elaborately considered, and the argument is applicable here: In re Dunkerson Co., 4 Biss. 253; In re Cram, 1 Haskell, 89." Upon this present submission we are satisfied with the reasons and conclusions reached by the late justice, as embodied in the foregoing opinion, and adopt it as the prevailing opinion of the court It is therefore ordered that the portion of the order appealed from be reversed, the cause remanded, and the court *Page 356 directed to enter a new order in accordance with the views above expressed and herein adopted. Beatty, C.J., and Henshaw, J., concurred.