High v. Fifth National Bank

Hooker, C. J. The Scofield Buggy Company, being indebted to various persons, executed two mortgages— one of real estate, the other of chattels — to the complainant as trustee. ,The real-estate mortgage stated that— “ Whereas, the said Scofield Buggy Company is indebted to the parties in the sums respectively next below named, and are liable as indorsers upon * certain customers* and business papers, discounted and used by sundry corporations and persons, as below stated, to wit: [Here followed a list of the creditors, with the amount of indebtedness, due to each following his name, including “Fifth National Bank, Grand Bapids, Michigan, $5,500.**] And are liable to said Home Savings Bank, as indorser upon commercial paper discounted, in the sum of $8,925.15; and for like-, indorsement of paper discounted at Fifth National Bank,. Grand Bapids, to the amount of $19,000. * * * “Now, therefore, the said first party, for and in consideration of the said indebtedness and liabilities to said parties, and in consideration of the sum of one dollar to it in hand paid by said Hiram M. High, .trustee, party of the second part, * * * has granted * * * unto said Hiram M. High, trustee, party of the second, part, and to his successors and assigns: * * * Provided always, and these presents are upon the express condition, .that the said first party shall well and truly pay •or cause to be paid to each and all of said parties, or to. — 504 — said trustee for them, the amounts so due to them respectively, with interest thereon, and shall well and truly discharge or cause to be discharged each and every such contingent liability,” etc. The chattel mortgage contained similar recitals and provisions. Soon after making these mortgages the Scofield Buggy Company made an assignment for the benefit of creditors. Under the decision of this Court In re Assignment of Scofield Buggy Co., 89 Mich. 15, the receiver paid over to the trustee the amount realized by him upon sale of the property mortgaged. It may be said, in passing, that.such payment was resisted upon the ground that the Fifth National Bank had received several thousand dollars upon the discounted paper alluded to in the mortgages, and it' was contended by the receiver that this sum should be deducted from the claim of the Fifth National Bank, and should lessen the amount to be paid to the trustee. The Court held that, inasmuch as the amount realized from the property was inadequate to pay the claims secured upon it, the trustee was entitled to the whole fund, and that it was of no concern to the receiver how it was divided among the secured creditors. In this case the claim is made that the amount received by the Fifth National Bank should be deducted from its original claim, and that the reduced amount should constitute its credit for the purpose of the -apportionment of the fund among the creditors. The .circuit court held otherwise, and two of the secured creditors appeal. The former decision recognizes the rule that a mortgagee 'is entitled to the whole mortgaged property as security for his debt. While payment of a part reduces the debt, it proportionately increases the value of the security. And had the claim of the Fifth National Bank been fully paid, the trustee would still have been entitled to the full fund, — 505 — if required to pay the other secured claims. Such decision also says: “The mortgages given to High in trust to secure the several creditors therein named the several debts due to them, respectively, are valid securities in the trustee’s hands.’’ Equitably, each creditor had a mortgage, concurrent in point of time with the others, for the amount of his debt. This statement should perhaps be qualified by the fact that the mortgage separated the claims based upon indorsed paper from other indebtedness held by the same creditor. As to such, we think the creditor stood in the position of holding separate mortgages for the'two claims, the effect of which would be that the full payment of either would extinguish the security of the creditor upon that claim. In other words, it could not be used to increase his percentage upon the other claim. But, until a claim was extinguished, he would be entitled to' apply the full share of the security for that claim, as provided by the terms of the mortgage, to the payment of the balance of such claim. If $19,000 was the amount of such indebtedness, that sum was to be used in computing the dividend to be applied to the payment of such claim, although a part of the claim had been paid, so long as the payment had not been made from the mortgaged property. This is but the application of the common doctrine that a person is entitled to the whole of his security. It may be said that the aggregate of discounted paper should not be treated as one debt, but that each note discounted should be considered as a sepárate and distiñct mortgage, the security and debt to be extinguished to the amount of such paper when paid: The mortgage secures many claims. It does not specify the items which go to make up the amount secured, except generally. It groups one class of the claims of the Fifth National Bank — 506 — under the name' of indebtedness, another under the name of liabilities. It does not itemize the specific items of indebtedness, or the several papers discounted which go to make up the $19,000 liability. It may be that each represents a single transaction; but, if not, why not treat the $5,500 indebtedness as several debts if the discounted paper is to be so treated? Again, if such a construction of the mortgage can be adopted, it is-apparent that the creditor having an indebtedness of a single item has an advantage over the one whose claim is made up of many, for, while the former may have the benefit of his whole security to the last • dollar of his claim, the latter must submit to having it reduced every time that one of the items of his indebtedness is paid in full. If such is the law, why should not the doctrine be applied in cases where several distinct notes are secured by one mortgage? We think that the mortgagor settled the question of how these items should be treated when it gathered them into two groups. Thenceforth the creditor had the right to treat them as two claims. It cannot be said that security for an indebtedness as indorser is any less a security than security for another as maker of a paper. It may be admitted that the holder of the former has an advantage over the holder of the latter, for the reason that he has a claim upon the maker of the paper; but the security is none the less his, nor is it governed by any other rule than that of the other. The mortgagor has- seen fit to give him such advantage. If he could lawfully do this, the creditor cannot be deprived of the legitimate benefit of such security. He may be required to resort to the maker of the paper first, or yield up his additional security for the general good, but he cannot be deprived of the security which the mortgage gives him, except by its application upon his debt. In Evertson v. Booth, 19 Johns. 486, it is said by — 507 — Spencer, C. J., that the equitable rule that the creditor must exhaust his exclusive security before resorting to that which is common is not to be enforced if it will in the least impair the prior creditor’s right to raise his debt out of both funds; and he adds: “I know of no principle of equity which can take from him any part of his security until he is completely satisfied.” See, also, Story, Eq. Jur. § 633. In Mason v. Bogg, 2 Mylne & C. 448, Lord Cottenham says in a case of the administration of the insolvent estate of a deceased person: “A mortgagee has a double security. He has a right to proceed against both, and to make the best he can of both. Why he should be deprived of this right because the debtor dies, and dies insolvent, it is not very easy to see.” In Kellock’s Case, L. R. 3 Ch. 769, 777, it is said: “This court is not to depart from its own established practice, and vary the nature of the contract between mortgagor and mortgagee, by analogy to a rule which has been adopted by a court having a peculiar jurisdiction, established for administering the property of traders unable to meet their engagements, which property that court found it proper and right to distribute in a particular manner, different from the mode in .which it would have been dealt with in the court of chancery. * * * We are asked to alter the contract between the parties by depriving the secured creditor of one of his remedies, namely, the right of standing upon his securities until they are redeemed.” See, also, People v. Remington, 121 N. Y. 328. In Miller’s Appeal, 35 Penn. St. 481, a debtor executed a general assignment for the benefit of creditors. Subsequently he became entitled to a legacy, which was attached and recovered by one of his creditors for whose benefit the assignment was made. It was held that such creditor was, nevertheless, entitled to a dividend out of the assigned — 508 — estate on the whole amount of his claim at the time of the execution of the assignment; and, further: “A creditor is entitled to a dividend under an assignment, not merely as a creditor, but as an equitable owner of the assigned estate; and the extent of his ownership is fixed by the amount of his claim when the assignment is made.” To the same effect is Keim’s Appeal, 27 Penn. St. 42. The case of Midgeley v. Slocomb, 32 How. Pr. 427, recognizes the doctrine, but applied the rule contended for in this case in view of the peculiar terms of the assignment. The case of Third Nat’l Bank v. Lanahan, 66 Md. 461, is relied upon to support appellants’ contention.' In that case a general assignment was made to a trustee for the benefit of creditors. Among the assets were some notes which had been deposited with complainant, a bank, as collateral security to obtain advances upon the debtor’s notes. Upon these notes the bank realized largely before filing its claim. The court held that the amount should be deducted from the amount claimed by the bank, saying: “ It is simply the case where a portion of a debt is paid by property of the debtor which had leen pledged to secure its payment.” But in the present case the attempt is made to deprive a party of a portion of his security because the debt secured has been partly paid, although that payment was not made from the property mortgaged. We think that the Fifth National Bank would be entitled to a dividend based upon each of its two claims, subject to the proviso that neither should exceed the amount remaining due upon such claim. As we cannot determine from the record whether the amount apportioned to the Fifth National Bank, if rightly applied upon its claims, would more than liquidate either — 509 — of such claims, we are unable to do more than to indicate the principles upon which such fund shall be apportioned. The .cause will therefore be remand¿d to the circuit court, in chancery, to distribute the fund in accordance with the views herein expressed. The Fifth National Bank will recover its costs of this Court from the fund. Long and Grant, JJ., concurred with Hooker, C. J.