John Matthews, Inc. v. Knickerbocker Trust Co.

NOYES, Circuit Judge (after stating the facts as above). The debenture bonds of the bankrupt corporation which the petitioner holds as collateral do not purport to impose any lien or charge upon the property of the corporation and are nothing more than instruments importing an obligation to pay. So far as the 23 bonds are concerned, the bankrupt corporation never received any consideration for them. They were treasury bonds when pledged and no change in their status has takén place since. ' The real debt which the bankrupt corporation owed the petitioner was evidenced by the note and nothing was added to it by giving as collateral another promise to pay. Any rule which would permit the proof of two notes for one indebtedness would permit the proof of a dozen, and would substitute for pro rata distribution among real creditors, distribution in accordance with the ability of a bankrupt to make manifold obligations for single debts. ít is a safe and equitable proposition that in the distribution of bankrupt estates, paper obligations issued without consideration as security for an indebtedness shall not be permitted to increase it. The situation with respect to the 6 bonds is different. Although treasury bonds when .originally delivered to the petitioner, their status was changed when they were purchased from the bankrupt. By such purchase they became the property of the purchaser subject to the lien of the petitioner which no longer held mere treasury bonds issued without consideration, but bonds issued to third persons upon consideration. The physical custody of the bonds was unimportant. The purchasers could, if they chose, buy bonds in pledge as well as any other bonds. To permit the petitioner to avail itself of these bonds does not increase the real indebtedness of the estate. The indebtedness evidenced by these bonds is based upon the moneys paid to the bankrupt by their purchasers. If the petitioner cannot avail itself of these bonds according to the contract of pledge, what is to become of them? They do not belong to the bankrupt estate because they were purchased from the bankrupt which received the consideration for them. 'They cannot be delivered to the purchasers without ignoring the contract of pledge and the rights of the petitioner subject to which they were purchased. Moreover to take the bonds from the petitioner and deliver them to [559] the purchasers would be not only to ignore the rights of the former but to do it a positive injury by reducing the estate in which it might be entitled to a distributive dividend. The conclusion necessarily follows, as it seems to us, that the petitioner has the right to enforce its contract of pledge against the 6 bonds in question. This conclusion requires a modification of the injunction which shall permit the petitioner to sell the 6 bonds. We are not, however, called upon to pass upon the question whether the petitioner should be regarded as a “secured creditor” within the meaning of the bankruptcy act or as holding as security property pledged by third persons. That is a question which, if presented, must be determined upon the distribution of the estate. The order of the District Court is reversed so far as it relates to the 6 bonds aforesaid and the cause is remanded for further proceedings in accordance with this opinion. No costs are awarded to either party.