UNITED SECURITY TRUST COMPANY CASE, 321 Pa. 276 (1936)

184 A. 106

Supreme Court of Pennsylvania.January 6, 1936.
March 23, 1936.

Insolvency — Distribution of assets of estate — Insolvent living or dead — Individual or corporate — Secured creditors — Bankruptcy Rule or Equity Rule — Intent of legislature — Acts of June 4, 1901, P. L. 404, and June 15, 1923, P. L. 809.

1. A secured creditor of an insolvent estate, whether the insolvent be living or dead, individual or corporate, who elects to prove his claim, may do so only for the amount of the claim less the sum realized on the collateral, or its value, if unconverted. [277-85]

2. Assignees of depositors of an insolvent trust company in the possession of the secretary of banking, pursuant to the Act of June 15, 1923, P. L. 809, as amended, held entitled to dividends only on the amount of the deposits remaining unpaid after crediting them with the proceeds realized by the sale of collateral held as security for the repayment of the deposits. [277-85]

3. The Insolvency Act of June 4, 1901, P. L. 404, relating to assignments for the benefit of creditors, in substituting the Bankruptcy Rule for the Equity Rule theretofore applied, made a radical change in the policy of the law. [284-5]

4. A statute may indicate a change in the policy of the law, although it expresses that change only in the specific cases immediately considered, and the scope of such change may be declared by the court. [285]

5. Fulton’s Est., 65 Pa. Super. 437, disapproved. [283]

Argued January 6, 1936.

Before KEPHART, C. J., SCHAFFER, DREW and LINN, JJ.

Appeals, Nos. 348 and 349, Jan. T., 1935, by claimants, from judgment of Superior Court, Oct. T., 1934, Nos. 116 and 117, affirming decree of C. P. No. 3, Phila. Co., Sept. T., 1931, No. 4252, in the matter of the United Security Trust Company, Luther A. Harr, Secretary of Banking. Affirmed.

Audit of account of Secretary of Banking, in possession of bank. Before MacNEILLE, J.

The opinion of the Supreme Court states the facts.

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Adjudication entered dismissing exceptions to account by surety companies, as assignees and depositors. Exceptions to adjudication dismissed and final decree entered. Decree affirmed on appeal to Superior Court. Appeal by claimants allowed to Supreme Court.

Errors assigned, among others, were action of Superior Court in failing to sustain the assignments of error.

Frederick H. Spotts, of Pepper, Bodine, Stokes Schoch, with him James A. Montgomery, Jr., for appellants.

Gerald F. Flood, Special Deputy Attorney General, with hi Robert L. Myers, Jr., Deputy Attorney General, and Charles J. Margiotti, Attorney General, for appellee.

Morton Meyers, of Graham, Yost Meyers, with him Fox, Rothschild, O’Brien Frankel, filed a brief under Rule 61 on behalf of interested parties.

OPINION BY MR. JUSTICE LINN, March 23, 1936:

Creditors complain of the dismissal of their exceptions to the account of the Secretary of Banking. On October 5, 1931, the Secretary took possession of the United Security Trust Company pursuant to the Act of June 15, 1923, P. L. 809, as amended (7 PS section 1 et seq.).[1] There was then on deposit the sum of $51,720.45 to the credit of trustees, and of receivers, of certain bankrupt estates. At that time, too, the clerk of the District Court of the United States for the Eastern District of Pennsylvania held $20,000 United States Treasury bonds, delivered to him by the trust company, as security for the repayment of the deposits. He sold the bonds for $18,892.48 and distributed the proceeds pro rata to the estates,

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leaving to their credit on the books of the trust company $32,827.97. Two dividends, one of 10% and one of 15% were declared in 1932. In his account the Secretary of Banking allowed dividends only on the amount of the deposits remaining unpaid after crediting them with the proceeds realized by the sale of the collateral, that is, he allowed dividends on $32,827.97, as the balance due, instead of on $51,720.45, the original debt. The common pleas dismissed the exceptions,[2] the Superior Court affirmed and an appeal to this court was allowed.

Appellants state their contention as follows: “A creditor of an insolvent estate is entitled to dividends on the full amount of his debt, notwithstanding he has collateral security on which he has or may thereafter receive a partial payment of his debt.”

Appellee contends that if a secured creditor elects to prove a claim, he may do so only for the balance due him, i. e., the original amount, less the value of the collateral or what he has realized on it.

Both contentions have been the subject of much familiar discussion. The rule for which appellants contend is known as the Equity or Chancery Rule; that for which the appellee contends, the Bankruptcy Rule. The Bankruptcy Rule originated in bankruptcy statutes; the Equity Rule developed in chancery, though not universally applied even there. The Bankruptcy Rule subsequently found enactment in state insolvency legislation providing for distribution of insolvent estates. Under this rule, the sum realized on the collateral, or its value if unconverted, is treated as payment on account; the balance due is the provable claim. In the three opinions filed i Merrill v. Nat. Bank of Jacksonville, 173 U.S. 131, dealing with the national banking law, will be found an elaborate discussion of the merits of the rules;

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also see Glenn on Liquidation (1935), Chapter 36, page 749 Clark, Proof of Secured Creditors, 15 Ill. L. Rev. 171 Annotation: 94 A.L.R. 468; L.R.A. [1918B] 1024. The Bankruptcy Rule is applied in First Amer. Bank T. Co. v. Palm Beach, 96 Fla. 247, 117 So. 900; Union Trust Co. v. Fletcher Sav. T. Co., 194 Ind. 314, 142 N.E. 711; Re Commissioner of Banks, 241 Mass. 346, 136 N.E. 269; First Nat. Bank v. Mansfield State Bank, 127 Wn. 475, 221 P. 595; Butler v. Commonwealth Tobacco Co., 74 N.J. Eq. 423, 70 A. 319; Creecy v. Pierce, 69 N.C. 67; Withernsea Brick Works, 16 Ch. D. 337 (1880), while the Equity Rule is applied in In re Bank of Dakley, 131 Cal.App. 203, 21 P.2d 164; McGrath v. Carnegie Trust Co., 221 N.Y. 92, 116 N.E. 787; First Wisconsin Nat. Bank v. Kingston, 213 Wis. 681, 252 N.W. 153; In re E. Bement’s Sons, 150 Mich. 536, 114 N.W. 329; Merrill v. Nat. Bank of Jacksonville, 173 U.S. 131; Goodman Mfg. Co. v. Pitts-Buffalo Co., 265 Fed. 561; American Surety Co. v. DeCarle, 25 F.2d 18. It is unnecessary to consider variations of these general rules applied in some states, e. g., First Nat. Bank v. Green, 221 Ala. 201, 128 So. 394 Merchants’ Nat. Bank v. Taylor, 181 Ark. 356, 25 S.W.2d 1048; Third Nat. Bank v. Lanahan, 66 Md. 461, 7 A. 615; Furness v. Union Nat. Bank, 147 Ill. 570, 35 N.E. 624; Rankin v. Yellowstone Bank and Trust Co., 75 Mont. 43, 243 P. 813.

Section 29 of the Act of June 15, 1923, P. L. 809 (under which the appellee is in charge of the insolvent bank), as amended May 5, 1927, P. L. 762, 767, 7 PS, section 29, provides: “Status of Secretary as Receiver. — Except as herein otherwise provided, the secretary shall, when he has taken possession of the business and property of a corporation or person, have all the rights, powers, and duties of a receiver appointed by any court of equity in this Commonwealth; and he shall be vested, in his official capacity, with all the rights, powers, and duties of such corporation or person and with all the

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property of such corporation or person, including debts due, liens, or securities therefor, and rights of action or redemption, whether or not the property of such corporation or person, including debts due, liens, or security therefor, and rights of action or redemption, are held in the name of such corporation or person, or in the name of some other corporation or person, but actually the property of the corporation or person of which, or of whom, the secretary has possession.

“He shall be the representative of the creditors of the corporation or person, and entitled, as such, to have vacated and set aside, for the benefit of the creditors, any judgment, execution, attachment, sequestration, payment, pledge, assignment, transfer, conveyance, or encumbrance, which could have been avoided by the creditors or any of them, or by which it is attempted to give any creditor unlawful preference over another.”

Proof of claims is dealt with in section 42 as amended in 1927, P. L. 770, 7 PS, section 42, which provides in part: “No claim other than the claim of a depositor shall be allowed unless the claimant, or some one for him if he cannot do so, shall, within four months from the date of such notice, furnish to the secretary a statement of his claim, together with a copy of any book entries pertaining thereto, or any note or other writing evidencing the same, verified by an affidavit in substantially the following form: ‘I, (name of claimant) do solemnly swear (or affirm) that the above is a true statement of my claim against (name of corporation or person); that there are no credits or allowances against the same except as therein set forth; that I have not directly or indirectly made or entered into any bargain, arrangement, or agreement, express or implied, to take or receive, directly or indirectly, any money, property, or consideration whatever, to or for myself, or to or for any other person, firm, or corporation whatever, other than my dividend as a creditor; and that there is no collateral security for said indebtedness, or any part thereof,

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held by me or anyone else other than as above set forth.’ ”

Allowance of claim and distribution are dealt with in sections 44 and 46 as amended (7 PS, sections 44 and 46). The Act of May 23, 1913, P. L. 354, 7 PS, section 689, provided the order of distribution and gave depositors a preference over “remaining liabilities.” See Metropolitan Life Ins. Co. App., 310 Pa. 17, 164 A. 715.

The obvious purpose was to treat alike all creditors of a given class to provide for equality of distribution and we all agree that equality of distribution among creditors can only be attained by the application of the Bankruptcy Rule.[3]

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We come, then, to appellants’ contention that the Equity Rule and not the Bankruptcy Rule has been heretofore applied in this Commonwealth. It is true that the Equity Rule was applied in decisions (cited by appellant) beginning with Morris v. Olwine, 22 Pa. 441, and ending with Jamison’s Est., 163 Pa. 143, 29 A. 1001, (1894) dealing with assignments for the benefit of creditors. But for that rule, the Bankruptcy Rule was substituted by section 28 of the Insolvency Act of June 4, 1901, P. L. 404, 39 PS, section 90.[4]

While that act is superseded in its bankruptcy features by the Bankruptcy Act, its severable insolvency provisions are not rendered inoperative by the federal statute; they are in force:Fidelity Trust Co. v. Union Nat. Bank, 313 Pa. 467, 486, 169 A. 209; Pobreslo v.

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Boyd Co., 287 U.S. 518, 525; Johnson v. Star, 287 U.S. 527. Appellants’ contention therefore finds no support in this class of cases.

In addition to the cases growing out of assignments for creditors, appellants refer to a decision of the Superior Court, Fulton’s Est., 65 Pa. Super. 437 (1917), involving a claim for interest presented in the orphans’ court by a secured creditor against the estate of an insolvent decedent. No question was made as to which of these rules was applicable. The court applied the Equity Rule, but, we think, erroneously; we now disapprove that decision as contrary to the policy of the law declared in the Act of 1901, supra. In Fulton’s Est., HEAD, J., at page 441, said: “The estate of the decedent was insolvent. His death, under such circumstances, practically effected an assignment of all of his property to his creditors and thereafter it belonged to them in proportion to the amount of the debt due to each.” In support of their contention, the learned counsel for appellants in the present case quote from the opinion of HEAD, J., (page 442) as follows: “The fact that he [the creditor] thus had recourse to two funds in no way impaired his right to proceed against either or both so long as he did not claim or secure more than was justly due.” If this statement be unobjectionable in the case of a solvent debtor, it is not accurate in its implications when applied to an insolvent’s estate. The creditor can of course still go against his collateral, but the finding of insolvency has produced a change in the status of the claims upon, and the custody of, the insolvent’s assets; and the duty of the court to decree equality of distribution to those entitled by the application of equitable principles has also intervened. Though the creditor retains the right to deal with the collateral, the necessity for equality of distribution enables the court to put him on terms in asserting his right to recourse to the general assets; in effect, the distributing court says to him, “You do not have two independent sources of payment;

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you have, in the collateral, an asset of the insolvent with which your contract enables you to deal, but it will be inequitable to permit you to claim on the fund (the remaining assets of the insolvent) available for distribution among creditors pro rata, unless you do equity by surrendering to that fund (or by accounting for its value) the insolvent’s property held as collateral; you cannot enforce or retain the collateral and also prove for the whole claim as an unsecured creditor; you may prove only for the balance due for that is all you could have done if insolvency had not intervened.”[5]

We need say nothing concerning Chambersburg Trust Co. v. Alexander, 102 Pa. Super. 158, also cited by appellants, except to note that the fund distributed was that of a solvent person.

Laying aside, then, the cases dealing with assignments for the benefit of creditors, for which the rule is supplied by the Act of 1901, and also Fulton’s Est., supra, dealing with an insolvent decedent’s property, administered in the orphans’ court, a court of equity, we come to a possible third class in which the question may arise: receiverships in equity. No case of this class is cited (and we have found none) in which the question was considered by either of our appellate courts. Rights of creditors are fixed as of the date of the appointment of receivers as creditors’ rights are fixed as of the date of the assignment for their benefit: Dean Sons’ App., 98 Pa. 101, 104. While the assignment cases held that creditors’ “rights are those of an owner by virtue of the deed of assignment” (Miller’s App., 35 Pa. 481) equity, in receivership

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proceedings has seized the assets for distribution; they are in the custody of the law and will be distributed according to equitable principles (Blum Bros. v. Girard Nat. Bank, 248 Pa. 148, 155, 93 A. 940; Pearson Mfg. Co. v. Pittsburgh Steamboat Co., 309 Pa. 340, 345, 163 A. 680), unless some statute provides otherwise. Generally, equality is equity. In such cases, therefore, we think the Bankruptcy Rule should be applied. The equitable doctrine of marshalling also furnishes a persuasive analogy: “. . . equity may require the creditor with two funds to resort first to that which the other creditors cannot reach . . .”: Graff Co.’s Est., 139 Pa. 69, 74, 21 A. 233.

While the Insolvency Act of 1901 dealt with assignments for the benefit of creditors, the legislature, in substituting the Bankruptcy Rule for the Equity Rule theretofore applied, made a radical change in the policy of the law. The court may declare the scope of the change affected by the statute. “For although courts sometimes have been slow to extend the effect of statutes modifying the common law beyond the direct operation of the words, it is obvious that a statute may indicate a change in the policy of the law, although it expresses that change only in the specific cases most likely to occur to the mind”: Gooch v. Oregon Short Line R. R. Co., 258 U.S. 22, 24. We think, therefore, that desirable uniformity of administration will be attained by applying the Bankruptcy Rule in all cases of the distribution of the assets of insolvents whether living or dead, individual or corporate, and that as this court, since the Act of 1901, is not committed to the application of any other rule, the Bankruptcy Rule should hereafter be considered of general application.

The order appealed from is affirmed at appellants’ costs.

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