Merrill v. National Bank of Jacksonville/Dissent Gray
Mr. Justice GRAY dissenting.

While also unable to concur in the opinion of the majority of the court, I prefer to rest my dissent upon the effect of the legislation of congress, read in the light of the English statutes and decisions before the American Revolution, and of the judgments of the courts of the United States, without particularly considering the cases in England in recent times, or the conflicting decisions made in the courts of the several states under local statute or usage or upon general theory. As the course of reasoning in support of this view traverses part of the ground covered by the other dissenting justices, I shall endeavor to state it as shortly as possible.

The English bankrupt acts in force at the time of the Declaration of Independence, so far as they touched the distribution of a bankrupt's estate among his creditors, were the statute of 13 Eliz. (1571) c. 7, § 2, which directed the estate to be applied to the 'true satisfaction and payment of the said creditors; that is to say, to every of the said creditors a portion, rate and rate like, according to the quantity of his or their debts'; and the statute of 21 Jac. I. (1623) c. 19, § 8 (or section 9), which made more specific provisions against allowing any creditors, whether 'having security' or not, to prove 'for any more than a ratable part of their just and due debts with the other creditors of the said bankrupt.' As appears on the face of this provision, the word 'security' was evidently there used, not as including a mortgage or other instrument executed by the debtor by way of pleading part of his property as collateral security for the payment of a debt, but merely as designating a bond or writing which was evidence of the debt itself as a direct personal obligation; and the objects of the provision would appear to have been to put all debts, whether by specialty or by simple contract, upon an equal footing in the ratable distribution of a bankrupt's estate, and to permit the real amount only of any debt, and not any larger sum named in a bond or other specialty, to be proved in bankruptcy. 4 Statutes of the Realm, 539, 1228; 2 Cooke, Bankr. Laws (4th Ed.) [18] [33]; 1 Cooke, Bankr. Laws, 119; Bac. Abr. 'Obligations,' A; 3 Bl. Comm. 439.

Neither of those statutes contained any provision whatever for deducting the value of collater l security and proving the rest of the debt. Yet from the earliest period of which there are any reported cases it was uniformly held,-would vouching in any provision of the bankrupt acts other than those directing a ratable distribution among all the creditors,-and had, long before the American Revolution, become the settled practice in the court of chancery, that a creditor could not retain collateral security received by him from the bankrupt, and prove for his whole debt, but must have his collateral security sold, and prove for the rest of the debt only. The authorities upon this point are collected in the opinion of Mr. Justice WHITE.

After the American Revolution, the provision of the statute of James I. was thrice reenacted, with little modification. St. 5 Geo. IV. (1824) c. 98, § 103; 6 Geo. IV. (1825) c. 16, § 108; 12 & 13 Vict. (1849) c. 106, § 184. But the rule established by the decisions and practice of the court of chancery as to the proof of secured debts was never expressly recognized in any of the English bankrupt acts until 1869, when provisions to that effect were inserted in the statute of 32 & 33 Vict. c. 71, § 40. And there is no trace of a different rule in England in proceedings in equity for the distribution of the estate of any insolvent debtor or corporation until more than 60 years after the Declaration of Independence. Amory v. Francis (1820) 16 Mass. 308, 311; Greenwood v. Taylor (1830) 1 Russ. & M. 185; Mason v. Bogg (1837) 2 Mylne & C. 443. In 1868, indeed, the court of chancery declined to apply the bankruptcy rule to proceedings under the winding-up acts. Kellock's Case, 3 Ch. App. 769. But parliament, by the judicature acts of 1873 and 1875, applied that rule to such proceedings. St. 36 & 37 Vict. c. 66, § 25(1); 38 & 39 Vict. c. 77, § 10. And Sir George Jessel, M. R., has pointed out the absurdity of having different rules in the cases of living and of dead bankrupts. In re Hopkins (1881) 18 Ch. Div. 370, 337.

The first bankrupt act of the United States, enacted in 1800, was in great part copied from the earlier bankrupt acts of England, and condensed the provisions above mentioned of the statutes of Elizabeth and of James I. in this form: 'In the distribution of the bankrupt's effects, there shall be paid to every of the creditors a portion-rate, according to the amount of their respective debts, so that every creditor having security for his debt by judgment, statute, recognizance or specialty, or having an attachment under any of the laws of the individual states, or of the United States, on the estate of such bankrupt (provided there be no execution executed upon any of the real or personal estate of such bankrupt, before the time he or she became bankrupts), shall not be relieved upon any such judgment, statute, recognizance, specialty or attachment, for more than a ratable part of his debt with the other creditors of the bankrupt.' Act April 4, 1800, c. 19, § 31 (2 Stat. 30). That provision must have received the same construction that had been given by the English judges to the statutes therein reenacted. Tucker v. Oxley (1809) 5 Cranch, 34, 42; Scott v. Armstrong (1892) 146 U.S. 499, 511, 13 Sup. Ct. 148.

The bankrupt act of 1841, which is well known to have been drafted by Mr. Justice Story, omitted that section, and made no specific provision whatever as to the proof of secured debts, but simply provided that 'all creditors coming in and proving their debts under such bankruptcy, in the manner hereinafter prescribed, the same being bona fide debts, shall be entitled to share in the bankrupt's property and effects, pro rata, without any priority or preference whatsoever, except only for debts due by such bankrupt to the United States, and for all debts due by him to persons who, by the laws of the United States, have a preference, in consequence of having paid moneys as his sureties, which shall be first paid out of the assets.' Act Aug. 19, 1841, c. 9, § 5 (5 Stat. 444).

Yet Mr. Justice Story, both in the circuit c urt and in this court, laid it down as an undoubted rule that a secured creditor could prove only for the rest of the debt after deducting the value of the security given him by the bankrupt himself of his own property. In re Babcock (1844) 3 Story, 393, 399, 400, Fed. Cas. No. 696; In re Christy (1845) 3 How. 292, 315.

The omission by that eminent jurist, when framing the act of 1841, of all specific provisions on the subject as unnecessary, and his repeated judicial declarations, after he had been habitually administering that act for three or four years, recognizing that rule as still in force, compel the inference that a general enactment for the ratable distribution of the estate of an insolvent among all the creditors had the effect of preventing any individual creditor, while retaining collateral security on part of the estate, from proving for his whole debt.

In 1864, congress, in the first national bank act, after providing for the appointment of a receiver with power to convert the assets of any insolvent national bank into money, and pay it to the treasurer of the United States, subject to the order of the comptroller of the currency, further provided that: 'From time to time the comptroller, after full provision shall have been first made for refunding to the United States any such deficiency in redeeming the notes of such association as is mentioned in this act, shall make a ratable dividend of the money so paid over to him by such receiver on all such claims as may have been proved to his satisfaction or adjudicated in a court of competent jurisdiction.' Act June 3, 1864, c. 106, § 50 (13 Stat. 115).

The words of this act requiring 'a ratable dividend' to be paid 'on all claims' proved or adjudicated, are equivalent to the words of the last preceding bankrupt act, directing that 'all creditors coming in and proving their debts' 'shall be entitled to share' in the estate 'pro rata, without any priority or preference whatsoever'; and, in view of the judicial construction which had been given to that act, may reasonably be considered as having been intended by congress to have the same effect of preventing a creditor, secured on part of the estate, from proving his whole debt without relinquishing or applying the security, although neither act specifically so provided.

If such was the rule under the national bank act of 1864, it could not be affected, as to national banks, by the express affirmance of the rule in the bankrupt act of 1867, or by the re-enactment of the provisions of each of these two acts in the Revised Statutes. And the extension of the bankrupt act of 1867 to 'moneyed business or commercial corporations and joint-stock companies' increases the improbability that congress intended banking associations to be governed by a different rule from that governing other private corporations, as well as natural persons, in regard to the effect which a creditor's holding collateral security should have upon the sum to be proved by him against an insolvent estate. Act March 2, 1867, c. 176, §§ 20, 37 (14 Stat. 526, 535); Rev. St. §§ 5075, 5236.

Reliance has been placed upon the remark of Mr. Justice Swayne in Lewis v. U.S., 92 U.S. 618, 623, that 'it is a settled principle in equity that a creditor holding collaterals is not bound to apply them before enforcing his direct remedies against the debtor.' But he added, 'This is admitted,' so that it is evident that the point was not controverted by counsel, or much considered by the court. Nor was it necessary to the decision, which had nothing to do with the right of an individual creditor, holding security upon the separate property of the debtor, to prove against his estate in bankruptcy, but simply affirmed the right of the United States, holding a debt against an English partnership, to prove the whole amount of the debt against one of the partners, an American, in proceedings in bankruptcy here under the act of 1867, without surrendering or accounting for collateral  ecurity given to the United States by the partnership. The United States were not bound by the bankrupt acts, nor subject to the rule of a ratable distribution, but were entitled to preference over all other creditors. U.S. v. Fisher, 2 Cranch, 358; Harrison v. Sterry, 5 Cranch, 289; U.S. v. State Bank, 6 Pet. 29; U.S. v. Herron, 20 Wall. 251. And, even as to a private creditor, it has always been held that he is obliged to account for such securities only as he holds from the debtor against whose estate he seeks to prove; and that a creditor proving against the estate of a partnership is not bound to account for security given to him by one partner, nor a creditor proving against the estate of one partner to account for security given him by the partnership. Ex parte Peacock (1825) 2 Glyn & J. 27; In re Plummer (1841) 1 Phil. Ch. 56; Rolfe v. Flower (1866) L. R. 1 P. C. 27, 46; In re Babcock, 3 Story, 393, 400, Fed. Cas. No. 696. To require a creditor, before proving against the estate of one partner, to surrender to the assignee of that estate security held from the partnership, would be to add to the separate estate property which should go to the estate of the partnership.

The ground and the limits of the rule in bankruptcy were clearly stated by Lord Chancellor Lyndhurst in Plummer's Case, above cited, in which a partnership creditor was allowed to prove a partnership debt against the separate estate of each partner without surrendering or realizing security held by him from the partnership. The lord chancellor said: 'Now, what are the principles applicable to cases of this kind? If a creditor of a bankrupt holds a security on part of the bankrupt's estate, he is not entitled to prove his debt under the commission, without giving up or realizing his security. For the principle of the bankrupt laws is that all creditors are to be put on an equal footing; and therefore, if a creditor chooses to prove under the commission, he must sell or surrender whatever property he holds belonging to the bankrupt. But, if he has a security on the estate of a third person, that principle does not apply. He is, in that case, entitled to prove for the whole amount of his debt, and also to realize the security, provided he does not altogether receive more than twenty shillings in the pound. That is the ground on which the principle is established. It is unnecessary to cite authorities for it, as it is too clearly settled to be disputed; but I may mention Ex parte Bennet, 2 Atk. 527, Ex parte Parr, 1 Rose, 76, and Ex parte Goodman, 3 Madd. 373, in which it has been laid down. The next point is this: In administration under bankruptcy the joint estate and the separate estate are considered as distinct estates, and accordingly it has been held that a joint creditor, having a security upon the separate estate, is entitled to prove against the joint estate without giving up his security, on the ground that it is a different estate. That was the principle upon which Ex parte Peacock proceeded, and that case was decided first by Sir John Leach and afterwards by Lord Eldon, and has since been followed in Ex parte Bowden, 1 Deac. & C. 135. Now, this case is merely the converse of that, and the same principle applies to it.' 1 Phil. Ch. 59, 60.

This court, under the existing national bank act, approving and following the example of the English courts under the statute of 13 Elizabeth, above cited, has allowed creditors to set off, against their claims on the estate, debts due from them to the debtor whose estate is in course of distribution, although the statute in question in either case contained no provision directing or permitting a set-off. Scott v. Armstrong, 146 U.S. 499, 511, 13 Sup. Ct. 148. In giving effect to a statute which simply directs an equal and ratable distribution of a debtor's estate among all creditors, without saying anything about either collateral security or set-off, there would seem to be quite as much ground for requiring each creditor to account for his collateral security, for the benefit of all the creditors, as for allowing him the benefit of a set-off, to their detriment.

For the reasons thus indicated, I cannot avoid the conclusion that under every act of congress directing the ratable distribution among all creditors of the estate of an insolvent person or corporation, and making no special provision as to secured creditors, an individual creditor, holding collateral security from the debtor on part of the estate in course of administration, is not entitled to a dividend upon the whole of his debt without releasing the security or deducting its value; and that, therefore, the judgment of the circuit court of appeals should be reversed. 

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