thereof, "shall be utterly null and void."I fully secured portion of the original loan is
Rev. Stat. § 5242.
that B is enabled to offset it against the de-
ficient dividend on the unsecured portion of
the debt, one equalling the other, thus clos-
ing the transaction without loss to him.

Let us suppose, also, the case of a creditor of a national bank, who recovers a judgment for $100,000 and levies the same upon real estate of the bank worth only $50.000. While the legal title and possession is still in the bank a receiver is appointed and takes possession of the real estate. Certainly it cannot be contended that this judgment-lien holder is not in equally as good a position as

It seems to me superfluous to demonstrate that the rules now upheld, by which a creditor holding security is decided to be entitled to disregard the value of his security and take a dividend upon the whole amount of the debt from the general assets, violates the principle of equality and ratable distribution which the act of Congress establishes. Is it not evident that if one creditor is allowed to reap the whole benefit of his security, and at the same time take from the general assets a dividend, on his whole claim, as if he had no security, he thereby obtains the holder of a mortgage lien or other colan advantage over the other general credit-lateral security. The doctrine of the court, ors, and that he gets more than his ratable however, if applied to the judgment-lien share of the general assets? Let me illus-holder, would authorize him to demand that [149]trate the unavoidable *consequence of the doc- the receiver treat the real estate as not emtrine now recognized. A loans a national braced in the general assets, and that the bank $5,000, and takes as the evidence of creditor be allowed to enforce his whole such loan a note of the bank for the sum claim against the other assets irrespective named, without security. The lender is thus of the value of the specific security acquired a general or unsecured creditor for the sum by his lien. of $5,000. B loans to the same bank $5,000, without security. He is applied to for a further loan, and agrees to loan another $5,000 on receiving collateral worth $5,000, and requires that a new note be executed for the amount of both loans, which recites that it is secured by the collateral in question. While theoretically, therefore, B is a secured creditor for $10,000, he practically has no security for $5,000 thereof. Insolvency supervenes. The general assets received by the Comptroller equal only fifty per cent of the claims. Now, under the rule which the court establishes, A on his unsecured claim of $5,000 collects a dividend of but $2,500, thereby losing $2,500; B, on the other hand, who proves $10,000, taking no account whatever of his collateral, realizes by way of dividends $5,000, and by collections on collaterals a similar amount, with the result that though as to $5,000 he was, in effect, an unsecured creditor, he loses nothing. B is thus in precisely as good a situation as though he had originally demanded and received from the borrowing bank collateral securities equal in value to the full amount loaned. It is thus apparent that the application of the rule would operate to enable B-who, I repeat virtually held no collateral security for $5,000 of the sums loaned-- to be paid his entire debt, though the assets of the insolvent estate of the borrower paid but fifty cents on the dollar, while another creditor holding an unsecured claim for $5,000 fails to realize thereon more than $2,500. Is it not plain that this result is produced by practically a double payment to B, that is, by recognizing B as a preferred creditor in the specific property, of the value of $5,000, pledged to him, withdrawing that property from the general assets, and allowing B to solely appropriate it, yet permitting him, when the secured part of his debt is thus virtually satisfied, to again assert the same secured portion of the debt against other assets, by a claim upon the general fund in the hands of the receiver for the full amount [150]*loaned? The consequence of the receipt of this extra sum upon account of the already

That the doctrine maintained by the court also tends to operate a discrimination as between secured creditors, in favor of the one holding collateral securities not susceptible of prompt realization, is, I think demonstrable. Thus, a secured creditor who takes collaterals maturing on the same day with the debt owing to himself, which collaterals consist of negotiable notes, the makers of which and indorsers upon which are pecuniarily responsible, finds the collaterals promptly paid when deposited for collection, and if his debtor should become insolvent the day after payment the creditor could only claim for the residue of the debt still unpaid. On the other hand, a creditor of the same debtor, the debt to whom matures at the same time as that owing the other creditor, and is secured by collaterals also due contemporaneously, has the collaterals protested for nonpayment, and when the debtor fails the collaterals have not been realized. While the first debtor who had received first-class collateral can collect dividends against the estate of his insolvent debtor only for the unpaid portion of the claim, losing a part of such residue by the inability of the estate[151] to pay in full, the debtor who received poor collateral collects dividends out of the general assets on his whole claim, and, if he eventually realizes on his securities, may come out of the transaction without the loss of one cent. These illustrations, to my mind, adequately portray the inequality and injustice which must arise from the application of the rules of distribution now sanctioned by the court.

The fallacies which, it strikes me, are involved in the two propositions sanctioned by the court, are these: First. The erroneous assumption that, although the act of Congress contemplates that the dividend should be declared out of the general assets after the secured creditors have withdrawn the amount of their security, it yet provides that the secured creditor who has withdrawn his se curity, and thus been pro tanto satisfied, can still assert his whole claim against the general assets, just as if he had no security and

unable to pay his debts, the position of all parties is altered,-the fund has become inadequate, and the policy of the law is to lead to equality. In pursuing that policy the bankrupt law endeavors to enforce an equal distribution, whilst it respects the rights of those who have previously, by grant or otherwise, acquired some security or some preferable right."

had not been allowed to withdraw the same. | Second. The mistaken assumption that the act confers upon the secured creditor a new and substantial right, enabling him to obtain, as a consequence of the failure of the bank, an advantage and preference which would not have existed in his favor had the failure not supervened. This arises from holding that the insolvency fixed the amount of the claim which the secured creditor may assert, as of the time of the insolvency; thereby enabling him to ignore any collections which he may have realized from his securities after the failure, and permitting him to assert as a claim, not the amount due at the time of the proof, but, by relation, the amount due at the date of the failure, the result being to cause the insolvency of the bank to relieve the creditor holding security from the obligation to impute any collections from his collateral to his debt, so as to reduce it by the extent of the collections, a duty which would have rested on him if insolvency had not taken place. Third. By presupposing that because before failure a secured creditor had a legal right to ignore the collaterals held by him and resort for the whole debt, in the first instance, against the general estate of his debtor, that it would impair the obligation of the contract to require [152]the secured creditor in case of insolvency *to take into account his collaterals and prevent him from asserting his whole claim, for the purpose of a dividend, against the general assets. But the preferential right arising from the contract of pledge is in nowise impaired by compelling the creditor to first exercise his preference against the security received from the debtor, and thus confine him to the specific advantage derived from his contract. Further, however, as the contract, construed in connection with the law governing it, restricts the secured as well as the unsecured creditor to a ratable dividend from the general assets, the secured creditor is prevented from enhancing the advantage obtained as a result of the contract for security, by proving his claim as if no security existed, since to allow him to so do would destroy the rule of ratable division, subject and subordinate to which the contract was made. A forcible statement of the true doctrine on the foregoing subject was expressed in the case of Société Générale de Paris v. Geen, L. R. 8 App. Cas. 606. The question before the court arose upon the construction to be given to a clause of the English bankrupt act of 1869, incidental to the requirement of a section, expressly embodied for the first time in a bankrupt act, that the secured creditor should in some form account for the collateral held by him in proving his claim against the general estate. In considering the restriction upon the remedy of a secured creditor produced by the insolvency, and the consequent right of such creditor to receive only a ratable dividend on the balance of the debt after the deduction of the value of the collaterals, Lord Fitzgerald said (p. 620): "Under ordinary circumstances each cred-Smith, 2 Rose, Bankr. Rep. 63, said: itor is at liberty to pursue at his discretion "The practice has been long established in the remedies which the law gives him, but bankruptcy, not to suffer a creditor holding when insolvency intervenes, and the debtor is a security to prove unless he will give up

Concerning the practice in bankruptcy, Lord Chancellor Eldon, in 1813, in Ex parte

To resort, however, to reasoning for the purpose of endeavoring to demonstrate that[153] where a statute does not allow preferences in case of insolvency, and commands a ratable distribution of the assets, a secured creditor cannot be allowed to disregard the value of his security and prove for the whole debt, seems to me to be unnecessary, since that he cannot be permitted to so do, under the circumstances stated, has been the universal rule applied in bankruptcy in England and in this country from the beginning.

In the earliest English bankrupt act (34 & 35 Hen. VIII. chap. 4) the distribution of the general assets of the bankrupt was directed to be made, "for 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 their debts." In the statute of 13 Elizabeth, chap. 7 (and which was in force in this particular when the consolidated bankrupt statute of 6 Geo. IV. chap. 16, was adopted), the distribution of assets was directed in language similar to that just quoted from the statute of Henry VIII. Under these statutes, from the earliest times, it was held by the lord chancellors of England, having the supervision of the execution of the bankrupt statutes, that a secured creditor could not retain his collateral security and prove for his whole debt, but must have his security sold, and prove for the rest of the debt only. Lord Somers, in Wiseman v. Carbonell (1695) 1 Eq. Cas. Abr. 312, pl. 9; Lord Hardwicke, in Howell, Petitioner (1737) 7 Vin. Abr. 101. pl. 13, and in Ex parte Grove, (1747) 1 Atk. 105; Lord Thurlow, in Ex parte Dickson (1789) 2 Cox, Ch. Cas. 196, and in Ex parte Coming (1790) 2 Cox, Ch. Cas. 225; Cooke's Bankrupt Laws (1st ed. 1786) 114, and (4th ed. 1799) 119.

In 1794 (4 Bro. Ch. star paging 55) the prevailing practice with respect to a sale of a mortgage security was regulated by a general order formulated by Lord Chancellor Loughborough, wherein. among other things, it was provided that in case the proceeds of sale should be insufficient to pay and satisfy what should be found due upon the mortgage, "that such mortgagee or mortgagees be admitted a creditor or creditors under such commission for such deficiency, and to receive a dividend or dividends thereon, out of the bankrupt's estate or *effects, ratably and[154 in proportion with the rest of the creditors seeking relief under the said commission," etc.

that security, or the value has been ascer-
tained by the sale of it. The reason is obvi-
ous: Till his debt has been reduced by the
proceeds of that sale, it is impossible cor-
rectly to say what the actual amount of it
It is, however, clearly within
the discretion of the court to relax this rule,
and cases may occur in which it would be for
the benefit of the general creditors to relax

of their "peculiar" jurisdiction, and the
courts which refuse to apply the rule gener-
ally declare that it arose from express pro-
visions in bankrupt statutes requiring a
creditor to surrender his collaterals or de-
duct for their value before proving against
the estate.

Pretermitting for a moment an examination of this reasoning, it is to be remarked in passing that the argument, if sound, rests upon the hypothesis that all the bankruptcy laws from the beginning in England and in our own country, and the universal course of decision thereon and the practice thereunder, have worked out inequality and injustice by depriving a secured creditor of rights which, it is now asserted, belonged to him and which could have been exercised by him without prᏅ ducing inequality. This deduction follows, for it cannot be that if not to compel the creditor to deduct produces no inequality or injustice, then to compel him to do so would have precisely the same result. The two opposing and conflicting rules cannot both be enforced, and yet in each instance equality result. At best, then, the contention admits that by *the consensus of mankind not[156] to compel the secured creditor to deduct the value of his collaterals before proving produces inequality, for of all statutes those relating to bankruptcy have most for their object an equal distribution of the assets of the insolvent among his creditors.

It is worthy also of notice, in passing, that the reasoning to which we have referred rests upon the assumption that the act of Congress providing for the liquidation of the affairs of a national bank and a distribution of the assets thereof among the creditors is not substantially a bankrupt statute. It certainly is a compulsory method provided by law for winding up the concerns of an insolvent bank, for preventing preferences, and for securing an equal and ratable division of the assets of the association among its creditors. And it assuredly can be safely assumed that Congress in adopting the rule of ratable distribution in the national banking act did not intend that the words embodying the rule should be so construed as to produce a result contrary to that which for hundreds of years had been recognized as necessarily implied by the employment of similar language. It may also, I submit, be likewise considered as certain that it was not intended, in using the words "ratable distribution" in the statute, to bring about an unequal instead of a ratable distribution of the general assets.

The reasoning by which it is maintained that the requirement for ratable distribution should not be applied in the act providing But, coming to the proposition itself, is for the liquidation of an insolvent national there any foundation for the assertion that bank may be thus summed up: True it is, the rule or practice in bankruptcy requiring that universally in bankruptcy in England the secured creditor to account for his securiand in this country the rule was as above ty was the result of something peculiar in stated, but outside of bankruptcy a differ- the jurisdiction of bankruptcy courts, other ent practice prevailed in England, known as than the requirement contained in bankthe chancery rule; and as the winding up of ruptcy statutes that the assets should be disan insolvent national bank does not present tributed ratably among creditors, and is a case of bankruptcy, its liquidation is gov- there any merit in the contention that the erned by such chancery rule, and not by the rule was the consequence of an express probankruptcy rule. The bankruptcy rule, it vision in such laws imposing the obligation is said, is commonly so called because en-referred to on the secured creditor?

forced by bankruptcy courts in the exercise A careful examination of every bankrupt

The first two bankrupt statutes enacted in this country (April 4, 1800, chap. 19, 2 Stat. at L. 19; August 19, 1841, chap. 9, 5 Stat. at L. 440) required a ratable distribution of the assets; and it was conceded in argument that the universal practice enforced under these acts was to require a creditor holding collateral security to deduct the amount of his security, and prove only for the residue of the debt. This court, speaking through Mr. Justice Story, in 1845, in Re Christy [Ex parte City Bank], 3 How. 314 [11: 613], declared that, under the act of 1841, "if creditors have a pledge or mortgage for their debt they may apply to the court to have the same sold, and the proceeds thereof applied towards the payment of their debts pro tanto, and to prove for the residue."

As the universal rule and practice in bankruptcy in England and in this country, up to and including the bankrupt act of 1841, was solely the result of the statutory requirement that the assets should be ratably distributed among the general creditors, my mind fails to discern why the requirement for ratable distribution of the assets in the act for the liquidation of failed national banks should not have the same meaning and produce the same result as the substantially similar provisions had always meant and had always operated in England for hundreds of years, and in this country for many years, before the adoption by Congress of the act for the liquidation of national banks. Indeed, the fact that the requirement of ratable distribution had by a long course of [155]practice and judicial construction in England and in this country required the secured creditor to account for his security before proving against the general assets gives rise to the application of the elementary canon of construction that where words are used in a statute, which words at the time had a settled and well-understood meaning, their insertion into the statute carries with them a legislative adoption of the previous and existing meaning.

statute in England, from the first statute of 34 & 35 Hen. VIII. chap. 4, down to and including the consolidated bankrupt act of 6 Geo. IV. chap. 16, fails to disclose any provi[157]sion sustaining the statement that the rule in bankruptcy depended upon express statutory requirement, and, on the contrary, shows that it was simply a necessary outgrowth of the command of the statute that there should be an equal distribution of the bankrupt's

| an examination of the section relied on shows
that it in no wise supports the assertion.
The pertinent portion of the section reads as



all and every creditor and creditors having security for his or their several debts, by judgment, statute, recognizance, specialty with penalty or without penalty, or other security, or having no security, or having made attachments in London, or any other place, by virtue of any custom there used, of the goods and chattels of any such bankrupt, whereof there is no execution or extent served and executed upon any the lands, tenements, hereditaments, goods, chattels, and other estate of such bankrupts, before such time as he or she shall or do become bankrupt, shall not be relieved upon any such judginent, statute, recognizance, specialty, attachinents, other security for any more than a ratable part of their just and due debts, with the other creditors of the said bankrupt, without respect to any such penalty of greater sum contained in any such judgment, stat ute, recognizance, specialty with penalty, at


I submit that not only an examination of the English statutes makes clear the truth of the foregoing, but that its correctness is placed beyond question by the statement of Lord Chancellor Eldon respecting proof in bankruptcy by a secured creditor, already adverted to, that "till his debt has been reduced by the proceeds of that sale" (that is, of the security), "it is impossible correctly to say what the actual amount of it is." And, as an authoritative declaration of the origin of the rule, the opinion of Vice Chancellor Malins, in Ex parte Alliance Bank (1868) L. R. 3 Ch., note at page 773, is in point. The Vice Chancellor said: "This rule" (requiring a creditor to real-tachment, or other security." ize his security and prove for the balance of The securities other than attachment rethe debt only) "does not depend on any stat-ferred to in this section were manifestly emutory enactment, but on a rule in bankrupt- braced in the class known at common law as cy, established irrespective of express statu- "personal" security, as distinguished from tory enactment, and under the statute of "real" security or security upon property. Elizabeth, which provides: 'Or otherwise Sweet's Dict. English Law, verbo Security. to order the same (i. e. the assets) to be ad- In other words, the effect of the section was ministered for the due satisfaction and pay- but to forbid preferences in favor of creditment of the said creditors, that is to say, ors, which at law would have resulted from for every of the said creditors a portion, rate the particular form in which the debt was and rate alike, according to the quantity of evidenced, and from which form a claim his and their debts.' would be raised to a higher ank than a sim-[159] ple-contract debt. That this is the significance of the word "security" as used in this section is shown by the following excerpt from Cooke's treatise on Bankrupt Laws, published in 1786. At page 114 he says:


"The aim of the legislature in all the statutes concerning bankrupts being that the creditors should have an equal proportion of the bankrupt's effects, creditors of every degree must come in equally; nor will the nature of their demands make any difference, unless they have obtained actual execution, or taken some pledge or security before an act of bankruptcy committed. For when a creditor comes to prove his debt he is obliged to swear whether he has a security or not; and if he has, and insists upon proving, he must deliver it up for the benefit of his creditors, unless it be a joint security from the bankrupt and another person," ele.

The fact that the expression "security" contained in the section referred to ha no as-reference to security on property is further demonstrated by the subsequent statute of 6 George IV. chap. 9, sec. 103, which re-enacted in an altered form the 9th section of the statute of James; for the re-enacted sec tion, although it referred in broad terms to securities generally, yet especially excepted the case of a mortgage or pledge. The sec tion is as follows:

"Sec. 103. And be it enacted. That no cred

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Indeed, not only was the obligation of the secured creditor to account for his security derived from the provision as to ratable distribution, but from that provision also originated the equally well-settled rule causing interest to cease upon the issuance of the commission of bankruptcy. As early as 1743, Lord Hardwicke, in Bromley v. Goodere, 1 Atk. 75, in speaking of the suspension of interest by the effect of bankruptcy, said: "There is no direction in the act for that purpose, and it has been used only as the best method of settling the proportion among the creditors, that they may have a rate-like satisfaction, and is founded upon the equitable power given them by the act."

While, generally, the claim that the bankruptcy rule was the creature of an express [158] provision of the bankruptcy acts, *other than the requirement as to a ratable distribution of assets, rests upon a mere statement to that effect without any reference to the specific text of the bankrupt act which it was sumed made such requirement, in one instance, in the brief of counsel in an early case in this country (Findlay v. Hosmer, (1817) 2 Conn. 350), the statement is made in a more specific form. A particular section of an English bankrupt statute is there referred to, as in effect expressly requiring a secured creditor to account for his collaterals in order to prove against the general assets. The statute thus referred to was itor having security for his debt, or having section 9 of 21 James J. chapter 19. But made any attachment in London or any

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other place by virtue of any custom there
used, of the goods and chattels of the bank-
rupt, shali receive upon any such security or
attachment more than a ratable part of such
debt, except in respect of any execution or
extent served and levied by seizure upon,
or any mortgage of or lien upon any part of
the property of such bankrupt before the

Is it pretended anywhere that after the reenactment of section 9 of the statute of James I. found in section 103, chap. 3, 6 George IV., the obligation of a secured creditor to account for his collateral before he took a dividend out of the general assets ceased to exist? Certainly, there is no such [160]* contention. If, however, that duty of the general creditor arose, not from the provision as to ratable distribution, but from the provisions of section 9 of the act of James as claimed, then necessarily such obligation on the part of the general creditor would have ceased immediately on the enactment of the statute of 6 George IV., which expressly excepted the mortgage creditor from the operation of the particular section which, it is contended, imposed the duty on the mortgage creditor to account. The continued enforcement of the rule which required the mortgage creditor to deduct the value of his security before proving against general as sets, after the re-enactment of section 9 of the statute of George referred to, can lead to but one conclusion; that is, that the duty of the mortgage creditor before existing arose from the provision for ratable distribution, and not from the terms of section 9 of the statute of James, since that duty continued to be compelled after the re-enactment of that section in terms, which renders it impossible to contend that that section created the duty.

statute, recognizance, specialty, or attachment, for more than a ratable part of his debt, with the other creditors of the bankrupt."

"Sec. 31. And be it further enacted, That 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, [161] 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,

This provision of the act of 1800 was, however, omitted from the bankrupt act of 1841, manifestly because it had become unnecessary. The later statute contained in the 5th section a general provision forbid ding all preferences except in favor of two classes of debts, thus rendering it superfluous to enumerate cases in which there should be no preference. It was, however, under the act of 1841, which was drafted by Mr. Justice Story (2 Story's Life of Story, 407), that this court, speaking through that learned justice, in Re Christy [Ex parte City Bank], already cited, declared that a secured creditor must account for his security when proving against the bankrupt estate. How it can be now argued that the requirement that such creditor should only so prove his claim was the result of a provision not found in the act of 1841, and clearly shown by all the antecedent legislation not to refer to a creditor holding property security, my mind fails to comprehend.

True it is that, both in our own act of 1867 and in the English bankrupt act of 1869, there were inserted express provisions requiring a secured creditor to account for his collaterals before proving against the general assets. But this was but the incorporation into the statutes of the rule which had arisen as a consequence of the requirement for a ratable distribution, and which had existed for hundreds of years before the statutes of 1867 and 1869 were adopted. In other words, the express statutory require ment only embodied in the form of a legislative enactment what theretofore from the earliest time had been universally enforced, because of the provision for a ratable distribution.

A similar course of reasoning applies to bankrupt statutes of this country.

Section 31 of our first bankrupt statute The rule in bankruptcy imposing the duty (chap. 19, act April 4, 1800, 2 Stat. at L. upon the creditor to account for his security 30) was, in substance and effect, similar to before proving being, then, the result of the the provision in the act of James. The stat- provision of the bankrupt laws requiring ute of 1800 is said to have been a consolida-ratable distribution, I submit that the same tion of the provisions of previous English requirements upon such *creditor should be[162] bankrupt statutes (Tucker v. Oxley, 5 Cranch, held to arise from a like provision contained 34, 42 [3: 29, 31]; Roosevelt v. Mark, 6 in the act of Congress under consideration. Johns. Ch. 285), and in Tucker v. Oxley, Chief Justice Marshall declared that, for that reason, the decisions of the English judges as to the effect of those acts might be considered as adopted with the text that they expounded. Section 31 reads as follows:

But, coming to consider the chancery rule which, it is contended, lends support to the doctrines applied in the cases at bar.

The foundation upon which the so-called chancery rule rests is the case of Mason v. Bogg, 2 Myl. & C. 443, decided in 1837, where Lord Chancellor Cottenham expressed his approval of the contention that a mortgage creditor, despite the death and insolvency of his debtor, possessed the contract right to assert his whole claim against general assets in the course of administration in chancery, without regard to his mortgage security. The question was not directly decided, however, as to whether the creditor might prove in the administration for the whole amount of the debt, but was reserved. As stated, however, the reasoning of the court favored the existence of such right, upon the theory that a court of chancery, when administering assets, in the absence of a statute regulating

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