that security, or the value has been ascer- 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." of their "peculiar" jurisdiction, and the Pretermitting for a moment an examination 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 It is worthy also of notice, in passing, that distribution of the assets in the act for the the reasoning to which we have referred rests liquidation of failed national banks should upon the assumption that the act of Congress not have the same meaning and produce the providing for the liquidation of the affairs same result as the substantially similar pro- of a national bank and a distribution of the visions had always meant and had always assets thereof among the creditors is not suboperated in England for hundreds of years, stantially a bankrupt statute. It certainly and in this country for many years, is a compulsory method provided by law for before the adoption by Congress of the act winding up the concerns of an insolvent for the liquidation of national banks. In- bank, for preventing preferences, and for sedeed, the fact that the requirement of rata-curing an equal and ratable division of the ble 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. The reasoning by which it is maintained that the requirement for ratable distribution should not be applied in the act providing for the liquidation of an insolvent national bank may be thus summed up: True it is, that universally in bankruptcy in England and in this country the rule was as above stated, but outside of bankruptcy a different practice prevailed in England, known as the chancery rule; and as the winding up of an insolvent national bank does not present a case of bankruptcy, its liquidation is governed by such chancery rule, and not by the bankruptcy rule. The bankruptcy rule, it is said, is commonly so called because enforced by bankruptcy courts in the exercise 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. But, coming to the proposition itself, is there any foundation for the assertion that the rule or practice in bankruptcy requiring the secured creditor to account for his security was the result of something peculiar in the jurisdiction of bankruptcy courts, other than the requirement contained in bankruptcy statutes that the assets should be distributed ratably among creditors, and is there any merit in the contention that the rule was the consequence of an express provision in such laws imposing the obligation referred to on the secured creditor? A careful examination of every bankrupt 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 assets. 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: an examination of the section relied on shows that it in no wise supports the assertion. The pertinent portion of the section reads as follows: "... 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, attachments, 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 or The securities other than attachment re "This rule" (requiring a creditor to real-tachment, or other security." ize his security and prove for the balance of the debt only) "does not depend on any stat-ferred to in this section were manifestly emutory enactment, but on a rule in bankruptcy, established irrespective of express statutory enactment, and under the statute of Elizabeth, which provides: 'Or otherwise to order the same (i, e. the assets) to be administered for the due satisfaction and payment of the said creditors, that is to say, for every of the said creditors a portion, rate and rate alike, according to the quantity of his and their debts.' " 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." braced in the class known at common law as "The aim of the legislature in all the stat utes 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," cic. The fact that the expression "security" contained in the section referred to ha' no 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 section is as follows: 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 assumed 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 "Sec. 103. And be it enacted. That no credassets. 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 other place by virtue of any custom there statute, recognizance, specialty, or attach- 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. A similar course of reasoning applies to bankrupt statutes of this country. 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 forbidding 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 requirement 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. 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. Onley, 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, But, coming to consider the chancery rule Chief Justice Marshall declared that, for which, it is contended, lends support to the that reason, the decisions of the English doctrines applied in the cases at bar. judges as to the effect of those acts might be considered as adopted with the text that they expounded. Section 31 reads as follows: "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, 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 the subject, could not deprive a secured credence to diminish, prejudice, or affect the itor of legal rights previously existing which rights of creditors. I can find no trace of he might have asserted at law, although by any such intention. I think, therefore, we permitting the exercise of such rights prefer- are bound to follow the established practice ences in the general assets would arise. of the court of chancery, especially when we The next case in point of time in England, find that that practice has been followed[164] and indeed the one upon which most reliance ever since the passing of the winding-up_act, is placed by those favoring the chancery rule, and so long as winding-up orders have been is Kellock's Case, reported in L. R. 3 Ch. 769, made in the court of chancery." involving two appeals, and argued before Sir W. Page Wood, L. J., and Sir C. J. Selwyn, L. J. The cases arose in the winding up of companies by virtue of the statute of 25 & 26 Vict. chap. 89. The issue presented in each case was whether a creditor having collateral security was entitled to dividends upon the full amount of the debt without ref-winding up of an insolvent company under erence to the value of collaterals; and in one of the cases the lower court applied the doctrine supported by the reasoning in Mason v. Bogg, while in the other the lower court decided the bankruptcy rule governed. The appellate court held that the chancery practice should be followed. The claim was made that the secured creditor ought not to be allowed to take a dividend on the full 63]amount of his claim, because, among other reasons, of section 133 of the act, which provided as follows: "133. The following Consequences shall ensue upon the voluntary Winding-up of a Company: (1.) The Property of the Company shall be applied in satisfaction of its Liabilities pari passu, and, subject thereto, shall, unless it be otherwise provided by the Regulations of the Company, be distributed amongst the Members according to their Rights and Interests in the Company." This contention, however, was answered by Lord Justice Wood, who said (p. 778): "There is a clause in the companies act of 1862, which says that in a voluntary winding up equal distribution is to be made among creditors; an expression similar to which, in 13 Eliz. chap. 7, appears to have led to the establishment of the rule in bankruptcy." The whole subject has been set at rest, however, in Great Britain, by section 25 of the judicature act of 1873, and by an amendment thereto adopted in 1875 (chap. 77), which expressly required that in the administration in chancery of an insolvent estate of one deceased, and in proceedings in the the companies acts, "the same rule shall prevail and be observed as to the respective rights of secured and unsecured creditors, and as to debts and liabilities provable, as may be in force for the time being under the law of bankruptcy, with respect to the estates of persons adjudged bankrupt." So that now, in Great Britain, in all proceedings involving the distribution of an insolvent fund, a secured creditor can only prove for the balance which may remain after deduction of the proceeds or value of collateral security. In view, therefore, of the English legislation in 1873 and 1875, wnich has rendered it impossible in cases of insolvency to apply the doctrine of the Kellock Case, we need not particularly notice decisions rendered in England subsequent to 1868, when the Kellock Case was decided, particularly as the tribunals which rendered such decisions were subordinate to the court of appeal and necessarily bound by its rulings. Now, I submit, as the English chancellors, from the date of the enactment of the earliest English bankrupt law, felt constrained to compel a secured creditor to account for his security before proving against the general assets of the bankrupt estate, because Parliament had directed a ratable distribuHe then called attention to the fact that tion of all such assets, it cannot in consona voluntary winding up was not limited to ance, with sound reasoning be said that this cases of insolvent companies, but might be court is to apply the chancery rule to the resorted to on behalf of a solvent one; and distribution of the assets of an insolvent nahe proceeded to comment upon the fact that tional bank as to which Congress has diin previous winding-up acts, "when the legis-rected a ratable distribution, because in Englature intended proceedings to be conducted land a different rule was for a time applied according to the course in bankruptcy, it to an act of Parliament providing, not solesaid so," concluding with the declaration ly for the liquidation of an insolvent estate, that the omission to do so in the case before the court indicated the purpose of Parliament that the court should be governed by the chancery rule. Lord Justice Selwyn, in a measure, also adopted this view, saying (p. 782): but equally to a solvent and *insolvent one,[165] "I think, therefore, that the onus is clear- It is worthy of note that Lord Justice ly thrown on those persons who come here Wood, after stating in his opinion in the and say that when the legislature, with a Kellock Case that the bankruptcy rule was knowledge of the existence of the difference "adopted by a court having a peculiar jubetween the practice in bankruptcy and the risdiction, established for administering the practice in chancery, intrusted the winding property of traders unable to meet their enup of the companies to the court of chan-gagements," conceded that the provision in cery, and said in express terms that the prac- the statute of 13 Eliz. chap. 7, requiring tice of the court of chancery was to prevail, equal distribution, "led to the establishment they intended by some implication or infer of the rule in bankruptcy." But the Lord some form accounting for its value, in which latter contingency he would be general or unsecured creditor only for the deficiency. That the bankruptcy rule was deemed to be founded upon equitable principles, I think, is demonstrated by the statement of Lord Hardwicke in a case already mentioned, Bromley v. Goodere, 1 Atk. 77, where, after referring to the act of 13 Elizabeth, chapter 7, he said: Justice took the cases then under considera- | debt, or realizing upon the security, or in tion out of the operation of the provision of the statute of Elizabeth because of provisions found in the company act, which, in his opinion, gave rise to a contrary view in cases governed by that act. The distribution of the assets of a failed national bank under the act of Congress, it is obvious, presents the "peculiar" features which Lord Justice Wood had in mind, since the requirement of ratable distribution is the exact equivalent of the provision contained in the statute of "It is manifest that this act intended to Elizabeth. But the reasoning now employed give the commissioners an equitable juristo cause the rule announced in the Kellock diction as well as a legal one, for they have Case to apply so as to defeat the ratable dis- full power and authority to take by their tribution provided by the act of Congress is discretions such order and direction as they made to rest upon the assumption that the shall think fit; and that this has been the[167] act of Congress does not contain the peculiar construction ever since; and therefore when requirement which was found in the bank-petitions have come before the chancellor he ruptcy acts, from which the duty of the secured creditor to account for his security before taking a dividend from the general assets arose. It comes, then, to this: That the theory by which the obsolete doctrine of the Kellock Case is made to apply rests upon an assumption which repudiates the reasoning of that case; in other words, that the result of the Kellock Case is taken and applied to this case, while the reasoning upon which the decision of the Kellock Case was based is in effect denied.. That to permit a secured creditor to retain his specific contract security, and also to prove against the general assets of his insolvent debtor for the whole amount of the debt, was deemed to work out inequality, is [166]shown, not only by the fact that it was not applied in bankruptcy, but that in the administration of equitable, as contradistinguished from legal, assets, courts of equity, following the maxim Equitas est quasi equalitas, would not permit claimants against equitable assets to share in the distribution of such assets until they had accounted for any advantage gained by the assertion against the general estate of the debtor of a preference permitted at law. Morrice v. Bank of England, Cas. t. Talb. 218; Sheppard v. Kent, 2 Vern. 435; Deg v. Deg, 2 P. Wms. 416; Chapman v. Esgar, 1 Smale & G. 575; Bain v. Sadler, L. R. 12 Eq. 570; Purdy v. Doyle, 1 Paige, 558; Bank of Louisville v. Lockridge, 92 Ky. 472; 1 Story, Eq. Jur. 12th ed. p. 543; Watson, 1 Comp. Eq. 2d rev. ed. chap. 11. p. 35. has always proceeded upon the same rules as he would upon causes coming before him upon the bill, The rules of equity." The foregoing reasoning renders it unnecessary to review at length the opinion delivered by the circuit court of appeals for the sixth circuit in Chemical National Bank v. Armstrong, 16 U. S. App. 465 [28 L. R. A. 231], to which the court has referred, as the conclusions announced by the circuit court of appeals were rested on the assumption that the bankruptcy rule was the creature of an express statutory requirement, and that to prevent a secured creditor from proving for his whole debt, as of the time of the insolvency, without regard to his collaterals, would deprive him of a contract right, both of which contentions have been fully considered in what I have already said. Nor is the case of Lewis v. United States, 92 U. S. 68 [23: 513], also referred to in the opinion of the court in the case at bar, controlling upon the question here presented. True, it was said in the Lewis Case, in passing, and upon the admission of counsel, that "it is a settled principle of equity that a creditor holding collaterals is not bound to apply them before enforcing his direct remedies against the debtor," citing the Kellock and two other English and two Pennsylvania cases involving the question of the rights of a creditor having the securities of distinct estates of separate debtors. But the controversy before the court in the Lewis Case was of this latter character, being between the United States as creditor of a partnership and holdIt was undoubtedly from a consideration ing collaterals belonging to the partnership, of this fundamental rule of equity, in con- and the trustee in bankruptcy of the sepastruing the statutory requirement for rat-rate estates of individual members of the able division of general assets, that the bank-partnership. The government was seeking ruptcy rule was formulated. That rule, to assert against such separate estates a however, in effect, declared that secured right of preference given to it by statute. creditors might retain their preferential contract rights in particular portions of the estate of the insolvent debtor, but that it was the purpose of Parliament, in commanding ratable distribution, that general assets, that is, assets disencumbered of liens, should be distributed only among the general or unsecured creditors; the necessary effect being that a secured creditor could not prove against general assets without surrendering his security, thus becoming a general or unsecured creditor for the whole amount of the The court decided that as the United States |
