Pledge. Receiver. Partnership. If a bank holds the note of a partnership indorsed by one of the partners and also holds an individual note of the same partner for which that partner wrongfully has pledged to the bank property of the partnership, but the bank has no notice actual or constructive that the property pledged does not belong to the pledgor individually, and if by the terms of the pledge the security is to be applied first to the payment of the note it is given to secure, and any excess may be applied in payment of any other liability of the pledgor to the bank, upon the insolvency of the partnership and also that of the pledgor, the bank as against the receiver of the property of the partnership has a right to apply any surplus from the proceeds of a sale of the pledged property after paying the pledgor's individual note to the liability of the pledgor as indorser of the partnership note held by it, in the same way as if the property pledged had belonged individually to the partner who pledged it.
In a suit to wind up an insolvent partnership, where a receiver has been appointed and the assets of the partnership are in his hands, the holder of a secured note of the partnership should be allowed to prove his debt in full before the receiver and to participate in the distribution of the assets in the proportion to which this entitles him, without any deduction for the amount realized by him on the security, unless by permitting such proof the creditor would receive more than the face value of his debt, in which case the excess must be deducted.
BRALEY, J.
When the bank proved the partnership note for the balance shown by the report it held another promissory note made by Rollins, who although a member of the firm was also liable on the first note as an indorser. To secure its payment he gave as collateral security a promissory note payable to his order, but which actually he had received from the makers to whom he had sold the stock in trade belonging to the partnership as a payment in part of the price. It is stated, however, in the report that the bank took the collateral note without actual or constructive notice that it was a part of the assets of the partnership which Rollins was pledging to secure the payment of his individual debt. By the terms of the pledge the security was to be applied first in payment of the note which it was given to secure, with the right of the pledgee to appropriate any excess in payment of any other liability due from the pledgor. A sale of the pledge having occurred, and a surplus remaining after liquidating the principal demand, the question is whether the original proof made by the bank of the balance due upon the partnership note is to be reduced by deducting this surplus, or whether the proof shall stand for participation in dividends for the full amount. The case then is one where a creditor holding security from an indorser offers as against the maker proof of the entire amount due without crediting any payment made by the indorser, although it is shown that the indorser also is liable as a joint maker because a member of the partnership. The contracts of the bank gave it the right to pursue both the indorser and makers until full satisfaction of its debt was obtained, and this is not changed by the insolvency of the firm, or the right on the part of creditors to resort to the individual members for satisfaction of the firm debts. If the indorser had paid he would have been entitled to reimbursement from the partnership in full, or participation by way of a dividend if insolvency had intervened. Any security of his own that he might have pledged upon redemption would have remained his property, which his partners could not call upon him to contribute toward the payment of their joint debts, for it did not form any part of the joint assets. Upon the facts in evidence the bank having taken and held the pledged property without notice of any equities is in no worse position, and it is not estopped from insisting upon the full benefit of the contract which it made with the indorser.
It has been held that in proof of debts against an insolvent, or a bankrupt, secured or unsecured creditors stand alike, in that each may prove his debt in full, though the secured creditor cannot eventually receive more than the face of his debt and interest. Merrill v. National Bank of Jacksonville, 173 U.S. 131. If this decision, as argued by the receiver, originally was made by a divided court, it was unanimously followed in the subsequent case of Aldrich v. Chemical National Bank, 176 U.S. 618. The receiver also contends that the first case arose under the national banking act, and is not of general application. But the equitable principle involved is not defined or limited by the nature of the business of the insolvent, or bankrupt, and depends entirely, in the absence of a statute, upon the right of the secured creditor to obtain the full benefit of his contract, unless by so doing it is found that the equitable rights of other creditors are wrongfully impaired. The general creditors of the firm have no larger rights than their debtors, who could not have compelled contribution from the separate property of the indorser, nor do they possess any equitable right to compel his creditor, who now holds his separate property under his individual contract, to make a similar contribution. Upon this somewhat vexed question it may be that our decisions are not entirely uniform, and perhaps cannot be fully harmonized, but they have been reviewed so exhaustively in the recent case of Hale v. Leatherbee, 175 Mass. 547, which arose under Pub. Sts. c. 157, that any further consideration of the subject would be unprofitable. In that case in speaking of the rights of unsecured creditors as against the claim of secured creditors to be allowed to prove their debts in full, it was said by Mr. Justice Barker, "Their equitable right is to have their own claims proved at a just amount, and to have recognized and enforced all equities growing out of the relation of the insolvent to the demand offered for proof. Until . . . full payment . . . neither the insolvent, the assignee, nor the general creditors have an equitable right to prevent the creditor from realizing by means of his security the full payment of his debt. Where the creditor by means of his security and his proof receives his whole debt, his rights in the security and in the estate of the insolvent stop. If at the outset the value of the security and the value of the assets of the insolvent estate, as compared with the amount of the claims provable against it, are such as to show that the creditor will receive from both his funds more than the amount of his debt, the facts disclose an equitable right in the security on the part of the insolvent estate, which may be enforced by a restraint in the proof without doing injustice perhaps to the creditor. But when it is not shown that such a state of facts exists it is not necessary for the preservation of the equitable rights of the insolvent and his assignee and other creditors that the creditor be restrained in his proof." In accordance with this rule the bank should be permitted to participate in the distribution of the assets of the insolvent partnership without any deduction from the amount proved, unless it should appear that by permitting such proof it would receive more than the face of its debt. If this is shown then there should be a proportionate reduction.
Decree accordingly.