1. Except where, within a prescribed period before the
commencement of proceedings in bankruptcy, an attachment has been
sued out against the property of the bankrupt, or where his
disposition of his property was, under the statute, fraudulent and
void, his assignees take his real and personal estate, subject to
all equities, liens, and encumbrances thereon, whether created by
his act or by operation of law.
2. Until he shall be paid, the pledgee is entitled to the
possession of the property which he holds under a valid pledge as
security for his debt against the pledgeors, notwithstanding a
subsequent adjudication of bankruptcy against them, and his refusal
to surrender it to their assignees is not a conversion of it.
3. The failure of the pledgee to appear and prove his claim in
the bankruptcy court forfeits only his right to participate in the
distribution of the bankrupt's estate ordered by that court.
On the 22d of July, 1871, O'Fallon & Hatch, a firm doing
business at St. Louis, delivered, in pledge, to the New Orleans
Savings Institution, a corporation created by the laws of
Louisiana, having its place of business in New Orleans, two
certificates of indebtedness issued by that state, each for the sum
of $5,000, to secure the payment of a promissory note of the firm
for $5,000, dated July 21, 1871, made payable to its own order on
the 21st of January, 1872, and by it endorsed in blank. It is
conceded that the corporation acquired the note and the
certificates of indebtedness in due course of business, and for a
valuable consideration. The firm and the individuals composing it
were, Nov. 27, 1871, adjudged bankrupts by the District Court of
the United States for the Eastern District of Missouri, and, upon
the application of creditors, a receiver of the estate and effects
of the bankrupts was, by an
ex parte order, appointed,
with authority to demand and receive all property of every kind and
description belonging to them.
Page 95 U. S. 765
An assignee in bankruptcy was afterwards appointed, to whom was
conveyed, in the prescribed mode, all the real and personal estate
of the bankrupts. First the receiver, and subsequently the
assignee, each claiming to act under the authority of that court,
demanded of the corporation, in the City of New Orleans, the
surrender of the certificates. That demand, repeated more than
once, and accompanied by copies of the orders of that court, was
uniformly met with a refusal to surrender them, except upon the
payment of the note for which they had been pledged. The
corporation, by its president, expressed its willingness to
surrender them, or have them sold, if an amount sufficient to pay
the note was left in New Orleans, with the agent of the receiver
and assignee, until proof of its debt should be made in the
bankruptcy court. Neither the receiver nor the assignee assented to
such an arrangement, but insisted upon the right to the actual
custody of the certificates pending the proceedings in bankruptcy.
The assignee, upon one occasion, authorized the president of the
corporation to sell them, at not less than sixty-eight cents on the
dollar, and retain the proceeds, without prejudice to the rights of
either party, until the claim of the institution should be proven
before a register in bankruptcy, and allowed. But a sale could not
be made at that limit, and the authority to sell was withdrawn.
The corporation did not become a party to the proceedings in
bankruptcy by proving its debt, or in any other mode.
This action by the assignee in bankruptcy, to recover of the
corporation the value of the certificates, was based upon the
ground that, by its refusal to surrender possession of them, it had
converted them to its own use, and become liable therefor.
The corporation insisted that, having obtained the certificates
in due course of business, and for a valuable consideration, it was
entitled to hold them until the note should be fully paid.
There was a finding in favor of the corporation; and, judgment
having been rendered thereon, Yeatman sued out this writ of
error.
Page 95 U. S. 766
MR. JUSTICE HARLAN delivered the opinion of the Court.
Counsel for the plaintiff in error has raised numerous questions
for our consideration, which, under the view we take of the case,
it is not necessary to determine. The sole question which, under
the pleadings, it seems essential to decide, is, whether the
savings institution, by its refusal to surrender the certificates,
can be held to have converted them to its own use.
We are of opinion that this question must receive a negative
answer. The savings institution, by virtue of the pledge, acquired
a special property in the certificates, and, until the payment of
the note for $5,000, was not bound to return them either to the
bankrupt, the receiver, or the assignee in bankruptcy. Such are,
beyond doubt, its rights at common law, as well as under the Code
of Louisiana, which declares that
"the creditor who is in possession of the pledge can only be
compelled to return it when he has received the whole payment of
the principal as well as the interest and costs."
Rev.Code La., sec. 3164.
These rights were not affected by any of the provisions of the
bankrupt law. The established rule is, that except in cases of
attachments against the property of the bankrupt within a
prescribed time preceding the commencement of proceedings in
bankruptcy, and except in cases where the disposition of property
by the bankrupt is declared by law to be fraudulent and void, the
assignee takes the title subject to all equities, liens, or
encumbrances, whether created by operation of law or by act of the
bankrupt, which existed against the property in the hands of the
bankrupt.
Brown v. Heathcote, 1 Atk. 160;
Mitchell v.
Winslow, 2 Story, 630;
Gibson v.
Warden, 14 Wall. 244;
Cook v.
Tullis, 18 Wall. 332;
Donaldson v.
Farwell, 93 U. S. 631;
Jerome v. McCarter, 94 U. S. 734. He
takes the property in the same "plight and condition" that the
bankrupt held it.
Winsor v. McLellan, 2 Story 492. In
Goddard v. Weaver, 1 Wood 260, it was well said that the
assignee
"takes only the bankrupt's interest in property. He has no right
or title to the interest which other parties have therein, nor any
control over the same, further than is expressly given to him by
the Bankrupt Act, as auxiliary to the preservation of the bankrupt
estate for the benefit of his creditors.
Page 95 U. S. 767
It would be absurd to contend that the assignee in bankruptcy
became
ipso facto seised and possessed in entirety, as
trustee, of every article of property in which the bankrupt has any
interest or share."
These views find direct support in more than one provision of
the Bankrupt Act. Among the rights which vest at once in the
assignee by virtue of the adjudication in bankruptcy, and of his
appointment as such assignee, is the right to redeem the property
or estate of the bankrupt. Act of 1867, sec. 14; Rev.Stat., sec.
5046. And, in order that it may be exercised for the benefit of
creditors, the assignee is given express authority,
"under the order and direction of the court, to redeem and
discharge any mortgage or conditional contract, or pledge, or
deposit, or lien upon any property, real or personal, whenever
payable, and to tender due performance of the condition thereof, or
to sell the same subject to such mortgage, lien, or other
encumbrance."
Act of 1867, sec. 14; Rev.Stat., sec. 5066. This is a distinct
recognition of the rights of the pledgee as against the assignee.
Of course, where the pledge is in fraud of the bankrupt law, and
consequently void, the assignee may disregard the contract of
pledge, and recover the property for the benefit of creditors. Not
so where the pledge, as in this case, was made in good faith, for a
valuable consideration, and not in violation of the provisions of
the bankrupt law.
The savings institution, therefore, incurred no liability by its
refusal to surrender the certificates upon the demand of the
receiver or the assignee. Such refusal affords no evidence of a
conversion of them to its use.
Nor was its right to hold them impaired by its failure to appear
in the bankruptcy court, or its refusal to prove its debt, in the
customary form, against the estate of the bankrupts. The only
effect of such refusal was to lose the privilege of participating
in such distribution of the estate as might be ordered by that
court. It had the right to forego that advantage, and look for
ultimate security wholly to the certificates which it held under a
valid pledge. If the assignee regarded them as of greater value
than the debt for which they had been pledged, or if the interest
of the creditors required prompt action, he had authority, under
the statute and the orders of the court, to
Page 95 U. S. 768
tender performance of the contract of pledge, or to discharge
the debt for which the certificates were held. He had the right,
perhaps, under the orders of the court, to sell them, subject to
the claim of the defendant in error. If he desired a sale of them,
and a distribution of the proceeds, or if he doubted the validity
of the pledge, he could have instituted an action against the
corporation in some court of competent jurisdiction in Louisiana,
and thereby obtained a judicial determination of the rights of the
parties. But none of these obvious modes of proceeding were
adopted. The receiver and assignee seem to have acted throughout
upon the theory that they had the right, immediately upon and by
virtue of the adjudication in bankruptcy, to assume control of all
property of every kind and description, wherever held, in which the
bankrupt had an interest, without reference either to the just
possession of others, lawfully acquired, prior to the commencement
of proceedings in bankruptcy, or to the liens, encumbrances, or
equities which existed against the property at the time of the
adjudication in bankruptcy. We have seen that such a theory is
unsupported by law.
The conclusions we have announced render it unnecessary to
consider any other questions raised in the case.
Judgment affirmed.
NOTE -- In
Yeatman v. Butler, Yeatman v. Turnell, Yeatman v.
Smith, and
Yeatman v. Generes, error to the circuit
court of the United States for the District of Louisiana, which
were argued by the same counsel as was the preceding case, MR.
JUSTICE HARLAN, in delivering the opinion of the Court, remarked,
that the same questions of law which arose in them had been
determined in
Yeatman v. Savings Institution, supra, p.
95 U. S. 764, and
that the ruling in that case controlled them.
Judgment in each case affirmed.
