In re Nathaniel O. Cram.

C. J., held, that a party holding a note signed by a principal and two sureties, all of whom were in insolvency, could not prove the full amount of his note against the principal, but must deduct the value of a mortgage given to him by one of the sureties, and prove for the residue of his debt- the clause in the insolvent act then under consideration, provided "that when any creditor shall have any mortgage or pledge of any real or personal estate of the debtor for securing the debt, &c., the property should be sold and the proceeds applied towards the payment of the debt, and he shall be admitted as a creditor for the residue, if any." The learned chief justice says in his opinion, if the term "debtor" in this sentence is necessarily to be limited to the insolvent debtor, whose estate is in the progress of settlement, then the case is not within the letter of it, because the mortgage was not made by the insolvent; but it is equally consistent with the manifest equity and policy of the statute to construe it to mean any person liable for the debt. It is a general rule of equity that when a final settlement is to be made, as in cases of bankruptcy, all mutual accounts should be balanced; that a pledge of property held as security for a debt, shall be deemed in the nature of set-off or payment, an extinguishment pro tanto, and the balance only is the actual amount which the creditor has trusted to the personal responsibility of the debtor, and it is for that sum only that he can come in pari passu with other creditors, who have relied on the same responsibility. If the debt is reduced and diminished by a pledge thus given by one of the debtors, it is equally reduced as against the creditors, if the creditor holds a mortgage made by either of the debtors; it is within the equity, if not the letter of the statute, and its value must first be deducted. The only authority cited to sustain this doctrine is Amory v. Francis, 16 Mass. 308, a proceeding against an administrator of an insolvent estate, in which it was decided that a creditor holding a mortgage given by the deceased debtor as security for the payment of the debt, and of less value than the amount of the debt, could only be allowed tc

In re Nathaniel O. Cram.

prove against the estate for the difference between his debt and the value of the property mortgaged- a proposition which no one could question, but which had no relevancy to the case then under consideration, as the property was not the property of the insolvent, but of a third party.

The decision in Lanckton v. Wolcott was followed in Richardson v. Wyman, 4 Gray, 553. There the debt was a joint and several note of three persons, who, as tenants in common of a parcel of real estate, had mortgaged it to the holder of the note. One of them was in insolvency, and it was decided that one third part of the land should be sold and applied in discharge of the note, and the value of the remaining two third parts should be ascertained by an assessor, and deducted from the amount due, and the creditor allowed to prove against the insolvent estate for the balance. It was admitted by the court that the case was not within the letter of the insolvent act, but it was claimed to be within its spirit, and the decision was based on Lanckton v. Wolcott. The learned judge admits that the statute did not prescribe any mode of ascertaining the amount to be allowed upon the demand for the two third parts of the mortgaged estate not belonging to the insolvent, and he therefore was obliged to devise a scheme of a valuation by an assessor in order to reach it. These cases, without reference to a single English authority in bankruptcy, adopt the conclusion that whatever property the creditor holds as security for his demand, whether from the insolvent or any other party, must be first appropriated to the reduction of the claim, and the balance only admitted against the estate.

In Agawam Bank v. Morris, 4 Cushing, 99, the court appear to have regarded the letter rather than the spirit of the act, as it allowed the petitioners, as indorsers, to prove their whole claim against an insolvent partner, on a partnership note, although a prior indorser held collateral security for the payment of the note given to him by the solvent partner, the indorser holding the security being the president of the bank which held the note, and testifying that the security was

In re Nathaniel O. Cram.

deposited for the purpose of making the bank and himself fully secure. See, also, Richardson v. City Bank et als. 11 Gray, 263.

It will be seen that the language of the insolvent act of Massachusetts is, "any real or personal estate of the debtor," and that the court had felt itself at liberty to include under the term "debtor" any party liable for the debt. In the bankrupt act the language is more precise and restricted, "any real or personal property of the bankrupt." The word bankrupt " is personal, confined to a single party, and cannot, I apprehend, be reasonably construed as including all others in any way answerable for the same demand.

66

I have examined numerous English decisions in bankruptcy bearing upon this question, but I can find no support in any of them for the principles laid down by the supreme court of Massachusetts; but on the contrary the very reverse has been sustained by the highest authority. In 1743, Lord Hard-' wicke, in Ex parte Bonnett, 2 Atkyns, 537, which was a case of proof against a bankrupt estate, said, "if these bonds," which had been given to the creditor as security, "had been joint bonds from the bankrupt, and another, to the claimant, he might have come in for his whole debt, under the commission, without being compelled to deliver up such joint securities."

The rule which universally prevails in bankruptcy in England is, that the creditor must apply all the property of the bankrupt, real or personal, which he holds as security for his claim, in reduction of his demand, and prove only the balance against his estate; but the security will not go in reduction of the claim, unless it is the property of the estate against which the proof is offered.

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Pari's case, 18 Vesey, 65, decided by Lord Eldon, I *think, fully confirms this proposition. In that case, the petitioning creditors held bills of exchange, drawn by certain parties in Demerara, and accepted by the bankrupts, who were partners with the drawers, but doing business in England - there being distinct firms carrying on

In re Nathaniel O. Cram.

business at Demerara and in Liverpool - the creditors held a mortgage on certain plantations in Demerara, given to them by the drawers as security for these bills, the objec tion was taken that the bills could not be proved against the estate of the bankrupt acceptors, without deducting the value of the mortgages. Lord Eldon ruled that the creditors could prove for the full amount of the bills, without deducting the value of the security, notwithstanding the partnership. The marginal note of Vesey is full to the point: "Creditor's right in bankruptcy to prove and avail himself of all collateral securities from third persons, to the extent of twenty shillings in the pound.

"Bills drawn and accepted by the same persons, constituting distinct firms, proof against the acceptor, without deducting the value of a security from the drawer.”

This decision, made in 1811, so far as I can ascertain, has ever since been recognized as the rule in bankruptcy in all the English courts.

In Ex parte Goodman, 3 Maddox, 373 (1818), a creditor was allowed to prove his whole debt against a bankrupt, notwithstanding he held an assigment of an interest in certain estates, made to him by third parties, at the bankrupt's request, as security for debt.

Pari's case was adopted In re Plummer, 1 Phillips, 56 (19 Eng. Ch. R.), 1841. In this case a creditor, whose debt was secured by the joint and several covenants of two parties in trade, and also by a mortgage on part of the joint property, was admitted to prove his debt against the separate estate of each, without surrendering or releasing his mortgage security.

Lord Lyndhurst, in his opinion, says "what are the principles applicable to cases of this kind; if a creditor of a bankrupt holds a security on a part of the estate of a bankrupt, he is not entitled to prove his debt, under the commission, without giving up or realizing his security; for the principle of the bankrupt law is, that all creditors are to be put on an equal footing; and therefore, if a creditor choose

In re Nathaniel O. Cram.

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, this 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 realize more than twenty shillings in the pound. That is the ground on which the principle is established; it is unnecessary to cite authorities, it is too clearly settled to be disputed."

"In administration under bankruptcy, the joint estate and separate estates are considered as distinct estates, and ac cordingly 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. Now this case is merely the converse of that, and the same principle applies to it."

Peacock's case, 2 Glyn & Jamison, 27, was where a joint creditor held security from one of the joint debtors, and was allowed to prove his debt against the joint estate without surrender or sale of his security.

In Ex parte Adams, 3 Montague & Ayrton, 265, it was decided that the security is not to go in reduction of the claim, unless it is the property of the estate against which the proof is offered. In Ex parte Heddersby, 2 Mont., D. & De Gex, 487, the creditor holding the estate of the wife of the bankrupt as security for his debt, was allowed to prove for the whole debt. The English authorities were examined and approved by Mr. Justice Story, In re Babcock, 3 Story, 399, a case arising under the former bankrupt act. In his opinion in this case, that most learned judge says, "In relation to the point of the creditor having securities in his hands for the payment of the debt in bankruptcy, a distinction is taken between the case of a security given to the creditor by the bankrupt himself, of his own property, and the case of a security of a third person, transferred to the creditor by the bankrupt, or otherwise. In the former case, the creditor is not allowed to prove his debt against the bankrupt unless he