General order in bankruptcy, No. 36, relates to 'Appeals,' and subdivision 3 thereof provides: 'In every case in which either party is entitled by the act to take an appeal to the Supreme Court of the United States, the court from which the appeal lies shall, at or before the time of entering its judgment or decree, make and file a finding of the facts, and its conclusions of law thereon, stated separately; and the record transmitted to the Supreme Court of the United States on such an appeal shall consist only of the pleadings, the judgment or decree, the finding of facts, and the conclusions of law.'
The circuit court of appeals, in pursuance thereof, made and filed its finding of the facts and its conclusions of law thereon.
August 18, 1903, a petition in bankruptcy was filed against the firm of Jacob M. Mertens & Company and the individual members thereof. They were adjudicated bankrupts Septem- [206 U.S. 28, 29] ber 15, and on the following 14th of October plaintiff in error was elected trustee in bankruptcy of both the copartnership and the individual estates. At the time the petition was filed the firm was indebted to the Varick Bank to the amount of $27,893.85, evidenced by notes made or indorsed or guaranteed by Mertens & Company, five of which, aggregating $ 22,500,-four for $5,000 each, and one for $2,500,-were collateral notes. These notes were alike in form and contained the following provision:
Indorsed upon the back of each of these notes and signed by J. M. Mertens & Company and J. M. Mertens appeared the following:
On the day the petition was filed, Mertens individually was indebted to the bank in the sum of $25,489.62. This indebtedness was upon his guaranty of the five collateral notes, of one of which he was also the maker, the balance being based upon his indorsement of sundry notes of third parties amounting to about $3,000. Mertens individually, to secure the payment of the indebtedness to the bank, pledged to it two policies of insurance upon his life, one for $50,000, No. 417,171, and the other for $ 10,000, No. 252,314. The $50,000 policy was a free tontine policy, issued February 15, 1889, payable to Mertens or his estate, the yearly premium was $1,750, and the tontine dividend period expired Feb- [206 U.S. 28, 31] ruary 15, 1909. The $10,000 policy was issued December 21, 1882, payable to Jennie Mertens, wife of the insured, but, in the event of her prior death, to the children of the insured, and the annual premium was $272.50. It was a tontine savings policy, and the tontine period was completed December 21, 1902, at which time Mertens, as the insured, withdrew in cash the share of the surplus apportioned to the policy, and continued it in force on the ordinary plan. On March 16, 1901, Jennie Mertens and the children of Jacob and Jennie executed an assignment of the $10,000 policy to the bank. On March 25, 1901, J. M. Mertens joined with his wife in executing a further assignment of the same policy to the bank. March 21, 1901, Mertens individually executed an assignment of the $50,000 policy to the bank. These assignments contained no power of sale. In addition the policies were pledged to the bank under the terms of the collateral notes and agreements of pledge. It appeared from the proofs that the claim against Mertens individually was secured by an individual deposit of Mertens of the sum of $6,000 as collateral, in addition to the policies.
Obligations aggregating $1,691.93, indorsed by Mertens, had matured and remained unpaid on August 18, and on September 15 obligations aggregating $13,570.47 had matured and remained unpaid, and in the latter amount were included two of the collateral notes for $5,000 each and some $ 3,000 of the notes of third persons, indorsed by Mertens individually.
On or before September 14, 1903, the two policies were delivered to a duly licensed auctioneer by the attorneys of the bank with instructions to sell the same at public auction at the New York Real Estate Office sales rooms, to the highest bidder, and they were offered for sale and sold to the highest bidder, an agent of the bank, on September 14, the $50,000 policy for the sum of $7,000 and the $10,000 policy for the sum of $3,250. No notice of the sale was given to anyone except the bank. In due time the bank filed with the referee [206 U.S. 28, 32] in bankruptcy two proofs of claim, one against the copartnership estate aggregating $27,893.85, and another against Mertens for the sum of $9,118. 37. Thereafter the claims were amended. Objections to both were filed by the trustee, alleging in substance that the sales of the policies were illegal; that the value of the securities held by the bank had not been ascertained according to the provisions of the bankruptcy act, and that the trustee still owned the equity.
No other evidence than appearing above was offered by the trustee on the hearing before the referee under the objections. The referee held, in substance, that the sale of the policies was null and void, and that the value of the securities had not been ascertained according to the provisions of 57h of the bankruptcy act, and refused to allow either claim against the estate or estates. Counsel for the trustee moved for the referee to direct a method by which the security held by the bank should be liquidated, and that in so doing he direct the bank to resell the policies on notice to the trustee. The motion was objected to, but was granted by the referee. The bank petitioned for a review, and the district court of the United States for the northern district of New York on such review approved the referee's rulings. 134 Fed. 101. From the order of the district court the bank appealed to the United States circuit court of appeals for the second circuit. That court, as previously stated, filed its finding of the facts and its conclusions of law, which conclusions of law were as follows:
The order of the district court was reversed and the case remanded with instructions to proceed conformably with the opinion of the circuit court of appeals. 75 C. C. A. 548, 144 Fed. 818. The case was then brought to this court on appeal.
Messrs. Will B. Crowley and Ceylon H. Lewis for appellant.
Mr. Chief Justice Fuller delivered the opinion of the court:
The errors assigned question the conclusions of law.
We need spend no time on the objection that the referee's order did not amount to the rejection of the claims. What the referee said was: 'As the proof now stands, I shall, therefore, decline to allow either claim as established against the estate or estates.'
The district judge recited the action of the referee as disallowing both claims, and entering 'an order prescribing the method for ascertaining the value of such policies,' and concluded: 'The orders of the referee disallowing the claims are approved and affirmed.' 134 Fed. 102, 104. And entered an order accordingly.
The circuit court of appeals held 'that the order appealed from was, in substance and effect, a rejection of the claims,' and said: 'The bank insisted that its claims were for a definite [206 U.S. 28, 37] amount, the amount stated in its proofs of debt, less the sumwh ich it had already derived from the sale of the securities. The decision not only disallowed these claims, but left the bank remediless, unless it should consent to allow a different reduction.'
We think it perfectly clear that the policies did not belong to the partnership estate. They insured the life of J. M. Mertens, and were payable, one to him or his legal representatives, and the other to his wife or children, or to him in the event of their death before his. And they had been assigned to the bank by him individually and the members of his family, as early as March, 1901, as collateral security, as well as by the collateral notes before mentioned. The fact that Mertens individually was the owner was in effect conceded, and the objections to the claims raised no issue in regard to it. That the partnership on some occasion may have pledged the policies in conjunction with Merten's separate individual pledge had no special significance.
The notes provided that the holder might apply the proceeds of a sale to 'pay one or more or all of the liabilities due it, as it shall deem proper, whether due or not.' And it had the right, according to the settled rule in equity and in courts of bankruptcy, to apply the proceeds of the collateral in extinction of the individual debts. If the sale was a good and valid sale and the value of the policies was properly liquidated thereby, and applied on the individual indebtedness, it follows that the claim against the partnership should have been allowed in full.
And also the claim against the individual estate of Mertens, for the balance, after deducting the $10,250 and the $6,000.
The contracts of pledge were made, executed, and to be performed in the state of New York, and the rights of the parties were governed by the law of that state. No preference under the bankruptcy act was alleged or proved, nor was there any allegation or proof that the pledge of the securities was in fraud of the rights of the creditors or trustee. The [206 U.S. 28, 38] questions of the extent and validity of the pledge were local questions, and the decisions of the courts of New York are to be followed by this court. York Mfg. Co. v. Cassell, 201 U.S. 344 , 50 L. ed. 782, 26 Sup. Ct. Rep. 481; Thompson v. Fairbanks, 196 U.S. 516, 522 , 49 S. L. ed. 577, 584, 25 Sup. Ct. Rep. 306; Humphrey v. Tatman, 198 U.S. 91 , 49 L. ed. 956, 25 Sup. Ct. Rep. 567. Here there was an absolute power of sale coupled with an interest. The bank had had both title and possession of the policies for a period of more than two years before the filing of the petition. It had a valid debt against both the copartnership and individual estates, which is not questioned. It could, therefore, make a sale under the power granted, and transfer title in its own name. Numerous decisions of the court of appeals of the state of New York sustain contracts of pledge waiving the right of the pledgeor to exact strict performance of the commonlaw duties of a pledgee. In the absence of fraud, the pledgee may buy at his own sale held without notice or demand or advertisement, when power so to do is expressly granted by the pledgeor. Baker v. Drake, 66 N. Y. 518, 23 Am. Rep. 80; Williams v. United States Trust Co. 133 N. Y. 660, 31 N. E. 29; Toplitz v. Bauer, 161 N. Y. 325, 55 N. E. 1059. And see National Bank v. Baker, 128 Ill. 533, 4 L.R.A. 568, 21 N. E. 510; McDowell v. Chicago Steel Works, 124 Ill. 491, 7 Am. St. Rep. 381, 16 N. E. 854; Farmers' Nat. Bank v. Venner, 192 Mass. 531, 78 N. E. 540.
It must be remembered that the circuit court of appeals found that there was no fraud in fact in the sale. In respect of that Judge Wallace, delivering the opinion, said:
The trustee did not offer to prove that others were prepared to purchase and might have done so but for want of information, or that the policies had a greater value than was realized at the sale, or that he was prepared to redeeom the pledge for the benefit of the estate, nor did he offer to do so. There was nothing in the evidence tending to show a wanton sacrifice or an intention to buy in at so inadequate a price as to justify the inference of a fraudulent purpose.
Counsel for the trustee contends that the policies were worth more than was obtained at the sale, because the bank's agent, after having borrowed on the strength of the policies the exact amount of his bid immediately after the sale, subsequently borrowed thereon $2,622.75; and also that from the terms of the $50,000 policy it appeared that on the completion of the tontine dividend period, February 15, 1909, the assured had the privilege to withdraw in cash $18,823, and in addition the surplus which might then be apportioned. And counsel called attention in his brief filed herein, February 26, 1907, to the case of Hiscock v. Mertens [ 205 U.S. 202 , ante, 488, 27 Sup. Ct. Rep. 488], then pending in this court, as demonstrating that the $50,000 policy was worth more than was realized at the sale. But the $2,622.75 loan covered the next ensuing premiums on the policies with interest; and the $7,000 paid for the $50,000 policy with interest and the premiums of February, 1904, 1905, 1906, 1907, and 1908, with interest, and the last premium, would appear to have aggregated a total cost of $21,346.50; while, if resort could be properly had to the record in another case to piece out the evidence in this, the opinion in Hiscock v. Mertens, decided March 25, 205 U.S. 202 , 51 L. ed. 771, 27 Sup. Ct. Rep. 488, states that the evidence showed that this particular policy had a surrender value of $6,574. And as to the $10,000 policy no suggestion was made that the $3,250 was not a full price or even more, nor could there be in reason, for as Ray, J., said, Re Mertens, 131 Fed. [206 U.S. 28, 40] 972, it 'had become a simple life policy, payable to the wife of the assured, if living at his death; if not living, to his children, if any; and, in default of child or children, to the personal representatives of the assured. This policy concededly is so conditioned and encumbered, and the interest of the trustee therein, if any, is so remote and uncertain, that it is of no practical value to the estate.' Clearly, there is nothing on the face of the record to justify a charge of fraud on account of inadequacy.
Section 57h provides: 'The value of securities held by secured creditors shall be determined by converting the same into money according to the terms of the agreement pursuant to which such securities were delivered to such creditors or by such creditors and the trustee, by agreement, arbitration, compromise, or litigation, as the court may direct, and the amount of such value shall be credited upon such claims, and a dividend shall be paid only on the unpaid balance. [30 Stat. at L. 560, chap. 541, U. S. Comp. Stat. 1901, p. 3443.]
The court was by this subdivision empowered to direct a disposition of the pledge, or the ascertainment of its value, where the parties had failed to do so by their own agreement. It is only when the securities have not been disposed of by the creditor in accordance with his contract that the court may direct what shall be done in the premises. Of course, where there is fraud or a proceeding contrary to the contract, the interposiio n of the court might properly be invoked.
According to the terms of the bankrupt act, the title of the bankrupt is vested in the trustee by operation of law as of the date of the adjudication. Act of 1898, 70a, e. By the act of 1867 [14 Stat. at L. 522, chap. 176] it was provided that as soon as an assignee was appointed and qualified the judge or register should, by instrument, assign or convey to him all of the property of the bankrupt, and such assignment shall relate back to the commencement of the proceedings in bankruptcy, and, by operation of law, shall vest the title to such estate, both real and personal, in the assignee. But 70a of the act of 1898 omits the provision that the trustee's title 'shall relate back to the com- [206 U.S. 28, 41] mencement of the proceedings in bankruptcy,' and explicitly states that it shall vest 'as of the date he was adjudged a bankrupt.' When the petition in the present case was filed the bank had a valid lien upon these policies for the payment of its debt. The contracts under which they were pledged were valid and enforceable under the laws of New York, where the debt was incurred and the lien created. The bankruptcy act did not attempt, by any of its provisions, to deprive a lienor of any remedy which the law of the state vested him with; on the other hand, it provided, 67 d: 'Liens given or accepted in good faith, and not in contemplation of, or in fraud upon, this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this act.'
Mueller v. Nugent, 184 U.S. 1 , 46 L. ed. 405, 22 Sup. Ct. Rep. 269, is not to the contrary, as explained in York Mfg. Co. v. Cassell, 201 U.S. 344 , 50 L. ed. 782, 26 Sup. Ct. Rep. 481.