Amicus Curiae Brief — Ticonic National Bank v. Sprague

INDEX

SUBJECT INDEX

A The lien of a secured contract creditor of a national

bank extends to interest to the date of payment-.-..-.

of a secured creditor of a national bank upon

the appointment of a receiver therefor-_-_. ---

B. Under the decisions of this Court a secured

creditor of a national bank, having a valid

contract for interest, is entitled to recover

interest in full after the suspension of the

bank out of the proceeds of his collateral in

accordance with the terms of his contract___

II. A rule to the effect that the appointment of a receiver

for a national bank limfts the liens of its secured

contract creditors would be detrimental to national

iveciictdine i ceakisscdbadinebdésawédancene 1g

TER | AREER AES NE eA SGE Ser iY Ri Ny ERS eC aN 22

ad ieee dss Sine ae heer gh aA Na tanh ac dt thinned lp asecaree 24

CITATIONS

- Aldrich v. Chemical National Bank, 176 U. 8. 618__.-.-- 6, 9,17

* American Iron & Steel Manufacturing Co. v. Seaboard Air

SS SS ee ee - 38,138

a American Exchange National Bank, 133 U. 8. ,

alsiitnne timabatetalatts titre ne en en enema ee 18

Pa: af County: Commiasioners of Sweetwater County v.

Bernardin (C. C. A. 10th), 74 Fed. (2d) 809.....-.---- 3

Chemical National Bank v. Armstrong (C. C. A. 6th), 59

oe. - Wed. 372.......--5...24.---< EEE ER Pe a See 6

sg Coder v. Arts, 213 U. Ph SAK ota citecentedlinbanposwdn 3

Coder v. Arie (C. C. A. 8th), 152 Fed. 943 Waar RAT Ree? 16.

ae Thureten County (O. C. A. 9th), 86 Fed. (2d) .

I neta eR Co a ane neobbmhownaeaaee 11,12

SS meh Carson, 188 U. & 42.....--.-.---.-------.-.<-

3 Fash v. First National Bank (C. C. A. 10th), 89 Fed. (24)

4 Ed dnakid pidédebudcswobindcactubusschewssedecen -14,12

4041138 —1 m

A. The National Bank Act does not limit the lien —

35 ae aR Re

eaP

syumepgprer seen tg Te we DST TS

SPIRE TEATS

Cases—Continued.

First National Bank v. J. I. Campbell Co. (Tex. Civ. App.)

Gamble v. Wimberly (C. C. A. 4th), 44 Fed. (2d) 329____.

Merrill v. National Bank of Jacksonville, 173 U. 8. 131_

; 1

National Bank of the Commonwealth vy. Mechanics’ Nationa

Sexton v. Dreyfus, 219 U. 8. 339_....---.--------------.

State ex rel. Hansen v. Chelan County, 185 Wash. 327, 5:

White v. Knoz, gg kag eee ae 9, 1

' Willing v. Binenstock, No. 36, October Term, 1937-.----.

Statutes: .

Bankruptey ‘Act: Sec. Os ee ye

Federal Reserve Act: ts te caeeeaseaws

National Bank Act:

a dot S. R. 8. sec. ag ona a scsdh ation cael

A ee ae

52 (U.8. BT Ws CG nocd kaadedadcoapeces

Regulations of the Board of Governors of the Federa

Reserve System, Regulation F: Sec. 9 (b).....--- ae

131_- 89,

Nenad

Sie Sere Gro ie res

OcroBER Trem, 1937

No. 374

Ticomio NavionaL Bank, Pxories-Ticonio Na-

TIONAL Bank, AND ARTHUR G. PICHER, as RE-

CEIVER OF BotH Samp BANKS, PETITIONERS —

v,

Lorre F. SPRAGUE . AND MARGARET Davis Spracug,

RESPONDENTS ©

ON WRIT OF CERTIORARI TO THE CIRCUIT COURT OF

APPEALS FOR THE FIRST CIRCUIT

- BRIEF OW BEHALF OF THE RECONSTRUCTION FINANCE

CORPORATION AS AMICUS CURIAE

4

STATEMENT

A ‘iattoiial bank accepting funds i in trust for i in-_

vestment and using the same, pending investment,

as in the conduct of its business is required by Section —

11 (k) of the. Federal Reserve Act and Section

9 (b) of Regulation F of the Regulations: ‘of the

Board of Governors of the Federal Reserve System

to deliver to and maintain in its trust department,

qa)

i. gil

2 | | ‘s

as collateral security, United States bonds or other

securities having at all times a market value at least

equal to the amount of such funds. Upon the fail-

ure of such a bank, prior to investment of such

funds, the owner thereof has a lien on the bonds or

other securities so set apart in addition to his claim

_ against the estate of the bank. The question pre-—

sented here is whether that lien extends to interest.

The District Court and the Circuit Court of Ap-

peals both held that the lien extended to interest to

the date of payment, calculated, however, only

from the date on which suit was started.

The approach to the question involved i in the pe-

tition for the writ of certiorari herein to the Cir-

cuit Court of Appeals for the.First Circuit indi-

cates that petitioners have construed certain deci-

sions of this Court as indicating that the lien of a

secured creditor of a national bank is limited, in

ease of suspension of such a bank, to principal un-

less the assets of the bank prove to be sufficient to

pay all the debts and engagements of the bank in

full, plus mterest. It is because of that approach -

and because of the fact that Reconstruction F:-

nance Corporation is a secured creditor of various

insolvent banks that this brief is filed.

This brief i# directed to the question of the

extent of the lien of a secured creditor of a national

bank rather than solely to the narrower question,

as to the claim for interest on uninvested trust

funds, presented by the record in this case.

3

SUMMARY OF ARGUMENT -

It is submitted, first, that the liens of secured con-

tract creditors of a national bank extend to interest.

to the date of payment; and, second, that it would

be detrimental to national banks if a rule existed to

the effect that the appointment of a receiver for

such a bank limited the liens of such creditors.

I

THE LIEN OF A SECURED CONTRACT CREDITOR OF A

NATIONAL BANK EXTENDS TO INTEREST TO THE DATE

OF*PAYMENT

Security posted for the performance of a contract

to repay money with stated interest equally secures

both the promise to repay the principal sum and

the promise to pay interest as stated.

A secured creditor’s lien is not limited to princi-

pal or to principal and a part of interest by the ap-

' pointment of a trustee im bankruptcy for his debtor.

Bankruptcy Act, Section 67d; Coder v. Arts, 213

U. S. 223. Nor is a secured creditor’s lien ‘so lim- —

ited by the appointment of a receiver in equity. for

. the affairs of the debtor. American Iron & Steel

Manufacturing Co. v. Seaboard Air Line Ry., 233

U. 8. 261; Board of County Commissioners of

- Sweetwater County v. Bernardin (C. C. A. 10th),

74 Fed. (2d) 809, certiorari denied, 295 U. 8. 731;

First National Bank v. J. I. Campbell Co., 114 8.

W. 887 (Tex. Civ. App. 1908). Nor does any such

limitation take place in case the assets of the

debtor, being a state bank, are taken over for liqui-

—f

4

dation by the State Banking Department. State,

-ex rel. Hansen. v. Chelan County, 185 Wash. 327,

54 Pae. (2d) 1006 (1936).

For the reasons briefly discussed below, we sub-

mit that a secured creditor’s rights in and to his |

collateral are in no wise limited or affected by the

appointment of a receiver for his debtor merely

because his debtor happens to be a national bank.

*

-

The National Bank Act does not limit the lien of a

secured creditor of a national bank upon the

appointment of a receiver therefor —

With reference to the appointment of receivers

‘for and the winding up of the affairs of national

‘banks, the National Bank Act provides that the

receiver, upon appointment, ‘‘shall take possession

of the books, records, and assets of every descrip-

tion”. (sec. 50; U. S. R. S., sec. 5234), paying. over

to the Comptroller.of the Currency the proceeds of

the assets of the bank as liquidated, and that the

Comptroller— '

_* * * shall make a ratable ‘dividend

of the money so paid over to him by such

receiver on all such claims as may have been

proved to his satisfaction or adjudicated in

a eourt of competent jurisdiction, and, as

the proceeds of the assets of such association

are paid over to him, shall make further

dividends on all claims previously proved or

adjudicated; * * * (sec.50;U.S.R.8.

sec. 5236). aan

There is no suggestion to be found in the National

- Bank Act to the effect that liens are in any wise —

affected by the appointment of a receiver. If Con-

gress had intended to change the fundamental rule —

of law that security for the performance of a con-

tract containing a promise to repay principal and

a promise to pay interest equally secures both prom-

ises, it would have done so expressly. Fundamental

rules are not changed my implication. ‘ The provis-

- ion for ratable dividends, above quoted, in no wise

limits a secured creditor’s rights in and to his col-

lateral. The section containing that provision deals

with the distribution of the general assets of an in-

solvent bank—not with creditors’ other rights. ' As

was said by Chief Justice Fuller in Beott v. Arm-

strong, 146 U. ‘9 499:

ee ‘The receiver took the assets of

the cane Bank as a mere trustee for

creditors, and not for value and without no-

tice, and, in the absence of statute to the

contrary, subject to all claims and defences

that might have been interposed as against

the insolvent corporation before the liens of

the United States and of the general credi-

tors attached Ce 507 ). ( Ttalies ond

*

ie RE The requirement as to ratable

dividends, is to make them from what be-

longs to the bank, and that which at the time

‘of the insolvency belongs of right to the

debtor does not belong to the bank (p. 510).

Laiies ours. J

* * =

6

* * * ‘We cannot believe Congress in-

tended * * * to destroy by implication

any right vested at the time of the suspen-

sion of a national bank (p. 511).

Chief Justice Taft, then Circuit Judge, said, in

. Chemical National Bank v. Armstrong (C. ©. A.

6th), 59 Fed. 372, affd. sub nom. Aldrich v.

Chemical National Bank, 176 U. S. 618:

* * * The suspension of the bank,.and

its seizure by order of the comptroller, have

no effect to change the rights of the creditor

with reference to his collateral. He enjoys

precisely the same advantage over the un-

secured creditor, with respect to the col-

lateral, that he did before the suspension

(p.. 376).

The interpretation of Section 50 of the National

Bavk Act (U.S. R. S., sec. 5236) contained in Scott

v. Armstrong, supra, was reaffirmed during this

term by this Court in Willing v. Binenstock, No. 36.

One of the prior contract rights of a secured ©

creditor of a national bank which is vested at the

time of its suspension is to hold his collateral until

both principal and interest have been paid in full,

in accordance with his contract. Insolvency of the

bank may prevent him realizing more than a part

of his principal out of the general estate, but it

does not limit his security rights. Other creditors

have no interest in his security until the secured

debt is entirely satisfied m so far as it is a lien on >

7

the property of the bank. Their interest is oii

in the surplus, if any.

Section 52 of the National Bank Act (U.S. B.S.

sec. 5242) voids certain preferential transfers by

national banks. By doing so, it impliedly recog-

nizes the validity of all others. As was said in

Earle v. Carson, 188 U. 8S. 42, 47:

* * * Thus; it is provided, Rev. Stat.

sec. 5242, that—

‘* All transfers of the notes, bonds, bills

of exchange, or other evidences of debt ow-

ing to any national banking association, or

of deposits to its credit; all assignments of

mortgages, sureties on real estate, or of

judgments or decrees in its favor; all de-

posits of money, bullion, or other valuable

thing for its use, or for the use of any of its

shareholders or creditors; and all payments

of money to either, made after the commis-

_sion of an act of insolvency, or in contem-

plation thereof, made with a view to pre- —

vent the application of its assets in the

manner prescribed by this chapter, or with

a view to the preference of one creditor

to another except in payment of its cir-

culating notes, shall be utterly null and

void; * * #9

This by a negative affirmative establishes

the validity of all contracts otherwise law- _

ful mdde. by the Bank concerning tts assets

before its failare * * *. [Italics oo

.40411—38——-2

8

B

Under the decisions of this Court a secured credi-

tor of a national bank, having a valid contract

- for interest, is entitled to recover interest in

full after the suspension of the bank. out of the

proceeds of his collateral in accordance with the

terms of his contract

A secured creditor of a national bank for which

a receiver has been appointed, and the general es-

tate of which is sufficient to pay only a percentage .

of the allowable claims, has two sources to which

he may look for the satisfaction of the bank’s debt

to lim. He is entitled to receive dividends out of

the estate of the bank on the amount of his claim

as of the date of suspension of the bank on the same

basis as unsecured creditors, and he may realize

upon his security for both principal and interest

to the date of payment. His right to dividends ©

was defined by Chief Justice Fuller in Merrill v. .

National Bank of Jacksonville, 173 U. 8S. 131, 135,

as follows: er

*-* * a secured creditor of. an insol-

vent national bank may prove and receive

dividends upon the face of his claim as it

_ stood at the time of the declaration of in-

solvency, without crediting either his col-

laterals, or collections made therefrom after

such declaration, subject always to the pro-

viso that dividends must cease when from

them and from collaterals realized, the claim

~ has been paid in full. [Italics ours.] —

— —_ “ EGP. CREB EEO OLGA EE BAI CIO

That

cal N

invoh

cured

to sh

receiy

of th

of th

elaim

the d

or of

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Bank

eery

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than

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9

at definition was reiterated in Aldrich v. Chemi-

| National Bank, 176 U..S. 618. The question

volved in both of those cases was whether a se-

red creditor of a national bank should be allowed

share in dividends out of its general estate in

eeivership on the basis of the amount due him as

the date of suspension (the Chancery rule), or

the amount’ due at the date of the filing of his

im (the Lllinois rule), or of the amount due on

e dividend payment date (the Maryland rule),

of the amount of the deficiency, if any, remain-

¢ after he had realized upon his collateral (the

unkruptey rule). The Court adopted the Chan-

ry rule and thereby placed secured creditors of

tional banks in receivership on the same basis

r dividend purposes as had been established for

secured creditors in White v. Knoz, 111 U. 8.

4. The case of Merrill v. National Bank of Jack-

nville, supra, involved no question of the extent ,

a secured creditor’s lien. The value of the credi-

r’s security in that case was considerably less

an the amount of the indebtedness secured there-

, and the court carefully limited its decision to

e dividend question involved. To that end Chiet

istice Fuller said:

The requirement of equality of distribution

among creditors by the national banking

act involves no invasion of prior contract

rights of any such creditors, and ought not

to be construed as having, or being intended

to have, such a result.

Se a RE EE BG

- 10

Our conclusion is that the clams of cred-

itors are to be determined as of the date of

the declaration of insolvency, irrespective

of the question whether particular creditors

‘have security or not (173 U. 8., at p. 147).

[ Italics ours. |

This Court, in White v. Knox, 111 U.S. 784, -

held that dividends should be paid to unsecured

creditors of a national bank out of the general

estate on the basis of the amounts due claimants ‘as

of the insolvency date without regard to interest

accruing after that date. The case established a rule

of convenience in the distribution of the general

estaté of a national bank in receivership. It had

nothing to do with the security rights of a secured

creditor, and a reading of the opinion, delivered by

Chief Justice Waite, leaves no doubt that the only -

question considered by the Court was with respect

to the distribution of the general estate. For ex-

ample, he said, in part:

* * * The only claims the comptroller

can recognize in the settlement of the affairs

of the bank are those which are shown by

proof satisfactory to him or by the adjudi-

cation of a competent court to have had their

_ origin in something done before the insol-

_ Vency. It is clearly his duty, therefore, in

paying dividends, to take the value of the

claim at that time as the basis of distribu-

tion. Hf interest is added on one claim after

that date before the percéntage of dividend

is calculated, it should be upon all, otherwise

11

the distribution would be according to dif-

. ferent rules, and not ratably as the law re-

quires (p. 787). [Italics ours.]

In short, that case decided the basis on which divi-

dends are payable to unsecured creditors out of

the general estate of an insolvent national —

and decided no more.

Certain of the Cireuit Courts of Appeals appar-

‘ently have misunderstood the decision in White v.

Knoz, and have failed to grasp the true signifi-

cance of the proviso contained in that part of the

opinion in the Merri: case quoted above, supra

p, 8, Thus, the Circuit Court of Appeals for the

Third Circuit, in Richman v. First M. E. Church

of Collingswood, 76 Fed. (2d) 344, which case in-

volved the security rights of a person having a

- statutory lien such as that of the claimants in this

_ case, said;

* * * Interest is ‘eat allowable, as a

general rule, after property of an insolvent

is in custodia legis, * * * This has been

specifically ruled as to national banks.

White v. Knox, 111 U. 8. 784, * * * (p.

346). [Italics ours.] |

The opinions in Douglass v. Thurston County

(C. C. A. 9th), 86 Fed. (2d) 899; and Fash v. First

National Bank (0. ©. A. 10th), 89 Fed (2d) 110,

both of which cases involved the rights of secured

depositors, also contain language evidencing an

apparent misunderstdhding of the decision . in

White v. Knox and of the above enias _—— in

the — in i Merrill case.

12

Conceivably the decisions in the Richman, F

and Douglass cases, supra, can be justified by

“Ing effect to the distinction which may be r

between interest allowable as damages for

withholding of money dué and interest specifi

or impliedly contracted for. Be that as it |

that distinction is not mentioned in the opinic

any of those cases and all three of the opirz

indicate that the misunderstanding: is cle

traceable to a failure to distinguish a sec

ereditor’s security rights from his rights to.

dends, with the result that language whic

applicable only to dividend rights has been lo«

used in discussing security rights.

The statement that interest is not allowable <

property of an insolvent is in custodia legis i:

curate only in so far as it states a result wit!

spect to creditors’ rights to dividends out of

general estate of a national bank in receiversh:

the usual case, that is, where the general esta

sufficient to pay only a percentage of the ba

debts. It has no application to creditors’ sect

rights except in the distribution of an insuffi

fund among lienors of the same rank. In fai

has no application to any creditor’s right to |

dends out of the general estate of a national |

in receivership, if the general estate proves 1

sufficient to pay more than principal. Nat

Bank of the Commonwealth v. Mechanics’

tional Bank, 94 U. 8. 487; Richmond v. I:

1, Fash,

by giv-

e made

for the

cifically

it may,

inion in

pinions “

clearly

secured

to divi-

hich is

loosely

le after -

is is ac-

vith re-

, of the .

rship in

state is

bank’s

security

afficient -

fact, it ©

to divi-

al bank

2s to be

Jational

cs’ Na-

, Irons,

y

o..

121 U.S. 27. Nor, indeed, has it any application

to ereditors’ rights to dividends out of an estate

in equity receivership or even in bankruptcy, in

Such a case. Cf. American Iron & Steel Manu- |

facturing Co. v.. Seaboard Air Line Ry., 233 U.S.

261, where the question involved was whether in-

o> terest was recoverable for the period of a receiver-

ship by a creditor having a statutory lien for sup- |

plies sold to the defendant prior to the receiver-

ship. Mr. Justice Lamar, who delivered the opin-

ion of the Court in that case, in discussing

creditors’ dividend rights, said:

* * * But that rule did not -prevent

the running of interest during the Receiver-

ship; and if as a result of good fortune or

good management, the estate proved suffi-

cient to discharge the claims in full, interest

1In National Bank of the Commonwealth v. Mechanics’

National Bank, it was held that before the assets of a na-

tional bank, of which the Comptroller of the Currency has

taken possession for liquidation in accordance with the Act,

may be returned to its shareholders, its creditors are entitled

to demand and receive interest on their claims down to the

date of final payment, including as to creditors who have not

contracted for interest, interest at the legal rate, computed

. from the date of demand and refusal mined to the prac-

tice in entering judgments.

In Richmond v. Irons; it was decided that, i in silliest

the extent.of the liability of shareholders of a national bank,

interest acérued on creditors’ claims up to the date of pay-

ment should be taken into-consideration, subject to the limi-

tation, of course, that the shareholders could not be held -

liable for more than the par value of their shares.

SO ee OD ne te 2D ote we _—_—<—~ —- - - ‘ sr SO

‘

- ’

14

as well as principal should be paid. , Even

in bankruptcy, and in the face of the argu-

ment that the debtor’s liability on the debt 499

and its incidents terminated at the date of opl:

adjudication and as a fixed liability was

transferred to the fund, it has been held, in

the rare instances where the assets ulti-

, mately proved sufficient for the purpose, that

| creditors were entitled to interest accruing

after adjudication. 2 Blackstone’s Comm.

488; Cf. Johnson v. Norris, 190 Fed. Rep.

459, 460 (5) (pp. 266-7). [Italics ours.]

The use by certain of the Cireuit Courts of

Appeals of language, in describing and determin-

ing security rights, that merely states a result in

certain instances with respect to creditors’ rights to

dividends, could have had no other result than that

which has occurred, namely, to lead to the confu-

sion to which petitioners refer in their petition for

the writ of certiorari herein. If the rights of a |

secured creditor in and to his security and his rights | -

to ratable dividends out of the insolvent estate of

“a national bank are considered separately, without

confusing the one with the other, and without using

language with respect to one which is only appli-

eable in certain instances to the other, we submit

that the definitiory of his rights is a comparatively

simple matter.

As to his security rights, it is perfectly clear that

the insolvency of the bank does not alter, mddify, or

limit the same. A contention to the contrary was

Qesgsr |

lo

fully disposed of in Scott v. Armstrong, 146 U. 8.

499, in which Chie! Justice Fuller, in rendering the -

opinion of the Court, in part, said:

We do not regard this position as tenable.

Undoubtedly, any disposition by a national

bank, being insolvent or in contemplation of

insolvency, of its choses in action, securities

or other assets, made to prevent their appli-

cation to the payment of its circulating:

notes, or to prefer one creditor to another, is

forbidden; but liens, equities or rights aris-

~ ing by express agreement, or implied from the

nature of the dealings between the parties,

or by operation of law, prior to insolvency

and not in contemplation thereof, are not in-

- validated. * * * The requirement as to

ratable dividends, is to make them from

what belongs to the bank, and that which at

the time of the insolvency belongs of right to-

the debtor does not belong to the bank (p.

510. ) — ours. |

ee Ses is We cannot believe Conguees | in-

tended * * * to destroy by implication

any right vested at the time of the suspen-

sion of a national bank (p. 511). |

Where, as has previously been pointed out, supra

p. 3, the lien of a secured creditor, existing prior

to insolvency, is not affected by insolvency, it ex-

tends to interest accruing until the indebtedness of

the insolvent to him is paid in full. On that point,

Cireuit Judge Sanborn, in delivering’ the _

40411—37——3 ©

16

ion of the Circuit Court of Appeals for the Eighth

Cirenit in Coder v. Arts (C. C. A. Sth); 152 Fed.

943, aff’d. 213 U. S. 223, said:

% * *

By the terms of the note and

mortgage the mortgagor agreed to pay in-

terest on his debt until it was paid, and that

the mortgaged lands might be sold by the

mortgagee, and that their proceeds might be

applied to the payment of this debt and in-

terest. The covenant for the sale and the

application of the proceeds of these lands

to the payment of the debt and interest was

valid and binding, and it ran with the land,

so that when the latter came to the hands

of the trustee it was mortgaged for the pay-

ment of the interest as much as for the pay-

ment of the principal, and the proceeds of —

its sale necessarily came to his possession

subject to the same charge. Another rule

might prevail if the proceeds of the mort-

gaged property were insufficient to pay the

mortgage debt and its interest in full and

the mortgagee was seeking to collect an un-

paid balance by sharing with other creditors

in the distribution of the common property.

_He.might not be entitled, then, to recover

from the proceeds of the common property

interest upon his debt to any later date than

the unsecured creditors would recover inter-

est upon their claims. But the proceeds of

these mortgaged lands appear to be ample

to pay the principal afid interest of the debt

to the mortgagee Arts, and where a trustec

sells mortgaged property of the bankrupt’s

17

estate free of the mortgage, and the proceeds

of the sale are sufficient for that purpose,

the mortgagee is entitled to payment of the

interest upon his mortgage debt as well as

the principal, out of the proceeds in accord-

ance with the terms of the note and mort-

gage (p. 950). [Italics ours.]

The decisions of this Court, defining the rights

- of unsecured creditors of a national bank to divi-

dends and defining and distinguishing the rights of.

secured creditors to dividends and their rights in

and to their security, may be summed up as follows:

1. Unsecured creditors receive ratable

dividends on the amounts due by the bank

to them as of the ‘‘insolvency’’ date. White

v. Knozé, 111 U. 8. 784.

2. Secured creditors receive dividends on

the same basis as unsecured creditors. Mer-

rill v. National Bank of Jacksonville, 173

U. 8. 181; Aldrich v.-Chemical National |

Bank, 176 U.S. 618.

3. The appointment of a receiver for a

national bank does not stop the running of

interest on debts owing by the bank, and

dividends are. payableto all creditors on

account of interest after principal has been

paid. National Bank of the Commonwealth

v. Mechanics National Bank, 94 U. 8S. 437;

Richmond v. Irons, 121 U. 8S. 27. |

4, All creditors, secured and unsecured,

must first get principal in full before any of

them can get anything by way of dividends

out of the general estate to apply on post —

ON ag ae RM AO

18

closing interest. Sexton v. Dreyfus, 219

U. S. 339.’

5. The failure to pay one creditor of a na-

tional bank his ratable dividend at the same

time that other creditors receive their divi-

dends entitles the creditor, who has been de-

layed through no fault of his own ini receiv-

ing his dividend, to damages measured by

way of interest on the amount of his divi-

dend from the date on which the dividend

should shave been paid to the date of payment.

Armstrong v. American Exchange Nattonal

Bank, 133 U. 8. 433, 470.

6. The appointment of a receiver for a

national bank does not invalidate legal or

equitable rights then existing in respect to —

its assets. Scott v.. Armstrong, 146 U. S.

499,

7. A secured creditor’s right to dividends

ceases ‘‘when from them and from collater-

als realized, the claim’’ (as contrasted with

principal of and interest on the secured in-

* Sexton v. Dreyfus was a bankruptcy, not a bank case.

However, Mr. Justice Holmes, in delivering the opinion of

the Court, pointed out that the conclusion which the Court

reached was somewhat sustained by analogy in the case of

insolvent banks and cited both the Merrill case and White

v. Know. The Sexton case involved an additional point,

namely, whether in determining the amount of a secured

creditor’s allowable claim income from collateral should

be applied to the indebtedness as of the date of the filing of

the petition or to interest accruing after that date. This

Court held that the income should be applied to post in-

solvency interest. In Gamble v. Wimberly (C. C. A. 4th),

44 Fed. (2d) 329, the same principle was applied in the

case of a national bank.

19

debtedness) ‘“‘has been paid in full” and

‘‘their right to retain their securities ceases’”’

when they “‘have received payment in full’’

(that is principal of and interest on the se-

cured indebtedness). Merrill v. National

Bank of Jacksonville, 173 U. S. 131, 135,

147. [Italics ours.]

II

A RULE TO THE EFFECT THAT THE APPOINTMENT OF A

.. RECEIVER FOR A NATIONAL BANK LIMITS THE LIENS OF

ITS SECURED CONTRACT CREDITORS WOULD BE DETRI-

MENTAL TO NATIONAL BANKS

In our opinion the adoption of a rule ta

ereditors who loan money to national banks the

right to collect interest out of collateral, as con-

trasted with thé opposite rule, would result in dis- .

_ erimination by banks and other lending institutions

against national banks in favor of state banks and

would have injurious results to depositors and un- —

_ secured creditors of national banks which are placed |

in receivership and would force national banks to

pursue practices which are not only unsound but

which would be injurious both to their depositors

and creditors and to the public at large.

If the situation were such that lending banks

and other financial institutions reeognized that se-

cured creditors of national banks could not realize

interest after insolvency out of security, loans

would probably not be made to national banks ex-

cept on readily marketable collateral and the present

eet Sheen taste nents coe

29

Pam, a i eT ee ee ee ee ee er ee ee

20

~ normal flow of credit would be seriously impeded.

‘This disadvantage would be felt by national banks’

in the conduct of business during normal times as

they would be compelled, from time to time, to

sell their investments to meet temporary needs

for cash instead of being able to borrow and pledge

their assets as is normally done. The disadvan-

tage, however, would have more far reaching con-

sequencés during periods. of depression when it:is

not possible for banks to liquidate their assets ‘sat-

isfactorily and with sufficient rapidity to meet

heavy deposit demands, and national banks, find-

ing as a result of such.a rule that the normal ave-

nues of credit were closed to them, would have no

other course but to sacrifice assets at prices which

would be certain to bring on insolvency to the detri-

ment of their depositors and creditors and thereby

increase the depth of the depression to the detri-

ment of the public at large by tying up purchasing

power in the form of frozen bank deposits.

The raison d’étre of banks and similar finan-

- cial institutions is the collection of interest. They

are not interested in acquiring title to security

which they hold as collateral, and, as a rule, prefer

to leave the responsibility for the handling of the

liquidation of security to the borrowing bank or its

receiver. Admittedly, a borrowing bank, with its

intimate knowledge of its own assets, its familiarity

with local conditions, and its close contact with the

21

people, with whom it has to deal, or its receiver with

that knowledge, familiarity, and contact, can, with

proper supervision and. guidance, handle the liqui-

dation of a bank’s assets so as to obtain the most

therefrom, and it is only through a liquidation con-

ducted in an orderly manner over a reasonable

period of time that real, as contrasted with sacrifice,

values can be obtained. This has been abundantly

proved by the experience of the Reconstruction

Finance Corporation, which has been that the equity

of depositors and unsecured creditors of banks in

collateral security can not only be protected and

preserved, but, in fact, enhanced during liquidation

by the bank’s receiver if the liquidation is con-

ducted in accordance with an orderly and id

supervised program. —

If perchance a bank or other lending institution

should overlook the effect of such a rule and make a

loan to a national bank and the bank should go into

receivership, there would be no other prudent

course for the lending institution to follow, in the

interest of self preservation, but to foreclose im-,

‘mediately upon the collateral. By such a course

the lending bank would destroy the equity of the

depositors and creditors of the borrowing bank in

- the collateral, which equity would otherwise have

been protected, preserved, and possibly enhanced

through an orderly liquidation over a reasonable

eens of time.

rae

os: 922 AR OCT PO . = ‘_-—s _ - - _——— a

7” ad

22

CONCLUSION

The true rule, consistent with this Court’s in-

terpretation of the National Bank Act, is that

where a creditor of a national bank realizes from

security an amount sufficient to pay the principal

sum owing to him at the date of the appointment

of the Receiver, together with interest accruing

on the principal balances due from time to time,

the creditor is absolutely entitled to retain, out of

the proceeds of such collateral sufficient sums to

pay both principal and interest, calculated in ac-

cordance with his contract to the date of final

payment.

If this Court, in deciding the extent of the

lien of the claimants herein, as created by Sec-

tion 11 (k) of the Federal Reserve Act, holds,

by reason of the distinction between damages by

way of interest and interest pursuant to contract,

or for other reasons, that such a lien does not ex-

tend to damages, measured by interest in full, then

' it is respectfully requested that the Court’s opin-

ion shall clearly indicate that its decision is limited

to the question of the extent of the statutory lien

of an owner of funds delivered to a national bank

for investment and held by it awaiting investment

at the time the bank closes, and that’its decision has

no application to the right of a secured creditor of

such a bani, having a valid contract for interest,

to recover interest in full out of the proceeds of

23

his collateral in accordance with the terms of his

contract.

Respectfully subennittod.

/ GoLpEN W. BELL,

Acting Solicitor General.

CLAUDE’ EK. HaMitton, Jr.,

General Counsel.

USSELL L. SNODGRASS,

Assistant General awed.

erick E. Bauxnaaes, ITI,

Attorneys for Reconstruction Finance

Corporation, Amicus sian

bial DA SAAT A Ne A a ane” eens

APPENDIX

Federal Reserve Act, as Amended

SECTION 11. Enumerated Powers:

' The Board. of Governors of the Federal Reserve

System shall be authorized and empowered :

* * '* * *

(k) Permitting national bank to act as trustees,

etc.—To grant by special permit to national banks

applying therefor, when not in contravention of

State or local law, the right to act as trustee, execu-

tor, administrator, registrar of stocks and bonds,

guardian of estates, assignee, receiver, committee of

estates of lunatics, or in any other fiduciary capacity

in which State banks, trust companies, or other cor-

porations which come into competition with na-

tional banks are permitted to act under the laws of

the State in which the national bank is located.

. Whenever the laws of such State authorize or per-

mit the exercise of any or all of the foregoing

powers by State banks, trust companies, or other

corporations which compete with national banks,

the granting to and the exercise of such powers by

national banks shall not be deemed to be in contra-

vention of State or local law within the meaning of

this chapter. |

National banks exercising any or all of the pow-

ers enumerated in this subsection (k) shall segre-

_ gate all assets held in any fiduciary capacity from

the general assets of the bank and shall keep a sep-

arate set of books and records showing in proper

»- :

—

25,

-

detail all transactions engaged in under authority

of this subsection. The State banking authorities .

may have access to reports of examination made by -

the Comptroller of the Currency insofar as such

reports relate to the trust department of such bank,

but nothing in this chapter shall be construed as

authorizing the State banking authorities to ex-

amine the books, records, and assets of such bank.

No national bank shall receive in its trust de-

partment deposits of current funds subject to check

or the deposit of checks, drafts, bills of exchange,

or other items for collection or exchange purposes.

Funds deposited or held in trust by the bank await-

ing investment shall be carried in a separate ac-

éount and shall not be used by the bank in the

conduct of its business unless it shall first set aside

in the trust department United States bonds or -

other securities approved by the Board of Gov-

ernors of the Federal Reserve System. |

In the event of the failure of such bank the

‘owners of the funds held in trust for investment

shall have a lien on the bonds or other securities

so set apart in addition to their claim against the

estate of the bank.

Whenever the laws of a State require’ corpora-

tions acting in a fiduciary capacity, to deposit secu-

rities with the State authorities for the protection

of private or court trusts, national banks so acting |

shall be required to make similar deposits, and se-

curities so deposited shall be held for the protection

of private er court trusts, as provided by the State

law.

National banks in such cases shall not be required —

to execute the bond usually required of individ-

~~.

henna Aid OO tee a ee tei a | aa

26

uals if State corporations under similar. circum-

stances are exempt from this requirement.

National banks shall have power to execute such

bond when so required by the laws of the State.

In any case in which the laws of a State require

that a corporation acting as trustee, executor, ad-

ministrator, or in any capacity specified in this

section, shall take an oath or make an affidavit, the

president, vice president, cashier, or trust officer

of such national bank may take the necessary oath

or execute the necessary affidavit,

It shall-be unlawful for any national banking

association to lend any officer, director, or em-

ployee any funds held in trust under the powers

conferred by this section. - Any officer, director, or

employee making such loan, or to whom such loan

is made, may be fined not more than $5,000, or im-

prisoned not more than five years, or may be both

fined and imprisoned, in the discretion of the court. .

In passing upon applications for permission to

exercise the powers enumerated in this subsection,

the Board of Governors of the Federal Reserve

System may take into consideration the amount of

capital and surplus of the applying bank, whether

or not such capital and surplus is sufficient under

the circumstances of the case, the needs of the com-

munity to be served, and any other facts and cir-

cumstances that seem to it proper, and may grant

or refuse the application accordingly: Providéd,

That no permit shall be issued to any national

banking association having a capital and surplus

less than the capital and surplus required by State

law of State banks, trust companies, and cdrpora-

tions exercising such powers.

Any national banking association desiring to sur-

render its right to exercise the powers granted un-

‘ der this subsection, in order to relieve itself from

the necessity of complying with the requirements

of this subsection, or to have returned to it any se-

' eurities which it may have deposited with the State

authorities for the protection of private or court

trusts, or for any other purpose, may file with the

Board of Governors of the Federal Reserve System

a certified copy of a resolution of its board of di-

rectors signifying such desire. Upon receipt of

such a resolution, the Board of Governors of the

Federal Reserve System, after. satisfying itself

that such bank has been relieved in accordance with

State law of all duties as trustee, executor, admin-

istrator, registrar of stocks and bonds, guardian of

estates, assigneé,.receiver, committee of estates of

lunatics or other fiduciary, under court, private, or

other appointments previously accepted under au-

thority of this subsection, may, in its discretion,

issue to such bank a certificate certifying that such

bank is no longer authorized to exercise the powers

granted by this subsection. Upon the issuance of

such a certificate by the Board of Governors of the

Federal Reserve System, such bank (1) shall no

longer be subject to. the provisions of this subsec-

tion or the regulations of the Board of Governors

of the Federal Reserve System made pursu-

ant thereto, (2) shall be entitled to have returned

to it any securities which it may have deposited

with the State authorities for the protection of

private or court trusts, and (3) shall not exercise

thereafter any of the powers granted by this sub- ,

section without first applying for and a

chat SPA ae

°

28

new permit to exercise such powers pursuant to the

- provisions of this subsection. The Board of Gov-

ernors of the Federal Reserve System is authorized

and empowered to promulgate such regulations as

it may deem necessary to enforce compliance with

the provisions of this subsection and the proper ex-

ercise of the powers granted therein.

Regulations of the Board of Governors of the Federal

Reserve System. Regulation F, Trust Powers of Na-

tional Banks

Section 9. Trust Funds Awaiting Investment or

Distribution:

* * * od *

_ (b) Use in conduct of business of trustee bank.—

Funds received or held by a national bank as fidu-

ciary awaiting investment or distribution shall not

be used by the bank in the conduct of its business,

unless the bank, under authorization by its board

of directors, first delivers to the trust department,

as collateral security—

(1) Bonds, notes, bills, certificates of in-

debtedness or other direct obligations of the

United States, or obligations fully guaran-

teed by the United States as to principal and

interest ; or

(2) Other readily marketable securities of

the classes in which State trust companies

or State banks exercising trust powers are

authorized or permitted to invest trust funds

under the laws of the State in which such

national bank is located; or

(3) Other readily marketable securities of

the classes defined as ‘‘investment securi-

ties’’ pursuant to section 5136 of the Revised

Statutes of the United States, as amended.

The securities so deposited as collateral shall be

pwned by the national bank and shall at all times

be at least equal in market value to the amount of

the trust funds so used in the conduct of the bank’s

business.

. Bankruptcy Act, as Amended

Section 67. Liens:

ec * * * «&

d. Liens given or accepted in goed faith and not

in contemplation of or in fraud upon this Act, and

for a present consideration, which have been re- ;

corded according to law, if record thereof was nec-

essary in order to impart notice, shall, to the extent

of such present consideration only, not be affected

by this Act.

National Bank Act, as Amended.

Section 50 (U.S. R. S. sec. 5236) :

From time to time, after full provision has been

first made for refunding to the United States any

deficiency in redeeming the notes of such associa-

tion, the comptroller shall make a ratable dividend

of the money so paid over to him by such receiver

on all such claims as may have been proved to his

satisfaction or adjudicated in a court of competent

jurisdiction, and, as the proceeds of the assets of

such association are paid over to him, shall make

further dividends on all claims previously proved

or adjudicated ; and the remainder of the proceeds,

if any, shall be paid over to the shareholders of

such association, or their legal representatives, in

proportion to the stock by them respectively held.

————

30

Section 50 (U.S. R. 8S. sec. 5234) :

On becoming satisfied, as specified in this act,

that any association has refused to pay its circu-

lating notes as therein mentioned, and is in default,

the Comptroller of the Currency may forthwith

appoint a receiver, and require of him such bond

and security as he deems proper. Such receiver,

under the direction of the comptroller, shall take

possession of the books, records, and assets of every

description of such association, collect all debts,

dues, and claims belonging to it, and, upon the

order of a court of record of competent jurisdic-

tion, may sell or compound all bad or doubtful

debts, and, on a like order, may sell all the real and

personal property of such association, on such

terms as the court shall direct; and may, if neces-

sary to pay the debts of such association, enforce

the individual liability of the stockholders. Such

receiver shall pay over all money so made to the

Treasurer of the United States, subject to the

order of the comptroller, and also make report to

the comptroller of all his acts and proceedings. -

Provided, That the comptroller may, if he deems

proper, deposit any of the money so made in any

regular Government depositary, or in any State or

national bank either of the city or town in which

the insolvent bank was located, or of a city or town

as adjacent thereto as practicable; if such deposit

is made he shall require the depositary to deposit

United States bonds or other satisfactory securi-

ties with the Treasurer of the United States for

the safe-keeping and prompt payment of the money

so deposited: Provided, That no security in the

form of deposit of United States bonds, or other-

vise, shall be required in the case of such parts of

he deposits as are insured under section 12B of

he Federal Reserve Act, as amended. Such de-

yository shall pay upon such money interest at such

ate as the comptroller may prescribe, not less, how-

sver, than 2 per centum per annum upon the aver-

wge monthly amount of such deposits.

Section 52 (U.S. R.S., sec. 5242) :

All transfers of the notes, bonds, bills of ex-

change, or other evidences of debt owing to any

national banking association, or of deposits to its

credit; all assignments of mortgages, sureties on

real estate, or of judgments or decrees in its favor ;

all deposits of money, bullion, or other valuable

thing for its use, or for the use of, any of its share-

holders or creditors; and all payments of money

to either, made after the commission of an act of

insolvency, or in contemplation thereof, made with —

a view to prevent the application of its assets in

the manner prescribed by this chapter, or with a

view to the preference of one creditor to another,

except in payment of its circulating notes, shall be

utterly null and void; and no attachment, injune-

tion or execution, shall be issued against such asso-

ciation or its property before final judgment in any

suit, action, or proceeding, in any State, county, or

municipal court.

©. ©. COVERUEERT PRURTING OFFice: 1938

BLANK

sé

|SUPREME COURT OF THE UNITED STATES.

No, 374.—OctoBer Term, 1937.

Ticonic National Bank, Peoples-Ticonic)

atleast Bonk. o¢ @., Pele, | = Coe ©

the United States Cir-

vs. 7 :

Lottie F, Sprague and Margaret Davis 6 Pe ae te ‘

Sprague. .

[March 7, 1938.]

Mr. Justice Rezp delivered the opinion of the Court.

The question for decision is whether or not a secured creditor

of a national bank, holding a non-interest bearing claim, is entitled

to interest for any period subsequent to the insolvency of the bank,

when the assets on which he has a lien are sufficient to pay the

principal and interest but the total assets of the bank are not suf-

ficient to pay in full all creditors’ claims as of the date of in-

solvency. .

On March 28, 1931, respondent Lottie F. Sprague delivered

$5,022.18 to the trust department of the Ticonic National Bank of

Waterville, Maine, in trust, under an agreement which authorized

the 'trustee to invest in bonds or securities and to deposit at least

$1,000 in its savings department at usual rates of interest; re-

quired specified monthly payments, subject to certain conditions,

to Margaret Sprague, also a respondent here; and reserved to the

grantor the right to revoke the trust and resume possession of the

‘| trust funds.

The Ticonic Bank had been authorized by the Federal Reserve

Board to act in a trust capacity, as provided in Section 11(k) of

the Federal Reserve Act, as amended (12 U. 8. C., § 248(k)).. That

Act provides that funds held in trust awaiting investment ‘‘shall

not be used by the bank in the conduct of its business unless it shall

first set aside in the trust department United States bonds or other

4 securities’? approved by the Board of Governors of the Federal Re-

serve System, and further provides that ‘‘In the event of the fail-

enna

a

eS Gee el pee | a SORE AO OU Re ee —

2 Ticonic National Bank et al. vs Sprague et al.

ure of such bank the owners of the funds held in trust for in

ment shall have a lien on the bonds or other securities so set a

in addition to their claim against the estate of the bank:’’

Pending investment of funds under the Sprague trust, and

suant to its resolution implementing the statutory provision

quoted, the Ticonic Bank placed the funds of this trust, along

other trust funds awaiting investment or distribution, as a dey

in its commercial checking department to the credit of its 1

department, and secured the total amount of such funds by set

aside in the trust department bonds, including $20,000 Kingdon

Denmark 6’s, 1942, at least equal in value to the total amour

such deposits.

On July 29, 1935, respondents, the settlor and benefici

brought this suit in the District Court for Maine to have the b

held as security with respect to the trust. It appears that on

gust 3, 1931, Ticonie Bank sold its assets (including the Denn

bonds) to the Peoples National Bank (later called Peoples-Tie

National Bank) in consideration of its agreement to ‘‘assum

pay all the indebtedness of said Ticonic Bank to its depositor!

that Ticonic Bank then went into voluntary liquidation; tha’

March 4, 1933, the Peoples-Ticonic Bank was closed ; that Art

Picher was appointed receiver for Peoples-Ticonic Bank on Nov

ber 6, 1933, and subsequently, on June 28, 1934, for the Tic

Bank, which had been continuing its voluntary liquidation.

The lower courts treated the suit, brought against both banks

against Picher as receiver, as one to assert and enforce the

protecting the uninvested funds. They held that, in view

Section 11 (k) of the Federal Reserve Act, as amended, rest

dents had acquired a lien upon the bonds set apart by the

conic Bank to secure the deposit of the trust department; .

that this lien had never been discharged or divested and so exten

to the proceeds of the Denmark bonds, which had been sold by

receiver for $20,722.66. We do not pause to state the conclusi

of fact and of law by means of which the lower courts arrive

this result, for in the grant of the writ of certiorari this Cc

declined to review the ruling that a statutory lien for the protect

of the owners of the funds held for investment extended to the I

ceeds of the Denmark bonds, the lower courts having predica

. their decision in large part on the facts of this particular case.

a +

Rm AREER

iTiconic National Bank et al. vs Sprague et al. 3

The decrees below did not end with the matters just stated. The

District Court, finding that the proceeds of the bonds exceeded theg

trust funds on deposit,’ held the resfondents entitled to payment

in full of $3,649.65, the amount to which the Sprague trust account

had been reduced, with interest-from the date of the filing of the

bill of complaint. At first the Circuit Court of Appeals reversed

that part of the decree allowing interest, but on rehearing it af-

firmed the decree in toto, approving the allowance of interest out

of the proceeds of the Denmark bonds, which it assumed were

sufficient to’ meet with interest the amount of all trust deposits. It

ruled’ that although the requirement of ratable distribution pre-

dudes the recovery of interest against the general funds of an in-

solvent national bank, the general creditors have no rights in the

trust funds here involved until after the secured claims are paid.

The attention of this Court was called to the fact that the ruling

| conflicted with decisions in other circuits, where secured creditors

were held not entitled to any interest after the suspension of the

national bank,? and for this reason certiorari was granted, limited

to this question of interest. — U. 8S. —. :

As an incident to the right to recover an unexpended balance in

a deposit, a depositor is entitled to interest as damages for the fail-

ure to pay that balance upon demand.* Compare Stewart v.

Barnes, 153 U. S. 456, 462; United States v. North Carolina, 136

U. 8. 211, 216.

The bank’s obligation to pay interest as damages for the detention

of the debt is not cut off by suspension of its business and receiver-

ship. The principle has been established, and claimants held en-

titled to such interest, in cases where the principal amount of each

of the claims was paid in full from the assets of the bank (Nattonal

1The total uninvested trust funds on deposit in the commercial department

of the Ticonie Bank amounted to about $10,000 at the time of the sale of

a, and to about $12,000 when the Peoples-Ticonic Bank was closed in

2 Richman v. First Methodist Episcopal Church of Collingswood, 76 F, (2d)

344, 346 (C. C. A. 3d), certiorari denied, Long v. First Methodist Episcopal

Church, 296 U. S. 593; Douglas v. Thurston County, 86 F. (2d) 899, 909

(C. C. A. 9th); Fash v. First Nat’l Bank of Alva, 89 F. (2d) 110, 112

(C. C, A. 10th).

_ 8 We need not explore petitioner’s suggestion, that if interest is granted at

all it should be measured from an earlier date than that of the judicial de-

mand contained in the bill of complaint, since respondent has filed no cross-

gg for certiorari complaining of that restriction (Langnes v. Green, 282

. 8. 531, 536-538).

4 ‘Ticonic National Bank et al. vs Sprague et al.

Bank; of the Commonwealth v. Mechanics’ National Bank, 94 U. §.

437), including if necessary the double liability of the sharehold.

ers (Richmond v. Irons, 121 U. 8S. 27, 64).

It is true that in the liquidation of national banks, dividends

from the general funds on unsecured claims are made pro rats

upon the amount of each claim as of the date of the insolvency,

White v. Knoz, 111 U. S. 784. This method of distribution gives

_ @ proportional part of the available funds to each creditor, in ac.

cordance with the statute requiring a ‘‘ratable dividend.’’ R. §,

§ 5236. Whether the reason for this method of determining divi-

dends is to avoid prejudice from the inevitable delay of court

proceedings for liquidation (In re Humber Ironworks and Ship.

building Company, IV Ch. App. Cas. 643, 646; American Irom

and Steel Manufacturing Co. v. Seaboard Air Line Ry., 233 U. 8,

261, 266; cf. People v. American Loan & Trust Company, 172 N. Y.

371, 379); to facilitate administration (Sexton v. Dreyfus, 219

U. S. 339, 344; Chemical National Bank v. Armstrong, 59 Fed. 372,

387) ; or because on that date the creditors acquire a right in rem

against the assets in the hands of the receiver (Chemical National

Bank v. Armstrong, supra, 379; Merrill v. National Bank of Jack-

sonville, 173 U. 8. 131, 140; Sexton v. Dreyfus, supra, 345) is im-

material. Dividends are paid on that basis. It is in order to

assure equality among creditors ds of the date of insolvency that

interest accruing thereafter is not considered. But interest is |

proper where the ideal of equality is served, and so a cred-

itor whose claim has been erroneously disallowed is entitled on

its allowance to interest on his dividends from the time a ratable

amount was paid other creditors. Armstrong v. American Ex-

change National Bank, 133 U. 8. 433, 470.

The rule of White v. Knoz, supra, does not require that interest

. be denied to the secured creditors unless the principle of equality

of distribution is to be applied as between all creditors. Secured

creditors have two sources of payment for their claims—the liability

of the debtor and the liability of the pledged or mortgaged assets.

One is personal, the other in rem. The liability in personam of

the bank gives rise to a claim in rem against the free assets in the

hands of the receiver; the claim in rem against the security con-

tinues as a claim in rem against that same security. With respect

’ to the former the secured creditors have merely the same rights

as any general creditor, and in so far as dividends are paid to

iconic National Bank et al. va Sprague et al. 5

cured creditors from free assets, they share ratably with the un-

cured creditors, and their claims bear interest to the same date,"

at of insolveacy. Compare Merrul v. National Bank of Jackson

lle, 173 U. S. at 146; Aldrich v. Chemical National Bank, 176

. §. 618, 638. But to the extent that one debt is secured and

nother is not there is manifestly an inequality of rights between

ve secured and unsecured creditors, which cannot be affected by

se principle of equality of distribution (American Iron and Steel

fanufacturing Co. v. Seaboard Air Line Ry., supra, at 266; Chem-

al National Bank v. Armstrong, supra, at 376-377), and interest

scruing after insolvency may not be withheld on account of that

rinciple. ,

The rule as to the date to which interest is to be allowed on

secured claims sharing pro rata with unsecured claims, cannot ap-

ly to the disposition of pledged or mortgaged assets subject to

he lien of individual creditors, unless we are to disregard the rights

n these assets acquired prior to insolvency. But ‘‘liens, equi-

ies or rights arising . . - prior to insolvency and not in

ontemplation thereof’ are not invalidated.’’ Scott v. Armstrong,

146 U. 8. 499, 510; Merrill v. National Bank of Jacksonville, 173

J..8. 131, 145. By contract or, as in this case, by statute, the se-

mred creditors gain or are given a lien on or right in property

‘in addition to their claim against the estate of the bank.’’ Sec-

jon 11(k) of the Federal Reserve Act as amended. The statutory

ien prior to receivership withdrew the pledged security from the

issefs of the bank available to general creditors, in so far as

night be necessary to satisfy the lien. Though title to the col-

ateral was in the name of the bank, it was subject to this lien, and

o that extent thé property pledged could not properly be said to

long to the bank for purposes of distribution to creditors. Scott

, Armstrong, supra at 510.

As the obligation to pay interest is not destroyed by the insol-

rency and as the rights of the secured creditor in his collateral, con-

ractual or statutory, are likewise unaffected, we are of the opinion

hat a secured creditor of a national bank in receivership may en-

orce his lien against his security, where it is sufficient to cover both .

incipal and interest, until his claim for both is satisfied.

With respect to analogous liquidations the rule just announced

0 £sconic National Hank et ad. VS OPTague €i ad.

has long been in force.‘ This Court has already held that a lien.

holder may look to his lien not only for the principal but also for

interest accruing up to the date of payment, though his debtor hag

gone into bankruptcy (Coder v. Arts, 213 U.S. 223, 245, affirming,

152 Fed. 948, 950) or into equity receivership (American Iron and

Steel Mfg. Co. v. Seaboard. Air Inne Ry. Co., 233 U.S. 261), ané

though interest will be denied the unsecured creditors if the assets.

are insufficient to pay all claims in full. Compare In re Humber

Ironworks and Shipbuilding Co., IV Ch. App. Cas. 643, with In re

Humber Ironworks and Shipbuilding Co., V Ch. App. Cas, 88

The same rule was applied to state banks in Washington-Alaske

Bank v. Dexter Horton National Bank, 263 Fed. 304, 306.

Petitioners suggest that the rule just laid down may have the

effect of penalizing the unsecured creditors for the precaution of the

‘ Feceiver in litigating doubtful claims asserted against segregated

. assets. This could be true only where the interest accruing to the

secured creditors during the pendency of the litigation exceeds the

appreciation in value of, and the income from, the security. And

since in many cases if the receiver is successful his conduct of the

litigation will inure to the advantage of the generat creditors, they

may fairly be charged with the expenses of contesting the claim,

including interest by way of damages. Cf. Chemical National Bank

v. Armstrong, supra, 59 Fed. at 384.

: Affirmed.

Mr. Justice Carpozo took no part in the consideration or decision |

of this case.

A true copy.

Test : ;

Clerk, Supreme Court, U. 8. ;

Compare 7 Vin. Abr. 110: ‘4 mortgagee shall have his interest run on

upon a bankrupt’s estate, because he hath a right in rem, but as to other @®

terest, it ceaseth on the bankruptcy. Per Ld. Chan. King, 18 July 1799,