Hiscock v. Varick Bank of New York

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 September 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:

'On the nonperformance of this promise or upon the nonpayment of any of the liabilities above mentioned, or upon the failure of the undersigned forthwith, with or without notice, to furnish satisfactory additional securities in case of decline as aforesaid,-then, and in either such case, this note shall forthwith become due and payable, without demand or notice, and full power and authority are hereby given to said holder to sell, assign, and deliver the whole of the said securities, or any part thereof, or any substitutes therefor, or any additions thereto, or any other securities or property given unto or left in the possession of the holder by the undersigned, for safekeeping or otherwise, at any broker's board or at public or private sale, at the option of the said holder, without either demand, advertisement, or notice of any kind, which are hereby expressly waived. At any such sale the said holder may purchase the whole or any part of the property sold, free from any right of redemption on the part of the undersigned, which is hereby waived and released. In case of sale for any cause, after deducting all costs or expenses of every kind for collection, sale, or delivery, the said holder may apply the residue of the proceeds of the sale or sales so made, to pay one or more or all of the said liabilities to it or him as to it or him shall seem proper, whether then due or not due, making proper rebate for interest on liabilities not the d ue, and returning the overplus, if any, to the undersigned, who agree to be and remain liable to the said holder for any deficiency arising upon such sale or sales. The undersigned do hereby authorize and empower the said bank (but no other holder) at its option, at any time, to appropriate and apply to the payment and extinguishment of any obligations or liabilities of the undersigned to it, whether now existing or hereafter contracted, any and all moneys now or hereafter in the hands of the said bank, on deposit or otherwise, to the credit of or belonging to the undersigned, whether the said obligations or liabilities are then due or not due.'

Indorsed upon the back of each of these notes and signed by J. M. Mertens & Company and J. M. Mertens appeared the following:

'In consideration of $1 paid to the undersigned, and of the making, at the request of the undersigned, of the loan evidenced by the within note, the undersigned hereby jointly and severally guarantee to the Varick Bank of New York, N. Y., its successors, indorsers, or assigns the punctual payment, at maturity, of the said loan, and hereby assent to all the terms and conditions of the said note, and consent that the securities for the said loan may be exchanged or surrendered from time to time, or the time of payment of the said loan extended without notice to or further assent from the undersigned, who will remain bound upon this guaranty, notwithstanding such changes, surrender, or extension.'

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 February 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 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:

'1. That the order made by the referee and by the district court was a rejection of the claims of the Varick Bank.

'2. That the policies in question did not belong to the partnership estate, and that the claim against the partnership should have been allowed in full.

'3. That the sale of the policies, under the facts as stipulated, was a good and valid sale, and passed a good and valid title to said policies to the Varick Bank.

'4. That the value of said policies was properly liquidated by said sale under the terms of § 57h of the bankruptcy act, and that, under said section, the referee had no power to make the order directing a resale thereof.

'5. That said bankruptcy act did not suspend or enjoin the exercise of said power of sale during the time between the filing of the petition and the adjudication in bankruptcy.

'6. That the claim against the individual estate of Jacob M. Mertens should be allowed in full.

'7. That the burden of proving that said sale was unfair was upon the trustee.'

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.

[Argument of Counsel from pages 33-35 intentionally omitted]

Mr. Frederick M. Czaki for appellee.

Mr. Chief Justice Fuller delivered the opinion of the court: