CHAPTER XIII.

SECURED CREDITORS.

$396. Valuing Security. We have already seen that the bankrupt's estate vested in the assignees is subject to all liens, charges, and incumbrances honestly and lawfully established by contract, and to judicial liens by attachment and seizure if they have existed for a certain time before the bankruptcy.1

The discharge of the bankrupt, of course, does not affect these securities, and they may be made the subject of a judgment or decree in rem, but the creditor applying for such a remedy may be required to await the result of the bankrupt's discharge, if the bankrupt or the assignee insists upon it.3

If it is more convenient for the parties the court will permit action to be taken or to be carried on in the court of admiralty or in the State courts to ascertain the validity and amount of a maritime or a mechanic's lien; or if the case is a simple one it may try it in the bankruptcy. In Clifton v. Foster, 103 Mass. 233, Gray, J., said, in speaking of a mechanic's lien, that if the courts of the United States should abstain from providing for it, as they were at liberty to do, there would be no remedy excepting only by the proceedings provided in the State courts.

§ 397. Secured Creditor need not apply to Court of Bankruptcy. A creditor who is secured in any of the modes above mentioned is not bound to apply to the court of bankruptcy, unless he wishes to avail himself of some of the peculiar remedies given by that court. Thus, if he has an attachment or other lien which is preserved, he may have a special judg

1 See supra, §§ 308, 332.

2 Moody v. Webster, 3 Pick. 424.

3 Ray v. Wight, 119 Mass. 426; Towne v. Rice, 122 Mass. 67.

ment entered in rem; if he has a mortgage or pledge with power of sale, he may sell after breach of condition, or foreclose.2 This must be understood, however, as subject to the reserved power of the court of bankruptcy presently to be mentioned. Our meaning here is, that the remedies of a secured creditor are not affected unless and until there is positive action in the court of bankruptcy. It was the practice in some districts, while the law of 1867 was in force, to require all secured creditors to make formal proof of their debts, and to obtain the permission of the District Court before exercising a power of sale. A very learned judge established this practice in a judgment of much ability. His reasoning was based upon a form adopted by the Supreme Court for proving a debt "with security," from which it was inferred that all secured creditors must prove their debts. There was nothing in the statute which required this practice, nor was it of any use excepting to those who made fees by it; and, in fact, the form was borrowed from the English law in which "security" meant only bills or notes, which are security in a certain sense, but in another are evidences of the same debt. The practice was not general, and it was afterwards decided that a secured creditor who did not care to prove any part of his debt, might prosecute his usual remedies as if the debtor were not bankrupt, unless the court of bankruptcy should affirmatively forbid such action. This power was expressly reserved to secured creditors by the English statute of 1869, which, however, was only declaratory in this particular.5 No mention is made

1 Peck v. Jenness, 16 N. H. 516; 7 How. 612; Davenport v. Tilton, 10 Met. 320; Bowditch Mut. Ins. Co. v. Jackson, 12 Gray, 114; Bates v. Tappan, 99 Mass. 376; Bosworth v. Pomeroy, 112 Mass. 293; Stockwell v. Silloway, 113 Mass. 382; Johnson v. Collins, 116 Mass. 392; Reed v. Bullington, 49 Miss. 223.

2 Jerome . McCarter, 94 U. S. 734; Hall v. Bliss, 118 Mass. 554.

3 Davis v. Anderson, 6 N. B. R. 145, Fed. Cas. No. 3623.

erland v. Lake Sup. Co., 9 N. B. R. 298, Fed. Cas. No. 13,643; s. c. nom. Jerome v. McCarter, 94 U. S. 734; Yeatman v. Savings Inst., 95 U. S. 764; Jones v. Lellyett, 39 Ga. 64; Cumming v. Clegg, 14 N. B. R. 49; Stoddard v. Locke, 43 Vt. 574; Second Nat. Bank v. Nat. State Bank, 10 Bush, 367; Talbert v. Melton, 9 Sm. & M. 9.

5 Tucker v. Wilson, 1 P. Wms. 261; Ex parte Reid, 1 Dea. & Ch. 250; Ex parte Belcher, 2 Dea. & Ch. 587; Ex

4 Norton v. Boyd, 3 How. 426; Suth- parte Rolfe, 3 Mont. & A. 305; Ex parte

of the subject in the English statute of 1883 now in force.

§ 398. Secured Creditor may apply for a Sale. - All debts being considered as due and payable at the date of the bankruptcy for the purposes of proof, and a secured creditor having, as we shall presently see, the right to prove for such part of his debt as is not protected by the property in his hands, he may apply to the court of bankruptcy for a sale, though his debt is not yet payable, and though there has been no breach of the agreement or condition.1

So though he have a mere lien or charge with no right to sell, he may obtain that right by application to the court.2 A great many cases of the sort are reported in the English books, because a common form of security there was by a simple deposit of deeds without writing, which gave the holder an equitable lien but no power of sale. So where there is only a common law lien without power of sale, or where an unpaid vendor has retained possession of goods, or has stopped goods in transitu.3

§ 399. Court may regulate the Liquidation of Securities. The court of bankruptcy has power to regulate the whole administration of the estate, including the ascertainment and liquidation of all incumbrances. Therefore, while the secured creditor may lawfully proceed, unless restrained, the courts, at the suggestion of the assignees, will await the action of the court of bankruptcy.5 So, it is the practice to stay a sale under a power, during the interval between the filing of the petition and the appointment of the assignees, upon the application either of the debtor or of any creditor, unless the state of the

Geller, 2 Mad. 262; Re Elmslie, L. R. 9 Eq. 72; White v. Simmons, L. R. 6 Ch. 555.

1 Ex parte Bignold, 3 Dea. 151; Ex parte Moore, 2 Dea. & Ch. 7; Ex parte Bacon, ib. 181.

2 Robson (7th ed.), pp. 339 et seq. 3 Snee v. Prescot, 1 Atk. 245, 251; Patten's Appeal, 45 Penn. St. 151; Mass. Iron Co. v. Hooper, 7 Cush. 183; Ex

parte Moffatt, 1 M. D. & De G. 282; s. c. 2 M. D. & De G. 170; Ex parte Twining, 1 M. D. & De G. 691; Ex parte Lewis, 3 M. D. & De G. 173.

4 Ex parte Christy, 3 How. 292.

5 Clifton v. Foster, 103 Mass. 233; Munson v. Boston, H., & E. R. R. Co., 120 Mass. 81.

6 Re Grinnell, 7 Ben. 42, Fed. Cas. No. 5830.

property or of the market, or some other circumstance, makes an immediate sale important, in which case a stay will not be granted except upon terms which will indemnify the secured creditor against loss by the delay. This practice binds the conscience of the court at whatever stage of the proceedings a secured creditor is to be delayed.

§ 400. Rights of Assignees. After the assignees are appointed, they may examine summarily the secured creditor, as they may other persons interested in the estate, in order to ascertain the amount, nature, and validity of the debt and security. They have all the right of the debtor to redeem or to sell the equity; and, under some statutes, they have a right correlative to that of the creditor to redeem before the debt is due. They are the proper parties to all suits for foreclosure, instead of the bankrupt. They may apply to the court of bankruptcy to exercise the powers mentioned in the following section.3

§ 401. Sales by order of Court free of Incumbrances. Under the broad powers given to the courts by the bankrupt acts of the United States, they can order incumbered property to be sold free of all liens and charges, and require the several incumbrancers to look to the fund derived from the proceeds of sale. This was first established in a case in Louisiana, and accords with the practice in France, where the syndics sell the whole assets and rank the various lien creditors. This power should not be exercised against the protest of the secured creditors, unless there is reasonable ground for believing that the bankrupt's equity will prove to be valuable. The assignees ought not to speculate upon the property of a mortgagee; nor is it their duty or right to settle the conflicting claims of different incumbrancers among themselves at the expense of the

1 Ex parte Caldecott, Mont. 55. See supra, § 148.

Wilson v. Turpin, 5 Gill, 56; Re Mead, 58 Fed. Rep 312; Burt v. Batavia Co.,

2 Archbold's Bankruptcy Practice 86 Ill. 66. [The sale discharges liens (11th ed.), p. 237.

3 Houston v. City Bank, 6 How. 486; Foster v. Ames, 1 Lowell, 313, Fed. Cas. No. 4965.

placed on the property by the insolvent, but not prior liens. Daniel v. Creditors, 23 So. Rep. 241 (La.).]

5 Re Taliafero, 3 Hughes, 422, Fed.

Ex parte Christy, 3 How. 292; Cas. No. 13,736.

bankrupt's estate. The mode of ascertaining a deficiency to be proved by the later incumbrancers is to sell the equity, relieved of the debts of such persons, and thereby establish what, if anything, is to be credited by them. Where there is but one incumbrance, and no fair prospect of a surplus, the creditor should be permitted to foreclose and wait the future chances of the market, if he prefers that remedy.

In England and some of the States such a sale can only be ordered when the secured creditor asks for it.1

§ 402. All Persons whose liens are affected must be made Parties. In no case can a sale by order of court free the property from the liens of persons not before the court. And where a bona fide purchaser from the assignees is met with such an incumbrance of which he was not informed, his title must yield, because both being innocent, the elder title is the better. This rule, though just, hardly seems to be necessary any more than in admiralty and other proceedings in rem. Justice only requires such publicity that all persons interested must have notice.

It is, of course, unnecessary to notify earlier incumbrancers, when only the equity of redemption is sold, as all their rights are reserved. Therefore, a second mortgagee need not, in such case, summon in the first; but the first must summon the second; and so of all others.3

§ 403. Different Rules in Equity and in Bankruptcy concerning Proof by secured Creditor.- By the general law of equity, a secured creditor might pursue all his remedies, and was, therefore, entitled to prove in full, and retain his security at the same time. This rule was applied in the settlement of the insolvent estates of deceased persons, and in the winding up of insolvent corporations. In bankruptcy, the practice has al

1 Day". Lamb, 6 Gray, 523; Wickenden . Rayson, 6 De G. M. & G. 210; and see Ex parte Jackson, 5 Ves. 357; Hunnewell v. Goodrich, 3 Cush. 469; Ex parte Topham, 1 Mad. 38; Ex parte Lacon, 1 Bky. & Ins. R. 107.

3 Day r. Lamb, 6 Gray, 523; Jerome v. McCarter, 94 U. S. 734.

4 Rome v. Young, 3 Y. & C. (Ex) 199; 4 Y. & C. 204; Tipping v. Power, Hare, 405; King v. Smith, 2 Hare, 239; Mason v. Bogg, 2 Myl. & Cr. 443; Kel

2 Ray v. Norseworthy, 23 Wall. 128; lock's Case, L. R. 3 Ch. 769; Atty. Gen. Moorman v. Arthur, 90 Va. 455.

v. Cox, 3 H. of L. 240. See Merrill &