Sixpenny Sav. Bank v. Estate of Stuyvesant Bank

22 F. Cas. 264, 12 Blatchf. 179, 10 Nat. Bank. Reg. 399, 1 Cent. Law J. 83, 1874 U.S. App. LEXIS 1894

• Court: U.S. Circuit Court for the District of Southern New York
• Decided: June 16, 1874
• Status: Published

Opinion

HUNT, Circuit Justice.

The facts in the two cases presented are the same, with the exception of a difference only in the amount claimed. A statement of the facts in the case of the Sixpenny Savings Bank will suffice for a statement in the case of the New York Savings Bank as well.

The Sixpenny Savings Bank is a savings hank in the city of New York, chartered by the state of New York, and has proved against the estate of the bankrupt a claim for the sum of twenty-three thousand two hundred and sixty-one dollars and six cents, with interest at the rate of five per cent, per annum from October 11th, 1871. It claims that under the statutes of the state of New York, which will be presently mentioned, it has a first lien upon the assets of the estate of the bankrupts, and is entitled to a priority of payment, by virtue of those statutes, and the agreement under which the debt was contracted over the other debts of the bankrupt. The statute of the state of New York, passed April 15, 1853 (Laws N. Y. 1853, c. 257), provides that it should be lawful for a savings bank in the counties of New York and Kings to make temporary deposits in bank or banking associations to a limited amount and for a limited time. In certain cases the savings bank may receive as security for such deposits securities of the character of those authorized to be received by the controller or superintendent of the bank department in exchange for bills for circulation. It is provided in section 4 of the act that “all the assets of any bank or banking association, now, or hereafter to be created, that shall become insolvent, shall, after providing for the payment of its circulating notes, be applied by the directors thereof in the first place to the payment of any deficiency that may arise on the sales of the securities aforesaid, and thereafter for any sum or sums of money deposited with such bank or banking association by any savings bank or institution for savngs within the range of twenty per cent., as provided in the second section of this act.” The act of 1858 (Laws 185S, c. 136) imposes certain further limits and restrictions, but' contains nothing to affect the question before us. The Sixpenny Savings Bank made deposits with reference to these acts, and upon the understanding that the deposits would have the benefit of the provisions referred to. In making proof of its debt it claims to be entitled to payment in full from the assets of the bankrupt before any payment is made to any other creditors, and to their exclusion, if need be. The question comes to this:.Is the statute, which declares that the debt of the savings bank shall be paid next after the claim of billholders, and to the exclusion, if need be, of all other creditors, a rule of distribution of estates appertaining to the remedy only, or does it give to the bank an interest in, or lien upon the property of the insolvent corporation? If the former only it is conceded that the claim of the petitioners must fail; if the latter, then the exclusive payment of the debt is insisted upon.

' As bearing upon, and illustrating this question, certain provisions of the constitution and statutes of the state of New York are worthy of consideration. The constitution of that state, adopted in November, 1846, contains the following provision: “In case of the insolvency of any bank, or banking association, the bill-holders thereof shall be entitled to preference in payment over all other creditors of such bank or association.” Article 8, I 8.

By the act of 1855 (chapter 69, § 13) it was provided that the receiver should apply the moneys in his hands to the payment of the bills or notes held by the bill-holders of such corporation in just and equal proportions, and if no surplus remains he shall divide the same among the creditors of the corporation having demands contracted after the 1st day of January, 1850, and any remaining surplus shall be divided among all the other creditors of the corporation whose demands shall have been presented and ascertained. By the insolvent laws of the state of New York the estate of the insolvent is directed to be distributed as follows, viz.:

First. All the debts due to the United States shall be paid.

Second. All debts due to persons who, by the laws of the United States, have a preference in consequence of having paid money as sureties of such debtors.

Third. All the debts due from the debtor as guardian, executor, administrator, or trustee.

Fourth. Debts due execution creditors, issues of attachment, etc., in the various cases specified. In all cases certain costs and disbursements are to be first provided for.. 3 Rev. St. (5th Ed.) pp. 119, . 120 (marg. pp. .46, 47, pt 2).

. In cases of intestacy the statutes of that state enact that.the personal estate of the deceased shall be distributed as follows, viz.':

First. To the widow one-third part thereof after the payment of the debts of the deceasr ed.

Second. All the residue among the children, and the representatives of the children, if any have died before the intestate, in equal proportion.

Third. If there be not any children, or representatives of them, one moiety of the whole shall be allotted to the widow, and the residue to the next of kin, as afterwards provided. .

Numerous details for other cases are. given in the subsequent sections of the statutes; relatives of the half blood taking .equally with those of the whole blood in the samé degree; and descendants begotten before the death of the intestate, but bom after, taking in the same manner as if horn in the lifetime of the deceased, and as if they had survived him.' 3 Rev. St. (5th Ed.) pp. 183, 184 (marg. pi .97, pt. 2). Subsequent to all these are the. provisions of the statutes of 1853 and 1858, now before us, to the effect that upon the occur? rence of the insolvency of a banking corporation the debts due from it to the holders of its circulating notes shall be first paid. The debts due to savings banks upon sales of securities given to such savings banks to secure payments of debts due to them; or .upon deposits, shall be next paid, and no other debts can be paid until those mentioned are fully-satisfied.

I am of the opinion that these laws are all of the same general character: that they are statutes furnishing a rule of distribution merely, and do not give any interest in or place any lien or incumbrance upon the estate to be disposed of. If distribution is to be made under the state laws, these rules will govern such distribution, because they are the rules made by the state, not because a lien or right in the property is conferred by them.

The soundness of the position that liens are preserved under the bankrupt act, and that the holders of them are to be protected, cannot be well doubted.

The bankrupt act of 1S41, in its second section, was very explicit on this subject, and it was repeatedly held that liens or rights of property created by the laws of the state could not be disturbed while enforcing the provisions of the act. The rule is the same under the present bankrupt law, and although not stated in terms so precise and specific as are found in the act of 1841, the provisions of sections 14 and 20 establish the same rule.

I concur with the counsel for the appellant and petitioner, that if the savings bank had a lien upon the assets of the Stuyvesant Bank, that lien must be protected in the distribution of its assets. Nor do I find any fault with his definition of a lien, to wit: that which gives a vested right or interest in the property sought to be appropriated. The preferences given by the statutes of the state of New York already mentioned, or by the fifth subdivision at the end of the twenty-eighth section of the bankrupt act. cannot properly be described as liens. Those un..er the state laws and those under the twer*/-eighth section are alike in their nature and character. They are rules or directions for the disposition of the property of the bankrupt or insolvent made because they seem wise and just, and which may be modified or abrogated whenever it becomes apparent that they are unwise or unjust. The debts due the United States from an individual citizen, it is enacted, must be first paid whether they are for taxes or for individual debts, or for debts due as surety for another, whether fiduciary, confidential, commercial, or in the nature of an enforced compulsory obligation. If A B becomes surety for O D. under the revenue laws of the United States, and a default ensues, although without his participation or knowledge, his estate in bankruptcy is liable for the debt of his principal, and the United States will receive payment in preference to his own creditors.

In the exercise of its sovereign power, the government so enacts, and therefore such' is the law, but the government had no- lien upon the estate either when he became surety for the government debtor, when that debtor failéd to pay, or when he himself became bankrupt. His property was his own throughout, subject to consumption, exchange, or other use until its status became fixed by the provisions of the bankrupt act. In cases of preference under the state laws, no interest is acquired in the projierty of the debtor either by deposit in the bank — for it may then be solvent, and the money goes into its business and forms a part of its general funds — nor by insolvency founded upon the principle that the event can produce no such result, and it is not declared in the statutes that such shall be its effect. No lien upon or specific interest in the property is declared in favor of any preferred creditors, and it is difficult to see when, where, or by what process the change from general creditor to a creditor with specific lien occurs. The language of the statute is satisfied by a rule of preference in making payment. This is easily understood, and I think is the basis of the law. I do not doubt that there may be a trust estate in which the trustee may have power from time to time to change investments, and that the lien may attach to new securities as they form a part of the estate. This does not, however, affect the main question. It is possl-ble, too, that the fluctuating assets of a bank of discount and deposit may be the subject of a trust, although I do not recollect to have met with any case that sustained that proposition. Neither does it affect the main question in this case, to wit. the existence of a lien. Preference is given by the bankrupt act, and it usually is by the state laws, to debts due to the state in which the bankruptcy proceedings are pending. As the sovereign authority upon a subject within the jurisdiction of the federal authority, congress provides first for the payment of debts due to the United States. In apparent deference to the authority which would be supreme, except for its own intervention, it enacts that debts due to the state in which the proceedings are pending, shall next be paid. This preference exists simply because the act of congress so enacts, and if congress had not so enacted, or if it should afterwards enact otherwise, the preference would cease. It is a rule of distribution merely, and if congress should abolish the preference given by the act to either government, it would be an exercise of undoubted power and no light or liens would be infringed. The power to establish a system of bankruptcy carries with it the power to establish the details of the system if congress shall think proper. In like manner, it is competent to the state of New York to provide that upon the failure of a bank of circulation and deposit, the assets of the bank shall be applied first in payment of its circulating notes; and second, in payment of debts due to savings banks; and third, to creditors generally. It may deem this rule of distribution to be so important that it will incorporate it with its fundamental law, when it will be, to some extent, free from the effects of public excitement. It is still, however, but a law of no further effect than an ordinary statute, while both remain unrepealed or uncontradicted. The same language, in the same circumstance, will confer the same rights, neither more or less, whether embodied in a state constitution or in a state statute. Such a law does not either by its language or upon principle give a lien or claim upon the funds of .the insolvent corporation. They remain with the receiver or the assignee. The law simply directs to whom and to the payment of what debts the funds shall be applied by such receiver or assignee. The distribution of estates of insolvents under the state laws, and of the estates of intestates stands upon the same principle. I am not able to discern any difference between these cases and the one we are considering. In each instance the proceeding is taken by virtue of the state authority. The title to the property vests in the assignee, receiver, trustee, administrator, or by whatever name he may be called; the statute says that he shall apply it by giving a particular portion to the widow, and another portion to the children; or the statute directs that certain debts due to the state shall first be paid, and certain other debts shall be then paid. This is a rule of distribution and gives no interest in or lien upon the property in the hands of the trustee. As the result ot this principle, the legislature may alter the theory of disposition at its pleasure, as often as it thinks fit and no rights are infringed. The statutes of 1853 and 1SD8, in my judgment, stand upon the same foundation; they give no lien upon or claim on the property in the hands of the receiver, and creditors are entitled to no other protection under them than are claimants under the other statutes referred to.

A brother of the half blood would to-day be entitled to an equal participation under the laws of New York in the estate of his deceased brother, should he now die, with a brother of the full blood. No one will argue, however, that he has any claim, interest in, or lien upon, the estate of his living brother that will prevent the legislature from passing a law that brothers of the full blood only shall inherit his inheritable. This heritable capacity is destroyed, but no lien or interest is effected if he had no interest in his brother’s estate. So an after begotten child may by legislative action be cut off from the participation which the law now gives him to the estate of his father. It results, however, from a change of a rule of distribution merely. Neither the child, this brother, or the savings bank have any greater interest in the property than an expectation derived from an existing rule of distribution. The property, and all and every interest in it belongs to the owner thereof, if the rule of distribution remains unaltered. They would, in certain contingencies, receive a portion on final distribution; but if altered, as it may be at any tíme, they take nothing. Norris v. Crocker, 13 How. [54 U. S.] 429; Steamship Co. v. Joleffe, 2 Wall. [69 U. S.] 450, etc.; Bronson v. Kinzee, 1 How. [42 U. S.] 316.

The object no doubt of the law of 185³ was to give additional securities to savings banks. They are in the nature of charitable institutions, and it may be assumed that the legislature intended to give them a preference over other creditors of insolvent banking corporations. This they intended to do by providing the rule of distribution contained in that act. The operation of a bankrupt law was probably not in the mind of the persons decreeing the act of 1853. Such a law is exceptional in the history of this country. The bankrupt laws passed prior to 1853, had been temporary in their character, and their consideration did not enter into ordinary business arrangements. 2 It was assumed in the event of the insolvency of banking corporations that they would be wound up by the courts of the state, and by officers appointed by them. In such cases the statute offered ample protection to savings banks. The rule of distribution provided by it would save their preferences. It is upon this theory that both the legislature and the parties probably acted, and it can scarcely be said with accuracy that the parties relied upon the plighted faith that the assets of the bank were pledged for the repayment of this deposit. There is no reason in fact or in law to suppose the parties in this case understood themselves to have given or to have received a lien upon the property of the Stuyvesant Bank, or that they had a vested, or any other right, in its estate. They were aware of the provisions of the law in that respect.' They knew that if this bank became insolvent, and was wound up under the laws as they then stood, their debts would have a preference. It is assumed that they contracted with reference to this, but to assume that they anticipated the passage of another bankrupt law, and provided to themselves a lien and pledge upon the assets of a bank then in prosperous condition, which would protect them as parties holding incum-brances, is quite unreasonable. We find nothing in the fact proved, or in the principles ot law, to warrant this assumption.

The deposits of the savings banks in question it is proved were made in reference to the law of 1853, and upon an understanding that there were such provisions as are relied upon here. This is not in law a material circumstance; if it be assumed to amount to an agreement, thdt, in case of the occurrence of the insolvency of the Stuyvesant Bank, the savings bank should have a preference over other creditors in payment of its debts, it would not avail. Such an agreement is not valid. It would amount to nothing more. No present security was offered or expected. No advantage was to be received except upon Insolvency. If the Stuyvesant Bank should become insolvent the statute provided for a preference, the understanding or expectation went to that point only. If there was an agreement it could only he to the effect that the law did and should continue to give them a preference. The bankrupt law could not exist a moment under the rule that the debtor could by such an agreement give a preference on his assets, and an agreement of this character is contrary to its entire spirit and purpose, and will at cnee destroy its effect. By the statutes of New York a banking corporation cannot give a preference in contemplation of insolvency. 2 Rev. St. (5th Ed.) p. 517, § 1.

It can hardly be assumed that they intended by implication to authorize a lien and charge which would fix such preference beyond their ■own power of change.

Holding that the appellant had no lien upon the funds in the possession of the Stuyvesant Bank, it is clear that the appeal must be dismissed, and within the bankrupt act the appellant is an ordinary creditor, and takes its chance with others to receive its distributive share without preference or advantage. The order of the district court of January 31st, 1874. is affirmed.

3 The first act to establish a uniform system of bankruptcy was passed by congress April 4th, 1800, and was repealed on the 9th of December, 1803 (2 Stat. 19, 248).

The second act by the United States authority to establish a system of bankruptcy was passed August 19th, 1843 (5 Stat. 440, 614).

In the year 1853, when the New York statute we are considering was passed by the legislature of that state, no bankruptcy system under the authority of the United States was in existence, nor had there been for ten years previously, nor was there until sixteen years after-wards.