Court Opinion

ID: 8801079
Source: CourtListenerOpinion
Date Created: 2022-11-26 14:32:48.72978+00
Date Added: 2024-06-11T17:03:54.324581
License: Public Domain

HOOK, Circuit Judge.
This is an appeal from a decree that the trustee in bankruptcy recover a voidable preference from the State Bank of Clearwater, Neb. The trial court found from the evidence the existence of the conditions of fact prescribed by section 60b of *77the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 562 [Comp. St. 1913, § 9644]), such as insolvency, the time and effect of the transfer, and knowledge of the creditor, and we' think its findings were right. Omitting irrelevant matters, the case reduced to its final terms is as follows:
Within four months of the commencement of the proceedings in bankruptcy, and at a time when the bankrupt was insolvent and the bank knew it, he transferred to it as security for an antecedent debt certain fire insurance policies under which a loss and claim had arisen. He authorized the bank to collect on the policies and apply the proceeds to the debt. Before this transaction the bank had a valid mortgage on the lots on which the burned buildings stood, but it had no Hen on the policies or their proceeds. There were other liens on the lots, one prior to the bank’s mortgage, and others inferior. The bank collected on the policies, credited the amounts to the bankrupt on its books, and took the bankrupt’s check in payment of the old debt. At the same time it discharged its mortgage on the lots. After-wards the lots were sold under decree in a foreclosure suit to which the trustee in bankruptcy was not a party, and the proceeds were exhausted by the claims of the other lienholders. The value of the real property was not sufficient to pay all the liens upon it, but if the bank had retained and enforced its mortgage it would have received all or the greater part of its claim. Before the transaction with the bank the policies constituted much the greater part of the free assets of the bankrupt available to his general creditors; there was little else. Their unsecured claims were in quite a large amount.
[1] It is contended that the bank, with its prior mortgage on the lots, was not in the same class with unsecured creditors, and that it had a right to obtain full payment in any way it could, whether from the property mortgaged to it or from general assets; also that the remedy of the trustee was to seek the foreclosure suit, become a party, and assert a right of subrogation to the mortgage lien which the bank discharged. The status of a creditor, whether general or secured, is naturally determined by his relation to the property of the bankrupt. As to the policies of insurance the bank was a general creditor. It had no lien or claim upon them. The fact that it had other security did not give it the right to take or seize for itself the unincumbered property of the bankrupt. The actual effect of the assignment of the policies was that the bank was paid in full and the general creditors received but little. When the bank took the assignment with knowledge of the bankrupt’s insolvency, it still retained its mortgage on the lots until it received payment from the insurance money. It then discharged its mortgage generally. There was no attempt to save or maleé good the loss to the general estate. Whether under the circumstances the trustee had a right of subrogation need not be determined. At the best the bank left the succeeding trustee a lawsuit, with its attendant uncertainty and expense, and, if successful, the necessity of protecting himself at the judicial sale against an admitted prior lien. Moreover, an effort of the trustee to secure subrogation would have been complicated by a home*78stead interest of the bankrupt in part of the mortgaged lots. We think the transaction should not bé sustained.
[2, 3] No right of set-off in the bank results from, the assignment of the policies, the collection, its deposit of the proceeds to the bankrupt’s credit and the talcing of his check in payment of its demand. Traders’ Bank v. Campbell, 14 Wall. 87, 20 L. Ed. 832. The decree of the trial court should be modified, however, by allowing the bank to prove its claim as a general creditor upon payment of the decree-against it. Page v. Rogers, 211 U. S. 575, 29 Sup. Ct. 159, 53 L. Ed. 332.
The decree, as so modified, is affirmed.