In re Hyndman , 5 F. 705 ( 1880 )

Hammond, D. J.

The first question in importance is whether the bankrupt was so liable as principal debtor on the Northern note that the whole of it must be counted against him; because, if this point be against him, it is conceded he cannot be discharged. I have no doubt that, in a controversy between him and the creditor, he would be held to be a principal debtor; for, as between them, no contract for surety-ship is shown to have been entered into. In form it is clearly not a contract of suretyship, but the opposite; and the creditor seems to have had no knowledge of any agreement between the bankrupt and his co-obligors changing the contract. Hence, if, as between Northern and the bankrupt, the question should arise whether he was principal or surety, I should have no difficulty in holding that he would be treated as principal. But I do not think the question is to bo decided wdiolly on the technical relation existing between the creditor and the bankrupt, but rather on the facts of the transaction as they show whether he is primarily liable to pay this note as his oivn debt. Counsel for the bankrupt has well suggested the true test: Hid he receive the consideration, and is this a debt contracted by him which, as against all the world, he is bound to pay ? If ho may call upon anybody else to relieve him of his obligation he is not, in the sense of this provision of the bankrupt law, a principal debtor. If paying this debt he w'ould have a remedy over against some one else, he is not a principal debtor. Bates v. Whitson, 2 Head, 155; Hall v. Hall, 34 Ind. 314; Smith v. Shelden, 35 Mich. 42; Crafts v. Mott, 4 N. Y. 604. Undoubtedly, a partnership note is of such character that, as between the creditor and themselves, they are all principals; but, even if the original debt to Northern was a partnership debt, the facts do not show that, when Hyndman came into the firm, it was renewed as a firm debt. In form, it is not a partnership debt, but the joint obligation of the three persons signing it. The facts show conclusively that Hyndman, as between the old members of the firm and himself, only agreed to pay oiie-third of this debt, and, perhaps, for this very reason it assumed the form of their joint obligation. I am satisfied he was not liable, as principal debtor, for two-thirds of the note, and therefore onlyone-third will be reckoned against him in determining the question of his discharge.

The next question is whether the assets must, in fact, pay to the creditors per centum to entitle the bankrupt to his discharge, or be only equal in value to that amount, whether upon distribution the creditors realize that sum or not. I had occasion once before to examine the authorities on this subject, and felt the embarrassment of the conflict of opinion among able judges, familiar with the law from its commencement. I am of opinion that Judge Hopkins’ views of this question are most in accordance with the probable intention of congress. It is all a matter of legislative intention, for congress could arbitrarily declare the circumstances under which the bankrupt-may be discharged. The first act said the assets should “pay” the amount specified, but the amendment said only that they should “be equal” to the amount then fixed. I think the significance of this change of phraseology cannot be destroyed by any judicial weighing of the words used, and finding them equivalent to each other. At all events, I adhere to my former ruling, and hold with Judge Hopkins and the judges agreeing with him In re Kahley, 6 N. B. R. 189, notwithstanding my respect for the other learned judges who have differed with him on the point in controversy. Bump, Bankr. (10th Ed.) 737.

The next question is as to the time when this estimate of value is to be made—whether at the date of adjudication or the date of the realization of the assets by the assignee. The question is presented here under a peculiar state of facts, and the interest of the subject has been heightened by the exhaustive and thorough arguments of counsel, who agree that no case has been found adjudicating the question as it now arises. If the exact amount of the bankrupt’s debts be ascertained on the day he was adjudicated, and all interest after that time be stopped, the gross value of his assets by actual result will be equal to SO per centum of the debts; but if interest be counted on any of the debts after adjudication, and the costs of administration, foreclosure suits, and other like expenses be deducted from the assets, he cannot be discharged. The learned counsel for the creditors argues with great force that the estate must bear the cost of administration, and that, in estimating their value, a reasonable sum must be allowed for the costs of realizing on the assets, and that, while interest must stop on unsecured claims, the secured creditors are entitled to interest till paid. He insists that it is a part of the contract for security that reasonable costs of foreclosure shall be first paid out of the proceeds, then the debt secured, and only the surplus to the debtor or his assignee. And he produces abundant authority for the proposition that secured creditors, in an insolvency court, will generally be allowed interest and costs on their debt to the day of payment. He further insists that the bankrupt is a party to the proceedings, and-may, by diligence and careful supervision, hasten the settlement; and that it is his duty, if he wishes a discharge, to see to it that the assets realize in the hands of the assignee a sum sufficient for the purpose.

It seems to me that the whole argument is but another mode of saying that to entitle the bankrupt to a discharge the assets must pay 30 per centum, and not merely be equal in value to that amount, which we have already determined is not the rule we follow. But why should the bankrupt be, by such construction, made to bear the penalty of possible mismanagement of the assets or shrinkage in values, or the deteriorating influences likely to follow litigation between the creditors as to their respective rights ? The law strips him of all his property, commits its care to the creditors and their assignee or representative, and he has no control over their action. They may by the best possible management realize the greatest possible results, or they may by mismanagement reduce the sum for distribution to the lowest possible amount, or entirely consume the estate in litigation or costly administration. They might do this for the very purpose of defeating a discharge. It is impossible to draw the line between reasonable expenditures and unreasonable expenditures, and no two eases would furnish the same criterion of judgment. It does not follow that because, as between each other, the secured creditor may collect interest and costs of foreclosure, it is only the net results that the bankrupt can enjoy in this matter of determining his discharge. It is to thé gross fund we must look in his behalf, and it does not concern him how or to whom it is distributed, whether it is paid out in costs or to the creditors, whether the property is well or ill managed, so long as he allows no fraudulent debts to be proved against him.

There is another suggestion in favor of this view. If the rule insisted on by the creditors here be the correct one, no bankrupt could ever be discharged until the final winding up of the estate; for, until then, it cannot be known what the costs and expenses may be, nor how much the assets will pay. Yet, on the contrary, the law allows the bankrupt, after six months, to be discharged, if no ground of opposition exists, and it may be long after that time before the estate is settled, and costs and expenses stopped. Eev. St. § 5108; Bump, Bankr. (10th Ed.) 695.

I think the true rule is to take the day of adjudication as the point of time for estimating the amount of debts and the value of assets; certainly not later than the date of assignment, when the assets pass under the control of the creditors and their assignee.

The register reaches the same conclusion, and it may be certified to him that I concur in his ruling and let the cause proceed. The bankrupt will be entitled to his discharge, if no other objection exists.