I regret that I am unable to concur in the conclusion of the court in this case, or the reasoning upon which it is based. Because of the novelty and importance of the question, I deem it proper to state the grounds of my dissent.
The rules as to the binding effect of applications of voluntary payments are not controlling here. All of the authorities agree that distributions made in the course of judicial proceedings must be governed by equitable principles and cannot be controlled by the acts of the parties, debtor or creditor. 6 Williston,Contracts, Rev. Ed., Sec. 1794 et seq. (particularly p. 5104, n. 1, p. 5112, n. 11); Page, Contracts, 2d Ed., Sec. 2847;Citizens Southern Bank v. Armstrong, 1918, 22 Ga. App. 138,95 S.E. 729; Wetmore Morse Granite Co. v. Ryle, 1919, 93 Vt. 245,107 A. 109; Ohio Electric v. Le Sage, 1926, *Page 572 198 Cal. 705, 247 P. 190; Madison National Bank v. Weber, 1927,117 Ohio St. 290, 158 N.E. 543, 60 A.L.R. 199; In reCunningham's Estate, 1924, 311 Ill. 311, 142 N.E. 740 (payment by an administrator); Munger, Application of Payments (1879), p. 31; Restatement, Contracts, Sec. 393. In each of the cases cited the distribution by the court was pro rata. This is not the invariable rule, but in each case the application must produce a just result. Carson v. Federal Reserve Bank, 1930,254 N.Y. 218, 172 N.E. 475.
The fundamental question in the case at bar is whether the application made by the Federal Court is legally binding in this proceeding. The appellee concedes that the order of that Court is not res adjudicata, and the opinion in the case at bar appears to concede as much. The case of Hubbard v. Hubbard,172 Md. 645, 192 A. 592, is directly in point. There the Federal Court applied a fund representing income from pledged securities prorata, as between the principal and interest of outstanding notes. This Court held that it should be applied wholly to overdue interest, where the security has not been realized and there is no showing that it is impaired. The case has no bearing upon the question as to the relative rights of overdue interest claimants.
No particular significance can be ascribed to the fact that the interest claims were evidenced by coupons which had not in fact been negotiated. Interest accrues from day to day and is apportionable. 2 Scott, Trusts Sec. 235; Owens v. Graetzel,146 Md. 361, 126 A. 224, 39 A.L.R. 943. In the case at bar the interest represented by one coupon was apportioned by the Chancellor as of the date of death of the first life tenant. The trustee, having in hand certain payments upon surrender of designated coupons, has asked instructions from the State Equity Court as to the proper distribution of the fund, as between successive life tenants of the trust estate. See Code, Art. 16, Sec. 223. The trust instrument sheds no light upon the question, for the contingency whereby default occurred in the lifetime of the *Page 573 first beneficiary, and continued for a considerable period after the second life tenant became entitled to interest, was obviously unforeseen. In this situation it would seem that the principle that equality is equity ought not to be disregarded except for positive and compelling reasons. As a result of the decision in the case at bar one beneficiary, having a claim for overdue interest, is preferred, in point of time and present enjoyment, over another beneficiary, having a claim for overdue interest of earlier maturity and at least equal standing that has passed to her executors. The fact that there may be no ultimate loss is beside the point; the question is one of present enjoyment.
There appears to be little authority dealing with the precise question presented here, although there are many cases dealing with the question of distribution as between principal and interest, after default but before foreclosure, or in the course of salvage operations. In New York a statute was passed in 1940, ch. 452, adding Personal Property Law, Sec. 17-c, Consol.Laws C-41, dealing with that problem. See In re West's Estate,289 N.Y. 423, 46 N.E.2d 501, 149 A.L.R. 1365, affirmed Demorestv. City Bank Farmers Trust Co., 321 U.S. 36, 64 S.Ct. 384,88 L.Ed. 526. See also the Maryland Statute, Code, Art. 75B, adopting the Uniform Principal and Income Act.
Perhaps the closest case upon the question as to distribution as between successive life tenants, after default but before foreclosure, is the English case of Broadwood's Settlements, 1 Ch. (1908) 115 (cited in Hubbard v. Hubbard, supra.) That case is stated in 4 Bogert, Trusts and Trustees, 1935 Ed., Sec. 819, n. 7, as follows: "Interest on mortgage fell behind during tenancies of several successive cestuis; payments later made should be apportioned to them in proportion to the amount of back interest due each." Swinfer-Eady, J., said (P. 122): "Until foreclosure absolute, I am of the opinion that the income must be distributed rateably between the persons entitled to the income, and the proper method will be to take the date when each sum is or was received *Page 574 or recovered and to apportion that sum in proportion to the amounts owing to the respective estates for arrears of interest at that date. That is to say, each sum received or recovered is to be treated as a payment on account of all arrears claimable by the representatives of the first and second life tenants and the remainderman, and is to be apportioned rateably between them in accordance with the arrears owing to them respectively." See also 29 Halsbury's Laws of England, 2d Ed., Sec. 949; Re Southwell (1915) 85 L.J. (Ch.) 70; and Skilton "Rights of SuccessiveBeneficiaries in Unproductive Trust Assets Bearing Interest," 15 Temp. U.L.R. 378, 396.
The appellee argues that special equities in the case at bar require that the actual payments made be honored for apportionment purposes. The Federal Court applied boom year earnings to interest accruing during that period, pursuant to a plan of tax avoidance. It is contended that from a realistic point of view the bonds bearing fixed interest were converted into income securities, on the date of the receivership of the Seaboard System. No authority is cited for this proposition. The case of Heyn v. Fidelity Trust Co., 174 Md. 639, 197 A. 292,1 A.2d 83, 739, dealt with a dividend, and the case of Re:Taylor's Trusts, 1 Ch. (1905) 734, dealt with income bonds. Both cases turn on the point that there was no obligation to pay interest except as and when earned. The Supreme Court has indicated that the right to accrued bond interest cannot be subordinated to the exigencies of corporate reorganization.Consolidated Rock Products v. DuBois, 312 U.S. 510,61 S.Ct. 675, 85 L.Ed. 982; Otis Co. v. Securities and Exchange Comm.,323 U.S. 624, 65 S.Ct. 483.
It is not necessary in the case at bar to challenge the right of the Federal Court to order payment of designated coupons; that designation should be disregarded by the Chancellor in order to reach a fair and equitable result between claimants of the same class, who were not parties in the receivership proceeding. I think the fund in hand should have been apportioned. *Page 575