The issue in this matter is one between the Atlantic National Bank and the receiver of the Bennettsville Warehouse Company, having arisen in the winding up of the affairs of the corporation.
On December 6, 1920, the plaintiff, Moore, instituted an action against the above-named corporation for the purpose of having a receiver appointed and the affairs of the corporation liquidated. The respondent J.W. Tison was duly appointed receiver. Creditors were called in to establish their demands. They consisted of three classes: General unsecured creditors; owners of cotton deposited in the warehouse who held warehouse receipts therefor; and the Atlantic National Bank, which held a warehouse receipt for 125 bales of cotton, issued by the warehouse company to itself on January 21, 1920, and assigned by it to the bank on June 3, 1920, as collateral security to a note given by it to the bank on September 27, 1920, due December 3, 1920, for $10,000. (Further details of the note do not appear in the record for appeal, nor are they necessary in determining the question at issue.)
When the receiver took charge of the affairs of the corporation, it was ascertained that a large quantity of the cotton stored in the warehouse, including that of the owners for *Page 321 which they held warehouse receipts, and that for which the bank held the receipt above referred to as collateral security, had been fraudulently and feloniously abstracted and disposed of by the then manager of the warehouse company.
During the administration of the insolvent estate by the receiver, his Honor, Circuit Judge Edward McIver, passed an order directing the receiver to allow the claims based on receipts for cotton abstracted, on a fixed basis value of cotton, and providing for an appeal from such valuation by the receiver. The receiver fixed the valuation at 14 cents per pound for short cotton and 20 cents for long staple. There was no appeal from this valuation.
A dividend was ordered and has been paid to the general creditors, including the owners of cotton who held receipts, but the question of the dividend to be paid to the Atlantic National Bank was left open on account of the contention of the bank thus explained:
The receipt held by the bank called for 61,700 pounds of cotton; at 14 cents per pound this would amount to $8,638. The bank contended that, as the cotton covered by the receipt which it held had been abstracted and fraudulently disposed of by the active manager of the warehouse company, it had a claim against the insolvent estate for the conversion of its cotton; that the claim for the conversion was in law substituted for the actual cotton; and that it was entitled, in the first instance, to a dividend upon the above stated value of cotton, $8,638, which dividend should be credited upon its $10,000 note, and a dividend upon the balance unpaid on this note. The controversy was referred to C.L. Prince, Esq., as special referee, who filed a report, dated February 19, 1924, disallowing the contention of the bank. Upon exceptions, his Honor, Judge Dennis, confirmed the report of the special referee in a formal order, and from that order the bank has appealed upon exceptions which raise the sole issue of the correctness of the bank's contention as above stated.
It has been held by the Supreme Court of the United States, in Merrill v. Bank, 173 U.S. 131; 19 S.Ct., 360; *Page 322 43 L.Ed., 640, that a creditor of an insolvent estate who holds collateral security may file his claim for the full amount of the debt, unaffected by the fact that he has realized or may realize upon his collateral. The opinion of Chief Justice Fuller was opposed by a dissenting opinion of Justice White (later Chief Justice), concurred in by Justices Harlan and McKenna, and by a separate dissenting opinion by Justice Gray. It was rendered in 1898, and, nine years before that, the Supreme Court of this State had decided in the case of Wheat v. Dingle, 32 S.C. 473; 11 S.E., 394; 8 L.R.A., 375 (cited by Justice White along with the decisions of many other Courts), in line with the dissents in the Merrill case, that the proceeds or value of the collaterals should be deducted from the claim before the creditor could participate in dividends. That doctrine is sustained by the many cases cited in the note to L.R.A. 1918-B, 1026, and has the approval of this Court as now constituted. The cases of Ragsdale v. Bank, 45 S.C. 575; 23 S.E., 947, andAtlantic Phosphate Co. v. Law, 45 S.C. 606;23 S.E., 955, accord with Wheat v. Dingle, supra, in the rule there stated.
It is conceded on all sides that the receiver becomes a trustee for all of the creditors, and that no creditor is obliged as a condition to his participation in dividends from the insolvent estate, to surrender any rights or interests he may have in the estate. As Chief Justice Fuller remarks in the Merrill case, "As the trust created by the transfer of the assets by operation of law or otherwise, is a trust for all creditors, no creditor can equitably be compelled to surrender any other vested right he has in the assets of his debtor in order to obtain his vested right under the trust" — an observation made in support of what he approved as the "fourth rule," which is as applicable to the rule declared inWheat v. Dingle as to the "fourth rule."
If the cotton covered by the bank's receipt had not been abstracted, it could certainly have taken possession of it, applied the proceeds to the payment of the note, and received *Page 323 its dividend upon the balance. As the cotton has been abstracted, there accrued immediately a claim against the warehouse company for conversion, to the amount of what was afterwards settled as the value of the cotton, $8,638; and, as the bank was not compelled to surrender any right which it had as a condition to participation in dividends, it was not compelled to surrender this claim for conversion, which represents by substitution the cotton itself, and is worth what dividend may be apportioned to it. Otherwise the bank, a secured creditor, is relegated to the ranks of the unsecured, and is held to have surrendered all rights by reason of the fraudulent conversion, as a condition to participation in the dividends, including its claim for conversion.
In the South Carolina cases above cited, it is nowhere suggested that the creditor with collateral must waive his right to realize upon his security, and must rely only upon his debt as an unsecured debt, in order to participate in the dividends. On the contrary they recognize his right to realize on the security and apply it to his debt. If the security has been dissipated by the act of the debtor, the liability of the debtor for conversion represents the dissipated security, and if the creditor had the right of subjecting the security, in the event that it was available, I see no reason why he should not have the right to subject that which represents it.
The Referee suggests that the security has been lost by the abstraction of the cotton. That the bank's lien has thereby been annihilated is self-evident; but the destruction of the lien has not interfered with the liability of the warehouse company for the fraudulent conversion of the cotton; and the point which I wish to stress and repeat is that this liability represents the cotton; that if the bank has the right to subject the cotton to its claim before demanding a dividend on the balance, it has the right to subject what stands for the cotton in like manner.
The Referee presents a plausible argument, thus:
"If no receiver had been appointed and if the Bennettsville *Page 324 Warehouse Company were still operating independently of the Courts, the Atlantic National Bank would be in the position above indicated, to wit, it would hold the note (the debt) and a warehouse certificate representing cotton feloniously removed and disposed of; and, so far as I am able to see, if unable to locate the actual cotton represented by the receipt, it would have no redress other than a straight suit upon the note and such criminal action as might inure to its benefit. If this be the case, its right would seem to be enlarged by the receivership if its contention were sustained."
The vice in this argument is in the limitation of the remedies permissible to the bank, under these circumstances, to an action on the note and a criminal prosecution. It would have a third remedy, an action against the company for damages, actual and punitive, on account of the fraudulent conversion of the cotton. Of course if the company were perfectly solvent, it would be immaterial whether the bank sued upon the note or for the conversion of its cotton; it would get all of its money in either case. But where the cotton has been abstracted and the company becomes insolvent, the right of the bank to set up its claim for conversion has not been destroyed; it has the right to pursue that claim, recover its dividend upon it, credit that dividend upon the note, and recover its dividend upon the balance due.
The Referee draws a distinction between the status of the bank and that of the owners of cotton who held receipts to the detriment of the bank, holding that the former are entitled to dividends upon the ascertained value of their cotton and the bank is not, for the reason that it held the receipt as collateral. I think that, on the contrary, the bank held the more advantageous position, in that it had the same right to damages for conversion which the owners had, and, in addition, an obligation by note which the others did not have. The Referee has lost sight entirely of the right of the bank to sue for conversion — a right which could not have been *Page 325 destroyed by appointment of a receiver, and a right which represents the abstracted cotton.
I do not perceive the reason for thus discriminating against the bank and denying to it the claim for conversion, which alone the owners of the cotton who have received dividends upon the identical basis had. The fact that the bank was a pledgee of the receipts surely cannot be held to mark the distinction, for it is universally held that when pledged property has been wrongfully converted, a cause of action for damages accrues immediately to the pledgee. 21 R.C.L., 663.
"The pledgee of a warehouse receipt is regarded as a purchaser of the receipt to the extent of the obligation it is pledged to secure, and his rights and liabilities are therefore governed by the same rules as those of other purchasers." 40 Cyc., 428.
"A pledgee who takes a warehouse receipt as security for a contemporaneous loan is universally recognized as a purchaser for value." Id., 422.
The statute Section 3906, 3 Code Laws, 1922, specifically provides that:
"Any person to whom the same may be so transferred shall be deemed and taken to be the owner of the goods, * * * therein specified, so far as to give validity to any pledge. * * *"
The result arrived at in the Court below is based upon logic which recognizes the rights of the owners of cotton to claims for conversion, and at the same time denies that right to the pledgee of cotton receipts, notwithstanding the plain terms of the statute.
It is a misconstruction to assume that, if the bank be allowed a dividend upon its claim for conversion, and also a dividend upon its note after applying the first dividend as a credit, the bank will receive a dividend upon two claims instead of one. The bank is entitled to be placed as nearly as possible in the situation it would have occupied if the cotton had not been abstracted. If that were the case, the *Page 326 bank in resorting to its collateral, then crediting the proceeds upon its note and claiming a dividend upon the balance, would have had recourse to two funds as much so as if, the cotton having been abstracted, it be allowed to claim a dividend upon the ascertained value of the cotton, which now represents the cotton itself. I assume that there can be no doubt of its right in the first instance, and it appears to me as clear in the second.
Another view of the matter is this: Under the rule which prevails in this State (Wheat v. Dingle, supra), the secured creditor must either reduce his collateral to cash, or account for its estimated value and enter one or the other as a credit upon the principal obligation, before he may be allowed to participate in the dividends upon the balance. This he not only is compelled to do, but he is entitled to do. Now, if the collateral had not been fraudulently removed by the debtor and the value had been fixed at $8,638, the bank would have been compelled, and entitled, to apply this as a credit on its $10,000 note and receive a dividend on the balance, and, as it has been fraudulently removed by the debtor, the creditor is compelled, and entitled to apply that value as in the other instance, if it had been able to collect it, but, not being able to do so, only receiving a dividend upon it, the bank is compelled, and entitled, to apply that dividend to the note and enter its claim for a dividend upon the balance. The rights of a pledgee are, first, to subject the pledge to the payment of his debt; and, second, if the pledgor has dissipated the pledge, to hold him in damages for conversion. The latter is as much an incident of the pledge as the former — as much a right in the pledgee as the other. If the pledgee should be denied the right to his claim for damages for conversion, as a condition to his participation in the dividends, he is necessarily required to surrender a part of his collateral. "A creditor may not be required to surrender any part of his collateral until payment has been made in full." McGrath v. Carnegie Co., 221 N.Y., 92;116 N.E., 787. *Page 327
In Evertson v. Booth, 19 Johns (N.Y.), 486, it is said:
"I know of no principle of equity which can take from him [the creditor] any part of his security, until he is completely satisfied."
See, also, People v. Remington, 121 N.Y., 328;24 N.E., 793; 8 L.R.A., 458.
If the "fourth rule" declared in the Merrill case, supra, were in force in this State, namely, that the creditor may receive a dividend upon his full claim, regardless of the collateral, the collateral is entirely negligible, and the bank's contention in this case could not prevail. But the rule inWheat v. Dingle, supra, prevails, which is opposed to the rule in the Merrill case, and is to the effect that the secured creditor must account for his collateral before participating. If this obligation be binding upon him, he should be allowed the value of his collateral as a credit.