of his debt, the result would be that he would thereafter file a claim as an unsecured creditor for the balance of the principal of his debt. Of course, the greater the amount of the security which he applied first to pay the post-bankruptcy interest, the greater would be the deficiency on the principal and the greater would be his claim as an unsecured creditor. If he had applied his security first to the principal, and thus exhausted it, he would not have been able to prove as an unsecured creditor for the post-bankruptcy interest, because an unsecured creditor can not obtain post-bankruptcy interest. This action of the unsecured creditor in Sexton, in applying his security to pay the post-bankruptcy interest on the debt, before paying its principal, thus resulted in increasing the total amount of the unsecured claims, and in turn resulted in a smaller ratable share going to each of the unsecured creditors. This, all agree, Sexton included, is inequitable to the unsecured creditors. Therefore, in a situation where the security itself, not a part of the bankrupt's estate, is insufficient to pay both the principal of the debt and the post-bankruptcy interest, due according to the terms of the security contract in full, the security must be applied first to pay the principal, plus the interest down to the time of the filing of the bankruptcy, which is due the secured creditor under all circumstances. Only thereafter can the remainder of the security equitably be used to pay the post-bankruptcy interest. So far as the security itself suffices, when thus applied, to pay some post-bankruptcy interest, the general creditors can not object, as such security belongs, not to the bankrupt, but to the secured creditor. However, as to any balance of post-bankruptcy interest remaining unpaid after the security has been exhausted, such balance is unsecured, and would be a claim of an unsecured creditor for post-bankruptcy interest. Since post-bankruptcy interest is allowed no unsecured creditor, such claim must be disallowed.
After the Sexton decision, the Supreme Court in Ticonic Nat. Bank v. Sprague, supra, held squarely that secured creditors of a National bank were entitled to interest subsequent to the date of bankruptcy, if the assets upon which the secured creditors had a lien are sufficient to pay both principal and interest, even if such assets were not sufficient to pay other creditors in full. Nine circuits have similarly held.
Nor is Sexton to the contrary. For in Sexton Justice Holmes said (219 U.S. 339, 31 S. Ct. 258): 'The view that we adopt is well presented in the late Judge Lowell's work on Bankruptcy, § 419; seems to have been entertained in Coder v. Arts, 8 Cir., 152 F. 943, 950 * * *.' And the very section in Lowell's Bankruptcy which our highest court thus says 'we adopt', not only sets forth the substance of the principle above stated as applicable to cases where a deficiency in the security exists, but reads, in its opening sentence 'If the security exceeds the debt, the creditor receives interest until the settlement with the assignees (the bankruptcy trustee) whether by redemption, sale or otherwise.' (Parentheses the Court's)
Furthermore in Coder v. Arts, supra (152 F.2d 950), also cited by Holmes, J., the Court held: 'But the proceeds of these mortgaged lands appear to be ample to pay the principal and interest of the debt to the mortgagee Arts, and where a trustee sells mortgaged property of the bankrupt's estate free of the mortgage, and the proceeds of the sale are sufficient for that purpose, the mortgagee is entitled to payment of the interest upon his mortgage debt as well as the principal, out of the proceeds in accordance with the terms of the note and mortgage.' In affirming the lower court in Coder v. Arts, 1909, 213 U.S. 223, 245, 29 S. Ct. 436, 445, 53 L. Ed. 772, the Supreme Court stated: 'Nor do we think the circuit court of appeals erred in holding that, inasmuch as the estate was ample for that purpose, Arts was entitled to interest on his mortgage debt.' Not only does Sexton thus approve of the above principles by the clearest of inference, but in turn Saper, which approves of Sexton, cites in footnote 7, at page 330, of 336 U.S., at page 555 of 69 S. Ct., many of the English cases in turn cited by Lowell, Bankruptcy, in support of his above quoted text.
In the case at bar, the security is ample to pay both the principal of the debt and post-bankruptcy interest thereon, so Heller is entitled to be paid both. The subordinate question then remains as to whether post-bankruptcy interest on the debt should be paid Heller out of the security, till the time the Trustee receives the security proceeds, through the sale of the inventory, under the factor's lien and his collection of the balance of the assigned accounts receivable, or whether such interest should be paid down to the time the Trustee pays these moneys to Heller.
Under the general principle which governs this entire interest question, namely, that bankruptcy should not affect the security of a secured creditor, because the security is not a part of the bankrupt's assets, the authorities are uniform in permitting interest to the secured creditor up to the time of payment to him.
Nor can it be argued that the delay between the sale of the security and the time of payment is attributable to Heller, so that equitably he should not receive interest during that period. Heller did not instigate the present litigation, but is merely defending its rightful claim, previously adjudicated, to the security, against the opposing tax trust claim of the United States. No waiver or estoppel can therefore lie, to prevent Heller's recovery of interest for the period of such delay.
The Claim of the Eureka Tube & Television Company
It is not clear whether this issue arises on the report of the Referee in Bankruptcy as such, or on a reference of the matter by this Court to the Referee, as Special Master. According to the order signed by this Court June 11, 1952, the matter was 'referred to Charles H. Weelans, Referee in Bankruptcy, for hearing and determination'. This indicates a reference to the Bankruptcy Court itself. If so, then, since no exceptions have been filed, the report stands.
But even if the matter is considered as referred to a Special Master for his report, the result is the same. For meanwhile Eureka itself has gone into bankruptcy, so its Trustee should have filed exceptions. Eureka's Trustee has advised this Court in writing, April 26, 1955, that he 'will not file exceptions * * *.' However, under such conditions this Court must act on such report, and, when we turn to the merits, the report would seem correct.
As previously stated, this Court has adopted the findings of fact in the present report as its own. These findings show that the tubes ordered from Eureka by Tele-Tone were delivered January 26, 1952. At first Eureka refused to send them unless they received a certified check. But later they waived this requirement and took an ordinary check, payment of which was refused by the bank. January 30, 1952 Tele-Tone filed its petition in the Southern District of New York, under Chapter XI.
Not only does the above indicate a waiver by Eureka of its original insistence on being paid before delivery of the goods, but the delivery and receipt of the ordinary check constitutes no assignment in, or trust for, Eureka of the amount of the check, let alone the goods themselves. This is indicated by the authorities cited supra under the United States tax trust claim. Furthermore, there is no evidence that these tubes ever came into the possession of either the debtor in possession, the Chapter X Trustee, or the Bankruptcy Receiver or Trustee instead of being shipped out by Tele-Tone previously, engaged in quantity production as it was. In the absence of such evidence, these fiduciaries are not shown to have ever had possession of property belonging to Eureka, and not to the bankrupt, even in the absence of any such waiver.
The finding of the report, that the claim of Eureka is a general claim, is therefore affirmed.
The Referee and Special Master's report is therefore affirmed with the exception of the charging of administrative expenses against Heller.
An order may be entered accordingly.