5. BANKRUPTCY 436(1, 3)-BURDEN IS ON | Visions seems to be that debts due to nonPLAINTIFF TO SHOW THAT BANKRUPT KNEW resident creditors, when properly scheduled, OF EQUITABLE ASSIGNMENT OF JUDGMENT. are discharged, so far as Congress has the The introduction of a discharge in bank-power to enact that such a result shall folruptcy is a prima facie defense to a suit on a low. That Congress has the power to so debt existing at the time of the filing of the provide, as far as future proceedings in this bankruptcy petition, and the burden is on plaintiff to show that the debt was not barred country are concerned, has not been quesby establishing that the bankrupt knew of the tioned, and is not open to doubt. equitable assignment of the judgment to him so that notice should have been given him. [2] But it is argued that, while Congress might enact such a law, it has not done so. The chief contention made in favor of this Transferred from Superior Court, Straf- conclusion is that, prior to the enactment of ford County; Branch, Judge. Appeal by Anna Morency, administratrix, against Vitaline Landry, as executrix, from the report of the commissioner denying the claim of plaintiff. Appeal dismissed subject to plaintiff's exception, and case transferred from the superior court. Exception overruled. Appeal from the report of the commissioner on the estate of Narcisse Landry. Landry was a resident of St. Marie in the province of Quebec in 1899, when he gave J. A. Morency, the plaintiff's intestate, a note, which Morency discounted at the local bank. As the note was not paid at maturity, the bank sued both Landry and Morency, and recovered judgment against them in 1900. Morency paid the judgment in 1902, and his administratrix is now attempting to enforce it against Landry's estate. Landry emigrated to this state at some time, filed a voluntary petition in bankruptcy in 1906, received a discharge in due course, and died in 1912. In the bankruptcy proceedings Landry included this claim in his schedule of liability, stating the creditors under the claim to be F. Morency, F. Morency & Co., and the bank. The court found on evidence that notices to these creditors were duly mailed, that both J. A. Morency and the bank had actual notice of these proceedings, and dismissed the appeal subject to the plaintiff's exception. Snow, Snow & Cooper, of Rochester, for plaintiff. Hughes & Doe, of Dover, for defendant. PEASLEE, J. [1] The Bankruptcy Act of July 1, 1898, provides that "a discharge in bankruptcy shall release a bankrupt from all of his provable debts," duly scheduled by the bankrupt, with the name of the creditor if known, with certain exceptions not material here. Section 17a (U. S. Comp. St. § 9601). The act also refers in terms to the claims of those residing outside the United States, as entitled to share in the dividends declared. Section 65d (section 9649). The plain conclusion from these pro the present statute, earlier bankruptcy acts containing provisions of similar purport had been construed as not affecting the right of the nonparticipating foreign creditor to thereafter maintain a suit in our courts. Hence it is said that Congress intended to express a like purpose here. The claim that prior to 1898 similar provisions in earlier bankruptcy laws had been authoritatively construed favorably to the plaintiff's contention is not borne out by the cases cited. The question has never been passed upon by the Supreme Court of the United States. The case in that court which is relied upon (Ogden v. Saunders, 12 Wheat. 213, 6 L. Ed. 606) raised questions as to the constitutional limitation upon the power of the several states to enact insolvency laws. No question of the meaning of any national bankruptcy law or of the power of Congress to enact the same was involved, and the subject was not considered. Phelps v. Borland, 103 N. Y. 406, 9 N. E. 307, 57 Am. Rep. 755, deals with the effect to be given here to a discharge of a foreign debtor in his own country. It does not involve the question now under consideration, and the matter is not referred to in the opinion. In Lizardi v. Cohen, 3 Gill (Md.) 430, the question was whether a discharged bankrupt was a competent witness as to a London contract. It was held that the contract was not discharged, and that therefore the witness was interested and incompetent. The decision is put upon the ground stated by Judge Story (Conf. of Laws, § 342) "that the discharge of a contract, by the law of a place where the contract was not made, or to be performed, will not be a discharge in any other country." It does not discharge the obligation so as to make the debtor disinterested. He is still liable in the "other country." Whether the debt was discharged locally was a question not necessary to the decision, and not discussed. The only case cited holding that under the bankruptcy law of 1867 (Act Cong. March 2, 1867, c. 176, 14 Stat. 517) a discharge did not bar a subsequent suit here by a foreign creditor is McDougall v. Page, 55 Vt. 187, 45 Am. Rep. 602, decided in 1882. But it was admitted in the opinion that the hold (108 A.) ing was contrary to the decisions in other is a provable debt (section 65d), the right of states, and that the question had not been the bank to recover on it is barred by the dispassed upon by the Supreme Court of the charge. The plaintiff cannot recover on the United States. Add to this the facts that note, or for money paid upon the judgment, two judges dissented from the Vermont de- because such claims are barred by the gencision, and that in 1884 still another deci- eral six-year limitation. She can recover sion opposed to it was announced (Moore v. only through the bank judgment. Stavrelis Horton, 32 Hun [N. Y.] 393), and it be- v. Zacharias, 79 N. H. —, 106 Atl. 306. comes evident that there was not, in 1898, any authoritative interpretation of the act of 1867, such as is now claimed. The matter had not been passed upon by the court of last resort, and the views of others were conflicting. So far as the authorities go, their weight is against rather than for the plaintiff upon the issue of how the earlier laws had been understood at the time the present law was enacted. [3] The argument that a law making the discharge efficient locally as to a foreign creditor gives the domestic creditors undue advantages compels the foreign creditor to pursue his debtor into other lands, and undertakes to make a foreign discharge effective in another country where the creditor resides, is based upon a misconception of the effect of the discharge, so far as it relates to foreign creditors who do not participate in the bankruptcy proceedings. Such creditors are not thereby compelled to pursue their debtor into foreign lands. But if they do so pursue him, they are bound by the limitation of remedy which applies to those resident there. Neither does the law undertake to make the discharge effective against the creditor in proceedings brought at his place of residence in Canada. It merely places him on an equality with our own citizens in proceedings in our courts. It is manifest that such a law is not so devoid of just principle that it is always to be inferred that there was no intent to enact it. It has recently been declared that the object of the bankruptcy law is not merely to distribute the debtor's property equitably among the creditors, "but as a main purpose of the act intends to aid the unfortunate debtor by giving him a fresh start in life, free from debts. * Our decisions lay great stress upon this feature of the law." Stellwagen v. Clum, 245 U. S. 605, 617, 38 Sup. Ct. 215, 218 (62 L. Ed. 507). The plaintiff's argument is based upon an erroneous assumption as to the state of the law in 1898, and takes a narrow and mistaken view of the purposes intended to be effected by the legislation in question. The statute plainly applies to the case in hand, and the plaintiff's rights here are no greater than they would be if the creditor had resided in the United States. 1 Lov. Bank. § 743; Bump, Bank. 713; Black, Bank. § 723; Ruiz v. Eickerman, 5 Fed. 790; Zarega's Case, 4 Law Reporter, 480, Fed. Cas. No. 18,204. If it can be found that equitably the judgment belonged to J. A. Morency, and that he had the right to prosecute it in the bank's name, the plaintiff can answer the discharge only upon the ground that the bankrupt failed to name Morency as the creditor under the judgment. In order to impose that duty upon the bankrupt, it must appear that he knew of the change in the equitable title. It is not the bankrupt's duty to notify the assignee, until the assignee has performed his duty of notifying the bankrupt. "Upon an assignment being made it becomes the duty of the assignee to notify the debtor." Thompson v. Emery, 27 N. H. 269, 272; Hellen v. Boston, 194 Mass. 579, 80 N. E. 603. While the mere fact of the surety's payment of the debt may be treated as constituting an equitable assignment of the rights incident to the original claim in the hands of the creditor, equity does not relieve the surety from the performance of his equitable duty to inform the debtor of the change in the situation. Until such notice is given, it is the debtor's right to treat the original creditor as the one to whom he owes a debtor's duties. And aside from this general common-law rule, the provision of the bankruptcy act, requiring the scheduling of the names of creditors "if known," plainly implies that one who has become a creditor without the knowledge of the bankrupt cannot complain because the claim is not scheduled as owing to him. [5] The cases "almost uniformly hold that where the bankrupt is sued on a debt existing at the time of the filing the petition, the introduction of the order makes out a prima facie defense, the burden being then cast upon the plaintiff to show that, because of the nature of the claim, failure to give notice or other statutory reason, the debt sued on was by law excepted from the operation of the discharge." Kreitlein v. Ferger, 238 U. S. 21, 26, 35 Sup. Ct. 685, 687 (59 L. Ed. 1184). The same rule was announced in this state as applicable in proceedings under similar provisions contained in the national bankruptcy law of 1841. Cutter v. Folsom, 17 N. H. 139; Wiggins v. Shapleigh, 20 N. H. 444. This imposed on the plaintiff the burden of offering evidence tending to show that Landry, when he filed his petition, knew Morency's relation to him as to him as a creditor through the bank judgment. No such evidence was offered, and there was no error [4] As the judgment recovered by the bank in the order dismissing the appeal. This conclusion renders it unnecessary to consid-, ed, and executed the mortgage in suit. At er whether the mailing of notices to F. Mor- the same time the building was insured ency and F. Morency & Co. authorized the finding that J. A. Morency had actual knowledge of the proceedings. Exception overruled. All concurred. (94 Conn. 294) SISK v. RAPUANO et al. (Supreme Court of Errors of Connecticut. Jan. 29, 1920.) 1. INSURANCE 581-APPLICATION OF PROCEEDS OF INSURANCE PAYABLE TO MORTGAGEE AS HIS INTEREST MAY APPEAR. Where a mortgagee insures his own interest at his own expense, payment of a loss before the mortgage is paid is not a payment on the mortgage, and, conversely, a mortgagor, insuring his separate interest, is entitled to the insurance proceeds, but, where the mortgagor effects insurance payable to the mortgagee as his interest may appear, the policy is for the benefit of both parties. 2. MORTGAGES 269-FIRE INSURANCE PAYMENTS CONSTITUTING PAYMENT OF MORTGAGE PREVENTING REISSUE OF MORTGAGE. against loss by fire under a policy making the loss payable to the mortgagee as her interest might appear. In December, 1916, the unfinished building was destroyed by fire at a time when only $1,000 had been advanced to Grillo by Miss Bowler. The remaining $1,500 was credited on the note. Grillo sold the equity in the property to Ruby for $300, and Ruby conveyed to the defendant Rapuano. In March, 1917, Grillo was adjudged a bankrupt, and one Podoloff appointed trustee. Meantime the fire loss had been adjusted at $2,200, and Grillo's claim against the insurance company constituted the only asset of his estate. At Podoloff's request Miss Bowler executed and left with her attorneys a release of the insurance company and a transfer of the mortgage to Podoloff, trustee, and in May the insurer paid the loss to Podoloff who, as part of the same transaction, turned over to Miss Bowler's attorneys $1,017.43, being the amount of the mortgage debt, with interest, and received from them the above-mentioned release and transfer. Podoloff assigned the mortgage to the plaintiff, Sisk. Sisk died after this action was commenced, and his administrator has entered to prosecute. Other facts are stated Walter J. Walsh, of New Haven, for appellant. William J. McKenna, of New Haven, for appellees. Where mortgaged premises were insured for the mortgagee's benefit as his interest might ap-in the opinion. pear, and the insurance money was paid to the mortgagor's trustee in bankruptcy, who transmitted part of the money to the mortgagee upon receiving a transfer of the mortgage, held that the transaction constituted, as respects a purchaser of the premises from mortgagor under warranty of freedom from incumbrances, a payment of the mortgage and not the purchase thereof by the trustee in bankruptcy so that against such purchaser the mortgage had no effect when sold by the trustee to a purchaser with notice. 3. SUBROGATION 18-MORTGAGOR NOT ENTITLED TO SUBROGATION AGAINST PURCHASER BUYING, NOT SUBJECT TO, BUT FREE FROM, MORTGAGE. The equitable principle that a mortgagor selling subject to the mortgage, but afterwards compelled to pay the debt, may be subrogated to the mortgagee's rights does not authorize the mortgagor's trustee in bankruptcy to purchase the mortgage with fire insurance proceeds out of which the mortgagor, who had warranted the land free from incumbrances, had agreed to pay the mortgage debt. BEACH, J. (after stating the facts as above). The underlying question is whether facts amounts to a purchase of the mortgage the transaction described in the finding of by the trustee in bankruptcy, or whether, as the trial court held, to a payment of the mortgage. It is said that on the facts found the judgment is erroneous because it violates the rule that the intention of the parties should prevail; that in this case the manifest intention of the parties was that the note and mortgage should be kept alive and not extinguished, and that the court has no right to apply the payment in satisfaction of the mortgage, when the parties had already made a different application of it. These proposi Appeal from Superior Court, New Haven tions assume that the trustee and the mortCounty; William S. Case, Judge. Mortgage foreclosure action by Edward J. Sisk, Francis P. Sisk, administrator, against Maria Rapuano and others. Judgment for Maria Rapuano and others. Judgment for defendants, and plaintiff appeais. No error. gagee were free to deal with this insurance money as they saw fit, and might make such application of it as they chose; whereas the defendant claimed, and the court so rules, that by the terms of the policy, the insurance money, or so much of it as was necessary One Grillo, owner of the premises in ques- for that purpose had already been applied, or tion, being about to build thereon, borrowed agreed to be applied, in case of loss to the pay$2,500 for that purpose from Hannah Bowler, ment of the mortgage, and that if the mortto be advanced as building operations requir-gagee elected to accept it, she could not make (108 A.) any other application of the fund without [apply it on successive installments of the the consent of the mortgagor. principal as they became due. [1] The subject of insurance for the benefit of the mortgage is exhaustively treated in Jones on Mortgages, §§ 400-417, and some of the principal phases of it are discussed by Chief Justice Shaw in King v. Insurance Co., 7 Cush. (Mass.) 1, 54 Am. Dec. 683. If a mortgagee insures his own interest at his own expense, the payment of a loss accruing before the mortgage debt is paid is not a payment on the mortgage, and authorities differ as to whether in such a case the insurance company on paying the loss is subrogated to the rights of the mortgagee. Mr. Justice Story, in Carpenter v. Insurance Co., 16 Pet. 495, 10 L. Ed. 1044, holds that the insurer is subrogated. King v. Insurance Co., supra, holds the other way. Conversely, the mortgagor may insure his separate interest without any reference to that of the mortgagee, and in case of loss is entitled to receive the insurance and to deal with it as he pleases. Carpenter v. Insurance Co., supra; 27 Cyc. 1263; Jones on Mortgages, 397. But when the insurance is effected by or at the expense of the mortgagor, and the policy is made payable to the mortgagee as his interest may appear, it is evidently for the benefit of both mortgagor and mortgagee. The contract of indemnity is primarily with the mortgagor, but the mortgagee is a third party beneficiary. In this state it is held that the insertion of the so-called open mortgage clause will not of itself entitle the mortgagee to sue on the policy. Meriden Savings Bank v. Insurance Co., 50 Conn. 396; Collinsville Savings Bank v. Insurance Co., 77 Conn. 676, 60 Atl. 647, 69 L. R. A. 924. Also that before a loss occurs the mortgagee is only a conditional appointee of the property owner, and as such appointee entitled to receive so much of any sum that may become due under the policy as does not exceed his interest as mortgagee. Collinsville Savings Bank v. Insurance Co., supra. In this case a loss had already occurred and become payable while the mortgage debt was still outstanding, and thereupon the appointment and the right of the mortgagee to receive so much of the insurance money as would satisfy the amount of the outstanding debt became absolute. It sometimes happens that the loss becomes payable before the mortgage debt is due, and then it is said that the mortgagee is entitled to receive the money and apply it to the extinguishment of the debt as fast as it becomes due. Thorp v. Croto, 79 Vt. 390, 65 Atl. 562, 10 L. R. A. (N. S.) 1166, 118 Am. St. Rep. 961, 9 Ann. Cas. 58, and cases cited. A difference of opinion arose in that case on the question whether the mortgagee might apply the insurance money to the payment of interest, and the prevailing opinion holds that he was bound to retain it and [2] In this case, however, the mortgage debt was due when the insurance was paid on May 21, 1917, and no question can arise as to the proper application of the fund by the mortgagee. It will therefore be apparent that if Miss Bowler had received her agreed share of the insurance money directly from the insurance company after the debt was due, she would be bound to apply it in extinguishment of the mortgage. Conn. Life Ins. Co. v. Scammon, 117 U. S. 634, 6 Sup. Ct. 889, 29 L. Ed. 1007; 27 Cyc. 1264. This follows from the fact that, notwithstanding the open mortgage clause, the contract for indemnity remains one exclusively between the insurance company and the mortgagor. Collinsville Savings Bank v. Insurance Co., supra, 77 Conn. 679, 60 Atl. 647, 69 L. R. A. 924. In this case the contract of the insurance company to pay the mortgagee was for the benefit of Grillo, and for the purpose of extinguishing his liability on the note and of releasing his land from the incumbrance of the mortgage. After the loss and before it had been adjusted Grillo conveyed the land to Ruby by warranty deed free from all incumbrances, and undertook to apply the insurance money to the payment of the mortgage debt. He thus remained liable on the note and on the warranty, and had the same interest as before in requiring the insurance company to carry out its agreement so as to extinguish the debt and release the land. The appointment of the trustee in bankrupt cy did not release the insurance company from its agreement with Grillo, and if the transaction recited in the finding amounted in substance and effect to a performance of the open mortgage clause by the company and the acceptance of the fund by the mortgagee, the mortgage debt was extinguished in the manner contracted for by the policy. In order to accept the alternative claim of the plaintiff that the transaction was a purchase of the note and mortgage by the trustee with funds belonging to the estate, it is necessary to reach the conclusion that Miss Bowler has abandoned her rights as appointee under the policy in favor of the bankrupt estate, and permitted her share of the fund to become part of the general assets of the bankrupt estate. The finding is perfectly clear that she did not do so. It is found that the check to Hannah Bowler for the balance of the mortgage was executed by the trustee as part of the payment on the loss by the insurance company to the trustee. Also that Miss Bowler did not release the insurance company until the trustee had turned the check for her share of the insurance money over to her attorneys, when they in turn surrendered to the trustee a release to the insurance company. In other words, guishment of a debt not yet due, without the consent of the mortgagor. But when, as in this case, the debt is due, the mortgagee has a present right to demand payment, and in default of payment to have possession of the collateral. The bankruptcy of Grillo was a default, and the insurance money, or so much of it as was necessary to satisfy the mort curity, and was collateral. That being so, it is hard to see how the fund could be otherwise applied by the mortgagee than in extinguishment of the debt. the payment of the loss by the insurance [ before the debt was due, and it was held that company was contemporaneously accompa- it could not be applied in immediate extinnied by a division of the fund into two parts, one of which went to the mortgagee and the other to the trustee; and, since the part which went to the mortgagee simply passed through the trustee's hands because he had succeeded to Grillo's rights under the policy, it never became available for the general purposes of the bankrupt estate, and the court was fully justified in treating the al-gage, stood in the place of the original seleged purchase of the note and mortgage as a futile attempt to keep the mortgage alive as against the mortgagor and as against the land in the hands of the mortgagor's grantee. In addition to this the plaintiff's claim re- It is also claimed that Sisk was a holder quired the trial court to believe that the trus- in due course of the mortgage note, and as tee in bankruptcy had used the funds of the such not affected by any equitable defenses. estate to buy this mortgage, paying principal But this action is not on the note; it is a and interest in full, and had afterwards sold suit in equity against one who is not a party it to Sisk for $100 in cash and a release of to the note, and has never agreed to pay it Sisk's claim of about $1,900 against the es- for a foreclosure of the mortgage. Besides, tate. Such a transaction would have been the maker of the note was bankrupt. The quite outside of the powers of trustees in note itself was overdue when Sisk took it bankruptcy as defined by section 47 of the in November, 1917; the indorsements of the Bankruptcy Act (U. S. Comp. St. § 9631). No payee and trustee were not only without reclaim appears to have been made by the plain-course, but without warranty, express or imtiff that such a purchase and sale of the mort-plied, and Sisk, in dealing with the trustee, gage was specifically authorized by the ref- was bound to take notice of the limits of eree or the court; and it is difficult to see his authority. The record of a mortgage why any responsible authority should permit is not notice that it remains unpaid, and the a trustee in bankruptcy to buy an overdue surrounding circumstances were such as to demand note of the bankrupt secured by a mortgage on real estate, the indorsement on put Sisk on inquiry. the note being "without recourse and with[3] A word may be said as to a possible out warranty express or implied," and the claim which the plaintiff has not made. If surrounding circumstances making it at least a mortgagor sells the security subject to the probable that the trustee was buying a law-mortgage debt, and is afterwards compelled to pay it, he may be subrogated to the rights suit. The only reasonable explanation of the of the mortgagee. Hart v. Chase, 46 Conn. affair is that which the court adopted, name- 207. In this case, however, Grillo warranted ly, that the trustee, who might either elect the land free from all incumbrances, and to carry out or not the contracts of the bank- undertook that the mortgage debt should be rupt, according to whether they seemed prof-paid out of the insurance; and it is apparent itable or otherwise, elected to carry out the that Grillo at least was not equitably encontract expressed by the policy, in order to titled to subrogation. This equitable princiobtain the balance of the insurance money ple has no application when, as in this case, for the estate. Having adopted and elected a part only of the original security is sold, to carry out the contract expressed in the and another part, which the mortgagor has policy, he was bound to take it as he found agreed may be primarily applied to the satisit, including the open mortgage clause. In faction of the debt, is retained by the mortre De Long Furniture Co. (D. C.) 188 Fed. gagor for that purpose. Although the mort686, 26 Am. Bank. Rep. 469. gagor's agreement with the insurer and with Ruby that the insurance should be applied in the first instance to pay off the mortgage might not of itself prevent the mortgagee from exercising her right to resort to the land, it is effective in equity to prevent the mortgagor, or his trustee in bankruptcy who elected to take the benefit of the policy, from afterwards purchasing the mortgage with the very fund out of which Grillo had agreed to pay it. The plaintiff relies on Gordon v. Ware Savings Bank, 115 Mass. 591, in which it is said that "Money received from the insurance took the place of the property destroyed, and was still collateral until applied** * by mutual consent, or by some exercise by the mortgagee of the right to demand payment of the debt, and upon default of payment to convert the securities." This is a correct statement of the equities arising from the facts of that case. There The assignments of error based on the refusal of the court to find as requested in |