authorize and empower the said Bank (but no other holder) at its option, at any time, to appropriate and apply to the payment and extinguishment of any obligations or liabilities. of the undersigned to it, whether now existing or hereafter contracted any and all moneys now or hereafter in the hands of the said Bank, on deposit or otherwise, to the credit of or belonging to the undersigned, whether the said obligations or liabilities are then due or not due."

Endorsed upon the back of each of these notes and signed by J. M. Mertens & Co. and J. M. Mertens appeared the following:

"In consideration of one dollar paid to the undersigned, and of the making, at the request of the undersigned, of the loan evidenced by the within note, the undersigned hereby jointly and severally guarantee to the Varick Bank of New York, N. Y., its successors, endorsers or assigns, the punctual payment, at maturity, of the said loan, and hereby assent to all the terms and conditions of the said note and consent that the securities for the said loan may be exchanged or surrendered from time to time, or the time of payment of the said loan extended without notice to or further assent from the undersigned, who will remain bound upon this guarantee, notwithstanding such changes, surrender or extension."

On the day the petition was filed, Mertens individually was indebted to the bank in the sum of $25,489.62. This indebtedness was upon his guaranty of the five collateral notes, of one of which he was also the maker, the balance being based upon his endorsement of sundry notes of third parties amounting to about $3,000. Mertens individually, to secure the payment of the indebtedness to the bank, pledged to it two policies of insurance upon his life, one for $50,000, No. 417,171, and the other for $10,000, No. 252,314. The $50,000 policy was a free Tontine policy, issued February 15, 1889, payable to Mertens or his estate, the yearly premium was $1,750, and the Tontine dividend period expired Feb

ruary 15, 1909. The $10,000 policy was issued December 21, 1882, payable to Jennie Mertens, wife of the insured, but in the event of her prior death, to the children of the insured, and the annual premium was $272.50. It was a Tontine savings policy and the Tontine period was completed December 21, 1902, at which time Mertens, as the insured, withdrew in cash the share of the surplus apportioned to the policy, and continued it in force on the ordinary plan. On March 16, 1901, Jennie Mertens and the children of Jacob and Jennie executed an assignment of the $10,000 policy to the bank. On March 25, 1901, J. M. Mertens joined with his wife in executing a further assignment of the same policy to the bank. March 21, 1901, Mertens individually executed an assignment of the $50,000 policy to the bank. These assignments contained no power of sale. In addition the policies were pledged to the bank under the terms of the collateral notes and agreements of pledge. It appeared from the proofs that the claim against Mertens individually was secured by an individual deposit of Mertens of the sum of $6,000 as collateral, in addition to the policies.

Obligations aggregating $1,691.93, endorsed by Mertens, had matured and remained unpaid on August 18, and on September 15, obligations aggregating $13,570.47 had matured and remained unpaid, and in the latter amount were included two of the collateral notes for $5,000 each and some $3,000 of the notes of third persons, endorsed by Mertens individually.

On or before September 14, 1903, the two policies were delivered to a duly licensed auctioneer by the attorneys of the bank with instructions to sell the same at public auction at the New York Real Estate Office salesrooms, to the highest bidder, and they were offered for sale and sold to the highest bidder, an agent of the bank, on September 14, the $50,000 policy for the sum of $7,000 and the $10,000 policy for the sum of $3,250. No notice of the sale was given to any one except the bank. In due time the bank filed with the referee

in bankruptcy two proofs of claim, one against the co-partnership estate aggregating $27,893.85, and another against Mertens for the sum of $9,118.37. Thereafter the claims were amended. Objections to both were filed by the trustee, alleging in substance that the sales of the policies were illegal; that the value of the securities held by the bank had not been ascertained according to the provisions of the bankruptcy act, and that the trustee still owned the equity.

No other evidence than appearing above was offered by the trustee on the hearing before the referee under the objections. The referee held, in substance, that the sale of the policies was null and void, and that the value of the securities had not been ascertained according to the provisions of section 57h of the bankruptcy act, and refused to allow either claim against the estate or estates. Counsel for the trustee moved for the referee to direct a method by which the security held by the bank should be liquidated and that in so doing he direct the bank to resell the policies on notice to the trustee. The motion was objected to, but was granted by the referee. The bank petitioned for a review, and the District Court of the United States for the Northern District of New York on such review approved the referee's rulings. 134 Fed. Rep. 101. From the order of the District Court the bank appealed to the United States Circuit Court of Appeals for the Second Circuit. That court, as previously stated, filed its finding of the facts and its conclusions of law, which conclusions of law were as follows;

"1. That the order made by the referee and by the District Court was a rejection of the claims of the Varick Bank.

"2. That the policies in question did not belong to the partnership estate, and that the claim against the partnership should have been allowed in full.

"3. That the sale of the policies under the facts as stipulated was a good and valid sale and passed a good and valid title to said policies to the Varick Bank.

"4. That the value of said policies was properly liquidated

by said sale under the terms of section 57h of the Bankruptcy Act and that under said section the referee had no power to make the order directing a resale thereof.

“5. That said Bankruptcy Act did not suspend or enjoin the exercise of said power of sale during the time between the filing of the petition and the adjudication in bankruptcy. "6. That the claim against the individual estate of Jacob M. Mertens should be allowed in full.

"7. That the burden of proving that said sale was unfair was upon the trustee."

The order of the District Court was reversed and the case remanded with instructions to proceed conformably with the opinion of the Circuit Court of Appeals. 144 Fed. Rep. 818. The case was then brought to this court on appeal.

Mr. Will B. Crowley, with whom Mr. Ceylon H. Lewis was on the brief, for appellant:

Between the time of filing the petition and the adjudication, the bankruptcy proceedings themselves were an injunction against any sale of the policies in question. After filing the petition, no sale could be held without leave of the court. Whitney v. Wenman, 198 U. S. 539; Bryan v. Bernheimer, 181 U. S. 188; Mueller v. Nugent, 184 U. S. 1. See also Lee v. Franklin Sav. Inst., Fed. Cases, 8188; Conner v. Long, 104 U. S. 244; McHenry v. La Société Française, 95 U. S. 60; Wiswall v. Sampson, 14 How. 66; State Bank v. Cox, 143 Fed. Rep. 93; In re Reynolds, 127 Fed. Rep. 762; In re Brooks, 91 Fed. Rep. 509; In re Antigo, 123 Fed. Rep. 254; In re Gutman, 114 Fed. Rep. 1010; In re Krinski, 112 Fed. Rep. 975.

The pretended sale of the insurance policies held as collateral was a sham and was invalid at common law. It constituted no liquidation nor evidence of the value of the policies, which, it appeared, were worth more.

A pledgee cannot become the purchaser of pledged securities except by the express permission of the pledgor; a pledgee VOL. CCVI-3

Argument for Appellant.

206 U.S.

is a trustee for the benefit of the pledgor. Pauly v. State Loan Co., 165 U. S. 620. See also: Easton v. German American Bank, 127 U. S. 537; Perry on Trusts, 4th ed., sec. 602, o. x.; Laclede Bank v. Richardson, 156 Missouri, 275; Dana v. Buckeye Co., 38 Ill. App. 371; Jones on Pledges, sec. 648; Story on Bailments, secs. 318-345.

The $6,000 deposit and the value of the policies should also be applied in reduction of the amount of the partnership claim. The express terms of the promissory notes so require. It did not appear that the policies belonged to J. M. Mertens.

In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor, the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.

If the bank waived the terms of the notes and relied upon its legal rights to offset this deposit, then the time when the set-off was required to be made was at the time of the filing of the petition. Collier on Bankruptcy, 4th ed., 496; In re City Bank, Fed. Cases, 2742; Drake v. Rollo, Fed. Cases, 4066.

No liquidation of securities which is binding upon the bankruptcy court, can be made by a creditor except as directed by the court. The "value" of the securities was not determined and the referee had the right under $57d to refuse to be bound by the alleged sale. Whitney v. Wenman, 198 U. S. 539; McHenry v. Société Française, 95 U. S. 60.

Whether the court must direct the manner of liquidation or not, sec. 57h provides that before having a claim allowed a secured creditor must deduct "the value of securities" held by him.

The referee had some discretion; he had a conscience to satisfy; he was required to ascertain the value and deduct it, and sec. 57d, which provides that the consideration of claims may "be continued for cause by the court upon its own motion," was ample authority for him to require further evidence of the value of the policies before allowing the claims.