deed to Pat was executed after the date of the Dorough deed. In fact, J. J. Osley swore that at the time he made the deed to Pat to the 31% acres he deeded to him every foot of land he owned. If this is to be believed, then according to his own testimony the title to the 25 acres had already passed out of him. "J. J. Osley made other deeds in 1915, and, strange to note, and rather significant, Pat's deed carries everything up to the boundaries of the tracts deeded to other parties in 1915. "According to the evidence of J. J. Osley, it was his custom to withhold deeds from the records (the deeds to Pat and Mrs. Emma Osley were not recorded for over four years), and yet a number of deeds were introduced from various parties to J. J. Osley, and these deeds show invariably that they were recorded within a few days of their execution, possibly with one or two exceptions. "J. J. Osley has been in possession of the land all the while since 1913, just as prior to that time. He swore that he had never told any one of the transactions between himself and his son and his wife. "The inconsistencies mentioned reflect the entire evidence of the case; and it is the opinion of the master that the defendants not only failed to carry the burden, and show that this transaction was fair and for a valid consideration, but the evidence shows overwhelmingly that the defendants conspired to put the property of J. J. Osley beyond the reach of his creditors. The evidence fairly reeks with unexplained circumstances pointing only to this conclusion. "The conclusion is inevitable that the deeds and transfers of the bond for title were all made at the same time. "Under the evidence of Mr. Bennett, a disinterested witness, it is impossible that these deeds could have been written prior to August, 1916. Under the other evidence in the case, the deeds were certainly written and signed not earlier than 1915; and I find, as a matter of fact, that the deeds and transfers of the bond for title sought to be canceled were executed between August, 1916, and February 12, 1917, and were without consideration, and made for the purpose of hindering, delaying, and defrauding the creditors of J. J. Osley, known to all the defendants. The creditors represented by the trustee in this suit were creditors long before this time. "The defendants contend that there is no evidence that A. C. Adams is trustee of J. J. Osley, bankrupt. The entire record from the bankruptcy court was introduced in evidence. Be that as it may, the plaintiff affirmatively alleges in paragraph 1 of his petition that he is trustee for J. J. Osley, bankrupt, and this is not denied by the defendants. It is therefore to be taken as true. [English v. Arizona] 214 U. S. 359, 361 [29 Sup. Ct. 658, 53 L. Ed. 1030]. "After careful and painstaking consideration of the testimony, I find that the deed to the 31% acres of land from J. J. Osley to Patrick Osley, and the deed from Patrick Osley to Mrs. Emma Osley to the same tract of land, and the transfer of the bond for title from J. J. Osley to Patrick Osley, to an equity in 380 acres of land, and the transfer of the same bond for title from Patrick Osley to Mrs. Emma Osley were without consideration and made for the purpose of hindering, delaying, and defrauding certain of the creditors of J. J. Osley, represented by A. C. Adams, trustee for J. J. Osley, bankrupt, which was known to all parties concerned in the drawing and execution of the papers." In conclusion, the master says: "I therefore recommend that a decree be entered finding these conveyances void, and that the title to said property be decreed to be in the trustee of J. J. Osley, bankrupt." [1, 2] The evidence abundantly supports the conclusion of the master in this case; indeed, to me seems to require it. At all events, there is no sufficient ground to justify sustaining any of the exceptions to the report. Those exceptions which go to the master's ruling as to the burden of proof, and as to the effect of certain evidence, are wholly immaterial, because it seems to me that the evidence absolutely required the master to hold as he did. There was abundant evidence to justify him in holding that the deeds were made for the purpose of hindering, delaying, and defrauding creditors, as charged in the petition. The exceptions are overruled and the report confirmed. In re AMERICAN PAPER CO. (District Court, D. New Jersey. January 22, 1919.) 1. BANKRUPTCY 387-INDORSERS-DISCHARGE. Notwithstanding New York Negotiable Instruments Law, declaring that a person secondarily liable is discharged by the release of the principal debtor, the assent of the holder of a note to a composition offered by the maker does not, under Bankruptcy Act, § 16 (Comp. St. § 9600), discharge the indorser, for the discharge of the maker is brought about by operation of law, and not the voluntary act of the parties. 2. PAYMENT 41(1)—APPLICATION BY Court. When neither debtor nor creditor makes application of payment, they cannot do so after controversy or litigation has been instituted, and the court should make the appropriation in accordance with equitable principles. When the security is the same, it is the rule in the federal courts, as well as in the state of New Jersey, to apply a payment without designation first to the oldest obligation. 4. PAYMENT 46(1)—APPLICATION-EFFECT OF SECURITY. When the security is not the same, the rule is to apply an undesignated payment to the obligation least secured, or whose security is most precarious. 5. BANKRUPTCY 273-APPLICATION OF PAYMENTS-RULES. Where the trustee in bankruptcy agreed with a creditor that bonds held by the creditor should be retained and applied as a general payment upon its claim, rule for application of payment stated, and payment directed applied first to debts least secured. 6. BANKRUPTCY 273-PAYMENTS. Where trustee in bankruptcy consented to a creditor's retention of bonds held as collateral, and the payment was sufficient, in connection with dividends received by creditor on claims for which bankrupt was only secondarily liable, to pay all amounts for which bankrupt was primarily liable, and leave a surplus applicable to payment of claims for which bankrupt was only secondarily liable, the creditor was entitled to retain dividends on claims for which the bankrupt was secondarily liable, until it received full payment, but trustee was subrogated to future dividends. 7. BANKRUPTCY 273—APPLICATION OF PAYMENTS. Where a creditor held bonds of a bankrupt, and after bankruptcy the trustee agreed that they should be applied by the creditor to its claims, but no mode of application was agreed upon, the court, in making application, will determine the matter as of the time of bankruptcy, and not the date when the trustee agreed that the creditor might apply the bonds to payment of its claim. >For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes In Bankruptcy. In the matter of the American Paper Company, bankrupt. On review of referee's order subrogating the trustees of the bankrupt to the rights of Wilkinson Bros. & Co. in its claim filed. against another bankrupt. Order reversed. See, also, 243 Fed. 753. McDermott & Enright, of Jersey City, N. J., for trustee. Allan C. Rowe, of New York City, for Wilkinson Bros. & Co. DAVIS, District Judge. The American Paper Company, hereinafter called the Paper Company, Wilkinson Brothers & Co., hereinafter called the Wilkinson Company, George F. Hills Company, hereinafter called the Hills Company, and the Webb Folding Box Company, hereinafter called the Webb Company, did business with one another. All of said companies, with the exception of the Wilkinson Company, became bankrupt; the Paper Company on July 10, 1914, the Webb Company on July 27, 1914, in the district of New Jersey, and the George F. Hills Company on July 8, 1915, in the Southern district of New York. A claim was filed against the Paper Company by the Wilkinson Company, which after some modification was allowed on December 22, 1915, as follows: (1) Merchandise, open account (2) Six notes of American Paper Company. $ 2,171.36 13,780.15 3,014.12 (4) Four Fey notes, indorsed by American Paper Company. 2,208.69 1,027.48 10,729.32 (7) Sixteen notes of George F. Hills Company, indorsed by American Paper Company... 12,038.57 $44,989.69 At the time of filing the said claims the Wilkinson Company held as security for its debt first mortgage bonds of the Paper Company amounting at par to $38,000. In January, 1916, it was agreed between the Wilkinson Company and the trustee of the Paper Company that the said bonds should be retained by the Wilkinson Company and applied as a general payment upon its claim against the Paper Company, and that the said claim be reduced thereby to $6,967.69. There was no agreement whatever between the trustee of the Paper Company and the Wilkinson Company as to how the said bonds should be applied in payment of the various items in said claim, and this contest really results from the manner in which they are sought to be applied. The Wilkinson Company filed a claim against the Webb Company, but the Paper Company did not. The Paper Company contends that its bonds as a fact have been applied to the payment of the Webb Company notes on which it was indorser, and that it has the common right of an indorser, upon taking up indorsed paper, to proceed against the principal, and therefore it should be subrogated to the rights of the Wilkinson Company in the claim filed. The referee made an order subrogating the trustee of the Paper Company to the rights of the Wilkinson Company in its claim filed against the Webb Company to which an exception was taken, and that order is before me for review. On June 25, 1915, the Wilkinson Company made a composition with the Hills Company and received 20 per cent. of its claim against that company, being Nos. (3) and (7) in the claim above mentioned. At the time of the settlement of the bonds in January, 1916, the Wilkinson Company did not disclose that it had made a composition with the Hills Company, or give credit for the 20 per cent. dividend, and thus, the trustee contends, treated these notes as unpaid, and if this is so the Webb Company notes must have been satisfied out of the bonds of the Paper Company. It was the duty of the Wilkinson Company to disclose the composition of the Hills Company at the bond settlement in January, 1916, and it is difficult to reconcile its failure to do so with an honest purpose; but it does not follow that its failure to do so establishes the satisfaction of the Webb notes out of the bonds, or that the Wilkinson Company so regarded it. [1] The trustee further contends that the American Company was discharged from its obligations as indorser on the notes of the Hills Company by the composition, and therefore the $38,000 paid the Webb Company notes, and the trustee of the Paper Company should be subrogated to the rights of Wilkinson Company in its claim filed against the Webb Company. This position is supported by the opinion of Referee Stone in the Matter of Harry Benedict, 18 Am. Bankr. Rep. 604. It was held in that case that the general rule of law, that if the holder of negotiable paper does any act which operates to release the principal, or which impairs the rights or remedies of the surety against the principal, the obligation of the surety will be released, is crystallized in the state of New York (in the Northern district of which this case arose) in the Negotiable Instruments Law, which provides that: "A person secondarily liable on the instrument is discharged: 1. By any act which discharges the instrument. * 3. By the discharge of a prior party. 5. By a release of the principal debtor, unless the holder's right of recourse against the party secondarily liable is expressly reserved." Consol. Laws, c. 38, § 201. A release, therefore, through composition of the principal, discharges the liability of the surety, notwithstanding the provisions of section. 16 of the Bankruptcy Act (Act July 1, 1898, c. 541, 30 Stat. 550 [Comp. St. § 9600]) that: "The liability of a person who is a codebtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt" --because the relief through composition, though as effectual as a "discharge," is secured through "the co-operation of the creditors." The same rule was applied in that case to a creditor voting for a composition in bankruptcy as to a person making a voluntary composition deed outside of bankruptcy. There is a difference, however. In the one case the discharge is by the voluntary act of the party; in the other by operation of law, not by the act of the creditor who assented to the composition. Therefore a different rule should be applied, and the case at bar accordingly comes within the provision of section 16 of the Bankruptcy Act. This seems to be the rule in the states of New York and Massachusetts and in England, as pointed out in the New York decisions. In re Burchell (D. C.) 4 Fed. 406; Guild v. Butler, 122 Mass. 498, 23 Am. Rep. 378; Mason & Hamlin Organ Co. v. Bancroft, 1 Abbott, N. C. (N. Y.) 415; Eastern Furniture Co. v. Caminez, 146 App. Div. 436, 131 N. Y. Supp. 157. This rule seems to be well founded in reason and supported by the greater weight of authority. Therefore the liability of the Paper Company as indorser on the Hills Company notes was not discharged by the composition of the Hills Company. [2-4] When a payment, insufficient to satisfy two or more debts, is made, and neither the debtor nor creditor makes an appropriation of payment, it is too late for either to make an appropriation after controversy has arisen thereover or litigation has been instituted. It is the duty of the court in such case to make the appropriation in accordance with equitable principles. When the security is the same, the state and federal rule is to apply the payment first to the oldest obligation. When the security is not the same, the rule is to apply the payment first to the obligation least secured, or whose security is most precarious. Terhune v. Colton, 12 N. J. Eq. 312; Frost v. Mixsell, 38 N. J. Eq. 589; Leeds v. Gifford, 41 N. J. Eq. 464, 5 Atl. 795; Turner v. Hill, 56 N. J. Eq. 293, 39 Atl. 137; Field v. Holland, 10 U. S. (6 Cranch) 8, 22, 28, 3 L. Ed. 136; U. S. v. Kirkpatrick, 22 U. S. (9 Wheat.) 720, 6 L. Ed. 199. [5, 6] Item (5) in the claim filed against the Paper Company, aggregating $1,027.48, is composed of two notes of one Tucker, indorsed by the Paper Company. After the bond settlement of January, 1916, the Wilkinson Company sued Tucker and secured judgment for the full amount of the notes, thereby showing that it elected not to apply any of the bond payment to that item. This is admitted by the Wilkinson Company, and consequently in the appropriation to be made that item should be eliminated. Items (1) and (2) in claim are obligations of the Paper Company alone. Items (3), (4), (6), and (7) are obligations of the Paper Company and another, either as maker or indorser. Items (1) and (2) should, in accordance with the above rule, be first paid out of the bond settlement, for they rest upon the liability of the Paper Company only, and are manifestly less secured than the other four. The security in items (3) and (7), other than the liability of the Paper Company, is as above stated, 20 per cent. Whether that security is more or less than that of the Fey notes in item (4), or the Webb Company notes in item (6), I am not informed, though counsel for the Wilkinson Company make the general statement that Fey is practically worthless. The security in all four items, (3), (4), (6), and (7), is precarious; but which is more and which is less precarious is, so far as I am aware, unknown. Therefore, after items (1) and (2) are paid out of the $38,000 bond settlement, the remainder should be applied to items (3), (4), (6), and (7), in accordance with the priority of the obligations. When |