This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 437.— A and B are holders of a note, the promissor and endorser on which are both bankrupt. After a lapse of time each estate pays a dividend (or arranges a compromise) of sixty cents on the dollar. Can A and B prove for interest to date of payment, or can they, after collecting sixty cents from one estate, collect more than forty cents (or as much more as will pay principal and interest in full) from the other?
Answer.—In making up claims to be filed with an assignee in bankruptcy the rule is to compute interest to the date of the assignment, the reason for this being that the property is assigned in trust to pay the obligations to the debtor existing at the date of the assignment.
As regards the holder's rights against the different parties, he is entitled, as holder, to recover from the promissor the full amount of the note with interest to date of payment, notwithstanding that he has received a part from the endorser, but if he receives more than one hundred cents on the dollar and interest he becomes a trustee as to the excess for the endorser or other parties concerned. After he has collected from the promissor's estate all that it will pay, his dividend from the endorser's estate cannot exceed the balance of his claim and interest. If he has received the endorser's dividend first, and the dividend from the promissor's estate overpays him, he must pay back the excess to the endorser's estate. If he only collects enough from the promissor's estate to pay his claim in full after applying what he has received from the endorser's estate, the latter would be entitled to the balance of the dividend, if any, from the promissor.
We assume that as between the promissor and endorser the note under consideration is one which the former ought to pay; also that there is no Bankruptcy Act in force containing provisions which would conflict with the views expressed.
On the question of collecting interest from the endorser's estate, the dividend on which would pay balance of principal and interest in full, we think that the claim must be regarded as one against the endorser, for which the claim on the promissor is the security, and that whatever is recovered from the security may be applied, so far as the claim on the endorser goes, first to interest and then to principal, leaving the endorser liable for the balance. This in effect gives a claim for payment of principal and interest in full, when the dividends; as in the case you mention, would more than cover the debt in full.
The question mentions a compromise, as to which it is to be noted that the acceptance of a composition from the promissor, coupled with his discharge, might discharge the endorser from liability as well, if his consent were not obtained, or if the rights against him were not reserved.