## Facts

- Real estate owners executed a bond and mortgage to Ivanhoe Building & Loan Association securing a debt; the property was later conveyed to Eastern Sash & Door Company, which expressly assumed the mortgage debt.
- Eastern later conveyed the premises to a third party.
- After default, Ivanhoe foreclosed against the then-owner; the debt was found due in foreclosure, and Ivanhoe bid $100 at the sale.
- In the bankruptcy proceedings of Eastern, the parties stipulated the foreclosed property was worth $9,000.
- Ivanhoe filed a proof of claim in Eastern’s bankruptcy for the amount due on the bond (less the $100 bid).
- The bankruptcy referee limited the allowable claim to the deficiency after crediting the $9,000 stipulated value; the district court and the court of appeals affirmed.

## Issues

1. Whether a creditor holding mortgage security on property not owned by the bankrupt is a “secured creditor” under the Bankruptcy Act such that its claim must be allowed only for the amount exceeding the value of the security.
2. Whether the Bankruptcy Act’s setoff provision for “mutual debts” limits the creditor’s proof of claim to the debt remaining after crediting the proceeds or value of the third-party foreclosure.
3. Whether, even if full proof is permitted, bankruptcy distributions must be limited to prevent the creditor from recovering more than the total debt.

## Decision

- The Supreme Court reversed.
- A creditor whose mortgage security is not on the bankrupt’s property is not a “secured creditor” of the bankrupt under the Bankruptcy Act provisions governing secured claims.
- The creditor may prove in bankruptcy for the full amount of principal and interest, without valuing the third-party collateral to cap the provable claim.
- The setoff provision for mutual debts does not apply because the foreclosure on third-party property does not create mutual debts between creditor and bankrupt.
- The creditor may not collect and retain bankruptcy dividends that, combined with foreclosure recovery, exceed the total debt.

## Legal Principles

- Under the Bankruptcy Act, the secured-claim limitation applies only where the creditor has security upon property of the bankrupt (or within the statute’s specified secondary-liability/security arrangement); security on third-party property does not make the creditor a secured creditor of the bankrupt estate.
- A creditor with third-party collateral may file and have allowed a provable claim for the full debt against the bankrupt estate, even if it has realized (or may realize) value from the third-party collateral.
- Setoff under the mutual-debts provision requires mutual obligations between the bankrupt and the creditor; independent realization on third-party collateral is not a mutual debt or credit that reduces the provable claim.
- Bankruptcy administration must prevent double recovery: total distributions retained from the estate plus amounts realized from the collateral cannot exceed the debt.

## Conclusion

The Court held that a mortgagee whose collateral is not property of the bankrupt is not a secured creditor under the Bankruptcy Act and may prove the full debt in the bankrupt’s estate; setoff principles for mutual debts do not restrict proof, but distributions must be limited to avoid recovery beyond the amount owed.


Ivanhoe Bldg. & Loan Ass’n v. Orr, 295 U.S. 243 (1935)