the surety to receive any part of the estate of an insolvent debtor. To do so would decrease the creditor's dividend by his proportionate share of the payments to the surety, and thus allow the surety to compete against him -- in derogation of the purpose of his contract of suretyship.
However, when the creditor has received everything due him and his claim has been discharged, there is no further reason, so far as he is concerned, why the surety's right to reimbursement should be suspended. This is, of course, true whether the creditor has been paid in whole by the surety or whether part of his claim has been recovered from the debtor or the debtor's collateral.There may have been some confusion about this formerly, but there is no doubt at the present time that where the claim of the creditor has been satisfied, from whatever source, surety is entitled to subrogation.
The creditor, having been paid, and so eliminated as a factor in the problem, it remains to balance the surety's rights and the interests of the general creditors. It is not easy to arrive at any solution which is entirely satisfactory and leaves one free from doubt as to the justice of the result. On the one hand, if the surety be allowed dividends on the full amount of the creditor's claim, they will be based upon an amount in excess of what he has expended, whereas the general creditors will be sharing only on the basis of their actual advancements. If, on the other hand, the surety is limited to the amount which he has actually paid as the basis of his claim, then the general creditors get a windfall, for no other reason than that one of them has bought and paid for additional protection which none of the others chose to take -- for, of course, if there had been no suretyship, the creditor would be proving and receiving dividends on the full amount of his claim.
On the whole, it seems to me that, if the real objective of the doctrine of subrogation be kept in mind, we come closer to distributing the loss fairly and avoiding unjust enrichment of any interest by allowing the surety to claim on the basis of the full amount of the creditor's claim. By so doing it may be possible to reimburse him fully, and still do entire justice to the general creditors -- for it can hardly be called unjust or unfair to leave them exactly where they would have been had there been no suretyship, with their rights neither impaired nor enlarged by an arrangement with which they had nothing to do and which was purely fortuitous so far as they are concerned. To hold otherwise would really be to deny the surety subrogation altogether. If he be limited to the actual amount that he has expended or has contributed toward the payment of the creditor's claim, then he might as well come in as a direct creditor by virtue of the debtor's obligation to indemnify him.
Of course, a subrogated surety who has paid less than the entire amount of the creditor's debt will never be allowed to recover more than he has actually advanced, but, until he is made whole I see no reason why he should not be clothed with all the creditor's rights and remedies as they stood at the time of the debtor's insolvency.
This brings us to the question of the effect of the creditor's realization from the sale of the collateral. The creditor in this case had the right to prove and receive dividends upon its full claim, as it stood at the time of the debtor's insolvency, without crediting collections from collateral pledged to secure the debt. This was settled beyond dispute in Merrill v. National Bank of Jacksonville, 173 U.S. 131, 19 S. Ct. 360, 43 L. Ed. 640, as the rule for the ratable distribution of the assets of an insolvent national bank. If the subrogee is to be placed as far as justly possible in the precise position of the one to whose rights he is subrogated, then he should be entitled to assert those rights as they stood at the date of the insolvency, and the basis for his dividends, no more than that of the creditor, should not be cut down by the realization on collateral.
I am therefore of the opinion that the plaintiff is entitled to participation in the liquidation of the Bank on the basis of $135,000, or the full amount of the Commonwealth's claim, save that in no event can it receive more than it has actually paid the Commonwealth.
If the foregoing view of the plaintiff's rights is correct, there is no reason why interest should not be allowed. The dividend was declared and became payable immediately thereafter. It was never tendered to the plaintiff in full, nor was the partial tender in a form which the plaintiff could accept without waiving its rights to the balance.
Counsel fees are not allowable to the plaintiff.
The parties may submit an order for judgment in accordance with the foregoing opinion.
(1) I do not regard the Pennsylvania decisions as controlling. What is involved here is the distribution of the assets of an insolvent national bank. Under the Federal Banking Law, 12 U.S.C.A. § 194, distribution is to be "ratable," and it is for the Federal Court to determine what that means in each particular case. Of course, in so doing, considerations of underlying equitable principles as well as fairness and justice to all interests govern.
(2) The defendant relied principally upon two decisions of Circuit Courts of Appeals in other Circuits.
Ward v. First National Bank of Caruthersville, 8 Cir., 76 F.2d 256, was a case in which the surety (not the creditor) held collateral pledged by the debtor. It is perhaps distinguishable upon that and the further ground that what was really involved was the surety's rights as a direct creditor of the debtor upon the latter's contract to indemnify it (though the Court seems to have observed no distinction between this right and the equitable remedy of subrogation). At any rate, the practical effect of the decision was to deny the surety the right of subrogation.
Maryland Cas. Co. v. Cox, 6 Cir., 104 F.2d 354, 358, is, at any rate so far as certain statements contained in the opinion are concerned, in conflict with the principles upon which I have reached my conclusion in the present case. The Court there said, referring to a surety who had paid part of the creditor's claim (the balance having been recovered from other sources and the creditor paid in full), "It is as though the appellant had purchased a part of the debt. It did not pay the whole debt and is not entitled to collect upon the whole debt * * *." I can only say that, as applied to a case in which the creditor had been made whole, I can find no other authority for this statement of the law. It limits the surety to his claim on the debtor's contract of indemnity and, although the creditor is no longer interested, denies the surety the remedy of subrogation. It seems quite clear that the decisions go to this length only where the creditor's debt has not been discharged. The Court in the Cox case also pointed out that there were other sureties on the same debt, and that to allow each of them to prove separately on the basis of the entire debt would be unfair and a duplication. No doubt it would be, but there should be no difficulty, under equitable rules, in pro-rating between sureties in a situation of that kind.In the present case the question does not arise, because the plaintiff is the only surety.
The question does not seem to have been dealt with in this Circuit. Piedmont Coal Co. v. Hustead, 3 Cir., 294 F. 247, 32 A.L.R. 556, would seem to indicate that the Court felt that a surety who has paid part of the claim is entitled to subrogation by way of substitution to the entire claim, even in a case where the creditor voluntarily remitted about 10% of the claim to the debtor, and so was not quite paid in full. However, I do not go so far as to say that I regard this case as dispositive of the present one, because it is not clear to what extent subrogation was allowed.
(3) It is a fact that the Commonwealth made an assignment of its entire claim to the plaintiff, but, inasmuch as I have fully sustained the plaintiff's position, upon the ground that it is entitled to be substituted for the Commonwealth by subrogation, it is unnecessary to consider whether, independently of that right, the plaintiff's position could have been sustained upon the assignment alone.
© 1992-2004 VersusLaw Inc.