Source: https://supreme.justia.com/cases/federal/us/314/314/
Timestamp: 2019-04-24 00:13:37+00:00

Document:
1. In making the "ratable" distribution of assets of an insolvent National bank required by R.S. 5236, dividends must be declared proportionately upon the amounts of all claims as they stood on the date of insolvency. P. 314 U. S. 317.
2. Where a claim against an insolvent national bank secured by a surety bond is paid in part by collateral and by dividends from the estate and the remainder by the surety company, the surety is subrogated to the right of the creditor in future dividends, and its proportion of future dividends is to be calculated not upon the basis of what it paid, but upon the amount of the original claim. P. 314 U. S. 318.
Certiorari, 312 U.S. 677, to review the reversal of a judgment of the District Court fixing dividends in the winding up of an insolvent national bank.
of government bonds having a par value of $12,000. The bank became insolvent, and a receiver was appointed. Thereafter, the Commonwealth obtained, in round figures, $12,500 from the sale of the collateral and $54,000 as a 40% dividend on its claim, a total of $66,500. The remaining $68,500 was paid by the surety, thereby fully satisfying the Commonwealth's claim. The present suit arose out of three further dividends, of 20%, 10%, and 5%, respectively, declared by the receiver. The surety sought dividend payments on the basis of the original indebtedness, that is, $135,000. The receiver insisted that the extent of the surety's participation must be measured by the sum actually expended to discharge its principal's obligation, to-wit, $68,500. Reversing the decision of the District Court, 33 F.Supp. 722, the Circuit Court of Appeals for the Third Circuit upheld the receiver's contention. 116 F.2d 75. In view of conflicting expressions by the lower courts upon a question so important in the liquidation of national banks, cf. Maryland Casualty Co. v. Cox, 104 F.2d 354; Ward v. First National Bank, 76 F.2d 256; Fouts v. Maryland Casualty Co., 30 F.2d 357, we brought the case here. 312 U.S. 677.
"one who has been compelled to pay a debt which ought to have been paid by another is entitled to exercise all the remedies which the creditor possessed against that other."
Sheldon, Subrogation, 2d Ed., § 11; see Hampton v. Phipps, 108 U. S. 260, 108 U. S. 263; Hodgson v. Shaw, 3 Myl. & K. 183, 191; Hays v. Ward, 4 Johns.Ch. 123, 130.
Here, the surety was compelled to pay to the Commonwealth $68,500 which ought to have been paid by the bank. Of course, it succeeds to the Commonwealth's right to receive payment of $68,500 from the bank -- and in no event can the surety receive more. But, as a means of enforcing this right, the Commonwealth was entitled to share in all future dividends on the basis of its original claim of $135,000. Merrill v. National Bank of Jacksonville, 173 U. S. 131. Succeeding to the creditor's right, the surety also succeeds to the creditor's means for enforcing it. The surety is a special kind of secured creditor. For its claim against the principal is secured by its right of subrogation to the remedies of the creditor which it has been compelled to pay. Of course, this right can be availed of only by a surety alert in discharging its duty, Jenkins v. National Surety Co., 277 U. S. 258, 277 U. S. 267, and one not guilty of inequitable conduct, United States v. Ryder, 110 U. S. 729, 110 U. S. 737. In other respects, a right of subrogation is as much in the nature of a security as is a mortgage.
A "ratable" distribution requires that dividends be declared proportionately upon the amount of all claims as they stand on the date of the insolvency. This is settled law. White v. Knox, 111 U. S. 784, 111 U. S. 787; Merrill v. National Bank of Jacksonville, supra, at 173 U. S. 143; Ticonic Bank v. Sprague, 303 U. S. 406, 303 U. S. 411.
on one rule of proportion applicable to all alike. In order to be 'ratable,' the claims must manifestly be estimated as of the same point of time, and that date has been adjudged to be the date of the declaration of insolvency."
Merrill v. National Bank of Jacksonville, supra, at 173 U. S. 143. The basis of participation in the bank's assets by the Commonwealth was $135,000, the amount of the claim on the date of insolvency. The amount of the claim having been thus fixed on the date of insolvency, it did not shrink because of the extraneous circumstance of the creditor's forethought in securing partial satisfaction of its loss by going against the collateral and the surety.
A final consideration needs mention. The receiver cites several instances in which the Comptroller of the Currency has stated that the basis of a surety's claim is to be measured by the amounts it has expended. But there is wanting here any long continued practice which establishes its own law within the permissible area of administrative action. Cf. Inland Waterways Corp. v. Young, 309 U. S. 517, 309 U. S. 524-525.
* Reflecting the special policy of bankruptcy legislation favoring the general creditor against the secured creditor, the rule prevails in bankruptcy that dividends upon the claims of secured creditors "shall be paid only on the unpaid balance." § 57(h), 30 Stat. 544, 560, 11 U.S.C. § 93(h). It is settled, however, that the "bankruptcy" rule is inapplicable to the distribution of assets of insolvent national banks. Merrill v. National Bank of Jacksonville, 173 U. S. 131. There is no occasion to reexamine the correctness of that decision, the authority of which has never been questioned here, and was again recognized very recently. Ticonic Bank v. Sprague, 303 U. S. 406, 303 U. S. 412. Although the National Bank Act has been amended many times since its original enactment in 1864, 13 Stat. 114, the provision governing distribution of dividends has remained substantially intact. The construction given the provision in the Merrill case has been left unchanged by Congress.
by any provision of his contract. For it treats the claim as wholly unpaid even though it has been partially discharged by liquidation of the collateral. The impact on other creditors is oppressive. Under the rule of the Merrill case, a depositor with a $10,000 claim, secured by $5,000 worth of collateral, will be wholly paid if the insolvent bank pays a 50% dividend. On the other hand, an unsecured depositor with a $10,000 claim salvages under those circumstances only $5,000. A rule of distribution which sanctions such a discriminatory result violates the requirement for "ratable" dividends prescribed by the National Banking Act. R.S. § 5236, 12 U.S.C. § 194. This is no occasion, however, to elaborate on the point. It was fully covered in its historical and legal aspects by the dissenting opinions of Mr. Justice White and Mr. Justice Gray in the Merrill case.
"the creditor's rights in the trust fund are established when the fund is created, collections subsequently made from, or payments subsequently made on, collateral cannot operate to change the relations between the creditor and his co-creditors in respect of their rights in the fund."
(P. 173 U. S. 140.) For that reason it was held "that the claims of creditors are to be determined as of the date of the declaration of insolvency." (P. 173 U. S. 147.) There is serious question whether that foundation has not been swept away by William Filene's Sons Co. v. Weed, 245 U. S. 597.
"But, when the Courts without statute take possession of all the assets of a corporation under a bill like the present, and so make it impossible to collect debts except from the Court's hands, they have no warrant for excluding creditors, or for introducing supposed equities other than those determined by the contracts that the debtor was content to make and the creditors to accept. In order to make a distribution possible, they must, of necessity, limit the time for the proof of claims. But they have no authority to give to the filing of the bill the effect of the filing of a petition in bankruptcy so as to exclude any previously made and lawful claim that matures within a reasonable time before distribution can be made."
That theory runs counter to the assumption in the Merrill case (173 U.S. at p. 173 U. S. 136) that a creditor acquires a "vested interest in the trust fund" antedating distribution. For, if that assumption were valid, the claim in the Weed case, which had matured after the proceedings had been instituted, would have been disallowed. Such an assumption would likewise fail to take heed of the admonition of Mr. Justice Holmes that "supposed equities other than those determined by the contracts that the debtor was content to make and the creditors to accept" are not to be recognized.
". . . the preferential right arising from the contract of pledge is no no wise impaired by compelling the creditor to first exercise his preference against the security received from the debtor, and thus confine him to the specific advantage derived from his contract. Further, however, as the contract, construed in connection with the law governing it, restricts the secured as well as the unsecured creditor to a ratable dividend from the general assets, the secured creditor is prevented from enhancing the advantage obtained as a result of the contract for security by proving his claim as if no security existed, since to allow him to so do would destroy the rule of ratable division, subject and subordinate to which the contract was made."
And see Glenn, Liquidation (1935) § 530.
This analysis of the Merrill case is germane to the present problem not merely to focus the historical setting of the rule which we are asked to enforce. It is especially important because we are now asked to extend that rule to a special type of unsecured creditor.
surety, though it would fail to gain the preferred position of a secured creditor under the test of the Merrill case, is allowed to reach that position through the back door of subrogation.
"The right of subrogation is not founded on contract. It is a creature of equity; is enforced solely for the purpose of accomplishing the ends of substantial justice."
In determining whether it would be fair or equitable to allow the subrogation to the full extent of the creditor's rights and remedies, consideration will, of course, be given to the prejudice, if any, suffered by other creditors. But the mere fact that the other creditors will not be worse off than if the surety's principal had pressed the claim is not the sole solvent of the problem. We are not dealing with a mechanical rule. The question remains whether justice requires, or policy permits, the surety to succeed to his principal's privileged position.
remedies would clearly be against public policy by subverting, as far as it might prove effectual, the very object and purpose of the recognizance."
Id. p. 110 U. S. 737.
"the state's right to a preference over other creditors, being a sovereign right enjoyed for the benefit of all the people, cannot be transferred to individuals except by express legislative sanction."
(295 Pa. at p. 440). Though that case represents the minority view in the state courts, [Footnote 3] it is recognition of the healthy principle that application of the rule of subrogation should not be reduced to a conceptualistic formula.
claim not by looking for the principal's rights under its contract, but for reasons why this surety should be accorded priority over other unsecured creditors. Equity has regard not only for the rights of other creditors (Jenkins v. National Surety Co., 277 U. S. 258), but also for the stake which the surety has and which it is asking a court of equity to protect. A court of equity should neither "come to the aid of one" whose equity is "subordinate until claims superior in equity" have been satisfied (American Surety Co. v. Westinghouse Electric Mfg. Co., 296 U. S. 133, 296 U. S. 136), nor create superior equities on behalf of one who can show no more compelling reasons for preferred treatment than can those with whom he competes. Under such an approach, this surety would be denied a superior equity.
Here, the surety has only an unsecured claim of $68,500. Any reason for continuation of the discrimination against the general depositors of this bank disappeared when the surety's creditor was paid. No equity has been suggested for allowing this surety preferred treatment. It was paid to assume the risk of insolvency of the bank. It was paid by the bank itself. And it has not been shown that it charged a lower rate because of the rule of the Merrill case. In view of those circumstances, it should not be allowed the lion's share. It is entitled to reimbursement, but certainly in no greater an amount than the run of depositors. It is no answer to say that such a result would give the general depositors a windfall. Unless subrogation is to be a mechanical formula, this surety should be required to establish its special equity to preferred treatment -- reasons why it, unlike any other unsecured creditor, should enjoy the benefits of the discriminatory rule of the Merrill case.
Finally, it is suggested that, if the surety is not allowed this preference, much will be left to "caprice or accident,"
since the surety would have been entitled to share on the basis of the full amount if it had satisfied the creditor's obligation at the very outset. The answer to that is that we would then have to determine whether the Merrill case has survived the Weed case (see Clark, Proof by Secured Creditors in Insolvency and Receivership Proceedings, 15 Ill.L.Rev. 171), and, if so, whether it should be overruled. It is sufficient at this time to say that, in view of the flimsy basis on which the Merrill case rests and the oppressive nature of the rule it fashioned, it should not be extended.
MR. JUSTICE BLACK concurs in this dissent.
It should be noticed that the bankruptcy rule, now codified (Bankruptcy Act § 57(h), 11 U.S.C. § 93(h)), which allows the secured creditor to receive dividends only on the balance remaining after the value of the security has been deducted from the claim, did not derive from a special statutory provision. As pointed out by Mr. Justice Gray in his dissent in the Merrill case, 173 U.S. at 173 U. S. 174-175, the Bankruptcy Act of 1841 (5 Stat. 440) had no such provision. Yet its requirement for "pro rata" distribution (§ 5) was recognized by Mr. Justice Story, its draftsman, as permitting a secured creditor to prove only for the balance of his claim as remained after crediting the value of the security. Ex parte City Bank of New Orleans, 3 How. 292, 44 U. S. 315. That rule of construction followed the long established English bankruptcy rule. See Mr. Justice White, dissenting, 173 U.S. at pp. 173 U. S. 153-155. As stated by Lord Eldon in Ex parte Smith, 2 Rose Bank.Rep. 63-64, until the secured creditor's claim has been reduced by deducting the value of the security, "it is impossible correctly to say what the actual amount of it is."
By statute, a surety of the United States succeeds to the latter's priority. R.S. § 3468, 31 U.S.C. § 193. It should be noted, however, that, though the United States has priority against an insolvent, R.S. § 3466, 31 U.S.C. § 191, that priority has been held not to extend to an insolvent national bank. Cook County Nat'l Bank v. United States, 107 U. S. 445.
See Arant, Suretyship (1931), p. 363.

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