Opinion ID: 558657
Heading Depth: 2
Heading Rank: 2

Heading: Subrogation and 11 U.S.C. Sec. 509(a)

Text: 11 Leroy argues in his cross-appeal that the district court erred in determining that Bernadine could subrogate a $130,000 claim against Leroy's estate. The relevant statute provides: [A]n entity that is liable with the debtor on ... a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment. 11 U.S.C. Sec. 509(a) (1988). It is undisputed that because Bernadine co-signed the promissory notes to the FLB, she was jointly and severally liable with Leroy for the $356,000. 12 Leroy claims that Bernadine is not entitled to subrogation because she fails the five-part Sec. 509(a) subrogation test set out in In re Leedy Mortgage Co., 111 B.R. 488 (Bankr.E.D.Pa.1990). Under Leedy, for a claimant to be entitled to subrogation: 13 1) Payment must have been made by the subrogee to protect his own interest. 14 2) The subrogee must not have acted as a volunteer. 15 3) The debt paid must be one for which the subrogee was not primarily liable. 16 4) The entire debt must have been paid. 17 5) Subrogation must not work any injustice to the rights of others. Id. at 492. 4 18 As regards the five-part test, Leroy argues that Bernadine fails the first, second, and fourth parts. Parts one and two concern whether the subrogee made the payment as a volunteer and in the subrogee's own interest. Leroy's contention that Bernadine acted as a volunteer is meritless. Because Bernadine was jointly and severally liable for the $356,000 owed the FLB, her attempt to discharge the indebtedness was not voluntary, see In re Bugos, 760 F.2d 731, 734-35 (7th Cir.1985); In re Zoglman, 78 B.R. 213, 215 (Bankr.W.D.Wis.1987), and was in her own interest. See In re Cooper, 83 B.R. 544, 547 (Bankr.C.D.Ill.1988); Zoglman, 78 B.R. at 215. 5 19 The fourth part of the test requires the subrogee to pay the entire debt. Leroy argues that because he still owes the FLB $760,000 in secured debt, plus $77,000 in unsecured debt representing a deficiency judgment, Bernadine's assignment did not satisfy the entire debt. This argument is meritless. The FLB's $356,000 claim was separate from the other debts Leroy had to the FLB, and is treated separately in Leroy's Fourth Amended and Substituted Plan for Reorganization. Appellee's App. at 14. Bernadine's assignment did satisfy the $356,000 debt, and thus the latter portion of part four is satisfied. 20 This still leaves the issue of whether Bernadine's collateralized assignment constitutes payment under the statute. Although there is a dearth of relevant case law on this issue, the secondary authorities agree that to subrogate a claim, payment in the technical sense is not required. See 73 Am.Jur.2d Subrogation Sec. 29 (1974) (Payment of the debt need not necessarily be made in money to entitle the party making the payment to subrogation. Whatever discharges the liability and is accepted as payment is sufficient.); 83 C.J.S. Subrogation Sec. 48(a) (1953) (It is immaterial in what way a surety satisfied the debt provided he was discharged from liability to his creditor....); see also Black's Law Dictionary 1016 (5th ed.1979) (defining payment as a discharge of an obligation or debt). Similarly, a leading bankruptcy treatise takes a broad approach to the payment requirement: A partial discharge of the principal debt by the codebtor is clearly covered by section 509(a).... Section 509(a) also clearly applies to a codebtor who discharges the principal debt in full. 3 Collier on Bankruptcy p 509.02 (15th ed.1990). In this case, Bernadine discharged the debt by means of assigning up to $130,000 of her interest in Brady Street. Therefore, we conclude that Bernadine's collateralized assignment constitutes payment under Sec. 509(a). 21 Leroy also alleges matters that are not properly before us, hoping to convince us that the equities favor him. On the contrary, the equities are clearly on Bernadine's side on this issue. The clear language of the divorce decree states that Leroy was responsible for the couple's debts to the FLB. Bernadine helped satisfy those debts. Therefore, it would be unfair to allow Leroy to avoid his obligations under the divorce decree at Bernadine's expense.