Court Opinion

ID: 9444841
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:13:49.941265+00
Date Added: 2024-06-11T17:30:01.883933
License: Public Domain

SOPER, Circuit Judge
(dissenting).
This is an appeal from an order of the District Court dismissing a petition in bankruptcy filed on August 16, 1954 against L & M Realty Corporation, a Virginia corporation, based on the ground' that on August 12, 1954' the corporation had committed an act of bankruptcy in that while insolvent, it paid in full a note of $9,000 owing by it to the National Bank of Commerce and a note of $5,000' owing by it to the Seaboard Citizens-Bank, thereby' making a preferential transfer, as defined in 11 U.S.C.A. § 96' sub. a(l), the effect of which was to> enable the banks to obtain a greater percentage of their debts than other creditors of the same class.
The facts are simple and undisputed.. The only stockholders of the corporation were Dr. Louis S. Leo and Dr. Edward' Myers. The only creditors of the corporation were the two banks in the sums mentioned, and the two stockholders, each of whom.had loaned the corporation approximately $17,000. Each of them had' also endorsed the notes held by the banks. The only asset of the bankrupt corporation was the sum of $14,000 in cash, and this was used, as we have seen, to pay the notes held by the banks. At the time that the petition in bankruptcy was filed Leo was dead and his estate , was insolvent. The payments to the banks were made at the instance of Myers, so that he would *93not be obliged as an endorser to pay more than his fair share of the notes held by the bank. The petition in bankruptcy was filed by the executrix of Leo in the hope that the monies paid to the bank might be recovered as preferential payments so that the creditors of the insolvent estate of Leo might participate in the distribution of the assets of the bankrupt corporation. In such case Myers would be obliged to make good the shortage to the banks.
From these circumstances it is manifest that the payments to the banks were not preferential in the statutory sense since they did not deprive any creditor of a share of the bankrupt’s estate which he was entitled to receive. It is true that in the rule set forth in Swarts v. Fourth National Bank, 8 Cir., 117 F. 1, and subsequent decisions, Leo and Myers belonged to the same class of creditors as the banks although the notes held by the banks were endorsed by them; but Leo and Myers were not entitled to share the assets of the bankrupt equally with the banks because they had surrendered their right to participate by their contracts of endorsement until the banks had been paid. The banks of course had no lien on the assets and would have had no priority over other creditors had there been any; but they were entitled to be paid before the creditors who had endorsed the obligations which they held.
The equitable principle has been frequently laid own and applied that a surety may not share a bankrupt’s estate on equal terms with creditors whom the surety has undertaken to secure. In American Surety Co. v. Westinghouse Electric Mfg. Co., 296 U.S. 133, 59 S.Ct. 9, 80 L.Ed. 105, it was held that a surety company, which had executed a statutory construction bond to satisfy the claims of labor and material men against the building contractor, and had paid the full amount of its bond, had no right to compete with creditors of the contractor who had not been paid for labor or material; and the same rule was applied in American Surety Co. of New York v. Sampsell, 327 U.S. 269, 66 S.Ct. 571, 90 L.Ed. 663 as to the claims of material men who had not filed their claims in due time and had thereby lost their right to recover under the bond. The Supreme Court went further in Jenkins v. National Surety Co., 277 U.S. 258, 48 S.Ct. 445, 72 L.Ed. 874, where it held that the surety company could not compete with the creditor it had agreed to protect, although the surety’s claim was not based on the right of subrogation but upon a separate agreement of indemnity between the surety company and, the principal in the bond.1
It is contended that this principle should not be applied in the instant case because the claims of Leo and Myers are independent of the claims of the banks, whereas, in the cited cases, the rule was applied to claims of the surety which were connected with or grew out of the obligations which it had assumed. There is, however, no intimation in the decided cases that the equitable principle should be strictly limited to the circumstances therein disclosed; and there is no good reason why it should be so limited. Moreover, it is not necessary for our present purposes to hold that the principle should be extended to all cases in which one creditor has endorsed or guaranteed the indebtedness due another. It is sufficient to point out that under the unusual circumstances of the pending case, it would be inequitable to permit the endorsers to press their claims in competition with the claims of the banks.
The injustice of such a proceeding is easily shown. Except for the limited li*94ability of the stockholders for the debts of the L & M Realty Company, the business in effect belonged to and was conducted by Leo and Myers as if they were partners each of whom had a one-half interest in the enterprise. When the business was in need of money they advanced additional sums in the form of loans to carry it on and when more money was needed they persuaded the banks to make loans to the corporation upon their endorsements. It would obviously be most inequitable to permit the owners of the business to apply its assets to the payment of their own claims until they had made good on their guarantees to the banks. If, in the cited cases, it was inequitable for a surety company, which had completely complied with its contract of indemnity by paying to the creditors the full amount of its bond, to compete with the creditors of the bankrupt contractor, how can the endorsers in the instant case, who have paid no part of the obligations which they guaranteed, be allowed to participate ?
It is conceded in the opposing argument that if Leo’s estate were solvent, the payments to the banks would not have prejudiced the other two creditors because each of them would have been relieved of his obligation as endorser. This is true, but it is also conclusive of the whole controversy. It is manifest that Leo, insolvent, had no greater claim against the corporation than Leo, solvent, would have had. Undoubtedly, the effect of the payments to the banks was to deprive Leo’s creditors of a share of the assets of the bankrupt corporation, but Leo’s creditors had no greater right to object than Leo himself. The argument confuses the creditors of Leo with the creditors of the bankrupt corporation. The section of the bankruptcy act which defines the preferential transfer of the property of an insolvent is designed to protect Ms creditors; but is not concerned with the creditors of his creditors.

. See also Fonts v. Maryland Cas. Co., 4 Cir., 30 F.2d 357; See also Central States Corp. v. Luther, 10 Cir., 215 F. 2d 38, 46; In re Prudence-Bonds Corp., 2 Cir., 102 F.2d 531, 534; Amick v. Columbia Casualty Co., 8 Cir., 101, F.2d 984, 986.