Maryland Casualty Co. v. Cox

• Decision Date: 07 June 1939
• Docket Number: No. 7991,7992.,7991
• Citation: 104 F.2d 354
• Parties: MARYLAND CASUALTY CO. v. COX. COX v. MARYLAND CASUALTY CO.
• Court: U.S. Court of Appeals — Sixth Circuit

104 F.2d 354 (1939)

MARYLAND CASUALTY CO. v. COX.

COX v. MARYLAND CASUALTY CO.

Nos. 7991, 7992.

Circuit Court of Appeals, Sixth Circuit.

June 7, 1939.

D. H. Hill Arnold, of Elkins, W. Va. (Lee F. Miller, Jr., and Orville S. Martin, both of Johnson City, Tenn., Fred E. Pausch, of Baltimore, Md., and D. H. Hill Arnold, of Elkins, W. Va., and Clarence H. Miller, of Johnson City, Tenn., on the brief), for appellant and cross-appellee Maryland Casualty Co.

F. H. Parvin, of Greeneville, Tenn., George F. Dugger, of Elizabethton, Tenn., and Jos. A. Caldwell, of Bristol, Tenn., for cross-appellant and appellee Cox.

Geo. F. Dugger, Hallie K. Riner, and E. M. Johnston, all of Elizabethton, Tenn., for appellee E. M. Johnston, trustee of C. L. Grindstaff, bankrupt.

Before HICKS, SIMONS, and ALLEN, Circuit Judges.

SIMONS, Circuit Judge.

From a suit in equity originally instituted by the United States for the use and benefit of various trustees in bankruptcy who had funds on deposit in a closed national bank, secured by (a) depository bonds, (b) a pledge of collateral belonging to the bank, and (c) a trust mortgage upon real estate given by a personal surety on one of the bonds, there emerges a controversy which involves (1) the right of the appellant as a surety upon a depository bond after payment of its full obligation to be subrogated to the rights of the bankruptcy trustees as secured depositors in the pledged collateral, (2) the extent to which the appellant under its right to subrogation may receive dividends from the insolvent estate, and (3) the right of the appellant to enforce contribution from a personal surety whose real estate was mortgaged as additional security for the depository bond signed by him.

The facts, though complicated, are not in dispute. The First National Bank of Elizabethton was designated in December, 1928, as a depository for the funds of bankrupt estates in the Eastern District of Tennessee, and to qualify executed a bond in the penal sum of $17,500, with the appellant as surety. In June, 1930, it appearing that further security should be provided, an additional bond in the sum of $60,000, with individual sureties, was furnished by the bank. Some of the signatories later desiring to be released, a new bond in the sum of $60,000 was substituted by the bank on April 14, 1931, under an order of the court providing that the sureties on the first $60,000 bond were not to be relieved of liability for deposits made prior to April 1, 1931. The last bond was signed by individuals connected with the bank as sureties, and simultaneously the bank executed to a trustee an assignment of collateral for the purpose of securing the bond, the assignment providing that it was expressly made to secure the United States of America in the payment of the bond primarily, and to secure the sureties secondarily. At the same time Grindstaff, one of the sureties on the bond, executed a trust deed or mortgage upon real estate to the trustee to further secure the deposits with the bank, the deed providing that in the event the bank or thereafter the grantor failed to pay the deposits on demand, the trustee was authorized to advertise and sell the property.

When the bank was declared insolvent on October 17, 1931, and a receiver was appointed for it, the several trustees in bankruptcy had on deposit therein the sum of $50,065.83. The United States by its bill sought the benefit of the pledged collateral, judgments against the bank and each of its sureties, and prayed that each of the parties be brought before the court to have all rights and equities determined. A receiver was appointed for the pledged collateral, and on September 27, 1932, the court entered its first decree, which was against the bank for the aggregate amount of the deposits, against the appellant for the penalty of its bond, and against each of the personal sureties for the penalty of the $60,000 bond. It fixed a lien upon Grindstaff's real estate to secure the payment of the bankruptcy deposits, and ordered the pledged collateral to be reduced to cash and applied to the satisfaction of the decree against the bank.

The appellant perfected an appeal to this court, which it later dismissed, whereupon the decree of December 22, 1932, was entered, reciting that the appellant had agreed to dismiss its appeal and pay the penalty upon its bond providing that an order be entered subrogating it to the rights of the obligees of the bond, and that the bond be surrendered and marked paid. The decree provided that the appellant be subrogated to the rights of the obligees in the bond, so far as collateral had been deposited by the bank for the security of the deposits, after the deposits had been paid in full and costs of proceedings satisfied. It also provided that the special receiver apply all funds coming to him on account of the disposition of collateral to the payment of the bankruptcy deposits until they had been paid in full, and that the appellant be subrogated to remaining funds or collateral in his hands as security for deposits, as well as to any dividends paid or to be paid by the receiver of the bank on the claims of the bankruptcy trustees. The question of the appellant's rights to contribution against the personal sureties on the bonds was sought to be reserved.

From the avails of the pledged collateral and the payment by the appellant of its obligation, the trustees in bankruptcy have been paid their deposits in full, and after payment of costs there remains in possession of the special receiver the sum of $4,522, together with some unliquidated collateral. The sureties upon the personal depository bonds have paid nothing, and all, including Grindstaff, whose estate is in process of liquidation in bankruptcy, are insolvent.

No effort was made by any of the parties to the litigation to amend or modify the 1932 decrees either during the term of court at which they were entered or during the succeeding term. On September 19, 1933, the appellee sought to set aside certain portions of the December, 1932, decree on the ground that neither he nor his counsel had any knowledge of its entry. The procedural steps that followed by way of amendments to pleadings, motions to strike, and so on, need not now concern us. On November 15, 1937, the court entered its last decree, adjudging the appellant a general unsecured creditor to the extent of $17,500, not entitled to subrogation to the rights of any other creditors or to contributions from any other sureties, and directing that the surplus cash and collateral remaining from the liquidation of the pledge be turned over to the bank's receiver. This decree further provided that the order of December 22, 1932, having been entered inadvertently and without notice to general creditors, be vacated in respect to the grant therein of subrogation to the appellant.

The first problem we have to deal with is the effect of the 1932 decrees upon the right of the appellant to be subrogated to the lien of the bankruptcy trustees upon the pledged collateral. The appellee assails the pledge as ultra vires and so invalid upon authority...