Swarts v. Fourth Nat. Bank

• Citation: 117 F. 1
• Decision Date: 21 July 1902
• Docket Number: 1,695.
• Parties: SWARTS v. FOURTH NAT. BANK OF ST. LOUIS.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

117 F. 1

SWARTS v. FOURTH NAT. BANK OF ST. LOUIS.

No. 1,695.

United States Court of Appeals, Eighth Circuit.

July 21, 1902

Syllabus by the Court.

Section 60a furnished the legal and controlling definition of the preference specified in section 57g and other parts of the bankrupt act of 1898.

The test of a preference is the payment, out of the bankrupt's estate, of a larger percentage of the claim of a creditor than other creditors of the same class receive from that estate. and it is not whether or not, in view of the obligations of sureties to pay the claim, the payment benefited the preferred creditor.

Payments by the bankrupt, while insolvent, within four months prior to the filing of the petition in bankruptcy against him, upon his indorsed notes, which the indorsers would have paid if he had not, constitute a preference, whether the creditor preferred derived any benefit from these payments or not.

A creditor who has several claims of the same class, upon one of which he has received a preference, must surrender the preference 0efore any of his claims can be allowed.

The status of their claims at the time of the filing of the petition in bankruptcy fixes the rights of the creditors to share in the estate of the bankrupt, under the bankrupt act of 1898.

The meaning of the term 'class' in the bankrupt act should be derived, and the classification of creditors thereunder should be made, from the provisions of that act.

The test of the classification of creditors under the bankrupt act of 1898 is the percentage of their claims they are entitled to draw out of the estate of the bankrupt, and not the relations of the creditors to parties other than the bankrupt. If they are entitled to receive the same percentage, they are in the same class; if different percentages, in different classes.

Creditors whose claims are secured by the indorsement or guaranty of one or more third persons are in the same class as those whose claims are not thus secured, when they are entitled to draw out of the bankrupt estate the same percentage on their claims.

A bank which held two series of notes of a bankrupt, one for $35,000, secured by two insolvent accommf xodation makers and one for $25,000, secured by four accommodation makers some of whom were solvent, received payments on the latter series, to the amount of $14,600, from the bankrupt while he was insolvent, and within four months of the filing of the petition in bankruptcy against him. Held, the bank was in the same class of creditors as holder of the second series of notes as it was as holder of the first series, and its claim based upon the first series, was not allowable unless it surrendered the preference it received by the payments upon the second series.

The disqualification of a claim for allowance created by a preference inheres in, and follows every part of, the claim whether retained by the creditor or transferred to another, until the preference is surrendered. After the bank had received the $14,600 on the notes for $25,000, the solvent accommodation makers paid the balance remaining due upon them. Held, both the accommodation makers' claim for the $10,400, and interest, which they paid, and the bank's claim for the $35,000, were disqualified for allowance until the $14,600 was surrendered to the trustee of the bankrupt estate.

If the bank surrenders the $14,600, it will become entitled to the allowance of its claim for $60,000 in full, and the solvent accommodation makers will be entitled to the allowance of no claim for the $10,400 and interest which they have paid.

Accommodation makers, indorsers, or sureties upon the obligations of an insolvent debtor are not discharged from liability to pay them by the innocent acceptance, by their creditor, of payments thereon by the debtor, which the creditor is subsequently required to, and does, surrender to the latter's trustee in bankruptcy as a condition of the allowance of its claim under section 57g of the bankrupt act of 1898.

A creditor who holds the obligations of a bankrupt which have been partly paid by an accommodation maker, an indorser, or a surety, may prove and have his claim allowed, against the estate of the bankrupt, for the full amount owing by the bankrupt on the obligations. If the dividends on those obligations, plus the amount previously paid by the surety, amount to more than the obligations, the creditor will hold the surplus in trust for the surety.

David Goldsmith (A. L. Abbott, on the brief), for appellant.

Lee Sale (M. N. Sale, on the brief), for appellee.

On February 6, 1900, the Siegel-hillman Dry Goods Company, a corporation, was adjudged a bankrupt on the petition of its creditors, which was filed on December 30, 1899. Four months before the filing of the petition, the Fourth National Bank of St. Louis held a claim of $60,000 against this corporation, which was evidenced by a series of promissory notes signed by the company, and indorsed by H. A. Loeb and B. Hillman, which amounted to $35,000, and by another series of promissory notes signed by the corporation, and indorsed by H. A. Loeb, B. Hillman, L. Regenstein, and F. Siegel & Bro., which aggregated $25,000. All the indorsements were placed upon these notes before they were discounted for the accommodation of the corporation, and for the purpose of giving credit to the notes, so that the indorsers stood in the relation of makers to the bank, and of accommodation makers or sureties to the dry goods company. Within four months preceding the filing of the petition in bankruptcy, the dry goods company, while it was insolvent, paid to the bank, which did not have reasonable cause to believe that it was intended thereby to give a preference, the sum of $14,600 upon some of the notes which were indorsed by Siegel & Bro. On February 21, 1900, Siegel & Bro. paid the $10,400 and interest which remained unpaid upon the notes which they had indorsed, and subsequently proved up this payment as a claim against the estate of the bankrupt. The bank proved its claim against the bankrupt's estate for $35,000 and interest, based upon the notes which had been indorsed by Loeb and Hillman, but which did not bear the names of Regenstein or Siegel & Bro. The trustee moved to expunge the claim of the bank unless it surrendered the $14,600 which it had received from the estate of the bankrupt within four months preceding the filing of the petition. The referee granted the motion. The district court reversed this decision, and directed the referee to deny the motion. From the decree to this effect, the trustee has appealed to this court.

Before SANBORN and THAYER, Circuit Judges, and LOCHREN, District Judge.

SANBORN Circuit Judge, after stating the case as above, .

May a creditor of a bankrupt whose claim is evidenced by numerous promissory notes secured by different indorsers or accommodation makers accept from the insolvent, within four months of the filing of the petition in bankruptcy against him, payment in part of the notes secured by the solvent indorsers, and then obtain the allowance of that portion of his claim against the bankrupt upon which the solvent indorsers were not liable, without a surrender of the payment he has thus obtained? This is the primary question which this case presents.

No one can become familiar with the bankrupt law of 1898 without a settled conviction that the two dominant purposes of the framers of that act were: (1) The protection and discharge of the bankrupt; and (2) the distribution of the unexempt property which the bankrupt owned four months before the filing of the petition in bankruptcy against him, share and share alike, among his creditors. All the earlier sections of the act are devoted to the security and relief of the bankrupt, and, when the distribution of his property is reached, the provisions relating to it are all drawn from the standpoint of the insolvent, and not from that of his creditors. The rights and privileges of the bankrupt, and the equal distribution of his property, dominate every provision, while the rights, wrongs, benefits, and injuries of his creditors are always incidental, and secondary to these controlling purposes. Section 60a contains the legal and controlling definition of the preference specified in section 57g and the other parts of the bankrupt act. 30 Stat.c. 541, pp. 562, 560; Kimball v. E. A. Rosenham Co. (C.C.A.) 114 F. 85, 7 Am.Bankr.R. 718, 719; Pirie v. Trust Co., 182 U.S. 438, 21 Sup.Ct. 906, 45 L.Ed. 1171. But this definition of a preference was not written from the station of the creditor, but from that of the debtor. It is not the act of the creditor, but the act of the debtor, which gives it,-- which produces it. The controlling thought is not the benefit or injury to the creditor, but the equal distribution of the property of the bankrupt among the holders of the provable claims against him.

It is contended that there was no preference by the payment by the bankrupt of the $14,600 to the bank on the notes of its solvent indorsers, because the bank derived no benefit therefrom. It is said that the bank would have received the full payment of these notes from the indorsers of the bankrupt if nothing had been paid upon them by the corporation. The argument assumes a fact which does not really exist, for the presumption always is that cash in hand is more valuable and useful than the legal liability of any party to pay it. But, if the bank had derived no benefit from this payment, its legal effect would not have been different. When the authors of paragraph 60a prepared the legal definition of a preference, they were neither considering nor dealing with the promises, liabilities, payments, or acts of others than the bankrupt. They were treating...