American Surety Co of New York v. Bethlehem Nat Bank of Bethlehem, Pa

• Citation: 314 U.S. 314,86 L.Ed. 241,62 S.Ct. 226
• Decision Date: 08 December 1941
• Docket Number: No. 29,29
• Parties: AMERICAN SURETY CO. OF NEW YORK v. BETHLEHEM NAT. BANK OF BETHLEHEM, PA., et al
• Court: United States Supreme Court

314 U.S. 314

62 S.Ct. 226

86 L.Ed. 241

AMERICAN SURETY CO. OF NEW YORK

v BETHLEHEM NAT. BANK OF BETHLEHEM, PA., et al.

No. 29.

Argued Nov. 12, 1941.

Decided Dec. 8, 1941.

Messrs. Rutledge Slattery and Geo. P. Williams, Jr., both of Philadelphia, Pa., for petitioner.

Mr. George P. Barse, of Washington, D.C., for respondents.

Mr. Justice FRANKFURTER delivered the opinion of the Court.

The facts of this case are simple. The Commonwealth of Pennsylvania had $135,000 on deposit in the Bethlehem National Bank. This deposit was secured by a $125,000 bond, upon which the plaintiff was surety, and by a pledge 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, 6 Cir., 104 F.2d 354; Ward v. First National Bank, 8 Cir., 76 F.2d 256; Fouts v. Maryland Casualty Co., 4 Cir., 30 F.2d 357, we brought the case here. 312 U.S. 677, 61 S.Ct. 828, 85 L.Ed. 1116.

The National Bank Act provides for the 'ratable' distribution of assets of insolvent national banks. R.S. § 5236, 12 U.S.C. § 194, 12 U.S.C.A. § 194. The question for decision is therefore one of federal law. Deitrick v. Greaney, 309 U.S. 190, 200, 201, 60 S.Ct. 480, 484, 485, 84 L.Ed. 694; Merrill v. National Bank of Jacksonville, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640; Davis v. Elmira Savings Bank, 161 U.S. 275, 16 S.Ct. 502, 40 L.Ed. 700; Cook County Nat. Bank v. United States, 107 U.S. 445, 448, 2 S.Ct. 561, 564, 27 L.Ed. 537. Congress has seen fit not to anticipate by specific rules solution of problems that inevitably arise in national bank liquidations. Instead, it chose achievement of a 'just and equal distribution' of an insolvent bank's assets through the operation of familiar equitable doctrines evolved by the courts. Davis v. Elmira Savings Bank, 161 U.S. 275, 284, 16 S.Ct. 502, 504, 40 L.Ed. 700; Jenkins v. National Surety Co. 277 U.S. 258, 267, 48 S.Ct. 445, 446, 72 L.Ed. 874. Among the oldest of these doctrines is the rule of subrogation whereby '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, 263, 2 S.Ct. 622, 623, 27 L.Ed. 719; Hodgson v. Shaw, 3 Myl. & K. 183, 191; Hays v. Ward, 4 Johns.Ch. 123, 130, 8 Am.Dec. 554.

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, 19 S.Ct. 360, 43 L.Ed. 640. 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, 267, 48 S.Ct. 445, 446, 72 L.Ed. 874, and one not guilty of inequitable conduct, United States v. Ryder, 110 U.S. 729, 737, 4 S.Ct. 196, 199, 28 L.Ed. 308. 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. United States ex rel. White v. Knox, 111 U.S. 784, 787, 4 S.Ct. 686, 687, 28 L.Ed. 603; Merrill v. National Bank of Jacksonville, supra, 173 U.S. at page 143, 19 S.Ct. at page 365, 43 L.Ed. 640; Ticonic Bank v. Sprague, 303 U.S. 406, 411, 58 S.Ct. 612, 614, 82 L.Ed. 926. 'The distribution is to be 'ratable' on the claims as proved or adjudicated; that is 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, 173 U.S. at page 143, 19 S.Ct. at page 365, 43 L.Ed. 640. 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.

To permit the surety to stand in the shoes of the secured creditor whose claim it has paid does not prejudice the rights of the general creditors. The extent of their participation in the distribution of the Bank's assets was fixed on the day it became insolvent. The surety will receive no greater share than would have been received by the Commonwealth had it not been for the circumstance that its claim was secured by a surety's bond. If, for one reason or another, the surety had withheld payment to the Commonwealth, the latter would have continued to receive dividends on the full amount of its claim, or if, on a nice calculation, the surety had at the outset satisfied its principal's obligation, it would have been entitled to share on the basis of the full amount. On the other hand, if the surety's participation should be limited to the extent now urged by the receiver, the other creditors would profit solely because of fortuitous circumstances and without any relation to reasons of intrinsic fairness. The extent of the participation of the surety, and therefore that of the other creditors, would depend on how, when, and against whom the secured creditor presses its claim. Cf. In re Thompson, D.C., 300 F. 215, 217, 218; Pace v. Pace's Adm'r, 95 Va. 792, 799, 30 S.E. 361, 44 L.R.A. 459. Such a result leaves too much to caprice or accident and is wholly at variance with the guiding criterion of 'ratable' distribution.¹

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, 524, 525, 60 S.Ct. 646, 650, 651, 84 L.Ed. 901.

Reversed.

Mr. Justice DOUGLAS, dissenting.

The only virtue possessed by Merrill v. National Bank of Jacksonville, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640, is the fact that it has been on the books for over forty years. It held that a secured creditor could receive dividends on the face amount of his claim even though that claim had been reduced by the value of the collateral between the date of insolvency and the date of distribution. That rule of distribution is inequitable and unfair to the run of depositors. It gives an advantage to the secured creditor unwarranted 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, 12 U.S.C.A. § 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 majority of the Court was of the view that whatever might be the power of Congress under the bankruptcy clause of the Constitution, the adoption of the bankruptcy rule,² in equity would be an invasion of 'prior' contract rights (173 U.S. at page 146, 19 S.Ct. at page 366, 43 L.Ed. 640)—an impairment of obligation of contract. And the reason for that conclusion was based on the theory that since '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.' 173 U.S. page 140, 19 S.Ct. page 364, 43 L.Ed. 640. For that reason it was held 'that the claims of creditors are to be determined as of the date of the declaration of insolvency'. 173 U.S....