American Surety Co of New York v. Sampsell
| Decision Date | 25 February 1946 |
| Docket Number | No. 142,142 |
| Citation | 90 L.Ed. 663,66 S.Ct. 571,327 U.S. 269 |
| Parties | AMERICAN SURETY CO. OF NEW YORK v. SAMPSELL |
| Court | U.S. Supreme Court |
Mr.Homer Cummings, of Washington, D.C., for petitioner.
Mr. Martin Gendel, of Los Angeles, Cal., for respondent.
This case raises questions concernin the equitable power of a federal bankruptcy court to subordinate claims of some creditors to those of others. The creditors are a surety entitled to subrogation for payments upon its surety bond and laborers and materialmen for whose benefit the bond was executed.
Stratton, now in bankruptcy, made certain alterations in factory buildings located in California. In connection with this project Stratton as principal, and the petitioner, American Surety Company of New York, as surety, executed a joint statutory bond for $39,500, by which they bound themselves to pay all persons furnishing materials for, or performing work on, the job. The bond strictly conformed in all respects with requirements of the California law governing laborers' and materialmen's liens and was filed and recorded as provided by Section 1183 of the California Code of Civil Procedure. Parts of the bond's language incorporated portions of Sections 1183 and 1187 of the California Code of Civil Procedure which provide that 'no action' on a recorded bond may be maintained unless within a specified statutory period a mechanics lien claim shall have been filed or the surety shall have been given notice of the unpaid claim.
Because of financial difficulties Stratton was unable to pay all the laborers and materialmen. Some of them, with claims aggregating $6,724.78, filed lien claims and gave notice within the statutory period and the surety paid their claims in full. Others failed to file claims or give the required notice and the surety did not pay them.
Stratton was later adjudged a bankrupt. The petitioner surety company filed a claim for the money it had been compelled to expend in payment of the materialmen and laborers who had given the statutory notice. Its claim rested on an agreement by Stratton to indemnify it and on the equitable doctrine of subrogation. Three of the materialmen and laborers who had failed to give notice also filed claims totalling $1,336.11 owed them for materials furnished and work performed. The referee allowed all of these claims including that of the surety company as general claims in bankruptcy. Upon motion of the respondent trustee, the referee subordinated the petitioner's claim to that of the unpaid laborers and materialmen, holding that '* * * as long as there are creditors of the class for whose benefit the original surety bond was written * * * the surety company cannot participate in dividends from the estate until these creditors have been paid in full.' Thus under the order the three unpaid laborers and materialmen were to receive in addition to dividends on their own claims a pro-rata share of dividends otherwise due the petitioner until they had been paid in full or the petitioner's dividend had been exhausted. The District Court sustained the referee's order, In re Stratton, 53 F.Supp. 131, and the Circuit Court of Appeals Affirmed, 9 Cir., 148 F.2d 986. We granted certiorari because of petitioner's contention that the order subordinating its claims failed to take into consideration contractual rights of the surety under state law.
Petitioner argues that because the state statute incorporated into the bond requires laborers and materialmen either to file a lien claim or notify the surety within a specified period after completion of the job, the referee erred in subordinating the surety's claim to those of the laborers and materialmen who had not complied with the statutory notice provision. The rights of those creditors, it is argued, had never, under California law, been more than inchoate, and even as such had been completely extinguished prior to the bankruptcy proceedings because of a failure to give the statutory notice. Consequently, the petitioner urges, these claims ought not to be preferred in a federal bankruptcy proceeding. We think this contention is without merit and that the order of the referee was correct.
We recently had occasion to reiterate that federal bankruptcy law, not state law, governs the distribut on of a bankrupt's assets to his creditors. Prudence Realization...
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