American Surety Co. v. Bethlehem Nat. Bank

• Citation: 116 F.2d 75
• Decision Date: 27 November 1940
• Docket Number: No. 7518.,7518.
• Parties: AMERICAN SURETY CO. OF NEW YORK v. BETHLEHEM NAT. BANK OF BETHLEHEM, PA.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

116 F.2d 75 (1940)

AMERICAN SURETY CO. OF NEW YORK v. BETHLEHEM NAT. BANK OF BETHLEHEM, PA.

No. 7518.

Circuit Court of Appeals, Third Circuit.

November 27, 1940.

H. P. McFadden, of Bethlehem, Pa., for appellants.

Rutledge Slattery, of Phildelphia, Pa., and Frank P. Slattery, of Wilkes-Barre, Pa., for appellee.

Before CLARK, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

At the closing of the Bethlehem National Bank of Bethlehem, Pa., the Commonwealth of Pennsylvania had on deposit $135,000. It was secured by the bank's bond for $125,000 with the plaintiff as surety. As additional security the bank had pledged bonds with the Commonwealth, par value of which was $12,000. These bonds were sold for $12,411.44. The Commonwealth received the first dividend of 40% in the course of liquidation of the bank and the plaintiff paid the Commonwealth the balance. The total amount paid by the plaintiff, not counting interest, was $68,588.56.

The question before the court on this appeal is the basis upon which the plaintiff surety might prove and receive dividends. Plaintiff takes the position that it is entitled to dividends upon the full amount of its obligee's original bank claim which was $135,000. The court below, D.C., 33 F.Supp. 722, 724, after a carefully prepared and thoughtfully reasoned opinion, sustained the plaintiff's view. The receiver contends that plaintiff is entitled to participate in the liquidation of the bank to the extent of a claim of $68,588.56, the amount it actually paid to the Commonwealth. There is also the question of whether the plaintiff is entitled to interest upon further dividends which have been declared and paid to other creditors, but which the plaintiff has not received.

The difficulty with regard to the decision is clearly stated by the trial court in this language: "It is not easy to arrive at any solution which is entirely satisfactory and leaves one free from doubt as to the justice of the result. On the one hand, if the surety be allowed dividends on the full amount of the creditor's claim, they will be based upon an amount in excess of what he has expended, whereas the general creditors will be sharing only on the basis of their actual advancements. If, on the other hand, the surety is limited to the amount which he has actually paid as the basis of his claim, then the general creditors get a windfall, for no other reason than that one of them has bought and paid for additional protection which none of the others chose to take — for, of course, if there had been no suretyship, the creditor would be proving and receiving dividends on the full amount of his claim."

Nobody disputes the general right of a surety who pays a principal debtor's obligation to reimbursement and indemnity from the debtor whether expressly provided by contract or not. Nor does either party to this litigation dispute the general doctrine by which a surety who pays a creditor is subrogated to the creditor's rights. Restatement, Restitution § 162. The question here is much narrower, for it has to do, not with the broad principles of subrogation, but with the rights of a surety who has paid a part of a claim against a national bank which is in liquidation. Both the lower court and the parties agree that the Pennsylvania decisions are not controlling because what is involved here is the distribution of assets of an insolvent national bank. Again to quote from the opinion below: "Under the Federal Banking Law, 12 U.S.C.A. § 194, distribution is to be `rateable,' and it is for the Federal Court to determine what that means in each particular case. Of course, in so doing, considerations of underlying equitable principles as well as fairness and justice to all interests govern." 33 F.Supp. 722, 725.

One can make a formally logical argument in support of the surety's position. In Merrill v. National Bank of Jacksonville, 1899, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640, it was held by the Supreme Court, though not without very vigorous dissent, that the "equity rule" was the one to be applied as between a debtor and the creditors where a national bank was in liquidation. By that decision a creditor was permitted to prove in the liquidation proceedings for the full amount of his claim notwithstanding he was protected by collateral which covered a large part of it. That decision, of course, binds this court.¹ But that case did not concern a surety and, therefore, is not directly in point here. However, if a surety, upon paying the creditor, is entitled to step exactly into the creditor's shoes by the doctrine of subrogation, it is arguable that he has all the rights which the creditor had, including the right to prove for the full amount of the claim. As a possible makeweight it can be added that the surety in this case took an assignment from the creditor, after the surety had paid the sum due the creditor. This makeweight, however, has no added force since, at the time of the assignment, the claim had been discharged. We do not think that the assignment added anything to the rights which the surety already had. See Louisville Trust Co. v. Royal Indemnity Co., 1929, 230 Ky. 482, 20 S.W.2d 71.

The flaw in the argument is the major premise that subrogation involves a complete assimilation by the one subrogated of all of the creditor's rights. It is another illustration of the point that one can get out of a major premise all that he puts into it. Subrogation is not an inflexible legal concept nor a hard and fast rule like that of the common law which required words of inheritance to create an estate in fee simple. It is simply...