American Surety Co. v. Bethlehem Nat. Bank

• Decision Date: 06 March 1940
• Docket Number: No. 514.,514.
• Parties: AMERICAN SURETY CO. OF NEW YORK v. BETHLEHEM NAT. BANK OF BETHLEHEM, PA., et al.
• Court: U.S. District Court — Western District of Pennsylvania

33 F. Supp. 722

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

No. 514.

District Court, E. D. Pennsylvania.

March 6, 1940.

Frank P. Slattery, of Wilkes-Barre, Pa., and Rutledge Slattery, of Philadelphia, Pa., for plaintiff.

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

KIRKPATRICK, District Judge.

This is a suit by the surety upon a bond, given by the now insolvent Bethlehem National Bank as security for the deposit of the Commonwealth of Pennsylvania, to recover dividends declared by the receiver. The right of the plaintiff to dividends is not disputed, but the amount is. The point at issue is the basis for the dividend, that is, the amount of the claim upon which it should be calculated and paid.

The case came before the Court upon a motion to dismiss, but, inasmuch as it appeared at the argument that no facts were in dispute, the parties filed a stipulation (which for all practical purposes amounts to an amendment of the complaint and an answer admitting all fact allegations) and agreed that the Court should dispose of the case as on a rule for judgment on the pleadings.

When the Bank closed, the Commonwealth's deposit amounted to $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, of the par value of $12,000, with the Commonwealth.

Seven months after the Bank closed, the Commonwealth was paid $50,000 by the plaintiff on account of its liability as the Bank's surety.

Five months later a dividend of 40% was declared, and the Commonwealth received an additional $54,000 from the receiver.

A month after that, the Commonwealth sold the pledged securities for $12,411.44, and shortly thereafter the plaintiff paid the Commonwealth $18,588.56, or the balance of its deposit. In all the plaintiff paid the Commonwealth $68,588.56, not counting interest.

The plaintiff takes the position that it is entitled to dividends upon the basis of the full amount of its principal's deposit in the Bank ($135,000). The receiver contends that the dividend should be on a basis, not of the full amount of the deposit, but either (a) of the actual amount paid by the plaintiff to the Commonwealth in discharge of its suretyship liability ($68,588.56), or (b) of the amount of the deposit reduced by the amount of the Commonwealth's recovery from the pledged collateral ($12,411.44). Upon this latter theory, the basis of the dividend would be $122,588.66. The receiver has made tenders in accordance with both theories.

In stating the general principles which apply to this case it will be convenient to use the term "the creditor" when referring to the creditor secured by the surety bond (here the Commonwealth), and the term "general creditors" collectively for all other creditors entitled to share in dividends. The Bank is, of course, the debtor, and the plaintiff the surety.

The case before us is that of a surety asserting its right to dividends upon the whole claim of the creditor whom it secured, and to the benefit of the rule which would allow the creditor dividends on its claim without reduction by the realization from collateral. The creditor has received full payment of his claim. Part of it was paid by the debtor; part of it was realized from the debtor's collateral; and the surety has paid the balance. The debtor is insolvent.

It is highly important to have clearly in mind that the surety is claiming subrogation — that is, substitution in place of the creditor. It also has (but is not here asserting) a direct claim against the debtor, as a creditor in its own right, by virtue of the debtor's implied agreement to indemnify it for any payment which it might be required to make under the contract of suretyship. The distinction between the two kinds of claims is pointed out clearly in Mellette etc. Co. v. H. Poehler Co., D. C., 18 F.2d 430.

The doctrine of subrogation is a device adopted or invented by equity to provide that debts ultimately will be discharged by those who in good conscience ought to pay them. Conversely, it is an appropriate means of preventing unjust enrichment. If a surety is made to pay, it is only just that he should have full reimbursement, out of the assets of the principal debtor, so far as it can be given him without injustice to others. The rights and interests which must be balanced in determining what is a just distribution are those of the surety, the creditor whom he has secured, and the general creditors.

As long as the creditor remains unpaid in whole or in part it would be obviously unfair and unjust to him to permit the surety to receive any part of the estate of an insolvent debtor. To do so would decrease the creditor's dividend by his proportionate share of the payments to the surety, and thus allow the surety to compete against him — in derogation of the purpose of his contract of suretyship.

However, when the creditor has received everything due him and his claim has been discharged, there is no further reason, so far as he is concerned, why the surety's right to reimbursement should be suspended. This is, of course, true whether the creditor has been paid in whole by the surety or whether part of his claim has been recovered from the debtor or the debtor's collateral. There may have been some confusion about this formerly, but there is no doubt at the present time that where the claim of the creditor has been satisfied, from whatever source, surety is entitled to subrogation.

The creditor, having been paid, and so eliminated as a factor in the problem, it remains to balance the surety's rights...