Knaffl v. Knoxville Banking & Trust Co.

• Decision Date: 12 January 1916
• Citation: 182 S.W. 232,133 Tenn. 655
• Parties: KNAFFL v. KNOXVILLE BANKING & TRUST CO. IN RE BACON.
• Court: Tennessee Supreme Court

182 S.W. 232

133 Tenn. 655

KNAFFL v. KNOXVILLE BANKING & TRUST CO.

IN RE BACON.

Supreme Court of Tennessee.

January 12, 1916

Appeal from Chancery Court, Knox County; Will D. Wright, Chancellor.

Suit by Joseph Knaffl against the Knoxville Banking & Trust Company in which Charles H. Bacon filed a petition. From a decree sustaining a demurrer to the petition, petitioner appeals. Affirmed.

Charles T. Cates, Jr., of Knoxville, for appellant.

Wright & Jones, D. C. Webb, and Hugh M. Tate, all of Knoxville, for appellee.

FANCHER J.

The suit in which this petition is filed is a proceeding by complainants on behalf of themselves and all other creditors of the Knoxville Banking & Trust Company for the purpose of administering the affairs of said corporation as an insolvent concern. This particular intervening petition was filed by Charles H. Bacon to recover of the receiver of said Knoxville Banking & Trust Company in round numbers $28,000, being the amount, with interest, of a bond executed by the said Charles H. Bacon and others, as sureties for the Knoxville Banking & Trust Company, as principal, to secure the city of Knoxville in the deposit of moneys in said banking institution.

Petitioner avers that judgment was rendered against him and all the other sureties on said bond, which judgment was paid by him alone; the other sureties being insolvent. This bond provided that the Knoxville Banking & Trust Company will "truly keep all sums of money deposited with it by the city of Knoxville, and shall pay over the same, and each and every part thereof, upon the written demand of the said city of Knoxville."

Petitioner avers, in effect, that he is entitled to recover of the receiver such pro rata as he may be entitled to on the $28,000 paid by him, upon the ground that he will be subrogated to all the rights of the city of Knoxville to the extent of the payment made by him to the city on this obligation.

The petition does not aver that this payment was in full of all sums of money so deposited. On the contrary, it is admitted in the petition that the city had on deposit more than the amount of the bond, and has received only a 30 per cent dividend. The amount of the city's deposit is shown by the bill or petition of the said city of Knoxville filed in the general cause which was ordered to be sent up with the transcript to be $60,000, and in the briefs of counsel this sum is treated as the total amount of the deposit.

The receiver demurred to this intervening petition upon three grounds. The first ground of demurrer, we think, is conclusive of the case, to wit, that it was not averred that the entire indebtedness due the city of Knoxville from the Knoxville Banking & Trust Company has been paid, and consequently the petitioner would not be entitled to subrogation or to any other relief against the Knoxville Banking & Trust Company or its receiver. It appears that, if the city should receive the full amount which will be finally paid in the receivership proceeding, it will not receive a sufficient amount to cover the entire indebtedness.

A surety is not entitled to subrogation until the debt is paid in full, the creditor in the meantime left in control of the debt, and all the remedies for collection. A pro tanto assignment or subrogation will not be allowed. The reason is that subrogation is a creature of equity and will never be allowed to the prejudice of the creditor. Harlan v Sweeny, 1 Lea, 686; Gilliam v. Esselman, 5 Sneed, 86; 37 Cyc. 408.

"If the surety, upon making a partial payment, became entitled to subrogation pro tanto, and thereby became entitled to the position of an assignee of the property to the extent of such payment, it would operate to place such surety upon a footing of equality with the holders of the unpaid part of the debt, and, in case the property was insufficient to pay the remainder of the debt for which the guarantor was bound, the loss would logically fall proportionately upon the creditor and upon the surety. Such a result would be grossly inequitable." Columbia Finance, etc., Co. v. Ky. Un. R. Co., 60 F. 794, 9 C. C. A. 264.

In New Jersey Midland R. Co. v. Wortendyke, 27 N. J. Eq. 658, the New Jersey court said:

"The right of subrogation cannot be enforced until the whole debt is paid. And until the creditor be wholly satisfied there ought and

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