State Bank of Commerce v. United States F. & G. Co.

• Decision Date: 06 May 1930
• Docket Number: No. 3821.,3821.
• Citation: 28 S.W.2d 184
• Parties: STATE BANK OF COMMERCE v. UNITED STATES FIDELITY & GUARANTY CO.
• Court: Texas Court of Appeals

28 S.W.2d 184

STATE BANK OF COMMERCE v. UNITED STATES FIDELITY & GUARANTY CO.

No. 3821.

Court of Civil Appeals of Texas. Texarkana.

May 6, 1930.

Rehearing Denied May 15, 1930.

Appeal from District Court, Hunt County; Grover Sellers, Judge.

Action by the United States Fidelity & Guaranty Company against the State Bank of Commerce. Judgment for plaintiff, and defendant appeals.

Affirmed.

John W. Goodwin, of Austin, for appellant.

Seay, Seay, Malone & Lipscomb, of Dallas, for appellee.

HODGES, J.

This case is submitted on an agreed statement of facts, of which the following is the substance: In January, 1928, the State Bank of Commerce was selected by the state treasurer as a state depository under the provisions of article 2526, Rev. Civ. Stat. 1925. On January 16, 1928, the bank qualified as such depository by executing a bond in the sum of $21,000 with the United States Fidelity & Guaranty Company as its surety. The bond was conditioned, as required by law, for the payment of all funds and money that might be deposited by the state treasurer with the bank. In December, 1928, the bank became insolvent, and its affairs were placed in the hands of the banking commissioner for liquidation. At the time of the bank's failure the state had on deposit in the bank the sum of $10,500. In addition to that amount, the bank owed the state the sum of $32.20 as accrued interest. A claim was presented to the banking commissioner by the treasurer in behalf of the state, which was allowed as an unpreferred debt, but was not paid out of the assets of the bank. Later a demand for payment was made by the treasurer on the United States Fidelity & Guaranty Company as surety on the bank's bond. In July, 1929, the United States Fidelity & Guaranty Company paid over to the treasurer the sum of $10,753.13 in full of the amount due the state from the bank, including the accrued interest on the state's deposits. At the time of this payment the United States Fidelity & Guaranty Company took from the treasurer a written assignment of whatever right the state might have against the bank and against the banking department as holder of the bank's assets.

In due time the United States Fidelity & Guaranty Company presented a claim to the banking department for reimbursement out of the assets of the bank. That claim was approved only as a general debt against the assets of the bank. This suit was then filed by the United States Fidelity & Guaranty Company against the bank and the banking commissioner for the purpose of establishing that debt as a preferred claim against the assets of the insolvent bank. The trial resulted in a judgment in favor of the United States Fidelity & Guaranty Company, establishing its debt as a preferred claim. The bank and the banking commissioner have appealed.

The judgment allowing the claim as a preferred debt is based upon two legal propositions: One is that, at the time the bank failed, the state, as the sovereign, was entitled to a preference over other creditors of the bank; the other is that by paying the debt as a surety for the bank the United States Fidelity & Guaranty Company became subrogated to the state's status as a preferred creditor.

It is conceded by counsel that there is in Texas no statute expressly conferring upon the state the right of priority in the distribution of the assets of an insolvent bank; that whatever right the state may have grows out of the adoption of the common law of England. In 1840 the Legislature of Texas enacted the following statute:

"The common law of England, so far as it is not inconsistent with the Constitution and laws of this State, shall together with such Constitution and laws, be the rule of decision, and shall continue in force until altered or repealed by the Legislature." Article 1, Rev. Civ. Statutes 1925.

In the case of Swayne v. Lone Acre Oil Co., 98 Tex. 597, 86 S. W. 740, 741, 69 L. R. A. 986, 8 Ann. Cas. 1117, Chief Justice Gaines, of our Supreme Court, said:

"Since the passage of that act [act of 1840], which has ever since remained the law, and is now incorporated in our Revised Statutes as article 3258, probably few cases have been decided in this court in which the rules of the common law have not been expressly or impliedly applied in the determination of one or more of the questions involved. * * * At all events, since the adoption of the common law the courts of this state have adhered to the decisions of the English courts with as much strictness as the courts of the other states who have the common law, not by adoption, but by inheritance, so to speak."

One of the prerogatives belonging to the English crown was the right of the sovereign to demand the payment of his debt from the estate of an insolvent debtor before the claims of other creditors should be paid. It is admittedly true that there are some prerogatives of royalty recognized by the English common law which are repugnant to our system of government and not in harmony with the provisions of our Constitution. Whether or not this right of priority in the payment of debts is one of those offensive features of the common law has never been decided by any of the appellate courts in this state. It has, however, been before the courts of other states in a number of cases. But the conclusions announced in those cases have not been harmonious. The states of Georgia, Iowa, Missouri, Montana, New York, Oregon, Pennsylvania, Tennessee, Utah, and West Virginia have held that the adoption of the common law invests the state with this right of priority in the collection of its debts from insolvent debtors. See the following cases: Central Bank & Trust Corp. v. State, 139 Ga. 54, 76 S. E. 587; In re Receivership of Marathon Savings Bank, 198 Iowa, 696, 196 N. W. 729, 200 N. W. 199; Maryland Casualty Co. v. McConnell, 148 Tenn. 656, 257 S. W. 410; Woodyard v. Sayre, 90 W. Va. 295, 110 S. E. 689, 24 A. L. R. 1497; American Surety Co. v. Pearson, 146 Minn. 342, 178 N. W. 817; United States Fid. & Guar. Co. v. Rathbun, 160 Minn. 176, 199 N. W. 561; Fidelity & Deposit Co. v. State Bank, 117 Or. 1, 242 P. 823; Ætna Accident & Liability Co. v. Miller, 54 Mont. 377, 170 P. 760, L. R. A. 1918C, 954; United States Fid. & Guar. Co. v. Rainey, 120 Tenn. 357, 113 S. W. 397; People v. Farmers' State Bank, 335 Ill. 617, 167 N. E. 804. To these may be added numerous other cases collated in notes to North Carolina Corporation Comm. v. Citizens' Bank & Trust Co., in 51 A. L. R. 1350. The states of Arkansas, New Jersey, North Carolina, South Carolina, Mississippi, and Michigan have held to the contrary. Maryland Casualty Co. v. Rainwater, 173 Ark. 103, 291 S. W. 1003, 51 A. L. R. 1332; Board of Chosen Freeholders of Middlesex County v. State Bank, 29 N. J. Eq. 268; Id., 30 N. J. Eq. 311; North Carolina Corporation Comm. v. Citizens' Bank & Trust Co., 193 N. C. 513, 137 S. E. 587, 51 A. L. R. 1350, and cases therein cited; Baxter v. Baxter, 23 S. C. 114; Potter v. Fidelity & Deposit Co., 101 Miss. 823, 58 So. 713; Commissioner of Banking v. Chelsea Sav. Bank, 161 Mich. 691, 125 N. W. 424, 127 N. W. 351.

The principle which controls the rule adopted by the majority of the courts passing upon that question is thus stated by the Supreme Court of Montana in Ætna Accident & Liability Co. v. Miller, 54 Mont. 377, 170 P. 760, L. R. A. 1918C, 954, cited in 51 A. L. R. page 1359.

"Whether the state was entitled to a preference over all the unsecured general creditors of the insolvent bank cannot be determined by resort to any express statute or constitutional provision, for confessedly none such exist; hence the question is one to be resolved according to the common law. * * * Just what is meant by the `common law' in this connection, however, is a matter open to definition. Broadly speaking, it means, of course, the common law of England; but it means that body of jurisprudence as applied and modified by the courts of this country up to the time it became a rule of decision in this commonwealth. * * * The distinction is noted here because the common law as administered in England without a doubt commands the recognition of the sovereign as entitled to the preference * * * whereas the respondent insists that the common law as recognized and applied in the United States is otherwise. At the time the territory of Montana was organized and first formally adopted the common law as our rule of decision in the absence of statute, * * * there existed a vast number of decided cases from almost all of the states holding that divers and sundry prerogatives ascribed to the king at common law had passed to the states; those only being denied which had attached to the king in his personal character rather than as parens patriæ or personification of the sovereignty."

And, after reviewing the cases both for and against the right of the state at common law to a preference, the court continued as follows:

"Those opposed to the preference seem so overwhelmed by the term `prerogative' that they lose sight of the reality for which it stands and which is inseparable from sovereignty in any form. The prevailing view, and the view that has always held the weight of authority, is emphatically in favor of the preference, and the philosophy of it is sententiously expressed by the Supreme Court of the United States thus: `The right to priority of payment of debts due to the government is a prerogative of the crown well known to the common law. It is founded, not so much upon any personal advantage to the sovereign, as upon motives of public policy, in order to secure an adequate revenue to sustain the public burdens, and discharge the public debts.'"

In North Carolina Corporation Comm. v. Citizens' Bank & Trust Co., 193 N. C. 513, 137 S. E. 587, 589, 51 A. L. R. 1350, the North Carolina Supreme Court thus states the principle upon which the minority view is based:

"Courts denying the right [of priority] say that it should not be...