Swarts v. Siegel

• Decision Date: 21 July 1902
• Docket Number: 1,696,1,697.
• Citation: 117 F. 13
• Parties: SWARTS v. SIEGEL et al. SIEGEL et al. v. SWARTS.
• Court: U.S. Court of Appeals — Eighth Circuit

117 F. 13

SWARTS v. SIEGEL et al.

SIEGEL et al. v. SWARTS.

Nos. 1,696, 1,697.

United States Court of Appeals, Eighth Circuit.

July 21, 1902

David Goldsmith, for Swarts.

Edward C. Eliot, for F. Siegel & Bro.

Before SANBORN and THAYER, Circuit Judges, and LOCHREN, District Judge.

SANBORN Circuit Judge.

These are appeals from the decree of the district court directing that the claim of F. Siegel & Bro. against the estate of the Siegel-Hillman Dry Goods Company, a corporation and a bankrupt, be disallowed unless the claimants repay to the trustee the sums of $14,600 and $5,219.63, which the court held to constitute preferences given to the claimants which they were required to surrender under section 57g of the bankruptcy act of 1898. The claimants appealed from this decree because it required them to restore the $14,600 and the $5,219.63 as a condition of the allowance of their claim. The trustee appealed from it because it did not require the claimants to repay to him $20,000 more as a condition of the allowance of their claim.

1. The preference, amounting to $14,600, which the court required the claimants to repay, is the same preference, and results from the same payments, which the Fourth National Bank of St Louis has been required to surrender as a condition of the allowance of its claim against the estate of this bankrupt in Swarts v. Fourth Nat. Bank, 117 F. 1, in which the opinion is filed herewith. Reference is made to the opinion in that case for a detailed statement of the facts out of which this preference arose, and for a discussion of the legal conclusions which determine the rights of the parties interested therein. They will not be repeated at length here. It will suffice to make a brief statement of the salient facts which constitute this preference and of the rules which determine its disposition, and to intimate the order which should be made in these cases.

Four months prior to February 6, 1900, when the dry goods company was adjudicated a bankrupt, the Fourth National Bank of St Louis held the promissory notes of this corporation for $25,000 upon which the claimants, F. Siegel & Bro., had indorsed their names before the notes were discounted for the purpose of giving them credit, so that they became accommodation makers thereon. Within four months preceding the filing of the petition in bankruptcy, the dry goods company, while it was insolvent, paid to the bank $14,600 on some of these notes, and the bank innocently received these payments. On December 30, 1899, when the petition in bankruptcy was filed, the bank held a claim against the corporation for $10,600 and interest upon some of these notes which had been indorsed by the claimants, and for $35,000 upon other notes of the bankrupt which had not been so indorsed. After the adjudication in bankruptcy Siegel & Bro paid $10,535.46, the amount which remained due upon some of these notes which they had indorsed, and one of the items of their claim against the estate of the bankrupt is the amount which they so paid. Their claim consists of various items aggregating about $35,000. The court below directed the disallowance of their claim unless they refunded the $14,600 which the bank had received on the notes which Siegel & Bro. had indorsed.

The rights of creditors are fixed by the status of their claims when the petition in bankruptcy is filed. A creditor who has received a preference upon one claim against the estate of a bankrupt is thereby debarred from the allowance of any claim unless that preference is first surrendered. When the petition in bankruptcy in this case was filed the bank held a claim against the estate of the bankrupt for $10,400 and interest on some of the notes indorsed by Siegel & Bro., and that claim was disqualified for allowance unless the preference of $14,600, which the bank had received from the dry goods company, was surrendered. The disqualification of a claim for allowance created by a preference inheres in and follows every part of the claim, whether retained by the original creditor or transferred to another, until the preference is surrendered. The payment of the $10,400 and interest by Siegel & Bro., after the adjudication in bankruptcy, gave them no right to the allowance of the claim for this amount, based upon the notes which they took up, which the bank had not possessed before they made the payment. The claim was disqualified for allowance in the hands of Siegel & Bro. until the $14,600 was repaid to the same extent that it was so disqualified in the hands of the bank. 'Whenever a creditor, whose claim against a bankrupt is secured by the individual undertaking of any person, fails to prove such claim, such person may do so in the creditor's name, and if he discharge such undertaking in whole or in part, he shall be subrogated to that extent to the rights of the creditor. ' Section 57i, Bankr. Act 1898.

Subrogation is the substitution of one person or thing for another. Here it is the substitution of one holder of a claim for another. But one who holds the rights or claims of another by subrogation takes them subject to the limitations and disqualifications attached to them in the hands of his predecessor. He has no higher or better rights than those which the first holder possessed. Houston v. Bank, 25 Ala. 250, 257, 258; Brandt, Sur. p. 462, Sec. 316. As no claim of the bank against the estate of the bankrupt could be allowed until it repaid the $14,600 which it had received upon this claim based upon the notes indorsed by Siegel & Bro., so the latter have no claim against the bankrupt estate based upon these notes until the $14,600 is returned.

In order to avoid this inevitable conclusion, Siegel & Bro. have not founded their claim for the $10,400 and interest upon the indorsed notes, but they present it for $10,535.46 cash paid by them to take up the notes, and argue that they are not subject to the principle of subrogation, but that they are entitled to the allowance of their claim for this amount as for money had and received, regardless of the doctrine of subrogation, upon the ground that they have paid a debt of the bankrupt at his request. This payment, however, was not made until after the adjudication in bankruptcy. It was made upon a claim that was disqualified for allowance unless the holder of it first returned to the trustee $14,600. If the bankrupt had made a request of his friends to pay this claim and they had complied with that request, after the adjudication in bankruptcy, these facts could not have transformed this demand from a claim for $10,400 and interest, which draws back into the estate $14,600 before it can be allowed, into a claim for the same amount which would be entitled to allowance without any repayment. The fact is, however, that the bankrupt never made any such request. The only request he ever made was made before the notes were discounted, and it was that Siegel & Bro. would sign them as accommodation makers. They did so, and thereby became liable to pay them. They have paid $10,535.46, and taken them up. Now they either paid this sum voluntarily or they paid it in discharge of their liability as sureties on the notes. If they paid it voluntarily, they have no claim against the bankrupt or its estate for reimbursement. They were mere volunteers. If they paid it in discharge of their liability as sureties, they cannot escape the effect which the law invariably attaches to such a payment. They cannot escape the result that they have not paid the debt of the bankrupt. They have not discharged it from liability, but they have bought from its holder, the bank, the claim based upon these notes, which it held against the bankrupt, subject to all its limitations and disqualifications. They have been subrogated and limited to the rights of the bank in the collection and enforcement of the claim, and they have no legal demand to the reimbursement of the money they have paid except through the enforcement of the claim which they have purchased from the bank, because under the law they paid their money, not to relieve the bankrupt from liability, but to buy the claim of the bank against it. A surety who discharges his liability by the payment of his principal's debt does not thereby relieve the principal from liability to pay it, but he subrogates himself to the rights of the former owner of the claim and stands in his shoes. Morgan v. Wordell, 178 Mass. 350, 354, 59 N.E. 1037, 55 L.R.A. 33. In equity, and in bankruptcy, which is a branch of equity, names and forms are unimportant where the truth is evident. It is not material that the sureties here call their claim one for the money which they have paid instead of a claim for the amount which the bankrupt owes upon the notes. The fact is undisputed that they made their payment in discharge of their liability as sureties upon the notes. Given that fact, the law fixes their rights. They have no claim against the bankrupt or its estate for the money they paid. Their only claim is for the amount the bankrupt owes upon the notes, and they take this claim subject to its disqualification in the hands of its former holder, the bank. It cannot be allowed until the preference of $14,600, which the insolvent debtor gave upon it, has been restored to the trustee. An accommodation maker, indorser, or surety on the obligations of a bankrupt, who pays them and takes them up after the principal debtor has given a preference thereon to their original holder, cannot present an allowable claim against the estate of the bankrupt either for the amount owing by him upon the obligations or for the amount that the surety paid to take them up, unless the amount paid to give the preference is first returned to the estate of the bankrupt. Bartholow v....