United States Fidelity & Guaranty Co. v. Eichel

• Decision Date: 03 February 1915
• Docket Number: 1850.
• Parties: UNITED STATES FIDELITY & GUARANTY CO. v. EICHEL et al.
• Court: U.S. Court of Appeals — Third Circuit

219 F. 803

UNITED STATES FIDELITY & GUARANTY CO. v. EICHEL et al.

No. 1850.

United States Court of Appeals, Third Circuit.

February 3, 1915

Rehearing Denied February 18, 1915.

William E. Schoyer, of Pittsburgh, Pa., for appellant.

William M. Hall, of Pittsburgh, Pa., for appellees.

Before BUFFINGTON, McPHERSON, and WOOLLEY, Circuit Judges.

J. B McPHERSON, Circuit Judge.

This controversy has become so intricate that we cannot dispose of it as briefly as we should like. But we shall try to condense the facts as much as possible.

The transactions to be summarized began more than ten years ago when the United States Fidelity & Guaranty Company became surety on several bonds given to the government by contractors on public works. On these bonds-- all of which contained the usual condition that the principal would pay laborers and materialmen promptly and in full-- the Evansville Contract Company was originally liable as principal, or afterwards became liable. On February 27, 1904 the Contract Company was adjudged bankrupt in the Northern District of West Virginia, and three trustees were appointed-- one of them, Madison J. Bray, afterwards becoming sole trustee. Our principal concern is with his conduct, and no attention need be paid to his cotrustees. His attorney during the period chiefly in question was Philip W. Frey, and his conduct also is attacked. So, too, is the conduct of Laura Eichel and of her husband, Jacob Eichel; Jacob having been a large stockholder, as well as the president and general manager, of the Contract Company, and having carried on the company's business for the trustees after the adjudication.

The suit now before us is in equity, and was brought under the following circumstances: Within about a year after the adjudication, Bray, Frey, and the Eichels bought, or caused to be bought, at a discount certain claims for materials that had been furnished to the bankrupt under the contracts upon which the Guaranty Company was surety. Ultimately these claims were all assigned to Laura Eichel, and she brought 18 separate suits thereon against the Guaranty Company, first in a court of the state of Pennsylvania, and afterwards in the United States District Court for the Western District. The latter suits were brought to November term, 1907, but a final determination was delayed for several years. In October, 1912, while they were still pending, a bill in equity was filed against Laura Eichel, Jacob Eichel, Madison J. Bray, and Philip W. Frey. The service on Jacob Eichel was set aside, but the suit proceeded against the others. The bill asserted, inter alia, that the Guaranty Company had equitable defenses to some of the suits at law, but could not set them up in those actions, and for this reason, as well as to prevent a multiplicity of suits, the company prayed the court to take jurisdiction of all matters in controversy between the parties, and in the end to determine what amount, if any, the Guaranty Company was liable to pay because of its suretyship. There was no doubt that the Company was liable to some extent, but the precise amount depended upon the solution of several disputed questions. Without further reference to the pleadings or to the regularity of the proceeding, it will be enough to say that the defendants acquiesced in this prayer, and that testimony was taken and a hearing had upon the merits; the final result being, that the district court entered a decree against the Guaranty Company in favor of Laura Eichel for the face of the claims sued on-- $59,769.08-- with interest. From this decree the present appeal is taken, and the Guaranty Company contends that (while it is liable in some amount) its maximum liability is the amount paid for the claims by the defendants, and its true liability is much smaller.

For the moment we shall disregard what was done in West Virginia, and shall confine ourselves to the suit in the Western District of Pennsylvania, in order to decide two questions of minor importance.

The Guaranty Company set up as a defense to seven of the claims sued upon-- Nos. 42, 44, 45, 51, 52, 54, and 55 of November term, 1907-- that the claimants had already been paid either in whole or in part because they had received certain promissory notes from the Contract Company. These notes, however, are still unpaid, and we agree with the court below that they were neither given nor accepted in payment, and therefore, under familiar principles, are to be regarded merely as security. Neither do we think it material that these notes were proved in the bankruptcy proceeding as the foundation of the creditors' claims either in whole or in part. In substance, the claims were precisely the same as if the creditors had proved upon their open accounts, for there was certainly no doubt about the character and standing of these notes. We think the subject needs no further attention.

The other question has to do with the application of certain payments that had been made by the Contract Company to the Clydesdale Stone Company, two of whose claims are sued on at Nos. 24 and 25, November term, 1907. One of these claims is for material furnished between October 4 and November 20, 1901, upon a particular contract, and the other claim is for material furnished between November 8, 1901, and June 18, 1902, upon another contract. Upon both of these contracts the Guaranty Company was surety, and was therefore liable for the amount properly due upon both of the claims. How much is due is the point in dispute, and the question arises in this way: From time to time the Contract Company made payments to the Stone Company on open account, no application of these payments being made by either party at the time. This, of course, would make no difference, if these two claims comprised the whole indebtedness of the Contract Company to the Stone Company; but there is a third claim for materials that were furnished from October, 1902, to July, 1903, on a third contract upon which the Guaranty Company is not a surety, and therefore it may (and probably does) make a difference to the Guaranty Company upon which portion of the open running account the general payments made by the Contract Company should be applied. This account embraced the materials furnished upon the three contracts, and it appears that what was actually done with the Contract Company's payments was this: On July 1, 1904, several months after the bankruptcy, the Stone Company assigned its whole claim to Frey, and at that time undertook to apply the payments that had previously been made, distributing them (in the words of the court below) 'by proper apportionment to the several contracts. ' This application was sustained on the ground that, 'so far as appears, no surety of the bankrupt will be required to pay more of the Stone Company's account against the bankrupt than may be properly required of it. ' This may perhaps be true, although it does not certainly appear; but the difficulty is that the Stone Company had no right to make the application. The general rule on this subject is well known. The debtor, who is paying his own money, may apply it to whichever of his debts he may select. If the debtor makes no selection, the creditor has the right of application. If neither acts at the time of payment, the law applies the money to the oldest debt. Special equities may require special treatment, but the general rule requires the application just stated. No special equity appears in the present case. Probably there was a surety on the third contract, but he is not in court, and we are left to conjecture what special claim to consideration he might be able to present. But, aside from this, the Stone Company had no right to make a nunc pro tunc application two years after the payments had been made, and several months after the principal debtor had gone into bankruptcy. The rights of creditors against the estate had been fixed, and the Stone Company could not change them. In this respect therefore the decree needs to be modified, although we must leave the details to the district court.

Let us now turn to what was done in West Virginia. We should extend this opinion unduly if we set out the numerous facts in detail; and to do so would be needless repetition, for elaborate statements have already been made by the Court of Appeals for the Fourth Circuit in Bray v. Fidelity, etc., Co., 170 F. 689, 96 C.C.A. 9, and by the Supreme Court in an affirming opinion reported in 225 U.S. 205, 32 Sup.Ct. 620, 56 L.Ed. 1055. We shall content ourselves therefore by referring to these statements with the same effect as if we repeated them in full. It is sufficient to say here that these decisions settled the following proposition: That the bankruptcy court in West Virginia had exclusive jurisdiction to determine whether the foregoing claims, which had then been sued upon in Pittsburgh, and had also been allowed by the referee in bankruptcy as preferred claims, should be re-examined, and (if re-examined) whether the holders thereof-- namely, Bray, Frey, or the Eichels--had a right to have them rated and paid at their face value as preferred; and to determine also whether Bray, as 'trustee, and others who were employed to assist him in the management of the estate (had) been speculating in claims against it and procuring or acquiescing in their improper allowance and classification. ' United States Fidelity & Guaranty Co. v. Bray, 225 U.S. 218, 32 Sup.Ct. 625, 56 L.Ed. 1055.

In the exercise of this exclusive jurisdiction the bankruptcy court took the following steps: On January 4, 1913, eight months after the decision of the Supreme Court, the referee made an order distributing all the assets of the bankrupt estate,...