claim against the estate of the creditor and, if the dividends received by him from the estate of the bankrupt principal, added to the amount previously received from the surety, exceed the total amount of his claim, he holds such excess in trust for the surety.71 § 217. Is the surety bound by a preference received by the creditor? Section 57-g of the Bankruptcy Act reads as follows: "The claims of creditors who have received preferences, voidable under section sixty, subdivision (b), or to whom conveyances, transfers, assignments, or incumbrances, void or voidable under section sixty-seven, subdivision (e), have been made or given, shall not be allowed unless such creditors shall surrender such preferences, conveyances, transfers, assignments, or incumbrances." Suppose the bankrupt principal has, within the statutory period, made a transfer to the creditor under such circumstances that, under bankruptcy law, the transfer amounts to a preference. If the surety later pays the balance of the creditor's claim, is he then bound, in proving the claim of the creditor, to which he is now subrogated, to return the preference that the creditor has received and which has, of course, indirectly benefited the surety, by reducing the amount he was required to pay? Almost without exception, the courts hold that the provisions of section 57-g apply to the surety, considered as a "creditor," as well as to the obligee of the bond or holder of the promissory note.72 71 Swarts v. Fourth National Bank (1902) 117 Fed. 1, 54 C. C. A. 387; In re Hanson & Tyler Auto Co. (1922) 286 Fed. 161; In re Manhattan Brush Mfg. Co. (1913) 209 Fed. 997; In re Heyman (1899) 95 Fed. 800; Westinghouse Electric & Mfg. Co. v. Fidelity & Deposit Co. of Maryland (1925) 251 Mass. 418, 146 N. E. 711; United States Fidelity & Guaranty Co. v. Carnegie Trust Co. (1917) 177 App. Div. 176, 164 N. Y. S. 92. Contra, In re American Product Co. (1915) 224 Fed. 401, 140 C. C. A. 87. 72 In re Schmechel Cloak & Suit Co. (1900) 104 Fed. 64; Swarts v. Siegel (1902) 117 Fed. 13, 54 C. C. A. 399; In re Meyer (1902) 115 Fed. 997; In re Waterbury Furniture Co. (1902) 114 Fed. 255; In re Wiessner (1902) 115 Fed. 421; In re Lyon (1903) 121 Fed. 723, 58 C. C. A. 143; Livingstone v. Heineman (1903) 120 Fed. 785; Platt v. Ives (1913) 86 Conn. 690, 86 Atl. And the rule is the same where the payment is made directly to the surety, to apply on another debt of the same class.73 § 218. Is the paying surety subrogated to any right of priority that the creditor himself would have? The surety's obligation sometimes runs to a creditor who would, if he proved the claim himself, be entitled to priority in payment under the provisions of section 64 of the Bankruptcy Act.74 It seems, however, that the paying surety is not subrogated to this right of priority possessed by the satisfied creditor75 at least in the absence of a statute; and the same rule applies to other "advantages" possessed by the creditor, such as the privileges of the sovereign not to have the statute of limitations run against it.76 579, 45 L. R. A. (N. S.) 1086; Morgan v. Wordell (1901) 178 Mass. 350, 59 N. E. 1037, 55 L. R. A. 33; Bank of Wayne v. Gold (1911) 146 App. Div. 296, 130 N. Y. S. 942. Compare Butterfield v. Woodman (1915) 223 Fed. 956, 139 C. C. A. 436, wherein all the elements of a voidable preference did not exist. This was also true in In re Bullock (1902) 116 Fed. 667, holding the payment to the indorsee not to be a preference to the indorser. Contra, In re New (1902) 116 Fed. 116; but this is apparently the case that was reversed in Livingstone v. Heineman, supra. 78 M. Kahn & Bro. v. Bledsoe (1908) 22 Okla. 666. 98 Pac. 921, 132 Am. St. Rep. 665; Sec. 155, supra and 221, infra. 74 See Sec. 64 of the Bankruptcy Act, as amended by the Act of 1926. 75 United Surety Co. v. Iowa Mfg. Co. (1910) 179 Fed. 55, 102 C. C. A. 623. 76"For the purpose of the argument we shall assume that the United States are not bound by the Bankruptcy Act, or that part of it which requires claims to be proved within one year. But if the United States had, as a sovereign, the privilege of enforcing a claim not proven within a year, we are satisfied that the surety company cannot assert the same privilege. If the United States are not bound by a statute of limitation, the surety company cannot claim that it is entitled to enjoy the same advantage or privilege. The argument which the surety company makes is that inasmuch as it has paid the debt, it is by subrogation entitled to all the rights and privileges which the United States might have asserted. To this we find ourselves quite unable to agree." § 219. The surety as a petitioning creditor. Where the surety has a provable claim against the estate of the bankrupt principal, by reason of the fact that he has discharged such principal's primary obligation, he is competent to be a petitioning creditor.77 But if the surety cannot prove in his own right a claim against the estate of the bankrupt principal, because he has not yet discharged his undertaking, then he is not eligible to be a petitioning creditor.78 Where a surety is a petitioning creditor, he cannot allege, as the act of bankruptcy, the failure, on the part of the alleged bankrupt, to vacate the very attachment, upon which the petitioner is a surety.79 § 220. Surety's right to set off payment made to creditor against debt owed by surety to estate of bankrupt principal. Section 68 of the Bankruptcy Act reads as follows: "(a) In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid." "(b) A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate; or (2) was purchased by or transferred to him after the filing of the petition, or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent, or had committed an act of bankruptcy." courts have jurisdiction without reference to the citizenship of the other party or the nature of the subject-matter of the controversy. Const. art. 3, Sec. 2. And when the United States is a suitor in the courts, they are not liable to costs. In United States V. Barker, 2 Wheat. 395, 4 L. Ed. 271, Chief Justice Marshall said: "The United States never pay costs.' The claim seems to be that, in case a surety company finds it necessary to sue the principal on a bond, which it has given the United States, the surety is entitled to claim these and other like advantages which the United States might be entitled to assert. We certainly do not so understand the law, and we are not aware of any case in which such doctrine is laid down." In re J. Menist Co. (1923) 289 Fed. 229, 231, 232. See Secs. 147 and 214, supra. 77 Wright v. Rumph (1916) 238 Fed. 138, 151 C. C. A. 214. 78 Phillips v. Dreher Shoe Co. (1902) 112 Fed. 404. 79 In re Windt (1910) 177 Fed. 584. The relationship of a surety to his principal often grows out of prior business transactions between them in different capacities, and sometimes a person, who owes another a debt which it is inconvenient for him then to pay, consents to become a surety for such other person, in order to secure a longer period in which to pay his own indebtedness. Let us suppose that the principal, in such a case, becomes a bankrupt, and his trustee in bankruptcy sues the surety for the debt owing from the surety to the principal. Can the surety then set off against this debt his own liability to the creditor? If he has paid the creditor, then, under the provisions of section 57-c of the Bankruptcy Act, he has a set-off that is "provable" against the estate and the one debt should "be set off against the other.''80 The courts have gone further, however, and have held that where the surety is the actual, procuring cause for the obtaining of a loan of money by the principal from the creditor, the surety can set off his prospective liability even though he has not yet paid.81 80 Morgan v. Wordell (1901) 178 Mass. 350, 59 N. E. 1037, 55 L. R. A. 33. It was stated in the opinion in the case of Wagner v. Burnham (1909) 224 Pa. 586, 73 Atl. 990, that: "While the primary debtor of the subcontractors was the contractor whose duty it was to pay the claim, the property of the defendants, and hence the defendants themselves, were the statutory sureties for the payment of the debt of the bankrupt to the subcontractors. Bassett & Brown v. Baird, 85 Pa. 384. A surety paying the debt of his principal after bankruptcy may under the bankrupt act of 1898 set off the amount so paid against his debt to the bankrupt. In re Dillon (D. C.) 100 Fed. 627. It is clear, we think, that the claim of the defendants sought to be set off in this action is for money expended by them as quasi surety for the bankrupt, and is therefore a 'mutual credit' within contemplation of section 68 of the bankrupt act. It should not be overlooked that the right of the debtor to a set-off in an action brought against him by the trustees is not based upon the rules of equitable set-off adminis tered in the state courts, but upon those rules which prevail in the federal courts which are generally broader and more liberal in permitting the set-off. These rules must be observed by the state courts in construing the bankrupt act." 81 Abercrombie v. Brinkman (1923) 293 Fed. 375, 376, says: "The case turns on the question whether the bankrupt corporation owed Abercrombie $400, the balance of the $500 borrowed on the note of Rodenback and Abercrombie and used by the bankrupt. It is true that on the face of the transaction, Abercrombie was only an indorser of the note. But in a court of equity the substance and not the 1 In support of this view it may be observed that section 68-b of the Bankruptcy Act does not specify who must have a provable claim against the estate. Hence, it may well be argued that the set-off need not be a claim that is provable in favor of the debtor surety himself, but that it is sufficient if some one, namely, the creditor, has a provable claim. But the debts must be "mutual," otherwise there can be no right of set-off. Thus, where a surety company was the surety on the bonds of both contractors, A and B, and A intervened in a pending action against B and the surety, in order to recover a claim it had under the bond of B, the surety was not allowed to set off, as against A, the amount it had been compelled to pay on the bond. on which A, who was a bankrupt, was the principal.82 If the surety is discharged by some act, such as the death of a partner, and later makes a voluntary payment to the creditor, he cannot set off such payment, in an action brought against him by the trustee in bankruptcy of the principal on a note form determines the nature of the transaction. Rodenback was insolvent, and his name counted for nothing on the note. The testimony is undisputed that Abercrombie, not Rodenback, procured the money from the bank, and that he turned it over to Rodenback, the active partner, for use in the partnership business, and that Rodenback so used it. Under these conditions clearly the partnership owed Abercrombie the money so advanced to it. When the corporation took over the assets and assumed the liabilities it made itself liable for the debt to Abercrombie. All the evidence on the subject was to the effect that Rodenback, the manager of the corporation, agreed that the account against Abercrombie for work should be credited on the debt to him represented by the note. There is no imputation of bad faith in the evidence or the argument." "Since the undisputed evidence shows that Abercrombie owed the bankrupt $217.80 and the bankrupt 82 Maryland Casualty Co. v. John "Nor can the Casualty Company's claim of set-off be sustained, since the debt due the Parker Company and the debt which the surety is attempting to set off arose out of a different transaction and a different contract. The amount sued for is due from the Gordon Corporation, the principal debtor, and belongs to the assets of the Parker Company's estate for distribution among the creditors. The Casualty Company is merely a creditor to the amount it was compelled to pay as surety. To permit it to set off, to the full amount of the claim in suit, would be to give a preference in violation of Bankruptcy Act, 60 (30 Stat. 562)."' |