running from the surety to the principal, for the set-off gave no one a provable claim against the principal's estate.83 § 221. Release of surety by payment to creditor that is later held to have been preferential. It does not lie in the mouth of the surety to claim that he has been released by reason of the fact that the principal has paid the debt to the creditor, if the creditor, after the principal's bankruptcy, is required to return such payment as constituting a preference vitiated by the provisions of the Bankruptcy Act.84 See also Town of Cicero v. Grisko (1909) 240 Ill. 220, 88 N. E. 478. 83 In re Hallock (1915) 226 Fed. 821. 84 For definition of a preference, see Section 60 of the Act. Swarts v. Fourth Nat. Bank (1902) 117 Fed. 1, 11, 54 C. C. A. 387, contains this language: "The bank was guilty of no fraud or wrong when it accepted payment from the insolvent. The indorsers, as well as the bank, knew that any payments made upon the notes by the principal debtor were liable to be recalled as a condition of the allowance of the claim of the bank against its estate if the maker of the note was adjudged a bankrupt upon a petition filed within four months of the payments. Their contract was conditioned by this fact, and by the statute which called it into being. The acceptance of such payments was not forbidden by the moral or by the civil law. The bank did not know, and could not foresee, that the principal debtor on the note would become a bankrupt within four months from the payments. The holder of a surety's obligation may discharge it if he knowingly does any act to diminish his security or his opportunity to enforce it, or any act to increase his liability. But the acceptance of But these payments did none of these things. A refusal to accept them might well have been held to be an act so likely to entail unnecessary loss upon the accommodation makers that it would discharge them. the receipt of the money was an act of reasonable diligence, an act in the rational discharge of the duty of the bank towards the sureties. It hoped and believed that the money it received would be a payment upon the debt. If it returns it, no payment has been made by the receipt of it. The debt remains unpaid because the money received turns out to be the property of the bankrupt estate, which the bank holds in trust for, and returns to, the estate under the law. The sureties are not discharged by the payment and satisfaction of any part of the notes, because no payment and satisfaction were effected. They are not discharged by any act or negligence of the creditor, because it has been guilty of none which either increased their liability or diminished their security or their opportunity to enforce it. The only just and equitable conclusion is that the accommodation makers, indorsers, or sureties upon the obligations of an insolvent debtor are not discharged from liability to pay them by the innocent acceptance, § 222. Is the surety's claim barred by the principal's discharge in bankruptcy? If the surety's claim for indemnity from the principal be a provable one, and has been duly scheduled by the bankrupt principal, then it would seem that it should be released by a discharge in bankruptcy granted to the principal. And, in accordance with the ratio decidendi of the cases previously analyzed under the discussion of the provability of the surety's claim against the estate of the bankrupt principal, it is held that, where the surety's liability accrues prior to the bankruptcy proceedings, his claim for reimbursement is defeated by the principal's discharge in bankruptcy, even though the surety has not paid until after the institution of the bankruptcy action.85 by their creditor, of payments thereon from the insolvent debtor which the creditor is subsequently required to, and does surrender to the latter's trustee in bankruptcy as a condition of the allowance of its claim under Section 57-g of the bankrupt act." Accord: Higdon v. Bell (1920) 25 Ga. App. 54, 102 S. E. 546; Wright v. Gansevoort Bank (1907) 118 App. Div. 281, 103 N. Y. S. 548. See Secs. 155 and 217, supra. 85 Williams v. United States Fi. delity and Guaranty Co. (1915) 236 U. S. 549, 25 Sup. Ct. 289, 59 L. Ed. 713, quoted note 63, supra. In Hayer v. Comstock (1901) 115 Ia. 187, 88 N. W. 351, 352, 353, the court said that: "The plaintiff claims that as he had not, as surety, paid the note at the time the petition for adjudication in bankruptcy was filed, there was no debt then due to him, and he could not have his claim scheduled against the bankrupt's estate; that he had no provable claim; and that the discharge does not apply to his claim; while the defendant contends that under the facts the dis "This debt was a fixed liability evidenced by an instrument in writing, and absolutely owing by the defendant at the time of the filing of the petition in bankruptcy, and therefore might be proved against the estate as it was. It is the fact that the bankrupt absolutely owed this fixed liability, evidenced in writing, at the time of the filing of the petition, that made it provable, regardless of the person to whom it was owing. If the creditor had failed to prove the claim, the plaintiff could have done so in its name, not because the debt was then due him, but because it was a fixed liability, evidenced in writing, and absolutely owing by the defendant. Being proved as it was by the creditor, it was not required that the surety should take further steps. We do not overlook the distinctions that exist as between liability of the debtor to the creditor and his liability to his surety, but we emphasize the fact that it was the But, where the liability of the surety to pay, and the act of payment, both occur after the institution of the bankruptcy proceedings, some courts hold that the surety's claim in his own right, being entirely contingent, is not discharged.86 The surety who has paid the debt of his bankrupt principal may also recover the amount of his payment from the latter, notwithstanding his discharge in bankruptcy, where, although the debt was duly scheduled, the required notice was not sent by the referee to the surety, and the surety had no actual knowledge of the bankruptcy proceedings prior to notice.87 § 223. Staying the creditor's action against the bankrupt and his surety. Sec. 11-a of the Bankruptcy Act88 provides fixed liability, evidenced in writing, 'absolutely owing' by the defendant, that made this a provable claim against his estate. Said paragraphs in Section 57 and in the general orders of the supreme court recognize the right of the surety to protect himself before payment, and when his liability is contingent, and to share in the dividends of the estate after payment." "As already said, this was a fixed liability, evidenced in writing, and absolutely owing by the defendant at the time of the filing of the petition; and these facts render it a provable claim, regardless of whether, by transfer or otherwise, the person to whom he owed it was changed or not. Such, we think, is the plain intent of the law, and the discharge of the defendant operated to defeat the plaintiff's action.'' Accord: Smith v. Wheeler (1900) 55 App. Div. 170, 66 N. Y. S. 780. See "The Surety's Right to Indemnity-Effect of Principal's Bankruptcy" in (1922) 31 Yale Law Journal 582; Sec. 214, supra. 86 Smith v. McQuillin (1906) 193 Mass. 289, 79 N. E. 401; Goding v. Roscenthal (1901) 180 Mass. 43, 61 N. E. 222; but see, contra, Maryland Casualty Co. v. Jones (1922) 140 Md. 395, 117 Atl. 765. 87 Dodgen v. McCrea (1920) Tex. Civ. App. 225 S. W. 71. See 7 Remington on Bankruptcy (1922, 3d Ed.) Sec. 3579. Query: Would not the surety's claim on a fidelity bond survive the discharge in bankruptcy of the delinquent principal under Sec. 17-a (4) of the Bankruptcy Act? It was so held in Gaddy v. Witt (1911) Tex. Civ. App. 142 S. W. 926, and In re Dunfee (1916) 219 N. Y. 188, 114 N. E. 52. Compare In re Dunfee (1913) 206 Fed. 745. 88 Sec. 11-a reads as follows: A suit which is founded upon a claim from which a discharge would be a release, and which is pending against a person at the time of the filing of a petition against him, shall be stayed until after an adjudication or the dismissal of the petition; if such person is adjudged a bankrupt, such action may be fur for a mandatory stay of all actions, based upon dischargeable debts, pending at the time of the filing of the petition in bankruptcy against such defendant, until such time as he is either adjudged a bankrupt or the petition is dismissed. Thereafter, in the discretion of the court, the action may be further stayed for twelve months, or until such time as the question of the bankrupt's discharge is determined, providing he applies for a discharge within such twelve-month period. The question of stays has been involved in many of the cases referred to in this chapter in connection with the discussion of special judgments.89 Generally speaking, neither the federal court in which the bankruptcy proceedings are pending, nor the state court in which the bankrupt and his surety are defendants, will exercise its discretion to grant a further stay of the state court action after the adjudication of the bankrupt as such.90 But it is of course mandatory upon the court to stay the action, when properly informed of the bankruptcy proceedings, until such time as there is an adjudication upon, or a dismissal of, the petition.91 If the bankrupt has conveyed property to the surety to indemnify him, so that, in effect the creditor will be paid out of the bankrupt's estate, the pending action will be stayed and the bankrupt permitted to interpose his discharge as a defense.92 § 224. Staying the bankrupt's discharge. The federal courts go even further than indicated in the preceding section, ther stayed until twelve months after the date of such adjudication, or, if within that time such person applies for a discharge, then until the question of such discharge is determined." See also, 7 Remington (1922, 3d Ed.) Sec. 3465, et seq. 89 See Sec. 202, supra. 90 In re Rosenstein (1921) 276 Fed. 704; In re Mercedes Import Co. (1908) 166 Fed. 427, 92 C. C. A. 179; In re Maaget (1909) 173 Fed. 232, modified (1910) 179 Fed. 1019; Wallace v. Stokes (1922) 29 Ga. App. 160, 113 S. E. 829; Smith v. Miller (1917) 226 Mass. 187, 115 N. E. 243; In re Ennis & Stoppani (1909) 171 Fed. 755. 91 Star Braiding Co. v. Stienen Dyeing Co., Inc. (1921) 44 R. I. 88, 114 Atl. 129. For an instance, in which the bankruptcy matter was not brought to the attention of the state court in time, see St. Louis World Publishing Co. v. Rialto Grain & Securities Co. (1904) 108 Mo. App. 479, 83 S. W. 781. 92 In re Federal Biscuit Co. (1913) 203 Fed. 37, 121 C. C. A. 373. in order to enable the creditor to perfect his rights against the surety, no depreciation of the bankrupt's estate being involved, and, under such circumstances, will postpone, or stay, the bankrupt's application for discharge until such time as the creditor has obtained judgment and thus perfected his rights against the surety; and this is noticeably true where the court is in doubt as to whether the state court has the power to grant a special judgment against the surety.9 98 98 Brown v. Four-In-One Coal Co. (1923) 286 Fed. 512, 514, 515, says: "The bonds given in the attachment suit in the state court became no part or parcel of the bankrupt's estate, but they did advantage that estate by releasing the attached property from the lien of the attachment and afforded to Brown surety for the payment of his debt when reduced to judgment in that action. By reason of the fact that these bonds were no part of the bankrupt's estate, neither the other creditors nor the trustee in bankruptcy for the benefit of creditors could be subrogated to the rights of Brown to recover against the sureties upon this bond, and neither the bankrupt nor the trustee in bankruptcy should be heard to dispute Brown's right to fix, by a judgment in the state court, the liability of the sureties on these bonds, for neither is interested therein nor prejudiced thereby. In re Mercedes Import Co., 166 Fed. 427, 92 C. C. A. 179; In re Rosenstein (C. C. A.) 276 Fed. 704." "It is wholly unnecessary for the District Court or for this court to determine what relief, if any, the state court may afford Brown. It is sufficient to say that he has substantial rights against the sureties not affected by the bankruptcy proceedings, that he should be permitted to litigate to final judgment in the attachment suit in the state court, but, of course, can have no execution issued against the bankrupt upon any judgment he may recover therein. Section 16, Bankruptcy Act; Coal Co. v. Antezak, 164 Mich. 110, 128 N. W. 774, 130 N. W. 305, Ann. Cas. 1912B, 778.'' "Under the facts and circumstances of this case the District Court should have set aside its orders staying proceedings in the state court and postponed the discharge of the bankrupt for a reasonable time (within its discretion and retaining its control) to afford Brown an opportunity to proceed in his action in the state court of Kentucky to final judgment, granting or refusing the prayer of his petition. The question, however, of Brown's right to relief, if any, in the state court is a question solely for the determination of that court unembarrassed by any order of the bankruptcy court staying proceedings in that action or by a discharge in bankruptcy and, upon this question, this court intimates no opinion whatever. Upon the entering of a final judgment in the state court or upon the expiration of a reasonable time within the discretion and control of the bankruptcy court for obtaining such final judgment, an unconditional discharge in bankruptcy may be entered, and if at that time a personal judgment against the Four |