§ 225. Recovery of "preferences" given by the principal to the surety. The discussion of the subject of preferential transfers in bankruptcy and of the various elements necessary to a void preference is beyond the scope of this chapter.94

It is well settled, however, that, whenever the surety is a "creditor," a payment or other transfer (such as a transfer of collateral), either directly to the surety 95 or to the creditor,96 amounts to a preference, so far as the surety is concerned, and may be set aside by the principal's trustee in bankruptcy in a proper proceeding, provided all the requisites of a void preference, as defined by bankruptcy law, are present, and also, proIvided that the transfer, if made directly to the creditor, "inures to the benefit of the surety."

Where all the constituent elements of a void preference do not exist in a given case, the surety cannot be required to surrender the preference which he has received.97

In-One Coal Company in favor of Brown has been entered in the state court, a perpetual stay of execution upon that judgment as against the bankrupt should be allowed. Lockwood v. Exchange Bank, 190 U. S. 294, 23 Sup. Ct. 751, 47 L. Ed. 1061; In re J. L. Philips & Co. (D. C.) 224 Fed. 628."

Accord: In re J. L. Philips & Co. (1915) 224 Fed. 628; In re Maher (1909) 169 Fed. 997.

See also, Steinhauer & Wight, Inc. v. Adair (1917) 20 Ga. App. 733, 93 S. E. 280.

94 An exhaustive discussion of this point is to be found in 4 Remington (1922, 3d Ed.), Secs. 16281856. See Secs. 155, 217, and 221, supra.

95 Amundson v. Folsom (1914) 219 Fed. 122, 135 C. C. A. 24; Paper v. Stern (1912) 198 Fed. 642, 117 C. C. A. 346; United Surety Co. v. Iowa Mfg. Co. (1910) 179 Fed. 55, 102 C. C. A. 618; Lazarus v.

Eagen (1912) 206 Fed. 518, modified in (1914) 209 Fed. 1004.

See analogously, In re Christopher Bailey & Son (1909) 166 Fed. 982; Crandall v. Coats (1905) 133 Fed. 965; In re O'Donnell (1904) 131 Fed. 150.

96 Goldman v. Cohen (1919) 261 Fed. 672, holding that so long as the surety is benefited by the payment it is not necessary that he be, technically, a creditor. Kobusch v. Hand (1907) 156 Fed. 660, 84 C. C. A. 372; Huntington v. Baskerville (1911) 192 Fed. 813, 113 C. C. A. 137; analogously, Smith v. Tostevin (1917) 247 Fed. 102; Brown v. Streicher (1910) 177 Fed. 473; In re Sanderson (1906) 149 Fed. 273; Landry v. Andrews (1901) 22 R. I. 597, 48 Atl. 1036.

97 Angle v. Bankers' Surety Co. (1913) 210 Fed. 289, reversed on findings in (1917) 244 Fed. 401; In re Farmers' Supply Co. (1909) 170 Fed. 502.

CHAPTER XII.

THE COMPENSATED SURETY.

§ 226. Origin and development of the corporate surety. The oldest contracts recorded are those made by the surety.1 They antedate the Christian era many centuries. Various systems of jurisprudence have dealt with problems of suretyship, and codifiers have attempted to formulate rules governing the subject. With such antiquity and universal usage, it is interesting that it was not until within the lifetime of many readers that suretyship in corporate form developed. The first company

to insure the fidelity of employees held its preliminary meeting in 1720, pursuant to announcement in the London Daily Post. It was 1840, however, before an organization was effected for the purpose of engaging in the business of writing fidelity insurance on a commercial basis. As in the case of every innovation, opposition was encountered, requiring time to overcome. Now about forty guaranty companies are operating on the Continent and in England.3

In the United States, the first step towards corporate suretyship was taken in 1853, when the legislature of New York authorized the incorporation of fidelity companies; but none was incorporated until 1875. Many of the present day surety companies became established during the two decades between 18801900. Approximately twenty-five such organizations now compete for fidelity and surety business on a national scale, and local corporations will about double this number. Two hundred and seventy-five different kinds of so-called bonds given by various companies are now recognized."

The first sanction accorded corporate surety companies by the federal government is found in the brief act of Congress of August 13, 1894. Except for the amendment of March 23, 1910, transferring supervision from the Attorney General to the Secretary of the Treasury, the Act of 1894 remains in force as originally adopted.

Underwriter and National Agent for December 20, 1923, p. 485, says that "more than 4,500 years ago suretyship was well known," while "insurance as we know it today, cannot be traced back more than two or three centuries."'

Consult also, Gaius III, 110-127; Institutes, III, 20; Roman Law in the Modern World, by Sherman (1917) Secs. 768-772.

8 See Booklet on Live Articles on Suretyship No. 5, p. 37, by J. W. Mason, Vice-President American Surety Company, reprinted from the Weekly Underwriter and published during 1923-1924.

4"Surety Bonds," by Edward C. Lunt (1922) Sec. 1; introduction to Frost on Guaranty Insurance (1909, 2d Ed.) pp. 1-11. 5 See Tabular Index," Lunt on "Surety Bonds," pp. 359-366.

6 Act August 13, 1894 (Ch. 282, Secs. 1-8; 28 Stat. 279). See Departmental Circular 15, Treasury Department, dated April 4, 1910; Act March 23, 1910 (36 St. at L. 241); Departmental Circular 297, dated July 5, 1922, containing the most recent regulations of the Treasury Department governing the issuance of permits to bonding companies to do business as sureties with the United States.

Prior to 1894, all bonds of indemnity in favor of the United States were executed by individuals. Because of the insolvency of individual bondsmen, judgments obtained against them in many instances were worthless. At nearly every session of Congress, bills were introduced for the relief of debtors who had guaranteed the obligation of another to the United States. The federal government regards the corporate surety as preferable. The corporate surety never dies, and by close supervision the loss from insolvency is seldom experienced. The companies which may become sureties on bonds where the United States is obligee are required to make quarterly reports to the Secretary of the Treasury and submit to inspection, in addition to the supervision exercised by the state empowering them to engage in business. The most recent information of the Treasury Department shows it has approved fifty-five companies authorized to become sureties on federal bonds.7

§ 227. Classes of corporate guaranty contracts. Within the term guaranty insurance are included three classes: fidelity, commercial and judicial insurance. Fidelity insurance consists of those policies issued to protect the promisee in case of loss arising out of employment of another, whether such employer be the public, a corporation, or an individual. Commercial insurance, which includes so-called title, contract and credit insurance, is a guarantee against loss by reason of the breach of contractual obligations on the part of the other contracting party. Judicial insurance refers to bonds issued in the course of judicial proceedings, promising the faithful discharge of parties litigant.

§ 228. Differences between corporate and individual surety. Being of comparatively recent origin, it may be expected that

7 See Form 356, Section of Surety Bonds, Treasury Department. The author is largely indebted for information respecting federal bonds to Mr. T. L. Lawrence, Chief of the Division of Surety Bonds, Treasury Department, who specially prepared an elaborate memorandum on the subject.

8 Frost on Guaranty Insurance (1909, 2d Ed.) Sec. 2; Vance on Insurance (1904) pp. 595-604; Cowles v. United States Fidelity and Guaranty Co. (1903) 32 Wash. 120, 72 Pac. 1032, 98 A. S. R. 838.

many legal problems created by new methods remain unsolved. Adaptable to new conditions as the common law is, it is no surprise that in grafting corporate suretyship on to the law governing private sureties difficulties were to be encountered. At least three differences between the individual and the corporate surety may be suggested. First, the private surety becomes such as an accommodation for the principal. His act is gratuitous. He might lose by having to pay the principal's obligation, but usually he has received no benefit. The corporate surety seldom becomes liable without being paid a premium. It is in business for a profit. Its existence depends upon receiving sufficient compensation from the principals for whom it becomes bound. Second, the private surety generally does not prepare the note or bond which he signs, but writes his name on the line indicated by the principal or obligee. The language to which he subscribes is not his own. The corporate surety very infrequently signs an instrument prepared by another. It.subscribes to its own language, on its own forms, prepared by its own employees. Third, the obligation of the private surety is often assumed in haste, on the oral representation of the principal as to his financial conditions and the scope of the guaranty. It is unusual that legal advice is sought before he signs, and frequently the surety is ignorant of business and technical requirements. On the other hand, the corporate surety never relies upon the statements of the principal without corroboration; it requires written answers to an elaborate questionnaire; and it provides a staff of competent legal advisors.

§ 229. Interpretation of the contract of guaranty. Because of the circumstances under which the obligation of the private, gratuitous surety is ordinarily assumed, the common law regarded him as a favorite. In actions on his promise, the principal of strictissimi juris was applied. The law became solicit

9 Nearly thirty years ago, this prophecy was quoted with approval from a legal writer in People ex rel. Kasson v. Rose (1898) 174 Ill. 310, 313, 51 N. E. 246, 247, 44 L. R. A. 124: "This branch of insurance (guaranty) is so much more modern

in origin and development than fire, marine, life, and accident insurance that there are few decisions upon the subject; but the business is gradually increasing, and is doubtless destined to take an important place in the commercial world."