United States Fidelity & Guaranty Co v. Carnegie Trust Co.

177 A.D. 176, 164 N.Y.S. 92, 1917 N.Y. App. Div. LEXIS 5704

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: March 30, 1917
• Status: Published

Opinions

Smith, J.:

The facts in this case are so fully and fairly stated in the opinion of my brother Justice Laughlin, filed herewith, that it is not necessary to restate them in this opinion. I will proceed at once, therefore, to an expression of my views upon the questions presented.

In Remington on Bankruptcy (Vol. 1 [2d ed.], § 757), in discussing guaranteed allowable claims, it is said: “ There should be no deduction for the amounts paid in on the debt by the surety. The creditor should prove for the entire debt as if no part thereof had been paid by the surety; and if the dividend plus the payments made by the surety exceed the total amount due, then the creditor holds the excess in trust for the surety.” That rule seems also to be laid down in section 756. The Bankruptcy Act especially provided that where there is a secured claim the value of the security must be deducted from the claim before proof. (30 U. S. Stat. at Large, 560, § 57.) But a secured claim as there mentioned is defined to be a claim secured by a lien upon the bankrupt’s property. (Id. 545, § 1, subd. 23.) A claim secured by the surety bond or by an indorser, for instance, is not a secured claim within the meaning of the Bankruptcy Law, and, therefore, comes within the common-law right authorizing proof of the full amount of the claim, whether or not any part thereof has been paid by the surety.

If this be the rule I am unable to see how it is possible that this surety, upon paying to the bankruptcy creditors $25,000, is entitled to subrogation. If the surety pays the claim in full, then the creditors have no claim against the bankrupt but the surety is subrogated to their rights. When, however, the creditors are entitled to dividends upon their entire claim in addition to their rights against the surety, that makes subrogation impossible. There is nothing to which the surely can be subrogated.

It does not follow, however, because the surety cannot be subrogated to the rights of the bankruptcy creditors that it has no claim for the moneys paid on the surety bond. The Carnegie Trust Company gave its indemnity agreement covenanting to make good to the surety company any moneys which that company should be compelled to pay under its bond. The surety company thus has become the creditor of the Carnegie Company to the extent of ihe required payment, and its right to its dividend cannot be impaired by the fact that the claim arises upon a payment of a deficiency .upon another debt of the Carnegie Company which has already had its full dividends. To hold otherwise would hold nugatory the indemnity agreement. The authorities holding that one debt of a bankrupt cannot create two liabilities against the estate apply only where a creditor is thus seeking an undue proportion of the assets of the bankrupt. No such result can be here reached, and the surety’s claim here arises, as any other claim might arise, out of a contract which itself contemplates the possible inability of the debtor to pay a certain debt in full.

It is not necessary to determine whether or not the claim of the plaintiff can be allowed in such a way as to diminish the dividends which would otherwise accrue to the bankruptcy creditors. It is contended that such effect cannot be given, because it would violate the spirit of the guaranty. The Special Term has so held, and has made full provision for the protection of the bankruptcy creditors in the judgment appealed from, and from this judgment the plaintiff has taken no appeal.

I recommend, therefore, that the judgment be affirmed, with costs.

Clarke, P. J., and Shearn, J., concurred; Laughlin and Dowling, JJ., dissented.