Lyttle v. National Surety Co.

Mr. Justice Van Orsdel. delivered the opinion of the Court: The appeal can be disposed of upon the single question of whether or not the court below erred in ordering the money paid to the surety company, instead of to the trustee of the bankrupt, to be adjudicated as part of the bankrupt’s estate in the bankruptcy court. The amount which the surety company finally received was about $5,000 less than the amount it was compelled to advance on account of the default of the contractor. Hence, no question as to the disposition of a surplus is involved. Counsel for appellant, in their brief concede the validity of plaintiffs claim to a lien, and its right to subrogation, in the following statement: “In this proceeding the trustee in bank — 140 — ruptcy is not questioning the validity of the plaintiff’s claim to a lien, or to be subrogated to the rights of the United States in respect to the security of the fund in question. He insists, however, that the fund must be brought into the bankruptcy court, and the plaintiff’s lien recognized by the orders of that court.” We start, therefore, with the concession that a lien and right of subrogation exist in favor of the surety company. That the surety company, as surety on the contract, could invoke the equitable doctrine of subrogation, is well settled. The principles upon which a surety may avail himself of this right are stated in Ætna L. Ins. Co. v. Middleport, 124 U. S. 534, 31 L. ed. 537, 8 Sup. Ct. Rep. 625, as follows: “(1) That the person seeking its benefits must have paid a debt due to a third party before he can be substituted to that party’s rights; and (2) that in doing this he must not act as a mere volunteer, but on compulsion, to save himself from loss by reason of a superior lien or claim on the part of the person to whom he pays the debt, as in cases of sureties, prior mortgagees, etc. The right is never accorded in equity to one who is a mere volunteer in paying a debt of one person to another.” The surety company having a valid equitable lien on this fund, and being subrogated to the rights of the government to the extent of being reimbursed for the amount advanced under its obligation as surety, it is not clear just what claims could be asserted by the trustee to have the matter adjudicated in the bankruptcy court. The lien of the surety company against this fund was prior and superior to any claim shown to exist against the contractor or the trustee standing in his shoes. As against the contractor, and likewise against the trustee, the equity which existed in favor of the surety existed not from the date of bringing the present suit, but from the date of the bond. In Prairie State Nat. Bank v. United States, 164 U. S. 227, 41 L. ed. 412, 17 Sup. Ct. Rep. 142, the contract, as here, was for the construction of a government building. The government, as here, had the right to retain a percentage of the contract price until the completion of the work. The contractor, in consideration of advances made and to be made by the bank, gave the bank, in — 141 — 1890, written authority to receive from the United States the final contract payment so reserved. The contractor defaulted, and the surety completed the work, being called upon, as here, to disburse more than the amount of the final payment due from the government. Disposing of the respective rights of the surety and the bank, Mr. Justice White, speaking for the court, said: “Sundberg & Company [the contractors] could not transfer to the bank any greater rights in the fund than they themselves possessed. Their rights were subordinate to those of the United States and the sureties. Depending, therefore, solely upon rights claimed to have been derived in February, 1890, by express contract with Sundberg & Company, it necessarily results that the equity, if any, acquired by the Prairie Bank in the 10-per-cent fund then in existence and thereafter to arise, was subordinate to the equity which had, in May, 1888, arisen in favor of the surety Hitchcock.” The trustee has not attempted to assert any superior lien on behalf of any creditor of the bankrupt. Hence, he “stands simply in the shoes of the bankrupt, and as between them he has no greater right than the bankrupt.” York Mfg. Co. v. Cassell, 201 U. S. 344, 352, 50 L. ed. 782, 785, 26 Sup. Ct. Rep. 481. Or, as stated in Thompson v. Fairbanks, 196 U. S. 516, 49 L. ed. 577, 25 Sup. Ct. Rep. 306. “Under the present bankrupt act, the trustee takes the property of the bankrupt, in cases unaffected by fraud, in the same plight and condition that the bankrupt himself held it, arrd subject to all the equities impressed upon it in the hands of the bankrupt.” In what position, therefore, do we find the appellant % After the court below had acquired jurisdiction of the subject-matter and the parties, and had secured possession of the fund in the hands of its receiver, appellant intervened and submitted his rights to the adjudication of the court. In asserting his rights, he did not dispute the validity of the lien or equity of the surety company, made no showing of superior claims by creditors of the bankrupt, but stood upon the bald right of a trustee, which, in the circumstances of the case, could rise no higher than the bankrupt's, to have this fund delivered to him as against the — 142 — surety company, which, as we have observed, was not only entitled to assert the equitable doctrine of subrogation, but to have the subrogation date back to the giving of the bond, with right to the fund superior to any voluntary creditors of the bankrupt. Prairie State Nat. Bank v. United States, supra. The jurisdiction of State courts in cases of this sort is well established. Under the bankrupt act of 1867, it was held that State courts had concurrent jurisdiction with Federal courts in suits between an assignee in bankruptcy and third parties asserting rights in property claimed by the assignee as belonging to the estate of the bankrupt. Eyster v. Gaff, 91 U. S. 521, 23 L. ed. 403; McKenna v. Simpson, 129 U. S. 506, 32 L. ed. 771, 9 Sup. Ct. Rep. 365. By the same reasoning, this jurisdiction exists under the present bankrupt act. Of course, a State court cannot exercise any of the functions of a bankrupt court, such as adjudging a person a bankrupt, appointing a receiver or trustee, granting a discharge, or distributing assets. But where, as in this case, the issue is between the trustee and a surety company which is asserting a lien against a fund otherwise belonging to the estate of the bankrupt, the suit becomes one between the surety company and the trustee representing the bankrupt’s estate in the proper court of the jurisdiction where the property is found. The trustee is a mere party to the action, and the court will undoubtedly adjudicate the issue with regard to the bankrupt act and the rights of the respective parties under it, and to that end protect the estate. If the party asserting a right to the property fails, it would be the duty of the court to order the property turned over to the trustee, and it would then become part of the estate to be administered by the bankrupt court. Analogous to the jurisdiction thus exercised by State courts, is that of Federal courts, which are not vested with probate jurisdiction, but which have jurisdiction to hear and determine controversies between third parties and executors or administrators in regard to property belonging to the estate. Yonley v. Lavender, 21 Wall. 276, 22 L. ed. 536; Hess v. Reynolds, 113 U. S. 73, 28 L. ed. 927, — 143 — 5 Sup. Ct. Rep. 377; Byers v. McAuley, 149 U. S. 608, 37 L. ed. 867, 13 Sup. Ct. Rep. 906. In Heath v. Shaffer, 93 Fed. 647, the holder of a- chattel mortgage took possession of the mortgaged property before the institution of proceedings in bankruptcy against the mortgagor, and thereafter brought suit in the State courts to foreclose the mortgage against the bankrupt and his trustee. The bankrupt court refused, on a bill by the trustee alleging that the mortgage was avoidable as an unlawful preference, to enjoin the further prosecution of the suit. Upholding the jurisdiction of the State court, Judge Shiras, after quoting at length from Eysler v. Gaff, supra, said: “Thus is stated the correct rule for the guidance of the trustee in cases of this character. lie should appear in the State court, and, by pleading the adjudication in bankruptcy and his appointment as trustee, lay the foundation for the protection of his rights. If he questions the jurisdiction of the State court, he can plead thereto in proper form. If the case be one that is removable under the provisions of the judiciary act, he can make the requisite showing. If he does not dispute the validity of any lien asserted by the plaintiff, he can set up his title and rights as trustee, subject to the admitted lien, and the-State court will protect his rights in the premises. If lie wishes to contest the validity or extent of the adverse claim asserted by the plaintiff in the State court, he can do so by answer or cross bill. If, upon the hearing, the State court holds and adjudges the plaintiff’s claim or lien to be invalid and void either at the common law or under the provisions of the bankrupt act, that court would, undoubtedly, order the property to be delivered to the possession of the trustee. If the State court holds and adjudges the lien of the plaintiff to be valid, it would, upon the proper showing, also recognize the title and rights of the trustee, subject to the lien of the plaintiff, and would enforce the same according to the true intent and meaning of the bankrupt act.” Of course, the supreme court of the District of Columbia occupies the same relation to the District that a State court of similar jurisdiction does to a State, and whatever may he said — 144 — in support of the jurisdiction of the State courts would apply with equal force here. Not only did the bill of the surety company state a cause of action, but the court below was well within its jurisdiction in trying the issue and entering a decree therein. The decree is affirmed with costs. Affirmed.