Livingstone v. Heineman

THOMPSON, District Judge, after stating the case as above, delivered the opinion of the court. The co-sureties of Heineman on the second series of notes do not make any claim against the estate of the bankrupt, and they have no relation to the controversy here which we are called upon to consider. The controversy is between Heineman and the trustee of the bankrupt. Some time within four months preceding the filing of the petition in bankruptcy the bank was the owner and legal holder of the two series of notes, which, in so far as the bank was concerned, and for the purposes of the administration of the bankrupt’s estate, constituted but a single claim for $9,000, no part of which could have "been allowed, in favor of the bank, without the restoration to the bankrupt’s estate of the two preferential payments. The disability of the bank in this respect inheres in the claim, and operates against 'the holder into whose hands it may come, whether by assignment ■or subrogation. Such holder succeeds “to the rights of the creditor,” ¡but “the rights of the creditor,” under the bankrupt law, entitle him -.to participate in the distribution of the bankrupt’s estate when, and only when, he surrenders and restores to the estate the preferential payments. The equal distribution of the bankrupt’s estate among his creditors, contemplated by the bankrupt law, will not admit of one creditor receiving a greater percentage of his debt than any other creditor of the same class, and there are two general classes — first, those who have priority and are to be paid in full; and, second, gen [789] eral or unsecured creditors, among whom the balance remaining after paying the creditors of the first class, is to be distributed equally, in proportion to the amount of their respective claims. The claim of a surety against the principal debtor for reimbursement of moneys paid in discharge of his obligation as surety belongs to the second class; and the surety, to obtain his distributive share of the bankrupt’s estate, must proceed in the manner pointed out by the bankrupt law; that is, if the creditor fails to prove the claim, he must prove it in the name of the creditor, and he will then be permitted to participate in the distribution to the extent that he has discharged the obligation. A surety, when he assumes the relation, becomes contingently the creditor of the debtor, and the debtor of the creditor. If the debtor fails to pay the debt when it matures, the liability of the surety to the creditor becomes fixed, and he may be compelled to pay the debt; and when he pays it he succeeds to the rights of the creditor, and the liability of his principal to reimburse him becomes fixed. Here Heineman paid all the notes of the first series, but succeeded to the rights of the bank cum onere, and can only participate in the distribution of the bankrupt’s estate when he restores to the estate the two preferential payments. He paid two of the notes before the filing of the petition in bankruptcy, thereby fixing the liability of the bankrupt to reimburse him, but this payment did not create a new and independent claim, free from the disability arising out of the preferential payments; nor will the fact that he was co-surety with others on the second series of notes require or permit that series- to be treated by him as a separate claim, unaffected by the $600 payment. He was surety on all the notes of both series, and the effect of the two preferential payments was to reduce his liability to the bank to the extent of $866.66, by depleting the estate to the same extent. These payments reduced the claim of the bank to a balance of $8,133.33 5 and if it be assumed that this amount was paid by Heineman, and there be added to it the $600 surrendered by him to the referee, his total outlay will be $8,733.33, but if he be paid a dividend of 10 per cent, on $8,200, which will be the amount for which his claim on the first series of notes should be allowed, if the referee’s view be sustained, his outlay will be reduced to $7,913.33, being $186.66 less than it would have been had he surrendered both payments and received a dividend on the full claim of $9,000. In other words, if the surety be permitted to treat each series of notes as a separate claim, and withhold the smaller claim, and refuse to surrender the proportionally large preference payment thereon, the original claim of the bank in the hands of the surety will receive a greater percentage in the distribution of the bankrupt’s estate than other claims of the same class. The questions presented in this case have been ably and exhaustively considered by the Circuit Courts of Appeals of the Seventh and Eighth Circuits, from opposing standpoints, and they have reached opposing conclusions. The views and conclusions of the court for the Seventh Circuit will be found in Doyle v. Milwaukee National Bank, 116 Fed. 295, and of the other court in Swarts v. Fourth National Bank, 117 Fed. 1, and Swarts v. Siegel, Id. 13. In view of [790] these cases, it would be a work of supererogation to discuss these questions further here. We agree with the conclusions reached by our Brethren of the Eighth Circuit. The right of the court to entertain the appeal is questioned by the appellee, but we have no doubt of the right and the duty of the court to do so. The order is reversed, with costs, and with directions to allow Heineman’s claim for $9,000, provided he first restores to the estate the amount of both the preferential payments, and to disallow the claims proven by him if he refuses to restore the same. -