Third National Bank v. Hastings — 35 N.Y. St. Rep. 475

Majority

p. 475

The Third National Bank of Springfield, Resp’t, v. Orlando B. Hastings, App’lt.

(Supreme Court, General Term, First Department,

Filed December 29, 1890.)

Headnote

1. Insolvency—Effect of discharge upon rights of surety.

Where the debtor and creditor reside in the same state, and the dis

p. 476

charge in insolvency would be operative whether the creditor appeared and proved his debt or not, the proving of the debt or the taking of a dividend by the creditor does not discharge the surety.

2. Same—Subrogation.

In such a case the decree discharges the debtor absolutely and there are no rights against the debtor to which the foreign surety can be subrogated.

Appeal from judgment entered on verdict rendered by direction of the court

F. B. Candler, for app’lt; J. L. Bishop, for resp’t

This action was brought to recover a promissory note made by the defendant under the firm name of Hastings & Todd, to the order of the Hurlburt Paper Co., properly endorsed and delivered to and held by the plaintiff. The defendant made the note for the accommodation of the Hurlburt Paper Co., under which name Thomas 0. Hurlburt and H. C. Hurlburt conducted business as copartners. The Hurlburts were afterwards adjudged insolvent under the laws of the state of Massachusetts in proceedings instituted in the court of insolvency for the county of Berkshire, in that state. The plaintiff proved its debt under the insolvency proceedings, which resulted in a composition and discharge of the debtors under said act, by which it was adjudged that upon the debtors paying into court a sum sufficient to pay to their creditors twenty per cent, of their indebtedness a certificate of discharge should be granted them. They made the payment and the discharge was granted. The plaintiff received twenty cents on the dollar upon the claim proved, which claim included, among other things, the note in suit

This plaintiff is a national banking association organized under the United States , statute at Springfield, in the county of Hamilton and state of Massachusetts, where it was located and had its place of business. The Hurlburts were both residents of the state of Massachusetts, and the defendant was a resident of this state.

The question presented at the trial was whether the discharge of the Hurlburts under the Massachusetts insolvent laws furnishes a defense to the defendant as against his liability as mater of the note in suit

The court directed a verdict for the plaintiffs and from the judgment thereupon entered this appeal is taken.

It is urged upon the part of the plaintiff that conceding that the defendant occupied the position of accommodation maker and the Hurlburts were principal debtors, the discharge of the Hurlburts in the insolvency proceedings would not discharge the liability of the defendant, because under the insolvent laws of Massachusetts, it is expressly provided that a discharge shall not release or discharge a person liable for the same debt as partner, joint, contractor, endorser, surety or otherwise. This proposition it does not seem to be necessary to decide in the disposition of this case. But it is doubtful whether the courts of this state as against a resident of this state would give effect to this provision of the statute law of Massachusetts in contradiction of its own policy in that regard.

p. 477

But we think there is another proposition which is fatal to the defendant’s contention, and that is the plaintiffs, the owners of the debt, and the Hurlburts, the debtors, were both residents of Massachusetts. The insolvency court acquired jurisdiction, both of the subject-matter, vía : of the debt due to the plaintiff, and of the persons,- both debtors and creditor. Their discharge under the insolvent laws discharged the debt as to them whether the creditor appeared or not, and, therefore, the appearance of the creditor and the taking of the dividend in no way deprived the surety of any rights which he could have maintained had not such appearance been had.

It is a well established principle that where debtor and creditor reside in the same state and the debtor is discharged by the insolvent laws of that state that the discharge is valid everywhere.

And it is equally well settled that where a debtor and creditor are residents of different states a discharge -under the bankrupt laws of the state where the debtor is domiciled will not operate as a discharge of the debt in the state where the creditor is domiciled.

It was for this reason that it was held in the cases cited by the defendant that the appearance of the creditor in the bankruptcy court and thus conferring jurisdiction upon the bankruptcy court, although not a resident of the country over which the court had jurisdiction, and the accepting of a dividend discharged the surety. In such a case, unless the creditor had intervened, the discharge would have had no effect upon the debt in the jurisdiction where the creditor and the surety lived, and the property of the debtor which might come into that jurisdiction could be made subject to the payment of the debt

. But no case has been found and no principle adverted to, where the debtor and creditor reside in the same state, and the discharge would be operative whether the creditor appeared and proved his debt or not, holding that the proving of a debt or the taking of a dividend by the creditor discharges the surety.

The whole theory oi these decisions is that the surety is entitled to be subrogated to the rights of the creditor; and that in a case where the discharge becomes operative as to the debtor the right of the surety is cut off without his having an opportunity to be heard, and where that is done voluntarily by the creditor he cannot subsequently come upon the surety for any portion of the debt

But where the discharge has taken place involuntarily, or where whether the creditor appeared or not the same result would have followed, except that the surety’s liability would have been increased because the debt would not have been diminished by the dividend, the rule in the cases cited cannot apply.

It is urged upon the part of the appellant that the mere fact that the creditor resided in the state with the bankrupt would not destroy a foreign surety’s right to subrogation. But in this propbsition the learned counsel ovérlooks the principle which is conceded in the cases of Gardner v. Oliver Lee’s Bank, 11 Barb., 558 , and Phelps v. Borland, 103 N. Y., 406 ; 4 N. Y. State Rep., 233,

p. 478

that if the bankrupt court acquired _ jurisdiction- of the creditor without his intervention, the debt would have been discharged and the surety would have lost no rights. And those cases were,, decided as they were only because the creditor voluntarily intervened, and gave the court jurisdiction to so-discharge the debt that tbn rights of the surety were gone. If a bankruptcy court having jurisdiction of the person of the creditor could not discharge the debt so that the right of the surety would be extinguished, it could ■ not do so where the creditor having appeared, being a non-resident, thus conferred jurisdiction. But the contrary is the rule recognized by the cases above cited, viz.: that where the court has jurisdiction of the person in proceedings of this description, where the creditor is a resident within the jurisdiction of the insolvency court, its decree discharges the debtor absolutely, and there areno rights against the debtor to which anybody can be subrogated.

The judgment should be affirmed, with costs.

Daniels and Brady, JJ., concur.