Statutes should be sensibly construed with a view to
effectuating the legislative intent.
It is the purpose of the Bankruptcy Act to convert the assets of
the bankrupt into cash for distribution among creditors and then
relieve the honest debtor from the weight of oppressive
indebtedness and permit him to start afresh free from obligations
and responsibilities consequent upon business misfortunes. Within
the intendment of the bankruptcy law, provable debts include all
liabilities of the bankrupt founded on contract, express or implied
which at the time of the bankruptcy were fixed in amount or
susceptible of liquidation. Under the provisions of the Bankrupt
Act, the surety of the bankrupt either shares, or enjoys due
opportunity to share, in the principal's
Page 236 U. S. 550
estate, and therefore the discharge of the bankrupt acquits the
obligation between them incident to the relationship.
A discharge in bankruptcy acquits the express obligation of the
principal to indemnify his surety against loss by reason of their
joint bond conditioned to secure his faithful performance of a
building contract broken prior to the bankruptcy, although the
surety did not pay the consequent damage until thereafter.
11 Ga.App. 635 reversed.
The facts, which involve the construction of the Bankruptcy Act
and effect of a discharge in bankruptcy, are stated in the
opinion.
Page 236 U. S. 552
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
This cause presents the following question: does a discharge in
bankruptcy acquit an express obligation of the principal to
indemnify his surety against loss by reason of their joint bond,
conditioned to secure his faithful performance of a building
contract broken prior to the bankruptcy when the surety paid the
consequent damage thereafter?
R. P. Williams and J. B. Carr, as partners, entered into a
contract with certain school trustees -- April, 1900 -- to
construct a building in Florida, and, with defendant in error
company as surety, gave a bond guarantying its
Page 236 U. S. 553
faithful performance. Contemporaneously with the execution of
the bond, and as a condition thereto, the partners made a written
application to the company in which they obligated themselves
"to indemnify the said United States Fidelity & Guaranty
Company against all loss, costs, damages, charges, and expenses
whatever resulting from any act, default, or neglect of ours that
said United States Fidelity & Guaranty Company may sustain or
incur by reason of its having executed said bond or any
continuation thereof."
November 9, 1900, the partners abandoned the contract; the
trustees took possession and completed the structure April 13,
1901, and on May 14th following they made adequate demands for
payment of the amount expended beyond the contract price. This
being refused, they brought suit and recovered a judgment against
the company July 1, 1904, which it satisfied February 20, 1905, by
paying $5,475.36.
Voluntary petitions were filed by partnership and members May
28, 1901, and all were immediately adjudged bankrupt. The schedules
specified the building contract, its breach and the bond, and their
adequacy is not now questioned. In due time, the school trustees
proved their claim and it was allowed. October 5, 1901, the
petitioners received their discharges. No dividend was declared,
all the assets being required for administration expenses.
Defendant in error brought suit in the City Court of Atlanta
against the firm and its members -- August, 1911 -- setting up the
written promise made to it when the bond was executed and asking
judgment for the amount paid in satisfaction of the recovery
thereon, together with attorneys' fees. The matter was submitted
upon an agreed statement of facts, and judgment went in favor of
the company; this was affirmed by the Court of Appeals of Georgia
(11 Ga.App. 635), and the cause is here upon writ of error.
Page 236 U. S. 554
The state court treated the written contract of indemnity
between the bankrupts and the surety company as the expression of
what would have been implied, and declared:
"The bankrupts owed the surety nothing at the time the petition
in bankruptcy was filed, because the surety had paid nothing for
their benefit, and the relation of debtor and creditor did not
exist between them until after actual payment by the surety. . . .
The surety had no claim against the bankrupts which it could file
in its own name. . . . The liability to the surety by the bankrupts
was altogether contingent, and might never have arisen. Indeed, we
hold that, at the time the petition in bankruptcy was filed, the
surety had no claim or debt against the bankrupt which could have
been proved in the bankrupt court under § 63 of the Bankrupt
Act."
Counsel for the company
"contend that the claim at bar was subject to two contingencies,
one of which, to-wit, the sustaining or incurring of actual
pecuniary loss, resultant to the principal's act, had not arisen at
the time of the filing of the petition. Therefore, said claim was
not an unliquidated claim upon an express contract absolutely owing
at the time. It was a contingent claim, and as such not provable,
and therefore not affected by the bankrupt principal's
discharge."
If the doctrine announced by the court below and maintained here
by counsel is correct, a discharge in bankruptcy may have very
small value for the luckless debtor who has faithfully tried to
secure his creditors against loss, and, in effect, a demand against
him may be kept alive indefinitely, according to the interest or
caprice of his surety.
It is the purpose of the Bankrupt Act to convert the assets of
the bankrupt into cash for distribution among creditors, and then
to relieve the honest debtor from the weight of oppressive
indebtedness, and permit him to
Page 236 U. S. 555
start afresh free from the obligations and responsibilities
consequent upon business misfortunes.
Wetmore v. Markoe,
196 U. S. 68,
196 U. S. 77;
Zavelo v. Reeves, 227 U. S. 625,
227 U. S. 629;
Burlingham v. Crouse, 228 U. S. 459,
228 U. S. 473.
And nothing is better settled than that statutes should be sensibly
construed, with a view to effectuating the legislative intent.
Lau Ow Bew v. United States, 144 U. S.
47,
144 U. S. 59;
In re Chapman, 166 U. S. 661,
166 U. S.
667.
The statute (July 1, 1898, 30 Stat. 544, c. 541), as amended in
1903 (February 3, 1905, 32 Stat. 797, c. 487), provides:
"Section 17. A discharge in bankruptcy shall release a bankrupt
from all of his provable debts, except such as . . . (2) are
liabilities for obtaining property by false pretenses or false
representations."
"Section 63. Debts of the bankrupt may be proved and allowed
against his estate which are . . . (4) founded upon an open
account, or upon a contract, express or implied; . . . unliquidated
claims against the bankrupt may, pursuant to application to the
court, be liquidated in such manner as it shall direct, and may
thereafter be proved and allowed against his estate."
"Section 1."
"(11) 'Debt' shall include any debt, demand, or claim provable
in bankruptcy."
"Section 2. Courts of bankruptcy have jurisdiction to"
"(6) bring in and substitute additional persons or parties in
proceedings in bankruptcy when necessary for the complete
determination of a matter in controversy; . . ."
"(15) make such orders, issue such process, and enter such
judgments in addition to those specifically provided for as may be
necessary for the enforcement of the provisions of this Act."
"Sec. 57
i. Whenever a creditor whose claim against a
bankrupt estate is secured by the individual undertaking of any
person fails to prove such claim, such person may do so in the
creditor's name, and if he discharge such undertaking in whole or
in part, he shall be subrogated to that extent to the rights of the
creditor."
"General Order
Page 236 U. S. 556
XXI.-4. The claims of persons contingently liable for the
bankrupt may be proved in the name of the creditor when known by
the party contingently liable. When the name of the creditor is
unknown, such claim may be proved in the name of the party
contingently liable, but no dividend shall be paid upon such claim
except upon satisfactory proof that it will diminish
pro
tanto the original debt."
"Sec. 16. The liability of a person who is a co-debtor with, or
guarantor or in any manner a surety for, a bankrupt shall not be
altered by the discharge of such bankrupt."
Within the intendment of the law, provable debts include all
liabilities of the bankrupt founded on contract, express or
implied, which at the time of the bankruptcy were fixed in amount
or susceptible of liquidation.
Dunbar v. Dunbar,
190 U. S. 340,
190 U. S. 350;
Crawford v. Burke, 195 U. S. 176,
195 U. S. 187;
Grant Shoe Co. v. Laird, 212 U. S. 445,
212 U. S. 448;
Zavelo v. Reeves, 227 U. S. 625,
227 U. S. 631.
It provides complete protection and an ample remedy in behalf of
the surety upon any such obligation. He may pay it off and be
subrogated to the rights of the creditor; if the creditor fails to
present the claim for allowance against the estate, he may prove
it; and, in any event, he has abundant power, by resort to the
court or otherwise, to require application of its full
pro
rata part of the bankrupt's estate to the principal debt. To
the extent of such distribution, the obligation of the bankrupt to
the surety will be satisfied. Although, unlike the Act of 1867, the
present one contains no express provision permitting proof of
contingent claims, it does in substance afford the surety on a
liability susceptible of liquidation the same relief possible under
the earlier act --
i.e., application to the principal debt
of all dividends declared out of the estate (Act of 1867, §§ 19,
27, 14 Stat. 525, 529, c. 176). And as the surety thus either
shares or enjoys an opportunity to share in the principal's estate,
we think the discharge of the latter
Page 236 U. S. 557
acquits the obligation between them incident to the
relationship.
Mace v. Wells,
7 How. 272,
48 U. S. 276;
Fairbanks v. Lambert, 137 Mass. 373, 374;
Hayer v.
Comstock, 115 Ia. 187, 191;
Post v. Losey, 111 Ind.
74, 80;
Smith v. Wheeler, 55 App.Div. 170, 171.
It would be contrary to the basal spirit of the Bankrupt Law to
permit a surety, by simply postponing compliance with his own
promise in respect of a liability until after bankruptcy, to
preserve a right of recovery over against his principal,
notwithstanding the discharge would have extinguished this if the
surety had promptly performed as he agreed. Such an interpretation
would effectually defeat a fundamental purpose of the
enactment.
The written indemnity agreement embodied in the bankrupt's
application to the surety company for execution of the bond, so far
as its terms are important here, but expressed what otherwise would
have been implied from the relationship assumed by the parties. At
the time of the bankruptcy, the obligation under this agreement was
ancillary to a liability arising out of a contract, estimation of
which was easy of establishment by proof. There was no uncertainty
which could prevent the surety from obtaining all benefits to which
it was justly entitled from the bankrupt estate.
Upon the facts presented, we are of opinion that the discharge
pleaded by the plaintiffs in error constituted a good defense, and
the court below erred in holding otherwise. The judgment is
accordingly reversed, and the cause remanded for further
proceedings not inconsistent with this opinion.
Reversed.