United States Fid. & Guar. Co. v. Wooldridge, 268 U.S. 234 (1925)

U.S. Supreme Court

United States Fid. & Guar. Co. v. Wooldridge, 268 U.S. 234 (1925) United States Fidelity & Guaranty Company v. Wooldridge

No. 352

Argued April 29, 1925

Decided May 11, 1925

268 U.S. 234

ERROR TO THE CIRCUIT COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Syllabus

1. Where a guaranty company executed a bond guaranteeing the fidelity of the president of a national bank, and another to a depositor of the bank insuring payment of deposit, and the bank thereafter became insolvent through the fraud of the president and the guarantor paid the depositor and took an assignment of the depositor's claim against the bank with approval of the bank's receiver, held that this claim could not be set-off by the guarantor as assignee or subrogee in an action by the receiver upon the bond first mentioned. P. 268 U. S. 237.

2. The doctrine of relation is a legal fiction invented to promote justice, and never allowed to defeat the collateral rights of third persons. Id.

295 F. 847 affirmed.

Error to a judgment of the circuit court of appeals affirming a judgment of the district court in favor of the receiver of a national bank in an action against the surety of one of its officers.

Page 268 U. S. 236

MR. JUSTICE HOLMES delivered the opinion of the Court.

The National Bank of Cleburne, Texas, became insolvent through the frauds of its president, and closed its doors on October 17, 1921. On November 1 following, the defendant in error was appointed receiver, and on April

Page 268 U. S. 237

14, 1922, began this suit upon a bond executed by the plaintiff in error on August 28, 1921, binding it to indemnify the Bank for losses of this character to the extent of $25,000. The Guaranty Company pleaded in set-off that, on August 24, 1921, it became surety for the Bank upon another bond to the Gulf, Colorado & Santa Fe Railway Company, conditioned upon payment by the Bank to the Railway Company of the Company's deposits in the Bank, and that, on January 16, 1922, it paid to the Railway Company $23,312.51 and as matter of law become subrogated to the rights of the Company against the Bank, and in addition took an assignment of such rights, which was approved by the plaintiff on February 1. An agreement of the parties was filed that the facts alleged were true and that the only question for the Court was

"whether or not, under the facts alleged, the defendant is entitled as against the plaintiff to set off the demand it holds as assignee or subrogee of the Gulf, Colorado & Santa Fe Railway Company."

Thus, the answer and the agreement confine the issue before us to the rights of the defendant guaranty company by way of subrogation or assignment. The district court and the circuit court of appeals gave judgment for the plaintiff for $25,000 interest and costs and denied the defendant's right. 295 F. 847.

The two bonds were wholly independent transactions, and were not brought into mutual account by any agreement of the parties. The guaranty company, after the insolvency of the bank, could not have bought a claim against the bank and used it in setoff. Scott v. Armstrong, 146 U. S. 499, 146 U. S. 511; Davis v. Elmira Savings Bank, 161 U. S. 275, 161 U. S. 290; Yardley v. Philler, 167 U. S. 340, 167 U. S. 360. The receiver contends that that is the position of the defendant here, because it was only a guarantor and was only liable upon the default of the president of the bank that produced the insolvency. The court

Page 268 U. S. 238

below treated the claim of the railway company against the bank as acquired by the defendant after the insolvency. The defendant, however, contends that, upon its payment to the railway company, its subrogation related back to the date of its contract, and we will assume for purposes of argument that this is true. But suppose it is, the right of the railway company was simply that of a depositor, a right to share with other unsecured creditors in the assets of the bank, of which the bond now in suit was a part. There would be no equity in allowing the railway company a special claim against this bond. We will assume that, if the railway company had insured the honesty of the bank's officers, the bank might have offset the obligation of the company against its claim as a depositor. But it is impossible to treat the succession of the defendant to the railway company's claim as effecting such an absolute identification with the railway company that one and the same person insured the bank and made the deposits. The doctrine of relation "is a legal fiction invented to promote the ends of justice. . . . It is never allowed to defeat the collateral rights of third persons, lawfully acquired." Johnston v. Jones, 1 Black 209, 66 U. S. 221.

Judgment affirmed.