The opinion of the court was delivered by: BYERS
Petition for certificate of review of determination of referee.
The two questions presented have to do with the effect here to be given to tax payments arising under State and City statutes imposing a cigarette tax.
The bankrupt was a wholesale dealer in cigarettes, tobacco and kindred products, and failed to pay certain taxes imposed by the said legislation; that is, it obligated itself to pay for tax stamps purchased on credit -- as the law permitted -- and payment was made instead by the United States Fidelity and Guaranty Company, a surety for the bankrupt, as to the State taxes; and by the American Surety Company, likewise a surety for the bankrupt, as to the City taxes; concerning the latter, resort was had to the collateral deposited with the surety to secure its bond, and consequently the individuals who deposited that collateral assert their succession to the rights of the surety in this proceeding; no question is made concerning their capacity to appear and litigate this matter in place of the surety.
(1) Did the sureties by paying the tax become subrogated to the rights of the State and the City, respectively, so that they may now be reimbursed, as the holders of priority claims, out of the general funds in the hands of the trustee?
(2) If such right of subrogation exists, can it be enforced with reference to these particular taxing statutes?
The referee decided the first question in the negative and hence declined to pass upon the second.
At the outset it is apparent that the equities seemingly lie with the petitioners, since the payments made by them have relieved the general creditors from depletion of the bankrupt estate consequent upon the enforcement of the statutory priority of the State and City in respect of these imposts; so much is hinted at by the referee, who says: "The State could have filed a claim in this bankruptcy proceeding. But it did not. It chose to call on the claimant to pay pursuant to the three bonds referred to."
It is customary to refer to bankruptcy proceedings as being essentially equitable in nature, which suggests that those who have paid priority claims, not as volunteers but as sureties, in good conscience ought not to be relegated to the position of general creditors, to their own detriment, unless the administration of the law inexorably so requires.
The applicable provisions of the Bankruptcy Act, for ready reference, are:
§ 57 sub. i. "Whenever a creditor whose claim against a bankrupt estate is secured by the individual undertaking of any person fails to prove and file 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." 11 U.S.C.A. § 93, sub. i.
These petitioners seem to fall within the clear purpose of the foregoing.
The referee concedes so much when he says: "There is subrogation as to the claim but none as to the priority accorded by Section 64a(4)." 11 U.S.C.A. § 104, sub. a(4).
"The debts to have priority, in advance of the payment of dividends to creditors, and to be paid in full out of bankrupt estates, and ...