Orem v. Wrightson

Brent, J.,

delivered the opinion of the Court.

The appellees were sureties upon the bond of Arthur W. Leeke, Collector of State Taxes for Talbot County. Leeke proceeded to collect a large amount of said taxes, but died before paying into the treasury of the State the whole amount so collected by him. For this balance, due at the time of his death, suit was afterwards brought, upon the bond, by the State against the appellees, and judgment obtained. Having paid their respective portions of the judgment, they now seek to recover the sums of money so paid from the personal estate of Leeke, the principal debtor, in the hands of his administrator. This being insufficient to pay all the debts due, the ground is taken that this is a preferred debt, and as such must take priority in the distribution. The record shows, that there is no other claim of preference against the property.

The Orphans’ Court of Talbot County in June, 1878, upon the final distribution of this estate passed an order allowing a priority to this claim of the appellees, and from that order the present appeal is taken by one of the other creditors.

Appended to the agreed statement of facts in the record is the following:

“It is further agreed, that in the foregoing proceedings, the questions submitted to the Orphans’ Court, and upon *42 which their order of the 11th of June, 1878, was passed, were:

“ First. Whether under the facts of this case, the State of Maryland was entitled to priority of payment of its claim, out of the assets of the estate of Arthur W. Leeke, deceased; and if so, whether, secondly, the sureties in Leeke’s bond, as collector of State taxes, having paid the said claim, were entitled to be subrogated to the State’s priority ? Both of these questions were decided affirmatively by the Orphans’ Court, and upon this appeal, the same questions will he submitted to the Court of Appeals.”

The priority of the State in the payment of its claim against a debtor is not a new question. It was recognized and enforced as early as 1787 in the case of The State vs. Rogers and Wife, 2 H. & McH., 198 ; and again in 1793 in the case of Murray vs. Ridley’s Administratrix, 3 H. & McH, 171, where one of the questions presented in the distribution among creditors, of the estate of the intestate Ridley, was the priority of the State as a preferred creditor. The same question also arose in Contee vs. Chew’s Executor, 1 H. & J., 417 , and the right of the State to he first paid out of the assets of its deceased debtor was again announced. In these cases there was no opinion delivered, giving the grounds of the decision. But' in the case of The State of Maryland vs. The Bank of Maryland, 6 G. & J., 205 , argued by the ablest members of the bar, the question was again presented, and is treated at considerable length in the opinion of Court, delivered by Chief Judge Buchanan. The conclusion, reached by the Court, is in favor of the State’s right of priority, as a prerogative right derived from the common law, entitling her to be first paid, except only where some antecedent lien stands in the way. This may now be well considered as the settled law in this State.

In the present case, there being no liens in the way, the State was clearly entitled to be first paid out of the assets in the hands of the administrator of Leeke.

*43 The next question to be examined is, to what rights, if any, the appellees as sureties of Leeke are subrogated by their payment to the State of the debt due by him, at the time of his death, as principal debtor.

The doctrine of subrogation, or substitution as it is also termed, is a peculiar feature of equity. It is not founded in contract, but has its origin in a sense of natural justice. So soon as a surety pays the debt of the principal debtor, equity subrogates him to the place of the creditor, and gives him every right, lien, and security, to which the creditor could have resorted for the payment of his debt. As said in the annotation to the case of Dering vs. Earl of Winchelsea, 1 Leading Cases in Eq., 60 (m,) “Payment by one who stands in the relation of a surety, although it may extinguish the remedy or discharge the security, as respects the creditor, has not that effect as between the principal debtor and the surety. As between them it is in the nature of a purchase by the surety from the creditor ; it operates an assignment in equity of the debt and all legal proceedings upon it, and gives a right in equity to cal 1 for an assignment of all securities; and, in favor of the surety, the debt and all its obligations and incidents, are considered as still subsisting.” A large number of American cases are cited, and they sustain fully these general principles.

The doctrine announced in Copis vs. Middleton, 1 Tur. & Rus., 224, to the effect that equity will not subrogate the surety in cases where payment extinguishes the security at law, has not been generally followed in this country. While it has been adopted in cases in Alabama and North Carolina, it seems that the Courts in the other. States, where the question has arisen, and the Supreme Court of the United States, ( 12 Wheaton, 598 ,) have held the opposite view. The annotators in 1 Leading Cases in Equity, 88, referring to the cases in the United States say, that, with the exception of the cases in the two States *44 above named, “it appears to be universally and firmly settled, that although the surety or lien be extinguished at law, yet for the benefit of the surety, by whose money or property the creditor has been satisfied, it continues in full force.” This rule is equitable and just, and supported as it is by the great weight of authority in this country we feel justified in adopting it. See Hollingsworth vs. Floyd, 2 H. & G., 90 ; Sotheren vs. Reed, 4 H. & J, 309; Creager vs. Brengle, 5 H. & J., 240 ; Merryman vs. State, Id., 427.

The question of the subrogation of the surety to the priority of the creditor, by the payment of the debt to him, has arisen, as in the present case, most frequently in regard to the distribution among creditors of assets in the hands of an executor or administrator. In Powell’s Ex’rs vs White, and others, 11 Leigh, 309 , after a very able and extended review of the authorities, especially the English, a surety upon a bond, who had paid it off after the death of the principal debtor, was held to be subrogated to the same right of priority in the distribution of assets in the hands of the executor, which the law of the State conferred upon bond creditors.

In Lidderdale vs. Robinson, 2 Brockenborough, C. C. of U. S. Reps., 159, the doctrine of subrogation arose, and the extent to which a surety, who has paid the debt, is subrogated to the priority of the creditor, was presented and'considered. Chief Justice Marshall, in his opinion in the case, adopts the Virginia decisions as establishing “ the principle incontrovertibly, that the surety who has paid a debt, stands, as respects his claim on the principal or his estate, to every purpose in the place of the creditor.” He refers to the three cases in 4 Johns. Ch. Reps., 123, 530, and 545, as recognizing the same principle, and to the case in 4 Desaussure, 44. He then proceeds to say: “ The principle that a person, who has paid money as surety or on account of another, shall be substituted in the place of *45 the creditor, seems to be familiar in England. In 3 P. Wms., 400, it is laid down by the Chancellor, that an executor, who has paid beyond the assets which have come to his hands, shall rank as the creditor whose debt he has paid.” 1 Atk., 134; Ex parte Crisp, 2 Ves. Sen., 302, and 11 Ves. Jr., 22, are also cited in the opinion. In the case, the learned Chief Justice not only maintains the right of a surety to be subrogated to the priority of the creditor against the principal debtor, but extends the doctrine against a co-surety.

This case was carried to the Supreme Court of the United States upon a certified division of opinion between the Chief Justice and Judge Tucker, who sat with him in the Circuit Court, and is reported in Lidderdale vs. Robinson, 12 Wheaton, 594 . The Supreme Court sustained the views of the Chief Justice, and in the conclusion of their opinion on page 598, they say; “ That this, then, is the settled law of the State, in which this contract and cause originated, cannot be doubted. But we feel no inclination to place our decision upon that restricted ground, since we are well satisfied with its correctness on general principle, and on authorities of great respectability in other States.” See also Watts, and others vs. Kinney, et ux., 3 Leigh, 272 ; Cheeseborough vs. Willard, 1 John. Chan. Reps., 413; Croft vs. Moore, 9 Watts, 409 ; Himes vs. Keller, 3 Watts & Sarg., 404; Carrico vs. Farmers and Merchants’ National Panic, &c., 33 Md., 241 , and cases there cited.

We might cite a very large number of other authorities upon this point, but have not considered it necessary. We think the doctrine is well established by a decided preponderance of the cases, that a surety, who has paid the debt of his principal obligor, is subrogated in equity by the act of payment, not only to the securities of the creditor, but to all his rights of priority. If therefore the creditor could have rightfully claimed a preference in *46 the distribution of assets, the same preference will be upheld by way of subrogation for the benefit of the surety.

Is a different rule to be applied where the State is the creditor? We can see no reason why it should be. It is not necessary to inquire how, or in what manner the State’s right to rank as a preferred creditor is derived, whether it is a prerogative right derived from the common law, or whether it has been conferred by statute. As is said in some of the cases to which we have referred, equity in applying the doctrine of subrogation looks not to form, but to the substance and essence of the transaction. It looks to the debt which is to be paid, and not to the hand which may happen to hold it, and will see that the fund charged with its payment shall be so applied. 3 Leigh, 295 .

In the present case, the debt of the collector, Leeke, was due to the State at the time of his death. It was a charge against him as the principal debtor, and upon the assets left by him. The latter constituted the fund out of which it was to be paid as a preferred debt. And if equity, does not regard the hand which holds the debt, and will see that the fund charged with its payment shall be so applied, what difference can logically result whether the creditor, to whom the surety has made payment, is the State or an individual.

While this view of the law will do no wrong to any one, it will add facilities in securing and collecting the revenue of the State. If sureties know that they can be subrogated to the priority of the State, less apprehension will be felt in joining in the bonds of collectors, and less delay in payment by solvent sureties, other., creditors are not injured^for'’ if the~State 'has the" first claim upon the fund, it does them no wrong whether this claim is enforced by the State, or by those standing in its stead.

We have not referred to the agreement in regard to the assignment, under the Act of Assembly, of judgments *47 obtained by the State. Our decision rests entirely upon the doctrine of subrogation, and outside of any consideration of the effect and requisites of an actual assignment.

(Decided 6th March, 1879.)

Upon the whole, we think the sureties in this case are equitably entitled to be subrogated to the priority of the State, and that by virtue of such subrogation the debt, which they have paid to the State, should he first paid to them in the distribution of the assets in the hands of Leeke’s administrator.

The order of the Orphans’ Court, appealed from, will therefore be affirmed.

Order of Orphans’ Oourl affirmed, and the costs to he paid out of the fund.