Ætna Casualty & Surety Co. v. Kishwaukee Special Drainage Dist. , 143 F.2d 471 ( 1944 )

EVANS, Circuit Judge

(dissenting).

Two questions are presented: (a) Should the court subrogate plaintiff to the rights of the Masterson judgment creditors? (b) What are the rights of said judgment creditors as against the Drainage District? The District Court not only held plaintiff to be entitled to subrogation, but ordered an assessment of land in the District to pay the plaintiff’s claim. I think that the two questions are quite separate and in no way interdependent.

To better picture the status of the parties, the following is submitted as

A Chronological Statement of the Important Events:

(1) In 1906 The Kishwaukee Special Drainage District was organized.

(2) July 1, 1908 The District issued bonds aggregating $27,000, here termed the Masterson bonds, which were to mature, July 1, 1918.

(3) March 12, 1923 Seven judgments totaling $16,024 were recovered in the state court, against the District, in favor of the Masterson bondholders.

(4) October 15, 1923 Another issue of bonds, $16,200, called the Adamson bonds, was issued. They were special, limited liens payable out of assessments to be collected.

(5) October 25, 1923 The Adamson bonds were sold to Armstrong Co. for $15,-740.99.

(6) October 29, 1923 The District

Treasurer paid the first issue of bonds, the Masterson bonds, out of moneys received from the sale of the Adamson bonds.

(7) In 1926 The state court sustained obj ections to further assessments under the Adamson issue. Up to that time $6,574,25 had been collected on such assessments.

(8) August 22, 1929 Adamson and other holders of the 1923 issue sued the District, the Treasurer, and its commissioners for misapplication of the funds received on the sale of their bonds.

(9) January 29, 1932 The Adamson suit resulted in a judgment in favor of Adam-son, et al., against the District, in the sum of $5,237.49, and against the Treasurer and the commissioners for $18,758.06. The District paid its judgment.

(10) June 7, 1932 Adamson, et al., filed suit on their judgment against the surety of Decker, the Treasurer.

(11) October 14, 1934 Adamson, et al., recovered judgment against the surety (the instant plaintiff) and said judgment of $18,-758.06 was paid by the surety.

(12) April 23, 1937 The surety, instant plaintiff, as subrogee of Adamson, sued the Treasurer, in state court on fieri facias, returned no property found.

(13) July 17, 1937 Instant suit begun, by surety against District.

(14) November 25, 1938 Surety filed new count seeking to be subrogated to Masterson bonds.

(15) February 26, 1941 The Treasurer paid the surety company, $3,250 on account.

(16) October, 1942 Masterson bonds satisfied of record.

(17) April 16, 1943 Instant judgment, subrogating surety to the Masterson creditors and to recover $22,913.24 against the District, and if it did not have the funds on hand, ordered the District to levy a special assessment against the lands.

Event No. 11 is the basis of plaintiff’s cause of action. It paid a judgment of $18,-780.19, as surety of the treasurer of the District, who erroneously used moneys derived from sale of the Adamson bonds to pay the holders of the Masterson bonds. The Masterson bonds thus satisfied were legal obligations of the District for which judgment had'been entered (See event No. 3). The judgments were not satisfied of record until October, 1942 (see event No. 16). The legal effect of the payment, however, was to satisfy the debt evidenced by the bonds and the state court judgments based on them.

The mistake of the treasurer whereby he used funds lawfully devotable solely to the payment of Adamson bondholders, to' the payment of the lawfully-issued Masterson bonds, created a liability on the part of the treasurer for which the surety was liable. The treasurer not being financially able to meet the District’s demand to make good on his misapplication of the District’s funds to the wrong obligation of the District, the surety company was called upon to pay and did pay the said obligation of its principal.

What right, if any, did it thereby become subrogated to? That is our question.

Undoubtedly plaintiff became subrogated to the principal’s rights, to the rights of the treasurer of the District. American Surety Co. v. Bethlehem Bank, 314 U.S. 314, 317, 62 S.Ct. 226, 86 L.Ed. 241, 138 A.L.R. 509. The principal had paid the Masterson bondholders, whose claims were then reduced to judgment against the District. Had the treasurer, instead of the surety, paid this money to the District, would he not have been entitled to be subrogated to the Masterson judgment creditors’ claims? I think so. It seems to me that the surety would have the same right to subrogation as its principal.

It has been said (50 Am.Juris. pp. 683-685) that “Subrogation is a creature of equity, having for its purpose the working out of an equitable adjustment and the doing of complete and perfect justice between the parties. (Restatement of the Law— Restitution Sec. 162.) * * * It is the machinery by which the equities of one man are worked out through the legal rights of another; a legal fiction through which one person who pays the debt of another, not as a volunteer, is put into the shoes of the creditor, thereby becoming entitled to the 'latter’s rights, priorities, remedies, liens, and securities.”

“It is not static, but is sufficiently elastic co take within its remedy cases of first instance which fairly fall within it.”

The doctrine of subrogation found its most frequent application, in the earlier cases, to instances where sureties made good the default of their principals. Its application in this case cannot be questioned. Only the extent to which it should be carried is debatable.

Defendant disputes plaintiff’s right to step into the shoes of the Masterson bondholders, because to so hold would be carrying subrogation further than permissible. The majority opinion so holds. I think otherwise.

The rule is well recognized that a surety entitled to subrogation is entitled not only to the rights and remedies of the creditor against the principal, but may also be subrogated to the rights and remedies of the creditor against third persons. The right to recover from third persons, however, does not stand on the same footing as the right to recover from the principal. As against the principal, the right is absolute. As against the third party, it is conditional. Against the third party the right will usually be enforced, but not if innocent purchasers’ or innocent third parties’ rights are thereby impaired. See Amer.Juris. page 754.

In the instant case, no third parties’ rights have intervened. Plaintiff paid an obligation of its principal which arose because said principal paid the claims of bondholders from funds of the Drainage District, which were only usable for another purpose.

To hold that the surety’s right to subrogation extends only to a cause of action against the principal would give to this equitable doctrine a scope inconsistent with the spirit of equity out of which it grew. Payment by the principal was payment of a valid obligation of thé Drainage District. In fact, the obligation, evidenced by bonds of the District, had been reduced to a judgment. Its legality could not be assailed, although its enforceability presents a different question.

It is quite beside the question to say that the holder of the bonds or the holder of the judgment could not enforce the judgment in the usual way, by assessment. We are here merely considering the right of subrogation. Whether that right will prove valuable raises a different question.

It is hardly necessary to add that I am of the opinion that plaintiff was subrogated to the rights of the Masterson bondholders, whose claims were paid by the District’s treasurer on whose bond the plaintiff’s liability arose.

Does the record show that plaintiff, who was subrogated to the rights of the Master-son bondholders, was entitled to the decree ordering an assessment - against the landowners of the District ?

The instant decree was entered in a summary proceeding without a trial. The District Court only had pleadings before it. There were some disputed issues presented by these pleadings.

I am not satisfied from the record before, me that an assessment should be made, nor can I say that the prayer for an assessment should be denied.

The right to compel an assessment depends upon the Illinois law as construed by the Illinois Supreme Court.

I am unable to say that there existed sufficient reason to justify refusal to order an assessment. The Masterson creditors held bonds which had been reduced to judgment, in an Illinois state court. That much is clear. But what interfered with their payment? Were the facts which prevented their payment sufficient to relieve the. landowners from further assessments of their land? I am unable to say from the meager record before us.

I believe the decree should be reversed, but only as to that part which orders an assessment of land to pay plaintiff’s claim. As to this issue, the District Court should hear the parties fully and make findings which hear upon, and determine, the liability of the landowners for assessment with which to pay all or part of plaintiff’s claim based on its right through subrogation to enforce the Masterson bonds.