Phoenix Indem. Co. v. Earle

218 F.2d 645 (9th Cir. 1955)



11 U.S.C.S. § 93(i) permits a surety to be subrogated to the rights of creditors to the extent that he pays the creditors. 


The debtor was a contractor who obtained a government contract to construct a parking lot for a government agency. Appellant issued performance and payment bonds to the debtor in connection with the project. The debtor completed the project, and his work was accepted by the agency. Because of financial difficulties, the debtor was unable to pay all of his creditors, and the debtor filed for bankruptcy. Pursuant to the bonds, appellant paid the debtor's creditors. Sums due from the agency to the debtor were surrendered to the debtor's trustee. Prior to the debtor's bankruptcy and the payments made by appellant, the IRS filed several tax liens against the debtor. The bankruptcy referee ordered that the monies paid by the agency to trustee were to be paid to the IRS to satisfy the tax liens, over appellant's subrogation claim to the funds. On appeal the court affirmed, holding that appellant's claims were unsecured and unperfected.


Are the government's tax liens asserted against funds in the hands of a trustee in bankruptcy superior to a surety's claim?




Under the Bankruptcy Act it appears that a surety is limited to a right of subrogation to the position of the creditors of the debtor to the extent that the surety pays the creditors. The best position of any of the creditors paid by Phoenix Indemnity Company to which it might be subrogated (although we understand this claim to be abandoned) was a right to priority by § 64 of the Act. The government is the holder of valid, perfected tax liens. Such a lien claimant has a position in bankruptcy superior to priority claimants whose claims are unsupported by perfected liens.

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