Document Type

Article

Publication Date

1-1912

Abstract

The peculiar three-sided relationship of principal, surety and creditor gives rise to many vexatious questions of law, and one of the most interesting of these vexatious questions is that of the relationship between surety and principal in the case of the latter's bankruptcy. Under such circumstances, the creditor's right is fairly simple; he may prove his debt against the principal, take such dividend as may be declared, and recover the balance of the debt from the surety, his remedy against the latter being expressly saved by Sec. 16 of the present Bankruptcy Act.1 But the position of the surety is less clear. Upon becoming a surety, he has acquired a two-sided status of liability and right; he has become liable to pay money to the creditor if the principal defaults; and if he does so pay to the creditor, he has a right to be reimbursed by the principal for the payment so made. In other words, the surety is contingently the debtor of the creditor, and the creditor of the debtor (principal). And this contingent liability and right exist in the surety from the time of making the contract of suretyship. He is, clearly enough, always liable to pay the debt to the creditor if the principal does not, and he is also always the possessor of a right against the principal, namely, the right to be reimbursed for any payment he may have to make on the principal's account. It is the nature of this right that leads to the difficulty of determining the status in bankruptcy of the surety's claim against his bankrupt principal. It is clear that the surety, from the time of making the contract of suretyship, has a potential claim, or contingent possibility of a right, against his principal, but it is equally clear that this claim or right does not become absolute and fixed until the surety has made a payment for his principal. Until this time he has no right of action against his principal, but merely a contingent possibility of a right. The following questions naturally arise as to this right to reimbursement: Can the holder of this claim (the surety) join in a petition in involuntary bankruptcy against the principal? Can he prove his claim against the principal's estate? Is his right against the principal barred by the latter's discharge in bankruptcy? Is the surety, by virtue of his inchoate claim, a creditor who may be preferred or defrauded by the bankrupt principal?

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