A company engaged in the mortgage-guaranty business became bankrupt, the respondent being the successor company resulting from reorganization proceedings under section 77B of the Bankruptcy Act. The original company had loaned money secured by a bond and mortgage and then sold certificates to the public representing undivided shares in the mortgage, the certificates being guaranteed by the same company. The mortgagor having defaulted, the controversy in the principal case arose because the now bankrupt company had before bankruptcy repurchased two of the certificates, acquired title to a third, and held the balance of the loan for which no certificates had been issued. In the reorganization proceedings the successor company, respondent, protested the lower court's subordination of its claims (the reacquired certificates and the uncertificated balance) to the claims of the public holders of these certificates. The lower court had applied the New York rule that a guarantor of mortgage certificates cannot share in the collateral until all certificate holders are paid unless there is a clear reservation of a right to share on a parity. Held, on appeal, one judge dissenting, that this was a case of construction of the certificates and not of the administration of insolvent estates and, therefore, the New York rule was properly applied, under the doctrine of Erie Railroad v. Tompkins. Geist v. Prudence Realization Corp. (C. C. A. 2d, 1941) 122 F. (2d) 503, cert. granted (U.S. 1942) 62 S. Ct. 479.
Michigan Law Review,
BANKRUPTCY-EFFECT OF RULE OF ERIE RAILROAD v. TOMPKINS ON PRIORITIES IN FEDERAL BANKRUPTCY PROCEEDINGS,
Mich. L. Rev.
Available at: https://repository.law.umich.edu/mlr/vol40/iss5/8