Felix Frankfurter

“ It held that a secured creditor could receive dividends on the face amount of his claim even though that claim had been reduced by the value of the collateral between the date of insolvency and the date of distribution. That rule of distribution is inequitable and unfair to the run of depositors. It gives an advantage to the secured creditor unwarranted by any provision of his contract. For it treats the claim as wholly unpaid even though it has been partially discharged by liquidation of the collateral. The impact on other creditors is oppressive. ”

“ Instead, it chose achievement of a 'just and equal distribution' of an insolvent bank's assets through the operation of familiar equitable doctrines evolved by the courts. Davis v. Elmira Savings Bank, 161 U.S. 275, 284, 16 S.Ct. 502, 504, 40 L.Ed. 700; Jenkins v. National Surety Co., 277 U.S. 258, 267, 48 S.Ct. 445, 446, 72 L.Ed. 874. Among the oldest of these doctrines is the rule of subrogation whereby 'one who has been compelled to pay a debt which ought to have been paid by another is entitled to exercise all the remedies which the creditor possessed against that other'. ”

“ This surety neither has nor had any claim which was secured. Nor did it have any fixed and liquidated claim at the date of the declaration of insolvency. Its claim was always unsecured and it matured, as in the Weed case, after the appointment of the receiver. Nevertheless, this surety, though it would fail to gain the preferred position of a secured creditor under the test of the Merrill case, is allowed to reach that position through the back door of subrogation.
It is ordinarily true that a surety succeeds to all of the rights and remedies of the creditor including the latter's priority. ”

“ The theory of that case is that 'the state's right to a preference over other creditors, being a sovereign right enjoyed for the benefit of all the people, cannot be transferred to individuals except by express legislative sanction.' 295 Pa. ”

“ Closer in point, however, are those cases which award the surety less rights than his principal had. Thus In re South Philadelphia State Bank's Insolvency, 295 Pa. 433, 145 A. 520, 83 A.L.R. 1123, held that while a surety was entitled to be subrogated to the rights of a State against an insolvent bank, the surety did not in absence of statute [3] acquire the State's priority. See Arnold, An Inequitable Preference in Favor of Surety Companies, 36 W.Va.L.Q. 278 ”

“ Notes
↑ Reflecting the special policy of bankruptcy legislation favoring the general creditor against the secured creditor, the rule prevails in bankruptcy that dividends upon the claims of secured creditors 'shall be paid only on the unpaid balance.' § 57 sub. h, 30 Stat. 544, 560, 11 U.S.C. § 93, sub. h, 11 U.S.C.A. § 93, sub. h; 14 Stat. 517, 526. It is settled, however, that the 'bankruptcy' rule is inapplicable to the distribution of assets of insolvent national banks. Merrill v. ”