The Prudence Company, Inc., and Prudence-Bonds Corporation, wholly owned subsidiaries of the same parent corporation —New York Investors, Inc. — were together engaged in the mortgage-guaranty business. By a common practice, Prudence would lend money on a bond and real property mortgage, which it would assign to Prudence-Bonds, The latter would place them with a public depository and would issue certificates authenticated by the depository of undivided shares of specified amounts in the bond and the mortgage. These certificates would then be sold to the public with Prudence’s guarantee attached. The practice is described in Re Westover, Inc., 2 Cir., 82 F.2d 177, and see, also, In re Prudence Co., Inc., 2 Cir., 89 F.2d 689; In re Prudence Co., Inc., 2 Cir., 98 F.2d 559, certiorari denied Stein v. McGrath, 306 U.S. 636, 59 S.Ct. 485, 83 L.Ed. 1037; In re Prudence Bonds Corp., 2 Cir., 79 F.2d 212.
This procedure was followed in connection with the issue here involved. Prudence having lent the Zo-Gale Realty Co., Inc., $480,000, the loans were consolidated in 1925 in one bond secured by mortgage of the premises at 202 Riverside Drive, New York City. Prudence immediately assigned the bond and mortgage to Prudence-Bonds, which deposited them with Central Union Trust Company of New York and sold to the public certificates guaranteed by Prudence to the amount of $382,800. The mortgage was thereafter reduced by payment to $390,000. In 1932, Prudence repurchased two certificates in the amount of $800, and otherwise became entitled to one in the amount of $16.67. Whether claims in reorganization proceedings on these certificates totalling $816.67 and on the uncertificated balance of the loan, to wit, $7,200, stand on a parity with, or are subordinated to, the claims of general certificate holders is the question here at issue.
In proceedings for the foreclosure of a mortgage junior to the one received by Prudence, following the mortgagor’s default, the property was transferred February 1, 1933, subject to Prudence’s mortgage, to Amalgamated Properties, Inc., a subsidiary of Prudence. Reorganization proceedings against Prudence were begun February 1, 1935, and against Amalgamated, March 16, 1936. By an order therein of January 28, 1938, the court approved a transfer by Prudence-Bonds, also in reorganization, to the Prudence trustees of the $7,200 uncertificated portion of the Zo-Gale mortgage, in compromise of other claims. A plan for the reorganization of the Zo-Gale issue was subsequently confirmed, February 19, 1938, and pursuant thereto, title to the mortgaged property was transferred to Geist, petitioner herein, to carry out the plan.
Respondent, Prudence Realization Corporation, which succeeded to the interest of the Prudence trustees following the reorganization of Prudence by an order of May 26, 1939, now opposes Geist’s petition for subordination of the claims. The court below held, however, that under New York law a guarantor of mortgage certificates who also has an interest in the mortgage cannot share in the collateral until the certificate holders are paid, unless there is a clear reservation in the certificate of a right to share on a parity. Respondent has appealed from the resulting order of subordination against it.
The New York law to which the district court refers has been established in a series of recent cases dealing with the liquidation of companies engaged in the guaranteed mortgage business. In re Union Guarantee & Mortgage Co., 285 N.Y. 337, 34 N.E.2d 345; Pink v. Thomas, 282 N.Y. 10, 24 N.E.2d 724; In re Title & Mortgage Guaranty Co. of Sullivan County, 275 N.Y. 347, 9 N.E.2d 957, 115 A.L.R. 35, and other cases cited in these decisions. An important issue herein is whether this is primarily a rule of construction of the guaranty in the certificates or is a rule of administration of insolvent estates which violates bankruptcy principles of equal distribution of a bankrupt estate among creditors. If it is a rule of construction, we would follow it as we held in Re Prudence Co., Inc., 2 Cir., 82 F.2d 755, certiorari denied 298 U.S. 685, 56 S.Ct. 958, 80 L.Ed. 1405; and see, of course, Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487. And if we thus found the guarantee to amount to an actual agreement between two creditors that the claim of one against the debtor should be subordinated to that of the other, we should give that effect to it, as was done in St. Louis Union Trust Co. v. Champion Shoe Machinery Co., 8 Cir., 109 F.2d 313; Bird & Sons Sales Corp. v. Tobin, 8 Cir., 78 F.2d 371, 100 A.L.R. 654; and Searle v. Mechanics’ Loan & Trust Co., 9 Cir., 249 F. 942, cer-tiorari denied 248 U.S. 592, 39 S.Ct. 67, 63 L.Ed. 437, even though there appears to be authority contra to the effect that the enforcement of such agreements, not amounting to assignment of a claim, is entirely collateral to the interests of the estate and outside the bankruptcy power. In re Railroad Supply Co., 7 Cir., 78 F.2d 530; In re Goodman-Kinstler Cigar Co., 32 A.B.R. 624; see Nixon v. Michaels, 8 Cir., 38 F.2d 420. Where the state law determines what the actual agreement made by the parties is, and therefore the real basis of their claims in bankruptcy, it must be given effect.
If, however, the matter is one of insolvent liquidation only, we have a different situation. It is a necessary implication of the requirement of a plan of reorganization that “it is fair and equitable and does not discriminate unfairly in favor of any class of creditors,” Bankruptcy Act, former § 77B, sub.f(1), 11 U.S.C.A. § 207, sub.f(1), as it is a corollary of the strict priorities rule of Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110, that a plan may not discriminate between different members of the same class of creditors or classify creditors arbitrarily, without due regard to their economic status as defined in their respective claims. See Southern Pacific Co. v. Bogert, 250 U.S. 483, 492, 39 S.Ct. 533, 63 L.Ed. 1099; 49 Yale L.J. 881, 882 ; 2 Gerdes, Corporate Reorganizations, 1682; Finletter, Bankruptcy Reorganization, 465. Similarly, Bankruptcy Act, § 65, sub. a, 11 U.S.C.A. § 105, sub. a, requires, in liquidation, the distribution of “dividends of an equal per centum” “on all allowed claims, except such as have priority or are secured.” Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, 76 A.L.R. 1198; Globe Bank & Trust Co. v. Martin, 236 U.S. 288, 305, 35 S.Ct. 377, 59 L.Ed. 583; Sampsell v. Imperial Paper & Color Corp., 61 S.Ct. 904, 907, 85 L.Ed. 1293. The only departures made from the ordinary rule of equality are based on some very definite equity, such as fraud, Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281, mismanagement of the debtor by a parent corporation, Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct 543, 83 L.Ed. 669, or conceal
Notwithstanding the antithesis thus stated, the question might still remain somewhat more extensive than whether the New York rule is a mere rule of interpretation. For if it is a rule of law, hut one attributing a certain legal result to a contract, that result must still be the basis of the bankruptcy claim — just as, for example, a New York contract of insurance must legally incorporate in itself provisions which may be directly opposed to the parties’ actual intent. American Lumber-mens Mut. Cas. Co. v. Timms & Howard, Inc., 2 Cir., 108 F.2d 497, 502. It is still the difference between finding out what the contract claim is as opposed to adjusting priorities among ascertained claims. But, however far the answer to such a question might take us, we need not determine it here, for the New York decisions emphasize that it is the intent of the parties which they are seeking to ascertain with the aid of a “presumption of intent derived from the guaranty of the assignor.” The language just quoted is from In re Title & Mortgage Guaranty Co. of Sullivan County, supra [275 N.Y. 347, 9 N.E.2d 960, 115 A.L.R. 35], where the present Chief Judge has made the most extensive analysis of the subject of any of the cases and where he discusses not merely New York, but general, precedents. He finds that the rule “is supported by the weight of authority in this and other jurisdictions and produces an equitable result in accordance with the intent of the parties,” that “the decisive test in every case is the intention of the parties, either as actually expressed, or as derived from the natural equity of the situation,” and that “a presumption of such intent is derived from special equities,” of which the guaranty seems to he the one most noted. 275 N.Y. pages 353-355, 9 N.E.2d page 960, 115 A.L.R. 35. In thus stating the basis of the rule he expressly eliminates “avoidance of circuity of action” as its basis in this State; and he holds that the mere assignment of part of the mortgage without any guaranty is insufficient to raise a presumption against parity, citing Title Guarantee & Trust Co. v. Mortgage Commission, 273 N.Y. 415, 428, 7 N.E.2d 841, 847, where such an assignment was held to permit the assignor to share pro rata with the as-signee in the proceeds of insufficient surety. The most recent cases have followed the same principle; indeed, in the latest case of all, In re Union Guarantee & Mortgage Co., supra, certain language of the depository agreement was assumed to be adequate to achieve such parity but for the fact that the guarantor had can-celled its acquired certificates and had not issued others in place of them.
There is considerable authority in other jurisdictions to similar effect. In re Phil-lippi, 329 Pa. 581, 198 A. 16; Appeal of Fourth Nat. Bank, 123 Pa. 473, 16 A. 779, 10 Am.St.Rep. 538; Donley v. Hays, 17 Serg. & R., Pa., 400; Worrall’s Appeal, 41 Pa. 524; Fidelity Trust Co. v. Orr, 154 Tenn. 538, 289 S.W. 500; and see, also, Whitehead v. Morrill, 108 N.C. 65, 12 S.E. 894; Cannon v. McDaniel & Jackson, 46 Tex. 303; Dixon v. Clayville, 44 Md.. 573. The leading authority to the contrary is Kelly v. Middlesex Title Guarantee & Trust Co., 115 N.J.Eq. 592, 171 A. 823, affirmed 116 N.J.Eq. 574, 174 A. 706, much relied on by respondent herein. The reasons assigned for the rule have varied between the effect of the guaranty as evidence of an intent to grant the assignees priority, as in the Pennsylvania and Tennessee cases cited, or, as in Dixon v. Clayville and apparently the two cases cited before it, to avoid a circuity of action in suits by the general creditors against the guarantor — a reason, as is pointed out in the Kelly case, which loses its force where the guarantor is insolvent. A vigorous criticism of the rule as applied to an insolvent assignor appears in 47 Yale L.J. 480-483, where it is pointed out that the rule may give the assignees a preference at the expense of unsecured creditors, and, in the case of a large holding of a single issue, prejudice other customers of the assignor in favor of the holders of this particular issue. Compare, also, 37 Col.L.Rev. 1010; 34 Col.L.Rev. 663, 678; 14 N.Y.U.L.Q.Rev. 259; 19 R. C.L. 659, 660. In these comments it appears to be assumed that the rule is one of intent or construction of the guaranty.
Whether or not we might quarrel with the rule as an original or a general proposition, we see no occasion to do
A final question arises as to the claim on the uncertificated indebtedness of $7,200, for that, at the time of the debtor’s bankruptcy, was nominally in the name of Prudence-Bonds, which, in the light of the agreement just quoted, as well as Title Guarantee & Trust Co. v. Mortgage Commission, supra, would itself be entitled to share on a parity with the certificate holders, since it was not a guarantor. But the record shows without dispute that Prudence-Bonds when it took the original assignment from Prudence did not give any money value for the bond and mortgage and could not be expected to, as it had no such assets as would justify a loan in its own right of this amount. Compare In re Westover, Inc., supra; In re Prudence Bonds Corp., supra. And later collections of interest applicable to this uncertificated indebtedness went to Prudence. On the basis of such facts appearing of record the court below held that Prudence was the actual and equitable owner throughout, and hence the New York rule was applicable. We think this conclusion sound and in accordance with the undoubted realities of the relations between the parties here. On this basis both the uncertificated portion of the indebtedness and the certificates bought by Prudence prior to any of the reorganization proceedings were properly declared subordinate to the claims of the public certificate holders.
Affirmed.
FRANK, Circuit Judge, dissents with opinion.