Duarte Bankruptcy Attorney, Bankruptcy Lawyer, Bankruptcy Code 11 USC Section 509

TITLE 11 - BANKRUPTCY
CHAPTER 5 - CREDITORS, THE DEBTOR, AND THE ESTATE
    SUBCHAPTER I - CREDITORS AND CLAIMS

-HEAD-
    Sec. 509. Claims of codebtors

-STATUTE-
      (a) Except as provided in subsection (b) or (c) of this section,
    an entity that is liable with the debtor on, or that has secured, a
    claim of a creditor against the debtor, and that pays such claim,
    is subrogated to the rights of such creditor to the extent of such
    payment.
      (b) Such entity is not subrogated to the rights of such creditor
    to the extent that - 
        (1) a claim of such entity for reimbursement or contribution on
      account of such payment of such creditor's claim is - 
          (A) allowed under section 502 of this title;
          (B) disallowed other than under section 502(e) of this title;
        or
          (C) subordinated under section 510 of this title; or

        (2) as between the debtor and such entity, such entity received
      the consideration for the claim held by such creditor.

      (c) The court shall subordinate to the claim of a creditor and
    for the benefit of such creditor an allowed claim, by way of
    subrogation under this section, or for reimbursement or
    contribution, of an entity that is liable with the debtor on, or
    that has secured, such creditor's claim, until such creditor's
    claim is paid in full, either through payments under this title or
    otherwise.

-SOURCE-
    (Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2585; Pub. L. 98-353, title
    III, Sec. 450, July 10, 1984, 98 Stat. 375.)


                       HISTORICAL AND REVISION NOTES                   

                          LEGISLATIVE STATEMENTS                      
      Section 509 of the House amendment represents a substantial
    revision of provisions contained in H.R. 8200 as passed by the
    House and in the Senate amendment. Section 509(a) states a general
    rule that a surety or co-debtor is subrogated to the rights of a
    creditor assured by the surety or co-debtor to the extent the
    surety or co-debtor pays such creditor. Section 509(b) states a
    general exception indicating that subrogation is not granted to the
    extent that a claim of a surety or co-debtor for reimbursement or
    contribution is allowed under section 502 or disallowed other than
    under section 502(e). Additionally, section 509(b)(1)(C) provides
    that such claims for subrogation are subordinated to the extent
    that a claim of the surety or co-debtor for reimbursement or
    contribution is subordinated under section 510(a)(1) or 510(b).
    Section 509(b)(2) reiterates the well-known rule that prevents a
    debtor that is ultimately liable on the debt from recovering from a
    surety or a co-debtor. Although the language in section 509(b)(2)
    focuses in terms of receipt of consideration, legislative history
    appearing elsewhere indicates that an agreement to share
    liabilities should prevail over an agreement to share profits
    throughout title 11. This is particularly important in the context
    of co-debtors who are partners. Section 509(c) subordinates the
    claim of a surety or co-debtor to the claim of an assured creditor
    until the creditor's claim is paid in full.

                         SENATE REPORT NO. 95-989                     
      Section 509 deals with codebtors generally, and is in addition to
    the disallowance provision in section 502(e). This section is based
    on the notion that the only rights available to a surety,
    guarantor, or comaker are contribution, reimbursement, and
    subrogation. The right that applies in a particular situation will
    depend on the agreement between the debtor and the codebtor, and on
    whether and how payment was made by the codebtor to the creditor.
    The claim of a surety or codebtor for contribution or reimbursement
    is discharged even if the claim is never filed, as is any claim for
    subrogation even if the surety or codebtor chooses to file a claim
    for contribution or reimbursement instead.
      Subsection (a) subrogates the codebtor (whether as a codebtor,
    surety, or guarantor) to the rights of the creditor, to the extent
    of any payment made by the codebtor to the creditor. Whether the
    creditor's claim was filed under section 501(a) or 501(b) is
    irrelevant. The right of subrogation will exist even if the primary
    creditor's claim is allowed by virtue of being listed under
    proposed 11 U.S.C. 924 or 1111, and not by reason of a proof of
    claim.
      Subsection (b) permits a subrogated codebtor to receive payments
    in the bankruptcy case only if the creditor has been paid in full,
    either through payments under the bankruptcy code or otherwise.

                                AMENDMENTS                            
      1984 - Subsec. (a). Pub. L. 98-353, Sec. 450(a), substituted
    "subsection (b) or" for "subsections (b) and", and inserted
    "against the debtor" after "a creditor".
      Subsec. (b)(1). Pub. L. 98-353, Sec. 450(b), substituted "of
    such" for "of a" after "account".
      Subsec. (c). Pub. L. 98-353, Sec. 450(c), substituted "this
    section" for "section 509 of this title".

                     EFFECTIVE DATE OF 1984 AMENDMENT                 
      Amendment by Pub. L. 98-353 effective with respect to cases filed
    90 days after July 10, 1984, see section 552(a) of Pub. L. 98-353,
    set out as a note under section 101 of this title.

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