Hall & Ruckel v. Johnston, Hill & Co.

This suit was instituted by William H. Hall against A.J. Hill, T.J. Johnston, and L.E. Belcia, comprising the firm of Johnston, Hill Co., appellant alleging that he was doing business under the name of Hall Ruckel. The suit is for a balance alleged to be due on an account for merchandise. The plaintiff dismissed as to the defendant Belcia, and verdict and judgment were rendered in favor of the other defendants. The answer of these defendants is quite voluminous, but its nature will be disclosed as this opinion proceeds. The testimony shows that after the account in question was created, Johnston and Hill retired from the firm, selling their interest in the partnership to Paul M. Potts; that Belcia and Potts continued the business as partners; that as part of the consideration for the sale Belcia Potts assumed the payment of all the indebtedness of Johnston, Hill Co., including the debt sued for. It is contended by appellees: 1. That appellant agreed to accept Belcia Potts for the payment of this debt, and released appellees. 2. That after appellees sold to Belcia Potts the latter firm was dissolved, Potts agreeing to pay this debt; that appellant entered into an agreement with Potts, by which the latter was to pay the debt in installments of $150 per month, thereby extending the time for its payment, it being then past due. It was also pleaded that Potts thereafter made certain payments, which should have been credited on said debt. *Page 112 The most important question in the case is, whether or not, when a partner retires from a firm, selling his interest in the assets to the other partner and another person who takes the retiring partner's place, and there is an agreement between them by which the new firm assumes the liabilities of the old firm, such retiring partner is entitled to the rights of a surety as against an antecedent creditor who has notice of all the facts. On this question there is considerable conflict of authority. The modern English doctrine appears to be against the proposition; and there are some American cases to the some effect. 17 Am. and Eng. Encycl. of Law, 1131. There are other American cases which support the affirmative of this proposition, and, in our opinion, they are founded upon correct principles of equity. The case of Colgrove v. Tallman, 67 New York, 95 (23 American Reports, 90), was an action upon a promissory note executed by H.C. Barnes Co. After its execution, Tallman, who was a member of the firm, sold all of his interest in the partnership property to the other partners, and the latter agreed to assume and pay all the firm's debts. Afterward Tallman notified the plaintiff, who then held the note, of the agreement between him and Barnes, and requested him to proceed and collect the note immediately. Barnes was then solvent and able to pay; he afterwards became insolvent. The question in the case was whether or not, under these circumstances, Tallman was discharged. The opinion in the case was prepared by Judge Folger, and it was held that Tallman's relation was changed from that of principal to surety, and that he was discharged, because the plaintiff failed to sue when he requested it. In the course of the opinion it is said: "And what comes close to this case in principle, and shows what a creditor must care for equities growing from new relations, arising out of changes made without his assent, is this: If several lots are mortgaged, and after that have come to different owners, and the mortgagee releases some of them, he may not enforce against those not released more than a proportionate amount of the mortgage debt; the creditor, says the chancellor, owes a duty to his debtors not to impair their rights as against each other. Stevens v. Cooper, 1 Johns. Ch., 425. This rule has been reiterated, with the requirement that the creditor must have notice of the change sufficient to put him on inquiry. Howard Ins. Co. v. Halsey, 8 N.Y. 271; and see Guion v. Knapp, 6 Paige, 35; Stuyvesant v. Hall, 2 Barb. Ch., 151. The reason is, that the parcels sold have become as sureties to the parcels not sold. The latter are as principals. A release of them is as a release of a principal debtor, which discharges the surety. To the same end is the rule, that a creditor having a lien upon two funds will be forced, in favor of an after-lienor having a claim upon one of the funds only, to seek his debt from the other fund. Cheesebrough v. Millard, 1 Johns. Ch., 409. And if he does aught to prejudice the claim upon the one fund of the after-lienor, *Page 113 after notice of the lien, he will to that extent be cut off from his own claim upon that fund. "In equity, then, the relations of the parties to this case are, that Barnes is the principal debtor, Tallman his surety for the payment of the debt, and Colgrove their creditor, of one as the principal debtor, of the other as surety. These relations existed as soon as Tallman gave notice to Colgrove of the dissolution of the partnership and the agreement between him and Barnes. Each of them was, after that, affected by all the rules applicable to persons in those relations." Smith v. Shelden, 35 Michigan, 42 (24 American Reports, 529), was a similar case. The opinion was written by Chief Justice Cooley, and in reference to this question he says: "For a determination of the question whether Smith and Owen were entitled to the rights of sureties, it seems only necessary to point out the relative position of the several parties as regards the partnership debt. Place, by the arrangement, had agreed to pay this debt, and as between himself and Smith and Owen, he was legally bound to do so. But Smith and Owen were also liable to the creditors equally with Place, and the latter might look to all three together. Had they done so, and made collections from Smith and Owen, these parties would have been entitled to demand indemnity from Place. This we believe to be a correct statement of the relative rights and obligations of all. "Now a surety, as we understand it, is a person who, being liable to pay a debt or perform an obligation, is entitled, if it is enforced against him, to be indemnified by some other person, who ought himself to have made payment or performed before the surety was compelled to do so. It is immaterial in what form the relation of principal and surety is established, or whether the creditor is or is not contracted with in the two capacities, as is often the case when notes are given or bonds taken; the relation is fixed by the arrangement and equities between the debtors or obligors, and may be known to the creditor, or wholly unknown. If it is unknown to him, his rights are in no manner affected by it; but if he knows that one party is surety merely, it is only just to require of him that in any subsequent action he may take regarding the debt, he shall not lose sight of the surety's equities. "That Smith and Owen were sureties for Place, and the latter was principal debtor after the dissolution of the copartnership, seems to us unquestionable. It was then the duty of Place to pay this debt and save them from being called on for the amount. But if the creditors, having a right to proceed against them all, should take steps for that purpose, the duty of Place to indemnify, and the right of Smith and Owen to demand indemnity, were clear. Every element of suretyship is here present, as much as if, in contracting an original indebtedness, the contract *Page 114 itself had been made to show on its face that one of the obligors was surety merely. As already stated, it is immaterial how the fact is established, or whether the creditor is or is not a party to the arrangement which establishes it." And it was held that as time for the payment of the debt was extended to Place, Smith and Owen were released. Mr. Brandt, in his work on Suretyship and Guaranty, second edition, section 36, adopts the views announced in these opinions as correct. See, also, 17 Am. and Eng. Encycl. of Law, 1129, 1130; Barber v. Gilson, 18 Nev. 89; Millerd v. Thorne, 56 N.Y. 402; Bank v. Waterman, 134 Ill. 46; Wilde v. Jenkins, 4 Paige, 481; Gates v. Hughes, 44 Wis. 332; Williams v. Boyd,75 Ind. 286; Gurley v. Tyler, 15 S.W. Rep., 731. The same principle is often applied in determining the rights of mortgagor and mortgagee, when the former has sold the mortgaged property to a third person who, as between them, has assumed payment of the debt. Considering this subject, a standard author says: "When a grantee thus assumes payment of the mortgage debt as a part of the purchase price, the land in his hands is not only made the primary fund for payment of the debt, but he himself becomes personally liable therefor to the mortgagee or other holder of the mortgage. The assumption produces its most important effect by the operation of equitable principles, upon the relations subsisting between the mortgagor, the grantee, and the mortgagee. As between the mortgagor and the grantee, the grantee becomes the principal debtor primarily liable for the debt, and the mortgagor becomes a surety, with all the consequences flowing from the relation of suretyship. As between these two and the mortgagee, although he may treat them both as debtors, and may enforce the liability against either, still, after receiving notice of the assumption, he is bound to recognize the condition of suretyship, and to respect the rights of the surety in all of his subsequent dealings with them." 3 Pome. Eq. Jur., sec. 1206. See, also, Calvo v. Davies, 73 N.Y. 211; Marshall v. Davies, 78 N.Y. 414; Palmer v. Purdy, 83 N.Y. 144; Murry v. Marshall, 94 N.Y. 611; Wilcox v. Campbell, 106 N.Y. 325; George v. Adams, 60 Md. 26; Union Stone and Machine Works v. Caswell, Book 16 Lawyers Ann. Rep., 85; Union Life Ins. Co. v. Hanford, 143 U.S. 187. It is not necessary to go as far as Colgrove v. Tallman, supra, and hold, that in case like the one under consideration, the failure of the creditor to sue within a given time or when requested will discharge the debtor; but our conclusion is, that if appellees transferred their interest in the assets of the firm of Johnston, Hill Co. to Belcia Potts, upon an agreement that the latter firm would pay the debt in question, and appellant had notice of these facts, he could not by a binding contract, not *Page 115 assented to by appellees, extend the time of payment without releasing them. Such affirmative action by the creditor is much more inequitable than a failure to sue when requested, because in the absence of an extension of time to the other debtor, the one asserting the rights of a surety can pay the debt and secure the right, by subrogation, to proceed immediately against his codebtor for reimbursement. We concur in the conclusion reached in the Michigan case from which we have quoted, and hold that the ruling of the court below, which followed the doctrine announced in that case, was correct. Appellees pleaded, that after they had sold out to Belcia Potts, and the latter had assumed the payment of the debt in question, and after Belcia Potts had dissolved and Potts had agreed to pay this debt, appellant, knowing these facts, agreed with Potts, as herein before stated, to extend the time of payment; and appellees claim that by reason of said last agreement they were discharged. Appellant, in addition to his general demurrer thereto raising the question just decided, excepted specially to this answer, because, as to him, it did not show that there was any consideration for said agreement. The action of the court in overruling this exception is assigned as error. This assignment is well taken. As it does not appear that the agreement to extend the time of payment was in writing, it does not import a consideration; and it was therefore necessary, in order to show a binding contract, for appellees to allege and prove that the agreement was founded upon a sufficient consideration. In so far as the answer sets up a novation — an agreement by appellants to accept Belcia Potts, or Potts individually, as paymasters, instead of the old firm — it discloses a sufficient consideration. Securing the liability of another person in lieu of or in addition to the original debtor is a good consideration. But the pleading in question does not show that by the alleged agreement any one became liable for the debt who was not already obligated to pay it; and it does not, in terms, aver that said agreement was founded upon a consideration. It is well settled, that in order to release a surety, an agreement to extend the time of payment must be based upon a sufficient consideration. Burke v. Cruger, 8 Tex. 66; Pilgrim v. Dykes, 24 Tex. 383; Hunter v. Clark, 28 Tex. 159 [28 Tex. 159]. Appellees pleaded only one agreement to extend time. That agreement was alleged to have been made with Potts at the time of the dissolution of the firm of Belcia Potts. But at the request of appellees, the court instructed the jury, that if such an agreement was made with either Potts or Belcia Potts, without appellees' consent, to find in his favor. Under their answer appellees had no right to have submitted to the jury any agreement to extend the time of payment, other than the one alleged *Page 116 to have been made with Potts. Whether or not such an agreement was made with Belcia Potts was not an issue in the case, and it was prejudicial to appellant's rights to submit that question to the jury. Railway v. Terry, 42 Tex. 451; Markham v. Carothers,47 Tex. 22; Loving v. Dixon, 56 Tex. 75. In regard to the application of payments, the court instructed the jury as follows: "If the jury should find from the evidence that the firm of Belcia Potts, upon the dissolution of the firm of Johnston, Hill Co., did assume to pay the indebtedness of Johnston, Hill Co. then existing, and should further find that thereafter the said Belcia Potts did pay to said Hall Ruckel certain moneys, without designating the particular item to which such payments should be applied; and should you further find that at the time such payments were made plaintiff knew that said Belcia Potts had assumed the indebtedness of Johnston, Hill Co., then I charge you that such payments should be applied to the indebtedness so assumed before indebtedness thereafter created by said Belcia Potts." This charge does not correctly state the law. The general rule is, that when a debtor owes two debts to the same creditor, one secured and the other unsecured, and makes a payment without directing its application, the creditor may apply it to the unsecured debt. Story on Part., secs. 157, 158; 18 Am. and Eng. Encycl. of Law, 239. If, however, equities exist between the principal and surety which are known to the creditor, by reason of which the payment ought to be appropriated to the secured debt, the creditor will be compelled to so apply it. But in the absence of such notice, the creditor may apply the amount to either debt. Harding v. Taft, 75 N.Y. 461. So in this case, if appellees transferred their interest in the assets of the firm of Johnston, Hill Co., upon an agreement that Belcia Potts, or either of them, were to pay the indebtedness of the old firm, and if the proceeds of any of these assets were paid to appellant, and he had notice of all these facts, equity will compel him to credit such payment upon the indebtedness of the old firm. For under such circumstances, the assets so transferred were held in trust for the payment of the antecedent partnership debts for which appellees were still liable. The charge given does not limit appellees' right to credits to such payments as were made from proceeds of the property transferred by them to the new firm, and for this reason was erroneous. We do not think the court erred in allowing the witnesses Robinson and Belcia to testify to the contents of certain statements of accounts sent to Belcia Potts and Paul M. Potts. They each stated that the statements were sent by Hall Ruckel (appellant), and their nonproduction was sufficiently accounted for. *Page 117 The other assignments relate to the verdict; but as the case must be reversed for other reasons, it becomes unnecessary to consider them. For the errors pointed out, the judgment will be reversed and the cause remanded. Reversed and remanded.