Schroeppel v. Shaw

By the Court, Allen, J. It is well settled that the plaintiff could not have successfully defended the suit at law mentioned in the pleadings, upon the grounds relied upon for relief in this action. A dealing by the creditor with the principal in respect of a second or collateral security, will not at law discharge the surety from the payment of the principal debt, although he might have been discharged had the creditor dealt with the principal in the same manner with respect to the original security. (Pitman’s Pr. & Surety, 203. Twopenny v. Young, 3 Barn. & Cress. 208. Taggard v. Curtenius, 15 Wend. 155.) The plaintiff, as surety for Baker, for the payment of the original debt to the defendant, had rights well established in principle, and by authority, and which, enforced at a proper time, would in the view now taken by his counsel of the pecuniary ability of Jackson and Bradley, have fully protected him from any possibility of loss. (1.) He was at liberty at any time to pay the principal debt and be subrogated to all the rights of the creditor and to all securities in his hands. (Story’s Eq. Jur. § 499, and cases cited in notes 1 and 2, § 502. Hodgson v. Shaw, 3 Mylne & Keene, 190.) (2.) He could have filed his bill in a court of equity to compel the creditor to seek his remedy first out of the collateral security and to enforce his remedy — 590 — against the mortgaged premises and the mortgage debtors at once. (Story’s Eq. Jur. §§ 237, 499. Ex parte Rushforth, 10 Vesey, 409. Hayes v. Ward, 4 John. Ch. Rep. 123. King v. Baldwin, 2 Id. 554. Huffman v. Hurlbut, 13 Wend. 375.) It is incumbent upon the plaintiff to establish the fact that he has lost the benefit of the collateral securities by some act of the defendant inconsistent with his rights as surety, and not by any act or default of his own. It is settled by an unbroken line of authorities, that mere delay on the part of the creditor to enforce his remedy against the principal debtor will not discharge the surety; but tq effect such discharge there must be a valid agreement, upon a sufficient consideration, to forbear and give day of payment. From such an agreement the law presumes injury to the surety, and holds him discharged. (Wright v. Simpson, 6 Vesey, 714. Boulton v. Stutts, 18 Id. 20. Commercial Bank v. French, 21 Pick. 489. United States v. Kirkpatrick, 9 Wheaton, 760. Fulton v. Matthews, 15 John, 433. Crealth v. Sims, 5 Howard, 192. United States v. Hunt, 1 Gall. 42.) In the language of Lord Eldon in Wright v. Simpson, adopted by Chancellor Kent in King v. Baldwin, the surety is a guarantor, and it is his business to see whether the principal pays, and not that of the creditor. The reason of the rule which governs the rights and determines the liability of the surety, in case of a delay by the creditor to prosecute his remedy against the principal debtor, applies with full force to the action of the creditor in respect to collateral securities in his hands. In both cases the surety is in default. He has omitted to perform his part of the agreement. In the case now under consideration the plaintiff undertook to pay the defendant the full amount of his debt before the first instalment became due upon the bond and mortgage against Bradley and Jackson; and had he performed his agreement he would have been entitled to an assignment of that security, and would have, had the actual possession and full control of it at the time the first instalment became due. How, then, can it be said that the plaintiff has lost the benefit of the securities by the act of the defendant in omitting to prosecute, when it is only by the viola591 lion of the positive agreement of the plaintiff that the defendant retained or had them in his possession at a time when they might have been enforced ? If in the one case it is the .duty of the surety, as a guarantor, to see that the principal pays, why is it not in the other case equally his duty to see that ,the principal pays the original debt and redeems the collaterals ? A different rule would make the collaterals the principal securities, and then apply to them a law more stringént as against .the creditor than would be applied if they were in fact the principal and not collateral securities. It would enable the plaintiff to take advantage of his own laches and default. It would establish a rule dangerous to creditors, and difficult of execution and application. The rules of law which govern the dealing of the creditor with the principal debtor are plain, reasonable and easy of application. Mere inaction, unaccompanied with a binding agreement for delay, will not discharge the surety; and a delay in pursuance of a valid contract for that purpose, will operate as a discharge of the surety, irrespective of actual damage. But if the rule contended for by the counsel for the plaintiff is the true rule, then each case of dealing with collaterals must be decided upon its peculiar circumstances, and not unfrequently by the fluctuating and uncertain discretion of an individual judge or of a jury. I should have great difficulty in determining, from the evidence, that Bradley was solvent, within the true meaning of that term, at any time after the first instalment became due upon the bond and mortgage, (Huffman v. Hulbert, 13 Wend. 377;) and that the amount of the first instalment would, with certainty, have been collected upon an immediate prosecution of the demand; and if that should have been collected the doubt is increased as to the next, and each subsequent instalment. It is true that from the evidence I should think it probable the first and perhaps the second instalment might have been collected. But in his own language Bradley was “ hard pressed.” There were judgments and executions against him, and although he paid them until 1843, it is impossible to say that the attempt to enforce the — 592 — collection of this bond would not have been the cause of his failure at that time. The law requires good faith on the part of the creditor towards the surety; and hence he is discharged from liability if the-creditor does any act injurious to the surety, or inconsistent with his rights, or if he omits to do any act when required by the surety which his duty requires him to do, and the omissions proves injurious to the surety. (Story's Eq. Jur. § 325.) An omission to sue the principal is not a breach of faith to the surety, and it is difficult to perceive how an omission to prosectite collateral securities can be a breach of faith, unless there is an express agreement on the part of the creditor to use reasonable diligence in their collection, or do some act in respect to them necessary to their validity as securities, or such agreement can be inferred from the circumstances of the case, or from the character and situation of the securities. Justice Story, in treating of constructive frauds which will discharge a surety, says, “ if the creditor has any security from the debtor and he parts with it without communication with the surety, or by his gross negligence it is lost, that will operate at least to the value of the security, to discharge the surety.” (Story’s Eq. Jur. § 326.) And for authority he refers in note (1) to Mayhew v. Crickett, (2 Swanst. 185,191, and note a.) Law v. East India Company, (4 Vesey, 833,) and Capel v. Butler, (2 Sim. & Stu. 457.) By referring to those cases it will be seen that “ gross negligence” is something beyond, ail'd entirely distinct from, mere delay. Indeed, Judge Story, in the same section and in the paragraph immediately preceding that quoted, asserts the principle that there is no positive duty incumbent on the creditor, to prosecute measures of active diligence—evidently treating delay as one thing and negligence or omission of duty as another and quite distinct matter. In Mayhew v. Crickett a debt was secured by two promissory notes, each for half the amount, of two sureties, and also by a warrant of attorney of the principal debtor upon which the creditor had entered up judgment and taken the goods of the debtor in execution, but he afterwards .withdrew the execution. — 593 — Here there was something more than mere omission to enforce the judgment. There was a parting with the security ; the' goods of the principal debtor were released from execution without communication with the surety. There was an act of the creditor which, as he was trustee for the sureties, was a fraud upon them. In Law v. East India Company, the creditors had settled with the principal debtor and paid him a balance found due upon that settlement and suffered him to remove with his property over which they had control, and the court held the sureties for the settlement of the account and payment of any balance discharged by such settlement and payment; although it was erroneous in fact, the principal debtor after-wards becoming insolvent, In Capel v. Butler the principal debtor assigned two vessels as collateral security for the payment of an annuity also secured by the joint bond of the plaintiff and the principal debtor, and the creditor neglected to perfect the assignment of the vessels in the mode required by acts of parliament for the registry of vessels and the transfer of property therein, by means of which omission the debtor was enabled to and did actually sell the vessels to other persons, and the surety had lost the benefit of the assignments. The nature of the security required something to be done at once by the creditor to make it a valid security, and hence the law should, as it doubtless did imply an agreement on his part to perform that act without which the security was invalid. An omission to do this would be gross neglect in an agent, bailee or' trustee, and would be a breach of good faith on the part of the’ creditor toward the surety. Judge Story, in the section quoted, doubtless had in view neglect of the character of that in the case last cited as the gross neglect which should discharge the surety, that is, the omission of an act agreed to be done by him, or evidently imposed upon him by the .situation and character of the securities in his hands. Indeed, a request from the surety to do this act might be implied, so necessary was it to his indemnity to bring the case within the principle discharging a surety “ by the omission of the creditor to do an act when, required by the surety which his duty enjoins him to do, and — 594 — the omission to do which proves injurious to the surety.” The other cases relied upon by Judge Story are instances of the parting with the securities by the creditor, to the prejudice of the surety. Ex parte Muir, (2 Cox, 63,) and Williams v. Pierce, (1 Sim. & Stuart, 581,) are relied upon by the counsel for the plaintiff in support of the principle contended for by him, that delay in the prosecution of the collateral securities, when by reason of such delay they become less available, discharges the surety. In the first case, J. T. gave his bond and warrant of attorney to D., conditioned for the payment of a certain debt by instalments, and D. assigned the bond and warrant of attorney to C. his creditor, and the latter failed to enter up the judgment, in consequence of which, upon the obligor’s decease, other creditors obtained a priority which by perfecting the judgment and thereby making the debt of a higher nature he might have prevented, and secured the debt upon the real and personal estate of the obligor. It was held that the creditor was chargeable for his default, to the amount of the loss incurred by the forbearance. This case is distinguishable from the one now under consideration. (1.) The bond and warrant of attorney in their nature required further action to make them valid securities of the character and degree contemplated by the parties, and the debtor put it out of his power to perform this act by placing the papers in the hands of his creditor, and making that creditor his attorney in respect to them and the debt secured by them. There was therefore, as in the case of Capel v. Butler, a duty imposed upon the creditor in respect to the securities, by their character and condition. The correctness of the decision in the particular cause may be conceded; but the opinion of the lord chancellor goes farther than was necessary to decide the case, and his reasoning has not at all times been fully acquiesced in. The case is not even cited or referred to by Justice Story in his treatise on equity jurisprudence, when treating of the relative rights and duties of principal and surety. And while in Williams v. Price the decision was followed, the Vice Chancellor, Sir John Leach, takes — 595 — especial care to withhold his assent from the argument of the lord chancellor, and the principles advanced by him. (2.) In Ex parte Muir, the lord chancellor held that the bond which was the subject of the controversy had been assigned absolutely to the creditor and to its full amount, in discharge of the debt of the assignor. If the bond was assigned in payment of the principal debt, to be applied when collected, it might well be that the creditor was bound to use ordinary diligence in its collection, and to apply as payment upon the original debt what was actually collected or what might with reasonable diligence have been collected. This would be so within Dayton v. Trull, (23 Wend. 345.) But in the case before us, the assignment of the bond and mortgage of Bradley and Jackson was in pursuance of and a part of the contract by which the principal debt originated and was conceded to be as collateral to it, and the principal debt was to become due and payable before any part of the amount secured by the bond and mortgage became due. In Williams v. Price, a debtor had assigned to his creditor as collateral security for his debt, a judgment which he had recovered by confession against a third person, and the creditor had sued out two or more executions upon the judgment, but had not put them in the sheriff’s hands, or having placed them in the sheriff’s hands had withdrawn them, and after that had negotiated with the judgment debtor and had given him time for payment, and had taken from him acceptances which were dishonored, until finally the judgment was lost. The Vice Chancellor, Sir John Leach, refrained from expressing an opinion upon the question whether the creditor was bound to use legal diligence to give effect to the judgment, or whether he might remain passive until required by the assignee to resort to legal diligence, and said it was not necessary to determine those questions, but based his decision upon that of Ex parte Muir, and upon the fact that the creditor, by suing out execution, assumed the possession or control of the judgment in exclusion of the assignee, and that it was within the principle which charges the creditor in possession of property held by him as a security not only with what he actually re — 596 — c.eives but with what he might have received but for his wilful default or neglect. Many of the features of this case, and which by the vice chancellor were held to control the decision, are wanting in the one before us ; and it would be an unwarrantable extension of the principles of any decided case to hold the surety discharged by mere delay of the creditor in the prosecution of the principal debtor, or in the collection of collateral securities, unaccompanied by an actual agreement, fraud of wilful neglect. In the note to Paine v. Packard, and King v. Baldwin, (2 Am. Lead. Cases, 127,) it is attempted to reconcile the cases of Ex parte Muir and Williams v. Price with the decisions which hold that mere delay or omission to prosecute, on the part of the creditor, will not discharge a surety, by making a distinction between .cases in which the creditor has received collateral securities directly from and by the voluntary act of his debtor, and those in which he has acquired them by legal or coercive measures, and by his own acts. But I find no case in which this distinction is taken, and there appears to be no distinction upon principle. The rights of the surety are the same whether the collateral security is taken at the time or after he has incurred his obligation, and whether he knew the fact or not; and it would seem to follow that it was immaterial by what means it was acquired. His creditor is alike the trustee of the surety in every case. (Pitman on Pr. & Surety, 114.) If the decisions referred to are put upon fhe grounds on which they may be put, and indeed upon the grounds upon which they were placed by the courts by which they were pronounced, then there are no circumstances to be reconciled, and the law will be harmonious. The same duties and the same liabilities will result from this quasi relation of trustee and cestui que trust, as to securities jn the hands of the creditor, which exist between the creditor and the surety of the debtor as to the principal obligation, subject to be varied only by the express or implied contract of the parties. Baker v. Briggs, (8 Pick. 122,) merely decides that a creditor who has his debt secured by a surety and has also property pledged to him by his principal debtor, may not sunender the — 597 — property without the knowledge and consent of the surety; and if he does so he .thereby discharges the surety to the amount of the property given up. In Taggart v. Jones, (15 Wend. 155,) there was .an agreement that the creditor should use due -diligence in disposing of the property pledged, (stock in a bridge company,) at the highest price, and this was omitted for some four years and until after the bridge was carried off and the value of the stock greatly depreciated. And it is of such a case that Bronson, J. says “ whether the matters pleaded would entitle the defendants to relief in a court of equity need not be considered.” Up to November, 1840, the defendant took no action in respect to the bond and mortgage. He had merely delayed the commencement of proceedings to enforce their collection ; and for mere delay we think he is not under the circumstances chargeable for any loss which may have ensued. He then undertook the foreclosure, and there is no evidence that there was any unnecessary delay in the proceedings up to the time of the decree and the advertisement of the mortgaged premises for sale ; at least, no evidence of such delay as would amount to wilful default or negligence, or be evidence of fraud. The postponements of the sale appear not to have been unreasonable. They were for short periods, and with a view to procure an enhanced price for the premises, or to enable the mortgagees to ,do so. In the language of the vice chancellor, in Williams v. Price, “ I think it would be difficult to find a principle for charging such a creditor simply upon the ground that he gave time to the debtor, .upon the judgment; for it may be that the giving of time is a provident act, and affords the best chance of securing the d.ebt.” But it is said that the postponement upon one occasion was at the request of the mortgagor, and in consideration of his note for two hundred dollars, and that the case is therefore one of giving time in pursuance of a valid contract for that purpose. But the note itself in that case would be void, and could not avail as a consideration to support the agreement to give time. (Pitman’s Pr. and Surety, 168. 2 Am. Lead. Cases, 171. Tudor v. Goodlow, 1 B. Monroe, 322. — 598 — Pyle v. Clark, 3 Id. 262, and Scott v. Hull, 6 Id. 285, cited 2 Am. Lead. Cases, 173. 1 Comstock, 274.) In this case, the usurious character of the note forming the consideration of this agreement, appears by the plaintiff’s showing, and is not set up and proved by the defendant to invalidate an agreement apparently valid. We may add that the postponements of the sale were with the knowledge and assent of Gardner Lawrence, one of the co-sureties with the plaintiff in this suit and a joint debtor with him. We then come to the delay in docketing the decree for the deficiency, so as to make it a lien upon the real property of the mortgagor, and in enforcing the collection thereof by execution, from the last of July, 1841, until about the 1st of May, 1842. During all this time, the defendant did no act inconsistent with the rights of the plaintiff as a surety. He was merely inactive. He did not, as in Williams v. Price, sue out executions, and then withhold them from the proper officer ; or negotiate with the mortgagor to give- him further time, by agreement, and take bills for the amount of the debt on time, which in that case the vice chancellor held to be such an interference and assumption of control over the judgment as operated to discharge the surety. In this case, the plaintiff might at any time have paid the debt,, and been subrogated to the rights of the defendant to the bond and mortgage and decree thereon, and have received the" same unembarrassed by any agreement or negotiation by the defendant, and in a situation to be immediately enforced. The defendant had foreclosed the mortgage and sold the mortgagéd premises, and then remained passive, as we think he might safely do, without prejudicing his claims,, upon the surety. If Jackson and Bradley had been the principal debtors, and he had commenced proceedings against them, he could have stopped at any stage, and the surety could not complain. (Lenox v. Prout, 3 Wheaton, 520. Com. of Berks Co. v. Ross, 3 Binney, 520. United States v. Simpson, 3 Penn. 457. Minerdorff v. Snyder, 5 Watts, 179.) The most that can be claimed, is that by the assignment of the bond and mortgage to the defendant, the obligors and mortgagors,. — 599 — Jackson and Bradley, became quasi principal debtors, not only so far as the sureties for Baker are concerned, but that Baker, so far as these securities were concerned, became a quasi surety or entitled to all the rights of a surety; and in that view mere delay could not in any case vitiate the claim as against Baker and his sureties. There is no claim for relief made in the case peculiar to the plaintiff as a surety ; and all the defendants in the judgment should have been parties to the suit. (Beggs v. Butler, 9 Paige, 226. Boughton v. Allen, 11 Id. 321.) But this point was not made in the answer, nor upon the argument, and the decision is not therefore put upon the ground of a want of parties. The next claim is, that certain payments should be allowed which might have been allowed upon the trial of the suit at law. The plaintiff had a perfect remedy in respect to these payments, in the action at law, and should have sought it there. But this point is not taken in the answer as distinctly as it should have been; and there is equity in the claim of the plaintiff to have them allowed at this time. The agreement of the defendant was to make certain admissions upon the trial, and the attorney for the plaintiff testifies, that in consideration of that agreement he agreed not to defend the suit, and relying upon it, omitted to attend upon the trial; and the defendant in pleading admits this to be true, by denying in his answer that he ever attempted or intended to enforce the judgment for the full amount. It is true, that after verdict, the plaintiff and his co-debtors might and should have sought relief in the court in which the suit was pending. He, by his attorney, had notice very shortly after the verdict, that the payments had not been allowed, and addressed the defendant upon the subject. (Story’s Eq. Jur. §§ 894, 895. Marine Ins. Co. v. Hodgson, 7 Cranch, 332.) But the defendant says he never claimed the full amount of the judgment, and does not very distinctly take the ground that the remedy was at law, and we therefore though with some hesitation, allow the payments_ at this time. The plaintiff next claims that the defendant should be decreed to have taken the title to the premises purchased by — 600 — him upon the foreclosure of the Jackson and Bradley mortgage in trust as security for the payment of the debt, and for the benefit of the debtors. There is a difficulty in making such decree, for want of parties. Lawrence, Baker, and the representatives of Wood will not be bound by the decree. After the sale of the premises and an accounting with the present plaintiff in respect to the trust property, they may call upon him to account with them; of they may repudiate the trust and insist that he purchased the property for himself atvthe price bid, and that that sum was absolutely paid upon the judgment at that time ; and the defendant may be called to litigate that question. But inasmuch as the defendant did not, in fact, credit the amount of his bid upon the note, and thus give color to the claim that he had bought the premises as trustee to apply the avails, whatever they might be, upon a resale, to the payment of the debt, and as bis counsel upon the argument conceded that such decree might be entered, a decree may be entered declaring that the defendant holds the premises upon the same trusts, and for the same purposes, that he held the bond and mortgage, and directing a reference to Peter Out water, jun. to ascertain and compute the amount paid to the plaintiff upon the verdict in the suit at law, and which should then have been credited and allowed to the plaintiff and his co-debtors, and directing the allowance of said sum with interest, in part payment of the judgments; and also to ascertain and compute the amount due to him for the amount paid to acquire the Colvin mortgage, and for taxes, insurances, agencies and other expenses in and about the property and its preservation, with interest to the date of the report, deducting what he may have received for rents and profits, and directing a sale thereof, at public auction, upon the notice required for the sale of real es-tate on an execution at law; and that out of the proceeds thereof be paid, 1, the amount which shall be reported due to the defendant for said payments, with interest to the time of payment; and 2d, the residue to the defendant, to apply in payment of his judgment mentioned in the pleadings, and that' said judgment be deemed satisfied, to the amount so paid. — 601 — Neither party is to have costs against the other. For although the plaintiff has succeeded in part he had made no call upon the defendant for the relief now obtained, before filing the bill; and the defendant, although he has succeeded on the principal grounds, should have demurred to the bill. He has increased the costs by his defence, unnecessarily, and therefore should not recover them as against the plaintiff.