Federal Land Bank v. Fulcher

Stephens, J. The Federal Land Bank of Columbia, South Carolina, sued W. M. Fulcher as principal and W. M. Fulcher Jr. and E. D. Fulcher as sureties upon a note payable to the plaintiff in the sum of $675 with interest at 8% per annum and the cost of collection, including 10% attorney’s fees, executed May 31, 1930, maturing October 1, 1930. The defendants admitted the execution of the note and denied liability thereon except in the sum of $80.16. 'The defendants in their plea alleged that the note was executed by the principal and the sureties thereon to the plaintiff as security for one of a series of semiannual payments due by the defendant W. M. Fulcher to the plaintiff on a loan in the sum of $20,000, secured by a deed executed by the defendant W. M. Fulcher to the plaintiff, that the installment payment for which the note sued on was given as security was in the sum of $675, represented by two notes for $350 and $325 each, and fell due April 1, 1930, and the amount of this installment included the interest due on the loan to date and an amount to be applied to a reduction of — 603 — the principal, that there were a number of installments due upon the loan successively every six months, each in an amount sufficient to pay the interest to date and reduce the principal, that neither the installment for which the note sued upon was given as security, nor the next installment falling due the first of October, 1930, was paid, and the plaintiff, who was the holder of the deed to secure the debt,'acting under the provisions contained in the deed, declared the entire principal and interest due for nonpayment of the installments due, and sold the property for the purpose of satisfying the debt, that the proceeds derived from the sale of the property were insufficient by more than the amount of the note sued on to pay the amount due as principal and interest upon the debt, and that after applying the proceeds of the sale to the payment of the entire amount due as interest upon the debt and to a reduction of the amount due as principal upon the debt, the balance due upon the portion of the principal represented in the installment in the sum of $675, due April 1, 1930, for which the note sued on was given as security, applying the proceeds of the sale pro rata to the indebtedness represented by all the unpaid installments, including the installment of $675 for which the note sued on was given as security, there would be clue upon this installment a balance of only $80.16. It appeared from the agreed statement of facts that the allegations of the defendant’s plea were true and that the deed which had been given to secure the indebtedness contained a power of sale authorizing the lender, the Federal Land Bank, in the event of a default in the payment of any indebtedness due, to sell the property at public outcry and “collect the proceeds of such sale, and after reserving therefrom the entire amount of principal and interest due, together with the amount of any taxes, assessments, and premiums of insurance theretofore paid by the Federal Land Bank of Columbia, its successors or assigns, with eight (8) per centum per annum thereon from date of payment, together with all costs and expenses of sale and ten (10) per centum of the principal and interest due for attorney’s fees, shall pay any overplus to the said parties of the first part, their heirs, executors, administrators or assigns.” There was also introduced in evidence by the plaintiff, as tending to prove the law of South Carolina, the State in which the note sued on and also the $20,000 secured by the land, were payable, an extract from the opinion of the Supreme Court — 604 — of that State in the case of Bell v. Bell, 20 S. C. 34, which indicated that that court had held that where money is paid by a debtor to a creditor holding several demands against the debtor and neither party makes an application of the fund, and it devolves upon the court to make the application, but that where one demand is less secured than the other, the funds will be first applied to it. The trial judge, in passing upon both the law and facts, held that the proceeds derived from the sale of the land should be applied pro rata on the entire indebtedness, including the portion of the principal and the interest represented in the installment of $675 for which the note sued on was given as security, and found for the plaintiff in the sum of $71.22 principal, $9.50 interest to date of judgment, $8.07 attorney’s fees, and all costs of suit. The plaintiff excepts to the verdict and judgment as being contrary to law and without evidence to support it. Counsel for the plaintiff contend that the rights of the parties are determinable by the law of South Carolina, and that, according to the law of that State, as well as the law of Georgia, where a payment is made by a debtor to a creditor having several demands against the debtor and no application of the fund is made, either by the debtor or the creditor, and it devolves upon a court to make an application of the fund, whether the pajonent is made voluntarily or involuntarily, as by a foreclosure proceeding, the court will, where one of the demands is better secured than the others, apply the rule announced by Chief Justice Marshall in Field v. Holland, 10 U. S. (6 Cranch) 8 (3 L. ed. 136), where a payment was voluntarily made, that “It being equitable that the whole debt should be paid, it can not be inequitable to extinguish first those debts for which the security is most precarious.” Counsel for the defendants contend that the rights of the parties are determinable by the law of Georgia, and that under the law of this State, where funds of a debtor are involuntarily paid, as by a foreclosure proceeding, to a creditor having several demands against the debtor, the funds are pro rated to all the demands of equal dignity notwithstanding some of them have better security; and they rely principally on the case of Citizens & Southern Bank v. Armstrong, 22 Ga. App. 138 (95 S. E. 729), as authority for this proposition. Under the view which we take of the ease it is immaterial whether the rights of the parties are determinable by the law of South Caro — 605 — lina or by the law of Georgia, as contended by counsel respectively. Whether the non-statntory law of South Carolina as it appears in evidence could, under the authority of Slaton v. Hall, 168 Ga. 710 (148 S. E. 741, 73 A. L. R. 891), be considered and applied to a determination of the rights of the parties, it is not applicable to the case. The rights of the parties therefore must be determinable by the law of Georgia. Whatever conflict, if any, there may be in the law applied by the courts of Georgia and that applied by the courts of South Carolina respecting the application of a fund belonging to'a debtor whether paid voluntarily or involuntarily to a creditor having several demands against the debtor, the rule is universal, whether announced by the courts of Georgia or the courts of other States, that where the funds are involuntarily paid and it is left to the court to make application, the application must be made upon equitable principles. Hargroves v. Cooke, 15 Ga. 321 (7); Civil Code (1910), § 4316. There seems to be a conflict of authority as to whether, where funds belonging to a debtor, which are derived involuntarily as by a judicial process, are applied for the benefit of a creditor having several demands against the debtor where some of the demands are better secured than the others, the funds shall be applied pro rata to all the demands or shall be applied first to those demands which are less secured, or, in the words of Chief Justice Marshall, are “most precarious.” Whether under the Georgia rule, which necessarily makes an equitable apportionment of the funds, the funds thus derived should be applied pro rata to all the demands, or only to those demands less secured, is immaterial under the facts of this case. Let us see what are the equities of the parties, and therefore determine what is an equitable apportionment of the fund derived from the sale of the land. The defendant W. M. Eulcher, the principal on the note sued on, before he executed the note was in arrears in the payment of the installment, of $675 due April 1, 1930, upon the loan which he had obtained from the Federal Land Bank, and the Federal Land Bank then and there had the right under the contract to declare the entire loan due and to foreclose. It was therefore to the mutual interest and advantage of both the debtor and the creditor to execute to the creditor the note sued on, with the additional security consisting in the indorsements on the note. The debtor obtained the indulgence and the forbearance of the — 606 — creditor to foreclose, and the creditor received an additional security for a portion of the debt. The debtor entered into an unconditional contract, by 'which he and the sureties guaranteed, for a consideration, the payment of this portion of the debt within a period of six months. The creditor retained the security which he had and obtained better and additional security for a portion of the debt, and he should not be deprived of this security and the right to call on the sureties to make good unless he has done something to release the sureties or the debtor, or the sureties can establish some equity in the matter superior to that of the creditor. In Horne v. Planters Bank of Georgia, 32 Ga. 1, 12, it is stated by Chief Justice Lumpkin, after quoting the language which we have quoted from Chief Justice Marshall in Field v. Holland, cited supra, that this is “the weight of authority in this country, and the courts have gone so far as to hold that a security, or accommodation endorser, can not be relieved at the expense of the creditor.” High Co. v. Arrington, 45 Ga. App. 392 (165 S. E. 151). In the case of Kortlander v. Elston, in the Circuit Court of Appeals of the 6th circuit, 52 Fed. 180, where Elston brought suit against Kortlander upon a written contract of guaranty by the defendant for a consideration to pay to the plaintiff a portion of the money due by one Carman to the plaintiff for the purchase of certain lands, and the defendant sought to have credited against his guarantee a part of the proceeds of the insurance-money due on account of the destruction by fire of buildings upon the premises, Circuit Judge William H. Taft said: “It was said that he had guaranteed the payment of $3,000 out of the $12,000 to be paid for the land, and as surety he had a right in equity to be protected by a pro rata distribution of the collateral over the whole debt. The court below refused a charge embodying this view of Kortlander’s right to the insurance money, and told the jury that, unless there was a subsequent agreement changing the rights of the parties, Elston had the right to hold the insurance-money realized on the buildings as security for the payment of the whole debt, exactly as he might have taken possession of the buildings for this purpose, and that Kortlander had no right in law or equity to demand that the money be applied to the amount due under the guaranty. In this we think the court was entirely right. The primary equity growing out of the relation of creditor, debtor, and surety is that the creditor be paid what is due him; — 607 — and he does not lose this equity as against the surety, except by misconduct to the latter’s prejudice. When the creditor in the original contract has received collateral covering the entire debt, and a personal guaranty on part of it, the legal and the natural presumption, in the absence of circumstances showing the contrary, is that he has taken the personal guaranty as additional or cumulative protection for his debt. In order that his debt may be paid, therefore, he has the right to exhaust all his securities, and in doing so he may apply the collaterals to that part of the debt not covered by the personal guaranty, and hold the guarantor to the full measure of his contract. . . It would seem absurd to require Elston to suffer loss by sharing the collateral with Kortlander for the purpose of reducing the latter’s liability on a guaranty, the only object of which could have been to supplement the collateral and increase Elston’s security.” In Smythe v. New England Loan Co., 12 Wash. 424 (41 Pac. 184), it was held that “One liable as guarantor for the prompt payment of, interest on a mortgage bond can not, in an action upon the guaranty, after a foreclosure sale which failed to realize the full amount of principal and interest due, set up the defense that the moneys realized must be applied first, in the absence of express direction, to the interest due.” In Union Trust Co. v. Detroit Motor Co., 117 Mich. 631 (76 N. W. 112), it was held that “Persons who have guaranteed the payment of the principal and interest of bonds ‘at the time specified in the bonds’ are not released from liability, either as to matured interest or as to the principal sum when due, by an election of the representative of the bondholders, under a provision in the mortgage securing the bonds, to declare the principal immediately due for default in interest; such election being ineffectual as to the guarantors, and in no way varying their contract.” In Monson v. Meyer, 190 Ill. 105 (60 N. E. 63), it was held that “If a defendant in foreclosure appeals and gives a bond for the payment, in case of affirmance, of such interest as might accrue and remain otherwise unpaid upon the decree from the date thereof, it is proper, upon affirmance, to apply the proceeds of the sale to satisfy fees, costs and principal before satisfying the interest on the decree, since the deficiency, if any, will thereby embrace the interest which is secured by the appeal bond.” In 42 C. J. 314, the rule is laid down that “equity is willing to give the — 608 — creditor the best security for his debt; and hence if he holds additional or collateral security for a portion of the mortgage debt, he will generally be permitted to apply the proceeds of foreclosure to that portion of the claim for which the mortgage is the only security." It seems, if the creditor, as in this case, has taken extra and additional security for a portion of his debt where the whole debt was already secured by a security deed to land, that upon his failure to realize the full amount of the debt out of the proceeds from the sale of the land upon a foreclosure, he has the right to resort to the additional security for the deficiency. The plaintiff, therefore, since the proceeds from the sale of the land were insufficient, in an amount greater than the note sued on, to pay the entire debt, is 'entitled to recover the full amount of the note sued on, given as security for a portion of the debt additional to the security represented by the deed to the land. While it may seem a hardship to the defendant debtor that, after his land has been taken from him for the debt, he should be compelled to make an additional payment upon the debt, this court has to be governed by the law, and must hold the defendant to his contract upon the insistence of the plaintiff, and give to the plaintiff that to which he is legally entitled under the contract. The plaintiff is entitled to recover the full amount sued for, and the verdict and judgment in his favor in a less amount was contrary to law and without evidence to support it, and it must, at the instance of the plaintiff, be set aside. The judgment is reversed because the court erred in not finding for the plaintiff the full amount of the note sued on. Judgment reversed. GuerryJ., concurs. Jenlcins, P. J., being absent on account of illness, took no pa/ri.