Smith v. Estate of Steele

The opinion of the court was delivered by Redfield, Ch. J. The only question made in the present case . is, how far a surety, who has ample collateral security from the principal, is precluded from taking advantage of any enlargement of the time of payment, by arrangement between the creditor and the principal, this property having subsequently, by consent of the principal, gone to pay other of his debts. This case states, that the first contract for the enlargement of time was made in January, 1843, the note falling due in April following, which was for one year, and that this agreement was renewed from time to time, until the decease of defendant, Steele, in August, 1847. On the 25th day of November, 1842, the surety gave the principal a mortgage of real estate, and made an assignment of personal property to secure him for all his indebtedness to him, and specially to secure him for signing this note — as appears by the conditions of the mortgage, which was recorded in the proper ofiice. • The testimony tended to show, that the security was ample, and it must be so regarded, for the purposes of this trial, as it was virtually rejected by the court. It did not appear at what time this property was applied to other debts. Upon general principles, it seems to us, that so long as the surety was fully secured, by property in his hands, he should be estopped from objecting to any enlargement of the time of payment, made by arrangement between the creditor and principal. If this fact is known to the creditor, it would certainly place his conduct [432] in a very different light, from what it is when no such indemnity exists. We can all see, that in such a cáse there can probably be no fraud in fact. And in equity, (and in law, we think the rule should be the same,) there is no fraud if such indemnity exists, whether known to the creditor or not. And this ground of defence for the surety, goes upon the supposed basis of fraud. 1 Story Eq. § 327. In such a case, the surety is the virtual principal, and ought to be bound by every enlargement of the time of payment, quite as much, perhaps more, than are joint principals by such a contract made by one of their number and the creditors, of which there is no doubt. A surety who is fully indemnified, by property in his possession, which, by the terms of the assignment, he is at liberty to convert at once into money, as in the present case, stands much in the same light as a surety, who has received the amount of the debt in money from his principal. And in such case he is clearly the principal. And so, if he had received half the money, he would become a co-principal ; and in all these cases, as it seems to us, on general principles, he should not be permitted to claim the privileges of a strict surety, without indemnity. The case of Chilton v. Robbins, 4 Ala. 223, is fully in point, to show that the surety cannot avail himself of any such defence, while he retains such security, and to that extent, certainly seems a sound case. The case of Moore et al. v. Paine, 12 Wend. 123, goes upon the ground that even if the principal be released by the concurrence of the creditor, sureties fully indemnified are not thereby released. In that case, the replication averred that the sureties still retained the indemnity which had become money. And to the extent of contracts of enlargement, made while the surety had ample indemnity of the kind shown here, there can be no doubt he would be estopped from setting up this defence. And as he had such security, when the first contract of enlargement of time of payment was made, and nothing appears but such was the fact, at the subsequent times of such enlargement, the case must be opened upon this point alone, and go back to ascertain the facts, in regard to this subject. How far the surety, after having such property assigned to pay the debt, or indemnify him against signing the note, could place himself in the same situation he was before, is a point of some difficulty. Judgment reversed and case remanded.