Stearns v. Bates

Caepenteb, J. By the law of Massachusetts, which gov [311] erns the transactions involved in the present suit, Aldrich, by indorsing- the note payable to the plaintiff before its delivery to him, became liable as a maker thereof. As between himself and Porter he was a mere surety. As between himself and the plaintiff he was liable absolutely as maker. But conceding that the claim of the defendants is correct, that the contract in suit is a contract of indemnity, that Aldrich has paid nothing on the indorsement for which the indemnity was given, and therefore that he could not recover on this contract—it does not necessarily follow that the plaintiff may not recover. We are inclined to think that the law is so that Aldrich himself .could not recover without payment, or assuming the payment, of the note indorsed. (Whether his liability as maker is equivalent to an assumption of the note is a question we will not now consider.) Otherwise the circumstances might be such that he could recover of Porter, or of his sureties, for the benefit of himself or his creditors, and the plaintiff, for whose ultimate benefit the guaranty was given, might receive nothing. So too if Aldrich had assigned the collateral note and guaranty to a stranger, who took them with knowledge of the circumstances, we suppose he could nob recover unless Aldrich paid the note or some part of it to the plaintiff. As to all such parties the contract is one of indemnity merely, and the principle alluded to applies. If the case depended upon that principle it might be difficult to sustain this action. But there is another principle which applies to the case, and which we think controls it. In Homer v. Savings Bank, 7 Conn., 478, Bissell, J., after referring to the English and American authorities, sums up as follows: “ The principle to be extracted from these cases is this—that when collateral security is given,- or property assigned, for the better protection or payment of a debt, it shall be made effectual for that purpose; and that not only to the immediate party to the security, but to others who are entitled to the debt. And to make them thus effectual a court of chancery will lend its aid. And the reason is that such is the intent of the transaction.” [312] In New London Bank v. Lee, 11 Conn., 111, it was held that a surety who had paid the debt was entitled to any funds appropriated for its payment remaining in the hands of the creditor; and that the same reasons and equities apply with equal strength when the creditor seeks to apply the funds in the hands of a surety to the payment of the debt. Church, J., says:—“In both cases the security or fund is created for the payment of the debt, and is a trust existing for that specific purpose; and whether the creditor, as in the former case, or the surety as in this, be the trustee, is very immaterial. The trust is created, ultimately, for the benefit of the creditor, or of him who stands in his place by having paid the debt.” That doctrine has been repeatedly recognized and enforced gincc, and is decisive of this case. Belcher v. The Hartford Bank, 15 Conn., 381; Lewis v. De Forest, 20 Conn., 427; Potter v. Holden, 31 Conn., 385. The reasonableness of this doctrine and of its application to this case will be apparent from a careful consideration of the nature of this transaction and the interest which each party has in the security. Before the note and guaranty were transferred to the plaintiff Aldrich held them simply as security for his liability to the plaintiff. They were intended to secure that debt and its payment. The legal title to the security was in Aldrich; but it was a naked title, the equitable and beneficial interest being in the plaintiff, who owned the debt. The principal reason, and perhaps the only one, why Aldrich could not bring a suit on the security in this state of things is, that the security might thereby be misappropriated and the debt not paid, thus defeating the intention of the parties. The same reason applies to a stranger who might purchase the security. He would thereby acquire a mere naked title without any beneficial interest. To allow him to recover might divert the funds of the maker to a purpose never designed or intended, and at the same time deprive the owner of his only chance to collect his debt, thus operating as a fraud upon both the debtor and creditor. But when the security is transferred to the creditor no such [313] consequences can follow. Before the transfer he was the equitable owner by virtue of his ownership of the debt, and by the transfer he became clothed with the legal title also. Thus he has a better and more complete title than the surety —a union of both the legal and equitable; while the surety had only the legal, which, standing alone, he could not enforce, and could not empower a stranger to enforce. He could vest in himself the equitable title also by paying the debt, and then he could enforce the security or sell it to others. He chose rather to transfer his legal title to the plaintiff, who already had the equitable title, thereby making his title perfect. When he recovers on the guaranty, if sufficient, his debt is paid, the surety is relieved, and the intention of all the parties is carried into effect. The circumstance that Gould and Porter, who indorsed the first note with Aldrich, did not indorse the later ones, is no defense. The security was given primarily to secure Aldrich for his indorsement. In legal effect it secured the debt, and was a fund for the benefit of any party who might have to pay the debt. If therefore Gould and Porter had continued to indorse, and had been compelled to pay the debt, they would have been entitled to the collateral note and guaranty, and might have recovered of the defendants. Eor these reasons we advise judgment for the plaintiff. In this opinion the other judges concurred