First National Bank of Fair Haven v. Johnson

The opinion of the court was delivered by THOMPSON J. These cases were heard together. The defendant, Victoria A. Johnson, was a surety on the notes in suit and that fact was known to the plaintiff when it discounted them for the Valido Marble company. She contends that she has been discharged from liability on the notes by the conduct of the plaintiff in respect to collateral security which it received and held from the company to secure its indebtedness including these notes to the plaintiff. As we construe the referee’s report, he finds that two or three years previous to the execution and delivery of these notes, the company made an arrangement with the plaintiff by which the latter was to discount notes for the former to the amount of $7,000, and for security for the payment of notes thus discounted the company was to deposit with the plaintiff notes to the amount of $7,000. By the terms of the arrangement as to this collateral security, the plaintiff was to collect the notes deposited as collateral as they fell due and pay over the money thus collected to the company, when it deposited with the plaintiff satisfactory collateral notes to take the place of those which had been collected. The company was also to replace with other notes such of the collateral notes, as might not be paid by the makers at maturity, so that the amount of the collateral should at all [387] times be kept good. Before Mrs. Johnson became a surety on any notes for the company, this arrangement was so modified as to provide for discounts and collateral security to the amount of $9,000, the arrangement in all other respects being the same as before. This modified arrangement continued for. a time, when the plaintiff becoming dissatisfied with the collateral notes, declined to proceed further under it in respect to discounts. Thereupon the arrangement was so modified that the collateral account was to be increased to $10,000, and the notes which plaintiff should discount for the company were to be signed by Mrs. Johnson, but the other provisions of the previous arrangement were to continue in force. The company deposited collateral notes with the plaintiff as required by the terms of the agreement first made and its subsequent modifications. Under the arrangement last stated the plaintiff discounted the notes in suit and the other notes described in the referee’s report. Subsequent to the time when Mrs. Johnson became surety on the notes in suit, the plaintiff received from the collection of notes held as collateral security $9,059.36, of which it applied $4,771.59 in payment of notes discounted by it for the company and secured by this collateral. The balance of the amount collected, viz., $4,287.77, was paid over to the company from time to time, upon the plaintiff’s receiving from it a like amount of satisfactory commercial paper to take its place in the collateral security. The defendant, Mrs. Johnson, insists that the plaintiff was bound to apply this money, or so much of it as might be required for that purpose, in the payment of the notes in suit, and that the failure of the plaintiff to thus apply it discharged her as surety. All the notes held by the plaintiff were secured by the collateral notes. It does not appear that the debtor gave any direction in respect to the application of the money collected thereon. The plaintiff, therefore, had the right to [388] make the application on any indebtedness secured by the collateral. Hicks v. Blanchard, 60 Vt. 673. Mrs. Johnson was not injured by such application, for to entitle her to receive the collateral security from the plaintiff she must first pay it the entire indebtedness secured thereby. Hence, she was not discharged by the application of that part of the money collected which was applied in payment of the notes not signed by her. The general rule is that if a creditor receives collateral security from the principal, the surety is entitled to the benefit of it; and that a voluntary surrender of it by the creditor discharges the surety. Austin v. Belknap, 54 Vt. 495. The payment of the $4,287.77 to the company by the plaintiff, as stated by the referee, was not a voluntary surrender of the collateral security, but a keeping the same good to the full ariiount by substitution of the commercial paper for the money collected' in strict performance by the plaintiff of the contract by which it received the collateral notes. The plaintiff had not received notice from Mrs. Johnson that she signed the notes relying upon an understanding with the company that the security held by the plaintiff should be held for the payment of the notes signed by her. In performing its agreement with the company in respect to the collateral security, the plaintiff simply observed its legal duty and violated no duty which it owed to her as surety. 'Judgment affirmed in both cases.