Mattingly v. Sutton

HaymoND, Judge, announced the opinion of the Court: A case of the application of the remedial justice of courts of equity is by bill quia timet in cases of sureties of debtors and others. If a surety, after the debt has become due, has any apprehension of loss or injury from the delay of the creditor to enforce the debt against the principal debtor, he may file a bill of this sort to compel the debtor to discharge the debt or other obligation, for which the surety is responsible. 2 Story Eq. Jur. §§ 730, 849. The insolvency of one of the parties is a ground, upon which a bill may sometimes be maintained for a set-off, when it clearly appears, that in consequence of such insolvency the complainant can have no adequate remedy at law. 2 Rob. (old) Pr. 144; Simson v. Hart, 14 Johns. 63; Lindsay v. Jackson et at., 2 Paige 581. In the last named case it was held by the court, that equity requires, that cross-demands should be set-off against each other; and in a case not within the statute of set-off chancery will permit an equitable set-off, if from the nature of the claim or the situation of the parties justice cannot be obtained by cross-action ; also that insolvency of one of the parties is a sufficient ground for the court to exercise its equitable jurisdiction in allowing an equitable set-off'; and also that a set-off will be allowed on the application of the complainant, where the defendant is insolvent, although the debt of the complainant to the defendant is not due. In the first named case it is said, the fact, that the notes due from the complainant to the defendants had not become payable, could form no objection to the relief sought; for there could be no injustice in compensating the defendants at once the whole amount to become due to them at a future day. The question is somewhat different where the claim of the complainants against the defendants is payable at a future day, and they seek to make this claim compensate a debt already payable from the defendants; then a court of law cannot allow a set-off. Young v. Gye et al., 10 J. B. Moore 198, (17 Eng. Com. Law Rep. 139.) Yet even in a case of that kind equity will give relief. 2 Rob. (old) Pr. 144. In the case of Ford’s adm’r v. Thornton, 3 Leigh 695, it appeared, that Eord and Thornton were endorsers of a note at — 28 — sixty days, made by Gregory and discounted for bis accommodation by the Bank of Virginia. Gregory died before the note became payable, having at the time of his death a sum of money in bank exceeding the amount of the note. When the note became payable, there being no administration of Gregory’s estate, Ford and Thornton retired the note by giving their own note with an endorser for the same sum at sixty days, which the bank discounted for their accommodation. Before the last mentioned note came to maturity, administration was granted on Gregory’s estate; and then the question was, whether the money in bank should be appropriated to the indemnity of Ford and Thornton or applied in satisfaction of debts of superior dignity. The Court of Appeals was of opinion, that no part of Gregory’s deposit in bank constituted upon his death general assets of the estate, except the excess above what was sufficient to liquidate the note of Gregory due to the bank ; that although the debt due the bank might not have become payable at the time of Gregory’s death, yet if he was insolvent, the bank might have insisted in equity, that the note due to it should be set off against the claim to the money on deposit; Ford and Thornton having taken up Gregory’s note, they had a right to stand in the shoes of the bank and have the deposit applied to their indemnity. See on this subject Miller v. Receiver of Franklin Bank, 1 Paige 444; In re Receiver of Middle District Bank, Id. 585; McLaren v. Pennington, et als., Id. 102; Bob. (old) Pr. 145. In the case of Hupp v. Hupp, 6 Gratt. 310, according to the syllabus it was held : “ H. and N. are merchants and partners. H. sells out to M.; and the new firm undertake to pay the debts of the first. H. becomes indebted to the new firm, for which he executes his bond with two sureties; and this bond is assigned for value to A. The new firm afterwards fails, and the partners are insolvent, leaving debts of the old firm unpaid to a larger amount than the bond of H.; and H. pays them. Held: H. is entitled in equity to set off against his bond in the hands of the assignee the debt of the old concern of H. & N., which M. & N. were bound to pay, and which H. had paid.” In the case of Beaver v. Beaver, 23 Pa. St. 167, it was held: — 29 — “ Id a suit by administrators of an insolvent estate the defendant is entitled to credit for a payment by him of a note, in which he was surety for the decedent, though paid by the defendant since the institution of the suit. The case of Bosler’s adm’rs v. The Exchange Bank, 4 Barr 32, in effect overruled.” In Thompson v. McClelland, 29 Pa. St. 475, it was held : “ An action on a due-bill not negotiable assigned to a third party long after its date is to be regarded as between the original parties without reference to the use-man, and subject to every legal set-off the maker may have against the payee. In such case he may set off the amount paid on a judgment as surety of the legal plaintiff, who was insolvent, although such payment was made after suit brought, the judgment having been entered and being due before the commencement of the action.” In Brittain v. Quiet, 1 Jones Eq. (N. C.) 328, it was held : “ The rule, that a party must establish his claim at law, before he can come into equity, is confined to cases, where a creditor seeks the aid of a court of equity in the collection of his debt on the ground of imposing on an equitable interest the liability, which would attach at law on a corresponding legal interest. It does not apply to the case, where a surety has paid money for his principal and seeks to enjoin an execution on a judgment against him in favor of such surety, the latter being out of the State and insolvent. In such a case the surety is entitled to relief, though he did not pay the money, until after the suit against him had been commenced, and therefore could not have pleaded it at law as a set-off. In the case of Williams's Adm’r v. Helme et al., 1 Dev. 151 it was held: “ A surety has in respect to his liability the rights of a creditor, and upon the insolvency of the principal debtor may retain any funds belonging to him in his hands. Therefore when the surety owed the principal debtor, who became insolvent and assigned for value the debt due by the surety, it was held, that the latter might retain the amount of his subsequent payment against the assignee. In this case the judge, who delivered the opinion of the court, at pp. 159, 160 says: “Ido not know a plainer equity. Indeed it was admitted in the argument, that if Williams had before the as — 30 — signment actually suffered, he would be entitled to the relief, which he asks. Or if he had before the assignment applied to this Court to restrain Helme from transferring, that then the assignment would not avail, as it would have been made in violation of an order of the court. Williams has other equities besides those arising from actual sufferings. As a surety he has a right to have his fears and apprehensions quieted, to be made safe from apprehended harm. He need not wait, till he has suffered, because his equity arises before that time ; and this seems to be admitted in that part of the argument, which rather concedes, that he might have obtained an order, that Helme should not assign. And as to the position, that Williams should have applied to a court of equity to restrain Helme from transferring, I think, that his equity is higher than any, which could arise from the violation of orders or rules of court. It is independent of them — it arises from the principle first mentioned, that Helme could neither by himself nor by another require of Williams todo, what he, Helme, was unable to do towards him from the fact of his insolvency. Williams being indebted to him was also bound for him in a very large sum, from which he sustained a loss of double the amount of the sum,, which Williams owed. The debt, which the plaintiff owed, should have been left in his hands as an indemnity in part for his loss. It is true, that if the judgment had been of a negotiable character, it would have been proper to have applied to a court to restrain its negotiation ; for had it been of that character, Williams might have had a legal owner to contend with, one who stood upon his own rights instead of those of auother — and who would not as these defendants represent the original creditor and be bound by every obligation, which was imposed upon him,” &c. A present equitable demand may be set off, although it is not a legal cause of action; and as a surety may equitably require the principal to pay the debt, as soon as it matures, so he may file a bill to compel the appropriation of an amount, which he owes the principal, to discharge the obligation to the creditor. For like reasons a payment by the surety to the creditors may be set off in an action by the principal against the surety, although not made until after suit brought. Thompson v. McClelland, 29 Pa. St. 475; Beaver v. Beaver, 23 — 31 — Pa. St. 166; Brittain v. Quiet, 1 Jones. Eq. 328; 2 Lead. Cas. in Eq. (White & Tudor 4 Am. ed.) 1345. A principal, who is insolvent, cannot collect a debt, which the surety owes him, without first indemnifying the surety; A surety has in respect to his liability the rights of his creditor as against his principal; and upon the insolvency of the principal debtor he may retain any funds belonging to such debtor by way of indemnity against his liability. Otherwise a surety in such a case would be wholly without remedy, when the plainest principles of justice are in his favor. The assignee of a judgment obtained by the principal against the surety will in such case stand in no better position than the principal. Brandt on Suretyship and Guaranty 278. In the case of Abbey v. Van Campen, administrator, 1 Freeman’s Chancery R. 273, it was held : “A court of equity will not permit a plaintiff at law to enforce against the defendant the collection of a debt, when the defendant stands as surety for the plaintiff to an amount greater than that sued for, unless the plaintiff will fully indemnify the defendant against his liability as his surety, more especially if the plaintiff is shown to be insolvent. A surety has in respect of his liability the right of a creditor as against his principal, and upon the insolvency of the principal debtor he may retain any funds belonging to such debtor by way of indemnity against his liability.” In this case the surety filed his bill in chancery to restrain the collection of a judgment at law against him in favor of the administrator of his principal, until the notes, on which he was surety, were paid.” The injunction was granted. The Chancellor in his opinion in the case on pp. 274, 275, says: “This case was submitted on a motion to dissolve the injunction therein. The answer does not deny the agreement, upon which, I conceive, the equity of the bill rests. Here there is an express agreement, by which Abbey was at liberty to withhold the payment of the note for one thousand dollars, upon which he is sued, until Dickinson should release him from his liability on notes made by Dickinson and endorsed' for his accommodation by Abbey. This is certainly such an agreement between principal and surety, as a court of equity would enforce for the protection of the latter. The allegation of the bill on this subject is not denied and therefore stands — 32 — admitted on a mere motion to dissolve. I entertain no doubt however that. Abbey would upon well considered principles of equity have been entitled to the relief, which he asks, even independent of the agreement set up by the - bill, if the suit had been brought by Dickinson in his lifetime against him. A court of equity would not permit a plaintiff at law to enforce against the defendant the collection of a debt, when the defendant stood as surety for the plaintiff to an amount greater than that sued for, unless the plaintiff would fully indemnify the defendant against his liability as his surety, and especially if the plaintiff were shown to be insolvent. It would be rank injustice to permit a principal to collect a debt from his surety and at the same time leave his surety to pay a debt for him without the most distant hope of reimbursement. A surety has in respect to his liability the rights of a creditor as against his principal; and upon the insolvency of the principal debtor he may retain any funds belonging to such debtor by way of indemnity against his liability; otherwise a surety in such a case would be wholly without remedy, when the plainest principles of justice are in his favor. The cases of Williams, adm’r v. Helm et al., 1 Dev. Eq. R. 151, and Battle v. Hart, 2 Dev. Eq. R. 31, are fully in support of this view of the cased’ In the case last referred to (2 Dev. Eq. 31,) it was held, that “ upon the insolvency of the principal debtor a surety is considered in equity as a creditor, and may retain against an assignee for value and without notice any funds of the principal, which he has in his hands.” As we have seen, in the case at bar the debt, for which the defendant Sutton obtained judgment against the plaintiff, was owing from the plaintiff to Sutton, at the time when the plaintiff became surety for Sutton in the appeal-bond made to enable the plaintiff to obtain an appeal from the judgment of the justice in the case of Barret v. Sutton, and by means of said appeal-bond Sutton did obtain an appeal from the judgment of the justice to the county court of said county of Wood. The condition of that appeal bond is, that “ whereas the above bound Hiram Sutton has appealed from the decision of William Cook, a justice of the peace of Wood county, West Virginia, in a certain action before him, in which — 33 — Thomas Barrett is plaintiff, and the said Hiram Sutton is defendant. Now, if the said Hiram Sutton will perform and satisfy any judgment, which may be rendered against him on such appeal, then the above obligation to be void, else to remain in full force and virtue.” It appears, that after said appeal was taken to the county court by Sutton, that case was by the consent of said Barrett and Sutton by order of court referred to arbitrators, their judgment to be entered up as the judgment of the court. This consent-order wasmad'e at the-term 1877 of the county court. The judgment of the justice appealed from was in favor of Barrett against Sutton for $100.00 with interest and the costs. The arbitrators, to whom the appeal case was referred, made their award on the 17th day of October, 1877, and in and by their award they awai'ded in substance, that the said Barrett recover of the defendant, Sutton, the sum of $100.00 with interest thereon from the 3ist day of July, 1875, the date of the judgment rendered by the justice in the cause, and also the costs of suit, and that therefore the judgment of the justice be affirmed. It appears, that at the time the injunction was obtained in this cause by the plaintiff, said award had been returned by the arbitrators and filed with the papers of the said appeal-case. This being so, the said award being valid on its face prima facie fixed the liability and the amount thereof of the plaintiff as the surety of said Sutton on said appeal-bond, because prima facie there was nothing left for the county court to do in the case (after a suit against said Sutton) but to enter judgment upon said award against said Sutton and the plaintiff, his surety, jointly. Under the 126th section of chapter 226 of the Acts of the Legislature of 1872-3 the judgment of the county court in appeal-cases, where the appellee prevails, is rendered against the appellant and his security for the sum due, including interest and costs. The plaintiff in his own deposition taken in his own behalf fully sustains the allegations of his bill in relation to an agreement or understanding between him and said Sutton made by them, before plaintiff signed said appeal-bond, if he is to be believed. It is proper to remark, that the deposition of said Sutton was not taken in the cause for some reason. If the statements of the plaintiff contained in his deposition in re — 34 — lation to said agreement with Sutton were untrue in whole or in part, Sutton must have been cognizant of the fact and was competent to so testify. It seems to me, that under the circumstances and evidence I am not authorized to say, that the evidence of plaintiff touching said agreement is false and should nor receive credit. Still if there was no agreement between the plaintiff and the defendant, Sutton, of the character claimed, I am of the opinion under the facts appearing and the authorities I have cited, that it was proper just and equitable to grant the injunction awarded in this cause, although it was awarded before judgment was entered by the county court upon the award of the said arbitrators. As we have seen, it appears, that in a few months after said award was made, and in a less time after the injunction was awarded restraining the collection of the judgment in favor of- the defendant Sutton against the plaintiff, and some time before the injunction was dissolved and the plaintiff’s bill dismissed, the county court did enter judgment upon said award against said Sutton and the plaintiff his surety for $100.00 with interest from the 31st day of July, 1875, and the costs, to wit: $76.53, which is greater in the aggregate by several dollars than the said judgment of said Sutton against the plaintiff. All of this was before the circuit court, together with the fact of the insolvency of the defendant, Sutton, at the time plaintiff became his surety in said appeal-bond, and from thence continually afterwards, and at the time the circuit court dissolved said injunction and dismissed the plaintiff’s bill. It seems to me upon well settled principles of equity, which are fully supported by authorities cited supra, that the circuit court erred to the prejudice of the plaintiff in dissolving said injunction as well as in dismissing the plaintiff’s bill. I think it was clearly right and proper to grant the injunction upon the facts stated in the bill, and that after the injunction was granted, it would have been error upon the facts appearing to dissolve the injunction before the county court entered judgment upon the award in favor of Barrett against said Sutton and plaintiff as his surety without indemnity to the plaintiff against any judgment, which might thereafter be rendered against him in said appeal-case as the — 35 — surety of said Sutton in said appeal-bond. And after the county court entered judgment upon the said award against said Sutton and the plaintiff as his surety as aforesaid, the said injunction should not have been dissolved, unless it had appeared to the court, that the said Sutton or some person for him, other than the plaintiff, had satisfied and discharged said judgment of the county court and procured the plaintiff to be released from any and every liability thereunder. It might have been different in this case, if the plaintiff had incurred his liability as surety for Sutton after the assignment of the said award in the case of his principal (Sutton) against him and after notice of such assignments; but, as we have seen, that question does not arise in this case; and it is therefore not now decided. It seems to me further, that it was the right of the plaintiff as the surety of Sutton in said appeal in equity and upon principles settled in courts of equity under the circumstances and facts appearing in this case to withhold the amount of the said judgment of Sutton against him, including principal, interest and costs, for his indemnity against the said Barrett judgment against said Sutton and plaintiff as his security, as far as it would go, and to apply the same to the payment of the said Barrett judgment; and that when it shall be made to appear to the court, that the plaintiff has paid the amount of the said judgment of Barrett against Sutton and him including the principal, interest and costs, the circuit court should perpetuate the injunction heretofore allowed at the costs of the defendants. Under the facts appearing in this case the defendants, who are assignees of said Sutton, stand in no better situation than Sutton would, if he had made no assignment, the debt assigned not being negotiable in its nature or character, the assignees respectively took their assignments subject to the equities of the plaintiff as the surety of Sutton as aforesaid. Entertaining the foregoing views, the said decree of the circuit court of the county of Wood rendered in this cause on the 13th day of April, 1878, must be reversed with costs to the appellant, William H. Mattingly, against the appellees, Hiram Sutton, John G. McLuer and James M. Jackson; and this cause must be remanded to the said circuit court for such — 36 — further proceedings therein to be had, as are in accordance with the principles settled in this opinion, and further according to the principles and rules governing courts of equity. Judges GreeN AND JohNson Concurred. Debree Reversed. Cause Remanded.