Crump v. McMurtry

Scott, J., delivered the opinion of the Court. This was a hill in chancery filed by T. Crump, N. E. Branham, and others, securities in a bond executed by them, together with J. M. McClelland and Compton, to Levi McMurtry. McClelland, the principal in the bond, and Compton, one of the securities, were made defendants together with McMurtry. The facts, as stated in the bill, are as follows: McMurtry sold a tract of land to McClelland for $5,760, to he paid by three'equal instalments of $1,920 each, on the 25th October, 1836, 1837, and 1838. These instalments were secured by the notes of McClelland. Most of the first instalment was paid, and in January, 1838, McMurtry commenced suit by attachment for the recovery of the balance of the first instalment and the second instalment. The attachment was levied on nine horses and other personal property of McClelland. It was afterwards agreed between McMurtry and McClelland, that if McClelland would secure a thousand dollars of the note for the payment of the second instalment then in' suit, with personal security bearing ten per cent, interest, McMurtry would accept the same in lieu of, and as collateral security for, an equal amount of said note, and would release the horses from the attachment. Accordingly, afterwards, on the 4th January, McClelland, as principal, and the complainants, together with the defendant Compton, as securities, executed their bond to McMurtry, due twelve months after date, with ten per cent, interest. This bond was delivered to McMurtry, who released the horses from the attachment. After, in June, 1838, it was agreed between Mc-Murtry and McClelland, that the latter should withdraw his plea in abatement of the attachment, and plead to the merits, and that McMurtry should pay all the costs incurred by the attachment; that, at the ensuing term of the court, McMurtry should have judgment for the balance due on the two notes, after allowing all credits to which McClelland, on settlement, was entitled; that the personal property then subject to the attachment should he sold, and the proceeds applied to the satisfaction of the judgment to be rendered at the ensuing term; that, if the bond for $1,000, of the 4th January, 1838, should be paid, the amount should he credited upon the judgment to be taken, and that the said bond was collateral security for so much of the second instalment; that the judgment to be taken, when satisfied, would operate as an extinguishment of said bond, and that the land sold was bound in equity for the two notes then in suit, but should not be sold under execution upon the j udgment to be obtained in the suit then pending. In pursuance of this agreement at the October term, 1838, judgment was rendered against Mc-Clelland for $1,994 95, besides costs. At the July term, 1839, judgment was obtained on the bond for $1,000, against McClelland and his securities; and at the November term of the same year, a recovery was had on the note for the last instalment. The proceeds of the sale of the personal property taken under the attachment, amounting to $480, was applied in part satisfaction of the judgment of October term, 1838. In April, 1840, McMurtry sued out executions on the three judgments, by virtue of which the land sold by McMurtry to McClelland was levied upon, an,d, at the July term, sold for $2,400. This sum was, by the sheriff, first applied in satisfaction of the judgment of October, 1838, the execution — 412 — on which was returned satisfied, and the residue, amounting to $607, was applied to the judgment on the note for the last instalment. The prayer of the bill is, that the judgment on the bond for $1,000 be declared to be extinguished, and the collection thereof be perpetually enjoined and for general relief. McMurtry answers, and denies that the bond for $1,000 was given or received as collateral security for a like amount of the note for the second instalment. He denies that he authorized the sheriff to apply the money arising from the sale of the land in the manner it was done, and avers, that he instructed the sheriff to apply it, first, in satisfaction of the judgment on the note for the last instalment, and the residue to the judgment of October of 1838. He further slates, that he instituted proceedings in the Callaway Circuit Court to correct and amend the returns of the sheriff to the several executions, which resulted in an order of the court, setting aside so much of the return on the execution on the judgment of October, 1838, as states that it is returned satisfied; and so much of the return on the execution issued on the judgment rendered in the suit on the note for the last instalment, as applies the residue of the money arising from the sale of the land, is also set aside, leaving the facts of the levy and sale contained in the return on the execution on the judgment of October, 1838, remaining on the same. The other facts charged in the hill are admitted by McMurtry. McClelland, in his answer, admitted the facts charged in the bill, and the same were taken as confessed against Compton. After the execution of the bond of the 4th January, 1838, for $1,000, by Mc-Clelland and his securities, McClelland took from McMurtry the following receipt, viz.: — “ Received of Mr. J. W. McClelland a bond, with the following securities : T. Crump, N. E. Branham, V. D. Boone, B. G. D. Mosley, and Compton —for-$1,000, which I promise to credit J. W. McClelland’s bond that was due to me in October, 1837. “ Levi McMiiiitey.” The following is so much of the agreement of June, 1838, referred to in the bill, as is deemed material. If McClelland and his securities will further secure, if McMurtry requires it when due, a note for $1,000, its payment shall be extended at same interest due in January next, for twelve months. If it be paid, it is to be a credit on the amount of the above-named judgment, (the judgment of October, 1838,) as it stands as collateral security to the note sued upon for that amount, and McMurtry is not to sell McClelland’s land in Callaway county, now in Mc-Clelland’s possession, under the execution on the judgment to be given at the next term, this land being now bound in equity for the payment of the notes sued upon. If the judgment to be rendered at the next term be fully paid, it extinguishes the note .mentioned above for the payment of a $1,000. On the hearing, the court entered a decree dismissing the bill, from which the complainants appealed. The complainants insist, that by the agreement of June, 1838, between McMurtry and McClelland, the bond for a thousand dollars became collateral security for a like amount of the second instalment, and that although the securities to the bond were not parties to that agreement, yet in equity they are entitled to all advantages secured by it, as fully as though they had executed it. After asserting this prin — 413 — ciple, they maintain, that the judgment of October, 1838, was a lien on the land sold, and therefore entiled to payment in preference to the judgment of November, 1839 ; that the securities in the bond for $1,000 had a right to be substituted, in relation to this lien, in the place of McMurtry, the judgment creditor; and Mc-Murtry, by the sale under the execution, having discharged the land from the lien, thereby released the sureties. It is a clear principle in equity, that if a creditor has personal security for a debt, and also an incumbrance on property of the debtor, to secure the payment of it, if the surety satisfies the debt, he shall be substituted for the creditor, and have an indemnity out of the property which was -collaterally bound to secure the same ; and if the creditor, acting in bad faith, by any means, destroys this recourse of the surety, he will thereby be discharged. As the surety, by paying the debt of his principal, becomes in turn a creditor of the debtor, it is nothing but equity that he should seek his indemnity out of the property which had been appropriated for the payment of the debt which he has discharged. This principle is one of pure equity, and is founded on the dictates of refined justice. It is not intended to be applied in all cases where there is a collateral security for a debt, but in those only in which justice demands its application. To apply it indiscriminately, without regard to circumstances, would be to convert a mild rule of equity into one of stern law, working its way regardless of the injustice which may follow. — 1 Johns. Chan. Rep , 409. It is above stated, that the complainants assume that the judgment of October, 1838, was a lien upon the land sold, and entitled to priority of satisfaction. That judgment may have been a lien on the land, but it could not displace that which existed anterior to its rendition. It seems to be well settled, that a vendor of real estate retains a lien for the purchase money on the estate sold, whether he has executed a conveyance or not. This principle is supported by a current of authority which cannot be resisted. (Cole vs. Scott, 2 Wash.; 2 Story’s Equity sec. 12, 13; 2 Sugden on Vendors, 57.) it will follow, then, that although the judgment of October, 1838, was a lien, yet it attached subsequently to the prior lien for the amount of the purchase money secured by the note for the last instalment, and notwithstanding that judgment, the land was bound for all the purchase money remaining unpaid. McMurtry might have satisfied the judgment of October, 1838, by a sale of the land, and thereby extinguished the bond of the complainants. But this was not done. That judgment remained unpaid until a judgment was rendered on the note for the last instalment, and having two judgments, they were subject to his control, and he might have the money arising from the sale of the land under them applied as he thought proper, unless the rights of third persons were concerned. This renders necessary the inquiry whether the complainants, as sureties on the bond for $1,000, had a right to interfere and control McMurtry in the application of the proceeds of the sale of land. If such a right exists, it must have its foundation in the doctrine of substitution, or it must be by contract. ■The principle of equity is this: if an individual is security for a debt, and the creditor has a lien on property as collateral security for the payment of that debt, if the surety discharges the obligation of his principal, he shall be substituted for the — 414 — creditor, and have satisfaction out of the property collaterally bound for the payment of the debt. The case under consideration does not fall within this principle. A surety is not asking to he substituted for a creditor who has collateral security for his debt, but one security is demanding to he substituted for the creditor in relation to another security when the effect will be to deprive the creditor of one of his resources, and thereby cause a partial loss of his debt. A vendor sells a tract of land, and takes three notes of the vendee for the purchase money, payable in annual instalments. Taking no security other than the notes of the vendee for the purchase money, he retains the lien given by law to secure its payment. Apprehensive that the estate sold will he insufficient to pay the purchase money, he institutes an action on the note for the second instalment, and attaches property of the vendee worth a thousand dollars, and in consideration of the release of that property from the attachment, a bond is given for a thousand dollars as security for a like amount of the note on which the suit is brought. This is the case of a creditor having a security for his debt, and fearing that it will prove insufficient, he obtains supplemental security, and then the supplemental security asks to be substituted in the place of the creditor as to the other security, thereby defeating every advantage the creditor had obtained by taking the supplemental security. In reviewing this transaction, will not a court of equity regard the bond of the complainants as the jiroperty for which it was substituted ? But for the bond of the complainants, McMurtry would have'had the horses as additional security for his debt; and can the substitution of the bond for the horses make any difference in equity? The complainants,by their interference,induced McMurtry to release a lien on property worth the amount of their bond, and now that they seek to be discharged from the obligation, some equitable circumstance should be shown other than that the security into which they entered was termed collateral. If this case furnishes no circumstances which would warrant a court of equity in extending to the complainants a right to substitution, is there anything contained in the covenant between the parties t>f June, 1838, which will give them this right ? That instrument recites, that the bond of the complainants stands as collateral security to the note sued upon for that amount; that the land sold is now bound in equity for the payment of the notes in suit; and that, if the judgment to be rendered on the notes he fully paid, the bond of the complainants will be extinguished ; and it is agreed that the lands sold by McMurtry to McClelland shall not be sold to satisfy the judgment to be rendered on the notes then in suit. McMurtry, fearful that the land sold would not be a sufficient security for the purchase money, instituted proceedings, by attachment, for the recovery of a part of the first, and the whole of the second, instalment. Property other than the land, to the amount of a thousand dollars, is attached ; and the complainants, in order to obtain a release of this property from the attachment, that it might be sold by McClelland, and the proceeds paid to McMurtry, entered into the bond which is the subject of this controversy. Afterwards, an argument is entered into, between McMurtry and McClelland, in which the recitals and stipulations above set forth are contained. It is under this agreement that the complainants- seek relief against the bond which they have executed. It may be remarked on the terms of — 415 — the instrument, that the parties do not contract, in express words, that the bond of the complainants shall be collateral security, and that the land sold shall be bound in equity for the payment of the notes sued upon; but these are simply announced as facts. What could have been the object of the parties in making these declarations ? The bond of the complainants was given to secure part payment of a note on which suit had been brought; and unless it was declared to be merely collateral security, the whole of the purchase money might have been recovered by MeMurtry; and, afterwards, suit might have been instituted for the recovery of the amount secured by the bond of the complainants. This view of the matter is strengthened by the fact, that the parties stipulated that the land should not be sold under the judgment to be obtained on the notes in suit. If it was designed to place the note for the second instalment — forpart of which the complainants’ bond was collateral security — in such a situation as to have a priority of all the other notes, why stipulate that the land should not be sold for its payment? Was not the effect of that stipulation to leave the land undisturbed for the payment of the last instalment ? The term “ collateral,” applied to the security'of a third person, does not esc vi termini confer a right in equity to substitution. Its signification is not technical; and, as used by the parties to the covenant, in our opinion, it means additional, or supplemental. Can we suppose that, by the Use of that term, it was designed to deprive MeMurtry of all the advantages he had obtained by his diligence, render the bond of the complainants of no avail whatever, and place MeMurtry where he was before he obtained it? It is certainly competent for a party to do such an act: any one may relinquish or release any right conferred on hin\ by law or contract; but when we see an individual sedulously employed in securing a debt, and, just as he has obtained his end, to believe that he would relinquish it without any consideration, we should have clear and manifest language indicative" of such an intent. There is nothing in the argument which would warrant us in adopting the opinion that such was the understanding of the parties. How can it be said that a right to substitution was contracted for on behalf of the complainants, when, by the payment of the bond which they executed^ the lien on the land for that amount would be extinguished ? What was there to be substituted to ? We have seen that the judgment of October, 1838, had no priority of the note for the last instalment; and the reason why that priority does not exist has been shown. The recital of the fact of the existence of a lien, to the amount of the two notes in suit, admitting it amounted to a covenant that the land should be equitably bound for that amount, might have the effect to preserve the lien of MeMurtry on the land sold for the amount of the bond of the complainants, as otherwise such a security might be held a discharge of the lien pro ianie: As the existence of a lien somewhat depends on the contract and understanding of the parties to the sale, such a recital would show that it was not abandoned. (Story’s Equity, see. 1,226.) Chancellor Kent has summed up the general doctrine on this subject, as well as the exceptions to it, with great clearness. He holds, that the better opinion is — that taking a note, bond, or covenant, of the vendee himself, is not a waiver of the lien, for such instruments are only the ordinary evidence»of a debt; but that talc — 416 — ing a note, bill or bond, with distinct security, or talcing a distinct security exclusively by itself, either in the shape of real or personal property, from the vendee, or taking the responsibility of a third person, is evidence that the vendor does not repose upon the lien, but upon an independent security, and it discharges the lien. These rules he deduces from a review of the American as well as the English authorities. But although the effect of the recital was to preserve the lien of McMurtry, yet both parties.knew that the land was already subject to the lien of the unpaid purchase money; and, consequently, the recital could not give the lien for the second instalment a priority over the lien on the land for the last instalment. In this respect the covenant places the complainants in no better situation than the judgment of October, 1838. As to the point, that the judgment on the bond of the complainants was prior to the judgment on the note for the last instalment, and therefore entitled to be first paid, we deem it answered in what has been said in relation to the lien of the judgment of October, 1838. Had the bond of the complainants been made a collateral security for the payment of the whole debt, or for the last instalment, none of the difficulties with which this cause is surrounded would have arisen: the transaction would have been plain, and easily comprehended. As it is, its peculiar circumstances render it'unnecessary to determine the abstract question —whether, if a whole debt, payable in three instalments, is secured by property which is insufficient to satisfy it, and a surety, being bound for the first or second instalment of the debt, pays the same, whether,.he is entitled to any, or what, relief in equity, in respect to the property bound for the debt P For in this transaction, the complainants, so far as McMurtry is concerned, in whatever relation they may stand to McClelland, cannot be regarded as sureties. This is not like the case of one voluntarily becoming the surety of another for the payment of a debt: McMurtry purchased the bond of the complainants for a valuable consideration: it was given for the horses which he held for the payment of his debt, and justice and equity constrain us to regard it'merely as the representative of the property for which it was substituted. We know of no principle of equity, arising out of the doctrine of contribution or substitution created for the protection of sureties, which can enable us to extend to the complainants the relief they ask. As to the point, that the judgment of October, 1838, is satisfied by the levy and sale of the land under it, we are of the opinion that the action of the court below, in relation to the returns of the sheriff on the several executions, is sufficient to show that the application of the proceeds of the land is yet to be made. Enough of the several returns was quashed to show that the court intended to set aside the application made by the sheriff, and to leave the matter open. Had not that been the design of the court, as manifested by its action, it is hard to conceive why the complainants should be apellants here, asking relief in this form. Surely the court understood the effect of its own orders! and why should we give them a more limited construction than was intended by the power making them P Decree affirmed.