Reed v. Cramb

Lacey, J. It can not be doubted if a principal debtor place collateral securities in the hands of his creditor holding his promissory notes that no renewal of the notes or change of the contract between the parties without mentioning the col-laterals would have the effect to release such collaterals, but we understand the law to be as well settled, that in case the principal debtor places collaterals in the hands of his debtors holding his note belonging to a third party who has simply loaned him the property to be pledged as collateral, and the creditor has notice of such fact, that such third party as to such security occupies the position of surety, and any change of the contract for a valuable consideration between the principal debtor and his creditor without the consent of such surety thereby releases the property so pledged from all lien of the creditor. Burnap v. National Bank of Potsdam 96 N. Y. 125; Bank of Albion v. Burns, 46 N. Y. 170; Smith v. Townsend, 25 N. Y. 479; Fitch v. Cotheal, 2 Sandford’s Ch. 32; Brown v. Sharp Rifle Co., 33 Conn. 18; Colebrook on Collateral Securities, Sec. 239. There might be a case where the owner of property placed it in pledge for the debt of another, with the agreement and understanding that it was to stand good for the debt without reference to what the principals might do by way of changing the agreement, where the property would not be released by reason of any extension or change in the contract between the parties to the original contract. Such seems to be the interpretation put upon the facts of Collins v. Dawley, 4 Col. 138. We may say herd, we do not approve the decision in that case and think it stands alone without support from any other court. It so seems to us in view of the law, that contracts of security are to be construed against the beneficiary, and where collaterals of a third party are in the hands of a pledgee as a security for the principal of a promissory note to the payee with the knowledge of the fact, the proper construction of the contract would be that such pledge only stands good for the fulfilment of the contract as it then stands. Ho other presumption should arise. But it is insisted that the long- delay of appellant in not attempting to reclaim these securities from 1876 to 1879, when Levi Kelsey died, and still longer when H. 0. Beed went insane, ought to be sufficient proof that he had agreed that the stock should stand good for the payment of the debt, regardless of changes in the contract without his consent. We think such fact alone should not have such effect. Appellant is not permitted to testify as to what he knows or what he did during that time, nor is there any proof that, he was aware of the extensions. H. 0. Beed was insolvent, or at least unable to pay his debts, and William K. Beed may have been, and ho doubt was, aware of this fact and was not aware of the release, and allowed the matter to run along. His stock would not bo released unless the time was extended. If he delayed purposely, his rights to reclaim the stock ought not to be defeated for that reason alone. But it is claimed by appellee that, so far. as Levi Kelsey knew at the time, W. K. Beed deposited the savings bank stock with him in lieu of the Buehler mortgage. H. C. Beed was the owner of the mortgage, and hence the stock must be regarded as being substituted for the mortgage in exactly the same way as he held the mortgage, notwithstanding he knew at the time the stock was placed in his hands by William K. Beed, that William K. was the owner thereof and that as between William K. and H. G. the former was surety for the latter. It is insisted also that William K. received consideration for making the substitute and pledging his stock; therefore he must be regarded as principal as regards his stock and may be treated as such by renewals without his consent without having the effect to release him as to the stock. The appellee’s case hinges upon the correctness of these assumptions. It appears, as we gather from the evidence, that the Buehler note was the property of William K. Beed, and that in reality he was security to amount of the one thousand dollar mortgage in the first instance, H. C. Beed having borrowed the note of him, though the evidence fails to show that Levi Kelsey had notice of this fact, and had he renewed the note without such knowledge the security would not have been released, but in case he had been notified before extension that William K. was the owner and the note was simply loaned to H. C. Beed and the extension had been made, then he would have as effectually lost his lien on the note as he would if he had known the fact in the first instance, so that the fact of want of knowledge that William K. was the security to the amount of the note could only protect him in making renewals in the absence of such notice, no matter when acquired, before or after the making of the contract, so it was not after the extension. Addison in his work on contracts lays this down as a rule, that notice coming to the party who takes the security after the contract, compels him to act with reference to the rights of the security in as equitable manner as though he had known it before. The text is as follows: “The doctrine of the discharge of the surety by time given to the principal debtor, by a binding contract, is not confined to cases where the relation of suretyship appears on the face of the original contract between the creditor, the principal and the alleged surety. The equity arises from the relation of the co-obligors, or promisors inter se, and on the knowledge by the creditors of the existence of that relation. It is held to be inequitable in the creditor knowingly to prejudice the rights of the surety, although he may know of the existence of the relation of suretyship only at the time of dealing with the principal debtor, so as to prejudice such rights. But extraneous evidence is not admissible for the purpose of showing that a party who, on the face of the contract, has incurred a primary liability, was only intended to be secondarily liable as surety after the default of another principal contracting party.” Addison on Contracts, 864; Bailey v. Edwards, 4 B. S. 761; 34 L. J. Q. B. 41; Rayner v. Fussey, 28 L. J. Ex. 132; Pooley v. Harridone, 7 Ell. & B. 431; Greenough v. McClelland, 2 El. & El. 424; Davies v. Stainbank, 6 De Gex, M. & G. 696. Apply this doctrine to this case. At the time the substitution was made Levi Kelsey knew that the stock that was being substituted was the property of William K. Reed, and that as between him and H. C. Reed the former was security. He had no reason to suppose that this stock had been exchanged by way of sale for the note. There vas no reason for such supposition. The stock was worth $5,000 and the mortgage $1,000. Then in such case equity would require him to regard the rights of the security and not extend the time of payment without his consent. Such even would have been the case as regards the mortgage upon notice of the suretyship, and much more with regard to the stock. There could be no difference as far as Levi Kelsey’s remedy for the collection of his debt is concerned, and his right to appropriate this stock to the payment of the notes of H. C. Reed, whether the collateral was put in pledge by the principal of William K. Reed. The only difference would be that he would not have to act in such manner in changing the contract or the time of the payment of the notes as not to injure the surety or obtain the latter’s assent to the change. It is claimed by the appellee that as William K. Reed took up the note from Levi Kelsey, that the latter parted with something valuable, so constituting a valuable consideration moving to William K. Reed, and hence the stock, substituted for the mortgage and note, should be regarded as having been placed there by the principal and might be treated as belonging to a principal. But it may properly be answered that without some valid consideration the holder of the principal notes of H. O. Reed could have no claim on the stock whatever. The notes having been made and delivered by H. C. Reed to Levi Kelsey before the stock was placed in the latter’s hands, without some such consideration there could be no claim on Kelsey’s part to hold the stock in any legal right whatever. “ There must be a consideration for suretyship, otherwise it will be invalid. An agreement to be security for goods already sold to the principal is void.” Addison on Contracts, 853. It would not seem to follow that the mere fact that there was a consideration for the suretyship at the time the Dime Savings Bank stock was delivered to Kelsey, that William K. Reed,, to the extent of the stock, assumed the position of a principal. By way of illustration we may look at the matter in another light. Suppose the payee of a note, having no IDrincipal makers, agrees with one of the principals that if he will procure a surety to sign a new note with him, in consideration that the payee release and discharge the other principal, and the principal so contracting and the surety execute a note for the same amount and due the same time as the old note, and the other principal is released, would not the surety on the new note have all the rights of any other surety? While the release of the principal would be a good consideration to support the promise of the surety, he would none the less be a surety. In principle this is exactly the case at bar, even considering that the Buehler note was not shown to have been the note of William K. Reed, and even it' the note were regarded as the property of H. C. Reed. Another principle of law in regard to the contract of a surety is that it must be strictly construed in favor of the surety and his liability can not be extended by implication. Reynolds v. Hall, 1 Scam. 35; The People v. Moon, 3 Scam. 123. It must be strictly construed and his liability is never extended beyond the terms of his agreement, or at least its manifest import. In case of doubt the doubt is generally if not universally solved in his favor. Stull et al. v. Hance, 62 Ill. 52. “ The courts therefore in all cases construe doubtful contracts of suretyship, etc., in favor of the surety, so as to narrow rather than enlarge his liability.” Addison on Contracts, 856. If then there could be by implication a construction not contained in the words of the letter placing the Dime Savings Bank stock in the hands of Kelsey “in place of ” the note and •mortgage, unfavorable to the surety, it should not be given, but the construction should he favorable to him, if indeed a/ny construction could, under the law we have cited, be unfavorable. Because the court below committed error in granting the relief prayed for in the bill and decreeing the foreclosure and sale of the stock in the Dime Savings Bank, described in the bill, to satisfy the notes of H. C. Beed, described in the bill, the decree of the court below is reversed and the cause 'remanded to the court below with directions to that court to dismiss the bill. Decree reversed a/nd cause rema/nded with directions.