King v. Harman's Heirs

Bullard, J., delivered the opinion of the court. The plaintiff sues to recover of the heirs of the late T. L. Harman, the amount of the penalty of a bond of indemnity executed by their ancestor jointly and severally with G. W. Murray of New York, in favor of Henry Payson. Payson had been the surety of Murray on two bonds conditioned for the payment of certain sums of mone}r to F. H. Nicoll, E. H. Nicoll, and H. W. Nicoll of New York, and the bond now in question was given to indemnify and save harmless the said Payson, against his responsibility on those bonds. The Nicolls having recovered judgment against Payson for the amount of the original debt, the latter became insolvent, and in pursuance of certain chancery proceedings assigned the bond of indémnity to the present plaintiff for the use of the Nicolls, as a fund out of which the debt should be paid. The answer of the defendants, which is in the nature of the general issue, brings the whole merits before the court on the evidence in the record. Substantially thefore the case stands as if the Nicolls, the original creditors of Murray were seeking, under an assignment from Payson, after judgment recovered against him but unpaid, to recover the amount of their judgment in pursuance of the covenants in the bond of indemnity. _ t these different bonds were entered into in States of the / Union where it is admitted the common law prevails, and ' * ’ consequently the rights and liabilities of the parties are to measured by that system of jurisprudence, and whatever — 617 — the plaintiff would he entitled to recover in a court of law or equity in the state where the transaction originated, he is entitled to in this court in the present form of action. Our first inquiry is, what was the intention of the parties in giving and accepting this bond. Was it intended ultimately to operate in favor of the Nicolls for the better security of the debt duo to them by Murray, or was it simply an obligation to refund to Payson whatever he should pay in consequence of his previous liability as Murray’s surety? The whole instrument and all the concomitant circumstances must be looked at for this purpose. The bond recites that it had been previously covenanted and agreed between Murray and Payson, that if Murray would within six months from a certain day mentioned, by good and sufficient security, indemnify or release and discharge Payson from and against all liability, damage, costs, and charges, for or by means of certain instruments of guaranty, given to Nicolls and others, Payson would on his part release Murray from certain liabilities to him, Payson, the parties there say, “and whereas these presents are intended by the parties to said agreement, be as a compliance on the part of the said G. W. Murray, with so much of the said agreement as is above in substance and effect recited, now therefore, the condition of this obligation is such, that if the said G. W. Murray, &c. shall and do well and truly, indemnify and save and keep harmless, the said Henry Payson, &c. of from and against all his and their liability under and by virtue of the said two instruments of guaranty, and of and from and against all sum or sums of money that may at any time hereafter in due course oflaw be recovered, awarded, adjudged, decreed, and paid, &c. And of and from all actions, suits? judgments, and decrees that may at any time hereafter be in due course of law brought, prosecuted, obtained, and awarded against the said Henry Payson, &c. It is in proof, that in order to procure this indemnity ? Payson did release a debt due to him by Murray, amounting to upwards of thirty thousand dollars. And Murray who — 618 — was examined as a witness, swears that as counter security to Harman for the liability incurred by him in this bond to Payson, he conveyed to Harman certain property in New York, which had been mortgaged to Nicolls, to secure the original debt. If we give effect and meaning to every clause and word in this bond; if we are to consider the varied form of expres_ sion and terms in which the parties express themselves as any thing but idle verbiage, we cannot but be convinced, that the parties meant something more than merely that Payson should be refunded what he might be compelled to pay to Nicolls on his guaranty. The parties say that Pay-son was to be released from his liability, and this bond was intended as a compliance with Murray’s engagement to release and discharge him, and to save and keep him harmless. This intention could not be fully effectuated without the consent of the Nicolls, the original creditors, who do not appear to have been privy to this bond of indemnity. Is it a sufficient breach of any of the covenants of this bond that Murray and Harman suffered judgment to be recovered against Payson on the original debt against which they engaged to save and keep him harmless? Perhaps according to our own law, this agreement fairly construed, might be regarded as in the nature of a stipulation pour autrui, which would authorise the original creditors, the Nicolls, to pass over Payson and by the actio utilis come directly on Harman for the amount of ihe debt when it fell due. Our inquiry is however confined to the question, whether a court of equity in the common law States, according to the principles laid down in works of acknowledged authority, would authorise them or those who represented them, to proceed on an assignment of the bond to recover the amount of their debt against the surety on the bond of indemnity? The principle contended for and to a certain extent sanctioned by a train of decisions in courts of chancery is, that all securities given to the surety for his protection and indemnity against the debt inure to the benefit of the original — 619 — creditor, and that courts of equity will give them effect in his favor, that counter securitied follow the original debt, and are considered as substantially for the better protection of the original debt; the creditor being beneficially interested. In cases where a fund has been created or assigned to indemnity, the surety it seems will settle that the original credstor may in equity cause himself to be paid out of the fund, because it is in the nature of a trust for his benefit, m-?-» t t/v»i i-i* in 1 o this extent there seems to be no dimculty. Equity would J x J not permit the fund thus created, to be diverted to any other purpose; that is the payment of the original debt. But to what extent and in what case a bond of indemnity on collateral security given to the surety, would be regarded in equity as a fund created for the benefit of the creditor, between whom and the counter surety there existed no privity, is a question by no means free from difficulty. It would seem to us to depend on the condition of the bond of indemnity, and whether it had been forfited before the relief sought in equity. It then becomes a chose in action which perhaps may be reduced to possession for the benefit of the original creditor, according to the supposed intent of the parties. But this would depend on the question, whether as between the surety and the counter surety, the bond had been forfeited for a breach of the covenants; for it would seem to us against all equity, that the original creditors should interfere and make the condition of the counter surety more onerous, and render that engagement absolute in his favor which was only conditional as to the surety. In cases wll01.e created órassígnthes?uetydth“oriy may in “‘equity cai,se himself to he paid outof the funds which is in tlle ,of » fit- Abona creditor in chancery lias the benent of nil counter bonds or collateral securities gqVen by the p™“Pal t0 tl)0 A cursory view of the adjudged cases within our reach may show us to what extent and under what limitations this doctrine has been carried by courts of equity. In the case of Manno vs. Harrison, it was said that a bond it , creditor shall in chancery have the benefit ol ail the counter bonds or collateral securities given by the principal to the ° ^ i j. surety as if A owes B money, and C are bound for it, and A gives C a mortgage or bond to indemnify him, B shall have the benefit of it to recover his debt. 1 Equity Ca. abr. 93. In this case the nature or conditions of the bond are not — 620 — shown. It would seem that the principle was first announced in this case, and in terms sufficiently broad to cover almost any case. But it docs not appear to. have been a case against a surety on a bond of indemnity. If it was a mortgage, then it would amount to a trust fund. In the case of Russell vs. Clark's executors, decided by the Supreme Court of the United States, the principal question was whether a certain letter of recommendation from one merchant to another in favor of the bearer, amounted to a guaranty against certain endorsements and other engagements undertaken in favor of the person who was recommended. Murray & Co., the bearers of the letter, became insolvent and made assignments of their property. Russell to whom the letter was addressed, endorsed their bills to a large amount, the proceeds of which were employed in the purchase of rice, which among other things was assigned, and Russell sued the trustee to discover funds of Murray & Co., and prays that the intention of the parties as to the guaranty, may be enforced and payment made on account of the endorsements out of the fund arising from the sales of the rice. The facts of the case are complicated; and it is not necessary to mention them all. But there was a fund in the hands of the trustees, and the question was, whether Russell who had endorsed the bills of the insolvent on the strength of the letter of recommendation, should be paid out of a particular fund. Chief Justice Marshall in delivering the opinion of the court says, “ it is settled in this court that the person for whose benefit a trust is created, who is to be the ultimate receiver of the money, may sustain a suit in equity to have it paid directly to himself. This trust being to pay J. and W. Russell a sum they are liable to pay to N. Russell, and being created in such terms that the money is 'certainly payable to them, the purposes of equity will be best effected by decreeing it in a case like the present, to be paid directly to N. Russell. Indeed a court ought not to decree a pay-ment to J. and W. Russell, without security that the debt to N. Russell should be satisfied.” But nothing was finally — 621 — decided; the cause was remanded with leave to make new parties. Here was a fund in money to be distributed by trustees, and the question was how it should be distributed. In the case now before the court, the difficulty lies deeper; the very existence of the trust is denied by the defendants. 7 CrancWs Rep. 69, 97. In the next case cited, that of Moses vs. Murgatroyd. 1 . Johnson's Ch. Rep. 119. Chancellor Kent said, after quoting the case of Maure vs. Harrison above referred to, “ These collateral securities are in fact trusts created for the better protection of the debt, and it is the duty of this court to see that they fulfil the design.” The securities here spoken of consisted in fact of a quantity of coffee assigned by the debtor to his endorser by way of indemnity against his liability j and the question was how much of the proceeds should be appropriated to pay the original creditor who was the plaintiff. In this case it further appears that the assignment of the coffee was absolute, and parole evidence was admitted to show the real intention of the parties, and the chancellor remarked that it was not material whether the plaintiffs were apprised at the time of the creation of this security. Phillips vs. Thompson. 2 Johnson’s Ch. Rep. 417, was precisely" this: a judgment bond was assigned to indemnify certain endorsers. The same principle was applied to the disposition of the funds paid under the judgment. The holder of the note was considered entitled to the benefit of the collateral security. The Supreme Court of Errors of Connecticut recognised the same doctrine in the case of Homer vs. the Savings Bank, and stated the principle as extracted from the different-cases to be; that when the collateral security is given on property assigned for the better protection of the debt, it shall be made effectual for that purpose. 7 Connecticut Rep. 478. The question in the case of ex parte Rushmorth, 10 Vesey, 420, related to the right of the surety in a bond of indemnity, to avail himself of the proof made by the creditors under a commission of bankruptcy for his own reimburse — 622 — ment. It was in fact a question of subrogation, and Lord Eldon said that a surety is entitled to all the securities the principal has; the very converse of the proposition advanced in the other cases. In Wright vs. Mosley, 11 Vesey, 13, the master of the rolls stated the question to be whether the court would act upon the assignment at the instance of the surety in whose favor it was made. His argument rests upon what he considers a settled principle, that as the creditor is entitled to the benefit of all the securities, the principal debtor has given to his surety, so the surety has full as good an equity to the benefit of all the securities the principal gives to the creditor. So where A gave liis bond of indemnity to B to secure him aginst his guarantee for C to D, on the failure of C, and B his surety becoming liable on his guarantee to D and assigning his indemnity bond from A, to the creditors of D: held, that the latter can recover on it even before actual payment by B. It will have been perceived that in all the cases, which have thus come under review the creditors who sought relief in equity proceeded upon a tangible fund created originally for the indemnity of the surety but which by a kind of equitable fiction was regarded as the real pledge of the creditor. In the present case that fund consists not in money, but in the liability of Harman under his bond. According to the principle stated by Chief Justice Marshall, if Payson were now demanding the money from the defendants, if it be really due, the Court of Equity would not decree it to him without requiring security that it should be paid over to the original creditors. This case differs from all the others and we are driven back at last to the question, has this bond been forfeited and had a right of action accrued to Payson before he assigned the bond to the plaintiff 1 We have already said that the intention of the parties appears to have been, that Murray should release and discharge Payson from all liability on account of his guaranty. Harman acceeded to this obligation as surety and stipulated that on notice of the default of Murray' being given, he would step in and save Payson from loss. Notice is proved to have been given and we are of opinion that they did not comply with the covenants and the bond was forfeited. It is therefore ordered, adjudged and decreed, that the judgment of the District Court be affirmed with costs.