Manufacturers Casualty Insurance v. Wilhelm

Paul Ward, Associate Justice. This litigation presents a legal question of first impression in this State relative to rights of subrogation. The pertinent facts are not in dispute. On June 25, 1957, Mrs. Margaret McLaughlin secured a judgment in the Carroll Chancery Court against Milton Wilhelm in the amount of $3,700.00; against Jeanne Luptak in the amount of $1,300.00, and, against the Manufacturers Casualty Insurance Company (hereafter called Company) in the amount of $2,000.00. A brief explanation of the reasons for the above judgments is necessary. Wilhelm, who was a real estate broker, and Luptak, who owned a motel, were supposed to have mishandled a business transaction for McLaughlin, the Company having undertaken to see that any judgment against Wilhelm (up to $2,000.00) would be paid. Hence, the June 25th decree provided that when the $2,000.00 was paid it would apply on the $3,700 judgment against Wilhelm. In other words, McLaughlin was entitled to collect only $5,000.00 ($3,700.00 and $1,-300.00). Within apt time Wilhelm and Luptak prosecuted an appeal to this court (See Wilhelm v. McLaughlin, 229 Ark. 118, 313 S. W. 2d 821), where the judgments against them were affirmed. Before the appeal was perfected Wilhelm and Luptak executed a supersedeas bond with Sheehan and Tyrrell as sureties. However, the Company did not appeal from the $2,000.00 judgment against it, and, after the time for appeal had lapsed, McLaughlin had an execution issued and the Company paid over to her $2,000.00. This payment by the Company was made after its attorneys had written Wilhelm’s attorneys that it would expect reimbursement from Wilhelm. On July 21, 1958, after this court’s affirmance above mentioned, the Company filed, in the original case, a Motion for Summary Judgment against Wilhelm and all the sureties (on the said supersedeas bond) for the sum of $2,000.00. Attached to the motion, as exhibits, were copies of the decree in the original case, of the said supersedeas bond, McLaughlin’s assignment to the Company, and Wilhelm’s agreement (in his application for a bond) to hold the Company harmless for any loss. The Motion also set out many of the pertinent facts heretofore stated. The trial court sustained the Company’s motion for judgment against Wilhelm for $2,000.00 but denied the motion as to the sureties on the supersedeas bond executed for Wilhelm. The Company now presents this appeal from that portion of the decree denying judgment against the sureties. In the absence of any brief on behalf of the appellees we have made our own research of the authorities but are unable to find any definite pronouncement which sustains the trial court’s action. On the other hand all the legal and equitable principles of which we are cognizant indicate the contrary. The supersedeas bond signed by appellees bound them to "satisfy and perform the judgment . . . appealed from in case it should be affirmed”. The judgment against Wilhelm was, of course, affirmed as heretofore noted. Ark. Stats. § 27-2146, dealing with appeals to the Supreme Court, provides that upon the affirmance of a judgment which has been superseded —• "Judgment shall be rendered and entered up against the securities on the supersedeas bond, and the Court shall award execution thereon”. It is obvious then that McLaughlin had the right to collect the $2,000.00 in question from the sureties had appellant not paid her that amount. But when she did receive $2,000.00 from appellant she assigned her right to collect to appellant. This assignment reads as follows: "In consideration of payment of the $2,000.00 judgment against the Manufacturers Casualty Insurance Company, which was paid to me after execution was issued in the case of Margaret O. McLaughlin v. Milton Wilhelm, et al, in the Carroll Chancery Court, Western District, I hereby transfer, assign and set over unto the Manufacturers Casualty Insurance Company, the surety on Wilhelm’s real estate broker’s bond, all the right, title, interest and equity that I may have had in said judgment on October 3, 1957, or at any other time”. It seems logical to us then, since appellant was not primarily liable and since appellees voluntarily assumed payment of the $2,000.00 to McLaughlin, that appellees are legally bound to pay the $2,000.00 to appellant. In other words, we fail to see how appellees have been placed in a worse condition merely because one payee has been substituted for another. This same view was expressed in Howell v. Alma Milling Co., 36 Neb. 80, 54 N. W. 126, where surety liability to a substituted party was under consideration in a situation similar to the one here, and where the court said: “The surety took this risk of substitution. He was not in the least prejudiced by the change of plaintiffs. The cause of action remained the same. He was not placed in a worse situation, for had there been no substitution Howell could have prosecuted the suit to judgment in the name of the original plaintiff”. A similar statement is found in 3 Am. Jur., Appeal and Error, § 1296: “Where the substitution of a person who has succeeded to the rights of a party to an action is authorized, á surety on an appeal bond is not discharged by the fact that a person to whom the appellee’s interest in the subject matter of the action has passed, while the appeal is pending, is substituted for the appellee without the consent of the surety, as the law permitting the substitution of parties must have been known to the surety when he became surety and he must be held to have signed the bond subject to such contingency; and so, if there had been no substitution, the person succeeding to the rights of the appellee could have prosecuted the action in the name of the appellee, and as the cause of action remained the same, the surety is in no way prejudiced by the substitution.” In addition to the above there appears to be respectable authority, in cases of this nature, to the effect that a later surety (in point of time) will be liable to an earlier surety, based on equitable principles. Although not in point on facts, the early case of Chrisman v. Jones, et al, 34 Ark. 73, apparently bears out the significance of the time factor. At Page 77 we find this statement: “The principle in equity seems to be well established, that when successive securities for debt have been given in judicial proceedings upon the request of the debtor alone, to enable him to prolong the litigation, whilst all will be liable directly to the creditor, they will be, as amongst themselves, liable to exoneration in the inverse order of their undertakings. That is to say, those who contract last become sureties, not only for the benefit of the creditor, but in the exoneration of those who precede, and all will be liable to exonerate the original sureties for the debt, if any there be”. The Ghrisman case (along with other cases) is cited in support of the above announced rule in L.R.A. 1918 D at Page 1191, where it is stated: “. . . In cases where the appeal is not taken with the consent of the prior surety, the first surety, upon payment of the obligation of his bond, is entitled to be subrogated to the rights of the creditor as against the sureties on the supersedeas bond”. The rule relevant to the sequence of liability among sureties, often referred to as the rule of inverse order, is recognized to depend to some degree on the equities involved. The equitable element is recognized in connection with the inverse order rule in 117 A. L. R. at Page 584. It is there said: “The rule of inverse order, considered infra, III., has been sometimes laid down, to the effect that the sureties will be exonerated in the inverse order of their undertakings. However, it will be noted that this is not an absolute rule, distinct from the equitable rule, and that the cases in which the rule as to inverse order has been applied have usually been those in which there was some equity in favor of the earlier surety”. A consideration of the present case under the modified rule still, we think, calls for a reversal. Although the equities on the side of appellant and the sureties are not easy to assess, we believe, as before indicated, that they favor appellant. In assessing the equities in favor of the sureties we should not be swayed too much by the fact that they must pay a debt which they did not create and from which they derived no tangible benefit, because it is after all an obligation which they voluntarily assumed with full knowledge of all inherent consequences. Equity must not be confused with hardship. It is always a hardship for one person to have to pay the debt of another, but it is no excuse for refusal to pay. On the other hand, under appellant’s policy of indemnity, its obligation to pay could arise only in case McLaughlin could not obtain payment from Wilhelm who was the prime obligor. The sureties, in an effort to help free their friend (Wilhelm) from all liability (by appealing) chose to assume Wilhelm’s debt, and we fail to see in what way it is inequitable for appellant to reap the benefit. After all, appellant seeks not to gain but only to avert a loss. It follows from the above that the decree of the trial court must be, and it is hereby, reversed. Eeversed. McFaddin and Johnson, JJ., dissent.