Osborn v. Noble

SlMKALL, J. : The complainant filed his bill in chancery, to be substituted to the benefits of a deed in trust, executed by S. O. Capers, to protect and indemnify Winters, Myers and — 453 — Strong, who were his sureties on several promissory notes, amounting in the aggregate to $29,620, given to the complainant, Noble, for a plantation and slaves, sold and conveyed by Noble to Capers in 1858. The complainant grounds his right upon doctrines well established in the courts of equity: “That, if a creditor obtains a mortgage or other security from the principal debtor, the surety is entitled to its protection. So, if the surety has obtained indemnity from his principal, the creditor may avail of it, and have satisfaction of his debt out of it.” 1 Story’s Eq., § 481. For a statement of the general principle see, also, Bowen v. Hoskins, 45 Miss. 183. In disposing of this case, it is necessary to look somewhat closely into the principle invoked : to trace its origin and see upon what considerations it rests; what is its extent and limitation. It is universally conceded by the jurists, that the principle known in our jurisprudence as “substitution,” was brought from the civil laws, where it was known as “ cessio actionem.” As, if the surety pays voluntarily or compulsorily, the creditor must make good to the surety any actions or remedies he has against the principal debtor, also all the accessories thereof, his actions against other sureties and his pledges. If the creditor has put himself in such condition that he cannot assign his securities and remedies against the principal and other sureties, he is barred of his remedy against him upon whom he makes claim. Potier Pan., book 46, § 5. In Hopeland v. Bank of Cumberland, 10 Leigh, 220, it was thought to be wise to recur to the civil law, to derive aid in determining the scope of the doctrine of substitution. There could be no “cessio actionem ” if there never had been a cause of action and a remedy. Where one is bound for the debt of another and pays it, equity will treat the securities and remedies of the creditor, against the principal debtor, as still subsisting for the benefit of the surety. Some of the cases hold, that the rule only embraces collateral securities, while others have so extended it as not to treat the princi — 454 — pal debt extinguished by the payment, if there were any special advantages incident to it, but consider such payment as operating as an assignment of the debt-itself, in order that the surety may avail of the incidental privileges. As if it be a judgment with a lien on property, the judgment will be considered, by an advance of the money, as purchased and equitably assigned, so that the surety may have the priority of the lien, against other creditors. The rule, that a creditor is equally provided for, when the principal has created an indemnity for his surety, does not arise out of any notion of mutual contract between the parties, but is rather the offspring of natural equity, independent of contract, to prevent the surety, in the first instance, from being harrassed with the debt, and then turn him round to seek redress out of the collateral indemnity. Where the conveyance is made to or for the security of property not by the terms of the instrument specifically bound to the creditor, the primary intent apparent on the face of the writing is that the property is not pledged to him for the debt. The extent of the burdens, trusts and conditions annexed to a grant, is to be learned by reading the instrument, and gathering from it the intent and purpose. The owner has a right (if he does no fraud, -or violates no prohibition of law) to dispose of his property at pleasure. Courts enforce contracts, or give redress for the violation of them, as made by the parties. By construction, they cannot enlarge them beyond their fair intent and meaning, nor, on the other hand, so limit them as to fall short of that. An subrogating, therefore, the creditor to the surety’s place,' as to any indemnity given him, there can be neither increase nor diminution of rights, as they actually existed in favor of the surety. If, therefore, the indemnity is against a contingent liability, there can be no substitution until the liability has become absolute. Bank of Virginia v. Boiseau, 12 Leigh, 370; 10 ib. 222. If a mortgage or other security is given to the surety, not to secure the debt or provide a fund for its payment, but to — 455 — save harmless from a contingent liability or loss, that contingency must come, or the injury be sustained before a right to the indemnity inures to the creditor. Where the contract is for the personal benefit of the surety, in opposition to the idea of 'a pledge for the debt, or providing means for its payment, the creditor can claim only such rights and remedies as the surety had. If he has not been damnified, and the conditions of the mortgage or other contract of indemnity are unbroken, the surety himself could assert no remedy, nor could the creditor claiming through him and in his stead have substitution. Ohio Life Ins. Co. v. Reeder et al., 18 Ohio, 46. If, however, the principal has assigned a fund for the payment of the debt, and the surety pays it, he is entitled to re-imbursement out of the funds. 2 Burr. 202. An analysis of the cases in this state and elsewhere will, we think, show the distinction we have attempted to enforce though not always adverted to, that where the creditor seeks to appropriate to his debt the collateral indemnity of the surety, it must appear that the security is for the debt as well as the ultimate protection of the surety. If such be its character, it is of no moment whether it was given at the time the principal obligation was incurred or afterward, or whether it was known at the time to the creditor or not. The creditor has an interest in it, and becomes a cestui que trust. The fund or property at once takes on a trust character, and the surety can do no act which will discharge the trust or release the property from the burden, to the prejudice of the creditor. Thus in Paris v. Hulet, 26 Vt., the mortgage to the surety was upon the condition that the mortgagor would pay the notes and hold the surety harmless. So in Eastman v. Foster, 8 Metc. (Mass.), and Collin ads. Roberts Colvin, 8 Gratt. 363. In Ohio Life Ins. Co. v. Ledyard, it was said the indemnity was for the better security and protection of the debt. In Moses v. Murgatroyd, 1 Johns. Ch., it was said by Chancellor Kent, that it made no difference whether the creditor knew of the securities or not, they were — 456 — trusts created for the better protection of the debt, “and the court will see that they fulfill that design.” In Homer v. Savings Bank, 7 Conn. 484, after a somewhat' patient examination of the books, it was declared by the court that the principle to be extracted from the cases was, that if collateral security is given, or property assigned for the better protection or payment of the debt, it shall be made effective for that purpose, not only to the immediate parties, but to whomsoever is entitled to the debt. It rests upon the intent of the transaction. When created for such an object, the indemnities become trusts, which courts of chancery will carry out, “and see that they fulfill the design.” In Daniel v. Joyner et al., 3 Ired. Eq. 913 (to which reference was made by counsel for appellee), the terms of the trust deed were “to save harmless B” (the surety), “and whenever required by the creditors of A (the grantor), or by any surety who may be threatened with loss by reason of his suretyship, the trustee shall proceed to sell sufficient property to answer the ends of this deed in trust.” There the creditors on request to have a sale to pay their debts, and the surety was not obliged to remit until he was injured, it was held, that the trustee need not remit until the surety was actually damnified. The trustee had sold all the property before the suit was brought, and the points of law arose on its distribution among several claimants. While the language of the courts when speaking to the general proposition has not, perhaps, been quite harmonious, we think the principle has been stated and enforced, that if the security be purely personal, as to indemnify, and save harmless the surety, and not for the better protection of the debt, or intended as a fund for its payment, a trust does not attach to it for the creditor. In such instances no breach occurs until the surety has been damnified, nor is there an action or remedy to which the creditor can be substituted. The general doctrine which we have traced with more or less distinctness elsewhere has, we think, been laid down with emphasis by our predecessors in Dick et al. — 457 — v. Maury, 9 Smedes & Marsh. 456. The terms of the mortgage are not given, though it is inferable from the statement of the case it was to recover the notes. In Ross v. Wilson, 7 ib. 766, speaking of the character of the security, the court say: “The Conveyance was intended not only to indemnify Gayle and Doyle against their liability as sureties, but manifestly to secure the payment of the debt.” The condition was, that “Woods, the mortgagor, would pay the note to Ross, indorsed by Doyle and Gayle.” “The deed was to be void on condition that the debt was paid, otherwise not;” therefore “Gayle and Doyle were by the conveyance made trustees for Ross (the creditor), therefore they could not release or discharge the trust to the prejudice of Ross.” In Bibb v. Martin, 14 Smedes & Marsh., Hartzogg and Slater were sureties on an injunction bond. The condition of the mortgage was, if “Vickers shall well and truly pay and discharge said bonds, in case by law he shall be required to pay them, and if at all events he shall save entirely harmless and free from all costs and damages and loss on account of said bonds, said Hartzogg and Slater, then this obligation to be void. * * * The complainants were denied substitution to the mortgage, because there had been no breach of the condition, ‘Vickers had not been required by law to pay the bond.’ The right is governed by the instrument which created it, and the creditor by substitution can have no higher right than the surety. ” In Bush v. Stamps, 26 Miss., the condition of the deed in trust was, that should judgment be at any time rendered on the note against Shelby, and said Pearson should fail to satisfy the same, the trustee shall sell, etc. Here the relief was denied upon the reasoning in Bibb v. Martin, supra, the “rights being tried by the deed which creates them,” there was no breach of contract, no remedy had accrued to the surety, for “no judgment had been recovered on the note against Shelby.” In Carpenter, executrix, v. Bowen, 42 Miss. 28, the securities protected the debt by authorizing a sale upon non-payment at maturity. — 458 — The decisions in this court have, with more clearness than elsewhere, observed the distinction between a security given to the surety, to save him against loss from being compelled to pay, or doing so voluntarily, and those which, while providing for that, affix to the property a trust for the payment of the debt, in such wise as that it is designed to be also a security for the debt. The instrument itself being referred to discloses its purpose, as embracing the more limited or enlarged sense. The deed in trust recites that Capers is willing and anxious to secure and save harmless his sureties. Therefore, he makes the conveyance upon the condition that, “if the sureties, or either of them, shall pay the notes, or any part thereof, to the payee or holder, then f the trustees, at the request of him or them who has paid, J shall make sale, and quoMes as payments shall be made; j sale is directed for re-imbursement. It will be observed this “ indemnity is merely personal, to save harmless from loss, and to re-imburse for actual credits from time to time made (upon the debt. There is no breach of this contract until an actual loss has been incurred, nor is authority to sell conferred until there has been an actual advance of money. It is not a pledge or security for the debt to Noble. If there had been no forfeiture as to the sureties and no right to sell, substitution does not place the creditor in a stronger or better position than the sureties had. We are of opinion, therefore, that the demurrer ought to have been sustained to the bill. Judgment here accordingly.