State Bank of La Crosse v. Michel

WiNslow, 0. J. This is an action brought against tbe surety upon a promissory note of $2,500. Tbe defense was that tbe plaintiff bad in its bands collateral security turned-out by tbe principal to secure tbe payment of tbe note and applied said security to tbe payment of tbe principal’s debt to another bank, and that by this act tbe surety was wholly discharged under tbe provisions of tbe Negotiable Instrument Law (sub. 4a, sec. 1679 — 1, Stats.). Tbe trial court found that tbe plaintiff bank applied tbe sum of $1,331 of funds received by it from tbe sale of goods pledged to it by tbe principal debtor, as collateral for tbe note in suit, to tbe payment of tbe principal debtor’s note to tbe Security Savings Bank, wbicb note tbe plaintiff was under no legal obligation to pay. As a conclusion of law tbe court found that tbe defendant was entirely released from bis liability as surety under tbe section of tbe Negotiable Instrument Law before cited, and dismissed tbe complaint. Tbe appellant contends that tbe defense found to exist by tbe court was not sufficiently pleaded, and that tbe evidence was insufficient to support tbe findings of tbe trial court. We do not deem it necessary to treat these contentions. We find no merit in them, -and therefore overrule them without discussion. Tbe difficult question presented by tbe. case is a legal one, namely, Under tbe Negotiable Instrument Law (sub. 4a, sec. 1679 — 1, Stats.), is tbe surety discharged of bis entire liability when tbe creditor gives up or releases collateral security to an amount less than tbe debt? In other words, does tbe release of collateral securities release tbe surety pro, tanto only? In tbe present case tbe note wbicb tbe defendant signed as surety was for $2,500. Tbe collateral applied to tbe discharge of another debt by the creditor amounted to $1,331. Was tbe surety discharged in full, or was be only discharged to tbe amount of tbe collateral wbicb tbe creditor diverted to another use ? — 90 — Tbe circuit judge held that the surety was wholly discharged, basing his conclusion upon the wording of the section of the Negotiable Instrument Law last cited. That section declares that: “A person secondarily liable on the instrument is discharged: . . . “(4a) By giving up or applying to other purposes collateral security applicable to the debt, or, there being in the holder’s hands or within his control the means of complete or partial satisfaction, the same are applied to other purposes.” There is no question but that the construction given to this section by the trial court is a natural construction, and if it be the only construction of which the words are reasonably susceptible the court must adopt it. But is it the only construction which can reasonably be given to the words ? We think not. So far as the surrendered security goes, the surety is discharged. In ordinary speech and writing an elliptical phrase of this kind is very common. True, the expression is not strictly accurate in a case of this kind, but we believe that it is not infrequently used. Suppose in the present case that a person familiar with the facts had said to the responsible officer of the plaintiff bank at the time of the release of the $1,331 of collateral, “By that act you have released the surety.” It would certainly have been very natural for the officer to ask at once, “Do you mean released entirely or only released pro icmtoV’ Now, if the words were only capable of one meaning, such a reply would neither be natural nor supposable. While one would hardly expect colloquial or inexact expressions in a statute, it is unquestionably true that statutes do sometimes contain such expressions, and the question is whether that is not the case here. The idea that a surety for a thousand dollars indebtedness is to be wholly released because the creditor gives up five dollars’ worth of collateral shocks the sense of fairness and justice. If there be another — 91 — construction wbicb may rightly be placed on the language which will obviate such a palpably unjust result that construction should be used. In considering whether the words used in the section should have their exact and precise meaning or whether they should be given their colloquial and inexact meaning, it is not only proper to consider the fact, if it be a fact, that the exact meaning would lead to unjust if not absurd results, but also to consider the defects or failings in the existing law which the act was expected to correct and the general object which the lawmakers had in mind. It is very well known that the Negotiable Instrument Law was the result of a widespread conviction that it would be a great benefit to the American business world if the laws governing negotiable instruments could be made uniform - throughout the country, instead of being diverse in many particulars in nearly every state. The law was prepared with the hope that it might be adopted practically without change in all of the states. The purpose of the law was, not to make radical changes in long established and fundamental principles, but to wipe out the many differences in minor details existing between the laws of the various states by adopting in each case of difference that uniform rule which was best adapted to the needs of the business world. The idea was to secure uniformity by wiping out small differences, not to change the general principles of commercial law. When, in 1899, the law was presented to the legislature of Wisconsin, it was accompanied with exhaustive notes to many of the sections, giving not only the Wisconsin authorities which support or bear upon the principle stated in the section, but also references to the decisions of other states and to the American and English Encyclopedia. These notes bear evidence of careful preparation by a good lawyer, and it is very suggestive to note that in eases where the rule in Wisconsin — 92 — was changed by tbe law, tbe annotation states tbe fact at tbe foot of tbe section and gives tbe authorities overruled by it. See secs. 1675 — 2, 1675 — 6, and 1676 — 28. It was evidently the purpose to call attention to any significant changes made by the bill in tbe Wisconsin law. See. 1679 — 1, as it appeared in tbe original Negotiable Instrument Law which bad been adopted in other states, provided that a person secondarily liable on a negotiable instrument should be discharged in six different ways, viz.: “1. By any act which discharges the instrument; “2. By the .intentional cancellation of his signature by the holder; “3. By the discharge of a prior party; “4. By a valid tender of payment made by a prior party; “5. By a release of the principal debtor, unless the holder’s right of recourse against the party secondarily liable is expressly reserved; “6. By an agreement binding upon the holder to extend the time of payment, or to postpone the holder’s right to enforce the instrument, unless made with the assent, prior or subsequent, of the party secondarily liable, unless the right of recourse against such party is expressly reserved, or unless he is fully indemnified.” .When, however, the bill was presented to the legislature of 1899, another subsection was added to the above list and named 4a, and that subsection was the one already quoted in this opinion providing for the discharge of the surety when the creditor gives up or applies to other purposes collateral securities pledged for the debt. There was an excellent reason for adding this new subsection, for this court had laid down that principle in Plankinton v. Gorman, 93 Wis. 560, 67 N. W. 1128 (June, 1896), and it seems to be demonstrated that the new subsection was based upon this decision by the fact that the syllabus of the Plankinion Case is quoted in full in the note to the entire section under the heading “Releasing security.” It is equally clear that there was no intention to change the — 93 — law as laid down in Plankinton v. Gorman, but rather an intention to incorporate the principle of that case in the Negotiable Instrument Law, because no mention is made in the note of any change in the law of Wisconsin, and it is quite plain that the Planlcinton Case is cited as the basis upon which sub. 4a rests. Now Plankinton v. Gorman does not lay down the principle that a surety on a note is wholly discharged by the release of collateral securities by the creditor, however inconsiderable in amount. That was a case where the creditor had an interest in the assets of the principal debtor which, if enforced, would have satisfied his entire claim, and he voluntarily released the same, and it was held that he thereby released the indorser upon the note. Nothing was said in that case about the effect of a release of security insufficient in amount to pay the debt, because no such case was before the court. The rule was briefly stated that where a creditor has a lien upon the principal debtor’s property for the payment of his debt and releases it voluntarily without attempt to obtain satisfaction of his debt, the surety is released. It was not necessary in that case to go further. But the idea that it was intended in that case to hold that the release of a few dollars’ worth of collateral security would wholly discharge a surety upon a note for thousands of dollars is repelled by the authorities cited in support of the general doctrine. Examination of those authorities, and especially the case of Rees v. Berrington (2 Ves. Jr. 540) 3 White & Tudor, Lead. Cas. Eq. (Hare & Wallace’s Notes) 529, shows that the principle upon which they rest is the principle of pro tanto discharge, and upon that alone. In the notes to the last cited case, at page 552, the doctrine is thus laid down with a wealth of authority: “When the property of the principal has been attached or taken in execution by the creditor, ... or when it has been voluntarily delivered to him as security for the debt, . . . the lien thus acquired cannot be relinquished without dis — 94 — charging tbe surety to an extent corresponding with its value.” This bas unquestionably been tbe principle of tbe common law from tbe earliest times. It is also tbe rule of reason and justice. Must tbe court now bold tbat a harsh, drastic, and inequitable rule bas been substituted for it.by tbe Negotiable Instrument Law, wben no intimation is given in tbe notes tbat tbe law bas been so radically and unconscionably changed ? We think not. It is provided in tbe law itself, sec. 1684 — 6, tbat tbe notes may be resorted to for purposes of construction and interpretation. In our judgment tbe notes to this section point unmistakably to tbe conclusion tbat it was intended by sub. 4a to incorporate in tbe law tbe principle decided in Plankinton v. Gorman, and tbat principle was unquestionably tbe old equitable principle of discharge pro tanto, as is demonstrated by tbe authorities relied upon in tbe opinion. Probably it did not occur to tbe person who drafted tbe subsection and inserted it in tbe section tbat any other construction could be given to it. We see now tbat there is another very natural construction which may be given to it, but as we are satisfied tbat it is susceptible at least of the limited construction which renders it equivalent to tbe long established and unbroken rule of courts of equity, we feel tbat it is our duty to give it tbat construction. We have not so far in this discussion referred to tbe case of Lowe v. Reddan, 123 Wis. 90, 100 N. W. 1038, because tbe transactions in question in tbat case all took place before tbe passage of tbe Negotiable Instrument Law, and hence tbat law bad no effect upon them and was not mentioned in tbe case. It appears by reference to tbe printed case tbat tbe note in tbat case was given May 18, 1896, was due August 18, 1896, anfi tbat tbe alleged release of security took place at or about tbe latter date. But while tbe Negotiable Instrument Law was not involved — 95 — or discussed in that case, tbe general equitable principle was discussed, and a very large number of authorities are there cited, showing not only that the rule of pro tanto discharge in such a case as the present has been held by the authorities from time immemorial, but that the case of Plankinton v. Gorman plainly recognized that rule. It follows that the plaintiff was entitled to judgment for the amount due upon the note after deducting the sum of $1,331, which is to be reckoned as a payment made upon the note as of the date of its diversion to other purposes, to wit, January 3, 1910’. By the Court. — Judgment reversed, and action remanded with directions to render judgment for the plaintiff in accordance with this opinion.