Case ID: la-ann_42/html/0260-01.html
Source: Caselaw Access Project
Author: {"author": "McEnery, J. Watkins, J. Fenner, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

No. 10.456.
    The New England Mutual Life Insurance Company vs. M. C. Randall et als.
    When a creditor receives property from a debtor for the payment of a debt for which security has been given, it is the duty of the creditor to hold the same impartially for the joint benefit of himself and surety. He has no right to dispose of it or appropriate it without the surety’s consent.
    When the creditor intends to look to the surety for payment, he is compelled to preserve unimpaired all his rights against the debtor.
    If the creditor, therefore, docs any act without the surety’s consent, which impairs his rights of subrogation, or the means of enforcing his claim against the principal in case he should pay the debt, the surety will ho discharged.
    The right of subrogation to the rights of the creditor is an essential part of the contract of suretyship.
    APPEAL from the Civil District Court for the Parish of Orleans. Mbwroe, J.
    
    Bayne, Dengére & Bayne for Plaintiff and Appellant:
    Plaintiff recovered judgment against M. O. Randall for $38,233.93 for deficiencies as its agent, and sues his four sureties for $2500 each, who bound themselves as such for that snm, It was objected that the bond was not formal and had not boon accepted by plaintiff. Plaintiff claims that the bond is sufficient in form and was accepted and acted upon by the company for ten years or more.
    If there was any defect in form the sureties, in signing the bond, waived it. State vs. 'Winfrco, 12 An. Rep. 645, and cases cited therein; Ponnyman vs. Barrymore, 6 Mart. N. S. 498; S Rob. 227; 3 An. Rep. 481; School Directors vs. Judice, 39 An. Rep. 898; 40 An. 705; 27 An. 568; 20 Wall. 165; 78 JCy. Rep. 435.
    The bond was sent by Randall on May 20, 1885, as a bond, and was accepted by the company, and he acted as agent for ton years. Maguire vs. Bry, 3 Rob. 196; 89 An. 899; 2 La. 47; 14 An. 725-67.1; 33 An. 736.
    The amount of the deficiency is established by the judgment against the principal, by his admissions and by testimony introduced by defendants. Putin vs Blaise, 19 La. 397; 38 An. 734; 40 An. 705.
    
      Payments made on account by the principal, or the delivery of collaterals on account after the deficiency, as partial reparation of the wrong, which in no manner injure the sureties, does not impair or destroy their liability. 97 U. S. Rep. 590; 11 Wall. 500; 11 An. 179; 13 An. 59; 30 An. 159, 387; (i How. 283; 29 An. 844 3 An. 688; 131 Mass. 86; 136 Mass. 226; 35 Fed. Rep. 99; 1 An. Rep. 76; American lam. Register, A. S., Yol. 8,110; 9 Wheat. 720; 11 Wheat. 184; Mayor vs. Kelley, 93 A. Y. 467; 21 A. Y. 88.
    The evidence and judgment establish the deficiency, which is several thousand dollars in excess of the amount of the bond and sum claimed from the sureties. The bond was signed by the defendants for the purpose of protecting plaintiffs from any unfaithfulness of the agent. Its condition has been violated, and they are liable. The sum for which defendants are bound is much less than the actual loss sustained by plaintiffs.
    J. MeGonnell and F. N. Butler for Defendants and Appellees:
    1. The evidence shows: 1. That the plaintiff company in Boston, requiring their-agent in Aew Orleans to give bond, did, on May 8, 1875, write him to furnish them with the names of parties who were willing to become sureties; and later wrote that a bond was being prepared by their counsel which would be sent out.
    2.on the 20th of May,the instrument sued on was signed and forwarded,by which certain parties agreed to become security for Randall; on receipt of which the president of the company wrote: (a) complaining of the form of the instrument; (b) that the names of the sureties must be submitted to the finance committee; (c) that their names could not be submitted to the said committee untiljie knew the bond was legal in form.
    8. On the 10th of August the president rejected the proposed bond; because, first referring to a former letter of June 3, specifying objections to the form of the bond, he writes as follows: “Inow enclose two blank forms of bond, which please have properly executed-and returned.”
    4. On the 30th of October, the correspondence of the president closes with a reiteration of his objections to the bond.
    2. From the correspondence of the president referred to above it does not appear that the company ever accepted this offer to become sureties; or that the company gave notice to, or in any manner ever had communication with the defendants until the lapse of nearly eleven years from the date nf the instrument sued on.
    3. ’Under these circumstances the instrument sued on is inoperative and void as a bond for want of acceptance. O. O. 3035, 1798, 1S00; 33 An. 578 ; 32 An. 501; JJurge on Suretyship, page 16.
    4. Suretyship is an auxiliary contract by which the person becoming surety makes an agreement with the creditor. There being no agreement or aggregatio mentium in this case, between the defendants and the plaintiffs, the plaintiffs’ action must fall. O. O. 3035,1798, et seq.
    
    5. To convert a proposition by one party to another into a contract, is not sufficient to show strong probability that it was or would have been accepted under certain circumstances; acceptance, actual, final and irrevocable, must be proved. 33 An. 578, 580; 1 Ra. 190. Suretyship is a consensual contract and can not be made without the consent of the creditor. 32 An. 501; C. C. 3043.
    
      7. In this case, if the plaintiffs had accepted, it was their duty to have given notice of such acceptance to the defendants, and this within a reasonable, time. 7 An. 886, S88.
    S. Suretyship is a contract created and governed by the provisions in the Civil Code, and not by the common law. 82 An. 502.
    <). If any personal obligations ever arose under the instrument sued on, they were prescribed; as nearly eleven years elapsed from the date of its signing before the plaintiffs made any response to the defendants, and that was only a notice of the present suit. O. O. 85áá and 3540.
    
      Andrew H. Wilson on same side:
    A writing wherein it is stated, “We, the undersigned, hereby agree to become the security of M. C. Randall,” etc., is only an offer to become such. Even if a bond in form, acceptance thereof is necessary to complete the obligation o£ surety-ship, and that acceptance should be clearly, unequivocally and affirmatively shown. C. C. 3039, 3035; Troplong du Cautionnemenl, Rocs. 138,131, 118. Gay & Oo. vs. Blanchard, 31 An. 197.
    Courts uniformly construe sureties’ obligations very strictly, and refuse to extend them by implication, construction or otherwise. 31 An. 659 ; 6 Rob. 50; 9 Wheat. 680; 21 An. 727 ; 30 An. 737; 6 M. (X. S.) 198; 8 Rob. 227; Eell on Guaranty and Suretyship, note on p. 130.
    If such a writing were a good and valid bond, and Randall, the principal, wore reengaged and reappointed agent after two years’service, such re-engagement and reappointment abrogated the first appointment and the bond given for faithful performance of services thereunder.
    Particularly is this the result where second engagement confers full powers on the agent, making the agency co-extensive in this respect with the company reengaging him, and thus changing materially his and its condition.
    Act 21 of 1877, Reg. Sess., reorganized and recreated the status of non-resident and foreign insurance companies and their agents in Louisiana, and required the conferring of all full powers on agents as enjoyed by the companies themselves. The conferring of new, full and co-ordinate power and authority on an agent, who was prcvioilsly only a clerical, local employ! with no power or discretion, and his re-engagement and reappointment with such new and full power as required by law, terminated his former engagement and extinguished the suretyship accessory to it. This occurred as well by novation and by the change of conditions of both principal and agent as by the fact of expiration of first engagement and re-ongagement and reappointment. C. C. 3059, 2188, 2189, 3027.
    “ Suretyship is an accessory promise.” C. C. 3035.
    It falls with the principal obligation. 15 La. 166.
    “ Suretyship * * * is to be restrained within the limits intended by the contract.” C. O. 3059. Please see: Green vs. Locke, 31 An. 656; McGuire vs. Woolidge, 6 Rob. 50; Miller vs. Stewart, 9 Wheat. 680; Xasnaelit vs. Winlcelman, 21 An. 727; Gerson vs. Hamilton, 30 An. 737; Troplong du Gautionnemont, p. 37, Xo. 118; p. 118, Xo. 171; Brandt on Suretyship, Sees. 79, 80, 330, 312; 61 X. Y. 356; 2 Caines’ Cases in Error, 1.1 Paine 303; 11’a. St. 318.
    
      General and continued negligence on the part o£ the creditor during eleven years, and want of proper investigation into the conduct of the agency, and the creditors’ consenting that its agent at the same time might engage in other engrossing occupations, and its laches in neglecting to properly.suporvise the agency through its officers, whose duty this was, make it responsible for losses incurred through its agent. And the fact that the sureties were never once notified of any or all of these hazardous privileges allowed the agent, nor of the lax supervision or investigation of the agent’s conduct of his business, nor of the improper performance of duty by the visiting supervisor, concludes the responsibility of the company for loss suffered thereby.
    (Facts are stated in brief applicable hereto. One of which is an unpaid loan and loss of over $8000 to fire insurance business, a “side enterprise” allowed the agent.)
    The discovery and investigation of the agent’s shortage in 1886, and the creditor’^ settlement thereof with the agent, without consultation with sureties or notice to them, whether such arrangement be payment or giving of security, released the sureties.
    If such arrangement was “ giving of collaterals,” and the creditor has disposed of them and placed it beyond its power to subrogate the sureties to them, the sureties are discharged. If such securities were given in payment, the sureties are entitled to have them credited at their fullest value — for such value as they would bo worth in a surety’s hand, and as demonstrated in brief.
    If their value is not clearly shown by the creditor, the highest value should bo allowed that they may by reasonable possibility turn out to be of. C. O. 8061, 8062; Troplong du Cautionnement, Secs. 376, 381, 570, 571, 582, 583; Ledouxvs. Rucker, 5 An. 500; Scott vs. Featherston, 5 An. 313; Saulet vs. Trepagnier, 2 An. 429; Succession of I’ratt, 16 An. ,357; Allison vs. Thomas. 29 An. 731; Mayor vs. Blache, 6 La. 514; Brandt on Suretyship, Sec. 370, pp. 498, 499; Sec. 372, pp. 501, 502; Hereford vs. Chase, 1 Rob. 23; Commissioners vs. Cardeviolle, 4Rob. 506.
   The opinion of the court was delivered by

McEnery, J.

The plaintiff sued M. C. Randall, its agent, in the City of New Orleans, and Henry Ginder, E. C. Palmer, P. H. Werlein, and C. Mehle, the sureties on his bond, for the sum of $33,233.93, the amount of the defalcation of the agent Randall to said company.

There was judgment against Randall on his written confession, which was made final, and the sureties were released, from which judgment the plaintiff has appealed. The answer of the sureties is substantially as follows: they plead the prescription of one, two, three, five and ten years; they allege that there is no sum of money due said company by Randall; that if any sum is due to the company by him, it arose through the negligence of the company in failing to compel him to make prompt returns of collections; that if plaintiff is entitled to a judgment against defendants, they are entitled to receive from plaintiff the sums of money received from the assets turned over to plaintiff by Randall, and that they are entitled to a judgment in reconvention for said amount; that if any liability existed on the part of the sureties, they have been discharged by plaintiff’s own acts and doings, made without the knowledge or consent of the defendants in regard to the property and assets turned over and assigned to plaintiff by Randall, and converted to its own use and benefit by said insurance company. The evidence establishes, the liability of the defendant Randall in the amount for which judgment was rendered against him. There is no evidence that the company was guilty of any negligence that contributed to Randall’s defalcation. A demand was made upon the sureties and suit commenced before prescription had acquired.

The only serious defence is that the sureties are discharged by the company’s acts in receiving property from Randall, on qccount of' his defalcation, administering it and converting the same to its own use and benefit without the knowledge or consent of the sureties.

Before and after the institution of this suit the company received from Randall a number of insurance policies, upon which it placed its own valuation, a fee due Randall in the insolvency of Carriére &Co., which it collected, a claim against Joseph Santini for $6315.88, which it compromised, as the evidence shows, at considerable less, than its value, and immovable property in Virginia, which the company in part disposed of and retained an interest, which it has valued in the remainder, and a cash payment from Randall of $740.11, and a transfer from Randall for commissions for policies renewed amounting, it is alleged, to some $9000 (nine thousand dollars). The face value of these assets was more than sufficient to extinguish Randall’s liability. The company admits it realized only $12,098.12 on these assets. The company received from Randall all the property he possessed, and administered it as owner, disposing of it and conveying it without the knowledge or consent of the sureties. It matters not whether the company received the full value of the assets turned over- to them by Randall.

The question is whether the company has changed the obligation of the surety and impaired any of the rights of the surety against the principal.

The surety is discharged when by the act of the creditor the subrogation to his rights, mortgages and privileges can no longer be operated in favor of the surety.” R. O. C. 8061.

The company received voluntarily from the agent Randall all of his property. It was appropriated by values placed upon it by the company and by Randall, and it disposed of all of it, either to the company or to others.

The duty of the company was, not to appropriate or dispose of the property, whether received before or after the sureties’ liability had accrued by the [defalcation of Randall, without the knowledge and consent of the sureties, but to hold it impartially for its own and the sureties’ benefit. 43 Me. 381; 8 Pie. 121; 4 Golas Oh. R. 129; o N. H. 353.

This the company.has not done. The plaintiff has placed the property beyond the reach of the sureties. They can not demand subrogation to the creditors’ rights against the principal, to which they are entitled under their contract of suretyship.

When the creditor intends to look to the surety for payment, he is compelled to preserve, unimpaired, all his rights against the debtor. If the creditor therefore does any act without the sureties’ consent, which impairs his rights of subrogation or the means of enforcing his claim against the principal in case he should be called upon to pay the debt, the surety will be discharged.

The sureties in the case may have desired to pay their obligation, which was for |2500 each, and take the -assets of their principal to the extent and amount of securing them against loss, and administer* them for their joint benefit. The evidence in the record leaves little-doubt but that they could have realized more from the assets of" Randall, had they received and properly administered them, oi; had; they been consulted about their disposition. In the petition of' plaintiff no mention is made of the transfer of the assets of Randall to the company, nor is there any credit given to the defendants for the sum realized on them.

The plaintiff contends that the acts of the ¡company in taking the property of Randall, operated an advantage to the sureties, and therefore they have no cause to complain. Admitting this to be so, the surety stands on the strict terms of his contract, and even should the act be beneficial to them, if it in any way changes the contract of suretyship, the surety will be discharged. The creditor has no right to make any change in the obligation. McGuire vs. Woolridge, 6 R. 50.

The right of subrogation to the right of the creditor is a part of the obligation, and an essential one, when the contract of suretyship is entered into. It exists whether the surety pays voluntarily or by compulsion. Offut et als. vs. Hendsley, 9 L. 12.

In this case it is clear that the creditor by his own act has changed the contract of the surety and has placed it beyond the power of the company to subrogate the sureties to its rights against the property of Randall.

Judgment affirmed.

On Application for Rehearing.

Watkins, J.

We have considered appellant’s application for an oral argument on this motion, but deem it unnecessary to depart from the rules of court, as the question on which it rests is one of law, and the mover’s brief is elaborate, and fully presents the authorities relied upon as supporting its theory.

That theory is that, having a final and unqualified judgment against the defendant for $33,000 as their agent, the plaintiff had the right to receive payment, or securities from him, for the deficiency, which was not covered by the obligations of the sureties.

For instance, plaintiff’s judgment being for $33,000, and the several obligations of the sureties aggregating only $10,000, Randall was at liberty to make a payment to the plaintiff in money, or to furnish it securities to the extent of the difference of $23,000, and the plaintiff had the right to appropriate same to the satisfaction of that difference — it not being covered by the sureties’ obligations — and that, only, when this deficiency had been first provided for, could the sureties complain of any after application of rights and securities of the debtor; and then, to the extent only of the injury suffered by the sureties.

As supporting this proposition, counsel cites a number of authorities. The general effect of those decisions is, that a partial release of any of the mortgages, or privileges of the creditor, releases the surety only pro tanto; or, in other words, the discharge of the surety only takes place, to the extent to which the acts of the creditor have prejudiced the recourse of the surety for reimbursement of what he may be obliged to pay, under the contract of suretyship. Or, as the case is put by Judge Story:

“On the other hand, if the creditor has any security from his debtor, and he parts with it without communication with his surety, * * that will operate, at least to the value of the security, to the surety’s discharge.” Story’s Equity Jurisprudence, Sec. 326.

A careful study of the question has satisfied us that the contention of the plaintiff’s counsel can not prevail, though the principles of law that are announced in the various authorities cited are well recognized by us.

We held, simply, that the insurance company received from Randall, the defendant, all the values he possessed, and converted them to its own use, without the consent of the sureties, and, in so doing, placed same beyond their reach, and deprived them of their rights of subrogation to the rights of the company, against their principal; on the theory that, when a creditor intends to look to the surety for payment, he is bound to preserve unimpaired all his rights against the debtor.

On this hypothesis our opinion proceeds and declares:

“If the creditor, therefore, does any act,| without the sureties’ consent, which impairs his right of subrogation, or the means of enforcing his claim against the principal, in case he should be called upon to pay the debt, the surety will be discharged.”

Our opinion rests upon an article of the Code, and McGuire vs. Wooldridge, 6 R. 47, and Offut vs. Hendsley, 9 La. 12; but, many other cases of like import and force can be cited. To point the argument in favor of its correctness we make the following quotation from the latter:

“ It being of the nature of the contract of suretyship, that the surety who pays, whether willingly or compulsively, has a right to demand the subrogation of all the creditors’ rights on his debtor, his property, and his sureties. This right of subrogation is the consideration (or a part of it) of the obligation which the surety contracts. There is a privity of contract between the surety and the creditor which compels the latter to preserve his rights for the former. If the preservation of these rights be burdensome to the creditors, they put an end to all trouble when the day of payment arrives by insisting on payment by the surety. No one can become surety against the creditor’s will, though he may against that of the debtor. The assent of the creditor is of the essence of suretyship, and no one can complain of the natural consequences of any contract into which he may enter.”

To this effect are many authorities. 8 N. S. 398; 3 La. 352; 6 La-514; 1 R. 212; 4 R. 506; 5 An. 266.

It follows that the surety has a right to stand upon the very terms of his contract, and the creditor has no right to make any alteration in it.

■ These principles are founded on provisions of the Code. Surety-ship is an accessory promise made to the creditor. R. O. O. 3035, 3045.

“ The surety is discharged when, by any act of the creditor, the subrogation to his rights, mortgages and privileges, can no longer be operated in favor of the surety.” R. O. O. 3061.

His discharge proceeds upon the theory, that the act of the creditor which deprives the surety of the right of subrogation of the former’s securities, violates their privity of contract, and prevents the latter from taking them to himself on paying the debt of the princi - pal, to the extent of suretyship.

Undoubtedly the creditor has a right to receive securities from the debtor, but he has not the right to appropriate them, and thus deprive the surety of the right of subrogation, in case of making payment. The creditor’s first and highest duty is to the surety; and he has nó right to first exhaust the debtor’s resources, and reduce him to a state of bankruptcy, and then call upon the surety to pay the balance that remains due.

We are thoroughly satisfied that our opinion is well grounded in law.

Rehearing refused.

On Application eor Rehearing.

Fenner, J.

I have given very close attention to the able brief for-rehearing, and to the argument cited in support thereof.

.These authorities certainly place a judicial construction on Art. 3061, Rev. O. O., to the effect that the partial release of any of the-securities of the principal held by the creditor only releases the debtor pro tanto. Barrow vs. Shields, 13 An. 63; 11 An. 179; 29 An. 844; 30 An. 159.

They rest upon the principle that the creditor has the right to take-payment from the debtor without discharging the surety from liabil - ity for any balance that may remain due; and so, if he has released,, or has applied to his debt, securities of fixed and certain value, at that value the sureties can not, on that account, claim discharge from liability for the amount remaining due after crediting the debt for such values.

• But I can not convince myself that the principle or the authorities cover such a case as the one before us, in which the creditor, after the defalcation of its employee, takes from him all the assets of every kind which he possesses, consisting of a mass of securities of contingent value, such as policies of life insurance on the lives of the debtor and of third persons, undivided interests in real estate, litigated ■ claims against debtors, unliquidated demands of various kinds, and, without notice to the sureties, proceeds, at its leisure, to reduce them all to cash by settlements, compromises and otherwise, and after crediting such cash on the excess of their claim above the amount of the sureties’ obligation, proceeds against the sureties for the balance.

The securities transferred had an apparent or potential value ■exceeding the total amount of the debtor’s liability. The policies of life insurance alone approximated, in amount, the total liability. Had Randall died the day after the transfer the policies on his life alone, with the amounts actually collected from other sources, would have wiped out the whole debt.

What right had the creditor, without notice to the sureties, to surrender these policies to the insuring companies at a trifling cash valuation? Non constat that the sureties might not have preferred themselves to' take these policies at the cash valuation to keep them alive, and thus secure themselves against eventual loss.

Might not the sureties have preferred to buy in the real estate which was sold in partitiqn, which sale may have been at a sacrifice, ■or which they might have desired to hold for a rise in value?

Might they not have chosen to resist the compromises and settlements of the liquidated and unliquidated claims, which the creditor chose to make, or to have paid him the amounts which he was willing to take for them, and to prosecute the suits?

These rights certainly belonged to the sureties under Art. 3061 of the Code, and the creditors had no right to deprive the sureties of them.

They had the right and the interest to see that the assets surrendered by their principal were so administered as to realize the utmost possible value to be appropriated in reducing the debt for which they were responsible, and to have a voice in such administration.

The creditor had no right to make compromises and settlements and surrenders according to Ms own whim without consulting the sureties, and without giving them even the chance of taking to themselves the benefit of such settlements, and, after denuding the principal of everything he has in the world, to turn his sureties over to a barren recourse against him.

Such unauthorized dealings with the securities turned over by the debtor, are inconsistent with the intention or with the right to pursue the sureties. He has deprived the latter of valuable rights of subrogation which inhered in their contract, and the penalty is the loss of his right to proceed against them.

It is said, however, that in this case the denial by the sureties of' their liability on this bond in any event deprives them of the right to notice and of the right' to complain of want thereof. They never made such denial until their answer in this suit, which was -not filed until after all the dealings above complained of had been completed. They were left in ignorance of any claim against them until after their principal had been shorn of every vestige of property to which they might have looked for protection under the unauthorized dealings of the creditor, and I think they were justified in settingup every •possible defence to such a suit.

I therefore concur in the refusal of the rehearing.

Pocho, J., concurs in this opinion.