Case ID: ny_56/html/0494-01.html
Source: Caselaw Access Project
Author: {"author": "Church, Ch. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

William E. Cory, Respondent, v. Willard F. Leonard et al., Appellants.
    The Second National Bank of 0. held notes of defendant 0., indorsed by a firm composed of the defendants W. F. L. & B. L., and, as collateral, two mortgages of 0. The bank also held a note of 0., -indorsed by plaintiff. C., upon the release and cancellation of the two mortgages, executed and delivered to the bank two other mortgages for the same amounts upon the same property, as collateral security for all his indebtedness, including that for which plaintiff was surety. W. F. L. purchased of the bank all its claims against C., took an assignment of the two mortgages and thereafter brought suit against plaintiff upon his indorsement and collected the amount of the note so indorsed from plaintiff.
    In an action by plaintiff to he subrogated to a proportionate share of the securities, Arid, that he had a right to subrogation; that, so far as he was concerned, the bank was bound to preserve the security unimpaired, so that he could have the benefit of it for his own indemnity, upon payment ■ of the note; that, although the bank by releasing the former securities may have incurred a liability to the Ls., or may have released them from liability, this gave them no superior equities under the new arrangement, and did not affect the rights of plaintiff; and that W. F. L., after he purchased from the bank the obligations of 0. and received, a transfer of the securities, occupied the same position as did the bank, and acquired no additional rights.
    
      (Argued April 17, 1874;
    decided May 26, 1874.)
    The mortgages given were for a less amount than the principal debt; they were each tor a specified sum, payable at a stated time with interest; the debts secured thereby were not specified. Reid, that it was fairly infer-able that the parties intended the interest should accumulate to cover the deficiency, and that payment of interest from time to time, as the notes were renewed, did not extinguish the interest on the collaterals. And it appearing that defendant L. foreclosed one of the mortgages, claiming only a portion of the interest, it also appearing affirmatively that he might have realized the full amount, held, that he should account to the plaintiff for that amount.
    Appeal from judgment of the General Term of the Supreme Court in the third judicial department, affirming a judgment in favor of plaintiff entered upon the decision of the court at Special Term.
    This action was brought by plaintiff, as surety, having paid the debt of his principal, to be subrogated to the rights of the creditor in, and to obtain the benefit of, certain collateral securities given by the original debtor.
    Previous to August, 1865, defendant Clinton was indebted to the Bank of Cooperstown above $80,000. In that month “ The Second National Bank of Cooperstown ” was organized, and the officers, including the directors of the Bank of Cooperstown, became the officers of the said Second National Bank, and the business of the latter bank was conducted by the latter in the same building of the former, and the business of the former ceased with the commencement of business of the latter. The debt of Clinton to the former bank, then of $81,500, was arranged by taking bonds and mortgages, formerly given as collateral, to the amount of $46,500, in absolute payment of that sum, and two other collateral mortgages, of $30,000 and $5,000, were passed over to and held by the Second National Bank of Cooperstown, from which last named bank, upon notes, the balance of Clinton’s debt to the Cooperstown bank was obtained and paid. No written transfer of these two collateral mortgages was made from the Cooperstown to the Second National Bank, nor any other ’ agreement than such as may be implied from the transaction itself, the relation of the banks to each other, and the change of the balance of Clinton’s debt from the one to the other. Twenty-four thousand eight hundred dollars of this balance, due the Cooperstown Bank by ''Clinton, was paid by Clinton’s check on the Second National, indorsed by the cashier of the latter, and was paid from the proceeds of notes of Clinton, discounted by the latter bank. Before these notes became due, Clinton asked the defendants Leonard to indorse notes, in order to renew them, which they declined doing until informed by the cashier of the Second National Bank that the bank held the $30,000 mortgage as security, and that, if they indorsed Clinton’s note, they should be protected by it. Belying upon that assurance, they indorsed in their firm name, W. F. & B. Leonard, to the amount of $25,000. These notes were renewed from time to time, down to January, 1870, when Clinton failed. Their liability then was $20,500. After Leonard had been so induced to indorse, the plaintiff, Cory, sometime in the spring of that year, indorsed a note of Clinton’s for $3,500, which was discounted at the Second National Bank, which note was also continued by renewals down to the time of Clinton’s failure, in 1870. In October, 1867, Clinton’s whole indebtedness, or liability, to this bank was $40,531.87. About this date, Clinton executed, directly to the Second National Bank, two bonds and mortgages, one for $30,000, the other for $5,000, covering the same premises as the two former mortgages, and upon the execution of these new mortgages, the old mortgages were delivered up to Clinton, and the new mortgages were, by a new agreement between Clinton and the Second National Bank, received by the latter as collateral security for alh Clinton’s liabilities to said bank. Of this agreement the Leonards were not informed.
    After the failure of Clinton, in June, 1870, the bank gave notice to Leonards to pay up the paper upon which they were indorsers for Clinton. Negotiations then commenced between the bank and W. F. Leonard, which ended in a transfer, by the hank to said W. F. Leonard, of the two mortgages, and also all the notes and liabilities of Clinton to said bank, for which the bank claimed to hold the mortgages as collateral security. W. F. Leonard, after receiving this assignment, commenced an •action against the plaintiff, Cory, to recover the amount of his note so assigned to him, and recovered a judgment thereon for the amount thereof, and collected said judgment of Cory. Said Leonard foreclosed the $5,000 mortgage, claiming due the sum of $5,000 and interest from the date of the mortgage. Ho notice was given to plaintiff of such foreclosure, and on the 1st day of October, 1870, the premises were sold by virtue of such foreclosure, for the sum of $5,500. The costs, counsel fees and disbursements were $110, leaving a balance of $5,390 as the proceeds of such mortgage.
    After the commencement of this action, said Leonard commenced proceedings to foreclose the $30,000 mortgage, claiming due $32,439.17 only, and said premises were sold on the 20th day of June, 1871, and bid off for the sum of $33,650. Such sale was forbidden by the plaintiff, on the ground that he owned an interest in the mortgage, and that the notice of sale did not state the correct amount due, and also on the ground that the premises were announced to be sold, subject to certain junior claims and incumbrances. It affirmatively appeared that the premises could have been sold on that day for $40,000. The principal and interest on said mortgage, from its date, then amounted to $37,746.66.
    . The complaint herein was amended, by direction of the court, at the trial, so as to set up the last foreclosure proceedings.
    Further facts appear in the opinion.
    
      Amasa J. Parker for the appellants.
    The intention of the parties at the time is controlling in determining whether the debt to the old bank was paid and extinguished, or transferred and continued at the new bank. (Pinckney v. Pomeroy, 62 Barb., 460, 466; Chapman v. Jerkins, 31 id., 164; Pond. v. 
      Clark, 14 Conn., 334; Whitehouse v. Bk. of Cooperstown, 48 N. Y., 239, 242; Tobey v. Barber, 5 J. R., 69; Crane v. McDonald, 45 Barb., 354; Noel v. Murray, 13 N. Y., 167.) The intention and understanding of the parties at the time the new hank discounted the renewal notes will be recognized, respected and enforced, both at law and in equity. (Kingston Bk. v. Gary, 19 Barb., 459; Harbeck v. Vanderbilt, 20 N. Y., 395; Champney v. Coope, 32 id., 543; Kellogg v. Ames, 41 id., 259.) Clinton and the old bank, after treating the bonds and mortgages as valid and subsisting securities in the hands of the new bank, are estopped from setting up any objection "or defence against the same. (Kellogg v. Ames, 41 N. Y., 259, 264; L'Amoreaux v. Vischer, 2 id., 278; Loomis v. Stuyvesant, 10 Paige, 490.) The transfer of the indebtedness carried with it, ipso facto, the bonds and mortgages as collateral securities for the debt, and no formal assignment was necessary. (Rose v. Baker., 13 Barb., 230; Langdon v. Buel, 9 Wend., 80; Jackson v. Blodgett, 5 Cow., 202; Pattison v. Hull, 9 id., 747; Runyan v. Mersereau, 11 J. R., 534; Prescott v. Hull, 17 id., 284; Hooker v. Eagle Bk., 30 N. Y., 83; Sexton v. Fleet, 2 Hilt., 477, 485; 2 Story’s Eq. Jur., §§1044, 1047; Smith’s Manual of Equity, 244,. 245; Nickolet v. Pillot, 24 Wend., 240; Hall v. City of Buffalo, 1 Keyes, 193, 197; Campbell v. Burch, 1 Lans., 178.) The indorsements of the Leonards having been obtained on the representation that the new bank held the $30,000 mortgage as collateral security, Clinton, the old and new banks are estopped from denying its validity. (Kellogg v. Ames, 41 N. Y., 259, 264 ; D Amoreaux v. Vischer, 2 id., 278 ; Campbell v. Burch, 1 Lans., 178; Loomis v. Stuyvesant, 10 Paige, 490; Smith’s Manual of Equity, 356; 1 Story’s Eq. Jur., § 499.) If any material fact be found wholly without evidence or against the undisputed evidence, it is an error of law and reviewable in this court. (Sheldon v. Sheldon, 51 N. Y., 354; Mason v. Lord, 40 id., 477; Fellows v. Northrup, 39 id., 117.) The surrender of the old securities and the acceptance of the new, by the new bank, did not release the Leonards as indorsers. (Fox v. Parker, 44 Barb., 541, 544; Taylor v. Allen, 36 id., 294, 297; Elwood v. Diefendorf, 5 id., 398, 409; Dorlon v. Christie, 39 id., 610, 613; Gahn v. Niemcewicz, 11 Wend., 312, 321; Bailey v. Baldwin, 7 id., 289; Carey v. White, 52 N. Y., 138, 142, 143.) All the indorsements of the Leonards having been made prior to plaintiff’s, they were entitled to prior protection on well settled principles of equity. (Smith’s Manual of Equity, 28; Pattison v. Hull, 9 Cow., 775, note b, 7; Broom’s Legal Maxims, 263, 264, marg. page; 2 Spence Eq. Jur., 727; 1 Story’s Eq. Jur., §§ 413, 419; Berry v. Mut. Ins. Co., 2 J. Ch., 603, 608; Reeves v. Kimball, 40 N. Y., 299, 305, 311.) The delivery of the bonds and mortgages to the bank was not a pledge, but a mere contract of indemnity between the parties. (4 Kent Com., 138, marg. page; 2 Pars, on Con. [5th ed.], 113; Edwds. on Bailments, 190, 191; Barrow v. Paxton, 5 J. R., 258, 261; McLeon v. Walker, 10 id., 472; Langdon v. Duel, 9 Wend., 80; Wilson v. Little, 2 N. Y., 443; Brownell v. Hawkins, 4 Barb., 491; Campbell v. Parker, 9 Bosw., 322; Haskins v. Kelley, 1 Robt., 160,171,172.) The bonds and mortgages, as such collateral security, were mere incidents of the principal debt and original securities, and the payment upon the lat ter was, ipso fado, a payment upon the collaterals. (Truscott v. King, 6 N. Y., 147, 157; Stoddard v. Hart, 23 id., 557; Townsend v. Em. S. D. Co., 6 Duer, 208, 219; N. Y. L. Ins. and Tr. Co. v. Howard, 2 Sandf. Ch., 183; Prouty v. Eaton, 41 Barb., 409.) As against subsequent purchasers and incumbrancers any payments made of principal or interest must, to that extent, be held to extinguish the securities. (Truscott v. King, 6 N. Y., 147; Mead v. York, id., 449 ; Stoddard v. Hart, 23 id., 557.) What the cashier considered or the plaintiff understood to be the effect of the transactions in regard to the collateral securities, cannot change the legal or equitable rights of the parties. (Stoddard v. Hart, 23 N. Y., 557, 561; 1 Story’s Eq. Jur., § 499.)
    
      
      Samuel A. Bowen for the respondent.
    As to the note indorsed by Cory and the notes negotiated in renewal thereof, plaintiff stood in the relation of surety. (Edwds. on Bills, marg. pages 186, 293, 295; Catlin v. Gunter, 1 Kern., 368; Clark v. Sisson, 22 N. Y., 312; Alby v. Rapelye, 1 Hill, 9; Baker v. Martin, 3 Barb., 634.) Plaintiff, as surety, is entitled to be subrogated to the rights of the creditors in the securities. (Hays v. Ward, 4 J. Ch., 123; Bullock v. Boyd, Hoff. Ch., 294; Edson v. Dillaye, 17 N. Y., 158; Matthews v. Aiken, 1 Coms, 595; Story’s Eq. Jur., § 493; Eddy v. Traver, 9 Paige, 521; Lewis v. Palmer, 28 N. Y., 271; Bridenbecker v. Lowell, 32 Barb., 9; Goodyear v. Watson, 14 id., 481; 3 Kent’s Com., 124; 1 Story’s Eq. Jur. [4th ed.], § 499, and note; Hayes v. Ward, 4 J. Ch., 123,130; Curtiss v. Tyler, 9 Paige, 432, and note, 435; Eddy v. Traver, 6 id., 521; Chester v. Kingston Bk., 17 Barb., 271.) The surrender of the prior mortgage of $30,000 released the Leonards as indorsers. (Blydenburgh v. Bingham, 38 N. Y., 371, 376; Pitts v. Congdon, 2 Corns., 352.) The interest on the original debt being paid in advance, the whole interest on the col-laterals should be applied to the payment of the principal. (Edwds. on Bailments, 240-242; Hasbrouck v. Vandevoort, 4 Sand., 74; Reid v. Rens. Glass Factory, 3 Cow., 393; 8 id., 587.) W. F. Leonard was liable to account to the indorsers for the whole amount of the two bonds and mortgages. (Bridenhecker v. Lowell, 32 Barb., 9; Hawks v. Hinchcliff, 17 id., 492.)
   Church, Ch. J.

We have carefully examined the questions involved, and have arrived at the conclusion that the judgment must be affirmed, and we concur substantially .with the views expressed in the prevailing -opinion of the General Term.

It is found, as a fact, that the two bonds and mortgages in question were executed and delivered to the bank on the 12th day of October, 1867, to hold as collateral security for the payment of the entire debt, then owing the bank by Clinton, amounting to $40,531.87, and the evidence of the president of the bank is sufficient to sustain this finding. The debt upon which the plaintiff"was surety was included in this amount, and he, with the other sureties, had an equitable interest in the proper application of the securities, and a right to subrogation upon the payment by them of the debts. (2 J. Ch., 122.) For releasing and canceling the old mortgages, the bank may have incurred a liability to the Leonards, who, from the facts appearing in this case, had an interest therein as sureties for Clinton, but the relative rights of the Leonards and the bank, as between themselves, are not involved in this action, and cannot be considered. The arrangement under which these mortgages were given was different from that under which the prior mortgages were delivered and held. The Second ¡National Bank received a benefit by this new arrangement, as the creditor of Clinton (aside from having them executed directly to itself, and thus, at least, saving the expense and trouble of an assignment from the old bank), in holding it for the whole instead of a part of the indebtedness of Clinton, and this furnished a good consideration between Clinton and the bank, and so far as the rights of the plaintiff as surety upon a portion of the debt were involved, the bank was bound to fulfill the obligations which the arrangement imposed. They were obliged to preserve the security unimpaired, so as to make it available to pay the debt, or in the event of payment by the surety, so that he could have the benefit of it for his own indemnity. (3 ¡Kent’s Com., 124.) The arrangement was not a mere substitution or renewal of the old securities, but it was a release of the old and a giving of new securities upon a new and different agreement, by which the rights of the plaintiff attached as soon as made. I think the Second National Bank had, in equity, a good title to the old bonds and mortgages, and had a right to enforce them for the purposes for which they were delivered to the old bank, and when it released them it incurred the liability incident to the.position of trustee, but this does not affect the rights of the plaintiff secured by the new agreement. When W. F. Leonard purchased of the bank the obligations of Clinton, and received a transfer of the collateral securities, he occupied precisely the same position toward the plaintiff that the bank did. Even if the firm of Leonards, instead of one of them, had made the purchase, they could have acquired against him no additional rights. Their rights and his, in the collaterals, were equal in degree, and differed only in the amount of their respective liabilities, and their rights could not be changed by the transfer. Under the finding of fact before referred to, it is manifest that any equitable claim which they may have, growing out of their interest in the old securities and the release of them, is enforceable against the bank and not against the plaintiff, and this covers the whole point of the principal litigation.

It is urged, with plausibility and considerable force, that the plaintiff could acquire no rights against the Leonards in the collaterals, by the wrongful act of the creditor in substituting securities. The answer to this is, that if the bank committed the wrongful act claimed against the Leonards, they were released from liability as sureties to the extent of the injury, by the change of collaterals, and they would have no occasion and no interest to litigate with the plaintiff, as their interests would not collide, and if such act was not committed, or if it has been waived, they have no reason to complain. The plaintiff claims through the bank in the sense of having a right, secured by an agreement which the latter had the power to make with his principal, but not in the sense of holding a title to such right, subject to any equities of the Leonards. The latter cannot insist upon their liability as sureties after being released by the act of the creditor, for the purpose of defeating the plaintiff’s rights. We think the transaction is in no respect different than if mortgages had been taken upon other property, or other securities taken under the new agreement.

It is made a question whether interest could be collected upon the mortgages and applied upon the principal debt. It is insisted that, as interest was paid from time to time upon the principal debt, it necessarily extinguished the interest upon the collaterals. The Special Term found that the bonds and mortgages “ were intended by the parties to be a continuing, interest bearing, accumulating collateral security.” We think the circumstances justified this finding. The form of the securities is a circumstance. The Special Term may have inferred that the parties understood that the interest upon bank paper, which constituted the principal debt, was payable in advance, and would not accumulate, and yet the bonds and mortgages expressly provided for interest, and the debts were not specified. Another material fact is, that the bonds and mortgages were for a less sum than the principal debt by more than $5,000, and it is fairly inferable that the parties intended that the interest should accumulate to cover the deficiency, or a portion of it, according to the terms of the instrument. If the bonds and mortgages had been existing securities in the hands of Clinton, and assigned by him to the bank, there would have been no doubt but that the interest would have been applicable to the payment of any part of the principal debt. (Edwards on Bailments, 210.) Ebr can there be any question that it is competent for a debtor to give such a security directly to the creditor, and if so, it is difficult to conceive any better mode to accomplish it than was adopted in this case. The defendant Leonard was, therefore, entitled to enforce the mortgages for the whole amount, including interest, and as it appears, affirmatively, that he might have realized the full amount of the $30,000 mortgage at the foreclosure sale, he should account with the plaintiff in this action for that amount. As to the $5,000 mortgage, it is found that the foreclosure was regular, and that he acted in good faith, and he was properly charged only with the amount realized on the foreclosure sale.

The defendant Spalding cannot be protected as a purchaser, against the accumulated interest upon the large mortgage, for the reason that he is chargeable with notice of its contents and its legal effect, which the statement of Clinton could not change or impair.

The judgment must be affirmed.

All concur.

Judgment affirmed.