Case ID: ohio-st_21/html/0086-01.html
Source: Caselaw Access Project
Author: {"author": "Day, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

James M. Dye v. W. H. H. Dye.
    Where the principal maker of a note assigned all his property to assignees for the benefit of bis creditors, and no steps were taken by the holder of the note, nor by the surety thereon, towards presenting it to the assignees for allowance and payment out oí the assets in their hands — held, that the mere omission of the holder of the note to present it to the assignees, did not exonerate the surety from liability thereon.
    Motion for leave to file a petition in error to the district court of Miami county.
    
      The judgment sought to be reversed by this proceeding, was rendered in an action brought in the court of common pleas of Miami county by W. H. H. Dye, (the defendant in error) against James M. Dye, (the plaintiff in error,)Thomas C. Dye, and Roswell S. Dye, on a joint and several promissory noto for ten thousand dollars, dated Dec. 12, 1864, and payable to W. H. H. Dye, in twelve months after date.
    The material question in the case arose on the demurrer of the plaintiff below to the separate answer of James M. Dye to the petition. He alleges in his answer, as a defence to the action against him, that the note executed by him and the other defendants to W. H. H. Dye, on which the action is brought, was signed by him as surety only for Thomas C. and Roswell S. Dye, which fact was known toW. H. H. Dye, the payee of the note and plaintiff in the action ; that, before the maturity of the note, Roswell S., one of the principals of the note, became insolvent; that on June 21, 1865, Thomas C. Dye, the other principal, failed', and made an assignment of all his property, for the benefit of his creditors, to O. Bowen and Roswell S. Dye, in the probate court of Marion county, according to law ; that said assignees duly qualified ; that they gave notice, as required by law, to the creditors of Thomas C. Dye (of whom W. H. H. Dye was one), to present their claims for allowance and payment; that the assignees realized out of the assets of Thomas C. Dye, after paying all special leins thereon, the sum of $167,323.04 ; that, after three partial settlements of said assignment, a final settlement was made by the assignees, Dec. 23, 1868, by which all claims against said Thomas C. presented to the assignees properly authenticated were paid in full; and that W. H. H. Dye, the plaintiff below, wholly neglected and refused to present his claim to the assignees, by reason of which the same was not paid. He insists that, therefore, he is discharged from his liability as surety thereon.
    The common pleas sustained the demurrer to the answer, and rendered judgment in favor of the plaintiff below for amount due on the note. Thereupon, James M. Dye took the case to the district court, on error, where the judgment of the common pleas was affirmed.
    To reverse these judgments, he now asks leave to file his petition in error in this court, on the ground that the courts below erred in sustaining the demurrer to the answer, thereby holding that the defence interposed by him was not sufficient in law to bar the action against him.
    
      JR. 8. Hart for the motion :
    Under our statute regulating the relations of sureties, so called, to their principals and payees, upon promissory notes, the surety is a guarantor, in the sense of having made a promise to pay collateral to the promise of another. The surety’s relations to the other parties are, by reason of the statute, other than they would be without its provisions, and different from what they would be at the common law.
    For example : It is put by the statute in the power of the surety to compel the payee to prosecute the principal without delay, under penalty of discharging the surety wholly — and this without reference to the question of actual damage by the delay. The surety may maintain an action against his principal to obtain indemnity against his liability, before the note becomes due. But what is more, he may compel the payee to exhaust the effects of the principal, by execution, levy and sale, before proceeding against his, the surety’s, property or effects.
    “ A guarantor or surety” [using the word surety to signify one who stands in the relation of a guarantor] “ has a right to expect that the creditor will not wantonly lose * * his claim against the principal debtor, with the intention of falling back upon the liability of the guarantor ; for the guarantor promises only to pay the debt of another in case the other does not pay it; and this contract is held to imply some endeavor and some diligence on the part of the creditor to secure the debt from the principal.” 2 Parsons, 26.
    The neglect of the defendant in not presenting his claim at Marion is a discharge of the surety. For if any, even the least “ endeavor” or degree of “ diligence to secure the debt from the principal debtor,” can be required in any case, from the payee of a promissory note, the small matter of presenting it for payment to the assignees might safely be required in the case at bar.
    If, however, the plaintiff is a surety in the more limited sense of a surety upon a promissory note, and if the statute referred to is to be excluded from all influence in arriving. at a conclusion, then we insist that as a surety only, he is discharged. The negligence alleged in his plea is not only recognized by the authorities cited below as ample for his exoneration, but they unqualifiedly require it. The money resulting from the assignment was, in the hands of the assignees, in contemplation of equity, a payment to the defendant. Or if it was not, it was in equity the equivalent of a tender to the defendant through the trustees. Or if it was not, it was a security in the hands of the assignees, which he was bound to look after in the interests of the surety, at the peril of his redress upon the latter ; and his neglect in not calling for it was a fraud upon the plaintiff, working his discharge. 13 Serg. & Rawle, 157.
    The circumstances of the case are the equivalent of the statutory, or, if not, of the common law warning ot the creditor by the surety, to take steps looking to the safety of the latter. The circumstances, of their own force, referred the creditor to the trustees; and rebut the idea that the surety, by his omission to serve notice, under the statute, of his unwillingness longer to remain surety, admitted his continuing liability.
    Where bankruptcy extinguishes the debt of the creditor, failure to present his claim to the assignee discharges the surety.
    Where a discharge by insolvency cuts off all future remedy, failure of the creditor to present his claim to the assignee discharges his surety.
    Where a creditor has the means of enforcing the debt from the principal debtor, and gives it up, either directly or permissively, he discharges his surety.
    A surety may resort to chancery to compel his principal to proceed, if he be apprehensive of damage by delay. (4 J ohns. — )
    At the common law a surety may notify the principal to proceed, -and if he neglect the warning, and loss ensue, the surety will be discharged pro tanto.
    
    
      Sailly v. Elmore, 2 Paige Ch. 497 ; Duval v. Trask, 12 Mass. 154; McCullum v. Executors of Williams, 9 Verm. 143 ; 17 Ala.— ; Capel v. Butler, 2 Sim. & Stuart Ch. 475 ; Holt v. Body, 18 Penn. St. 207 ; 3 Smith’s Lead. Cas. Eq. (notes to Reese v. Barrington) 552 ; Williams v. Price, 1 Sim. & Stuart, 581; 14 Ohio St. 372 ; 16 Ohio St. 433.
    
      H. G. Sellers (with 'whom is G. D. Burgess) for defendant in error:
    The act regulating the mode of administering assignments (S. & C. 709) does not release the debtor from the obligations of his contracts.
    There is a broad and well settled distinction between a guarantor and a surety. The undertaking of a guarantor is that the debtor shall pay.- The undertaking of the surety is that the debt shall be paid. 24 Pick. 252 ; 8 Pick. 423; 5 Mass. 358.
    The legislation of Ohio negatives the idea that a surety will be discharged by the holder of the note remaining passive, or by his delaying to pursue remedies. Code, secs. 500, 501; 61 O. L. 19, sec. 4 ; Jenkins v. Clarkson, 7 Ohio, 72; Headington v. Neff, 7 Ohio, 231; Farmers’ Bank of Canton v. Reynolds, 13 Ohio, 84.
    There is a class of cases where sureties have been discharged from their obligations, on the ground of injury resulting to the surety from active interference of the creditor, by reason of which it would amount to a fraud upon him to hold him liable. As where the creditor does some act prejudicial to the surety, by making a new contract without the assent of the surety, or releasing liens, or some active interference by him to the prejudice of the security. Dixon & Hawke v. Ewing, 3 Ohio, 281; Bank of Steubenville v. Carroll; Same v. Hodge, 6 Ohio, 17; Commercial 
      
      Bank of Lake Erie v. The Western Reserve Bank, 11 Ohio, 444; Jenkins v. Clarkson, 7 Ohio, 172 ; McComb v. Kittridge, 14 Ohio, 348; 15 Ohio St. 57, 297 ; Bank of Mount Pleasant v. Sprig, 1 McLean, 178 ; Ide v. Churchill, 14 Ohio St. 372.
    But these cases, and the principle on which they rest, are different from those where, on the part of the debtor, there is a mere delay to pursue remedies, or an omission to enforce liens, which will not operate to discharge the surety.
    To work his discharge there must be some positive act on the part of the creditor, and in order to preserve his rights against a- surety he is not bound to active diligence. If he merely remains passive his rights are not impaired. Farmers’ Bank of Canton v. Reynolds, 13 Ohio, 84 ; Fuller v. Milfred, 2 McLean, 74 ; Executors of Davis v. Rider et al. Id. 451 ; Johnson v. The President and Directors of the Planters’ Bank of Miss. 4 S. & M. 165 ; Kerr v. Brandon, 2 Howard, 910 ; Newell & Price v. Hamer et al. 4 Howard, 684 ; McLemore v. Powell, 12 Wheaton, 636. Judge Story says: i; As long as the holder is passive all his remedies remain, and we add that he is not bound to active diligence.” King v. Baldwin, 2 Johns. Ch. 501.
    If the surety neglects to take any steps for his own security, and the principal fails, he cannot complain of the creditor, or of the law, if he suffer by their negligence. Hunt, Executor, v. Brigham, 2 Pick. 581; note to same case, 585, where the authorities are collected. Also, the same, 613, 614, note 1.
    But it is insisted that the plaintiff in error is discharged, on the ground that the money in the hands of the assignee was a .payment, and if not, was, in equity, a tender, and equivalent to a payment. But see Johnson v. President, etc., of Planters’ Bank, 4 S. & M. 165 ; Obendorf v. Union Bank of Baltimore, 31 Md. 126; Fitch v. Sutton, 5 East. 230 ; Wilkinson v. Byers, 1 A. & E. 106 ; Cotton v. Godwin, 7 M. & W. 147 ; Lincoln v. Bassett, 23 Pick. 124.
    The general rule is, that the obligation of the surety becomes extinct by the extinction of the obligation of the principal debtor. An exception to this rule takes place whenever the extinction of the obligation of the principal arises from causes which originate in the law, and not in the voluntary act of the creditor, as in bankruptcy. Theobold on Prin. and Surety, 67 ; Brown v. Carr. 7 Bing. 508.
    Nothing is required of the creditor except that he should not increase the hazard of the surety, or do any act that would place it out of his power to bring suit if called on to do so. Theobold, 80 ; Heath v. Kay, 1 Y. & J. 434 ; McLemore v. Powell, 12 Wheaton, 636 ; Newell and Price v. Hamer, 4 Howard, 684.
    While both the creditor and the surety remain passive, the operation of the law will not discharge the surety. Rawstone v. Parr, 3 Russell, 424; 1 Rob. Pr. 49 ; 2 Williams on Ex. 1072.
    As to the relative rights and duties of creditor and surety, see, also, Executors of Dennis v. Rider, et al. 2 McLean, 451; 1 Story’s Eq. Jur. 692, sec. 639 ; Id. 322, sec. 327 ; Nesbit v. Smith, 2 Bro. Ch. 579 ; Hays v. Ward, 4 Johns. Ch. 123 ; Longtherne v. Swinburne, 14 Ves. 162 ; Wright v. Mosley, 11 Ves. 12, 22; Buchanan v. Birdley, 4 Hay. & McHen. 41.
   Day, J.

The error alleged originated in the court of common pleas. The action in that court was on a promissory note. One of the defendants, who was surety on the note, interposed a defence, which raises the material question to be considered : will the mere neglect of the holder of a note to present it to the assignee of the principal, discharge the surety to the extent that might have been thereby realized on it out of the assets of the principal.

No case upon this precise point has been brought to our attention; we are, therefore, left to determine it upon the principles that run through the cases on analogous questions.

The case before us is not embarrassed by considerations that arise in cases where the principal debtor is discharged by the negligence of the creditor, for the statute of this State in relation to assignments leaves the liability of the principal makers of the note unaffected by the neglect to present it for allowance and payment out of the assets in the hands of the assignees.

A creditor may, however, in many ways do that which, though it may not affect the liability of the principal, will exonerate sureties. In all such cases the discharge of the surety is based on some recognized and well-defined principle, and, in general, results from a positive act of the creditor which operates to the prejudice of the surety. Passiveness on the part of the creditor will not discharge the surety, unless he omits to do, when required by the surety, what the law or his duty enjoins him to do, or unless ho neglects, to the injury of the surety, to discharge his duty in any matter in which he occupies the position of a trustee for the surety. The Farmers' Bank of Canton v. Raynolds, 13 Ohio, 84; Schrœppell v. Shaw, 3 Comst. 446 ; 1 Story’s Eq. sec. 325; and note to Rees v. Barrington, 3 Leading Cases in Equity, 529, for a full reference to the authorities on the subject.

The discharge of the surety is not claimed in this case, by reason of any positive act of the creditor, nor by reason of his neglect to prosecute the claim, after being required by the surety to do so by notice in writing, in accordance with the statute, nor, indeed, by reason of - his neglect to comply with any requirement of the surety whatever, for, from aught that appears, the passiveness of the surety equaled that of the creditor. Nor did the creditor have anything in his hands, actually or constructively, in the nature of a trust. Then, upon the principles already so broadly stated, it would seem that the surety was not exonerated from liability on the note.

But it is claimed that it was the duty of the creditor tc present the note to the assignees, and thus save the surety harmless from the debt, and that his neglect to do so was, consequently, a fraud on the surely. This claim of fraud, it will be seen, rests on the supposition that it was a duty the creditor owed to the surety, to present the note to the assignees in order to protect him from liability. What might have been his duty, if the surety had required him to present the note, we are not called upon to decide. But so long as the surety is willing to remain passive, why may not the creditor ? He may be entirely willing to continue to rest upon the credit he had originally given to the surety, rather than take upon himself the trouble and expense of claiming a dividend out of the assets of the principal ; for he may look to the surety as well as the principal for the payment of the debt. He gave credit to both equally, while the surety trusted the principal alone for his indemnity. So far as the interest of the creditor was concerned, it was a matter of indifference to him which of the makers of the note paid it; but it was directly for the interest of the surety that the note should be paid out of the assets of the principal. It would, therefore, seem most reasonable that he should be the primary party to move for the accomplishment of that object, for he who enjoys the benefit ought to sustain the burden. At least he might have requested the creditor to present the note to the assignees, and, if he refused to do so, I see no reason why he might not have done it himself, nor why, if the assignees had refused to allow it, he might not have enforced it by action, for the statute gives to the surety substantially every remedy that the creditor has, to enforce payment of a claim by the principal. The note became due within the time mentioned in the statute for the presentation of claims, and was overdue, more than two months before the assignees were authorized by law to make a dividend, and more than two years before their final settlement. The surety was not at any time debarred from any of his legal remedies against the principal, or his assets in the hands of the assignees ; and if, by possibility, they were not as ample as those of the creditor, he might at least have made them equally so, by discharging his own obligation to the creditor by payment of the note when it became due. At best, then, the surety was not less in default than the creditor, and, therefore, can claim no equitable right against him. Indeed, if the surety had discharged his duty, by payment of the note when it became due, the creditor would have had no claim to present to the assignees of the principal; the surety’s own default to the creditor, therefore, in fact becomes the ground of his claim against him. Since, then, the breach of duty charged against the creditor cannot be sustained without giving the surety the advantage of his own default, I know of no principle on which his claim can be tolerated.

The case of McCullum v. Williams1 Exs. 9 Vt. 143, is much relied on by the plaintiff in error. In that case, the note was barred as against the estate of the principal, by reason of the creditor’s failure to present it to the administrator within the time limited by law, and the creditor sought to charge the estate in equity through its liability to the surety on the note. Relief was refused, in part, on the ground that good faith required the creditor to present his note to the administrator, and that, therefore, the negligence of the creditor, which discharged the principal, also discharged the surety. But that case is distinguishable from this, in that, here the principal was not discharged, nor does it appear, as it did in that case, that the surety was out of the country and had no notice of the decease of the principal.

But so far as the ruling in that case has any application to this, the weight of authority is against it. In Johnson v. The Planters' Bank, (4 Smedes & Marshall, 165,) it was held that the surety on a note was not discharged, although it was barred as against the estate of the principal, by reason of the omission of the holder of the note to present it to the administrator within thetime limited. In that case, after stating the general rule, “ that the obligation of the surety becomes extinct by the extinction of the obligation of the principal debtor,” the court say : “ An exception to this rule takes place whenever the extinction of the obligation of the principal arises from causes which originate in the law, and not in the voluntary act of the creditor, as in bankruptcy. Theo. on Prin. and surety, 67 ; Brown v. Carr, 7 Bing. 508. The creditor, in order to preserve his rights against the surety, is not bound to active diligence, and, if he merely remains passive, his rights are not impaired.” (Theobold, p. 80.) * * * # “The creditor would not often give the credit without security ; he takes it for his own indemnity. The surety knows his own risk. If he desires to lesson that risk he may file a bill to compel the bringing of the suit, or, by payment, he may have an assignment of the instrument. But while both remain passive the operation of the law will not discharge the surety.” * * * # “The sureties may, in such cases, compel the presentment of the claim in due time, and thus preserve their recourse against the estate beyond doubt. If they fail to do so they are in fault in neglecting to protect their interest, and have no x'ight to throw the consequences of their ixegligenee xxpon the credit-ox’.”

To the same effect is the holding ixi Nashville Bank v. Campbell, 7 Yerger, 353 ; Hooks & Wright v. Branch Bank of Mobile, 3 Ala. 580; Vanderburgh v. Snyder, 6 Iowa, 39; and Silbey v. McAllaster, 8 N. H. 389.

In the last case cited, the chief justice, in delivering the opixiion of the court, said: “It is well settled, that a discharge of the principal, under a bankrupt law, does not discharge the surety. 6 Mass. 33 ; 4 M. & S. 334 ; 2 M. & S. 39 ; 4 J. B. Moore, 153.”

“ And a creditor is under xxo oblgation to prove his debt under a commission of bankruptcy of the px’incipal, unless the surety gives to the creditor an indemnity for the expense. 4 John. C. R. 132; 10 Vesey, 414 ; 6 Vesey, 734 ; 2 John. C. R. 562.”

“ The surety is the person who trusts the px’incipal, and it is his busixxess to see that the px’incipal pays. * * * Sxxch being the general rules of law, it is very apparent that if the px’incipal die, and his estate be administered in the insolvent course, the creditor is under no obligation to present his claim to the commissioners, and procure what he may from that estate. He has a right in such case to look to the surety for the whole amount.”

“ It is the business of the surety to procure the creditor to lay his claim before the commissioxxers, or to pay the claim, and then lay his own claim before the commissioners for the money he may have paid to the creditor.”

If then the mere omission of the creditor to present his claim to the assignee of the principal in bankruptcy, or to his administrator, where in either case the liability of the principal is discharged, wil'1 not exonerate the surety, much less will such neglect exonerate him in a case like the one before us, where the principal remains liable.

The doctrine of the cases referred to, is in harmony with that before stated in relation to the liabilities of sureties, and, on principle, would seem to be decisive of this cáse.

In McLemore v. Powell, (12 Whea. 555,) Judge Story says : “It was correctly said by Lord Elden, in English v. Darley, (2 B. & P. 61,) that ' as long as the holder is passive all his remedies remain and, we may add, that he is not bound to active diligence.”

This doctrine, as applied to sureties, has been carried in this State to the extent of holding, that the loss of a judgment lien on the property of the principal, by reason of the omission of the creditor to enforce it, will not release the surety. (Farmers' Bank of Canton v. Raynolds, 13 Ohio, 84.)

We are not required to go to that extent, to hold that the mere omission of a holder of a note to present it to the assignee of the principal, will not exonerate the surety from liability thereon.

We are so well convinced that the rulings of the courts below were correct, that we are constrained to overrule the motion for leave to file a petition in error.

Scott, C. J., and Welch, White and McIlvaine, JJ., concurred.