Case ID: mich_35/html/0041-01.html
Source: Caselaw Access Project
Author: {"author": "Cooley, Ch. J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Eldad Smith v. Allan Shelden and others.
    
      Partnership: Dissolution: Settlement: Implied authority: Giving notes of firm. On the dissolution of a co-partnership the partner entrusted with the winding up of the business has no authority to give notes of the firm in settlement of partnership debts so as to bind the other partners to an extension of time of payment with an increased rate of interest, whatever may be the rule as to giving a mere acknowledgement of the amount due in the form of a due-bill or I O U.
    
    
      Partnership: Retiring partner: Firm debts: Surety. Where on the dissolution of a co-partnership one partner purchases the interest of his co-partners, agreeing to pay all the partnership liabilities, the partner thus retiring may still be held liable by the creditors, but if he is compelled to pay he is entitled to indemnity from the other partner, and is therefore as to such other partner a surety merely upon the partnership obligation.
    
    
      Surely: Definition: What the relation is and how established. A surety is defined as a person who, being liable to pay a debt or perform an obligation, is entitled, if it is enforced against him, to be indemnified by some other person who ought himself to have made payment or performed before the surety was compelled to do so; and the relation is fixed entirely by the arrangement and equities between the debtors or obligors, and may or may not be known to the creditors.
    
      
      Joint debtors: Principal and surety: Creditors: Notice of sw'eiyship. Creditors having no knowledge of the relation of their debtors to each other, as principal or surety, will not be affected in their rights by such relation; but if they know that one*party is surety merely, they are bound, in any subsequent action they may take regarding the debt, not to lose sight of the surety’s equities.
    
      Partnership: Retiring partner: Surety: • Creditors: Dealings with continuing partner: Release of surety. A partner having purchased the interest of his co-partner and agreed to pay the partnership debts, creditors who with full knowledge of these facts received for their claim against the firm a note executed in the name of the firm by the partner continuing the business, and without the knowledge or assent of the retiring partner, payable one day after date, with interest at ten per cent., are held, thereby to have released the retiring partner.
    
    
      Creditors: Principal and surety: Dealings with principal: Release of surety_ Creditors bargaining with a principal without the surety’s knowledge, in consideration of an extension, for an advantage which the surety is not to share with them, cannot lawfully nor justly turn over to the surety all the risks.
    
      Heard October 4.
    
    
      Decided October 17.
    
    Error to Wayne Circuit.
    
      O. &W.JV. Draper and G. I. Walker, for plaintiff in error,
    to the point that a partner, by taking the firm assets and agreeing to pay the liabilities, becomes, as between himself and his former partner, the principal debtor and bound to pay the debt, and the retiring partner is a surety merely, cited: Morse v. Gleason, 2 Hun., 31; Kinney v. McCullough, 1 Sand. Ch., 370; that a note given by one partner in the name of the firm, after dissolution, and without authority from the other partner, is the sole note of the partner giving it: F. & M. Bank v. Kercheval, 2 Mich., 518; Pars. on Part.; Pars, on Notes, 145-312; that such a note payable in the future operates as an extension of time to the continuing partner and no suit can be brought against him or the firm till the note becomes due and payable: 2 Pars, on Cont., 683-4; 3 Lead. Cases in Eq., 561; Glun v. Smith, 2 G. & J. (Md.), 496; 2 Mich., 518; that it is well settled that giving time to a principal without consent of his surety will discharge the latter, and the length of time given, or whether the surety has been benefited or injured by such arrangement, is wholly immaterial: 3 Lead. Cases in Equity, 534, 535, 561; 1 Parsons on Notes and Bills, 241; Miller v. Steart, 9 Wheat., 680; Commissioners of Berks v. Rap, 3 Binn , 520; Fellows v. Prentiss, 3 Denio, 512; Bringham v. Wentworth, 11 Cush., 123; 6 English Rep., 663; that notwithstanding parties may appear to be joint makers of the promissory note, and the holder thereof may have purchased the same believing them to be such, either may show by parol that he signed as surety, and the holder will be affected by such relation '"from the time he has notice of it: Subbard v. Gurney, N. Y. Court of Appeals, Albany Law Journal, April 15, 1876, page 267; Bank v. Haye, 6 Ohio, 17; Grafton Bank v. Kent, 4 N. H., 221; Harris v. Brooks, 21 Pick., 195; Carpenter v. King, 9 Metc., 511; Mariner’s Bank v. Abbott, 28 Me., 280; Wilson v. Green, 25 Vt., 450; Averend, Gurney & Co. v. Oriental Financial Co., 1 Eng., 469; 3 Lead. Cases in Equity, 570-2; that where one partner turns over the assets of the firm to his co-partner and retires, and the continuing partner assumes and agrees to pay all the debts, and the creditors are notified of such arrangement, the liability of the retiring partner is changed from that of principal to surety: Emmons v. Drummond, 4 Esp., 90; Oakeley v. Pashellar, 4 Cl. & Fin., 207; Stone v. Chamberlain, 20 Geo., 259; Colgrove v. Tallman, 2 Lans., 97; Wilson v. Lloyd, 6 Eng., 642; Millerd v. Thorn, 56 N. Y., 402
    
      Meddaugh & Driggs, for defendants in error,
    argued that nothing short of an express agreement by creditors will discharge retiring partners: Pars, on Part., 421; Story on Part., §§ 154-6; Collyer on Part. (5 Am. ed.), §§ 487, 563; that the promissory note of a third person taken for an antecedent debt is not a payment unless by agreement: Johnson v. Eard, 9 Johns., 310; Foley v. Barber, 5 Johns., 68; Jaffrey v. Cornish, 10 N. H., 505; Davison v. Bridgport, 8 Conn., 472; taking the notes of another than the debtor is an extinguishment of the debt only when so agreed: Jewett v. Plenk, 43 Ind., 368; Devlin v. Chamblin, 6 Minn., 468; Hotchin v. Secor, 8 Mich., 484; Dudgeon v. Haggart, 17 Mich., 273; and on the relations existing between a retiring partner and creditors of the firm, cited: Pars, on Part., 421-2; Story on Part. (2d ed.), 154-6; Collyer on Part. (5 Am. ed.), 481, 554-10; that a note of a surviving member of the firm, given in adjustment of a '^'creditor’s account against the firm, will not be deemed a payment of the account unless such is shown to have been the agreement: Leach v. Church, 15 Ohio St., 169; Bowen v. Still, 49 Penn. St., 65; Scholenberger v. Seloonridge, 1 Ired., 83; Van Epps v. Billage, 6 Barb., 244; Spear v. Atkinson, 1 Ired., 262; Thompson v. Briggs, 28 N. H., 40; Powell v. Charles, 34 Mo., 485; Keel v. Bridgers, 16 Miss., 612; Sneed v. Wiester, 2 A. K. Marsh., 277; Rayburn v. Day, 21 Ill., 46; Tyner v. Storps, 11 Ind., 22; Bonnell v. Chamberlin, 26 Conn., 487; Smith v. Rogers, 17 Johns., 340; that the mere acceptance of the promissory note of a less number than all of the joint debtors will not discharge the joint liability: Drake v. Mitchel, 2 East., 251; Foley v. Barber, 5 Johns., 68; Johnson v. Reed, 9 Johns., 310; and on the general subject they cited: Thompson v. Percival, 5 B. & Ad., 925; Reed v. White, 5 Esp., 122; Evans v. Drummond, 4 Esp., 192; Harris v. Farwell, 15 Beav., 31; Stevens v. Thompson, 28 Vt., 77; Harris v. Lindsey, 4 Wash. C. C., 98; Moulden v. Whittock, 1 Cow., 290; Rosseau v. Call, 14 Vt., 83; King v. Lowrey, 21 Barb., 532; Thurber v. Corbin, 51 Barb., 215; Wilson v. Lloyd, 6 Eng., 642; Daniel v. Cross, 3 Ves. Jr., 277; Millerd v. Thorn, 56 N. Y., 402; Brown v. Clark, 14 Penn. St., 469; Robinson v. Taylor, 4 Barb., 242,
    
      
       A survivor of a firm dissolved by the death of a partner cannot bind another surviving partner by a time note in the old firm name, even for an indebtedness accruing before dissolution: Matte eon v. Na'haimn, 33 Mich., 377; and see Goodspeed v. South Bend Plow Go., 45 Mich., 235. If, however, a creditor refuses to accept the paper of the continuing partner and to discharge the others, the latter are not discharged from liability upon paper subsequently signed by the continuing partner in the firm name without their knowledge, and accepted by the creditor, when the latter is ignorant that the signature is unauthorized: Adler v. Foster, 39 Mich., 87.
    
    
      
      That under the circumstances of the main case the outgoing partners are sureties, see Maierv. Canavan, 8 Daly, 272. See further Lindley on Partnership, *440, and Daniel Neg. Instr. (3d ed.) g 1300 a. If a new firm is composed of strangers, the creditor must accept the subrogation before such firm becomes his debtor. The old firm, therefore, is not. discharged merely by the new one’s assumption of liability. And mere del >y of the creditor which without a binding agreement would not discharge a surety, cannot affect the old firm: Hayes v. Knox, 41 Mich., 519.
    
    
      
       Tlie surety’s promise cannot be enlarged in the slightest particular. If a creditor secrelly releases the principal, the sureties are released: Greenlee v. Lowing, infra 63. If he undertakes for the payment of the price of goods to be sold, he cannot be held for a failure to pay promptly: Bulloch v. Taylor, 39 Mich., 137. If, after a debt is due, a creditor, fin a valuable consideral ion, extends the time of payment, an arcmimodaKon maker who is ignorant of such extension, is released as much as though ostensibly a surety: Barron v. Cady, 40 Mich., 259. So the sureties on a bond for the performance of a contract are released if the time of performance is extended after the contract has been assigned: Todd v. Greenwood School District, id., 294. It is “alwajs competent to show that any obligation whatever its iorm, was in fact made for a debt or liability of another, and where this is this the case the contract is one of suretyship, and the surety, if he is held to pay it, may sue for reimbursement. And when a creditor knows that his debtor is a surety, ho is bound to take no steps which will change the liability of the principal without the surety’s-consent:” Canadian Bank, dec. v. Coumtw, 47 Mich;, 357. But the extension of time upon a note in consequence of the signature of a new indorser, does not release one who as to the other maker is only a surety, but to the holder is only known as a joint maker: Gano v. Heath, 36 Mich., 441.
    
   Cooley, Ch. J.:

The legal questions in this case arise upon the following facts:

Prior to June, 1867, Eldad Smith, Isaac Place, and Francis B. Owen were partners in trade under the firm name of Place, Smith & Owen, and as such became indebted to defendants in error in the sum of nine hundred and sixty-nine dollars on book account.

*In the month mentioned the firm was dissolved by [*46] mutual consent, Place purchasing the assets of his co-partners and agreeing to pay off the partnership liabilities, including that to the defendants in error. On the second day of the following month Place informed the defendants in error of this arrangement, and that he had taken the assets and assumed the liabilities of the firm, and they, without the consent or knowledge of Smith and Owen, took from Place a note for the amount of the firm indebtedness to them, payable at one day with ten per centum interest. They did not agree to receive this note in payment of the partnership indebtedness, but they kept it and continued their dealings with Place, who made payments upon it. The payments, however, did not keep down the interest. Place, in 1872, became insolvent and made an assignment, and Smith was then called upon to make payment of the note. This was the first notice he had that he was looked to for payment. On his declining to make payment, suit was brought on the original indebtedness and judgment recovered.

The position taken by the plaintiffs below was, that as they had never received payment of their bill for merchandise they were entitled to recover it of those who made the debt, the giving of the note which still remained unpaid being immaterial. On behalf of Smith it was contended that, by the arrangement between Place and his co-partners, the latter, as between the three, became the principal debtor, and that from the time when the creditors were informed of this arrangement they were bound to regard Place as principal debtor and Smith and Owen as sureties, and that any dealing of the creditors with the principal to the injury of the sureties would have the effect to release them from liability. And it is further contended that the taking of the note from Place, and thereby giving him time, however short, was in law presumptively injurious.

Upon this state of facts the following questions have been argued in this court:

1. Was the note given by Place in the co-partnership *name for the co-partnership indebtedness, but given after the dissolution, binding upon Smith and Owen?

2. If Smith and Owen were not bound by the note, were they entitled to the lights of sureties ? And,

3. Did the taking of the note given by Place discharge Smith and Owen from their former liability ?

On the first point it is argued in support of the judgment that when a co-partnership is dissolved the partner who is entrusted with the settlement of the concern should be held to have implied authority to give notes in settlement. On the other hand it is insisted that in law lie has no such authority, and that if he assumes, as was done in this ease, to give a note in the partnership name, it will in law be his individual note only.

Whatever might be the case if the obligation which was given had been a mere acknowledgment of the amount due, in the form of a due-bill or I O U, we are satisfied that there is no good reason for recognizing in the partner who is to adjust the business of the concern any implied authority to execute such a note as was given in this case. This note was something more than a mere acknowledgment of indebtedness; and it bore interest at a large rate. It was in every respect a new contract. The liability of the parties upon their indebtedness would be increased by it if valid, and their rights might be seriously compromised by the execution of paper payable at a considerable time in the future if the partner entrusted with the adjustment of their concerns were authorized to make new contracts. It was assumed in F. & M. Bank v. Kercheval, 2 Mich., 506-519, that the law was well settled that no such implied authority existed, and we are not aware that this has before been questioned in this state. — See Pennoyer v. David, 8 Mich., 407. We think it much safer to require express authority when such obligations are contemplated, than to leave one party at liberty to execute at discretion new contracts of this nature, wbicb may postpone for an indefinite ^period the settlement of their concerns, when'a settle-meat is the very purpose for which he is to act at all.

For a determination of the question whether Smith and Owen were entitled to the rights of sureties, it seems only necessary to point out the relative position of the several parties as regards the partnership debt. Place, by the arrangement, had agreed to pay this debt, and as between himself and Smith and Owen, he was legally bound to do so. But Smith and Owen were also liable to the creditors equally with Place, and the latter might look to all three together. Had they done so and made collections from Smith and Owen, these parties would have been entitled to demand indemnity from Place. This we believe to be a correct statement of the relative rights and obligations of all.

Now a surety, as we understand it, is a person who, being liable to pay a debt or perform an obligation, is entitled, if it is enforced against him, to be indemnified by some other person, who ought himself to have made payment or performed before the surety was compelled to do so. It is immaterial in what form the relation of principal and surety is established, or whether the creditor is or is not contracted with in the two capacities, as is often the case when notes are given or bonds taken; the relation is fixed by the arrangement and equities between the debtors or obligors, and may be known to the creditor, or wholly unknown. If it is unknown to him, his rights are in no manner, affected by it; but if he knows that one party is surety merely, it is only just to require of him that in any subsequent action he may take regarding the debt, he shall not lose sight of the surety’s equities.

That Smith and Owen were sureties for Place, and the latter was principal debtor after the dissolution of the co-partnership, seems to us unquestionable. It was then the duty of Place to pay this debt and save them from being called upon for the' amount. But if the creditors, having a right to jn-oceed against them all, should take steps for *'that purpose, the duty of Place to indemnify, and the right of Smith and Owen to demand indemnity, were clear. Every element of suretyship is here present, as much as if, in contracting an original indebtedness, the contract itself had been made to show on its face that one of the obligors was surety merely. As already stated, it is immaterial how the fact is established, or whether the creditor is or is not a party to the arrangement which establishes it.

This view of the position of- the parties indicates clearly the right of Smith and Owen to the ordinary rights and equities as sureties. The cases which have held that retiring partners thus situated ai’e to be treated as sureties merely, have attempted no change in the law, but are entirely in harmony with older authorities which have only applied the like principle to different states of facts, where the relative position of the parties as regards the debt was precisely the same. We do not regard them as working any innovation whatever. The cases we particularly refer to are Oakeley v. Pasheller, 4 Cl. & Fin., 207; Wilson v. Lloyd, Law R., 16 Eq. Cas. 60; and Millerd v. Thorn, 56 N. Y., 402.

And it follows as a necessary result from what has been stated, that Smith and Owen were discharged by the arrangement made by the creditors with Place. They took his note on time, with knowledge that Place had become the principal debtor, and without the consent or knowledge of the sureties. They thereby endangered the security of the sureties, and as the event has proved, indulged Place until the security became of no value. True, they gave but very short time in the first instance; but, as was remarked by the vice chancellor in Wilson v. Lloyd, L. R., 16 Eq. Cas., 60, 71, “the length of time makes no kind of difference.” The time was the same in Fellows v. Prentiss, 3 Denio, 512, where the surety was also held discharged. — And see Okie v. Spencer, 2 Whart., 253. But that indulgence beyond the time fixed was contemplated when the note was given is manifest from the fact that it was made payable with interest. In a legal point of view this would *be immaterial, but it has a bearing on the equities, and it shows that the creditors received or bargained for a consideration for the very indulgence which was granted, and which ended in the insolvency of Place. When they thus bargain for an advantage which the sureties are not to share with them, it is neither right nor lawful for them to turn over to the sureties all the risks. This is the legal view of such a transaction, and in most cases it works substantial justice.

The judgment must be reversed with costs, and a new trial ordered.

The other justices concurred.