Case ID: ny-super-ct_23/html/0208-01.html
Source: Caselaw Access Project
Author: {"author": "By the Court—Monell, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

William W. Wakeman et al., Plaintiffs and Respondents, v. Hill Gowdy, Defendant and Appellant.
    1. A creditor, receiving from his debtor, as collateral security, a promissory note made by a third person, past due, with the request to collect it and apply the proceeds to the payment of the debt, though without any express direction to sue upon it, incurs the obligation to use diligence in its collection, and to sue if necessary. In such case, the debtor stands in the relation of guarantor for the collection of the note, and is entitled to the exercise on the part of the holder, of such diligence as is required of a bailee for hire, or of a pledgee.
    2. The degree of diligence required must be determined from the facts and circumstances of the case, as a question of law.
    
      3. Where creditors received such a note as collateral security at a time when the makers were abundantly able to pay it, and on their demanding payment the latter intimated that they had a defense, but the creditors neither notified the debtor thereof, nor brought suit on the note until three months thereafter, and meanwhile the makers had become insolvent, whereby the amount of the note was lost; — Held, that negligence was imputable to the creditors, and that they were liable to the debtor for the amount of the note, and could not recover from him their costs of obtaining judgment against the makers.
    (Before Moncrief and Monell, J. J.)
    
    Heard, January 12, 1863 ;
    decided, January 31, 1863.
    Appeal by the defendant from a judgment entered in favor of the plaintiffs on the report of S. P. Hash, Esq., Referee, before whom the issues in the cause were tried.
    This action was brought by William W. Wakeman, Zalmon B. Wakeman, Jonathan Godfrey and Diedrick Lannerman, to recover for the freight and charges of a cargo of cotton brought for the defendant in the plaintiffs’ vessel, from Savannah to Hew York, and also for the costs and charges incurred by the plaintiffs in the prosecution of a promissory note which had been delivered by the defendant to the plaintiffs as security for his indebtedness for the freight.
    The complaint, after alleging the cause of action for the freight, further alleged, that afterward the defendant delivered to the plaintiffs, as security for his indebtedness, a promissory note made by Silvanus Holbrook & Co., and requested the plaintiffs to collect the same and apply the moneys, when collected, to the payment of his said indebtedness ; and to that end requested and directed the plaintiffs, for and on his account, to prosecute the said note, and to take all legal measures for the collection of the same, and agreeing, in effect, to pay all the costs and expenses which the plaintiffs might incur in endeavoring to collect the note. That the plaintiffs instituted an action against the makers of the note, and subsequently obtained judgment thereon, but failed to collect anything. And that in obtaining such judgment the plaintiffs paid the sum of $144.44 for the costs and expenses thereof.
    
      The defendant did not controvert the cause of action for the freight and charges, but denied that he was liable for the costs and expenses of the suit against Holbrook & Co.
    ■ He averred in his answer, that the note of Holbrook & Co., at the time of its delivery to the plaintiffs, was past due; that they promised the defendant to collect the same immediately, and with all reasonable diligence to bring an action thereon, and to apply the moneys collected thereon to the payment of the defendant’s indebtedness to them ; that at the time of the delivery of the note to the plaintiffs, the makers of the note were responsible, and the same could have been collected; but that the plaintiffs, neglecting their duty, did not prosecute the makers until after they had become insolvent; whereby, as the defendant claimed, the plaintiffs became liable to the defendant for the amount of the note.
    The plaintiffs replied to the answer, denying negligence.
    The case was tried by the Referee, who found the facts:
    That on the 18th of June, 1851, the note in question was delivered to the plaintiffs as collateral security for the defendant’s indebtedness, and that the plaintiffs were authorized and requested by the defendant to collect the note and to apply the proceeds to the payment of such indebtedness.
    That on the same day the plaintiffs wrote to the makers, demanding payment.
    That the next day the makers replied that the note was given for half a lot of cotton bought from the defendant, and that they would pay the note whenever the thing was made right for the whole cotton.
    That on the 20th September, 1851, the plaintiffs made á personal demand of payment, but it was refused; and on the same day they caused a suit to be brought and an attachment was issued against the property of the makers.
    That on the 30th August, 1851, the manufactory and a large amount of property of the makers,' Holbrook & Co., was destroyed by fire; by reason of which they suspended payment on the first of September; that on that day a suit was commenced against them, and an attachment levied upon their property for a large sum; and that, by reason of liens and incumbrances prior to the plaintiffs’, nothing was collected on their judgment.
    That if legal proceedings by suit and attachment, according to the laws of Massachusetts, had been instituted against Holbrook & Go. upon the note, at any time prior to the first of September, 1851, any judgment recovered in the action would have been collectible out of their property.
    That the defendant was in the City of New York during the summer of 1851; that he knew at the maturity of the note, that the makers refused to pay it, on the ground that the cotton, for which it was given, had sand in it; that neither party supposed that the Holbrooks were insolvent or in precarious circumstances, nor were any express instructions given to the plaintiffs to prosecute the note.
    That there was no negligence on the part of the plaintiffs in not having commenced suit upon the note before the time when they in fact commenced the suit.
    Upon these facts, the Referee adjudged that the defendant was not entitled to recover, or have deducted from the plaintiffs’ claim the amount of said note or any part of it, and he directed judgment for the plaintiffs for the amount of the freight and charges, and the costs and expenses of the suit with interest.
    The defendant, in due form, excepted to the findings of fact and conclusions of law.
    It was proved by the plaintiffs’ agent that the defendant handed him the note, saying if he could get anything on it well and good; that the note was then past due, and that there was no agreement or understanding between him and the defendant in regard to commencing any suit upon the note. This testimony was objected to; the objection was overruled, and the defendant excepted.
    
      E. Seeley, for defendant, appellant.
    
      Cited Gilbert v. Williams, (8 Mass. R., 51;) Hill v. Featherstonhaugh, (7 Bing., 569;) Gallagher v. White, (31 Barb. S. C. R., 94;) Walker v. Goodman, (21 Ala. R., 647.)
    
      E. H. Owen, for plaintiff, respondent,
    Cited Hoard v. Garner, (6 Seld., 262;) Buckingham v Payne, (36 Barb., 81;) Williams v. Price, (1 Sim. & Stu., 581;) Foot v. Wiswall, (14 Johns., 304;) Savage v. Birckhead, (20 Pick., 167;) Gallagher v. White, (31 Barb., 92.)
   By the Court—Monell, J.

The note in question was delivered to and received by the plaintiffs as collateral security for a prior indebtedness of the defendant to the plaintiffs. The fact is so found by the Referee, and the finding is warranted by the evidence. There was no express direction given to the plaintiffs to sue the makers, nor was there any express agreement or understanding that the defendant would pay the costs and expenses of a suit for the collection of the note. ,

The obligation which the law imposed upon the plaintiffs when they received the collateral security, was that they would use diligence in its collection. The defendant stood in the relation of guarantor for the collection of the note, and was entitled to all the rights and protection which the law furnishes to such persons, among which is the exercise, on the part of the holder, of such, diligence as is •required of a bailee for hire, or of a pledgee. (Story on Prom. Notes, § 284; Lawrence v. McCalmont, 2 How. U. S. R., 427; Swinyard v. Bowes, 5 Maule & Selw., 62; Chitty on Bills, [8th ed.] 467, 474; Bayley on Bills, 286, 290.) In Lawrence v. McCalmont the principle is fully recognized (p. 454) that a person receiving a note as collateral security, was bound to due diligence in its collection, and that the case fell under the general law of agency And Story (Story on Bills, § 372,) applies the law applicable to .guarantors, to holders of bills held as collateral security.

The amount of diligence which the law requires should be exercised, must, of course, be determined from the facts and circumstances of each case. Nevertheless, it is a question of law and not of fact, and must be determined by the Court upon settled principles governing such eases. (Burt v. Horner, 5 Barb., 504.)

In guarantees of collection, the attempt to collect must have been made, it being a condition precedent to calling on the guarantor; and the creditor is held to the exercise of diligence in prosecuting the maker. (Taylor v. Bullen, 6 Cow., 624; Cumpston v. McNair, 1 Wend., 457; Lamourieux v. Hewit, 5 Wend., 307; Eddy v. Stantons, 21 Wend., 255; Burt v. Horner, 5 Barb., 501; Hart v. Hudson, 6 Duer, 294, 303; Hoard v. Garner, 6 Seld., 261; Kemmerer v. Wilson, 31 Penn., 110.)

In determining the question of diligence, two things must be considered. First. Was there any impediment to bringing a suit ? and, Secondly. Has the omission to sue injured the guarantor ? If the creditor has been unable to prosecute the maker, he cannot be chargeable with negligence ; nor can the guarantor be said to have sustained damage if the maker continues responsible. In Chitty on Bills, supra, it is said, “ if the parties who ought to have paid the bill or note were solvent at the time when it became due,, and for some time afterward, and only subsequently became insolvent before notice, an inference of actual damage from want of notice to the party guaranteeing, or who is otherwise collaterally liable, will prevail, until rebutted by actual proof, that if notice had been given, payment could not have been obtained.”

A reference to some of the above cases will exhibit the stringency of the rule and the degree of diligence required in particular cases.

Taylor v. Bullen was a guarantee of collection, and the maker died before the maturity of the note: held no excuse for not prosecuting his representatives.

In Cumpston v. McNair, the excuse for not prosecuting the note was that a recovery could not be had against.the makers, a partnership being denied. A suit had been commenced and discontinued because a witness could not be found to prove the partnership. It was held not sufficient.

Hor is it any excuse that the maker resides in another State. The creditor must prosecute him there. (Burt v. Horner, 5 Barb., 501.)

The general principle is also distinctly recognized in Barrow v. Rhinelander, (3 Johns. Ch., 614.)

In Hart v. Hudson, Mr. Justice Duee says, “ if the debt “ so guaranteed is unpaid at its maturity, the creditor, if he “wishes to retain the liability of the guarantor, must, “ without delay, commence proceedings for its recovery, “ and it is only when he can show that all the remedies “ which the law gave him against the debtor had been “ exhausted, that he is in a condition to demand payment “ of the debt from the guarantor. If he delay, without “ necessity, to commence the necessary proceedings, * * * “ the delay is imputed to him as ‘laches,’, and the guar- “ antor is discharged.”

In Gallagher v. White, (31 Barb., 92,) the note was past due when it was transferred. . The maker was insolvent at the time of transfer and continued so. And it was intimated, but not decided, that negligence was not imputable to the holder. This was put expressly on the ground that the guarantor had sustained no loss.

In Lamourieux v. Hewit, the doctrine of laches was held not to apply where the original debtor was insolvent. There, the suit was commenced within three months after the maturity of the note, and, except for the insolvency excusing the laches, it would have been negligence. (Burt v. Horner, supra.)

The case of Hoard v. Garner, (6 Seld., 261,) is like this in principle. In that case there was an express covenant to take proper means to collect, and the covenantor was held to be chargeable with laches, and the law of guarantors was applied to such a covenant.. •

Applying the principles of these cases to the facts found by the Referee, it will be seen that the plaintiffs having failed .to discharge the obligation imposed upon them by law, must be held liable for the damage sustained by the defendant.

The note was transferred on the 18th June, 1851, when the makers were abundantly able to pay it, and when, if a suit had been commenced and a judgment recovered, it could have been collected. The only excuse offered for not prosecuting the makers, was that they refused to pay until it was made right concerning the whole purchase of cotton. This was regarded by the plaintiffs as a sufficient reason for not suing, and yet they retained the security, omitting to give any notice to the defendant, until the 20th of September following, when, without any directions from the defendant, they commenced a suit. In the meantime and on the first of September, the makers of the note, through misfortune, became insolvent.

Under these facts, it seems to me that, in judgment of law, negligence is to be imputable to the plaintiffs. There was no impediment to suing the makers; their intimated defense did not excuse it, and there was an implied, if not an express, agreement by the defendant to pay the costs and expenses of the suit. By the omission of the plaintiffs to sue with diligence, the defendant has lost the debt through the insolvency of the debtors, and the plaintiffs must-be held responsible for such loss.

Under this view of the case, the defendant was entitled to have deducted from the plaintiffs’ claim for freight, the amount due on the note at the time of the trial; and for the same reasons, the plaintiffs cannot recover the costs of the suit against the Holbrooks.

The conclusions of the Beferee are therefore erroneous, and the judgment must be set aside, and a new trial granted, with costs to abide the event.