Case Name: McDermott vs. The Bank of Tennessee
Court: Tennessee Supreme Court
Jurisdiction: Tennessee
Decision Date: 1848-09
Citations: 9 Hum. 123
Docket Number: 
Parties: McDermott vs. The Bank of Tennessee.
Judges: 
Reporter: Tennessee Reports
Volume: 28
Pages: 123–128

Head Matter:
McDermott vs. The Bank of Tennessee.
Where a deed is executed, conveying estate for the security of notes endorsed by different individuals, a court of Chancery, at the instance of any of the endorsers, will compel a pro rata distribution of the proceeds of the trust sale.
P. B. Anderson executed and delivered two notes to the Bank of the State of Tennessee. One of these notes' was endorsed by D. D. Anderson and O. G. Murrell, and the other by A. Anderson and one W. P. H. McDermott. A deed of trust was éxecuted to the Bank to secure the payment of these debts. The deed conveyed a tract of land, lying in Hawkins county, to a trustee, and authorized •him to sell and pay the proceeds to the Bank, in satisfaction of such debts. The notes fell due, were protested, and the land was sold, and the proceeds applied to the satisfaction of the note, on whieh Anderson and Murrell were endorsers, — suit was commenced against McDermott, and judgment rendered against him. The principal being insolvent, McDermott filed this bill in the Chancery Court, praying that the proceeds of the sale of the trustee, should be appropriated, pro rata, to the satisfaction of both debts, and on the hearing the Chancellor so decreed. From this decree the defendant appealed.
T. Lyon, for the complainant.
Anderson was principal on both these notes, and his endorsers were merely sureties, as regards their relation to the principal and to the creditor; and all the equities, subsisting between principal and sureties, and surety and creditor, obtain in this case.
The debt is the principal, and the mortgage is the incident. The mortgage, in this case, was made for the security of both debts, and though given directly to the creditor, inures ratably to the benefit of the endorsers of each note. We are obliged to presume that the endorsers knew of this mortgage, and that such knowledge influenced their action. A creditor who has personal security and a pledge or fund is not obliged to proceed against the fund, but is at liberty to proceed against the surety personally, but in such case the surety may compel the creditor, when his debt is paid, to subject the fund for his benefit. Burge on Sur., 324; 6 Vesey, 714; 1 Story’s Eq. § 640.
In this case, had the Bank proceeded on its personal security alone, and collected both debts, the surety on each note would have been entitled to be substituted to the rights of the creditor, and to have his note ratably paid out of the fund; and no priority of payment to the creditor would have given one an advantage over the other.
Had the complainant, in this case, after default by the principal, voluntarily paid the debt, for which he was surety, it cannot be questioned he would have been entitled to be subrogated to the rights of the creditor, and had the pledge sold and applied ratably to his debt. 4 J. Ch. B,., 122; 2 Story Eq. § 549-50.
From a like principle it follows, that the creditor had no election as to which debt he should apply the fund mortgaged — it having been pledged for the security of both debts — in derogation of the equitable rights of either of the sureties.
The right of contribution between co-sureties and of substitution, does not depend upon contract, but upon a principle of equity — except only so far as a contract may be implied from a knowledge of that principle. 14 Vesey, 160.
R. H. Hynds, for the defendant.
It is the right of the debtor to make the application of the payments; on his omitting to do so the power belongs to the creditor. If this power be exercised by neither, it becomes the duty of the court. In this event, an equitable application should be made. It being equitable that the whole debt should be paid, it is not inequitable to extinguish ■first those debts for which the security is most precarious. Field vs. Holland, 6 Cranch, 8, 2 Cond. Rep., 285; United States vs. January, 7 Cranch, 572,
Van Dyke, for complainant. ,
The right of a person, owing money under several contracts, to apply a payment to whichever debt he chooses, may be exercised without any express direction being given at the time. A direction may be evidenced by circumstances, as well as by words. Taylor vs. Sandi-ford, 7 Wheaton, 13; Cond. Rep., 209.
The rules, as to the application of payments by debtors or creditors, in the ordinary transactions of business, do not apply to a case where different sureties are interested under different distinct obligations. United States vs. Eckford’s exr’s, 1 Howard 250; 7 Cranch 572.
Where there is a general assignment of a debtor’s property, for the benefit of his creditors and the priority of the United States attaches, they having various debts due by bond with different sureties, all payments made by the assignees, are to be applied pro rata to all the debts of the United States. 5 Mason, 455 ; 1 Wheel. Eq. Dig., 166; 11 Yez. jr., 12, 22.
The trustee, in this case, was the agent of the debt- or, P. B. Anderson; the special agent had particular instructions how to apply the proceeds of the sale of the land, those directions were set forth in the deed of trust— the money was to be applied to the payment of both debts — the deed of trust was registered, therefore the defendants had notice of how the proceeds of the sale of the lands were to be applied.
The debtor has the right to make the application of payments. 6 Cranch, 8 ; 9 Wheaton, 720; 4 Mason, 335; 7 Cranch 575; 2 Vern. 606.
The trustee, who was a mere agent, had no right to .make any application of the money, other than as he was directed by the deed of trust — the deed of trust was his letter of instructions. Delegated powers must be strictly pursued. 1 Hill S. C., 155. If the orders to an agent be positive, he must either refuse to act or he is bound to a strict observance of them. 1 Wash. C. C., 454. A special authority must be strictly pursued, and an act, substantially varying from it, is void. 2 Johns. 48; 1 Wash. C. C., 174; 5 Johns. 58.

Opinion:
McKinney, J.
delivered the opinion of the court.
The branch of the Bank of Tennessee, at Rogersville, was endorsee of two promissory notes, discounted at said branch, of which P. B. Anderson was maker — the one for $5,500 00, endorsed by D. D. Anderson and O. G. Murrell, and the other for $2,000 00, endorsed by A. Anderson and the complainant, who were mere accommodation endorsers, as were also the endorsers upon the other note. As collateral security to the Bank, for both notes, a deed of trust was executed by Anderson the maker, by which a tract of land was conveyed to a trustee, for the sole benefit of the Bank. In said deed it is stipulated that, upon failure of Anderson to meet the calls, and make payment of said notes, according to the ordinary course of business of said Bank, the trustee shall make sale of said tract of land, and the proceeds thereof, after discharging the costs incident to the execution of the trust, shall be applied to the payment of whatever amount shall be found due to said branch of the Bank of Tennessee, from P. B. Anderson on account of his said notes. Anderson having failed to comply with the requirements of said deed of trust, said two notes were regularly protested for non-payment at maturity, and the tract of land conveyed in trust was sold by the trustee, and was purchased by the Bank at the price of $500. The bid was subsequently increased to $5,000 00. After discharging the costs of sale, the net sum realized by the Bank, from the proceeds of the sale, was $4,961 00, the whole of which sum was applied by the Bank towards the satisfaction of the note for $5,500 00 — leaving the other note, upon which the complainant was endorser, wholly unsatisfied. The maker being insolvent, suit was brought upon the latter note against the complainant alone, and on the 15th of September, 1843, judgment was recovered thereon against him for $2,087 66-J, exclusive of costs. The complainant brings this bill to have the fund realized by the Bank, from the proceeds of the sale of said land, applied toward the satisfaction of both notes in proportion to their respective amounts. The Chancellor so decreed, and the Bank has appealed to this court, and the only question in the cause is, did the Chancellor err in the decree pronounced by him? We think not. By the express terms of the trust-deed the land stood pledged equally for the satisfaction of both notes. No question can arise in this case as to the right of the creditor to direct the application of the payment in case of the silence or failure of the debtor to . do so. Because, by the agreement of the Bank and the principal debtor, as evidenced by the stipulation in the deed, the fund arising from the sale of the land, in the event a sale should be made, is required to be applied to both notes, and in the absence of such stipulation, we think the complainant, upon general principles, is clearly entitled to have said fund applied pro rata to both notes. This right, like the right of, contribution among sureties, or the right of a surety who has paid the debt, to the benefit of all the securities which the principal debtor has given to his creditor, is founded not in contract, but is the result of general equity, on the ground of equality of burden and benefit.
If the Bank had coerced payment of both notes from the endorsers, as might have been done, notwithstanding the. collateral security taken from the principal debtor, they would jointly have been entitled, by substitution, to have had the land sold and the proceeds subjected to such pro rata division for their indemnity, and upon either endorser being thus forced to make payment, he had a clear right tó the same relief.
The decree will be affirmed, with costs.