Case Name: Liquidating Midland Bank, Trustee, v. Stecker et al.
Court: Ohio Court of Appeals
Jurisdiction: Ohio
Decision Date: 1930-10-20
Citations: 40 Ohio App. 510
Docket Number: 
Parties: Liquidating Midland Bank, Trustee, v. Stecker et al.
Judges: Cline, J., concurs.
Reporter: Ohio Appellate Reports
Volume: 40
Pages: 510–534

Head Matter:
Liquidating Midland Bank, Trustee, v. Stecker et al.
(Decided October 20, 1930.)
Messrs. Golfee, Fogg £ White, for plaintiff in error.
Mr. Maurice Q. Gritchfield and Messrs. Stanley, Horwits £ Kiefer, for defendants in error.

Opinion:
Levine, J.
Error proceedings are prosecuted from the judgment of the common pleas court. The parties appear in this court in the same relative positions held in the common pleas court.
Various demurrers filed by defendants were sustained by the court; various leaves to plead were granted; a third amended petition filed by the plaintiff was, on motion, stricken from the record; the final entry of the court was the entry of the judgment of dismissal of the petition by default against plaintiff.
A perusal of the petition discloses that the Arline Realty Company, a corporation, about November 1, 1923, issued its corporate bonds in the principal amount of $110,000, and, to secure the payment thereof, executed and delivered to the Midland Bank, therein named and constituted trustee for the purposes thereof, its mortgage and trust deed.
Samuel Stecker, Abe Greenwald and Samuel Stern entered into a contract in writing which recited the issue of the aforesaid bonds by the Arline Realty Company, that the Midland Bank had agreed to act as trustee, as in said first mortgage trust deed named and created, and further recited as follows: "Now, therefore, the undersigned, in consideration of the acceptance of said trusteeship and the purchase of said bonds hereby jointly and severally guarantee to The Midland Bank, as Trustee for the holder or holders of said temporary bond (until the same is surrendered for exchange) and said definitive bonds (when so exchanged) and to said holder or holders individually, jointly or severally, the full, prompt and punctual payment of the principal of and interest on said temporary bond or definitive bonds, as the case may be, according to their terms and tenor."
Samuel Stern and Abe Greenwald both died in the latter part of 1928, and the defendants Augusta Greenwald and Sarah Stern are the administratrix and executrix of their estates, respectively, and this action was brought by the Midland Bank as trustee of an express trust created by the terms of said contract hereinabove quoted, and as a person with whom and in whose name said contract was made for the benefit of another.
It being deemed necessary to set out such facts as would show that the bonds were valid obligations of the Arline Realty Company, the first part of the second amended petition deals with the facts in connection with the execution of the bonds of the Arline Realty Company, and the certification thereof, as required by the terms of said bonds, by the Midland Bank, as trustee under the terms of the mortgage and trust deed, and alleges specifically that all of said bonds were certified by the plaintiff, meaning the Midland Bank as trustee, under the terms of the mortgage and trust deed, in accordance with their terms. • It is further alleged that $90,000 in principal amount of said bonds are outstanding; all of which matured November 1, 1928, and for which, with interest thereon, the Arline Realty Company has been in default since November 1, 1928.
After the petition set forth the obligation and legal liability of the Arline Realty Company, the issuer of said bonds, it is further alleged that the defendants Samuel H. Stecker, Samuel Stern, deceased, and Abe G-reenwald, deceased, duly executed and delivered to the plaintiff, "The Midland Bank, now The Liquidating Midland Bank as Trustee for the holder or holders of said bonds under and by virtue of the terms of said contract whereby said Samuel H. Stecker, Abe G-reenwald and Samuel Stern jointly and severally unconditionally guaranteed to The Midland Bank as said trustee, under and for the purposes of said contract of guaranty, the full, prompt and punctual payment of the principal and interest on all of said bonds of The Arline Realty Company, according to the terms and tenor thereof," etc.
It is further alleged that by reason of the default of the Arline Realty Company, as aforesaid, and the further default of the said Stecker, Stern and Greenwald, for the payment of said $90,000 of bonds at maturity on November 1, 1928, with interest thereon accrued, and the continuance of said default, there was due the plaintiff, the Midland Bank, as trustee under and by the terms of said guaranty contract, the sum of $90,000, with interest at 7 per cent, from November 1, 1928, for which judgment was asked.
Three grounds were set forth in the defendants' demurrer:
1. Incapacity of plaintiff to sue.
2. The petition does not state a cause of action.
3. Misjoinder of parties plaintiff.
As to the capacity of plaintiff to sue, we are of the opinion that this case comes within the terms of Section 11244, General Code, which provides that a "trustee of an express trust, a person with whom, or in whose name, a contract is made for the benefit of another, may bring an action without, joining with him the person for whose benefit it is prosecuted. ' '
There is enough in the petition, by way of allegation, to show that the plaintiff the Midland Bank, now the Liquidating Midland Bank, was trustee under the terms of the mortgage and trust deed, for the purpose of that instrument, and of the parties thereto.
It is alleged in the petition that the Midland Bank brings this action in its capacity as trustee under the terms of a guaranty contract.
The demurrer admits the allegations of the petition, and in our opinion, capacity to sue appears upon the face of the petition.
There is, in our opinion, but one vital question in this case, namely, does the petition state a. cause of action, when it fails to allege that the plaintiff has sued the primary obligor and exhausted its assets'? It is urged in behalf of the defendants that this is, strictly speaking, a suit upon a contract of guaranty, as appears from the face of the instrument itself; that the defendants could be held to no greater liability than that of the ordinary guarantor; that before suit could be successfully prosecuted against the guarantors, who are usually only secondarily liable, the petition must allege, and upon trial it must be proven in evidence, that the principal who was the primary obligor had been sued and that his assets had been exhausted.
Much stress is laid by the plaintiff upon certain language found in the contract of guaranty, to wit: " The undersigned' guarantee to The Midland Bank the full and prompt and punctual payment of the principal of and interest on said temporary bonds or definitive bonds as the case may be, according to their terms and tenor."
In the brief of counsel for the plaintiff much learning was expended upon a distinction, ofttimes found in the books and decisions, between a "guarantee of collectibility" and a "guarantee of payment. ' '
The burden of plaintiff's argument is to the effect that where the guaranty is one of collectibility, or of the solvency of the principal obligor, the liability of the guarantor is secondary only, whereas, if the guaranty is one of payment, the'guarantor then becomes bound with the principal; that the guarantor then assumes a primary liability to the same extent as did the principal.
It is therefore claimed in argument that it was unnecessary to allege and prove that the primary obligor was sued and that its assets were exhausted before entering suit against the guarantor.
Both sides have collected many authorities, adjudicated in the courts of many states of the Union, relative to this question. We are of the opinion that the nature of the obligation of a guarantor depends upon the intention of the parties in entering into the contract of guaranty, as expressed in the language and circumstances attendant upon the transaction. We are aided in reaching this conclusion by the well-known rule of construction which the courts have adopted to the effect that a contract of guaranty will be construed in favor of the guarantor.
When an examination is made into the language and attendant circumstances of the transaction herein, as it appears upon the face of the petition, it leads us to the definite conclusion that the obligation of the defendants was a secondary obligation and that therefore it is incumbent upon the plaintiff to exhaust the primary obligation before being able to sue these defendants.
1. The instrument of the guaranty itself used the language "guarantee."
2. The agreement of guaranty is contained in a separate and distinct instrument, and does not appear on the bonds themselves which the instrument of guaranty seeks to guarantee.
3. The primary obligation on the bonds is secured by mortgage on real estate.
The use of the word "guarantee" in an agreement of guaranty, although not conclusive, imports not an absolute but a conditional promise to pay.
In J. W. Watkins Medical Co. v. Lovelady, 186 Ala., 414, 65 So., 52, 54, the court said in sustaining the demurrer of the guarantor in a petition against both the principal obligor and the guarantor:
"The single term of obligation in the collateral agreement here is 'guarantee,' and this term is without modification or limitation in the body of the contract. Appellant attaches importance to the fact that appellee guaranteed payment 'at the time and place and in the manner in said agreement provided, ' referring to the primary contract. But this language is without significance in the present contention, for, whether the contract binding upon appellee was one of guaranty or suretyship, in either event appellee became bound for Davidson's performance of his undertaking 'at the time and place and in the manner in said agreement provided'; the only question being whether that responsibility was absolute or conditional.
"The difference [between suretyship and guaranty] is that a surety insures the debt, is bound with his principal as an original promisor, is a debtor from the beginning; a guarantor answers for the debtor's solvency, must make good the consequences of his principal's failure to pay or perform, is bound only in case his principal is unable to pay or perform."
Rawleigh Co. v. Salter, 31 Ga. App., 329, 120 S. E., 679; Rouse v. Wooten, 140 N. C., 557, 53 S. E., 430, 111 Am. St. Rep., 875, 6 Ann. Cas., 280; Marberger v. Pott, 16 Pa., 9, 55 Am. Dec., 479; Imperial Water Co. v. Meserve, 62 Cal. App., 603, 217 P., 553; Dole v. Young, 41 Mass. (24 Pick.), 250.
The petition shows that the guaranty is not written upon the bonds themselves, but is contained in a separate instrument. This, in our opinion, is strong evidence that it was intended to be a conditional obligation.
In Emerson-Brantingham Implement Co. v. Raugstad, 65 Mont., 297, 211 P., 305, 307, the court said:
"A contract of guaranty is distinguishable from one of surety, in that the former is an independent contract whereby the promisor is bound independently of the person for whose benefit it is made, while the latter is a contract whereby the promisor is bound jointly with the principal on the same contract."
The petition discloses the fact that the primary obligation was secured by a first mortgage on real estate. This, in our opinion, is an additional element indicating the intention of the parties that this was to be, not an absolute guaranty, but a guaranty conditioned at least upon the exhausting of the mortgage security.
A reading of the petition shows the obligation of the bonds, which the instrument of guaranty seeks to guarantee, has been fully entered into and consummated on the part of the- principal. The instrument of guaranty is entered into at a time subsequent thereto and upon a separate instrument. It likewise appears that the agreement of guaranty is founded upon a different and separate consideration.
To hold, after a perusal of the allegations of the petition, that the guaranty in this case was absolute, primary, and in the nature of a suretyship contract, would be to do violence to certain well-founded principles which distinguish suretyship contracts from contracts of guaranty.
A surety usually enters into the same obligation as that of his principal. The signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation of both the principal and the surety.
Since it appears from the pleadings that the obligation of the bond on the part of the principal obligor had been fully consummated, and that the contract of guaranty was entered into at a time subsequent thereto, and upon a different instrument, and also that it was founded upon a different and separate consideration, the mere fact that it guarantees payment does not convert the obligation into a primary obligation.
There is plenty of authority to this effect.
In construing the language of the guaranty most favorably to the guarantor, the court finds it necessary to hold that what the parties intended by the language of the contract of guaranty is that the guarantors promised to pay if the principal cannot pay.
In J. W. Watkins Medical Co. v. Lovelady, 186 Ala., 414, 65 So., 52, 53, the defendants in a separate instrument agreed as follows: "We, the undersigned, do hereby jointly and severally guarantee the full and complete payment of said sum at the time and place and in the manner in said agreement provided."
The defendants demurred on the ground that they could not be sued jointly with the principal obligors. The court sustained the demurrer, and the ruling was affirmed by the Supreme Court. The court said at page 419 of 186 Ala., 65 So., 52, 54:
"Contracts of suretyship and of guaranty have much in common — in both the undertaking is to answer for the debt, default, or miscarriage of another. The difference is that a surety insures the debt, is bound with his principal as an original promisor, is a debtor from the beginning; a guarantor answers for the debtor's solvency, must make good the consequences of his principal's failure to pay or perform, is bound only in case his principal is unable to pay or perform.
"This case requires that the obligation of Love-lady be defined as either that of a surety or a guarantor. The result in this case is to be determined, as matter of law, from the language of the contract, though, as matter of fact, the parties may not have considered the difference, for there is nothing else to disclose the intention of the parties. They must be held to the legal intendment of the language they employed. As we have seen, Lovelady guaranteed Davidson's undertaking in the only language of obligation he employed, and this he did in a separate contract. The separation of the contracts indexed the intention of the parties to make an engagement of guaranty, as well as the term used. These are the principal factors of interpretation, since they arise out of the body and substance of the contract."
In Etheridge v. W. T. Rawleigh Co., 29 Ga. App., 698, 116 S. E., 903, the defendant in a separate instrument guaranteed the payment in full by the principal for merchandise to be delivered by the plaintiff to the principal. The plaintiff sued the principal and the defendant jointly on the contract of purchase. A demurrer of the defendant was overruled, and the decision reversed by the Court of Appeals of Georgia. In its opinion the court stated, at page 702 of 29 Ga. App., 116 S. E., 903, 905: " 'A contract of suretyship' is where one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him and on the same contract, and without any reference to the solvency of the principal. A contract of guaranty exists where one lends his credit for the benefit of another, but under an obligation which is separate and distinct from that of the principal debtor, and where he renders himself secondarily or collaterally liable on account of any inability of the principal to perform his own contract. It is evident that a surety, who simply joins the principal in thus becoming liable upon the principal's obligation, will usually, from the nature of such a transaction, become 'bound with his principal by the same instrument, executed at the same time and on the same consideration,' while a guarantor, who enters upon his own separate and distinct undertaking, will usually, from the nature of such a transaction, become bound 'before or after the obligation of the principal,' and the contract 'is often founded on a separate consideration from that supporting the contract of the principal.' "
It appears clear to us that the courts distinguish a guaranty of payment, which is made upon the instrument of the original obligation, for the same consideration and at the same time, from a contract of guaranty which is embodied in a separate instrument for a different consideration and executed at a different time. The former contract is held by many courts to be simply a contract of surety, where the obligation of the surety arises upon the failure of the principal to pay; whereas, the latter contract is a guaranty with the obligation of a guarantor to pay only if it is proven that a principal cannot or is unable to pay.
The petition in the case at bar nowhere alleges that the parties intended the instrument of guaranty to be in the nature of a primary obligation.
We hold, therefore, that the common pleas court was right in ruling as it did, and its judgment will be affirmed. •
Judgment affirmed.
Cline, J., concurs.