Title: Courson v. Simpson
Citation: N/A
Docket Number: 951295
State: Virginia
Issuer: Virginia Supreme Court
Date: March 1, 1996

Present:  Carrico, C.J., Compton, Stephenson, Lacy, Keenan, and 
Koontz, JJ., and Cochran, Retired Justice 
 
HERMAN L. COURSON, 
ET AL. 
 
v.  Record No. 951295 
OPINION BY JUSTICE BARBARA MILANO KEENAN 
                                   March 1, 1996 
MARGARET N. SIMPSON, 
TRUSTEE, ET AL. 
 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
 
Rosemarie P. Annunziata, Judge 
 
 
In this appeal, we consider whether a surety was discharged 
from its obligation by Code §§ 49-25 and -26,
1 after giving 
written notice to the creditor to institute suit against a debtor 
corporation which the surety concedes was insolvent. 
 
In 1981, Springfield Associates, Inc. borrowed $28,460.50 
from a trust established by the estate of Robert C. Nicoll (the 
                     
     
1Code § 49-25 provides, in relevant part: 
 
 
The surety . . . of any person bound by any contract 
may, if a right of action has accrued thereon, require 
the creditor . . . by notice in writing, to institute 
suit thereon . . . .  Such written notice shall also 
notify the creditor . . . that failure to act will 
result in the loss of the surety . . . as security for 
the debt in accordance with § 49-26. 
 
 
Code § 49-26 provides, in relevant part: 
 
 
If such creditor . . . shall not, within thirty days 
after such requirement, institute suit against every 
party to such contract who is resident in this 
Commonwealth and not insolvent and prosecute the same 
with due diligence to judgment and by execution, he 
shall forfeit his right to demand of such surety . . . 
the money due by any such contract for the payment of 
money, or the damages sustained by any breach of the 
collateral condition or undertaking specified as 
aforesaid; but the conditions, rights and remedies 
against the principal debtor shall remain unimpaired 
thereby. 
 
 
 
 
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Nicoll trust).  The loan was secured by a deed of trust on the 
personal residence of Eleanor E. and Herman L. Courson.  Mr. 
Courson was vice president and one of the principal stockholders 
of Springfield Associates, Inc.  However, neither he nor Mrs. 
Courson was a party to the original note establishing the debt. 
 
The following words were typed above the original note, 
"secured by a deed of trust on Lot Three (3), West Hill 
Subdivision, Fairfax County, Virginia."  No reference to the deed 
of trust was included in the body of the note. 
 
In a 1984 letter, Springfield Associates, Inc., Carl H. 
Hellwig, president of Springfield Associates, Inc., and Herman L. 
Courson acknowledged to Robert F. Silver, one of the co-trustees 
of the Nicoll trust, that the corporation owed money to the 
Nicoll trust, and that the Courson deed of trust secured 
performance of the corporate note.  Later, Springfield 
Associates, Inc. defaulted on the note. 
 
In 1987, the Coursons attempted to obtain a release of the 
deed of trust on their residence.  On January 19, 1987, they 
assigned to The George Mason Bank (the Bank) a sum sufficient to 
pay the note.  The Coursons directed that the assignment would 
terminate only on fulfillment of one of three conditions:  (1) 
entry of a court order on behalf of the Nicoll trust against 
Springfield Associates, Inc. and payment by the Bank from the 
proceeds of the assignment in discharge of the obligation; (2) 
foreclosure under the Coursons' deed of trust and payment by the 
 
 
 
 
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Bank from the assigned funds an amount necessary to discharge the 
lien of the deed of trust; or (3) entry of a court order 
declaring that the Coursons' obligation with respect to the note 
was discharged, and that the deed of trust was released. 
 
Also on January 19, 1987, the Coursons sent a letter, by 
certified mail, to Margaret N. Simpson, whom they believed to be 
the sole surviving trustee of the Nicoll trust.
2  The letter 
informed Simpson that the Coursons had assigned a sum sufficient 
to discharge the full indebtedness on the note of Springfield 
Associates, Inc.  The letter also stated that if Simpson did not 
institute suit for breach of the obligation of Springfield 
Associates, Inc., the Coursons' obligation under the deed of 
trust would be released, pursuant to Code §§ 49-25 and -26. 
 
Simpson did not file suit on the note.  The Coursons then 
filed a bill of complaint for declaratory judgment, asking the 
trial court to declare that the deed of trust was released by 
 
     
2When the trust was established, Silver and Simpson were co-
trustees.  Silver died in 1985.  In August 1985, the Alexandria 
Circuit Court appointed Gordon P. Peyton as substitute trustee.  
This substitution, however, was not recorded in the fiduciary 
records in the Alexandria Circuit Court.  In resolving the issues 
presented, we will assume, without deciding, that the January 19, 
1987, notice to Simpson constituted sufficient notice to Peyton 
and to the Nicoll trust. 
 
 
 
 
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operation of Code §§ 49-25 and -26.  Simpson was served 
personally with the bill of complaint, but did not file an 
answer.  In May 1987, a final decree was entered by default, 
releasing the deed of trust and extinguishing the Coursons' 
obligation as sureties.  Thereafter, the Bank released the 
assigned funds back to the Coursons. 
 
In July 1987, Gordon P. Peyton, one of the two co-trustees 
of the Nicoll trust, filed a motion to intervene, and Simpson 
filed a motion to set aside the May 1987 decree.  The trial court 
granted both motions.
3
 
The Coursons filed an amended bill of complaint against 
Christopher A. Nicoll and Lynne Nicoll Fuller, the beneficiaries 
of the Nicoll trust (the beneficiaries), Simpson, and Peyton.  
Simpson and Peyton (the trustees) did not respond to the amended 
bill, but the beneficiaries did file an answer. 
 
At trial, the uncontroverted evidence showed that 
Springfield Associates, Inc. was insolvent.  Mr. Courson 
testified that, at the time he sent the demand letter to Simpson, 
he knew that Springfield Associates, Inc. had no assets.  In 
addition, the evidence showed that the Coursons were not 
personally liable on the note of Springfield Associates, Inc.  
 
The trial court denied the Coursons' request for declaratory 
judgment relief.  The court held that, because the sole principal 
 
     
3These rulings are not assigned as error in this appeal. 
 
 
 
 
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debtor on the note was insolvent, Code § 49-26 did not release 
the Coursons from their obligation under the deed of trust.  In 
addition, the court held that Code § 49-26 did not require the 
trustees to institute suit against the Coursons as sureties after 
Simpson received the Coursons' demand, but only required the 
trustees to sue any solvent principal debtors.  This appeal 
followed. 
 
The issues before us are ones of first impression.  The 
Coursons first contend that, although Springfield Associates, 
Inc. was insolvent, the corporation was "not insolvent for the 
purposes of this specific debt," because the Coursons had 
assigned sufficient funds to discharge the obligation of 
Springfield Associates, Inc.  Second, the Coursons argue that 
Code § 49-26 required the trustees to sue every party to the 
transaction, including the surety, after receiving a demand 
notice from the surety under Code § 49-25.  Therefore, according 
to the Coursons, since the trustees did not institute suit 
against them after receiving their January 19, 1987, letter, Code 
§ 49-26 extinguished the Coursons' liability as surety.  We 
disagree with both contentions. 
 
Initially, we note that a surety makes a direct promise to 
perform an obligation in the event the principal debtor fails to 
perform.  As between the principal debtor and the surety, the 
ultimate liability rests on the principal debtor, but the 
creditor has a remedy against both.  First Virginia Bank-Colonial 
 
 
 
 
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v. Baker, 225 Va. 72, 77, 301 S.E.2d 8, 11 (1983); see also 
Restatement of Security § 82 (1941). 
 
Code § 49-25 allows a surety to require a creditor to 
institute suit against the principal debtor if a right of action 
has accrued on the principal debtor's obligation.  Code § 49-26 
provides that, if the creditor fails to institute such suit 
within thirty days of the written demand notice sent by the 
surety, the surety's obligation to the creditor is discharged. 
 
However, the creditor's obligation to sue is not absolute.  
Code § 49-26 requires a creditor to bring suit against a 
principal debtor only if that debtor is "not insolvent."  A 
debtor is insolvent, within the meaning of Code § 49-26, when it 
has insufficient property to pay all its debts.  See Hudson v. 
Hudson, 249 Va. 335, 340, 455 S.E.2d 14, 17 (1995); McArthur v. 
Chase, 54 Va. (13 Gratt.) 683, 694 (1857). 
 
The evidence showed that Springfield Associates, Inc. was an 
insolvent corporation when the Coursons sent the demand letter.  
As stated above, Mr. Courson's testimony established that 
Springfield Associates, Inc. had no assets when the demand letter 
was sent. 
 
The Coursons have not cited, and we have not found, any 
authority to support their contention that a corporation 
simultaneously can be insolvent and yet "solvent for purposes of 
a specific debt."  We find no merit in the Coursons' contention, 
because Code § 49-26 refers only to the solvency of the party to 
 
 
 
 
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the contract, not to any single debt on which that party is 
obligated.  Thus, since the sole principal debtor on the note, 
Springfield Associates, Inc., was insolvent, Simpson was not 
required by Code § 49-26 to sue that debtor. 
 
We next address the Coursons' contention that the January 
19, 1987, demand letter required the trustees to institute suit 
against the Coursons, as well as against Springfield Associates, 
Inc.  The Coursons urge us to adopt the majority holding in 
Colonial American National Bank v. Kosnoski, 617 F.2d 1025, 1027 
(4th Cir. 1980), in which the Court of Appeals ruled that the 
term "every party" in Code § 49-26 includes the surety.  We 
decline to do so. 
 
A surety relationship is based on two separate contractual 
obligations.  The first contract establishes the debt between the 
principal debtor and the creditor.  The second contract, between 
the surety and the creditor, secures the principal debt.  See 
Bourne v. Board of Supervisors of Henrico County, 161 Va. 678, 
684, 172 S.E. 245, 247 (1934).  In considering whether the 
Coursons are entitled to the remedy of discharge under Code 
§ 49-26, we must determine which contract is referenced in that 
statute. 
 
Code § 49-26 requires a creditor, who receives a notice to 
institute suit pursuant to that section, to sue "every party to 
such contract who is resident in this Commonwealth and not 
insolvent."  (Emphasis added.)  The antecedent to the term "such 
 
 
 
 
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contract" is found in Code § 49-25, which states that "the surety 
. . . of any person bound by any contract may, if a right of 
action has accrued thereon, require the creditor . . . to 
institute suit."  (Emphasis added.) 
 
This language in Code § 49-25 indicates that the contract on 
which the creditor must institute suit is the contract by which 
the principal debtor is bound, not the contract by which the 
surety is bound.  Thus, Code § 49-26 obligates the creditor, on 
proper demand by the surety, to institute suit against any 
principal debtor who is not insolvent.  This section does not 
obligate the creditor to bring suit against the surety in order 
to prevent the surety from obtaining a discharge under the 
statute.
4
 
 Here, the contract which bound the principal debtor was the 
1981 note between Springfield Associates, Inc. and the Nicoll 
trust.  Thus, the only contract on which the trustees would have 
been obligated to institute suit, pursuant to the Coursons' 
demand letter, was the note between Springfield Associates, Inc. 
and the Nicoll trust.  As stated above, the insolvency of 
                     
     
4As Kosnoski addresses, the predecessor statute to Code § 
49-26, originally enacted in 1794, was amended in 1849 to include 
the phrase "every party."  617 F.2d at 1027.  We believe that the 
intention of this amendment was to require the creditor to bring 
suit against every party to the principal debt. 
 
 
 
 
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Springfield Associates, Inc. eliminated this requirement.  
Further, since the Coursons were not personally liable on that 
note, the trustees had no obligation to sue them. 
 
We disagree with the Coursons' contention that the trial 
court erred by failing to take the amended bill of complaint as 
confessed to the trustees.  Although the trustees were sued in 
their representative capacity for the Nicoll trust, its 
beneficiaries had timely answered the amended bill of complaint. 
 The beneficiaries were entitled to assert every position that 
the trustees were entitled to assert.  Thus, we find no error in 
the trial court's decision not to enter a default decree against 
the trustees. 
 
We also find no merit in the Coursons' assertion that the 
1984 letter to Robert F. Silver made the Coursons a party to the 
original contract between the Nicoll trust and Springfield 
Associates, Inc.  That letter merely acknowledged the existing 
obligation of Springfield Associates, Inc. to the Nicoll trust, 
and the existing obligation of the Coursons to the Nicoll trust. 
 Likewise, the Courson's deed of trust was not incorporated by 
reference into the note because the body of the note contained no 
reference to the deed of trust. 
 
For these reasons, we will affirm the trial court's 
judgment. 
 
Affirmed. 
JUSTICE COCHRAN, with whom JUSTICE COMPTON and JUSTICE STEPHENSON 
join, dissenting. 
 
 
 
 
 
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I take a different view of this appeal. 
 
The majority assumes, without deciding, that the January 19, 
1987, notice from the Coursons to Margaret N. Simpson constituted 
sufficient notice to Gordon P. Peyton and to the Nicoll trust.  I 
consider this initial question to be highly significant in the 
appeal.  The Coursons presented evidence in the trial court 
sufficient to make a prima facie case that the required notice 
was given, and this evidence was not rebutted.  Accordingly, I 
would hold, rather than assume, that there was sufficient notice 
to Simpson, Peyton, and the Nicoll trust. 
 
What then were the trustees, Simpson and Peyton, and the 
beneficiaries of the Nicoll trust (Nicoll and Fuller) required to 
do under the provisions of Code § 49-26?  According to the 
majority they were required to do nothing, because the principal 
debtor, Springfield Associates, Inc., was insolvent under the 
common definition of insolvency that its liabilities exceeded its 
assets.  It is undeniable, however, that they could have 
instituted suit against the principal debtor, even if insolvent, 
and recovered the full amount of the obligation for which the 
Coursons were sureties.  The Coursons had assigned to The George 
Mason Bank a sum sufficient to discharge the obligation in full, 
regardless of the financial status of the principal debtor.  I 
would hold that under these circumstances, the debtor was not 
insolvent as to this obligation, and the Coursons were entitled 
to have suit instituted against Springfield Associates, Inc. 
 
 
 
 
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Having eliminated the principal debtor as a target because 
of insolvency, the majority then concludes that there was no 
other party to the contract against whom suit must be instituted. 
 To reach this conclusion the majority holds that the sureties 
were not parties to the contract between the principal debtor and 
the creditor, but were parties to a second contract securing the 
indebtedness.  I disagree with this unduly restrictive 
interpretation of Code § 49-26.  As a remedial statute, Code 
§ 49-26 should be liberally construed for the benefit of 
sureties.  Wright's Administrator v. Stockton, 32 Va. (5 Leigh) 
153, 159 (1834); see Univ. of Virginia v. Harris, 239 Va. 119, 
124, 387 S.E.2d 772, 775 (1990). 
 
In Colonial American Nat'l Bank v. Kosnoski, 617 F.2d 1025 
(4th Cir. 1980), a majority of the panel (Judges Bryan and 
Winter, Judge Murnaghan dissenting) ruled that the words "every 
party" in Code § 49-26 include sureties.  The opinion pointed out 
that the original 1794 statute was amended in 1849 to 
substantially its present form to require a creditor to institute 
suit against every party to the contract who is resident in 
Virginia and not insolvent.  The opinion noted that the amendment 
would have been unnecessary if the General Assembly had intended 
that the guarantor could demand suit only against the principal. 
 I agree with this construction of Code § 49-26. 
 
The note of Springfield Associates, Inc. dated September 30, 
1981, in the principal sum of $28,460.50 states that it was 
 
 
 
 
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secured by a deed of trust on property identified as that of the 
Coursons.  This reference, in my view, incorporated the deed of 
trust into the contract between principal and creditor.  See High 
Knob Assoc. v. Douglas, 249 Va. 478, 487-88, 457 S.E.2d 349, 354-
55 (1995). 
 
Moreover, by letter dated May 9, 1984, Springfield 
Associates, Inc., and the Coursons reaffirmed the agreement, and 
the Coursons further verified that their residence remained as 
additional security "behind the corporate note." 
 
Having concluded that the Coursons were parties to the 
contract in question, it follows that I would hold that they 
could and did demand that suit be instituted against them as 
sureties.  No such suit was instituted and I would hold that the 
Coursons did what was required of them and are now entitled to 
relief under Code § 49-26.  For these reasons, I would reverse 
the judgment of the trial court and enter final judgment in favor 
of the Coursons.