Opinion ID: 375917
Heading Depth: 1
Heading Rank: 2

Heading: e., on the contract by which the surety's principal is bound

Text: 18 Edward's and John's liabilities under the guaranty were only as sureties for the Virginia Corporation with respect to the $200,000 loan, not as principal debtors. The Virginia Corporation's liability under the contract of guaranty similarly was exclusively as surety for Edward and John on the $372,272 loan 19 See n.10 supra. Bourne v. Board of Supervisors of Henrico County, supra, is precise on the point:  . . . the guarantor is not a party to the principal obligation. 20 Even less could the legislature have contemplated discharging, as to all the cosureties, including Edward, John, the Partnership, the Virginia Corporation, Ernestine and Ruth, their liabilities, as guarantors, for $372,272 and $200,000. Yet that would be the consequence of the majority's decision, for failure to comply with Kosnoski's request, if the statute indeed extended to him the right to require suit against his cosureties, would also, under § 49-26, lead to forfeiture of the Bank's right to recover from his cosureties and their estates, the money due by any such contract. The effect of failure to institute suit against every party to such contract who resides in this state and is not insolvent, after notice, is an absolute forfeiture of all claims against every surety upon the contract. Edmonson v. Potts' Administrator, 111 Va. 79, 82, 68 S.E. 254, 256 (1910) 21 The statute creates a trap by using the phrase every party to such contract in circumstances where the contract to which reference is intended, i.e., the contract between the creditor and the surety's principal, is intertwined, often in the same document, with the separate and distinct contract between the creditor and the surety himself. The abstruse principles of suretyship are apt to elude the reader of the statute, who reasonably concentrates on every party, but pays insufficient attention, in circumstances of this nature, to such contract. The majority are not the first to misread such contract as extending to the agreement between creditor and surety, rather than to the agreement between the creditor and the debtor, the principal of the surety. The court in Edmonson v. Potts' Administrator, 111 Va. 79, 68 S.E. 254 (1910) fell into precisely the same trap in a case in which a cosurety sought to compel the creditor to sue a fellow cosurety. The point apparently was never made to the court that the statute did not extend to such a demand to sue. The consequence of the misreading of the statute was but harmless error, however, for the court held that the communications on which the cosurety relied did not, in any event, constitute sufficient notice under the statute. The Edmonson opinion emphasizes that the only question decided was whether the notice was sufficient. So the case constitutes no authority contrary to the conclusion I have reached 22 In those circumstances, the subsurety agreement between Kosnoski and Ruth would relate to the guaranty arrangement by which Ruth bound herself to the Bank to remedy any default by the borrowers (Edward, John and the Virginia Corporation). Kosnoski could under § 49-25, as surety for Ruth, have called on the Bank to institute suit thereon (rather than on the contract between the Bank and the borrowers). The February 15, 1978 demand letter sent by Kosnoski's counsel to counsel for the Bank would, in such circumstances, have satisfied the statute's insistence that the demand specify that suit be sought on the contract binding the surety's principal, for the letter demanded that suit be instituted, not only against the borrowers, but against the guarantors as well The applicability of the statute would clearly have been intended by the Virginia legislature in such circumstances, since Kosnoski, as subsurety, would have at risk the entire $150,000 for which Ruth, as a principal under the subsuretyship arrangement, would have indemnified him (not merely the $23,810 which, as cosurety, Ruth, as an absolute maximum, might be liable to contribute to Kosnoski if he completely fulfilled his surety undertaking to the Bank). Kosnoski evidently would fall within the protective scope of the statute if there were delay in proceeding against Ruth, since the delay might deprive him of a reimbursement source for the entire $150,000. 23 Even if there had been a subsuretyship, however, it appears that, nevertheless, in the particular circumstances of this case, Kosnoski has waived his rights under §§ 49-25 and 49-26. His guaranty agreement of August 12, 1976 expressly consented to extensions, . . . indulgences, . . . and compromises by the Bank with respect to any of the indebtedness, liabilities and obligations covered by the notes aforesaid and this guaranty. A decision by the Bank not to collect from Ruth by suit or otherwise would be an indulgence. Simpson, op. cit. n.4, § 42, p. 175. While we need not address the question of whether the benefit of the statute may be waived by contract, if it were necessary to do so, the answer is clear that a waiver is valid and enforceable. As held in J. R. Watkins Co. v. Fricks, 210 Ga. 83, 85, 78 S.E.2d 2, 4 (1953): The right created by the legislature, as embodied in § 103-205 of the Code of 1933, was established solely for the benefit of one who has become surety for another, and such surety may therefore waive it without injuring others and without affecting the public interest; and a waiver of the right, as thus established, does not in any way interfere with the preservation of public order or of good morals. See Annotation, Waiver by Surety Agreement of Benefit of Rule which Releases Surety in Event of Obligee's Failure to Comply with Surety's Demand that He Proceed Against Principal, 89 A.L.R. 570; Austad v. United States, 386 F.2d 147, 150 (9th Cir. 1967); United States v. Crain, 589 F.2d 996, 1001 (9th Cir. 1979); Commonwealth ex rel Department of Justice v. National Surety Co., 310 Pa. 108, 164 A. 788 (1932); Owensboro Savings Bank & Trust Co.'s Receiver v. Haynes, 143 Ky. 534, 136 S.W. 1004 (1911). Nor need we consider whether Kosnoski's delay in resorting to the statute after the Bank's notice on September 30, 1977 of default on both loans, until February 15, 1978, over two months after the Bank sued him on December 8, 1977, created any waiver or estoppel. The circumstances do suggest, however, that the demand that guarantors be sued was not made in fulfillment of the statutory purpose: namely, to protect a surety from having to stand by helplessly while someone else, who could minimize or eliminate the surety's secondary liability, wastes his assets. Wright's Administrator v. Stockton, 32 Va. (5 Leigh) 66, 68 (1834). Rather Kosnoski's action appears intended simply as a strategic ploy to set up a claim of release for noncompliance with the statute. 24 It may merit mention that the court in Philippi sensibly recognized the right of one cosurety, such as Kosnoski, to proceed in equity against other cosureties (as, for example, Ruth) to insure payment of their pro rata shares of the default of the principal debtor. See Simpson, op. cit. n. 4, § 46, p. 198. As the West Virginia court pointed out, the fact that the statute substantially identical with §§ 49-25 and 49-26 did not afford a right to the cosurety to compel the creditor to go after cosureties did not preclude the cosurety from himself pursuing in equity his remedy against other cosureties 25 Other authority on the point is non-existent as far as I have been able to discover. The district judge cited two cases which arguably might support Kosnoski's position. See Colonial American Nat'l Bank v. Kosnoski, 452 F.Supp. 135, 137 (W.D.Va.1978). The cases are ably distinguished by the district judge. There is an additional reason, over and beyond the critical differences in statutory language, why the cases afford no authority contrary to the position espoused in this dissenting opinion. Moore v. Peterson, 64 Iowa 423, 20 N.W. 744 (1884) and W. T. Rawleigh Co. v. Moore, 196 Ark. 1148, 121 S.W.2d 106 (1938), as well as the earlier Iowa case of Harriman v. Egbert, 36 Iowa 270 (1873), all concerned the adequacy of the demand by the surety to the creditor that suit be filed. Applying the principle that statutes in derogation of the common law are to be strictly construed, those cases refused to hold that the demanding surety was discharged from liability, because the demand had not been couched in terms of suing the other cosureties, as well as the principal. Such cases, whose results favored the creditor, are scant authority for the proposition Kosnoski here urges which would, if applied, cost the creditor Bank its rights against all the cosureties 26 Cf. Edmonson v. Potts' Administrator, 111 Va. 79, 82, 68 S.E. 254, 256 (1910), which reached a similar result on analogous facts. The interpretation given § 49-26 was very restricted. The court commented: That section is very stringent in its terms.