Opinion ID: 1659755
Heading Depth: 1
Heading Rank: 3

Heading: Release of the principal.

Text: Defendants argue that inasmuch as the settlement agreement was a release of Akwa-Downey from further liability upon the debts, evidenced by the notes alleged, such release also released the defendants from liability on the debt. Generally, release of principal also releases the surety. National Bank of La Crosse v. Funke (1934), 215 Wis. 541, 255 N. W. 147; Stearns, Suretyship, p. 174, sec. 6.42; 50 Am. Jur., Suretyship, p. 987, sec. 126. The reasons behind such a rule are stated in Simpson, Suretyship (hornbook series, 1950), pp. 296-301, sec. 63: It has always been held that the creditor's release of the principal discharges the surety. The reason most often given is that since the debt is discharged, the surety's right to be subrogated to the remedies thereon has been destroyed by act of the creditor. Upon payment, the surety is entitled to be subrogated to the creditor's claim and secure a judgment upon it in a suit. Since the release would be a defense to the principal in such a suit, the surety must be discharged. Any unwarranted interference by the creditor with those rights of the surety which are resultant after payment relieves the surety of the liability to pay; not because the creditor is to be penalized, but because the surety is to be protected in his rights.... Various other reasons have been advanced for the rule that the creditor's release of the principal discharges the surety. It has been said that the surety's obligation is so far accessory that it cannot survive extinguishment of the principal's debt. Otherwise stated, that `no collateral promise to pay the debt of another can have any force when the debt of the other has been satisfied.' The Restatement of Security advances this reason in terms as follows: `Where the principal and surety are not bound jointly, but the obligation of the surety is to answer for the duty of the principal, the termination of the principal's duty is also a termination of the surety's obligation. If the principal has no longer a duty as a result of the creditor's act, the surety should not be held to an obligation to answer for a default of that duty.' . . . Another reason for the rule, advanced by a learned English judge, is the reason why a simple release of the principal debtor discharges the surety is, that it would be a fraud on the principal debtor to profess to release him, and then to sue the surety, who would in turn sue him.' The Restatement of Security puts this reason persuasively as follows: `If the surety could be compelled to pay after the principal's release, he would be entitled to reimbursement if he had become surety at the principal's request or with his consent. Such an outcome would be unfair to the principal after a release because it would afford the creditor a means of attacking the principal indirectly through the surety.' . . . A reason better than any of the foregoing for discharging the surety is that payment by the surety after the creditor has voluntarily released the principal was not contemplated. When a surety contracts, he does so for the purpose of protecting the creditor from loss or inconvenience caused by the principal's nonperformance, but the nonperformance contemplated is one that is not caused or encouraged by the creditor himself. It could not have been contemplated that the surety should make good a debt that all parties originally expected the principal to pay when the creditor, by giving him a release, causes him not to pay. If the creditor makes performance by the principal impossible, it is quite clear that he has no recourse against the surety; he causes the principal's nonperformance. The function of a surety is to protect his promisee against loss caused by the principal, but not against that caused by the promisee himself.... Two exceptions have developed to this rule. Where the creditor releases a principal, the surety is discharged unless the creditor in the release reserves his rights against the surety or the surety consents to remain liable notwithstanding the release. [18] It is generally held that where the creditor releases the principal, an express reservation will preserve his claim against the surety. [19] The release is construed as a covenant not to sue, thus the principal debt remains alive and the surety is not discharged. In Simpson, Suretyship (hornbook series, 1950), pp. 302, 303, sec. 64, it is stated: The rule that the surety is discharged by the creditor's release of the principal is not applied when the release reserves to the creditor his remedies against sureties. When the principal accepts a release containing such a reservation, he is said impliedly to consent that the surety's rights shall not be impaired. An interpretation that a release with reservation of rights against the surety is actually a release discharging the debt gives effect only to the word release, and would disregard the reservation, and so is not admissible. The only interpretation which gives effect to the whole agreement of the parties is that which construes it as a covenant not to sue. It follows that the debt is not discharged, and so the surety's remedies thereon remain unaffected. Since this is so, the surety remains liable to the creditor. 'The creditor, by a release with reservation of rights against the surety, was in effect notifying the principal that, in spite of the release, the surety might pay as the result of compulsion or voluntarily and that the principal would then be liable to reimburse the surety.' Defendants concede that a reservation of rights preserves the creditor's rights against the surety, but argue that the reservation was not effective in the instant case, in that the transfer and cancellation of the notes effectively destroyed defendants' right of recourse, notwithstanding the express reservation, and that, in fact, defendants' liability is increased by the release of the principal. The former contention has been discussed and what has been previously said is applicable here. While defendants' last argument points to a criticism of the above-mentioned exception to the rule, the majority of courts have rejected such attacks. It is stated in Simpson, Suretyship (hornbook series, 1950), pp. 303, 304, sec. 64, that: A serious criticism of the rule is that it assumes, contrary to fact, that since the surety's rights after payment, of subrogation and reimbursement, continue after a release with reservation, the surety has suffered no injury. But actually he has suffered a very serious one, in that his risk of having to pay the debt has been materially increased. When the surety contracts, he assumes the risk of having to pay the debt if it is not paid by his principal, but he contemplates that his principal shall continue to have all the compulsion to perform that his undertaking originally placed upon him. By the creditor's release, whether with or without reservation of rights against sureties, some of this compulsion is removed, and the creditor thereby makes it certain that the principal, who was originally expected by all parties to perform as he agreed, will not do so. To hold the surety liable under such circumstances is unjust, because it imposes upon him a wholly different risk from that which he intended to assume. The answer to this objection, which is implicit in the decisions, is that any hope or expectation or right which the surety has that the principal will pay and so relieve the surety from the necessity of doing so lies between the surety and the principal. As to the creditor, the surety has promised to pay; and so long as the creditor has done nothing which destroys the [sic] or postpones the surety's legal rights consequent upon payment, the surety is not discharged. ... In the instant case, plaintiff's agreement with Akwa-Downey, and others, expressly reserved the rights of the plaintiff to proceed against defendants. The defendants were not discharged by the settlement agreement and subsequent release of Akwa-Downey. The complaint states a good cause of action on the contract of guaranty and the plaintiff has not inadvertently or otherwise created or conceded affirmative defenses fatal to the plaintiff's cause of action. While the plaintiff raises the issue as to whether the complaint alleges a cause of action in tort, based upon certain unauthorized actions on the part of the defendants, it is unnecessary for this court to rule thereon since the trial court's order overruling the demurrer must be sustained and the case remitted for further proceedings. By the Court. Order affirmed.