Court Opinion

ID: 8824991
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:44:15.488165+00
Date Added: 2024-06-11T17:04:45.082464
License: Public Domain

Mr. Justice Goodwin dissenting. As I am unable to concur in the conclusions reached by the majority of the court, it seems desirable that I should set out the reasons which have compelled me to dissent. The main facts necessary to an understanding of the questions involved in this case, briefly stated, are as follows: Appellee and his brother, Samuel J. Walker, executed a promissory note dated February 19, 1870, for $40,000, payable three years after date to the order of Albert Price, with interest at eight per cent, per annum and ten per cent, after due, secured by a trust deed executed by the parties to the note; appellee had no interest in the mortgaged property, and while he was a joint maker of the note and his name was signed above that of his comaker, he, in fact, signed only as surety. Andrew B. Price, executor of the estate of the payee, filed a bill April 9, 1878, to foreclose the mortgage given to secure the note in question. The principal debtor, Samuel J. Walker,- died in 1883, and some time prior thereto both he and appellee had been discharged in bankruptcy. The executor and heirs of the payee executed a certain instrument under seal, dated August 1, 1887, reciting that in consideration of $4,000 and some real estate (which was not described) they sold, assigned, transferred and conveyed to one Granville W. Browning all their right, title and interest in and to the note in question, and in the trust deed given to secure the same, and gave him full power and authority in his or their names to collect the money due and carry on the suit pending. Prom that time until July 6, 1903, Browning repeatedly appeared in court as solicitor for the original complainant, and secured the entry of numerous orders releasing certain pieces of property from the lien of the mortgage; he also filed a supplemental bill in the name of the original complainant in June, 1894. April 3, 1903, a motion to dismiss was made on the part of certain defendants, on the ground that the evidence taken before Master in Chancery Cooper disclosed that the note in question had been tarnsferred to Browning as the agent of appellee. By leave of court, appellee filed his supplemental bill July 13,1903, against numerous defendants, including the appellants in this cause, in which he rehearsed the various steps in the litigation, alleged that he signed the note and trust deed as surety only, and sought to enforce the lien of the mortgage for the balance due on the note, on the ground that he had purchased it through Browning, who had acted as his agent. It appears from the master’s report that in signing the note he did act as surety, and that Browning had acted solely as his agent in acquiring the note. It further appears that appellee, at the time he filed his bill, had already received payments in excess of the amount paid by him in acquiring or discharging the note in question. The chancellor, however, found that there was still due on the note on January 10, 1913, the sum of $42,747.54, and entered a decree allowing appellee to foreclose for this amount and interest thereafter. The main grounds upon which appellants seek a reversal of this decree are, first, that the acts by which appellee attempted to invest himself with title to the note constituted a payment and extinguishment of it, and that though he be a surety, his sole right in equity is to be. subrogated to the rights of the payee for the purpose of indemnity only; and second, that the supplemental bill filed in this cause in 1903 constituted a supplemental bill in the naturé of an original bill, and as it was not, filed until sixteen years after appellee’s rights, if any, accrued, he was barred by his laches. It is a very ancient and, I believe, indisputable principle that because of the mutually fiduciary relations which exist between principal and surety, the surety is disabled from dealing with the subject-matter of the obligation in such a way as to gain for himself a profit. Upon this principle both the civil and common law are agreed. In a Louisiana case in which the civil law applicable to the question is discussed, a distinguished authority is quoted as saying: ‘ ‘ Suretyship is entered upon as a means of service; not as an instrument of profit.” (Succession of Dinkgrave, 31 La. Ann. 707.) In Reed v. Norris, 2 Mylne & Craig, 362, Lord Cottenham, then Lord Chancellor, said p. 374: “The other question is, how far the representatives of the son, the surety, having come to an arrangement with Lord Vernon’s executors, by which the bond for 500 pounds has been got rid of and discharged, are entitled, as against the father’s estate, to demand more than they have actually paid to Lord Vernon’s executors in exoneration of the liability of the son’s estate upon the bond for 500 pounds. “Now, if there had been no authority upon this subject, I should have found very little difficulty in making a precedent for deciding that, under these circumstances, the surety is not entitled to demand more than he has actually paid. I take the case of an agent. Why is an agent precluded from taking the benefit of purchasing a debt which his principal was liable to discharge? Because it is his duty, on behalf of his employer, to settle the debt upon the best terms he can obtain; and if he is employed for that purpose, and is enabled to procure a settlement of the debt for anything less than the whole amount, it would be a violation of his duty to his employer, or, at least, would hold out a temptation to violate that duty, if he might take an assignment of the debt, and so make himself a creditor of his employer to the full amount of the debt which he was employed to settle. Does not the same duty devolve on a surety? He enters into an obligation and becomes subject to a liability, upon a contract of indemnity. The contract between him and his principal is, that the principal shall indemnify him from whatever loss he may sustain by reason of incurring an obligation together with the principal. It is on a contract for indemnity that the surety becomes liable for the debt. It is by virtue of that situation, and, because he is under an obligation as between himself and the creditor of his principal, that he is enabled to make the arrangement with that creditor. It is his duty to make the best terms he can for the person in whose behalf he is acting. His contract with the principal is indemnity. Can the surety, then, settle with the obligee, and instead of treating that settlement as payment of the debt, treat it as an assignment of the whole debt to himself, and claim the benefit of it, as such, to the full amount; thus relieving himself from the situation in which he stands with his principal, and keeping alive the whole debt? “As I have said, I would make a precedent if there were none; but it is very satisfactory to me to find that the question came before Lord Elden, and that he decided it in the cases which have been cited, viz., Ex Parte Rushforth” (10 Ves. 420), “and Butcher v. Churchill” (14 Ves. 567). “Lord Eldon did not decide those cases upon particular grounds of equity between the parties; but he lays it down as what he considers to be the rule of this court, that where a surety gets rid of and discharges an obligation at a less sum than its full amount, he cannot, as against his principal, make himself a creditor for the whole amount; but can only claim, as against his principal, what he has actually paid in discharge of the common obligation.” It is very clear, then, from the authorities in this case, that if the land mortgaged were still held by the original principal, appellee could not enforce the mortgage for a greater sum than the amount he had actually paid. He would be entitled to be subrogated to the rights of the payee for the purpose of indemnity and nothing else, regardless of whether the transaction by which he acquired the note took the form of a purchase or a discharge. The principle is amply sustained by the authorities, and is accepted as unquestioned by that learned author and jurist, Joseph Story, who says, in his work on Equity Jurisprudence, section 316: “Upon these principles if an agent sells to his principal his own property as the property of another, without disclosing the fact, the bargain, at the election of the principal, will be held void. So if an agent employed to purchase for another purchases for himself, he will be considered as the trustee of his employer. Therefore if a person is employed as an agent to purchase up a debt of his employer, he cannot purchase the debt upon his own account, for he is bound to purchase it at as low a rate as he can, and he would otherwise be tempted to violate his duty. The same rule applies to a surety who purchases up the debt of Ms principal. And therefore in each case if a purchase is made of the debt, the agent or surety can entitle himself, as against his principal, to no more than he has actually paid for the debt.” This principle was approved and applied by our Supreme Court in Coggeshall v. Ruggles, 62 Ill. 401, where it held that the surety who had, by an assignment to another, become the purchaser of his principal’s obligation, was only entitled to indemnity. The court said (p. 404): “Having acquired, by his arrangement with Beasely, the right to control the judgment, he must be regarded in a court of equity as having paid it, except so far as it would be just to allow the sheriff’s certificate of sale to be treated as a security. The principle is the same as when a surety buys the debt against his principal for less than its-face. He can enforce payment to himself of whatever he has actually paid, but only of that amount. Story’s Eq. Jur., sec. 316; Reed v. Norris, 2 Mylne & Craig, 361.” The appellee in this case, however, contends that the case at bar is distinguishable for the reason that the relation of .surety and principal is personal, and does not extend to those who have acquired title to the mortgaged property. Clearly, in this contention counsel ignore the only ground upon which the surety is allowed to recover at all, either at law or in equity. The debt secured by the mortgage is an obligation of which the appellee is a joint maker. It was, of course, impossible for him to acquire it without extinguishing it. But the law, for the purpose of protecting a surety who, in order to protect himself, has been obliged to discharge the original obligation, permits the surety to stand in the shoes of the obligee; but clearly, under the authorities, it permits him to do this for the sole purpose of indemnity. For that purpose, and for that purpose only, the obligation is kept alive in equity. The reason that the surety was allowed redress at all unquestionably was that the principal was bound, in-conscience, to make good the loss to the surety resulting from his own failure to discharge the obligation. The reason thai; he is not allowed to become a purchaser by assignment to some one else, and enforce the obligation to its full extent at law or in equity, is the mutually fiduciary relation which exists between principal and surety. The law recognizes that the affairs of the debtor may become involved, and that he has the right, therefore, to extricate himself upon the best terms obtainable. A surety, by reason of the fact that he is a surety, is brought into direct communication with the creditor and enabled to negotiate a settlement. The relation of principal and surety is manifestly one of mutual confidence, and it would be highly inequitable, therefore, to permit the surety to take advantage of the situation and become á competitor with his principal, and forestall him in the purchase of the obligation. But his principal is bound in good faith to indemnify him, and indemnity is.well said to be the full measure of the principal’s implied contract. But so far as the purchasers of the mortgaged property are concerned, there is no direct obligation running from them to the surety who has purchased the note. A mortgage of the character of the one in the case at bar is purely a collateral undertaking, dependent for its existence upon the continued existence of the original obligation. By the mortgage in question, the property stood charged with the joint debt of appellee and his principal; when appellee purchased' it he discharged it, but became subrogated to the rights of the payee for the purpose of securing indemnity. To that extent his principal became obligated to him, and for the purpose of enforcing that obligation equity kept the mortgage alive and gave him the right to resort to ■ the mortgaged property. In other words, equity, for the purpose of indemnifying a surety, permits him to stand in the shoes of the creditor for the purpose of enforcing the obligation which his principal owes him, hut the burden with which the mortgaged property is charged is the obligation of the principal debtor, and cannot be extended beyond that obligation, which, in the case of appellee, is to indemnify him for the amount expended in acquiring their joint obligation. The appellee further contends that the principles governing surety and principal do not apply in this case because the principal maker died several years before appellee purchased the note, and they both had, prior to that time, been freed from the obligation of this debt by his discharge in bankruptcy. In the first place, I am unable to see how the death of the principal could in any way affect the status of the appellee, for certainly all the obligations which he owed the principal he continued to owe to the principal’s estate, just as the administrator continued to be obligated to him to the same extent to which the principal had been in his lifetime. (See Reed v. Norris, supra.) I think, moreover, that the ease is not affected by the bankruptcy of the principal and surety. The original obligation of the principal was not extinguished by his discharge in bankruptcy, although the remedy of the creditor might be confined to the mortgaged property. It must be noted also that the discharge in bankruptcy did not extinguish the debt of either appellee or his principal, but, at most, gave them a means of defending against the enforcement of the obligation if they saw fit to use it. The obligation itself remained, and with it a moral duty to discharge it. Appellee’s discharge in bankruptcy was, at most, a shield which might or might not be successfully interposed to protect him against a pursuing creditor. In Marshall v. Tracy, 74 Ill. 379, an action was brought upon a debt, and bankruptcy was pleaded, to which the plaintiff replied a new promise. In affirming a judgment in favor of the plaintiff, our Supreme Court said (p. 379): <:One question raised was, whether appellee could declare on the original cause of action, or whether he was bound to declare specially on the alleged new promise. Chitty, in his work on Pleading, states the rule to be ‘when the subsequent promise is effectual, it is sufficient to declare upon the original consideration, unless where the promise is conditional, in which case it seems to be necessary for the creditor to declare specially: ’ “The authorities are not all harmonious on this question, but the doctrine best sustained by authority is that the original cause of action is not destroyed by the discharge in bankruptcy. The bar which the discharge interposes may be removed by an unconditional new promise, and the debt revived upon the original consideration. Shippey v. Henderson, 14 Johns. 178; Way v. Sperry, 6 Cush. 238; 1 Chitty’s Pleading, 54.” In Bush v. Stanley, 122 Ill. 406, the Supreme Court said (p. 415): “We said in Marshall v. Tracy, 74 Ill. 379: ‘The doctrine best sustained by authority is, that the original cause of action is not destroyed by the discharge in bankruptcy. The bar which the discharge interposes may be removed by an unconditional new promise, and debt revived upon the original consideration. ’ And this was re-affirmed in Classen v. Schoenemann, et al., 80 Ill. 304. The discharge is analogous, in effect, to the Statute of Limitations, in so far as it does not annul the original debt, but merely suspends the right of action for its recovery. (F. and M. v. Flint, 17 Vt. 508; 44 Am. Dec. 351.) It follows, necessarily, that the privilege is purely personal to the bankrupt, and if he does not choose to avail of it, no one else can do it for him.” It is clear, then, that the relation of principal and surety did not cease to exist by reason of their discharge in bankruptcy, and that the only change effected by that discharge was to give them a method of preventing the enforcement of the obligation, which might or might not be successfully pursued. If the surety chose to purchase the obligation, then, he effectually extinguished it at law, notwithstanding the fact that he had a defense which he might have interposed if suit had been brought against him. In this aspect of the case, as in the other, I see no way to escape the conclusion that a purchase by a maker of a note extinguishes it, and that if a joint maker can enforce it at all against his comaker, it can only be upon the ground that as between him and his comaker he is a surety, and entitled to indemnity. Leaving that fact out of consideration, he is entitled to nothing at all. In this case the record discloses that he has been fully indemnified. Counsel for appellee, in support of their position, cite many cases holding that an accommodation indorser may purchase the note and enforce it in full against the maker. It máy be noted here that the position of the accommodation indorser in the cases cited is entirely different from that of a joint maker who is, in reality, a surety. The express undertaking of the maker of a note to any indorser is to pay him in accordance with the terms of the note. The liability of the principal maker to a joint maker who signs as surety is, on the other hand, an implied promise to indemnify him. If one, purely for the accommodation of the maker of a note, consents to assume the position of an indorser, he, of necessity, becomes entitled to all the rights and remedies of an indorser, and is in no way differently situated from one who has come into the position of an indorser in the ordinary course of business. The maker’s express contract with every indorser, whether accommodation or otherwise, is payment in accordance with the terms of the instrument, and not indemnity. The cases cited by counsel for appellee on the question of agency are also clearly beside the point. An agent who purchases property for himself when under a duty to purchase it for his principal, or who acquires the property or obligation of his principal, acquires the legal title. If the principal desires to take advantage of the purchase in the one case, or cause the sale to he set aside in the second, he must, in some appropriate way, make it clear that he has elected to do so. But the surety, who purchases the obligation of his principal, becomes possessed of no legal title, and to enforce his rights he must ask in a court of equity, to be subrogated to the right's of the obligee, or sue at law upon his principal’s agreement of indemnity which the law implies, and, as we have seen, in both cases, the measure of his relief is the same. Counsel for appellee also attempt to sustain the decree upon the ground that as between the purchasers of the property and the appellee, the equities are with the latter. As we have seen, however, the record discloses that the appellee, a surety, purchased an obligation, of which he was a joint maker, from the representatives and heirs of the payee. The well-settled principles of law, as they existed at the time he made the purchase, entitled him to be indemnified on account of the loss sustained in discharging himself from his obligation as surety. Clearly, the law entitled him to this and. to no more, and he must be presumed to have acted with a full knowledge of his legal rights. He has, as we have seen, received everything that the law entitled him to. Let us look at it from the broad principles of justice and equity. The surety ordinarily, by reason of his relation to his principal, has some intimate knowledge of his principal’s affairs and in regard to the value of the property pledged as security. If the principal is embarrassed, ordinarily he negotiates with his creditors and settles his liabilities upon the best terms obtainable. The surety is brought into communication with the creditors by reason of the fact that the obligation is also his own. It would be manifestly a breach of faith for him, in competition with his principal, to acquire the obligation and then enforce it in full. The law declares that an obligation purchased by a joint obligor is extinguished; equity says, we will keep it alive, not for the purpose of allowing the surety to enforce it, but for the purpose of compelling the principal to do that which in good conscience he should do, namely, indemnify the surety. If, moreover, property is mortgaged to secure the obligation, and comes into the hands of third persons, equity will go a step further, and say that although the obligation is extinguished at law, it will keep it alive for the purpose of securing indemnity for the surety. But counsel wishes us to say that equity must go a step still further, and say that it will keep the obligation alive for the purpose of allowing the surety and co-obligor to enforce it against the purchasers of the mortgaged property for the full amount of the original obligation. I do not think that a single case cited by counsel for appellee sustains this position. Clearly, the purchaser of property, whether he gets it by direct grant or in satisfaction of a judgment or decree, is entitled, under every principle of equity, to stand exactly in the shoes of the person through whom he derives title. The argument of counsel that the purchasers of the property presumably obtained it for its value, less the amount of the incumbrance, seems sophistical and fallacious. The principal, when the property was in his hands, had the right to relieve it from the incumbrance of the mortgage upon the best terms obtainable, and without competition by his surety. When, therefore, third persons derived title through him, they became possessed of this same right. I see no equitable reason for saying that the appellee was entitled to recover a greater sum when the land was in the hands of third persons than he would have been had it still remained in the hands of his co-obligor. As I am of the opinion that for the reasons already indicated, the decree should be reversed and the cause remanded with directions to dismiss the supplemental bill, I do not think that it is necessary to discuss the other points raised.