Court Opinion

ID: 4711152
Source: CourtListenerOpinion
Date Created: 2021-08-12 00:36:37.932135+00
Date Added: 2024-06-11T08:07:07.418346
License: Public Domain

Sanders, J.
(dissenting) — Of course I dissent for self-evident reasons. Lessors who subordinate their reversion-ary fee interest may stand as principals to the creditor and sureties to the lessee. As such they are entitled to reimbursement from the lessee after they have discharged an obligation for which the lessee was the principal obligor. This is the necessary result in law and equity.
When Mid-Valley and the Honeys signed their original lease in February 1984 they agreed their legal relationship would be that of landlord-tenant. However, the rider to the subsequent June 1985 deed of trust did not limit the relationship between the two. When they signed the rider the parties had neither discussed nor entered into any agreements or understandings regarding the consequences of a future default to the creditor nor had they specified the Honeys’ rights and remedies if their interest *226in their property were foreclosed. Absent an agreed delineation of the rights and remedies of these parties in case of default, normal rules of suretyship apply. The Honeys became sureties by pledging their property as security for Mid-Valley’s debt without assuming a personal obligation. See Fluke Capital & Management Servs. Co. v. Richmond, 106 Wn.2d 614, 620-21, 724 P.2d 356 (1986). As such they were entitled to indemnification by the principal, Mid-Valley. "A[ ] . . . surety who is required to pay the obligation of his principal (the accommodated party) may recover the amount paid with interest. The action is not upon the note, but is an obligation or promise implied by law.” Eder v. Nelson, 41 Wn.2d 58, 62, 247 P.2d 230 (1952) (citations omitted).
It has long been recognized in this State that "while comakers to a written promissory obligation may sign and appear on the face of the writing as principals, they may in fact, as between themselves, occupy the relation of principal and surety, and, as between themselves, their true relationship may be established by parol or circumstantial evidence.” Leuning v. Hill, 79 Wn.2d 396, 400, 486 P.2d 87 (1971). This premise holds true because " '[i]t is immaterial in what form the relation of principal and surety is established, or whether the creditor was or was not contracted with in that relation. The relation is vested by the arrangement and equities between the debtors, and may or may not be known to the creditor.’ ”State of Wis. Inv. Bd. v. Hurst, 410 N.W.2d 560, 563 (S.D. 1987) (quoting Heinrich v. Magee, 52 S.D. 371, 217 N.W. 631, 634 (1928)).
It is also true that "[o]ne who signs a security document or other contract as a principal will be held as such even though the creditor knows that as between the signer and his fellow obligor, the former is only a surety,” Matthews v. Hinton, 234 Cal. App. 2d 736, 44 Cal. Rptr. 692, 696 (1965); however, this rule does not alter the principal’ and the surety’s relationship but merely estops a surety who signs a security document as a principal from denying his *227status as a principal to the creditor. "Whether one is a surety depends not so much upon his relation with the creditor as upon his relation to the principal debtor. In such a tripartite relationship one of the obligors may be a surety in the sense that, if he is called upon to pay the debt, he may indemnify himself by an action against the primary obligor; nevertheless, so far as the creditor is concerned, he contracts for a primary liability.” Id. at 695-96 (emphasis added) (citations omitted). The Court of Appeals therefore correctly concluded the Honeys are not estopped from relying on their status as sureties by the form of their signature on the deed of trust as against the principal7
The majority asserts lessors cannot be sureties when they subordinate their interest for financial gain. The flaw in this reasoning is the conclusion that because consideration flowed to the Honeys, the Honeys were a principal and not a surety. However, the majority mistakenly equates the benefit the Honeys would have received from the completion of the project with the consideration for the main obligation, i.e., the loan proceeds, flowing from the lender to the principal. The Honeys did not receive any of the loan proceeds. "The principal and not the surety, however, is the one to whom or for whom the consideration for the main obligation flows." Arthur Ad-elbert Stearns, The Law of Suretyship § 1.4, at 3 (James L. Elder ed., 5th ed. 1951) (emphasis added). This court has recognized that a surety may indirectly benefit from the relationship without destroying his role as a surety:
*228It has . . . been long recognized that when a surety, to protect his interests, discharges an obligation the primary responsibility for which rests with the principal obligor, an implied promise to indemnify or reimburse the surety comes into being on the part of the principal, which implied obligation, as such, is enforceable by the surety against the principal.
Leuning, 79 Wn.2d at 400 (emphasis added). Here the main consideration, the Rainier Financial Services Company loan, flowed to Mid-Valley Mall Ltd. Partnership, while the Honeys merely benefited secondarily from the subordination. Mid-Valley Mall is therefore the principal obligor and the Honeys are entitled to be indemnified or reimbursed by it.
Finally, while the majority errs by failing to recognize that a surety relationship could and does exist between the Honeys and Mid-Valley, the concurrence acknowledges this relationship but would deny the Honeys’ right to indemnification because "the equities” do not support it. Concurrence at 225. The concurrence cites not a scintilla of precedent to support this claim. It uses the term "equity” as if such is a ticket to anywhere the jurist might like to go. The concurrence ignores the fact that the law of suretyship is equitable by its nature; whereas, the nonexistence of a contractual clause assigning risk is the very reason the court assigns the risk as per the suretyship rule: *22974 Am. Jur. 2d Suretyship § 171, at 120 (1974) (emphasis added) (footnotes omitted). This rule is equitable assurance to the surety, who has paid the debt of another, that he will be indemnified. See State Fidelity Mortgage Co. v. Varner, 740 S.W.2d 477, 480 (Tex. Ct. App. 1987) ("[A] surety who has paid the debt of her principal is subrogated to a right of action against the principal for the debt so paid.”); Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136-37, 83 S. Ct. 232, 9 L. Ed. 2d 190 (1962) ("Traditionally sureties compelled to pay debts for their principal have been deemed entitled to reimbursement, even without a contractual promise . . . .”), superseded by statute as stated in In re Nemko, Inc., 143 B.R. 980 (Bankr. E.D.N.Y. 1992).
*228Irrespective of the existence of an express contract of indemnity it is an established rule of law, based on equitable considerations, that where one person is in the situation of a mere surety for another, whether he became so by actual contract or by operation of law, and pays or is compelled to pay the debt which the other in equity and justice ought to have paid, or extinguishes it so that it is no longer a debt against the other, he is entitled to relief against the other, who was in fact the principal debtor; that is, the law in such cases implies a promise on the part of the principal to reimburse the surety for the amount paid.
*229The Honeys, as sureties, are entitled as a matter of law to reimbursement precisely because they did not specifically assign the risk of loss in the contract. "[CJontracting parties are generally deemed to have relied on existing state law pertaining to interpretation and enforcement.” Margola Assocs. v. City of Seattle, 121 Wn.2d 625, 653, 854 P.2d 23 (1993). A surety who pays the obligation of the principal is entitled to indemnification. Eder, 41 Wn.2d at 62. The right to indemnification arises not out of the language of the contract, but is implied by law. Id. The Honeys were not required to further assign the risk of contract breach because the common law of surety, derived from equitable considerations, already provides that they are entitled to reimbursement from the principal, Mid-Valley. A court does not write a new contract for the parties when it recognizes a surety’s common-law right of indemnification; it merely construes the existing one according to established criteria.
The decision of the Court of Appeals should be affirmed and the case should be remanded to the superior court. I dissent.
*230Durham, C.J., and Johnson, J., concur with Sanders, J.
Reconsideration denied May 20, 1997.

 None of the courts in other jurisdictions have foreclosed the existence of a surety relationship when lessors subordinate their reversionary interest even in relation to the creditor.
Owners argue that holding them to be principals would render that portion of SDCL 56-2-1, which provides that a suretyship arises when one 'hypoth-ecates property’ to secure the debt of another, a nullity. To the contrary, we are not holding that when one hypothecates property to secure the debt of another that he is automatically a principal. We merely hold such a relationship arose under the facts of this case .... Owners could attempt to establish that they were in fact sureties, even though the mortgage was arguably signed as principals.
Hurst, 410 N.W.2d at 564.