White's Adm'r v. Life Ass'n of America

63 Ala. 419

• Court: Supreme Court of Alabama
• Decided: December 15, 1879
• Status: Published

Opinion

BBICKELL, C. J.

The contract of suretyship differs materially from that of a guarantor, bound by a separate, distinct contract from that of the principal, founded usually on another consideration, entitled to notice o.f the default of the principal, and not chargeable with non-performance until such notice is given. 1 Arising from joining in the making of a promissory note, joint and several in its terms, not negotiable, the consideration moving only to the principal, it was defined in Evans v. Keeland, 9 Ala. 46, as “ a contract whereby one person engages to be answerable for the debt, default, or miscarriage of another. It is an obligation accessorial to that of the principal debtor: the debt is due from the principal, and the surety is merely a guarantor for its payment.”

The contract of a surety imports, it is said by Judge Story, entire good faith and confidence between the parties, in regard to the whole transaction. The creditor, being informed of the relation, is bound to the duty of disclosure of all facts and circumstances, which are calculated to affect materially the discretion of the surety, or the degree of his responsibility. — Railton v. Matthews, 10 C. & E. 934; Hamilton v. Watson, 12 lb. 109; Owen v. Homan, 3 Mac. & Gr. 378 Pidcock v. Bishop, 5 Dow. & Ry. 505. The good faith, which must be observed in the making of the contract, must be kept inviolate in all subsequent transactions between' the creditor and principal. The proposition is thus stated in a general form: “ If a creditor does any act injurious to the surety, or inconsistent with his rights; or, if he omits to do any act, when required by the surety, which his duty enjoins him to do, and the omission proves injurious to the surety; in all such cases, the latter will be discharged.” — 1 Story’s Eq. § 324-5.

_ We have numerous decisions, in which these general principles have been applied, and especially directed to a consideration of acts or omissions of the creditor, subsequent to the making of the contract, which have been relied 'upon as relieving the surety from liability. Any alteration of the contract, without the consent of the surety, as to him extinguishes its obligation. It ceases to be the contract into which he entered; and though the alteration may not work injury to him, he is discharged, because he has not given assent to the new contract, and the original contract, to which assent was .given, has been displaced and extinguished. Comegys v. Booth, 3 Stew. 14; Pyke v. Searcy, 4 Porter, 52; McKay v. Dodge, 5 Ala. 388. The time of performing the contract, the day of payment, may be extended, by some subsequent arrangement between the creditor and the principal, to which the surety does not consent. If there is such an agreement, the surety is discharged, because the burdens of the contract are enlarged; there is, practically, a change of the original contract — the creditor places himself in a position, in which he cannot, on notice from the surety, proceed to sue on the contract, or respond to the decree of a court of equity, the surety has a right to obtain, compelling him to sue the principal. Here, again, the inquiry is not, whether practically any injury has resulted to the surety. It is- enough that the arrangement has been entered into without his consent; and from all such transactions good faith to the surety compels the creditor to abstain.

Mere gratuitous indulgence of the principal, whether extended at his request, or without it yielded by the creditor from sympathy, from an inclination to favor him, or the result of mere passiveness, will not operate to discharge the surety. There must be an agreement, founded on a valuable consideration; for, as we have said, there is practically a change of the original contract — a new contract, into which the surety has not entered. The length of the time of indulgence, or extension, is not material. The creditor cannot, for a day, or an hour, bv an agreement to which the surety does not yield assent, tie up his hands, so that the surety would be deprived of the right to proceed instantly against the principal, on the payment of the debt; nor hold him to the agreement made alone with the principal. — 2 Brick. Dig. 385, §§ 160-165. The main proposition, on which the chancellor rendered the decree now assailed, and which is now advanced to support it, is affirmed in numerous authorities, and its correctness has not been, and cannot be questioned. That proposition may be thus stated: Mere passiveness, or mere delay in suing the principal debtor, or in the prosecution of execution against him after judgment, will not discharge the surety. The duty of active diligence in the prosecution of suits, or of execution against the principal, can be devolved on the creditor by the surety, if he desired, by requesting it. But, if he is himself passive — if he does not, by preferring the request, quicken the creditor into activity, there is no room for, or justice in his complaint, of the inaction .of the creditor, which his own may have induced.

There are circumstances, however, in which the creditor cannot be inactive, without being unjust, and wanting in good faith to the surety. In all such cases, it must be supposed that he intends to discharge the surety; or, if that intention cannot be presumed, his inaction, to which the surety does not assent, operates as a discharge of the latter, in courts of law, or of equity. An undisputed equity of the surety is, on payment of the debt, to stand in the place of the creditor, as to all securities which the creditor may hold, or acquire, for the payment of the debt; and he is entitled to all the benefit from them, which the creditor could have derived. — Cullum v. Emanuel, 1 Ala. 23; Foster v. Athenœum, 3 Ala. 302; Ohio Life Ins. & Trust Co. v. Ledyard, 8 Ala. 866; Fawcetts v. Kinney, 33 Ala. 261; Lyon v. Leavitt, 3 Ala. 430; Knighton v. Curry, MSS. It follows, that the creditor is bound to exercise reasonable diligence in the preservation of such securities; and if, by his negligence, they are lost, or, if he should disable himself from surrendering them to the surety, on payment of the debt, the surety is discharged, to the extent to which the securities, if made available, would have extinguished his liability. — Cullum v. Emanuel, supra; Hayes v. Ward, 4 Johns. Ch. 123; Commonwealth v. Miller, 8 Serg. & R. 452; Everley v. Rice, 20 Penn. St. 297; Baker v. Briggs, 8 Pick. 122.

The principles defining, in particular circumstances, the good faith which the creditor must observe towards the surety, aid materially in determining what are his duties under other circumstances, in which he may have the means of obtaining payment from the principal. Good faith is not a mere absolute, inflexible phrase, existing of and by itself. It is a relative term, and must always be considered in reference to the relation of the parties — the confidence existing, or which may be justly reposed, and' the circumstances surrounding them, when it may or may not require the one party or the other to act, or a want of it may be deduced from inaction. A creditor may not have in his possession, or under his control, property or effects, which he has the right to retain for the payment of the debt, and to which right the security would be entitled on payment made by him. Having them, as we have seen, the law compels him, if he would preserve the liability of the surety to him, to good faith and reasonable diligence, in keeping and making them available. The payment of the debt by the principal, to whom the consideration has moved, and who is primarily liable, and bound to indemnify the surety, if he is compelled to make payment, is the great, controlling object in view. Now, if the principal tenders payment in full, after the debt is due, the creditor is bound to accept it, or • the surety will be discharged. It is bad faith towards the surety, on the part oí the creditor, to refuse; for he may thereby invert the order in which principal and surety are liable, as between themselves; and he changes the nature and character of the liability of the surety, compelling him to guarantee for a further and additional period of time the ability of the principal to make the payment. The tender having been made, the relation of the creditor and principal is changed — the only duty of the principal is to keep the tender open, ready for the acceptance of the creditor whenever he manifests it. If he is sued by the creditor, he may bring into court the sum tendered, without any.accruing interest, or compensation for the forbearance during the intervening period. There is, in

effect, a new loan to the principal, payable on demand, without interest, to which the surety is not a party, and gives no assent. — Brandt on Suretyship, § 295, and authorities cited in note. We speak now of cases in which there is a formal tender, and a refusal to accede to it by the creditor, which would constitute a defense for the principal, if he kept it open and ready for acceptance.

There is another class of cases, which the present case more nearly resembles, in which there may not be the form-, alities of a tender, and no -fact or circumstance affording the principal any defense against the claim of the creditor, or which places them in the relation of adversaries. There may be an offer of payment, which the principal may, at the request of the creditor, and for his ease and accommodation, forbear from converting into a formal tender, absolving him from liability for future interest, and for the costs of suit, if he kept the tender open. To this class belongs the case of Clark v. Sickler, 64 N. Y. 231, referred to by the chancellor. The principal, Mott, then being solvent, but subsequently becoming insolvent, offered to pay the debt; but the creditor-declined to receive payment, giving no other reason than that he had no use for the money, and requested Mott to keep it; to which he assented. It was held, that the surety was not discharged; that the indulgence to the surety was merely gratuitous, not compelling the creditor to delay for any definite period of time, and not disabling him from suing, or taking any other step for the payment of the debt the surety bad a legal right to require him to take.

There is an obvious distinction between that case and the present. If the surety had immediately paid the debt, Mott being solvent, his remedies for reimbursement would have been equal to any the creditor could have pursued. In this case, the principal was dead, and his estate insolvent. If the surety paid the debt, he would have been a mere general creditor of the principal, entitled only to share with other like creditors in the distribution of the assets, diminished, as they must be, by the payment of preferred claims. If the creditor had accepted payment, as proposed by the administratrix, and as it was her right to propose, and as he had the right of accepting, the debt would have been extinguished in full, and without offending the rights of other creditors, whether preferred or general. — Pitcher v. Patrick, Minor, 321; Perrine v. Warren, 3 Stew. 151; Godbold v. Roberts, 7 Ala. 622. In his transactions with the administratrix of the principal, good faith to the surety required, that the creditor should not be unmindful of, and indifferent to, the injury he was directly, and for no assigned reason, inflicting of his own volition. It is a duty the creditor owes the surety, in his dealings with the principal, to protect, so far as he can consistently with the preservation of his own rights, the rights and interests of the surety. Their right and interest is indeed the same — the performance of the” contract, or the payment of the debt — the right of the creditor to payment or performance from principal or surety, one or both — the right of the surety to payment or.performance primarily by the principal. A creditor, who voluntarily interposes obstacles, which prevent the surety from pursuing the creditor according to the remedies the law affords him, would not be allowed to recover of “the surety. If he declines or refuses accepting payment from the principal, when it is offered, and the means of making the payment are in his own hands, which he surrenders to the principal, though he could rightfully retain them, and he knows that the result of his conduct will inflict irreparable loss on the surety, it is difficult to abstain from imputing to him a want of good faith, or of distinguishing between his conduct and an interposition of obstacles preventing the surety from being fully indemnified. The liability of the surety, which could be immediately extinguished, is, without his assent, prolonged. Not only is it in this case prolonged, but the death and insolvency of the principal in fact increases its burdens; for he can not obtain from the estate of the principal full indemnity, when the creditor may elect to compel him to payment.

As the case is now presented, without any explanation of his conduct from the creditor, it is a little difficult to avoid the inference, that there was a design on his part to fasten on the property of the surety a liability for the debt, in ease of the estate of the principal. If that be true, there can be no doubt the law condemns his conduct, and relieves the surety, whose rights and interests he was bound to respect, and compels him to look for payment to the principal, whom he intended to favor at the expense of the surety. In Sears v. Van Dusen, 25 Mich. 351, the holder of a promissory note refused to receive payment, when tendered by the makers, and delayed its collection until they became insolvent. This conduct, it was held, discharged the payee, who had guaranteed unconditionally the payment of the note, and whose relation is not distinguishable from that of a surety. — Donley v. Camp, 22 Ala. 659. It is to be remarked of this case, that there was no formal tender, changing the condition of that of the makers to the duty of keeping the tender open for the acceptance. There was a mere offer of payment (without presenting the money, and without evidence that the makers then had it, save so far as it could be inferred from their credit and business), which the holder declined, because he did not need the money. It was for his ease' and accommodation, that the payment was not made.

In McQuesten v. Noyes, 6 N. H. 19, there was an offer of payment by the principal; but the creditor did not accept it, and made a mere general agreement that he would wait for payment, and the principal could retain the money. The court regarded the transaction as a new loan of the money, to which the surety was not a party. In Saille v. Elmore, 2 Paige, 497, it is said by Ch. Walworth, that a surety will be discharged by any arrangement or dealing between the principal debtor and the creditor, which operates as a fraud on the surety; “ as if the money had been offered to the creditor, at the day it fell due, or afterwards, and he had, without the consent of the surety, requested tbe debtor to retain it longer, this would operate as a fraud upon the surety, and discharge his liability.” In Joslyn v. Eatman, 46 Vt. 258, there was a tender of payment by the principal, which the creditor declined receiving; and it was held, that the surety was discharged. The tender was of a character which would have discharged the principal, if he had kept it open; and as it would have discharged him, it discharged the surety, whose obligation was accessorial — he could not be compelled into the new relation of a guarantor, that the principal would keep it open for the creditor, when he chose to manifest a willingness to accept it. To the same effect are the cases of Johnson v. Ivey, 4 Cold. (Tenn.) 608; Hayes v. Joseph, 26 Cal. 585; Curiac v. Packard, 29 Cal. 194.

There is another class of cases, which seem to be the subject of a conflict of decision: when a creditor, having in his possession, or under his' control, the means of satisfying the debt, yet chooses not to make the appropriation, and voluntarily parts with them. It may be conceded that, ordinarily, a creditor is not bound to assert and exercise the right, not existing at common, law, conferred by statutes, of setting off the demand or debt he may have against the principal and surety, against a demand or debt which may be due from him to the principal. The assertion of such right might involve him in litigation with the principal, into which it may not, in the absence of peculiar circumstances, be his duty to enter. Tbe failure to assert the right, compelling suit by the principal, can be no more than his mere passiveness, in the absence of peculiar circumstances, in pursuing legal remedies; for the plea of set-off is in its essence a cross-action. To this class belong the cases of Glazier v. Douglass, 32 Conn. 393; Hollingsworth v. Turner, 44 Ga. 11; Beaubien v. Storey, Speer’s Eq. 508, to which we have been referred. We do not dissent from the conclusion reached in these cases; nor do we now intend intimating under what circumstances it would be the duty of the creditor to insist on a right of set-off against the principal, for the ease of the surety.

The present case stands on a different ground: there was no necessity for the creditor to assert it — no peril of litigation with the principal, if he made the claim. The means of payment were in his hands, and it was his duty; the principal, by his proposal that they should be applied in payment of the debt, placing him in no other position than that of accepting or refusing the proposition. He had simply to retain, instead of paying the money to the principal; and the retainer operating not only to extinguish the liability of principal and surety, but his own liability to the principal. In Law v. East India Company, 4 Vesey, 824, the creditor had made a settlement with the personal representative of the principal, and paid to him a balance supposed to be due the principal on a settlement of his accounts as an officer of the company. Subsequently, a claim was made upon Law, as a surety on the official bond of the principal; and it was held he was discharged. The case was attended by peculiar circumstances, influencing its decision; but the underlying principle is, that the creditor must do no act, which may injure the surety; and if he does such an act, borrowing the words of the Master of the Rolls, “the court is very glad to lay hold of it in favor of the surety.”

In McDowell v. Bank, 1 Harr. (Del.) 369, the creditor, a bank, had on general deposit moneys of the principal, sufficient to pay the debt, but permitted the principal, from time to time, after maturity of the debt, to withdraw them by checks; and the surety was held discharged. The same principle is recognized in Dawson v. Real Estate Bank, 5 Ark. 296-99. The cases of Martin v. Merchants’ Bank, 6 Harr. & Johns. 235, and Voss v. German Am. Bank, 83 Ill. 599, assert the contrary doctrine. Assuming, as we think it must be assumed, that a bank has a lien on any balance which may be due from it to a customer, on any moneys he may have on general deposit — not moneys deposited for special purposes, of. which the bank is informed, and either expressly or impliedly consents to hold for such purposes — for the payment of a debt due to it for money borrowed, or for a debt negotiated to it in the usual course of trade; we incline to the opinion, that it can not pay such balance, or such moneys, to the principal, without discharging the surety. It has not the option to part with the security it has acquired, without the consent of the surety. We are not trammelled by the broad expressions found in Perrine v. Firemen’s Ins. Co., 22 Ala. 575, from -which we expressed dissent in Knighton v. Curry, MSS.

Affirming a proposition that meets the present case, we hold, that when the principal offers the creditor the privilege of retaining, from moneys the creditor has in his hands, and is about paying to him, the debt due him from principal and surety, good faith to the surety requires him to accept; and if he refuses, when he could rightfully retain, without prejudice to the rights or equities of others, the surety is discharged. There is more, in such case, than mere passiveness on the part of the creditor — there is positive action in the refusal to accept the payment. More especially must this be true, when the creditor is dealing with the principal* in the absence, and without the knowledge of the surety. The case has its unpleasant features, which, unexplained, if they do not create a presumption of sinister motive, cast suspicion on the conduct of the appellee. It is so much out of the course of ordinary transactions, for a debtor to pay his creditor a large sum of money, without the deduction of a debt the creditor expresses a willingness to receive, that, when immediate injury must result to another, it is difficult to resist the conclusion the injury was intended. No importance can be attached to the fact, that there is no averment in the bill, that the attorney, Day, had specific authority to propose receiving the debt in payment, or as money, from the appellee. It does not appear that the refusel of the appellee was placed on that ground, when the proposal was made; and if the fact is he was without authority, how far the equity of the appellant is affected, will arise on a hearing on the evidence.

The bill showing that the surety was discharged from personal liability by the conduct of the appellee, the mortgage he had executed, which passed the legal estate in the premises, and was but a further security for the payment of the debt, was also discharged. It was but an incident of the debt of the surety, and could not survive its discharge, or extinguishment, or a voluntary release of it by the creditor. Brandt on Suretyship, § 21. The principal has not been discharged; and the mortgage remains a valid security on his equity in the premises. The sale the appellee was proposing to make, was a sale not only of this equity, but of the legal estate; and there can be no doubt of the power of a court of equity to restrain it.

The decree must be reversed, the injunction reinstated, the demurrer and motion to dismiss overruled, and the cause remanded.