179 N.E. 504 | Ohio Ct. App. | 1930
Lead Opinion
Error proceedings are prosecuted from the judgment of the common pleas court. The parties appear in this court in the same relative positions held in the common pleas court.
Various demurrers filed by defendants were sustained by the court; various leaves to plead were granted; a third amended petition filed by the plaintiff was, on motion, stricken from the record; the final entry of the court was the entry of the judgment of dismissal of the petition by default against plaintiff.
A perusal of the petition discloses that the Arline Realty Company, a corporation, about November 1, 1923, issued its corporate bonds in the principal amount of $110,000, and, to secure the payment thereof, executed and delivered to the Midland *512 Bank, therein named and constituted trustee for the purposes thereof, its mortgage and trust deed.
Samuel Stecker, Abe Greenwald and Samuel Stern entered into a contract in writing which recited the issue of the aforesaid bonds by the Arline Realty Company, that the Midland Bank had agreed to act as trustee, as in said first mortgage trust deed named and created, and further recited as follows: "Now, therefore, the undersigned, in consideration of the acceptance of said trusteeship and the purchase of said bonds hereby jointly and severally guarantee to The Midland Bank, as Trustee for the holder or holders of said temporary bond (until the same is surrendered for exchange) and said definitive bonds (when so exchanged) and to said holder or holders individually, jointly or severally, the full, prompt and punctual payment of the principal of and interest on said temporary bond or definitive bonds, as the case may be, according to their terms and tenor."
Samuel Stern and Abe Greenwald both died in the latter part of 1928, and the defendants Augusta Greenwald and Sarah Stern are the administratrix and executrix of their estates, respectively, and this action was brought by the Midland Bank as trustee of an express trust created by the terms of said contract hereinabove quoted, and as a person with whom and in whose name said contract was made for the benefit of another.
It being deemed necessary to set out such facts as would show that the bonds were valid obligations of the Arline Realty Company, the first part of the second amended petition deals with the facts in connection with the execution of the bonds of the *513 Arline Realty Company, and the certification thereof, as required by the terms of said bonds, by the Midland Bank, as trustee under the terms of the mortgage and trust deed, and alleges specifically that all of said bonds were certified by the plaintiff, meaning the Midland Bank as trustee, under the terms of the mortgage and trust deed, in accordance with their terms. It is further alleged that $90,000 in principal amount of said bonds are outstanding; all of which matured November 1, 1928, and for which, with interest thereon, the Arline Realty Company has been in default since November 1, 1928.
After the petition set forth the obligation and legal liability of the Arline Realty Company, the issuer of said bonds, it is further alleged that the defendants Samuel H. Stecker, Samuel Stern, deceased, and Abe Greenwald, deceased, duly executed and delivered to the plaintiff, "The Midland Bank, now The Liquidating Midland Bank as Trustee for the holder or holders of said bonds under and by virtue of the terms of said contract whereby said Samuel H. Stecker, Abe Greenwald and Samuel Stern jointly and severally unconditionally guaranteed to The Midland Bank as said trustee, under and for the purposes of said contract of guaranty, the full, prompt and punctual payment of the principal and interest on all of said bonds of The Arline Realty Company, according to the terms and tenor thereof," etc.
It is further alleged that by reason of the default of the Arline Realty Company, as aforesaid, and the further default of the said Stecker, Stern and Greenwald, for the payment of said $90,000 of bonds *514 at maturity on November 1, 1928, with interest thereon accrued, and the continuance of said default, there was due the plaintiff, the Midland Bank, as trustee under and by the terms of said guaranty contract, the sum of $90,000, with interest at 7 per cent. from November 1, 1928, for which judgment was asked.
Three grounds were set forth in the defendants' demurrer:
1. Incapacity of plaintiff to sue.
2. The petition does not state a cause of action.
3. Misjoinder of parties plaintiff.
As to the capacity of plaintiff to sue, we are of the opinion that this case comes within the terms of Section 11244, General Code, which provides that a "trustee of an express trust, a person with whom, or in whose name, a contract is made for the benefit of another, * * * may bring an action without joining with him the person for whose benefit it is prosecuted."
There is enough in the petition, by way of allegation, to show that the plaintiff the Midland Bank, now the Liquidating Midland Bank, was trustee under the terms of the mortgage and trust deed, for the purpose of that instrument, and of the parties thereto.
It is alleged in the petition that the Midland Bank brings this action in its capacity as trustee under the terms of a guaranty contract.
The demurrer admits the allegations of the petition, and in our opinion, capacity to sue appears upon the face of the petition.
There is, in our opinion, but one vital question in this case, namely, does the petition state a cause of *515 action, when it fails to allege that the plaintiff has sued the primary obligor and exhausted its assets? It is urged in behalf of the defendants that this is, strictly speaking, a suit upon a contract of guaranty, as appears from the face of the instrument itself; that the defendants could be held to no greater liability than that of the ordinary guarantor; that before suit could be successfully prosecuted against the guarantors, who are usually only secondarily liable, the petition must allege, and upon trial it must be proven in evidence, that the principal who was the primary obligor had been sued and that his assets had been exhausted.
Much stress is laid by the plaintiff upon certain language found in the contract of guaranty, to wit: "The undersigned * * * guarantee to The Midland Bank * * * the full and prompt and punctual payment of the principal of and interest on said temporary bonds or definitive bonds as the case may be, according to their terms and tenor."
In the brief of counsel for the plaintiff much learning was expended upon a distinction, ofttimes found in the books and decisions, between a "guarantee of collectibility" and a "guarantee of payment."
The burden of plaintiff's argument is to the effect that where the guaranty is one of collectibility, or of the solvency of the principal obligor, the liability of the guarantor is secondary only, whereas, if the guaranty is one of payment, the guarantor then becomes bound with the principal; that the guarantor then assumes a primary liability to the same extent as did the principal.
It is therefore claimed in argument that it was *516 unnecessary to allege and prove that the primary obligor was sued and that its assets were exhausted before entering suit against the guarantor.
Both sides have collected many authorities, adjudicated in the courts of many states of the Union, relative to this question. We are of the opinion that the nature of the obligation of a guarantor depends upon the intention of the parties in entering into the contract of guaranty, as expressed in the language and circumstances attendant upon the transaction. We are aided in reaching this conclusion by the well-known rule of construction which the courts have adopted to the effect that a contract of guaranty will be construed in favor of the guarantor.
When an examination is made into the language and attendant circumstances of the transaction herein, as it appears upon the face of the petition, it leads us to the definite conclusion that the obligation of the defendants was a secondary obligation and that therefore it is incumbent upon the plaintiff to exhaust the primary obligation before being able to sue these defendants.
1. The instrument of the guaranty itself used the language "guarantee."
2. The agreement of guaranty is contained in a separate and distinct instrument, and does not appear on the bonds themselves which the instrument of guaranty seeks to guarantee.
3. The primary obligation on the bonds is secured by mortgage on real estate.
The use of the word "guarantee" in an agreement of guaranty, although not conclusive, imports not an absolute but a conditional promise to pay.
In J.W. Watkins Medical Co. v. Lovelady, *517
"The single term of obligation in the collateral agreement here is `guarantee,' and this term is without modification or limitation in the body of the contract. Appellant attaches importance to the fact that appellee guaranteed payment `at the time and place and in the manner in said agreement provided,' referring to the primary contract. But this language is without significance in the present contention, for, whether the contract binding upon appellee was one of guaranty or suretyship, in either event appellee became bound for Davidson's performance of his undertaking `at the time and place and in the manner in said agreement provided'; the only question being whether that responsibility was absolute or conditional. * * *
"The difference [between suretyship and guaranty] is that a surety insures the debt, is bound with his principal as an original promisor, is a debtor from the beginning; a guarantor answers for the debtor's solvency, must make good the consequences of his principal's failure to pay or perform, is bound only in case his principal is unable to pay or perform."
Rawleigh Co. v. Salter,
The petition shows that the guaranty is not written upon the bonds themselves, but is contained in a *518 separate instrument. This, in our opinion, is strong evidence that it was intended to be a conditional obligation.
In Emerson-Brantingham Implement Co. v. Raugstad,
The petition discloses the fact that the primary obligation was secured by a first mortgage on real estate. This, in our opinion, is an additional element indicating the intention of the parties that this was to be, not an absolute guaranty, but a guaranty conditioned at least upon the exhausting of the mortgage security.
A reading of the petition shows the obligation of the bonds, which the instrument of guaranty seeks to guarantee, has been fully entered into and consummated on the part of the principal. The instrument of guaranty is entered into at a time subsequent thereto and upon a separate instrument. It likewise appears that the agreement of guaranty is founded upon a different and separate consideration.
To hold, after a perusal of the allegations of the petition, that the guaranty in this case was absolute, primary, and in the nature of a suretyship contract, would be to do violence to certain well-founded principles which distinguish suretyship contracts from contracts of guaranty. *519
A surety usually enters into the same obligation as that of his principal. The signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation of both the principal and the surety.
Since it appears from the pleadings that the obligation of the bond on the part of the principal obligor had been fully consummated, and that the contract of guaranty was entered into at a time subsequent thereto, and upon a different instrument, and also that it was founded upon a different and separate consideration, the mere fact that it guarantees payment does not convert the obligation into a primary obligation.
There is plenty of authority to this effect.
In construing the language of the guaranty most favorably to the guarantor, the court finds it necessary to hold that what the parties intended by the language of the contract of guaranty is that the guarantors promised to pay if the principal cannot pay.
In J.W. Watkins Medical Co. v. Lovelady,
The defendants demurred on the ground that they could not be sued jointly with the principal obligors. The court sustained the demurrer, and the ruling was affirmed by the Supreme Court. The court said at page 419 of 186 Ala.,
"Contracts of suretyship and of guaranty have *520 much in common — in both the undertaking is to answer for the debt, default, or miscarriage of another. The difference is that a surety insures the debt, is bound with his principal as an original promisor, is a debtor from the beginning; a guarantor answers for the debtor's solvency, must make good the consequences of his principal's failure to pay or perform, is bound only in case his principal is unable to pay or perform. * * *
"This case requires that the obligation of Lovelady be defined as either that of a surety or a guarantor. The result in this case is to be determined, as matter of law, from the language of the contract, though, as matter of fact, the parties may not have considered the difference, for there is nothing else to disclose the intention of the parties. They must be held to the legal intendment of the language they employed. As we have seen, Lovelady guaranteed Davidson's undertaking in the only language of obligation he employed, and this he did in a separate contract. The separation of the contracts indexed the intention of the parties to make an engagement of guaranty, as well as the term used. These are the principal factors of interpretation, since they arise out of the body and substance of the contract."
In Etheridge v. W.T. Rawleigh Co.,
It appears clear to us that the courts distinguish a guaranty of payment, which is made upon the instrument of the original obligation, for the same consideration and at the same time, from a contract of guaranty which is embodied in a separate instrument for a different consideration and executed at a different time. The former contract is held by many courts to be simply a contract of surety, where *522 the obligation of the surety arises upon the failure of the principal to pay; whereas, the latter contract is a guaranty with the obligation of a guarantor to pay only if it is proven that a principal cannot or is unable to pay.
The petition in the case at bar nowhere alleges that the parties intended the instrument of guaranty to be in the nature of a primary obligation.
We hold, therefore, that the common pleas court was right in ruling as it did, and its judgment will be affirmed.
Judgment affirmed.
CLINE, J., concurs.
Dissenting Opinion
This action comes into this court on a petition in error to the common pleas court of Cuyahoga county, in which court the plaintiff in error was plaintiff and the defendants in error were defendants; the petition having been filed by the plaintiff in the court below to recover something like $90,000 upon a guaranty of payment against the defendants below — a written guaranty of payment of certain bonds issued by the Arline Realty Company and secured by a mortgage upon the premises. The Midland Bank, afterwards the Liquidating Midland Bank, was named as trustee in the bonds and the mortgage. The bonds that were issued by the Arline Realty Company were dated November 1, 1923, at which date the bonds and the mortgage securing them were apparently signed, and probably these bonds and mortgage were delivered to the Arline Realty Company. Apparently afterwards a sale of these bonds was negotiated with the Union Mortgage Company, which agreed to *523 become the purchaser of these bonds, but as a condition to its becoming the purchaser it demanded that the decedents of two of the present defendants, and Stecker, the third defendant, who were the principal stockholders in the Arline Realty Company, should guarantee the payment of the obligations created and issued by the Arline Realty Company. So on the 19th of November of the same year, the written guaranty was signed by Stecker, and the two decedents who were represented by the defendants in the present lawsuit, a proper claim having been filed with them as legal representatives of the estates of the decedents, which claims had been rejected and refused, all of which is set up in the petition, and so the suit was brought against them.
The petition of the plaintiff sets up at great length, and quotes the salient terms of, the written guaranty of November 19th, which was signed by Stecker and the defendants' decedents, who were, as already stated, the principal stockholders in the Arline Realty Company.
It will be noticed that the suit was brought upon the guaranty, and no effort was made apparently to exhaust the property upon which the mortgage securing the bonds was given, nor was there any allegation to that effect in the petition.
To the petition filed, as outlined above, demurrers were filed on the ground, first, that the Liquidating Midland Bank had no legal capacity to sue, that there was a misjoinder of parties plaintiff, and that the petition did not state facts sufficient to constitute a cause of action. The demurrer was sustained, and an amended petition was filed which set up substantially the same thing, and, I believe, a demurrer *524 to that amended petition was sustained and another amended petition was filed which set up in substance the same thing as the other petition and amended petition had set up; differing somewhat in statement, but substantially the same thing. Upon motion this amended petition was struck off and judgment was entered for the defendants, and it is to reverse that judgment that error is prosecuted here. So the only and real questions are: Did the petition state facts sufficient to constitute a cause of action; was there a misjoinder of parties plaintiff, or a nonjoinder; and did the plaintiff have capacity to sue?
Well, taking them up in their order, first, it must be remembered that the suit was brought upon this written guaranty which was made upon the 19th day of November. It is alleged in the petition that it and the issuing of the bonds were simultaneous and constituted a part of the same transaction. Whether this was so or not, I think that it is a matter of no importance, as will be demonstrated later on.
The petition, as already stated, was based upon this written guaranty, and that guaranty, so much as is pleaded in the petition, states that it was upon the consideration of the Midland Bank, later the Liquidating Midland Bank, having become trustee for these bonds, and, further, upon consideration of the fact that the Union Mortgage Company had agreed to become the purchaser upon the condition that the principal holders of the stock in the Arline Realty Company should guarantee the payment of the principal and interest of the bonds as they matured. That was made jointly and severally for the benefit of the various holders of the bonds and *525 the trustee. That would permit any one of the holders, or the trustee, to maintain this suit without joining other benefited parties, for the bondholders would be bound of course by the rules applying to persons who are jointly and severally bound. One could bring an action alone, or, if he would join some of them with him, he must join them all. In the instant case the Liquidating Midland Bank brought the suit in its own name, and I maintain that, inasmuch as it was a trustee of an express trust and was specifically so named in this written contract of guarantyship, it might maintain this action without joining any other person than itself as party plaintiff. Nor does the mere fact that the bondholders have subsequently or prior thereto brought an action militate against its right to maintain its suit. Several parties to whom the defendant is severally liable may simultaneously bring suits. A judgment and satisfaction upon the judgment in any one of the suits, of course, would bar any further recovery, so that if these persons should pay the bondholders it would be a complete defense to the trustee's maintaining this suit, and if the trustee should obtain a judgment and satisfaction of the same it would be a complete defense to the bondholders recovering. So that eliminates that proposition.
I think under this guarantyship upon which this suit is founded the Liquidating Midland Bank can maintain the suit in its own name, and had a right to maintain the suit without joining any other person, and so far as the court sustained the demurrer in these respects, the court erred, and for that reason the judgment should be reversed unless *526 there is something else in this case which would make the ruling the other way, and that something else has caused me more difficulty than the propositions already discussed, and that question is whether this guaranty was an absolute liability imposed upon the guarantors or a conditional liability.
Ordinarily a guaranty of payment is an absolute liability, and the guarantor becomes liable upon default of the principal, without exhausting the principal's assets. If, however, it were a guaranty of collectibility, or a guaranty of the soundness or goodness of the security, or any words which would import that the guaranty should only be available after the principal had been exhausted, then it would become a conditional liability and could only be enforced after the principal's liability had been exhausted, and, in order to state a cause of action, the petition would have to state that the principal's credit had been exhausted and the petitioners were unable to collect. That would be a condition precedent, and, if the petition did not state that, it would be demurrable for not having stated a cause of action.
In this connection I wish to state the law as laid down in Stearns on Suretyship, Section 62: "A guaranty of collectibility is distinguished from an absolute guaranty of payment. The latter imposes a liability to pay if the principal does not, and the former if the principal can not. No liability attaches upon guaranty of collectibility or solvency until in some way it is made to appear that the principal was not able to pay at maturity. Mere failure to pay the debt at maturity will fix the liability upon the promisor in an absolute guaranty of payment, *527 but it is necessary to show more than mere default of the principal to bind the guarantor of collectibility. Such a promise is conditional, and if the creditor by due diligence might have recovered from the debtor at maturity, or at any other time before bringing his action against the guarantor, then the guarantor is exonerated, for his promise is upon the condition that such diligence will be used."
Now if this be the law, and I think it is, it becomes necessary for me to construe the following words in this contract of guarantyship:
"Whereas The Midland Bank has agreed to act as such Trustee, and the Union Mortgage Company has agreed to purchase said bonds from said Company, only upon condition that the undersigned will jointly and severally guaranty payment of the principal of, and interest on, said bonds according to their terms and tenor; and the undersigned have agreed to guarantee such payment according to the terms hereof:
"Now, therefore, the undersigned, in consideration of the acceptance of said trusteeship and the purchase of said bonds, hereby jointly and severally guarantee to The Midland Bank, as Trustee for the holder or holders of said temporary bond, (until the same is surrendered for exchange) and said definitive bonds (when so exchanged), and to said holder or holders individually, jointly or severally, the full, prompt and punctual payment of the principal of and interest on said temporary bond or definitive bonds, as the case may be, according to their terms and tenor.
"And we hereby waive all notice, presentment and demand whatsoever, and agree to be and remain *528 bound hereunder until said principal and interest shall be fully paid, notwithstanding any act or omission of or on the part of said Trustee or The Arline Realty Company."
From the wording of this contract it would seem to be guaranty of payment and not one of collectibility, which if true, would make the guarantors liable in the first instance upon the failure of the principals to pay in accordance with the tenor of their obligation. It is claimed, however, that inasmuch as this guaranty is upon a separate paper, it cannot be construed to be a contract equivalent to that of suretyship; that it means that the principal obligor must be first exhausted. I do not think that that is the law. Of course, in this instant case, it is alleged in the petition that the papers were issued "simultaneously," and as part of one and the same transaction; but, as already stated, I do not think that so important. Assuming that it was upon a separate paper, there is no doubt but that both a contract of suretyship and of guarantyship may be upon separate paper, and of a later date, and at later times than the principals' obligation was created. The only question would be, if it were upon the later paper, the consideration that warranted the issuing of the original documents would not suffice to bind the guarantors upon the subsequent one. There must be another good and sufficient consideration.
To illustrate: If A borrows $1,000 from a bank and gives his note for it, if a surety or guarantor signs simultaneously before A gets the money, they are bound from that time, and the same consideration which binds the principal would bind both. But *529 if A goes to the bank and gives his obligation, and gets the money, and afterwards the bank wants a surety or a guarantor, and a surety or guarantor gives a written obligation, it must be based upon a different and distinct consideration, either a payment or something of value given to the surety or guarantor, or an extension of time or other benefit to the principal. That is the only difference between signing on the original document and upon a subsequent document.
Now reverting to the instant case, and the document upon which this suit is brought, it sets forth the consideration thus: "On consideration that The Midland Bank becomes trustee and on consideration of The Union Mortgage Company taking these bonds, these guarantors sign this obligation." Now if the Midland Bank had already become trustee, then as to it there might not be a sufficient consideration, but the Union Mortgage Company having taken these bonds upon the strength of this guarantyship, there is a sufficient consideration, and that would inure to the benefit of the Midland Bank as well as to the Union Mortgage Company or any of the purchasers of the bonds. So there is a distinct consideration in the instant case, and the guaranty being clear, I think the guarantors became liable upon the failure of the principals to comply with their obligation, and the plaintiff did not have to exhaust the principals' property before it could revert to the guarantors.
Now this proposition is sustained in the case of Clay v.Edgerton,
That case is decisive, I think, of the point in question in this case. The only difference between the words in that contract and in this is the word "ultimate," and the court of last resort in New York in passing upon that proposition held that the word "ultimate" did not modify or change the liability of the guarantors so as to make it one of collectibility only. Now it is important to read the language of the court in that case in connection with the language of this guaranty. The guaranty, after guaranteeing the payment in the instant case, goes on to say that the guarantors waive notice of demand and protest, and agree to be bound until all of the principal and interest is paid. That would seem to indicate that they contemplated that the payment be made out of the principals first; but, upon an analysis of those words, in connection with the other words, one can see a reason why these words were used by the careful writer of this document. Ordinarily a guarantor or a surety does not expect to pay the obligation of the principal, and there is a great line of authorities which hold that if the creditor has unduly delayed, where through his negligence the principal's property is allowed to escape, whereas if a prompt suit had been brought the guarantor or surety could have protected himself by paying the claim and having it assigned to him, or be subrogated to the rights of the creditor so that he could pursue his remedy against the principal *532 debtor — I say there is a great line of authority to the effect that where undue delay has taken place so that it damages the surety or guarantor of payment, it would operate as a defense, and could be set up as a defense to a recovery against the surety or guarantor, not that they are entitled to notice of non-payment, and so forth, but so that they could protect themselves against undue delay.
Now apparently the purpose of this latter part of this guaranty, above referred to, was that no matter what the delay might be in the collecting of the money from the principal debtor, the guarantor in this instance could not avail himself of the delay as a defense to a suit that might be brought against him. Of course, when one signs as a guarantor of payment, or as a surety, he contemplates that the obligation is going to be paid by the principal, and he does not anticipate that he is going to be called upon, but that does not affect the law on this proposition, and the only question here in this respect is whether this was a guaranty of payment, and so an absolute liability in case of default of the principals, or whether it was a guaranty of collectibility; and a plain reading of the words indicates without dispute that it was a guaranty of payment, and the sole claim that I have heard that it was a guaranty of collectibility only was that the guaranty was upon a separate paper.
Now there has been no authority shown which would indicate that the guaranty had to be upon the same paper, otherwise it was a guaranty of collectibility and not of payment. What authorities I have examined are all to the contrary, and the only question, as before outlined, as to whether a contract on *533 a separate paper could be enforced, made at a separate time, would be one of consideration, and that is obliterated in the instant suit.
A great many cases have been cited in the careful briefs that have been prepared in this action, and I have examined with interest the authorities cited in the very able supplemental brief filed by the defendants in error, some of which authorities seem to support their contention; but I do not think that they overturn the authorities on the other side. For example, the second syllabus in Middle States Loan, Building ConstructionCo. v. Engle,
I think that on the whole the authority is clear that the trustee in the instant case had the right to mainain his suit in its own name; that it did not have to join either the mortgage company or the bondholders, or any one of them, and inasmuch as this was an action upon the guaranty alone, the written paper, and that was a guaranty of payment upon the default of the principals, it did not have to allege or prove that the principals' property had been exhausted; that the petition, in other words, stated a cause of action, and the court should have overruled the demurrers to all the petitions, and the court erred in striking off the petition for noncompliance with its order and entering a judgment against the plaintiff in error, the plaintiff below, *534 and for that reason I think the judgment should have been reversed and the cause remanded to the common pleas court with instructions to overrule the demurrer.
For the above reasons I deem it my duty to dissent from the majority of the court in affirming the judgment of the court below.
