Wright v. Austin

| N.Y. Sup. Ct. | Apr 4, 1865

By the Court,

Foster, J.

There is no doubt that the defendant Austin was not entitled to set off the alleged claim of Warren S. Walker against the estate of his deceased father, as next of kin, as a counter-claim to the note in question; for that claim was not such in its nature, nor had the defendant Austin such an interest in it as would enable him to set it off. ÍTor do I understand that he attempted to do so. He claimed that it was a fund belonging to his principal, in the hands of, and under the control of, the plaintiff; and that he was entitled to have the plaintiff exhaust that fund, in the discharge of the note, before resorting to him as surety. It is well settled that the administrator of the estate had the right to apply so much 'of the distributive share of that estate coming to the defendant Warren S. Walker, as would pay and discharge the note in question. (Smith v. Kearney, 2 Barb. Ch. 533, 547, 548, 549. Jeffs v. Wood, 2 Peere Wms. Rep. 128. Sims v. Doughty, 5 Vesey, 243. Rankin v. Barnard, 5 Mad. Rep. 32. Cantery v. Williams, 3 Hare’s Ch. 359.)

A surety who has paid the debt of his principal is entitled to every remedy of the creditor, (Edson v. Dillaye, 17 N. Y. Rep. 158;) but if the defendant Austin were to pay and discharge the note, the lien upon the fund in the plaintiff’s hands would be discharged, and the fund would pass to the assignee of the principal, to the prejudice of the defendant, who is the surety. A surety, after the debt becomes,due, may come into a court of equity and compel the creditor to sue for and collect the debt of the principal debtor. (King v. Baldwin, 2 John. Ch. 554; and same ease in error, 17 John. 384. Hayes v. Ward, 4 John Ch. Rep. 123.) Where the creditor has collateral security from the principal for his debt, the surety can compel him to exhaust that security before resorting to him upon his contract, or at least before obtaining an absolute judgment against him for the amount. (Gary v. Cannon, 3 Iredell’s Eq. 64, s 65.) And where a judgment has been obtained against the principal and surety, the principal being.insolvent, the surety, before payment, might file a bill to compel the discharge of the debt out of the estate of the principal in the hands of third persons. (McConnell v. Scott, 15 Ohio Rep. 401.) So, too, the surety might compel the creditor to prove his debt before the commissioner in bankruptcy, against his principal, before he calls upon the surety for payment. (Beadman v. Cruttenden, Cooke’s Bankrupt Laws, marg., note, 265, ed. of 1793.) And in the case of Phillips v. Smith, (cited in Ex parte Atkinson, Cooke’s Bankr. Laws, 264, ed. of 1793,) a bill was filed by the surety against the creditor of the principal, a bankrupt, to stay his proceedings at law, until he went before the commissioners to prove his debt, that he might thereby become a trustee for the surety; which was ordered, upon his bringing the money into court. (Fell’s Law of Guaranty and Suretyship, 261, §§ 19, 20.)

Where the surety has collateral security from his,principal, the creditor may compel its application in satisfaction of the debt. (Pratt v. Adams, 7 Paige, 615. 1 id. 299. 2 id. 311. 1 John. Ch. 129. 18 John. 505. Clark v. Ely, 2 Sandf. Ch. 166.) And where a surety obtains from his principal a mortgage to secure him against his liability, the creditor is entitled to the benefit of such security. And if the surety include in such mortgage.a debt due to himself, as well as the indemnity against the principal’s debt for which he is surety, as between himself, or his voluntary assignees, and the creditor, the latter is entitled to be first paid out of the proceeds of the mortgage. (Ten Eyck v. Holmes, 3 Sandf. Ch. 428.)

It is true that in all these cases of collateral security, except in the one last cited, the whole fund was, by agreement, set apart as security for the payment of the debt, or as security to reimburse the surety for any payment which he should make; but what is the difference in principle, whether it is so provided, or whether it is s already in the. hands of the creditor, so that he has a right to apply it to the debt if he chooses. In the last case cited, the court held that the creditor might resort to the whole fund to discharge the debt, although the surety who took.the security intended at the time to take it as well to secure another debt due to himself, as to secure the debt of the creditor. And why is it that the courts would reach such a fund in the hands of the surety and appropriate all of it to the payment of the creditor’s debt, and at the same time refuse to compel the creditor to apply, for the benefit of the surety, a part of the principal in his hands, and which he had a right so to appropriate if he chose ? Surely the assignee of Warren S-. Walker had no claims upon the fund, either at law or in equity, until after the claims of the estate were satisfied. But I think the principles of this case have been decided in the case of Vartie v. Underwood, (18 Barb. 561,) where it is held to be the right of the surety, who has pledged his property,.with the property of the principal, to have the property of the principal first sold and applied to the payment of the debt. In that case a wife united with her husband in executing a mortgage, to secure the payment of a debt due from him, upon 100 acres of land, of 75 acres of which she owned one-sixth (|-th) part. The premises were sold on the mort-. gage, and upon the question as to the disposition of the funds, the court (at pages 564, 565) say: “ The exception taken by Mrs. Underwood presents a question of more difficulty. It is claimed, in her behalf, that the mortgage debt should be wholly satisfied from the moneys arising from the husband’s portion of the premises. This I think is right. The referee reports 'that the mortgage debt should be satisfied out of the entire fund raised by the sale. Thus the wife is made to pay her portion of the mortgage. In" this the referee erred. It is the right of the surety, who has pledged his property, with the property of the principal, to have the property of the principal first sold and applied. This principle applies, and should govern, in directing payments after the sale of the property of both. The property, or money, of the principal is the primary fund, and should be first exhausted. This would leave the money arising from the sale of the wife’s share' wholly untouched by the mortgage debt.” How the pledge of the property of the wife, by the mortgage, for the payment of the debt, was as absolute and unconditional as was the promise of Austin to pay the debt in question; and I am unable to discover any reason why a court of equity could in her case interfere and compel the creditor first to resort.to the fund belonging to the husband alone, which does not operate quite as forcibly to require the plaintiff in this case first to resort to the fund in his hands, belonging to the principal debtor. Upon the whole, I am of the opinion that if the facts set forth in the answer had been proved, the defendant Austin would have be,en entitled to equitable relief, and that the court below erred in rejecting the testimony. (See also Newton v. Stanley, 28 N. Y. Rep. 61.)

[Onondaga General Term, April 4, 1865.

The judgment should be reversed, and a new trial granted, with costs to abide the event; and the plaintiff be allowed so to amend his summons and complaint as to include James Donney as a party defendant, and so as to settle all questions between the plaintiff, defendant and Donney, concerning the application of the fund alleged by the answer to be in the hands of the plaintiff’; and in case the plaintiff shall so amend his summons and complaint, and a new issue be joined between the parties, then all questions as to costs ip be reserved until the final determination of the action.

Mullin, Morgan, Bacon and Foster, Justices.]