President, Directors, &c. of the American Bank & others vs. Henry F. Baker & others, 4 Met. 164

Wilde, J. The plaintiffs’ claim, as stated in the bill, is founded on an indenture, bearing date December 16th 1829, between the Saco Manufacturing Company, of the first part, Henry F. Baker and others, trustees, of the second part, the plaintiff banks, and the Globe and the Saco Banks, of the third part, and Robert Waterston and others, who had signed, accepted, indorsed, or guarantied certain paper mentioned in the

schedule annexed to the indenture, for the accommodation of the Saco Company, of the fourth part. The claim now to be de termined is that which is made on Robert Waterston and others, the parties last named in the indenture. They deny their liability and rely on two grounds of defence.

The first is, that this suit is barred by the statute of limitations : And secondly, they contend that they are discharged from all liability to the plaintiffs for the balance due to them from the Saco Manufacturing Company, because the plaintiffs have given up, by way of composition, certain notes and- obligations which they held as collateral security for their debts against the said Manufactur ing Company, exceeding m amount the balance now due to them lrom said company ; and that said notes and obligations, by the true construction of the indenture, ought to have been applied to the payment of the plaintiffs’ demands against said company ; and that the defendants, parties of the fourth part to said indenture, were liable only for the balance which might remain due, if any, after such application.

As to the first ground of defence, we think it very clear that the statute of limitations is no bar to the present suit, which is founded on the indenture; and it is quite immaterial whether the notes and obligations held by the plaintiffs, as collateral security, are barred by the statute or not. These notes and obligations were modified, as to the time of payment and the amount to be paid, by the indenture ; and thus they may be considered as merged in that new contract.

It is true also, as the plaintiffs’ counsel has argued, that the statute of limitations would be no bar to an action on this new contract, although it had not been under seal; as no action thereon would have accrued to the plaintiffs, until after the expiration of five years from the date of the contract. This point, however, is immaterial, as the new contract, on which the present suit is founded, is by indenture, under the seals of all the parties, so that un questionably the statute of limitations is no bar.

The only remaining question to be considered is, whether the plaintiffs have not discharged the defendants, against whom they now seek to enforce their claim, from all" legal and equitable liability therefor, by giving up, by way of composition with the debtors of the Saco Manufacturing Company, certain notes and obligations, which they held as collateral security for the payment of their demands, and which ought to have been so applied— exceeding in amount the balance now claimed. This question struck us, at the argument, as being not free from doubt.

No case precisely in point was then cited, or has been since found. The question, therefore, must be decided upon the general principles of equity, in relation to the conditional and limited liability of sureties.

It was argued for the defendants, that the notes and obligations, given up by the plaintiffs, were first to he applied to the reduction of their debts, and that the defendants were liable only for the balance which might remain due, if any, after such reduction ; and that if those notes and obligations had been collected and so applied, no balance would have remained due : That the defendants, having become liable as sureties for the said company, by indorsing or guarantying their paper for their accommodation, were entitled to the benefit of the notes and obligations given up by the plaintiffs to the debtors of said company ; and that, as they have been deprived of this benefit without their consent, they are, by the principles of equity and of law, discharged from their liability.

On the other hand, it was argued for the plaintiffs, that the parties, to whom the notes and obligations were given up by the plaintiffs, were sureties of the said company.

And they denied that the said securities were, by the terms of the indenture, or the principles of equity, to be collected and applied towards the payment and reduction of the plaintiffs’ debts, for the benefit and relief of the defendants ; and if they were to be so applied, that they substantially had been : That the compromises of said claims had been made in good faith, and on due consideration of the circumstances of each case, and were beneficial rather than prejudicial to the defendants ; and if they were not so, it was incumbent on the defendants to make it appear.

We have considered these arguments ; and having examined and considered the provisions of the indenture, and the facts of the case, so far as they bear on the present question, we are of opinion, that by the terms of the contract and the principles of equity, the defendants must be considered as discharged from their liability. In the first place, the parties to whom the plaintiffs surrendered the notes and obligations, which they held as collateral security, were not the sureties of the said Manufacturing Company. In no sense can they be considered as being in that relation.

They were the debtors of the said company, and their notes and obligations were the property of the company, subject only to the plaintiffs’ lien. They ought, therefore, to have been collected, if practicable, and applied to the payment and reduction of the plaintiffs’ debts, before they had any right to enforce their claims against the defendants, who were the mere sureties of the said company, having become liable for their accommodation.

By the principles of equity and the express terms of the indenture, the plaintiffs were required to C£ place the actual proceeds ” of said notes and obligations, “ when collected — deducting necessary expenses of collection — to the credit of the said company, and in diminution of their respective debts and demands against the company.” And the defendants, as sureties, were responsible only for the balance which might remain due after the said reduction, and after the appropriation of the proceeds of the other property of the company, assigned to the trustees for the payment of said debts.

And by the principles of equity, where the creditor has the property of the principal, or collateral securities for his debt, the surety is entitled to the benefit of them in aid of his own responsibility, although there be no express contract to that effect. 1 Story on Eq. 592.

The principle, as laid down by Theobald, in his treatise on the Law of Principal and Surety, §. 174, appears to be well founded, and is sustained by the authorities cited. ££ If the creditor,” he says, “ parts with securities, or any fund which he would be entitled to apply in discharge of his debt, the surety becomes exonerated, at least to the extent of the value of such securities ; because securities, which the creditor is entitled to apply in discharge of his debt, he is bound so to apply, or to hold them as a trustee, ready to be applied, should the surety desire it.” So also, any neglect of the creditor, occasioning the loss of securities, to the benefit of which the surety is entitled, will pro tanto discharge the surety.

Capel v. Butler, 2 Sim. & Stu. 457. It is true, that if the creditor holds several collateral securities for the same debt, he may compound with and discharge one of the parties liable, without exonerating thereby the parties liable on the other collateral securities. So the creditor may compound with the principal debtor, reserving his remedies on his collateral securities.

But these rights of the creditor do not exist when the party sought to be charged is a surety ; for the surety is entitled to the benefit of all the securities which the principal gives to the creditor ; and of this benefit he cannot be deprived by the creditor, without his assent. We are therefore of opinion, that by the principles of equity, and the provisions of the indenture, the defendants were entitled to the benefit of the securities given up by the plaintiffs, which neither they nor the trustees had, by the terms of the indenture, any right to compromise.

The plaintiffs’ claim, which they now seek to enforce, is founded on the indenture; and it is immaterial what were the rights and liabilities of the parties, prior to that contract. By its stipulations, the notes and obligations, which the plaintiffs held as collateral security against the debtors of the Manufacturing Company, were to be collected unconditionally, and the proceeds to be applied in discharge of the plaintiffs’ demands, for the exoneration of the defendants. These securities were a part of the funds charged with these demands.

The defendants were not to be responsible until five years after the date of the indenture, and then only for the balance which might remain due, after the other securities had been collected, and the proceeds applied to the reduction of the plaintiffs’ debts. If therefore the securities, which were given up, could have been collected, it seems quite clear that the plaintiffs, by compounding with the parties responsible, have virtually discharged the defendants, who were under only a limited and conditional responsibility.

The plaintiffs’ counsel, however, suggests that the defendants, Waterston and others, are bound by the vote of the Manufacturing Company, which authorized the said compromise. But we think it clear that they cannot be so bound, unless they assented thereto, and there is no evidence of such assent; nor is there any evidence that they had legal notice of said vote until the compromise was made. The plaintiffs’ counsel also denies that these securities could have been collected.

On the contrary he affirms, that the plaintiffs have, by their compromises with the debtors, obtained and credited, in reduction of their claims, all that could be obtained on those securities; that these compromises are prima facie beneficial rather than prejudicial to the defendants ; and if not so, it is incumbent on the defendants to prove it; it being reported by the master, that these compromises were made in good faith. But it is not sufficient for the plaintiffs to prove they acted in good faith.

They might thus act, on the opinion that they were authorized to make the compromises with the consent of the Saco Company, without consulting the sureties * or they might think the compromises would be beneficial to the sureties. But if they have in fact been prejudicial and not beneficial, the plaintiffs are clearly responsible, and must account for the securities at their nominal or real value. And they are bound to prove all the facts and circumstances, in reference to which the compromises were made.

If these facts and circumstances should be proved, and it should thereupon appear that the defendants have not been, and cannot be prejudiced by the said compromises, then another question would be raised, namely, whether the plaintiffs would be bound to account for said securities at their nominal or real value.

It is a settled rule in equity, that if the creditor, by a binding agreement with the principal debtor, extends the time of payment, without the consent or privity of the surety, such an agreement will ipso facto discharge the surety, although the surety does not thereby sustain any injury, and although he may derive an actual benefit from the extension of the time of pay ment. Chit. Con. (5th Amer. ed.) 529. 2 Keen, 644.

This rule, however, is founded on the consideration, that the extension of time is a new contract, to which the surety is not a party, and for the performance of which, therefore, he is not bound. But this reason does not apply to a case where the creditor relinquishes securities, to the benefit of which the surety is entitled. In such a case, the surety is not discharged absolutely, without regard to the value of the securities. He is entitled only to be exonerated to the extent of the value of them.

Whether the value is to be taken at the nominal amount, or is to be estimated under all the circumstances of the case., is a question not raised by the facts agreed, and upon which, there fore, we give no opinion. Upon the case stated, we are of opinion that the defendants -are discharged, it being admitted that the securities, given up by the plaintiffs, exceed in amount the balance now claimed. Bill dismissed as to Waterston and others.