1. When one of two sureties gives a mortgage of his real estate
to his co-surety to protect him against loss by reason of having
become security for the principal, a creditor of the principal is
not entitled to be subrogated in equity in place of the co-surety,
and enjoy the benefit of the mortgage.
2. The distinction in principle between the rights of creditors
of the principal debtor in the security where the debtor furnishes
it to his sureties, and their rights where such security is
furnished by one co-surety to the other, examined and
explained.
3. When each of two co-sureties gives security to the other to
protect him against liability on account of the principal beyond a
fixed sum, no right to resort to the security exists until
obligations on the part of the principal have been met by the
surety beyond the sum named.
Bill in equity by a creditor to obtain the benefit of securities
held by sureties of the principal debtor.
The appellee, who was complainant below, was the holder, and
filed his bill in equity, on behalf of himself and the other
holders of bonds, executed and delivered by Theodore D. Wagner and
William L. Trenholm, to the amount of $710,000, and paid to
creditors in settlement of the liabilities of two insolvent firms,
in which they were two of the co-partners. These bonds were dated
January 1st, 1868. The payment of the principal and interest of
each of these bonds was guaranteed, by writing endorsed thereon, by
George A. Trenholm and James T. Welsman, who were sureties merely.
These sureties entered into a written agreement each with the
other, dated May 3, 1869, in which it was recited that, in becoming
parties to said guarantee, they had agreed between themselves that
the said George A. Trenholm should be liable for the sum of
$400,000, and the said Jas. T. Welsman for the sum of $310,000, of
the aggregate amount of the bonds, and no more, and that each would
be respectively liable to the other for the full discharge of the
said sum and proportion by them respectively undertaken, and
Page 108 U. S. 261
that each would take and keep harmless and indemnify the other
from all claim, by reason of the said guarantee, beyond the amount
or proportion respectively assumed, as stated, and it was thereby
further agreed that at any time when either of them should so
require, each should, by mortgage of real estate, secure to the
other more perfect indemnity, because of the said guarantee.
Thereupon and on the same date, each executed to the other a
mortgage upon real estate of which they were respectively the
owners, the condition of which was that the mortgagor should
perform on his part the said agreement of that date. The
guarantors, as well as the principal obligors, had become insolvent
before the present bill was filed.
It also appears that, of the sum of $573,300 due on account of
outstanding bonds, George A. Trenholm, one of the guarantors, had
paid $108,454, leaving still due from his estate to make good the
proportion assumed by him $214,532, and that the proportion for
which the estate of James T. Welsman, the other guarantor, was
liable, was $250,314, of which nothing had been paid the appellees
claimed that the mortgages interchanged between the guarantors
inured to their benefit as securities for the payment of the
principal debt, and prayed for a foreclosure and sale for that
purpose.
This was resisted by the appellants, one of whom, Hampton's
administrator, as a judgment creditor of George A. Trenholm and
James T. Welsman, claimed a lien on the mortgaged premises; the
others, executrixes of James Welsman, deceased, being subsequent
mortgagees of the same property.
A decree was passed in favor of the complainants, according to
the prayer of the bill, and is now brought under review by this
appeal.
Page 108 U. S. 263
MR. JUSTICE MATTHEWS delivered the opinion of the Court. After
reciting the facts in the above language, he continued:
The ground on which the court below proceeded seems to have been
that the mortgages given by the co-sureties, each to the other,
were in equity securities for the payment of the principal debt,
which inured to the benefit of the creditors upon the principle of
subrogation.
The application of the principle of subrogation in favor of
creditors and of sureties has undoubtedly been frequent in the
courts of equity in England and the United States, and is an
ancient and familiar head of their jurisdiction.
It was distinctly stated, as to creditors, in the early case of
Maure v. Harrison, 1 Eq.Cas.Abr. 93, where the whole
report is as follows:
"A bond creditor shall in this Court, have the benefit of all
counter-bonds or collateral security given by the principal to the
surety; as if A. owes B. money, and he and C. are bound for it, A.
gives C. a mortgage or bond to indemnify him, B. shall have the
benefit of it to recover his debt."
And the converse of the rule was stated by Sir Wm. Grant, in
Wright v. Morley, 11 Vesey 12, where he said:
"I conceive that as a creditor is entitled to the benefit of all
the securities the principal debtor has given to his surety, the
surety has full as good an equity to the benefit of all the
securities the principal gives to the creditor."
And it applies equally between sureties, so that securities
placed by the principal in the hands of one to operate as an
indemnity by payment of the debt, shall inure to the benefit of
all.
Many sufficient maxims of the law conspire to justify the rule.
To avoid circuity and multiplicity of actions; to prevent the
exercise of one's right from interfering with the rights of others;
to treat that as done which ought to be done; to require that the
burden shall be borne by him for whose advantage it has been
assumed, and to secure equality among those
Page 108 U. S. 264
equally obliged and benefited, are perhaps not all the familiar
adages which may legitimately be assigned in support of it. It is
in fact a natural and necessary equity which flows from the
relation of the parties, and though not the result of contract, is
nevertheless the execution of their intentions. For when a debtor,
who has given personal guarantees for the performance of his
obligation, has further secured it by a pledge in the hands of his
creditor, or an indemnity in those of his surety, it is conformable
to the presumed intent of all the parties to the arrangement, that
the fund so appropriated shall be administered as a trust for all
the purposes, which a payment of the debt will accomplish, and a
court of equity accordingly will give to it this effect. All this,
it is to be observed, as the rule verbally requires, presupposes
that the fund specially pledged and sought to be primarily applied
is the property of the debtor, primarily liable for the payment of
the debt, and it is because it is so that equity impresses upon it
the trust, which requires that it shall be appropriated to the
satisfaction of the creditor, the exoneration of the surety, and
the discharge of the debtor. The implication is that a pledge made
expressly to one is in trust for another, because the relation
between the parties is such that that construction of the
transaction best effectuates the express purpose for which it was
made.
It follows that the present case cannot be brought within either
the terms or the reason of the rule, for, as the property, in
respect to which the creditors assert a lien, was not the property
of the principal debtor, and has never been expressly pledged to
the payment of the debt, so no equitable construction can convert
it by implication into a security for the creditor.
It is urged that the logic of the rule would extend it so as to
cover the case of all securities held by sureties for purposes of
indemnity of whatsoever character and by whomsoever given. But this
suggestion is founded on a misconception of the scope of the rule
and the rational grounds on which it is established. Of course, if
an express trust is created, no matter by whom, nor of what, for
the payment of the debt, equity will enforce it, according to its
terms, for the benefit of the creditor, as a
cestui que
trust; but the question concerns the creation of a
Page 108 U. S. 265
trust, by operation of law, in favor of a creditor, in a case
where there was no duty owing to him, and no intention of bounty. A
stranger might well choose to bestow upon a surety a benefit and a
preference, from considerations purely personal, in order to make
good to him exclusively any loss to which he might be subjected in
consequence of his suretyship for another. In such a case, neither
co-surety nor creditor could, upon any ground of priority in
interest, claim to share in the benefit of such a benevolence.
There may be indeed cases in which it would not be inequitable
for the debtor himself to make specific pledges of his own
property, limited to the personal indemnity of a single surety,
without benefit of participation or subrogation; as when the
liability of the surety was contingent upon conditions not common
to his co-sureties, and which may never become absolute.
Hopewell v. Cumberland Bank, 10 Leigh, 206.
We are referred by counsel to the case of
Curtis v.
Tyler, 9 Paige 432, as an instance in which the rule has been
extended to securities in the hands of a surety not derived from
the principal debtor. But the fact in that case is otherwise. The
question was as to the right of an assignee of a mortgage to the
benefit of the guarantee of one Allen to make good any deficiency
in the mortgaged property to pay the mortgage debt. This bond had
been given to one Murray, a prior holder of the mortgage, who had
assigned to the complainant. The court say, in the opinion, p.
436:
"In the case under consideration, Murray had assigned the bond
and mortgage given to him, and had guaranteed the payment thereof
to the assignee. He therefore stood in the situation of a surety
for the mortgagor, when the latter procured the bond of Allen as a
collateral security, or as a guarantee of the payment of his
original bond and mortgage. The present holders are therefore in
equity entitled to the benefit of this collateral bond, in the same
manner and to the same extent as if it had been given to Murray
before he assigned his bond and mortgage, and had been expressly
assigned by him to Beers, and by Beers to the complainants. "
Page 108 U. S. 266
It thus distinctly appears that the bond of Allen which was the
collateral security in controversy, was procured by and derived
from the original mortgagor, the principal debtor. We have been
referred to no case which forms an exception to the rule as we have
stated it.
But the claim of the complainants fails for another reason. The
right of subrogation, on which they rest it, is merely a right to
be substituted in place of each of the co-sureties in respect to
the other, in order to enforce the mortgages given by them
respectively according to their terms. But the conditions of those
mortgages have not been broken, and the very fact which is supposed
to confer the right upon the creditor to interpose -- the
insolvency of the sureties -- has rendered it impossible for either
to fasten upon the other a breach of the condition of his mortgage.
As neither can pay his own proportion of the liability they agreed
to divide, neither can claim indemnity against the other for an
overpayment. It is entirely clear therefore that neither of the
sureties could be, under the circumstances as they appear,
entitled, as mortgagee, to foreclose the mortgage against the
other. The condition of each mortgage was that the mortgagor would
perform his part of the agreement and indemnify the mortgagee
against the consequences of a failure to do so. Unless one of them
had been compelled to pay, and had in fact paid, an excess beyond
his agreed share of the debt, there could have been no breach of
the conditions of the mortgage, and consequently no right to a
foreclosure and sale of the mortgaged premises. And the amount
which the mortgagor could be required to pay, as a condition of
redeeming the mortgaged premises, in case of foreclosure, would be,
not the amount which the mortgagee, as between himself and the
common creditor, was bound to pay on account of the debt, but the
amount which, as between himself and his co-surety, the mortgagor,
he had paid beyond the proportion which, by the terms of the
agreement between them, was the limit of his liability. The
mortgages were not created for the security of the principal debt,
but as security for a debt possibly to arise from one surety to the
other. As to which of them has there been as yet any default?
Plainly none as to
Page 108 U. S. 267
either. And yet the complainants assert the right to foreclose
them both; a claim that is self-contradictory, for, by the very
nature of the arrangement, it is impossible that there should be a
default as to both. The fact that one mortgagor had failed to
perform his part of the agreement could only be on the supposition
that the other had not only fully performed it on his part, but had
paid that excess against which his co-surety had agreed to
indemnify him. There is therefore no right to the subrogation
insisted on, because there is nothing to which it can apply.
It results, therefore, that the complainants were not entitled
to participate in the benefit of the mortgages in question, nor to
share in the proceeds of the sale of the mortgaged premises, but
that the same should have been applied to the payment of the other
judgment and mortgage liens upon the premises, in the order of
their priority. The decree of May 29, 1879, therefore, being the
one from which the appeal was taken, is reversed, and the cause
remanded with directions to take such further proceedings therein,
not inconsistent with this opinion, as justice and equity
require.
Decree reversed.
