A surety who signs an unconditional promise is not discharged
from liability thereon by reason of any expectation, reliance or
condition unless notice thereof be given to the promisee -- or, in
other words, the contract stands as expressed in the writing in the
absence of conditions which are known to the recipient of the
promise.
An assignment in insolvency does not disturb liens created prior
thereto expressly or by implication in favor of a creditor.
On March 20, 1893, the plaintiff in error, as a surety, executed
with his principal the following note:
"Three years after date, we, or either of us, promise to pay to
the order of C. H. Whittemore, as receiver of the McCarthy &
Joyce Company, the sum of nine thousand ($9,000.00) dollars, with
interest at six percent per annum from date till paid. This is one
of the three notes executed for purchase money of the assets of the
McCarthy-Joyce Company, this day sold to James, E. Joyce &
Company."
"James E. Joyce & Co."
"John Joyce"
"Little Rock, Arkansas, March 20, 1893"
This note was transferred before due for value to the First
National Bank of Little Rock, which afterwards went into the hands
of a receiver. Such receivership was changed, and the defendant in
error is the present receiver. The note not having
Page 179 U. S. 592
been paid at maturity, this action was brought in the Circuit
Court of the United States for the Southern District of Ohio. The
defendant answered, pleading two defenses, as follows: first, that
the McCarthy & Joyce Company, a corporation, of Little Rock,
Arkansas, became involved, and on or about January 16, 1893,
assigned its property to one C. H. Whittemore, as assignee for the
benefit of creditors; that such assignment was confirmed by the
chancery court of the county, and the assignee appointed receiver;
that thereafter the receiver was directed by said court to sell all
the property belonging to the insolvent company; that such sale was
made on April 20, 1893, to James E. Joyce & Company, the
principal in this note, for $38,200, all of which has been paid by
the purchaser except this note and another of like date and amount
signed by another party as surety. The answer then proceeds as
follows:
"Defendant further says that, at the time the order for the sale
of said real and personal property was made, it was expressly
provided and ordered by the court that the said receiver was, in
addition to obtaining endorsers or sureties upon the notes given
for the deferred payments, to retain and reserve a lien, under the
statutes of the State of Arkansas, upon all the real and personal
property so ordered to be sold, and this defendant, knowing that
said property was more than sufficient in value to pay all the
deferred payments as provided for in said sale, and relying upon
the faithful execution of said order by said receiver, became
surety upon said note described in the petition herein. Defendant
further says that said receiver, after having received said note,
in violation of the order of the court and in violation of the
rights of this defendant, negligently and wrongfully failed to
retain or reserve a lien upon said property, real and personal, and
improperly conveyed all of said real and personal property to the
said James E. Joyce & Company free and clear of any lien
whatsoever. The defendant further says that said James E. Joyce
& Company, after so receiving said property, have sold and
conveyed all the personal property and nearly all the real estate
to third persons, who were ignorant of said order of court, made
for said sale, whereby the lien which ought to have been retained
and reserved has been lost, and
Page 179 U. S. 593
the said defendant further says that said property was
sufficient in value to have fully paid said note as well as the
other note given for the deferred payments, and the said First
National Bank of Little Rock, Arkansas, as well as its receiver,
having received the said note with notice of the foregoing facts,
this defendant is discharged and released from the said note, he
asks that the plaintiff be compelled to surrender said note and
that the same be cancelled by order of this court."
The second defense was that, when the McCarthy & Joyce
Company made its assignment, a part of the property assigned
consisted of certain promissory notes, the dates, amounts, and
payers of which were specifically described; that such notes at the
time of the assignment were in the possession of the First National
Bank of Little Rock for collection; that such bank was a preferred
creditor to a large amount; that all the property of said McCarthy
& Joyce Company, including such notes, was ordered sold, and
that the sale was made for $38,200, as heretofore stated; that
thereafter the First National Bank and its receivers declined to
surrender the notes, or the proceeds of such as had been collected;
that the purchaser, James Joyce & Company, paid to the receiver
of the McCarthy & Joyce Company $20,200, and that the notes
retained by the bank and its receiver were of sufficient value to
pay the unpaid purchase price both this note and the other note
heretofore described. A demurrer to such answer was sustained, and
judgment entered in favor of the plaintiff, which judgment was
affirmed by the court of appeals of the Sixth Circuit, 92 F. 838,
and thereafter this writ of error was sued out.
MR. JUSTICE BREWER delivered the opinion of the Court.
The surety, defendant below, now plaintiff in error, did not
Page 179 U. S. 594
in his answer aver that the note was not given for value or that
either he or his principal had paid it. His defenses were that he
was discharged from liability first by the conduct of the payee,
and second by that of the plaintiff.
With regard to the first defense, we may put the plaintiff out
of consideration and inquire whether the defense would have been
good if the payee had not transferred the note, but had himself
brought the action. For the plaintiff, though charged to have had
knowledge of the facts, is, if in no better, certainly in no worse,
position than the payee would have been.
That defense was, in substance, that the receiver was directed
in making a sale to retain a lien, as well as to take personal
security. The surety knew that such order had been made, expected
that it would be complied with, and signed as surety, relying upon
compliance, but there is no allegation that he ever notified either
his principal or the receiver that he signed upon that condition.
So far as the paper disclosed, it was an absolute promise on the
part of the principal to pay so much money, and an unconditional
guarantee by the surety of such payment. Could the principal defend
against an action on this note on the ground that no lien was
retained upon the property sold by the receiver and purchased by
him? Clearly not. But the paper puts both principal and surety on
the same plane. If the surety has any other defense, it must be
because the writing does not fully express his contract. He says
that it does not express the contract he intended to make, but no
conditions are named. If he wanted to attach conditions to his
guaranty, he should have stated them in the writing, or at least
given notice of them to the payee, the other party to the contract.
Even if he had told his principal that he signed only upon a
condition, such notice would not bind the payee unless communicated
to him much less when, so far as the answer discloses, he never
notified either the principal or the payee, but, relying upon the
payee's complying with the order of the court, signed an apparently
unconditional promise. The receiver was not acting in behalf of the
defendant. His duty was to the estate and its creditors. True, he
ought, in compliance with the order of the court, to have retained
a lien, but his failure so to do was a
Page 179 U. S. 595
breach of duty to the estate in his hands for which failure the
estate and its creditors might hold him responsible. Undoubtedly
one may not, after receiving the promise of a surety, release other
securities which he holds to the prejudice of the surety, but a
release of security after the receipt of the promise of a surety is
very different from a failure to take more security than such
promise. It would seem from the allegations in this answer that the
surety signed supposing that he was incurring no liability; that
his unconditional promise that the principal should pay the note
meant nothing, and this because he expected that other primary and
sufficient security would be taken. And yet he gave no notice that
such was the condition upon which he signed as surety, and did
nothing to compel compliance by the receiver with the order of the
court. He was willing to make his unconditional promise and take
the chances of the receiver doing as he was ordered, and now seeks
to release himself from that promise simply because of the
receiver's neglect.
There are many authorities sustaining the proposition that a
surety who signs an unconditional promise is not discharged from
liability thereon by reason of any expectation, reliance, or
condition unless notice thereof be given to the promisee, or, in
other words, that the contract stands as expressed in the writing
in the absence of conditions which are known to the recipient of
the promise.
See, among other cases,
Goodman v.
Simonds, 20 How. 343,
61 U. S. 366;
Dairy v. United
States, 16 Wall. 1;
Merriam v. Rockwood,
47 N.H. 81;
Selser v. Brock, 3 Ohio St. 302, 308;
Passumpsic Bank v. Goss, 31 Vt. 315;
State v.
Potter, 36 Mo. 212; Baylies on Sureties and Guarantors 440; 2
Brandt on Suretyship and Guaranty § 407. Without citing other
of the many authorities to the same effect, it may not be out of
place to refer to one decision which presents the question in
almost precisely the same form that it is presented here,
Wornell v. Williams, 19 Tex. 180. In that case, an
administrator sold property of the estate, the order of sale
directing that he take from the purchaser two good sureties as well
as mortgages upon the property, as provided by the statute. He took
the
Page 179 U. S. 596
sureties but failed to take the mortgage. The sureties, when
sued, setting forth these facts, averred in their answer:
"Further answering, these defendants say that they became
sureties to the note aforesaid in consideration of the requirement
made by the statute and said order that a mortgage should be taken
upon the said slave, and they would not have become sureties but
for that requirement and the belief and assurance that it would be
complied with."
There was no allegation of notice to the administrator of the
condition upon which they signed. The court, overruling the
defense, said:
"There is no allegation of any actual deception, imposition, or
fraud practiced upon the defendants. The only ground for relief
really disclosed by the plea is that the plaintiff did not perform
his duty by taking the required additional security. The taking of
that security should have been contemporaneous with the taking of
the note upon which the defendants became sureties. Hart.Dig. art.
1181. If they intended to become such only upon the taking of the
mortgage upon the property, it became them, before giving their
note, to see that the mortgage security was taken. There was
nothing to prevent them from doing so. If, instead of taking that
precaution, they saw fit to trust to the prudence and discretion of
the administrator, the estate he represents cannot be made to bear
the consequences of the want of their vigilance and care. They
cannot make a hardship, against which they had ample power and
opportunity to provide, a ground to relieve them from their
obligation to the estate."
The demurrer to the first defense in this answer was properly
overruled.
The second defense is substantially that the bank was a creditor
of the insolvent firm, that it was a preferred creditor, that it
had certain notes for collection, that those notes were included in
the sale, but were not turned over to the purchaser, and that they
were of sufficient value to offset the amount due on this note. It
is not alleged that the debt due from the insolvent to the bank had
been paid by collection of those notes or otherwise, but the
defense is rested on the averment that notes
Page 179 U. S. 597
thus deposited and unpaid were of sufficient value to pay the
unpaid purchase money. It is familiar law that a bank receiving
notes for collection is entitled, in the absence of a contract,
expressed or implied, to the contrary, to retain them as security
for the debt of the party depositing the notes. 1 Jones, Liens (2d
ed.), § 244;
Bank of the Metropolis v. New
England Bank, 1 How. 234,
42 U. S. 239;
Reynes v. Dumont, 130 U. S. 354,
130 U. S.
391-392. But if such banker's lien existed, the sale
transferred nothing but the equity in those notes after the payment
of the debt secured by their deposit.
The fact, as alleged, that the bank, although a preferred
creditor, accepted the assignment cannot be construed as an
admission that the bank waived its lien on the notes deposited with
it for collection. Nowhere is there a suggestion that the bank
either directly or indirectly consented that the assignment should
operate to divest itself of its lien and transfer the notes in its
hands to the receiver discharged from such lien. While the amount
of the indebtedness of the insolvent to the bank is not in this
answer disclosed, counsel refer us to the case of
Cockrill v.
Joyce, 62 Ark. 216, a case decided before the commencement of
this action, in which the purchaser, the principal debtor, sought
to defeat the title of the bank to these notes and compel an
inclusion of them
in solido in the sale to the purchaser
discharged of any lien of the bank thereon. And in that case, it
appeared that, prior to the insolvency, the company was indebted to
the bank in the sum of nearly $100,000, and that these notes were
placed in its hands for collection. The court sustained the title
of the bank to the notes, and their proceeds as security for its
indebtedness, notwithstanding the assignment. While we may not
refer to that case for matters of fact, yet the facts therein
disclosed add weight to the conclusion to which, irrespective
thereof, we have come -- that an assignment in insolvency does not
disturb liens created prior thereto expressly or by implication in
favor of a creditor. We conclude, therefore, that the demurrer to
the second defense was properly sustained. The judgment of the
circuit court of appeals is
Affirmed.
