Berthold v. Berthold

1. Principal and surety — Payment by surety — Extinguishment of obligation, to what extent — Subrogation.—A surety who pays the debt of his principal is entitled to an assignment of the instrument paid. The payment of the obligation by the surety extinguishes it so far as the creditor is concerned, but not as to any rights which the surety has acquired by its payment It should still subsist, with its liens and priorities, to enable him to recover of the principal as well as to compel contribution by the co-surcties, or to avail himself of any securities or collaterals turned out by the principal. So, where an obligation turned out as collateral is paid, the original instrument, so far as the condition is concerned,,is paid and extinguished; but it is still alive in favor of him who has paid it, and he should be permitted to avail himself of any rights in regard to it, to which its purchase would entitle him.

Error to St. Louis Circuit Court. John R. Sarpy resided in France several years next preceding his death, which occurred April 26, 1868. The defendant was the agent and attorney in fact of said Sarpy, and had possession of his assets in St. Louis, and collected rents, etc.,, for him, for all which he received a regular compensation. Among the assets of Sarpy in the hands of defendant -was a note for $10,000, dated May 9,1865, payable twelve months after date. The payment of the note was extended two years, making it finally fall due May 9, 1868, at which time it was paid. This note was indorsed by Berthold and placed with Tesson, Son & Co., bankers, for safekeeping and collection, more than a year before it fell due. While it so remained on deposit before its maturity, the defendant, Pierre A. Berthold, executed a noto, as maker, for $4,000, for the accommodation of E. P. Tesson, the senior member of the firm of Tesson, Son & Co., and Tesson discounted said $4,000 note at the Third National Bank, depositing the $10,000 note belonging to John R. Sarpy as collateral security, without the knoAvledge or consent of Berthold. The $4,000 note was dated December 11,1867, and became due in sixty days, that is, on February 12, 1868. On December 28,1867, Tesson, Son & Co. failed and suspended payment, and on January 6, 1868, filed their petition in bankruptcy. In their schedule they stated the note of Berthold among their liabilities. Sometime in April, 1868, before the $10,000 note became due, defendant called on Tesson, Son & Co., and asked them for the Sarpy assets, notes, etc. All were surrendered except this $10,000 note, which Tesson then informed Berthold had been deposited as collateral security for Berthold’s $4,000 note. Ber-thold being advised by counsel that the $10,000 note could not be released except on payment of said $4,000 note, 'went with Tesson to the Third National Bank, on May 12,1868, after said $10,000 note had been paid at said bank, and said Berthold received, in full payment of said $10,000 note, said note of $4,000, made by himself, and $6,000 in cash. Sarpy died, and defendant in error was appointed his adminis-tratrix1. She brought this suit against Pierre A. Berthold to recover said $4,000. The facts were all agreed upon. I, At law there is no cause of action, because the plaintiff-having received the note when it was past due, takes it subject to all of the equities attaching to it in the hands of the holder from whom he acquired it. Now, in the hands of the Third National Bank, from whom plaintiff received it, it was paid out of the collateral, and therefore the debt was extinguished. It matters not that it was paid out of plaintiff’s funds. It was paid, and hence- the note is dead. II. In equity there could be no recovery, for it could only be had on the principle of substitution or subrogation ; and subro-gation and substitution occur only in case of “ debtor and creditor,” or in that of w principal and surety.” Neither, of these relations exist in this instance. Berthold owed no debt to Tesson, and therefore none to plaintiff. The agreed facts prove it to be an accommodation note drawn for Tesson’s convenience. Tesson could as well have pledged the collateral for his own note. The Third National Bank gave credit on the strength of the collateral, not'on that of the note of Berthold ; hence it was no more Ber-thold’s agency than Sarpy’s through which the loss.occurred. In the agreed facts it is expressly admitted that Tesson’s transfer of a collateral was without the knowledge or consent of Berthold; and the act, when known to Berthold, was condemned by him. He'nce, as the equities in favor of both are equal, the maxim applies, 11 Potior est conditio defendenlisP It is impossible to assign a reason why Berthold any more than Sarpy should be responsible for this loss. Subrogation, and substitution apply only to tbe debtor and creditor, principal and surety. (Sto. Eq. Jur. 732, § 637; Constant v. Matteson, 22 Ill. 556.) The doctrine of substitution, being one of mere equity and benevolence, will never be enforced at the expense of a legal right. (Fink v. Mahaffy, 8 Watts, 382; Bank of Pennsylvania v. Portius, 10 Watts, 152; Erb’s Appeal, 2 Penn. 296 ; Ziegler v. Long, 2 Watts, 206; McGinnis’ Appeal, 16 Penn. St. 448.) Only in a clear case is it permitted, and where it works no injustice to others. (Lloyd v. Galbraith, 32 Penn. 103.) III. Where there is a bond and no mortgage, and it is paid, the bond is functus officio, and no recovery can be had on it at law or in equity. (Sto. Eq. Jur. 578, § 499 a; Gadsden v. Brown, Speer’s Eq. 37 ; Farmers’ Bank v. Gilson, 6 Penn. St. 57; Bank v! Alger, 2 Hill’s Ch. 267; Houston v. Branch Bank at Huntsville, 25 Ala. 261; Foster v. Trustees of Athenaeum, 3 Ala. 302 ; Bibb v. Martin, 14 S. &M. 93 ; Bush v. Stamps, 26 Miss. 465 ; Garth v. Campbell, 10 Mo. 154 ; Hays v. Steamboat Columbus, 23 Mo. 234; Jones v. Bragg, 33 Mo. 339; Wade v. Beldmeir, 40 Mo. ♦486 ; Stewart v. Atkinson, ante, p. 510; Atkinson v. Angert, ante, p. 515.) I. The defendant, as maker of the note, is liable to plaintiff’s intestate, who has paid full value for the same. (Holmes & Drake v. De Camp, 1 Johns. 36; Mechanics’ Bank v. Hayard, 13 Johns. 356.) H. Upon the payment of the amount of the note to the National Bank out of John Sarpy’s funds, equity instantly subrogated John Sarpy to all the rights of the bank. Subrogation, in this case, is the right to be regarded as the purchaser of Berthold’s note. (Bailey v. Broomfield, 8 Harris, 41; 1 Lead. Cas. Eq. 153.) The right of subrogation extends beyond the mere or ordinary and familiar relation of principal and surety, to every instance in which the position of two parties is such as to render one of them primarily liable for a debt which is a charge upon the estate of the other; for payment will give the latter a right to enforce all the remedies of the creditor against the latter. (Stevens v. Goodenough, 26 Term. 676; Morris v. Oakford, 9 Barr, 498.) The equity of a surety to be subrogated to the rights which the creditor has against the principal debtor or his estate exists as well where the surety’s property only is pledged 'as where he came under a personal responsibility. (3 Paige, 6.14, 642, 648 ; 11 Wend. 313 ; 7 Md. 164; 21 Barb. 262 ; Carter v. Jones, 5 Ired. 193 ; 8 Harris, 281.) The right of subrogation is wholly independent of the consent of those against whom it is enforced, and exists wherever the circumstances are such as to vest the property in the debt in those who seek to subrogate. (1 Comst. 505; 25 Yerm. 28 ; 9 Barr, 212.) Sureties are entitled to the benefit of all securities taken up by them, also to collaterals, (1 Sfco. Eq. Jur., § 499 ; 34 Hl.*489; 8 Cow., U. S., 461; 19 Mo. 622.) HI. Payment by one who stands in the relation of a surety, although it may extinguish the remedy or discharge the security as it respects the creditor, has not that effect between the surety and the principal debtor'. As between them it is in the nature of a purchase by the surety from the debtor. It operates an assignment in equity of the debt and of all legal proceedings upon it, and gives a right in equity to call for an assignment of all securities and in favor of the surety; the debt and all its incidents and obligations are considered as still subsisting. Parties incurring subsequent responsibility are as much entitled to the benefit of this rule as if their liability arose from, or was cotemporaneous with, the original obligation. (Cottrell’s Appeal, 11 Harris, 294; Haven v. Eoley, 19 Mo. 622 ; Powell’s Ex’r v. White et aL, 11 Leigh, 309 ; Mathey’s Heirs v. Calhoun, 12 Leigh, 265, 274 ; 1 Johns. Ch. 409-13 ; 9 Watts, 451; 3 Watts & Serg. 401-4; 1 Barr, 512 ; 1 Hill’s Ch. 344, 851 ; 2 Ear. & Johns. 288; 4 liar. & Johns. 307-9; 5 Har. ■& Johns. 423-7 ; 2 liar. & Gill, 88-91; 2 Bland, 509, 529 ; 1 Harrington, 874,377-8, and note.) Accordingly, if the First National Bank had canceled or surrendered Berthold’s note to him discharged, the right of subrogation in John Sarpy would still exist. (See 18 Mo. 400 ; 36 Me. 822; 5 Ired. Eq. 193 ; 1 Comst. 595; 9 Barr, 21; 8 Harris, 281; 25 Mo. 28 ; 1 Am. Lead. Cas. 408.)