American Sur. Co. v. Grace

• Decision Date: 02 May 1925
• Parties: AMERICAN SURETY CO. v. GRACE ET AL.
• Court: Tennessee Supreme Court

271 S.W. 739

151 Tenn. 575

AMERICAN SURETY CO. v. GRACE ET AL.

Supreme Court of Tennessee.

May 2, 1925

Appeal from Chancery Court, Shelby County; Israel H. Peres Chancellor.

Suit by the American Surety Company against D. K. Grace and others. From different parts of the decree, complainant and defendant North Memphis Savings Bank appeal. Affirmed.

McKellar Kyser & Allen, of Memphis, for Surety Co.

M. C Ketchum, Walter Chandler, Henry Craft, A. J. Calhoun, and L. L. Cole, Jr., all of Memphis, for Grace, Bank, and others.

GREEN C.J.

Mrs. D. K. Grace died in Memphis May 15, 1921, intestate. Her husband and three minor children survived her. She owned real estate in that city, incumbered by lien to secure her notes for balance of the purchase money amounting to $5,100. There was some interest due on these notes, and she owed certain taxes. These liabilities constituted all her indebtedness. In addition to her equity in said real estate, Mrs. Grace had $683 in cash and $13,500 of notes, secured by mortgage on Memphis real estate. Five of these notes were for $2,500 each, and one for $1,000.

After the death of this lady, her surviving husband, D. K. Grace, qualified as administrator of her estate; complainant, the American Surety Company, becoming his surety.

Grace paid his wife's funeral expenses out of her money coming into his hands as administrator, but seems to have paid nothing else on her indebtedness, and had at the time the bill herein was filed dissipated all the assets of his wife's estate that came into his hands as her administrator.

Grace was a partner in a business enterprise at Memphis, known as the Purity Seed Company. This concern did banking with the North Memphis Savings Bank, and was indebted to that bank in the sum of $1,200. After qualifying as administrator, Grace brought one of the $2,500 mortgage notes formerly owned by his wife to the North Memphis Savings Bank and pledged this note to secure the $1,200 due by his firm to the bank, and to secure an additional loan of $1,200 thereupon made by the bank to this firm. Grace indorsed said note "D. K. Grace, Administrator of Helene Clark Grace." Later this $2,500 note, thus put up with the bank as collateral, was paid by its maker direct to the bank. Out of the proceeds of said note, the bank satisfied the two $1,200 notes of Grace's firm just referred to, and credited this firm with $100; the balance remaining.

A short while after the pledge of the aforesaid $2,500 note to the bank as just detailed, Grace borrowed $3,000 from the bank for his firm, and a little later borrowed another $1,000 for his firm. At the time these last two loans were negotiated, Grace had $11,000 mortgage notes remaining in his hands as administrator of his wife's estate, and these notes were deposited with the bank as security for the two loans to Grace's firm aggregating $4,000.

Some time thereafter, acting under authority of an order of the probate court of Shelby county, Grace, as his wife's administrator, sold this $11,000 of notes to one Ennis for $8,900 cash. This transaction was concluded at the North Memphis Savings Bank and Ennis obtained the notes there and paid in the $8,900 to the bank. Out of this money paid in by Ennis, the bank satisfied its notes for $4,000 against the Purity Seed Company, and credited the balance, $4,900, to the account of D. K. Grace, administrator of Mrs. Helene Clark Grace. Grace appropriated the $4,900 to his own uses and has left entirely unpaid his wife's debts, as heretofore mentioned.

The original bill herein was filed by the American Surety Company, making the North Memphis Savings Bank, Grace, administrator, and individually, the minor children of Mrs. Helene Clark Grace, and some others, parties. The complainant recited in its bill the facts heretofore stated, and, as surety on Grace's bond as administrator, sought a decree against the bank, charging that institution with being a party to the misappropriation by Grace of the assets of his wife's estate. The minor defendants, through their guardian ad litem, filed a lengthy answer and cross-bill in which they asserted their claims, both against the surety company and the bank, and asked that the rights of all parties be determined by decree of the court. The bank answered and denied liability either to the complainant or to the cross-complainant. Some other steps were taken which it is not necessary to mention.

The chancellor decreed in favor of the minor children against their father, the mother's administrator, and his surety, to the extent of the indebtedness of the mother's estate. He decreed in favor of the surety company against the bank to the extent that the bank had gotten the proceeds of the mortgage notes pledged with it by Grace, the administrator, with interest from the several dates upon which the bank received payments out of such proceeds. The recovery against the bank was ordered paid into court, to be credited on the children's judgment against the surety. The chancellor decreed, however, that the bank was not liable for any of the $4,900 deposited therein to the credit of Grace, administrator, which was disbursed by Grace on checks signed by him as administrator. From this decree, in its last particular, the surety company has appealed, and from the decree, in so far as liability was adjudged against it, the bank has appealed.

It is first assigned for error by the bank that the surety company is not entitled to maintain this bill; it not appearing that it has discharged the indebtedness of its principal to the creditors, the minor heirs. The bank relies on Knaffl v. Knoxville Banking & Trust Co., 133 Tenn. 655, 182 S.W. 232, Ann. Cas. 1917C, 1181, and that line of cases. Passing over the exceptions to this general rule, the basis of the rule is that subrogation before payment would prejudice the creditor. Here the creditors by cross-bill acquiesce in the prayer of the surety for relief. It can make no difference to the bank, if liable, whether it pays the surety or the creditors. All parties were before the court and the chancellor undertook to protect the rights of all in his decree. We think the bank has no standing to complain of the decree in this particular.

There is no dispute over the facts of the case. The bank knew that the mortgage notes pledged to it belonged to the estate of Mrs. Grace. The bank contends that, upon the death of Mrs. Grace, intestate, "the absolute title to the surplus of said notes, after reserving enough to pay the debts of $5,422, vested in D. K. Grace immediately * * * jure mariti." The argument is that sufficient personalty came into the hands of Grace to pay all his wife's debts and still leave him with property received from this source greater in value than that pledged to the bank. So it is claimed that Grace was entitled to deal with this surplus property as he chose; that it was his and he had a right to pledge it.

Although there appears to be some controversy over the question, we think there is no doubt but that the personal estate of Mrs Grace was primarily liable for all her debts, and that her heirs were entitled to have her administrator, out of assets coming into his hands, discharge the...