Cobb v. Vaughan & Co.

• Decision Date: 15 January 1925
• Citation: 141 Va. 100
• Court: Virginia Supreme Court
• Parties: J. N. COBB, GEORGE W. SCOTT, I. J. JONES, W. M. BRADSHAW, HARRY STEINHARDT, J. E. ROSE, I. Q. WIGGINS, AND E. C. BEALE v. VAUGHAN & COMPANY, BANKERS.

Page 100

141 Va. 100

J. N. COBB, GEORGE W. SCOTT, I. J. JONES, W. M. BRADSHAW, HARRY STEINHARDT, J. E. ROSE, I. Q. WIGGINS, AND E. C. BEALE v. VAUGHAN & COMPANY, BANKERS.

Supreme Court of Virginia, Richmond.

January 15, 1925.

1. GUARANTY — Definition. — A guaranty is a collateral undertaking by one person to be answerable for the payment of some debt or the performance of some duty or contract for another person who stands first bound to pay or perform. There can only be a contract of guaranty where there is some principal or substantive liability to which it is collateral; if there is no debt, default, or miscarriage of a third person either present or prospective, there can be nothing upon which to base a contract of guaranty.

2. GUARANTY — Original Promise or Guaranty. — If it can be seen that the person sought to be held is primarily liable, prior to the breach of the contract or duty by some one else, the conclusion at once follows that the contract in question is not one of guaranty; and, although a contract is in form to answer for the debt or default of another, if its leading purpose is to secure some benefit to the promisor or to promote his interest, it will be regarded as an original undertaking. On the other hand, although the word "guaranty" may be used when the engagement is an original and absolute one to pay the debt when it becomes due, that construction is put upon it only when it is plain that such was the intent of the parties. The question as to whether a contract is one of original promise or of guaranty merely is one of fact to be determined from the circumstances surrounding the transaction.

3. GUARANTY — Diligence to Collect from Original Debtor. — To render a guarantor of a note liable upon his promise the promisee must have used due diligence to collect from the principal debtor.

4. GUARANTY — Guaranty of Note — Notice of Renewal. — The guarantor of a note is released from liability by the renewal of the note without his knowledge.

5. PLEDGE AND COLLATERAL SECURITY — Renewal of Note not Discharge of Security. — The law is that the renewal or extension of a principal note does not release or discharge the collateral deposited as security for its payment, and without dispute is this true where the stipulation is contained therein "that the bond is to also secure the payment of" any note given in extension or renewal of the original note.

6. PLEDGE AND COLLATERAL SECURITY — Renewal of Note not Discharge of Security — Case at Bar. — In the instant case defendant's directors and officials in a bank, which was in financial difficulties, gave their bond to secure a note of the bank. The bond executed by them was payable one year after date, while the note for which their bond was deposited as collateral bore the same date, and was payable sixty days after date. The bond stated that it was given as collateral for the note or any note given in renewal or extension.

Held: That defendants were put on notice that a renewal of the original note was contemplated.

7. GUARANTY — Bond by Directors of Bank Held an Original Contract and not a Guaranty. — A bank of which defendants were directors and officials was in financial difficulties and defendants executed and delivered to plaintiffs a bond as collateral security for a note of the bank. In view of the surrounding circumstances, the stipulations contained in the bond, the benefits accruing to the defendants, the positive testimony of one of plaintiffs as to the purpose of the bond, and the failure of defendants to testify as to their intention in executing the bond:

Held: That the bond was not a contract of guaranty but an original promise to pay.

8. DURESS — Bond by Director of Bank — Threats of Bank Examiner — Allegation of Duress. — In an action on a bond against a director of a bank, the director alleged that he had been induced to sign the bond by threats of a State bank examiner. The alleged threats were that the examiner "intimated" and "stated" that unless defendant signed he could be and might be prosecuted for mismanagement of the bank.

Held: That this was not a sufficient allegation of duress.

9. DURESS — Plea of Duress — Duress by Another than the party Benefited. — Where duress is alleged through the illegal acts or statements of a party other than the party benefited, the plea must allege that the party to be benefited is responsible in some way for the illegal acts done or the illegal statements made.

Error to a judgment of the Circuit Court of Southampton county, in a proceeding by motion for a judgment for money. Judgment for plaintiffs. Defendants assign error.

The opinion states the case.

N. T. Green, J. H. Corbitt, A. S. Johnson, Jno. N. Sebrell, Jr., and D. C. O'Flaherty, for the plaintiffs in error.

E. R. F. Wells and R. E. L. Watkins, for the defendants in error.

CAMPBELL, J., delivered the opinion of the court.

This is a proceeding by notice of motion, instituted by the defendants in error, C. C. Vaughan, Jr., and Cora V. Camp, partners, doing business under the firm name and style of Vaughan & Company, against the plaintiffs in error, to recover the sum of one hundred and ten thousand dollars, with interest thereon, from the 21st day of March, 1921, the same being alleged to be due as evidenced by a certain bond reading as follows: "$110,000.00.

"Franklin, Virginia,

"March 21, 1921.

"On demand, one year after date, with interest from date, for value received, we owe, both jointly and severally, and promise to pay unto Vaughan & Company, Bankers, Franklin, Virginia, the just and full sum of one hundred and ten thousand dollars.

"This obligation is to be used as collateral security for a loan to secure the deposits of the Farmers Bank of Franklin, Franklin, Virginia, this day taken over by said Vaughan & Company, Bankers. We, and each of us, hereby waive the benefit of our homestead exemption as to this obligation.

"Given under our hands and seals this 21st day of March, 1921."

As a matter of convenience, the parties litigant will be referred to as plaintiffs and defendants, according to the positions occupied by them in the trial court.

The facts in the case as disclosed by the record are in substance as follows:

The Farmers Bank of Franklin, of which the defendants were officers and directors, in March, 1921, found itself in financial straits, with its depositors demanding payment of the sums due them. In order to obtain a loan to meet the demand of depositors, the officers and directors of the bank applied to the plaintiffs for a loan of $110,000.00.

The result of the negotiations was that the plaintiffs agreed to make the loan and on the 21st day of March, 1921, an agreement was entered into between the parties, whereby the plaintiffs agreed to deposit with themselves $110,000.00 to the credit of the Farmers Bank of Franklin, to be applied to the payment of checks of depositors, and for the payment of certain other obligations of the Farmers Bank.

Under the terms of the agreement the Farmers Bank executed its note for the sum of $110,000.00 payable to the order of the plaintiffs, sixty days after date, and assigned to plaintiffs certain bonds, notes and other evidences of indebtedness owned and held by it, as collateral security for the payment of this note of $110,000.00.

In addition to its note and evidences of indebtedness, the Farmers Bank delivered to plaintiffs the note executed by the defendants, as heretofore set forth. This note executed by defendants was filled out on one of the printed forms of collateral notes used by the Farmers Bank, with the name Vaughan & Company, Bankers, substituted for Farmers Bank of Franklin.

Pursuant to these negotiations, the Farmers Bank of Franklin was enabled to pay its depositors every penny due them.

While irrelevant to the issue, it is disclosed by the evidence of General C. C. Vaughan, Jr., the only witness who testified upon the trial of the case, that the plaintiffs paid on account of the Farmers Bank, in addition to the $110,000.00, the sum of $413.48.

On May 20, 1921, the note of the Farmers Bank was curtailed by E. L. Beale, president thereof, to $108,848.00, and a renewal note was executed on that date, for that amount, payable thirty days after date. This note, after being curtailed, was renewed on June 18, 1921, for a period of thirty days from that date. Again, on July 18, 1921, this note, amounting to $108,000.00, was renewed by the execution and delivery of a thirty day note. This was the last renewal. These renewal notes were similar in form to the original note and contained a recital that the bond of defendants and certain bills receivable were held as collateral security.

On May 12, 1922, the plaintiff docketed their notice of motion for judgment, whereupon all of the defendants appeared either generally or specially and demurred or pleaded.

The demurrer being sustained, on motion of the plaintiffs, they were permitted by the court to file an amended notice of motion as follows:

"Take notice, that on the 19th day of June, 1922, the undersigned, C. C. Vaughan, Jr., and Cora V. Camp, partners, doing business under the firm name and style of Vaughan & Company, Bankers, will move the Circuit Court of the county of Southampton, Virginia, at its courthouse in Courtland, Southampton county, Virginia, for a judgment in their favor against you, and each of you, for the sum of $110,000.00 with interest thereon at the rate of six per centum per annum from the 21st day of March, 1921, until paid, and the costs of this proceeding; which said amount is due the undersigned by you in virtue of a certain written obligatory or bond, of which they are the owners and holders, signed and sealed by you, and each of you dated March 21, 1921, for the principal sum of $110,000.00, payable on demand one year after its date to the undersigned, Vaughan & Company, Bankers, bearing interest from its date, and containing a waiver of your...