Dickenson v. Charles

• Citation: 4 S.E.2d 351
• Court: Supreme Court of Virginia
• Decision Date: 13 September 1939
• Parties: DICKENSON . v. CHARLES et al.

4 S.E.2d 351

DICKENSON .

v.CHARLES et al.

Supreme Court of Appeals of Virginia.

Sept. 13, 1939.

Appeal from Circuit Court, Buchanan County; Alfred A. Skeen, Judge.

Proceeding for liquidation of the First National Bank of Grundy. From a decree allowing H. G. Charles to set off against the amount of judgments on his notes to the bank a claim for reimbursement of amounts he was obligated to pay on bank's certificates of deposit indorsed or guaranteed by him, G. H. Dickenson, receiver of the bank, appeals.

Affirmed.

Argued before CAMPBELL, C. T., and HUDGINS, GREGORY, EGGLESTON, and SPRATLEY, JJ.

Raymond J. Boyd, of Lebanon, for appellant.

F. H. Combs, H. Claude Pobst, and George C. Sutherland, all of Grundy, for appellees.

EGGLESTON, Justice.

The appellant, G. H. Dickenson, is the receiver of The First National Bank of Grundy, which closed its doors and was placed in liquidation in December, 1929. Among the assets coming into the hands of the receiver were three notes of the appellee, H. G. Charles, reduced to judgments since the bank's failure, and aggregating the principal sum of $4,206.11.

The receiver has appealed from a decree which allowed Charles to set off against his indebtedness to the bank on the judgments on these notes a claim for reimbursement due him by the bank for certain amounts which he is obligated to pay upon two certificates of deposit issued by the bank and endorsed or guaranteed by him.

It appears from the agreed statement of facts that in 1928 The First National Bank of Grundy issued two certificates of deposit, one in the principal sum of $9,761.29, payable to Wiley Justus, and the other in the sum of $4,000, payable to W. R. Fletcher and Cynthia Fletcher. Each certificate was payable after thirty days' notice and bore interest at the rate of 4% per annum.

Subsequently the holders of the certificates became uneasy as to the ability of the bank to pay their deposits and threatened to withdraw them. In order to satisfy the depositors and to prevent the withdrawal of their funds, each of the certificates was endorsed by H. G. Charles, A. M. Ratliff and D. M. Charles. All of the endorsers were directors of the bank, H. G. Charles being the president and A. M. Ratliff being the vice-president.

In 1929 the two certificates of deposit were renewed in like amounts and were similarly endorsed by the said officers and directors of the bank to prevent the withdrawal of the funds therefrom.

The bank closed its doors on December 11, 1929, and on December 31st of that year was placed in the hands of a receiver, who began the liquidation of its affairs.

Subsequently the holders of the two certificates of deposit obtained judgments against the three endorsers thereon. The receiver has already paid 66²/₃% on account of the certificates, and according to the agreed facts will pay another dividend of approximately 20%, making about 86²/₃% in all. However, as these dividends were not paid until some years after the bank closed, it is evident that by reason of the accumulation of interest a considerable loss will fall upon the endorsers. A. M. Ratliff, one of the endorsers, is insolvent, and the loss must be borne by the remaining endorsers, H. G. Charles and D. M. Charles.

In the meantime, on April 28, 1938, the Board of Supervisors of Buchanan county recovered a judgment against A. C. Stacey, former treasurer of the county, and H. G. Charles and others, as sureties on his bond, for the sum of approximately $136,500. In a chancery suit instituted for the purpose, the lands of H. G. Charles were subjected to the payment of his proportionate share of this judgment, leaving an excess to be applied to subsequent judgments docketed against him. In this latter class fall the three judgments in favor of the First National Bank of Grundy against H. G. Charles, aggregating the principal sum of $4,206.11, and with which we are concerned.

H. G. Charles is hopelessly insolvent and has been adjudicated a bankrupt. The numerous judgments docketed against him will more than exhaust the balance of the proceeds derived from the sale of his lands. He, therefore, has no further interest in this litigation.

But certain of the inferior judgment lien creditors are vitally interested in maintaining the set-off of Charles' claim for reimbursement against the bank's judgments against him. Obviously if this set-off is allowed the payments to the junior lien creditors will be pro tanto larger. If the set-off is disallowed the payments to them will be correspondingly smaller.

It is too well settled to require the citation of authority that in liquidating the affairs of an insolvent bank a debtor of the bank may set off the bank's debt to him against his debt to it where his claim against the bank has been acquired prior to insolvency. Conversely the set-off is not allowed where the debtor's claim against the bank has not been acquired until after insolvency. See Michie on Banks and Banking, Perm.Ed, Vol. 5, § 162, p. 312; Stegal v. Union Bank, etc. Trust Co, 163 Va. 417, 176 S.E. 438, 95 A.L.R. 582.

Moreover, "It is well settled that in order to warrant a set-off the debts must be mutual; that is, must be owing between the same parties." Elswick v. Combs, 171 Va. 112, 114, 198 S.E. 501, and authorities there cited.

The able briefs filed on behalf of the respective parties in the instant case agree with these principles. They differ only in their application. The vital question is, Was Charles' claim against the bank for reimbursement on account of his endorsements on the certificates of deposit acquired prior or subsequent to the closing of the bank?

While Charles' endorsements on the certificates of deposit were made many months prior to the closing of the bank, the payments to be made by him are subsequent to the bank's failure.

A certificate of deposit is, in effect, the bank's promissory note. 5 Michie on Banks and Banking, Perm.Ed, § 313, pp. 599, 600; 7 Am.Jur, § 492, p. 352. The liability of an endorser thereon is the same as upon the endorsement of any other promissory note. 5 Michie on Banks and Banking, Perm.Ed, § 322(c), p. 613.

An accommodation endorser of a negotiable note stands in the position of a surety for the maker. State Savings Bank v. Baker, 93 Va. 510, 514, 25 S.E. 550; Burton v. Slaughter, 26 Grat. 914, 67 Va. 914, 920; 8 Am.Jur, § 464, p. 212.

It is elementary that one secondarily liable on an obligation, such as a surety or an accommodation endorser, who has satisfied the demands of the holder, is entitled to reimbursement from the party primarily liable, such as the principal or maker of the obligation.

"A surety who pays the debt of his principal, upon the plainest principles of natural reason and justice, has a right to be reimbursed by him. And this principle is recognized by both courts of law and equity. There is an implied contract of indemnity between the principal and his surety, which obliges the former to reimburse the latter who has paid his debt; and the courts of equity will substitute him to the remedies and securities of the creditor for his indemnity; and this not upon the ground of contract, but upon a principle of natural equity and justice." Kendrick v. Forney, 22 Grat. 748, 63 Va. 748, 749, 750.

For numerous other decisions to this effect see 2 Michie's Va. and W.Va.Digest, p. 958.

In 4 Williston on Contracts, Rev.Ed, § 1274, p. 3637, that distinguished author says: "The implied obligation to indemnify a surety arises when the suretyship relation is created but matures only when he has been injured by being compelled to make payment of the debt."

In Scott v. Norton Hardware Co, 4 Cir, 54 F.2d 1047, 1050, Judge Parker, speaking for the court, said: "The implied contract to indemnify a surety arises, not when he sustains his loss, but when he contracts his obligation."

See, also, Wayland v. Tucker, 4 Grat. 267, 45 Va. 267, 268, 50 Am.Dec. 76.

In 50 C.J, § 394, p. 242, the author says: "While many of the rights of a surety depend upon payment by him, he possesses many before payment; and such rights have their inception as soon as he executes the instrument, and are fixed by the law in force at that time. Thus, although in some cases the contrary has been asserted, it is generally held that the relation of debtor and creditor exists between the principal and surety from the time the contract of suretyship is made."

In Rice v. Southgate, 16 Gray 142, 143, the Massachusetts court said: "Upon well settled principles, it is clear that the contract of a principal with his surety to indemnify him for any payment which the latter may make to the creditor in consequence of the liability assumed takes effect from the time when the surety becomes responsible for the debt of the principal. It is then that the law raises the

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implied contract or promise of indemnity. No new contract is made when the money is paid by the surety, but the payment relates back to the time when the contract was entered into by which the liability to pay was incurred. The payment only fixes the amount of damages for which the principal is liable under his original agreement to indemnify the surety."

See, also, Smith v. Young, 173 Ala. 190, 55 So. 425; Fidelity & Deposit Co. v. Duke, 9 Cir., 293 F. 661; United States Fidelity & Guaranty Co. v. Centropolis Bank, 8 Cir., 17 F.2d 913, 53 A.L.R. 295; Jackson v. McKeown, 79 Colo. 447, 246 P. 277.

Following this reasoning the decided weight of authority is that in equity a surety may set off the claim which he is required to pay for an insolvent principal against his indebtedness to the principal, although the payments are not actually made by the surety until after the insolvency of the principal.

In Feazle v. Dillard, 5 Leigh 30, 32 Va. 30, 34, 35, we held that a surety on the bond of an insolvent principal was entitled in equity to set off the amount of such bond, although not yet due, against the surety's debt to the principal. This holding has been reaffirmed and applied...