Fry v. Ausman

Decision Date02 April 1912
Citation29 S.D. 30,135 N.W. 708
PartiesURIAH S. FRY, Plaintiff and appellant, v. L. E. AUSMAN et al., Defendants and respondents.
CourtSouth Dakota Supreme Court

Appeal from Circuit Court, Jerauld County, SD

Hon. Frank B. Smith, Judge


Gleim & Hatch, Brown & Mossman

Attorneys for appellant.

Preston, Wagner & Tym

Attorneys for respondents.

Opinion filed April 2, 1912


The sole question presented by this appeal is whether one holding a note secured by a mortgage upon real estate can recover upon such note against a party other than the mortgagor, where such party had taken a deed to said mortgaged premises, and in such deed had assumed such mortgage indebtedness, the grantor in such deed being in no manner bound to pay such mortgage indebtedness, and there being no evidence, other than such deed, to show an intent on the part of the grantor and grantee in such deed to contract for the benefit of the owner of the note and mortgage. The trial court held there could be no recovery.

Respondent contends that, disregarding the other question involved herein, appellant cannot recover because of a lack of privity of contract between appellant and respondent. It is true that, under what is known as the English rule and which is followed in several of the states, appellant would not be the proper party plaintiff, and it would be necessary that the action be brought in the name of the grantor in the deed; but there early arose in this country what is known as the American rule allowing the real party in interest to sue in his own name upon a contract made for his benefit. The so-called "Code" states have many or all adopted, many by statutory enactment, the American rule. This state adopted such rule by section 1193, Civil Code, which reads: "A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescinded."

Respondent further urges that this court has decided the other question involved herein in the case of Fish & Hunter Co. v. New England Homestake Co., 27 S.D. 221, 130 N.W. 841. It is true that we indorsed therein the rule laid down in Jefferson v. Asch, 53 Minn. 446, 55 N.W. 604, 25 L.R.A. 257, 39 Am.St.Rep. 618, to-wit:

"Without undertaking to lay down a general rule defining when a stranger to a promise between others may sue to enforce it, we are prepared to say, where there is nothing but the promise, no consideration from such stranger, and no duty or obligation to him on the part of the promisee, he cannot sue upon it." An examination of the contract involved in the Fish & Hunter Co. case reveals the fact that such contract was one solely between Godfrey and his co-owners for Godfrey's benefit, and in no manner contained any promise or covenant in favor of third parties, and was therefore not "expressly for the benefit of a third person."

Under all the authorities, such a contract gives to third parties no right of action. The Supreme Court of Wisconsin holds exactly contrary to the above Minnesota decision; yet the Wisconsin court, in a case involving a question similar to- that arising upon the contract in the Fish & Hunter Co. case, sustains this court in its holding as to effect of such contract. Electric Appliance Co. v. U.S. Fidelity Co., 110 Wis. 434, 85 N.W. 648, 53 L.R.A. 609. Another opinion along the same line, the reasoning in which shows that this court was clearly right in its holding as to the effect of the contract in the Fish & Hunter Co. case regardless of the exact question involved in the case at bar, is that of Parlin v. Hall, 2 N.D. 473, 52 N.W. 405. See, also, Thomas Mfg. Co. v. Prather, 65 Ark. 27, 44 S.W. 218. It is thus seen that the precise question now before us was not necessarily involved in the Fish & Hunter Co. case, and we therefore approach the discussion of it as though we had made no reference to it in our opinion in such case.

Pomeroy at section 1207 of the third edition of his work on Equity Jurisprudence notes that the courts, holding that there can be no liability upon the part of the grantee where there was none on the part of the grantor, also hold that the liability, when any does exist, results only from an application of the doctrine of subrogation, and that, unless there was a liability or obligation on the part of the grantor so that, as between the grantor and grantee, the grantee became the principal debtor and the grantor but a surety, there would be nothing upon which the creditor could base a right of subrogation. Pomeroy also notes that the courts holding the grantee liable where the grantor was not liable base the right of recovery solely upon the contract, taking the position that, where a contract is made for the benefit of one not a party thereto, he may treat the promise as though made to himself, and may sue in his own name thereon.

The federal Supreme Court has adopted the subrogation theory of liability, as appears by the following from the case of Keller v. Ashford, 133 U.S. 610, 10 S.Ct. 494, 33 L. Ed. 667:

"The doctrine of the right of a creditor to the benefit of all securities given by the principal to the surety for the payment of the debt does not rest upon any liability of the principal to the creditor, or upon any peculiar relation of the surety towards the creditor, but upon the ground that the surety, being the creditor's debtor, and in fact occupying the relation of surety to another person, has received from that person an obligation or security for the payment of the debt, which a court of equity will therefore compel to be applied to that purpose at the suit of the creditor. Where the person ultimately held liable is himself a debtor to the creditor, the relief awarded has no reference to that fact, but is grounded wholly on the right of the creditor to avail himself of the right of the surety against the principal. If the person who is admitted to be the creditor's debtor stands at the time of receiving the security in the relation of surety to the person from whom he receives it, it is quite immaterial whether that person is or ever has been a debtor of the principal creditor, or whether the relation of suretyship or the indemnity to the surety existed, or was known to the creditor, when the debt was contracted. In short, if one person agrees with another to be primarily liable for a debt due from that other to a third person, so that as between the parties to the agreement the first is the principal and the second the surety, the creditor of such surety is entitled in equity to be substituted in his place for the purpose of compelling such principal to pay the debt."

For a general discussion of this question and a review of the numerous authorities bearing upon the different phases thereof, we refer to the very exhaustive notes pages 176 to 207 of 71 Am.St.Rep. These notes call particular attention to the two elements required under the New York decisions in order that there may be a recovery: (1) There must be an intent to benefit the third party; and (2) the promisee must owe some obligation to the third party. It is very apparent that the decisions from those states which have adopted the English rule above referred to are of no authoritative value upon the question before us. Among these states seem to be Georgia, Massachusetts, Michigan, New Hampshire, North Carolina, Vermont, Virginia, and Wyoming. We therefore cite cases from those states only which recognize the American rule allowing suit by real party in interest.

Among the authorities supporting the New York rule and denying a right of recovery under the facts in this case are the following: King v. Whitely, 10 Paige (N.. Y.) 465; Vrooman v. Turner, 69 N.Y. 280, 25 Am.Rep. 195; Matter of Wilber v. Warren, 104 N.Y. 192, 10 N.E. 263; Durnherr v. Rau, 135 N.Y. 219, 32 N.E. 49; Jefferson v. Asch, supra; Kramer v. Gardner, 104 Minn. 80, 116 N.W. 925, 22 L.R.A. (N.S.) 492; Clement v. Willett, 105 Minn. 267, 117 N.W. 491, 17 L.R.A. (N.S.) 1094, 127...

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