Southern Sur. Co. v. Merchants' & Farmers' Bank of Avilla

• Decision Date: 20 April 1928
• Docket Number: No. 12787.,12787.
• Citation: 161 N.E. 842
• Parties: SOUTHERN SURETY CO. v. MERCHANTS' & FARMERS' BANK OF AVILLA et al.
• Court: Indiana Appellate Court

161 N.E. 842

SOUTHERN SURETY CO.

v.MERCHANTS' & FARMERS' BANK OF AVILLA et al.^*

No. 12787.

Appellate Court of Indiana, in Banc.

April 20, 1928.

Appeal from Noble Circuit Court; Arthur F. Biggs, Judge.

On petition for rehearing. Rehearing denied.

For former opinion, see 159 N. E. 3.

John R. Browne, of Marion, Fred L. Bodenhafer, of Kendallville, and Wm. M. McLaughlin, of Des Moines, Iowa, for appellant.

Redmond & Emerick, of Kendallville, and Luke H. Wrigley, of Albion, for appellee.

McMAHAN, J.

We must not lose sight of the fact that appellant was the surety on the contractor's bonds, and as such had an interest in the retained percentages. This interest was such that a release or payment of the same to the contractor, without the consentof the surety, would have released the surety from its obligation under the bonds. This right of the surety did not arise out of the assignments by the contractor to it. It arose out of the suretyship.

Appellee agreed to extend to the contractor a “floating credit” and to loan it money “to be used in the execution of the contracts.” It entered into a written agreement with the contractor, in which the contractor agreed that the auditor of the county should turn over to appellee all checks issued to the contractor on estimates for work on each contract. When the arrangement for the floating credit and the above agreement was made, it was agreed that the proceeds of all loans made by appellee should be deposited with appellee bank, subject to the checks of the contractor for the purpose set out in the agreement, viz. “to be used in the execution” of the contracts.

Appellee, in its original brief and in its brief on rehearing, concedes that the assignment of the estimates to it was as security for the loans made by it to the contractor. The court found that appellee had loaned the contractor a total of $63,531.63; that the total amount received by appellee on account of the estimates, so held by it as collateral security, was $67,419.43, which was more than sufficient to have paid all of said loans and the interest thereon. Of the $67,419.43, so received by appellee, it applied $3,760.25, and no more, on the loans made to the contractor. The balance, $63,659.18, was turned over to the contractor, and no part of it was applied on the debt of the contractor to appellee.

Not only did appellee turn this vast sum of money, received by it on the estimates held by it as collateral security, over to the contractor, but, after placing the same to the credit of the contractor, it knowingly and negligently permitted the contractor to check out and use for the payment of claims not connected with or growing out of the construction of the Rich and Kreiger roads more than enough to have wholly paid and satisfied the debt of the contractor to appellee. Appellee not only claims that it is entitled to the reserved percentages, amounting to $29,843.71, but it also claims it should have a personal judgment against appellant for the balance of $10,381.05, which would be due it from the contractor after giving credit for the amount of the reserved percentages, and this, notwithstanding the fact that, if appellee had applied the proceeds received by it from the collateral, the debt owing it by the contractor would have been fully paid.

[1] As was said by the Supreme Court of this state in Weik v. Pugh, 92 Ind. 382, 386:

“It is a settled principle that a surety is entitled to the benefit of an securities for the debt that are held by the creditor, and it follows from this right of subrogation that the creditor cannot, without the surety's assent, surrender, release, waste, or render unavailable to the surety any of such securities, without affecting the creditor's remedy against the surety; but the surety is discharged on such ground only to the extent to which the creditor has parted with such securities.”

To the same effect, see Wasson v. Hodshire, 108 Ind. 26, 8 N. E. 621.

[2] Where the right of a surety is involved, a creditor is not entitled to relinquish any hold which he has actually acquired on the property of the principal, and which might have been made effectual for the payment of the debt. Robeson v. Roberts, 20 Ind. 155, 83 Am. Dec. 308. In Nichols, Shepard & Co. v. Burch, 128 Ind. 324, 27 N. E. 737, where a note was signed by sureties and also secured by a chattel mortgage, the court, in discussing the effect of fraud of the mortgagee in the sale of the mortgaged chattels, said:

“The sureties, while not parties to the mortgage, were interested in the debt thereby secured, and had a right to expect and insist upon the utmost good faith in the dealings between the creditor and the principals in the notes; they also had the right to insist that the creditor should not waste or unlawfully appropriate to his own use any securities or collaterals held by him to secure the payment of the debt, and, in case of a disregard of this duty by the creditor, the surety is discharged to the extent of the value of the securities so wasted or appropriated.”

In Lakenan v. Trust Co., 147 Mo. App. 48, 126 S. W. 547, it was held that, where the maker of a note gave a chattel mortgage on cattle to secure the same and after selling the cattle turned over the proceeds to the creditor, knowing the money turned over to the creditor was the proceeds of the mortgaged property, he owed the duty to the surety to apply the whole amount toward payment of the note, instead of turning a portion of it over to the maker, as the latter course would deprive the surety of his equity of subrogation. To the same effect, see Lee v. First National Bank (Tex. Civ. App.) 254 S. W. 394;Bank v. Kittle, 69 W. Va. 171, 71 S. E. 109, 37 L. R. A. (N. S.) 699, Ann. Cas. 1912D, 113;Montgomery v. Martin, 94 Ga. 219, 21 S. E. 513;Columbia Digger Co. v. Sparks (C. C. A.) 227 F. 780;Labbe v. Bernard, 196 Mass. 551, 82 N. E. 688, 14 L. R. A. (N. S.) 457;County of Wasco v. New England Equitable Ins. Co., 88 Or. 465, 172 P. 126, L. R. A. 1918D, 732, Ann. Cas. 1918E, 656;Illinois Surety Co. v. Mitchell, 177 Ky. 367, 197 S. W. 844, L. R. A. 1918A, 931;Hardaway v. National Surety Co., 211 U. S. 552, 29 S. Ct. 202, 53 L. Ed. 321.

Union Trust Co. v. Morrison, 125 U. S. 591, 8 S. Ct. 1004, 31 L. Ed. 825, was an action to enjoin the collection of a certain judgment; the bond being conditioned for the payment of the judgment should the injunction be dissolved. The injunction was dissolved. The judgment was not paid, and the holder of the judgment sued the surety on the bond and recovered judgment against him. In the meantime a prior mortgage had been declared due and foreclosed, and a receiver appointed, and the property sold by the receiver. The surety filed a petition, showing the bond had been given for the preservation of part of the property covered by the mortgage, and asking that he be protected from the consequences of signing the bond and from the judgment taken against him. In holding the surety entitled to protection the court said:

“He (the surety) had not paid the judgment against him, it is true; but, in equity (if he had any equity at all), he ought to have been protected from making that payment. It ought to have been made by the receiver out of the property which came into his hands. The reason he (the receiver) did not pay it seems to have been want of pecuniary funds. As will be seen, he had disposed of these funds in other ways. But surely, if Morrison had an equitable right to be protected, he ought not to be shut out from all remedy, because he did not do what ought to have been done by the receiver himself, or by the parties whom the receiver represented.”

In Brown v. First National Bank, 50 C. C. A. 602, 605, 112 F. 901, 904, 56 L. R. A. 870, 873, the court quotes Colebrooke, Collateral Securities (2d Ed.) § 239, as follows:

“A creditor holding collateral securities is chargeable with a trust concerning the same for the benefit of the surety, where he has notice of the existence of such relation as between the parties to the note. By his voluntary acceptance of such securities, the creditor assumes responsibilities in relation thereto not ordinarily undertaken by the holder of paper upon which are the names of the principal and surety. The personal obligation of the surety to pay the note upon default of the principal is not affected by the receipt of such collateral securities by the holder from the debtor, but the interest of the surety in the proper management and realization of such securities is recognized at law and in equity. If the creditor, by an act of a positive character, or by his gross negligence or bad faith, and without the knowledge and consent of the surety, releases, surrenders, impairs, destroys, or fraudulently transfers such collateral securities, so as to defeat any claim of the surety, upon payment of the debt, to be subrogated thereto for his indemnification, the surety is discharged to the extent of his actual loss at any rate, and of his whole liability in case of fraud or negligence so gross as to raise a presumption of fraud.”

The Supreme Court of Illinois, in speaking on this subject, said:

“There can be no doubt in regard to the principle that, where a creditor receives notes, mortgages, or property in pledge for a debt, such securities may be regarded as an indemnity to the creditor and to the person who may have become bound as surety for the original debtor, and the surety has the right to exact of the creditor proper care and diligence in the management and collection of such collateral security, and any...