838
92 FEDERAL. . , REPORTER. ,
insistence of counsel fo;rthe defendant in error. It was. necessarily so found by Judge Barr. We think the facts bring the case within our own decision in the case of Phrenix Iron-"Works Co. v. New York Security & Trust Co., 54 U. S. App. 408, 28 C. C. A. 76, and 83 Fed. 757, ,Bllt, jf ,a c;onclusion could be maintahied upon the facts. and law in respect to machinery been so af· pass under the.mortgage,the result would be the same fixed to defendant in error. In that event,. the surety would not have lost his right to recover the machinery upon payment of the debt. It has been argued that the evidence does not show that the creditor ever accepted this note, and that the 'judgment in favor of the surety should peaffirmed, upon this ground. We think the findings of fact must be construed as including a 'finding that the note was accepted. The. third assignment of error must be overruled. The facts found justified the credit allowed for the armature not sent to replace one returned. The first four assignments must The judgment will be affirmed as to the Park City Railway Company, and reversed as to F. L. Kister, Jr., and remanded with directions to render judgment against him for the same amount found due from his principal.
JOYCE v. COCKRILL. Court of Appeals, Sixth Circuit. March 7, 1899.) No.
613.
1.
SURETY ON NOTE-RELEABE-BREACH OF CONDITION,
'Where, on sale of property by receiver, a surety indorses a note given for the purchase price, on condition. that the receiver should take other security, and such condition is not known to the receiver, but the note is delivered to the payee, to be given to the receiver, a breach of such condition does not relieve the surety.
2.
SAME-KoTICE TO PAYEE.
On sale of assets of an insolvent by a receiver, the decree directed the receiver to require personal security on the dl'ferred and reserve a Uen in his deed of the real estate included in the sale. A surety on the purchase note understood from his principal that such lien ",-ould be reserved, but on delivery of the note to the receiver he either remained silent as to such condition or intrusted the note for delivery to the principal. Held, that the failure of the receiver to reserve a lien in his deed of conveyance did not release the surety.
3.
SAME-NEGLIGENCE OF PAYEE.
Failure of the receiver to perform his official duty will not relieve the surety, as such duty was owing, not to the surety, but to the creditors of the insolvent, for whose benefit a sale was made.
4.
SAME.
A sale of assets of an insolvent included notes which never came into the hands of the purchaser. The purchaser gave his note for the price, with defendant as surety. In an action on the note, the surety alleged that he became surety only on the understanding that all tlle assets should be delivered to his principal, and that the failure to obtain such notes constituted a failure of consideration, releasing him. Held, that the answer was' insufficient to discharge the surety, because it did not appear that the receiver, who was the payee of the note, accepted the note, and delivered the assets for which it was in part executed, with notice of any condition. '
JOYCE
v.
COCKRII-L.
839
5.
ACTroN ON NOTJ1:--FATLJ;!\E OF CONSIDERATION·
.\. note. with ;1efendnnt as surety, was executed for a lumping sale of the entire asspis of an insolvpnt. In an action thereon, the answer of the surety alleged that certain promissory notes, which were sold, were never delivered to his principal, and also alleged that repeated demands for said notes had never been complied with. No objection was taken in the court in which the sale was made by reason of the refusal to deliver the notes, and no effort made to rescind the contract. No good reason was shown why the principal could not acquire title through appropriate legal proceedings. The answer alleged that plaintiff took the notes with knowledge of the facts set up in the answer. Held insufficient to show failure of consideration. On a sale of assets of an insolvent, two notes were given for the purchase price. Defendant was a surety on one of the notes, and a third person a surety on the other. The sale was a lumping sale, and the two notes were not given for any particular portion of the assets. Certain of the property sold was never delivered. But other facts appearing in the answer showed that the purchasers obtained a good title thereto, amI that the present holder of the note in suit wrongfully withholds said notes from the purchasers, and is, therefore, liable to the purchasers for them or their value. Upon these facts it is held that this right of action is one which belongs solely to the purchasers or principals in the note now in suit, and is not a right of action available to the surety of such purchasers by way of either set-off or counterclaim, not being a mutual claim and the subject of set-off under the Ohio statute. There being outstanding and unpaid two notes, made by the purehasers, upon whieh different persons are bound as sureties, this atl'ords an additional reason why one surety should not appropriate to himself a right of action against the payer, belonging to the maker of the note, at the expense of the surety upon the other note, still unpaid, and having an equal equity to such relief.
6.
LIABILITY OF SUllETy-SET·OFF AND COUNTERCLAIM.
In Error to the Circuit Court of the United States for the Southern District of Ohio. 'rhomas Eo Powell, for plaintiff in error. T. P. Linn, for defendant in error. Before TAFT and LURTON, Circuit Judges, and SEVERENS, District Judge. LURTON, Circuit Judge. This is an action upon a promissory note, made by James E. Joyce & Co., with the plaintiff in error, John ,Joyce, as surety. The note is one of several made for the purchase price of the assets of an insolvent trading corporation, sold under order and directions of a chancery court at Little Rock, Ark. All the notes were payable to a receiver appointed by said court, and the note in suit was assigned to the First National Bank of Little Rock, which sues through the defendant in error, its duly·appointed receiver. The suit was by petition according to the Ohio code practice, and was against John Joyce only. Joyce, by answer, presented two defenses. There was a general demurrer going to both defenses, which the court sustained. The defendant below refused to further plead, whereupon the court rendered judgment for the amount of the note, interest, and costs. The action of the court in Emstaining the demurrer to the answer has been assigned as error. The property sold by the receiver consisted of a stock of goods and merchandise, real estate, and choses in action. It was sold in bulk for the gross price of $38,200. The note
840
92, FEDERAL REPORTER.
in suit is is dated March 20, 1893, and is payable three years after date.1'4e decree of sale directed the receiver to require personal security upon the deferred payments, and to reserve a lien in his deed of conveyance of the real estate included in the sale. The first defense of the answer is that the said John J ovce became the surety ()f.James E. Joyce & Co. upon the agreement and understanding that the lien directed bv the court would be reserved. It is then averred that the receiver, negligently and in violation of said order of the court, conveyed said real estate without reserving any lien in his deed, and that said James E. Joyce & Co. have since sold and conveyed said property to third persons, who were ignorant of said order of court made for said sale, "whereby the lien which ought to have been retained and reserved has been lost." It is further averred that the value of the real estate so sold was sufficient to pay the unpaid purchase money, consisting, as alleged, of the note in suit and of another, of like amount, outstanding, upon which one Fitzgerald is sale security. These facts are pleaded in discharge and relief of plaintiff in error as surety upon the note in suit. 'While it is stated in the answer that the agreement and understanding between the plaintiff in error and the principal debtors was that the receiver should retain or reserve a lien, as provided by the statute law of Arkansas, in his deed conveying to said James E. Joyce & Co. the real estate, whieh was part of the consideration for which this note was executed, and that the Little Rock Bank, to whom the note was subsequently assigned, took the note with knowledge of the facts stated in the petition, yet it is not averred that the receiver, who was to reserve the lien, was informed, when he accepted the note or before he conveyed the land, that any such conditions were attached by the surety to his liability. It is not stated whether the note was delivered to the receiver by the surety, or by the purchasers of the property; but, whether by the one or the other, plaintiff in error chose to remain silent as to any conditions, or intrusted the note for delivery to the purchasers, and is equally bound by the silence of the latter. A :surety is not discharged, even against the payee, by evidence that the obligation upon which he is sued was delivered to the principal obligor upon conditions which have not been performed, if the payee accepted the instrument without notice, and would sustain loss if deprived of the security upon which he relied. This principle has been applied to official bonds, as well as to promissory notes and other negotiable paper. Thus, in Dair v. U. S., 16 Wall. 1,' a distiller's bond, perfect upon its face, was signed by a surety, and delivered to one of the principal obligees, upon condition that it should not be delivered unless it was executed by other persons, who did not execute it. The obligee had no notice of this conditioT'\, and accepted it. It was held these facts constituted no defense by the surety, who had thus signed the bond upon a condition which had not been performed. To the same effect are the cases of Amis v. :Marks, 3 Lea, 568, Buford v. Cox, ld. 518, State v. Potter, 63 !fo. 212, and State v. Peck, 53 Me. 284. Neither will a surety upon a promissory note, or a private bond, in the hands of the payee, be discharged upon e'vidence that he had signed the note or bond upon conditions not performed, but of 'which the payee had
JOYCE V. COCKRILL.
84J
no notice. Jordan v. Jordan, 10 Lea, 124; Russell v. Freer, 5G :N. Y. 67; McCormick v. Bay City, 23 Mich. 457; Davis v. Gray, 61 Tex. 506; Merriam v. Rockwood, 47 K. H. 81. But it is insisted that by the neglect of the receiver a lien has not been reserved, which would, through subrogation, have inured to the benefit of the surety. Undoubtedly the general principle is that, if a creditor does any ad inconsistent with the ]'ightH of the surety and injurious to him, or Olnits to do any act which his dnty to the surety obliges him to do, and thereby injures the surety, the latter will be diseharged to the extent of sudl injury. Eq.·JUI'. §§ 325, 693. Ho a suretv is entitled to the benefit of all s(>eurities which the creditor obtains from the ptill(:ipal debtor, and if the creditor by any affirmative act surrender them to the debtOl', or they are lost through the neglect of some duty owing to the surety, the latter will be to the extent of the loss thus sustained. Enms v. Kister (decided at this term) !J2 Fed. 828. '1'he faets of this case do not bring it withiu the principles relied upon. '1'he reeeiver surrendered no lien. He never had a lien. He might have acquired one by an express reservation in his deed to the purehasers. but in no other way. The case would be very different if he had released such a lien after it had arisen. But the complaint is that he might have acquired a lien. and chose not to do so, and to rely alone upon the purchaser and his surety. It may be admitted that he failed in his duty by not resening a lien as directed by the decree. But to whom was this duty due'? '1'0 the court, and to the parties interested in the proceeds of sale. H was a duty imposed upon him by the court for the protection of tlw owners of the property and the creditors intereeted in its sale. Admit that he failed in the discharge of this official duty; can this surety obtain any benefit therefrom'? If so, it will be at the expense of thl> creditors, who, having lost one security through the negligence or ihl' reeeiver, will be deprived of the benefit of another whidl he did take. Yet the negligence of the creditors thus to be rnmished does not equal that of the surety who seeks to make it available for his own release. If those interested in the proceeds of the sale should have seen to it that the receiver did not neglect to take this lien, quite as much may be said as to the surety. He eitlll'r delivered tIl(' note himself, or suffered his principals to deliver it, to the receiver, without notice that his liability was to depend upon the reservation of this lien. It is incredible that the re{:eiver would have accepted the note subject to such conditions, or, if he did, that he ,vould have conveyed the property without reserving a lien. Upon the averments of the answer, the assignee of this note stood upon no higher footing than the receiver would, if he, in his official character, were plaintiff. Still, the negligence of the surety in failing to give notice to the receiver of the conditions upon which he was to become liable, and in failing to see that the reeeiver's deed reserved the lien directed by the eourt, is greater than that of the owners of the property or the creditors interested in the proeeeds of sale.' But this loss or injury has come about through the neglect of a public official to execute properly a duty imposed b.y the decree under which
92FEDEffAL REPORTER.
he was acting. That duty not for the benefit of the sureties, who might strengthen the notes of the purchaser, but for the benefit of the parties to the cause. He was, therefol'e, under no active or affirmative duty to the surety. .He had no notice of the conditions upon which the surety had-signed, nor of his reliance upon the' lien of a vendor for his protection. The performance of this official duty might have prevented loss to this surety. But mere laches or negligence, or nonperformance of some act which might have benefitcovenant or coned a surety, will not, in the absence of sOme dition, discharge a surety. The neglect must be of some duty owing to the surety. In the case of Board v. Otis,62 X. Y. 88-92, the sureties upon the official bond of a county treasurer sought to be discharged from liability upon their obligation because of the neglect of other county officials, whose duty it was to make stated examinations of the accounts of the treasurer. The court held that this duty was one owing to the public, and not to the sureties. In that case the court stated the rule, as between sureties and obligees, in a way which meets our approval: ":\fere passive negligence," said the court, "or laches of an obligee or creditor, mere nonperformance of some affirmative act which if performed might prevent loss to the surety, will not, in the absence of some express covenant or condition to that effect, discharge a surety. and that the neglect of duty which is available as a defense for a surety must he of some duty owing to Hw surety. and not to others,-some positive duty undertaken in behalf of und for the benefit of the surety."
To the same effect is the case of Wornell v. Williams, 19 Tex. 180, where the sureties upon the note of a purchaser at an administrator's sale sought to be released from liability upon the ground that the Texas statute and the order of the court required that a mortgagl' should be taken at such sales upon property sold, and that they would not have become sureties except in reliance upon this statute ami order, and that the neglect of the administrator to take the security required by statute and order of the court should operate to relieve them. The Texas court held that upon these facts the sureties were not released. In Dye v. Dye, 21 Ohio St. 93, the general principle is thus stated: , "A creditor may, however, in many ways do that which. though it lllay not affect the liability of the principal, will exonerate sureties. In all suell cases the discharge of the surety is based on s.GlUe reeognized and well-defined prin(:iple. and, in general, results from a positive act of the creditor which operates to the p,rejudice of the surety. Passiveness on the part of the creditor will not discharge the surety, unless he omits to do, when required by the surety. what the law or his duty enjoins him to do, or unless he negleets. to tlle injury of the surety, to discharge his duty In any matter In which he occupies the position of a trustee for the surety. The discharge of the surety is not claimed in this case by reason of any positive act of the creditor. nor by reason of his neglect to prosecute the claim, after being required by the surety to do so by notice in writing, in accordance with the statute, nor, indeed, by reason of his neglect to comply with any reqUirement of the surety whatever; for, from aught that appears, the passiveness of the surety equaled that of the creditor. Nor did the creditor have anything in his hands, actually 01' constructively, in the nature of a trust. Then, upon the prInciples already so broadly stated, it would seem that the surety was not exonerated from liability on the note." I
843
To the same general effect are the cases of Schroeppell v. Shaw, 3 N. Y. 446; Humphrey v. Hitt, 6 Grat. 509; Sawyer v. Bradford, 6 Ala. 572; Mundorff v. Singer, 5 Watts, 172. The learned counsel for plaintiff in error have cited and relied upon a number of cases, induding the cases of Burr v. Boyer, 2 Neb. 265, and Wulff v. Jay, L. R. 7 Q. B. 761. Most of them are distinguishable from the case in hand, but, in so far as they are in conflict with the cases cited and relied upon, it is enough to say that they do not meet with our approval, and are not in accord with the great weight of authority. The cases of Burr v. Boyer, supra, and Wulff v. Jay, supra, were cases in which an actual existing security was lost by the neglect of the creditor to register the instrument. ·Without stopping to consider these cases, it is enough to l?ay that they are distinguish· able from the one at bar by the fact that no existing lieu has been sacrificed, and that the only fault of the creditor here complained of is that he did not reserve a lien when he might and should have done so in obedience to the order of the court. 'rhere remains the defense of failure of consideration. This de· fense rests upon the averment that, among the assets of the McCarthy· .Joyce Company, sold to James E. Joyce & Co., were certain promissory notes, then in possession of the defendant in error as receiver for the ]i'irst National Bank of Little Rock, and that said reeeiver, though often requested, has refused to surrender same to said James E. Joyce & Co. 'rhe consideration which is sufficient to support the principal'l'l contract is the consideration upon which that of the surety rests. It follows, therefore, that if the consideration upon which this note was executed by the principal makers was sufficient, there is no failure of consideration ·which can be available to the surety, unless his own engagement was entered upon under some other and independent agreement. This the answer attempts to show by the statement that the defendant became surety "only upon the understanding and faith" that all of the assets of the McCarthy-Joyce Company sold to his prin· cipals, James E. Joyce & Co., including the notes then in the possession of the bank or its receiver, would be delivered to &'lid purchasers; and the failure to obtain said notes is relied upon as constituting a failure of consideration. This, if true, would constitute only a conditional obligation, and failure to comply with the condition would discharge the surety, without regard to its effect upon the obligation of bis principals. It is manifest, however, that the averments of the answer are insufficient to discharge the surety; for it is not averred that either the court or its receiver, the payee of the note, accepted the note and delivered the assets for which it was in part executed with notice of any condition. The authorities for this conclusion ha,ve been already cited in disposing of the first defense. Undoubtedly, a surety may, when the contract has not been assigned to a purchaser for value without notice, when called upon to perform, show either a total or partial failure of the consideration of his principal's contract. But such a defense, when made by the surety, must be one which would be available to the principal, if sued. Here, again, the averments of the answer are insufficient. This note in suit was not executed for any specific part of the property purchased