In a suit upon the defendant's written guaranty of a promissory note for $500 in which the plaintiff's assignor was payee, and which was secured by a third mortgage, the defense was that by the acts hereinafter stated the defendant was discharged. It appeared that upon foreclosure of the second mortgage, the plaintiff, without the defendant's knowledge, entered into an agreement with the owner of the equity and the second mortgagee, pursuant to which the latter, upon obtaining title absolute, reconveyed to the owner, who made a payment reducing his indebtedness, gave back a second mortgage for the reduced amount, and then gave a new note and third mortgage to the plaintiff for $500. The trial court found that the plaintiff received this new note and mortgage "in substitution of and as collateral for" his original note and mortgage. Later, when the second mortgage was again about to be foreclosed, the plaintiff released his note in return for $290 received from the then owner of the premises, although their value, as the court found, was in excess of all the mortgages. Held that by taking the substitute note and mortgage after the first foreclosure, the plaintiff had not injured the defendant, but, on the contrary, had increased the security for his benefit, by securing the reduction of the prior indebtedness; but that his later conduct in releasing ample security for less than the amount due, caused the defendant to lose his right of subrogation thereto, and thereby discharged him from further liability on his guaranty.
GAGER, J.
The defendant in writing, unconditionally guaranteed the payment of an instalment note for $500, secured by mortgage given by George Jackson to Fanny Bender. The plaintiff, by assignment, became the owner of the note so guaranteed, and of the mortgage. The defendant claims that as the result of certain transactions of the plaintiff the guarantor has been released from all liability on his guaranty. The trial court held that the defendant was so released, and the appeal raises the question whether any of the plaintiff's actions with respect to this mortgage deed operated to release the defendant from his guaranty on the note.
The question is as to the effect of the transaction resulting in the new third mortgage by Larsen to the plaintiff. The court, as a conclusion from the subordinate facts, found that this Larsen note and mortgage were given and received by the plaintiff in substitution for and as collateral for the Jackson note and mortgage. The plaintiff claims that by this finding the court intended to hold that as a fact the transaction with Larsen was a discharge of the original note and the acceptance of Larsen's note and mortgage in its place, and therefore was a discharge of the defendant as guarantor of the original note. The language "in substitution for and as collateral for," standing by itself, is ambiguous. We think a study of the facts will show, however, that the construction claimed by the plaintiff is not the true construction of the conclusion found by the court. Before the foreclosure the plaintiff had three sources from which to obtain payment: George Jackson, the maker, the land on Lenox Street mortgaged by Jackson to the plaintiff, and the defendant guarantor. The plaintiff never gave up the note with defendant's guaranty on it, nor did he agree to do so. By his arrangement with Katie Freedman, who foreclosed her second mortgage, he did agree to permit the mortgage to be foreclosed without redemption by him, upon receiving Larsen's note for the same amount, and a third mortgage on precisely the same property, but a better mortgage than the Jackson mortgage because of the fact that Larsen had paid $200 in reduction of a prior mortgage. The consideration for the Larsen note was the agreement of the plaintiff not to redeem, but to accept the new note and mortgage as a substitute for the lien of the Jackson mortgage, bettered in value by the $200 paid on the prior mortgage. Whatever there was in value in the Lenox Street mortgage, was created by Jackson's mortgage to Bender, assigned to the plaintiff. The plaintiff, under the new mortgage, retained that value to be applied on the original Jackson note, although the mortgage transaction had changed its form. The mortgage was still a collateral for the payment of the original Jackson note on which the defendant was guarantor. The plaintiff had done nothing to discharge the guarantor ( Continental Life Ins. Co. v. Barber, 50 Conn. 567; State Bank v. Smith, 155 N.Y. 185, 49 N.E. 680), but as matter of fact had improved his security. This security had originally proceeded from George Jackson, and it is still to be applied for the benefit of the Jackson note, which evidenced the only consideration on which the plaintiff could base his claim to the mortgage security in its new form as well as in the old. While the arrangement between Larsen and the plaintiff would have been more accurately shown by a new mortgage from Larsen to the plaintiff to secure the original Jackson note, yet the finding as to the purpose of the new mortgage is so clear, that we think the effect really intended should be given to the new transaction. It appears that after the plaintiff got the Larsen note and mortgage, plaintiff's attorney informed defendant of what had taken place, and told defendant if he could collect anything on the new note he would do so. While defendant as well as plaintiff was made a party defendant in the new foreclosure suit, he did nothing to protect himself on the original mortgage, though no party to the plaintiff's arrangement, but when this arrangement was brought to his attention he evidently assented to it.
The plaintiff, Goodwin, was under no obligation to take any active steps to keep the mortgage alive or to redeem. What he did do was voluntary in preserving the security as a substitute to which, upon the facts found, the defendant become subrogated. The transaction really amounted to a redemption. Spencer on Suretyship, §§ 246 and 247; Home Savings Bank v. Shallenberger, 95 Neb. 593, 146 N.W. 993; Hall v. Way, 47 Conn. 467; Pingrey on Suretyship Guaranty (2d Ed.) §§ 130, 364.
After the transaction with Larsen had taken place, Larsen conveyed his interest in the property, subject to the third mortgage, to one Sheronas. Freedman again brought foreclosure of her second mortgage and made plaintiff a defendant as third mortgagee. Unlike the substitution agreed to on the first foreclosure, the plaintiff, on the second foreclosure, took active steps to realize on the mortgage, and released his Larsen mortgage given for $500 to Sheronas, for the sum of $290. Plaintiff did not consult with the defendant or procure his assent, but, after the mortgage had been released, notified the defendant and demanded payment of him of the balance of the guaranteed note. The court found the value of the mortgaged property in excess of the three notes. The effect of the finding is to show that the plaintiff released ample security for less than the amount due. The right of the defendant to be subrogated to the security of value enough to protect him, was thus lost. This was in violation of the plaintiff's duty to the defendant, and it was this act of the plaintiff that discharged the guarantor from further liability. Spencer on Suretyship, § 246.