INGRAHAM, P.J.:
There was no substantial dispute as to the facts. At the end of the trial both parties moved for the direction of a verdict. The court denied the plaintiff's motion for the direction of a verdict in favor of the plaintiff and granted a motion directing a verdict for the defendants, to which the plaintiff excepted, and ordered the exceptions to be heard in the first instance by this court.
Kessler Co., the bankrupts, were bankers doing business in the city of New York and the defendants were engaged in business in New York and Germany. Mr. Gabriel Fensterer, one of the defendants, was in Germany and carried on business there in connection with the business carried on by his firm in New York, the business of the defendants' firm being transacted in New York by Mr. Ruhe, the other member of the copartnership. There was a firm of Leffler, Thiele Co., with whom the defendants had business transactions in Germany. The bankrupts failed on October 30, 1907, and on that day made a general assignment for the benefit of creditors. On November 8, 1907, a petition in involuntary bankruptcy was filed against the bankrupts and they were subsequently adjudicated bankrupts and the plaintiff was appointed trustee. There was also a firm doing business in Berlin, in the empire of Germany, under the firm name of Delbruck, Leo Co. For a number of years prior to April, 1906, there had been what was called a credit arrangement between the bankrupts and the defendants which had for its object the giving of defendants credit in Germany in their financial transactions there, and on April 9, 1906, to continue this arrangement the defendants wrote to the bankrupts requesting the bankrupts to issue "a credit to us for the firm of Leffler, Thiele Co., No. 47 Murray St., drawn to the favor of Mr. G. Fensterer of Berlin, Germany. We, the undersigned firm, guarantee the payment of any drafts drawn by our Mr. G. Fensterer in Europe under this letter of credit. The letter of credit to be issued to the above named firm, Leffler, Thiele Co., to be M20,000 per month and to be in force until cancelled." In consequence of this application the bankrupts wrote to Messrs. Delbruck, Leo Co., on April tenth, as follows: "By these respects we ask you to kindly pay, as heretofore, the 90 days' sight drafts of Mr. Gabriel Fensterer, Berlin, for account of Messrs. Leffler, Thiele Co., New York, and to debit us therefor each time under advice to us. The drafts of said gentleman may read M20,000 per month and this credit is to remain in force until cancellation on our part." And Delbruck, Leo Co., under date of April 21, 1906, acknowledged the receipt of this letter and noted that the bankrupts "accredit with us until further notice Mr. Gabriel Fensterer, of Berlin, on account of Leffler, Thiele Co., of New York, to the amount of 20,000 Marks monthly to be drawn in drafts at ninety days after sight." On April 23, 1906, Mr. Gabriel Fensterer wrote Delbruck, Leo Co., at Berlin, stating that he had been informed by his firm in New York that a credit of 20,000 marks per month had been opened in his favor by that firm through the New York banking concern of Messrs. Kessler Co., and that he would as on former occasions dispose of this amount by drawing his drafts at ninety days' sight, these drafts to be covered in New York as in former cases through his New York firm in accordance with the arrangement made with the New York firm of Kessler Co. In reply to which letter Delbruck, Leo Co. confirmed the arrangement that Kessler Co. in New York had opened with them in Mr. Fensterer's favor on account of Leffler, Thiele Co. a credit of 20,000 marks monthly, which was to be disposed of by drafts at ninety days after sight until recalled. The arrangement was thus completed and the manner of transacting this business seems to have been that Mr. Fensterer in Germany drew drafts at ninety days' sight on Delbruck, Leo Co.; that Delbruck, Leo Co. accepted these drafts, information of which was transmitted to the bankrupts in New York, for which the defendants paid to the bankrupts fifteen days before the drafts became due to the amount required to meet the drafts in Germany; and this sum was then transmitted by the bankrupts to Delbruck, Leo Co. to provide for the payment of the drafts. Thus before the drafts became payable the defendants had provided the money through the bankrupt firm to meet the payments in Berlin. All the drafts that had become payable prior to the time of the bankrupts' failure had been provided for under this arrangement, but there were outstanding at the time of the bankrupts' failure a number of drafts drawn by Mr. Fensterer on Delbruck, Leo Co. and accepted by them, but which were not then due. No funds had ever been received from the bankrupt firm to cover these outstanding acceptances of Delbruck, Leo Co. Kessler Co., the guarantors, having failed, Delbruck, Leo Co. entered into negotiations with one of the defendants, Gabriel Fensterer, who had drawn the drafts, and demanded of Gabriel Fensterer the payment of the drafts drawn by him and which had been accepted by Delbruck, Leo Co., whereupon Mr. Gabriel Fensterer himself, in the name of the defendants, provided the funds with which these drafts were paid, and, having been paid, no claim was made against the bankrupts on account of these acceptances. During all this time Mr. G. Fensterer was the agent of Leffler, Thiele Co. in Germany, buying goods for them, and the funds obtained by Gabriel Fensterer for the discounting of these notes were expended in making purchases for the account of Leffler, Thiele Co.
It thus appears that in the arrangement between the defendants and the bankrupt firm of Kessler Co. the defendants guaranteed the payment of any drafts drawn by our Mr. G. Fensterer in Europe, and upon that guaranty Kessler Co. requested Delbruck, Leo Co. to pay the ninety-day sight drafts of Mr. G. Fensterer and to debit Kessler Co. therefor. Under this guaranty no obligation of defendants existed until Delbruck, Leo Co. had paid the drafts drawn by G. Fensterer. So far as appears by the arrangement there was no agreement that Delbruck, Leo Co. should accept these drafts, although undoubtedly such an acceptance was contemplated as necessary to carry out the arrangement which was made; but under the guaranty the obligation to pay arose upon payment, not upon acceptance. The actual method adopted by the parties was for the defendants to furnish Kessler Co. in New York with money to pay the maturing drafts fifteen days before the due day to enable Kessler Co. to transmit that money to Delbruck, Leo Co. in time to meet the drafts when due. Thus at the time of Kessler Co.'s failure the outstanding drafts which are involved in this action had not become due nor had there arisen any obligation on behalf of the defendants to furnish Kessler Co. money to pay the drafts as they were all due more than fifteen days after the bankrupt's failure, and, therefore, the defendants had not furnished Kessler Co. the money to pay the drafts nor had Kessler Co. furnished Delbruck, Leo Co. the money to meet them when due. The situation that then existed, therefore, was that one of the defendants had drawn its draft upon Delbruck, Leo Co. which was payable ninety days after sight, which draft Delbruck, Leo Co. had accepted and thus became bound as principal debtors to the holders of the draft. But as between Delbruck, Leo Co. and the defendants, the drawer of the draft, one of the defendants was the principal debtor. If Delbruck, Leo Co. had paid these drafts they could have quite clearly recovered from the drawer of the drafts, one of the defendants, the amounts that they had paid. It is true that Kessler Co. had undertaken that if Delbruck, Leo Co. had paid the drafts they could debit Kessler Co. with the amount of the payments and defendants had guaranteed to Kessler Co. that these drafts would be paid, clearly meaning, I think, that they would be paid by the drawer of the draft who was a member of the defendant's firm. The object was not to protect the holders of the accepted drafts but to protect Delbruck, Leo Co. from having to pay drafts drawn by G. Fensterer in case G. Fensterer did not furnish the funds necessary to pay the drafts. In other words, Kessler Co. guaranteed Delbruck, Leo Co. against any loss by payment of the drafts and the defendants guaranteed Kessler Co. from any loss in consequence of their guaranty to Delbruck, Leo Co. Under this arrangement, as I view it, the principal debtor remained G. Fensterer or the defendants and no obligation ever existed as against Kessler Co. or the defendants until Delbruck, Leo Co. had actually paid the drafts. If this is the correct situation it seems to me entirely clear that the principal debtor, G. Fensterer or the defendants, not only had the right but they were bound to provide funds to meet these drafts accepted by Delbruck, Leo Co. before they became due, and if they performed that obligation no liability of Kessler Co. existed, and there was nothing due by the defendants to Kessler Co. under their guaranty. Assuming that Kessler Co. had not failed, but had continued business after October 30, 1907, and that Mr. G. Fensterer in Berlin had taken up the accepted drafts before they became due, certainly Kessler Co. would have had no claim against these defendants for the repayment of these drafts. They would never have been debited in their account with Delbruck, Leo Co. with the amount of the drafts which the drawer had actually paid and Kessler Co. could have had no claim against the defendants under their guaranty. The failure of Kessler Co. did not, it seems to me, at all change this situation. After the failure G. Fensterer, the drawer of the drafts accepted by Delbruck, Leo Co., did just what he might have done at any time — he paid the drafts when they became due — and this was just what the drawer of the drafts did after Kessler Co. had failed. The moment these accepted drafts were paid by defendants, Delbruck, Leo Co. had no possible claim against Kessler Co., no claim that Delbruck, Leo Co. could have proved in bankruptcy, and no obligation then existed or ever had existed by which Kessler Co. became liable to Delbruck, Leo Co. But even assuming that Delbruck, Leo Co. by reason of their failure or for any other reason had failed to provide the necessary funds to meet the accepted drafts, I think it clear that Delbruck, Leo Co. could have at once sued the drawer of the drafts and disregarded the guaranty of Kessler Co. It is true that Kessler Co. had guaranteed Delbruck, Leo Co. on the payment of the drafts and had authorized Delbruck, Leo Co. to debit Kessler Co. with the amount necessary to pay them; but as before stated the drawer of the drafts was as between the parties to the instruments the principal debtor, Kessler Co. standing only in the place of the guarantor. Assuming Delbruck, Leo Co., the guarantor, to have failed, holding a guaranty of the payment of the drafts executed by the defendants, it seems to me quite clear that upon the doctrine of equitable subrogation, Delbruck, Leo Co. would have been entitled to enforce the guaranty as against these defendants. It is a general principle that subrogation is a form of equity jurisprudence. It is founded on the facts and circumstances of each particular case and on the principle of natural justice. It is applied where one person is compelled for his own protection or that of some interest which he represents to pay a debt for which another is primarily liable. (27 Am. Eng. Ency. of Law [2d ed.], 203.) And it is also a general rule that a surety who pays the debt of his principal will be subrogated to all the securities, liens, equities, rights, remedies and priorities held by the creditor against the principal and entitled to enforce them against the latter in a court of equity or of equitable jurisdiction. And in the case of an accommodation acceptor of a bill "as between himself and the drawer he in equity occupies the position of a surety and on payment of the bill is entitled to be subrogated to the rights of the holder." (Id. 231.) And the rule is also stated (at p. 225): "On the other hand the weight of authority is that where the prior surety is compelled to pay the debt he will be subrogated to the rights of the creditor against the subsequent surety." And in 37 Cyc. 437, it is said: "A creditor whose debt is due is subrogated to the benefit of securities and indemnity furnished by the principal to the surety * * *. The rule extends to guarantors and indorsers, and where a third person, for a present consideration, guarantees the payment of an existing debt, and the debtor executes to him a mortgage conditioned for the payment of the indebtedness to the creditor and the indemnification of the guarantor, the creditor, by substitution, is entitled to the benefit of the security." ( Merchants Mfrs. Bank v. Cumings, 149 N.Y. 360; and National Bank of Newburgh v. Bigler, 83 id. 51, where, in speaking of this doctrine of equitable subrogation, it is said: "Its true basis is not to be found in the different and varying circumstances of the cases, but in the equitable consideration common to them all, that the securities in the hands of the sureties have been appropriated by the debtor for the payment of the debt, and constitute a trust for its better security which equity will enforce for the benefit of the creditor.") These principles of equitable subrogation are too familiar to require further authority. It is applied in favor of the creditor where for any reason equitable considerations require the securities or guaranties of a debtor to be applied to the discharge of the indebtedness, and applying this principle to this case, it seems to me that Delbruck, Leo Co., having at the request of Kessler Co. assumed liability by accepting the paper of Gabriel Fensterer, became subrogated to the right to all securities and guaranties held by Kessler Co. to secure the payment of that indebtedness. Kessler Co. had guaranteed the payment of the notes drawn on Delbruck, Leo Co. by Gabriel Fensterer and these defendants had guaranteed Kessler Co. against the payment of those notes. Whatever security, therefore, Kessler Co. had to protect themselves as against any obligation which it had assumed to Delbruck, Leo Co., the latter, as the creditor, had the right to enforce for its protection upon the failure of Kessler Co., and its consequent inability to comply with its obligation. And by virtue of this equitable subrogation Delbruck, Leo Co. had the right to enforce the defendants' guaranty to Kessler Co., and thus the voluntary payment of that obligation by the defendant to Delbruck, Leo Co. was a discharge of its obligation to that firm as the acceptor of these notes and was, therefore, a satisfaction of any obligation that existed between the defendant and Kessler Co. It follows, therefore, that upon no aspect was there any obligation ever existing in favor of Kessler Co. or its assignee in bankruptcy against the defendant, and the court was quite right in directing a verdict for the defendants.
The exceptions are, therefore, overruled, and judgment ordered for the defendants on the verdict, with costs.
LAUGHLIN, MILLER and DOWLING, JJ., concurred; McLAUGHLIN, J., dissented.