Pledge. Equity Jurisdiction, To compel marshalling of securities by creditor, To enforce rights of surety. Surety. Contract, Construction. Evidence, Extrinsic affecting writings. Equity Pleading and Practice, Memorandum, Bill, Decree.
From a memorandum of a judge who heard a suit in equity involving the question whether the relation between the plaintiff and a partnership was, as to a debt owed to the defendant, one of surety and principal, or one of joint principals, it appeared that a certain contract in writing had been made between the plaintiff and the defendant by which the plaintiff furnished to the defendant security for a debt owed to the defendant by the partnership, and that on its face the contract could have been construed as creating the relationship of joint principals between the partnership and the plaintiff, but that the plaintiff with the knowledge of the defendant furnished the security solely as an accommodation to the partnership. The judge in the memorandum stated, "I find . . . that the relations of principal and surety did not exist between the plaintiff and" the partnership. Held, that such statement was not a finding of a fact but was a conclusion of law.
A partnership furnished to a creditor certain security for the payment of their debt, and a third person, solely as an accommodation to the partnership, which the creditor understood, gave to him additional security and made with him a contract under seal which did not designate the third person as a surety for the partnership and which on its face could be construed as making him jointly bound with the partnership as a principal, in which case the creditor might apply to the payment of the debt the security furnished by such third person before resorting to that furnished by the partnership. Held, that in equity the actual relationship of the parties might be shown by evidence outside the contract in writing, that the creditor was bound by his knowledge that the third person was a surety for the partnership, and that the third person by a suit in equity against the creditor might compel him first to apply toward satisfaction of the debt the securities furnished by the partnership before resorting to those furnished by the plaintiff as an accommodation to them.
The allegations of a bill in equity were that the plaintiff, as additional security for a debt owed to the defendant by a partnership of which he was not a member, had given to the defendant his note and a mortgage of certain real estate, that without notice to or consent of the plaintiff the defendant had made a new and different agreement with the partnership as to the payment of the debt, so that the plaintiff had become entitled to a return of the note and mortgage, and that the defendant without consideration had assigned the note and mortgage to one who took them understanding the foregoing facts and who was about to foreclose the mortgage by sale. The prayers of the bill were for the enjoining of the sale, the discharge of the note and mortgage, and for general relief. At a hearing it appeared that the assignee of the mortgage was acting as the defendant's agent, that the defendant knew that the relationship of surety and principal existed between the plaintiff and the partnership, but that he was proceeding for satisfaction of the debt against the security furnished by the plaintiff before resorting to that furnished by the partnership. It also appeared that the defendant had not made such a new agreement with the partnership as would release the security furnished by the plaintiff. Held, that, although the plaintiff was not entitled to the discharge of the note and mortgage which he sought in his bill, he was entitled under the prayer for general relief to a decree compelling the defendant to marshal the securities and to apply them in satisfaction of the debt in the order in which they were chargeable.
The mere fact that a surety has not received any notice of, and has not consented to, an arrangement between the creditor and the principal debtor whereby immediate payment of the debt was not insisted upon at its maturity, payments were made from week to week and the rate of interest was changed from six to fifteen per cent, will not exonerate the surety from liability if there has been no agreement extending the time of payment for any definite period and it does not appear that such arrangement has acted to the surety's prejudice.
BRALEY, J.
The trial judge, whose finding is not disputed, having decided, that the defendant, Jacob Lebowich, by whom the foreclosure proceedings were instituted, was not a purchaser for value of the mortgage, but acted only as the agent of the defendant Max Lebowich, the question is, whether under the frame of the bill, and upon the evidence reported, the plaintiff, who is the mortgagor, is entitled to equitable relief.
It is true, that on the face of the agreement in writing signed by the plaintiff he is not designated as a surety for the copartnership described as Flashman Brothers, whose indebtedness to this defendant was thereby secured not only by a pledge of personal property of their own, but by the note and mortgage in question, with an assignment of a lease furnished by the plaintiff. The terms of this instrument show, that he did not become obligated in any form as the defendant's debtor. It is, however, under seal, and although the plaintiff did not engage to pay the debt, the defendant contends, that in the marshalling of securities he jointly bound himself with the debtors as a principal, and upon their default and at his election he can apply in liquidation the proceeds of the mortgage, the attempted foreclosure of which the bill seeks to enjoin, before resorting to the security given by the partnership. But if the contract itself can be thus construed it has been abundantly settled, that in equity the actual relations of the parties between themselves can be proved by extrinsic evidence, and whenever the relation of surety and principal is established, and the creditor has notice of the fact, he is as much bound by this knowledge, as if the suretyship had been disclosed by apt recitals in the contract with his debtor. Guild v. Butler, 127 Mass. 386, 389. Goodwin v. Massachusetts Loan Trust Co. 152 Mass. 189, 192.
It remains to apply this principle to the facts in the present case. The evidence warranted the findings, that with the defendant's knowledge the mortgage was given, and the lease assigned for the purpose of providing additional security which the debtors were unable to supply, and that they were furnished solely for their accommodation. It was a question of law under these findings, and not a question of fact as the defendant further urges, whether the plaintiff became a surety and his securities were held subject to the equities existing between himself and his principals. And the further conclusion of the judge that the plaintiff did not sustain this relation is to be treated as in the nature of a ruling of law which was erroneous. Campbell v. Cook, 193 Mass. 251, 256, 257.
Upon the debtor's default the defendant possessed two funds for his protection, and the satisfaction of the debt. No rights of strangers having intervened, the plaintiff upon tender and payment of the amount due would have been subrogated to the defendant's title, and could have enforced it for the purpose of self-protection. The plaintiff, however, who had the equitable rights of a surety as to the mortgaged property, can have his interests preserved not only by subrogation but by having the property pledged by himself and the partnership marshalled and applied in satisfaction of the debt of the principal in the order in which they are chargeable. It accordingly became the defendant's duty in the first instance to exhaust the security provided by the debtors to which the plaintiff could not resort, before compelling him to redeem from the mortgage or suffer the loss of the estate. American Bank v. Baker, 4 Met. 164, 175. Guild v. Butler, 127 Mass. 386. Kelly v. Herrick, 131 Mass. 373. Worcester Mechanics' Savings Bank v. Thayer, 136 Mass. 459, 462. Wilson v. Bryant, 134 Mass. 291, 297. King v. Nichols, 138 Mass. 18, 21. Kidd v. Hurley, 9 Dick. 177. Cuyler v. Ensworth, 6 Paige, 32. Arnold v. Green, 116 N.Y. 566. Aldrich v. Cooper, 8 Ves. 382, 395. Heyman v. Dubois, L.R. 13 Eq. 158. Duncan, Fox Co. v. North South Wales Bank, 6 App. Cas. 1, 19; Pom. Eq. Jur. (3d ed.) §§ 1414, 1417, 1419. The plaintiff under the prayer for general relief can enforce this equitable right and compel the defendant to marshal and apply the securities and during liquidation the mortgage sale may be enjoined. Franklin v. Greene, 2 Allen, 519. Hayes v. Ward, 4 Johns. Ch. 123. Thompson v. Taylor, 72 N.Y. 32. Irick v. Black, 2 C.E. Green, 189. Skinner v. Terhune, 18 Stew. 565. Wooldridge v. Norris, L.R. 6 Eq. 410. Allis v. Ware, 28 Minn. 166. Trentman v. Eldridge, 98 Ind. 525. Stafford v. Montgomery, 85 Tenn. 329.
The plaintiff also contends, that he has been exonerated from all liability by the defendant's forbearance to press promptly the collection of the loan at maturity. But a perusal of the evidence supports the judge's finding, that no definite extension of time had been granted, although it was understood that a different rate of interest should be charged while payment was delayed. The collateral has not been surrendered, and the change in the rate of interest would seem not to have been detrimental to the plaintiff, yet if finally a loss results, his liability would be diminished to that extent only and he fails to show affirmatively any prejudicial acts by the defendant sufficient to release him. Allen v. Brown, 124 Mass. 77. Watertown Fire Ins. Co. v. Simmons, 131 Mass. 85. Welch v. Walsh, 177 Mass. 555. Boston Penny Savings Bank v. Bradford, 181 Mass. 199. North Avenue Savings Bank v. Hayes, 188 Mass. 135, 137, 138. Mercantile Guaranty Co. v. Hilton, 191 Mass. 141. Cumberland Glass Manuf. Co. v. Wheaton, 208 Mass. 425, 432. Wakefield v. American Surety Co. 209 Mass. 173, 177. Gordon v. Third National Bank, 144 U.S. 97.
It results from what has been said, that the decree dismissing the bill must be reversed, and a decree is to be entered enjoining the foreclosure of the mortgage until the defendant has applied in such form as the Superior Court after hearing the parties may direct, the securities pledged by the debtors, and if the amount realized is insufficient to discharge the debt with interest, and whatever costs and charges may have been properly incurred, the plaintiff may redeem upon payment of the difference, with such further decree or decrees as that court may adjudge to be necessary or expedient.
Decree accordingly.