Brooke v. American Savings Bank , 207 Iowa 668 ( 1927 )

In February, 1903, Kirk Milnes was appointed guardian of the property of Abel Milnes, Jr., an incompetent, and qualified as such guardian by giving bond in the sum of $4,000, which bond was signed by Abel Milnes, Sr., the father of the 1. GUARDIAN AND ward. The surety on the aforesaid bond died in WARD: bond: February, 1919, and the ward inherited from his release of father the sum of $16,830, which amount was paid surety: to the guardian subsequent to February 23, 1920, strict on which date the guardian executed and filed compliance with the clerk of the district court a new bond with in the amount of $25,000, with W.J. Moore and statute. Joseph Kingsbury as sureties. On October 13, 1923, the guardian executed another bond in the sum of $30,000, with the defendant Federal Surety Company as surety, which bond, on the 22d of October, 1923, was filed with and approved by the clerk of the district court. At no time did Moore or Kingsbury, the former sureties, by petition ask to be relieved from their obligation as sureties on the $25,000 bond. On October 24, 1923, there was entered of record in said guardianship the following order:

"Now on this 24th day of October, 1923, it appearing to the court that Kirk Milnes, guardian of said Abel Milnes, Jr., incompetent, having filed a surety bond in the sum of $30,000 executed by the Federal Surety Company, the same is hereby accepted. It is further ordered by the court that said guardian be, and he is hereby, ordered to file a report with this court before the sureties on the old bond are by the court released."

On December 6, 1923, the guardian filed what is designated "Eighth Report of Guardian," wherein he states that he has furnished a bond with the Federal Surety Company as surety, which bond has been accepted and approved by the clerk of the court, and that, in order to show the condition of the estate of his said ward at the date of the substitution of the said Federal Surety Company in place of his original bondsmen, he files this report of his doings in said estate since the date of his last report, to wit, the 14th day of April, and up to the date of the execution of said new bond, to wit, the 13th day of October, 1923. On the following day, there was entered of record the following order:

"Now on this 7th day of December, 1923, this matter comes on for hearing upon the eighth progressive report of Kirk Milnes, guardian of Abel Milnes, of unsound mind; and, the court having examined said report, and being fully advised in the premises, it is therefore ordered by the court that the final report under the old bondsmen and accounting up to October 13th be, and the same is hereby, approved."

On December 29, 1923, there was entered of record the following additional order:

"Now on this 29th day of December, A.D. 1923, this matter comes on for hearing before the court for the release of old bondsmen, and it appearing to the court that the guardian having filed in this court on October 22d a bond of the Federal Surety Company, it is therefore ordered by the court that the old bondsmen, W.J. Moore and Joseph Kingsbury, be and they are hereby released and discharged as such."

Kirk Milnes, the former guardian, died December 9, 1924, and the defendant American Savings Bank of Muscatine is the regularly appointed, duly qualified, and now acting administrator of his estate. Upon the death of Kirk Milnes, the plaintiff Robert Brooke was appointed guardian of the property of the ward, and with the authority of the court, he brings this action to recover on the bond. Shortly after the commencement of this action, the ward died, and J.E. McIntosh was appointed and qualified as administrator of his estate, and he joins as a party plaintiff herein.

The case was tried to the court, without a jury, on an agreed stipulation of facts. At the conclusion of the trial, the court rendered judgment in favor of the plaintiff and against the Federal Surety Company in the sum of $23,030.70, with interest and costs. From this action by the trial court, the defendant Federal Surety Company appeals.

In the former guardian's written application to the appellant for the bond, appear the following questions and answers: "Are you indebted to the estate?" "Yes." "If so, give particulars." "Mtg. of $18,000 described above." At the time of the trial, the parties made the following concession:

"That substantially all of the guardianship estate was appropriated to his own uses by himself [Kirk Milnes] before the 13th day of October, 1923, but this does not include a $1,000 Liberty Bond and the interest coupons attached thereto."

On the merits of the case, the appellant's sole contention is that the bond upon which it is surety is a "substitute bond," and that it is not liable for any defalcation or devastavit which occurred prior to the date of its execution.

We will first inquire as to whether or not the bond executed by appellant as surety is or can be, under the law, a "substitute bond." Unless the liability of Moore and Kingsbury on the former bond for future acts of the guardian was superseded by the liability of the appellant on the bond in suit, then there was no "substitute bond." The former sureties, Moore and Kingsbury, were not relieved from liability for either the acts of commission or omission by the former guardian, unless they have been legally released or discharged. In Bookhart v. Younglove, 207 Iowa ___, we said:

"The object of a bond is security to those who are interested in the property settlement of the estate. The law requires the bond for their protection, and the parties interested acquire a vested interest in the bond, which cannot be divested withouttheir consent, except in the manner prescribed by law."

We further said in Bookhart v. Younglove, supra:

"It is generally held by the courts that, where the legislature had provided a statute authorizing the release of sureties, its provisions must be strictly complied with, in order that the release may be effective. * * * ``The courts have no power to waive compliance with the statute, but the surety, in seeking to avail himself of its benefits, must comply with its provisions. * * * The proceeding to release sureties is statutory and of a summary character, requiring no notice to the parties ultimately entitled to the fund, and the statute cannot be extended, by construction, to authorize the discharge of a surety on the application of the principal in the bond, in the absence of any provision in the statute authorizing it.' * * * The courts generally declare that, where the statute provides that the surety may apply for the release, or contemplates that the initial step for obtaining release must be taken by the surety, the proceeding asking for his discharge must be on his petition."

In so far as the present litigation is concerned, the statutory authority for release of sureties on a bond is found in Sections 1283, 1284, and 1285 of the Code of 1897, and Sections 1177-a and 1177-b of the Supplement to the Code, 1913, all of which statutory law is set out and referred to in Bookhart v.Younglove, supra. When the surety on a bond desires to be released, the first step toward obtaining jurisdiction for said relief is a petition by or in behalf of the surety. It is conceded in the instant case that neither Moore nor Kingsbury petitioned the court for the discharge of the bond on which they were sureties, nor for the execution of the new bond sued upon herein. Therefore, the requisite initial jurisdictional step toward the release of Moore and Kingsbury as sureties was never taken. The courts have no power to waive strict compliance with the statute. Clark v. American Sur. Co., 171 Ill. 235 (49 N.E. 481). While it is true, as held in the Bookhart case, that there may be a valid release of sureties on a bond as to interested parties consenting to the order of discharge, yet there can be no valid order of discharge of a surety by the court without strictly complying with the statutory authority, or without the appearance by the interested parties, and their giving their consent to the order of discharge. In the instant case, the statutory authority was not complied with. The interested party was Abel Milnes, Jr., an incompetent, a person of unsound mind. On account of his disability, he could not appear and consent to the release of Moore and Kingsbury as sureties. The burden is upon the appellant to show that there is a valid release of Moore and Kingsbury, before it has established the facts upholding its contention that the bond signed by it is a "substitute bond." Under the record of this case, there has been no valid release or discharge of the liability of Moore and Kingsbury, sureties on the former bond, and we said in the Bookhart case:

"In the numerous authorities from other jurisdictions hereinbefore cited, it is held that, where there is an attempt to procure the release of the sureties upon the first bond, without following statutory procedure, or without the consent of the interested parties, a second bond, voluntarily given under said conditions, is only additional security."

Taylor v. Taylor, 66 W. Va. 238 (19 Ann. Cas. 414), and Central Bank. Sec. Co. v. United States Fid. Guar. Co., 73 W. Va. 197 (51 L.R.A. [N.S.] 797), are companion cases. Three surety companies signed successive bonds for the liability of the administrator. The statutory law was not complied with by either one of the two surety companies who first signed, in order to obtain their release or discharge. In the Taylor case, recovery was had against the surety company which executed the first bond. The court, as authority for its pronouncement in holding the first surety, quotes from 2 Brandt on Suretyship and Guaranty (3d Ed.), Section 707, which is as follows:

"The statutory method for the release of an existing surety on a guardian's bond by the substitution of a new one must be strictly pursued; otherwise the new bond is merely cumulative, and the old sureties remain bound."

The court in said case further said, with reference to the taking of the successive bonds:

"* * * they are clearly not substitute bonds, releasing or discharging bonds antecedently given, such as are contemplated by Sections 9, 10, and 11 of Chapter 87" (provisions of the statutory law).

In the latter West Virginia case, hereinbefore referred to, the first surety brought suit against the two succeeding sureties for contribution. Each of the two later bonds contained a recital of a desire on the part of the principal therein to release the surety in the preceding one from further liability, and of tender thereof in lieu of the preceding one. The court held that the surety on the first bond was entitled to contribution from the sureties in the two succeeding bonds, the court saying:

"Being valid obligations, and yet not substitute bonds, and having been given for the same principal as the one for whom the first bond was given, and to guarantee faithful execution of the same trust, the two subsequent bonds are mere cumulative or additional bonds, and the sureties therein are cosureties with the surety in the first one."

In Barker v. Boyd (Ky.), 71 S.W. 528, the statutory law for the release of the surety was not complied with, and it was held that the sureties on the second bond were liable for any default by the guardian. The court said:

"If a surety becomes uneasy, and desires to be released from further liability on the bond, * * * he must pursue the method pointed out by the statute. * * * The order releasing Pence as surety on the first bond was therefore void. He remained bound as if that part of the order had not been made. * * * And it has been repeatedly held by this court that the effect of such renewal bonds is cumulative security for the ward, and that the sureties on all of them, so far as the ward is concerned, are equally and jointly bound for all the estate coming into the guardian's hands."

Also, see the authorities cited in Bookhart v. Younglove, supra.

Inasmuch as there was no valid release of Moore and Kingsbury from their liability as sureties on the former bond, the law fixes the status of the appellant to be that of additional surety.

We might well stop here, as what we have already said is determinative of the case. But what as to the 2. GUARDIAN AND liability of the appellant if it be conceded, WARD: bond: arguendo, that it is a surety on a "substitute surety: bond?" Under Section 1177-a of the 1913 liability Supplement to the Code, said bond shall be for prior conditioned as provided in Section 1183 of the defalcation. 1897 Code. It being a statutory bond, the provisions of the statute are read into it. Said bond provides:

"The condition of the above obligation is such that if the above-named Kirk Milnes, who has been appointed guardian of said incompetent, shall faithfully discharge the office and trust of such guardian according to law, and shall render a fair and just account of such guardianship from time to time, whenever thereunto required by law, and render and pay to said incompetent all moneys, goods and chattels, title papers and effects which may come to the hands or possession of such guardian, belonging to such incompetent when such shall be entitled thereto, or any subsequent guardian, should such court direct — then this obligation to be void, or otherwise to remain in full force and virtue."

In Dugger v. Wright, 51 Ark. 232 (14 Am. St. 48), the question was as to the liability upon two bonds, the sureties in the first bond having been legally released from future liability. The defalcation occurred prior to the execution of the second bond. The court held that the sureties on each bond were liable for the devastavit, but that they were entitled to contribution, as among themselves. With reference to the latter bond, the court declared:

"The conversion had taken place when they signed, and the liability of the defendants, who were the former sureties, had become fixed. It required only the order of the probate court to authorize suit against them. But the breach was a continuing one,because it was still the executor's duty to account to theprobate court for the proceeds of the property; and when hefailed to comply with the order of the court directing him to payover the amount with which he had been charged on that account,the new sureties became liable, by the terms of theirundertaking, to make good his default. There are no terms in the office of executor or administrator, and the principle which is properly invoked in the case of a public officer who executes a bond for the faithful discharge of the duties of his office for the term upon which he is about to enter, is not applicable. The new bond, or the obligation of the new sureties, relates back, and the two sets of sureties are jointly liable to the distributees and others for whose benefit they have contracted, for breaches committed prior to the second execution."

In support of the foregoing doctrine, see Knox v. Kearns,73 Iowa 286; Ellyson v. Lord, 124 Iowa 125; Douglass v. Kessler,57 Iowa 63. In Foster v. Wise, 46 Ohio St. 20 (15 Am. St. 542), the sureties on a former bond had been released, upon the motion of one of said sureties. The principal then gave a new bond. The assets had been previously collected, and converted by the principal to his own use and benefit. The sureties on the latter bond contended that they were not liable. The court held that their contention was not tenable, saying:

"The obligation of the bond is the thing to be considered. It, among other things, stipulates that the executor ``shall administer, according to law and to the will of the testatrix, all her goods, chattels, etc., which shall at any time come to the possession of the said executor.' The discharge of this obligation required that the executor should administer the estate as required by the law and the will, or deliver it to his successor to be so administered, should he resign or be removed. The fact that prior to executing the bond he had converted the assets to his own use in no way affected the obligation to account for all that had been received by him belonging to the estate; and it was to secure this obligation that the bond was required and given."

In Abshire v. Rowe, 112 Ky. 545 (56 L.R.A. 936), sureties on a guardian's bond were legally released, and a new bond executed. Subsequently, the guardian was removed, and a new guardian appointed, who brought suit against the sureties on the latter bond. Said sureties contended that they were not liable; that the assets were squandered and converted by the guardian before the execution of the bond on which they were sureties. The sureties on the latter bond were held liable for the defalcation previously occurring, the court declaring:

"As between the motioners and those executing the new bond, the motioners would be liable only for such defalcation as had occurred before its execution; but as between the other sureties on the old bond and the sureties of the new, they all stand alike, and upon the same footing. We could not conclude otherwise and be in harmony with the earlier and persistent rulings of this court upon the effect of such obligations."

For cases holding to like effect, see Morris v. Morris, 9 Heisk. (Tenn.) 814; Bobo v. Vaiden, 20 S.C. 271; Brooks v.Whitmore, 142 Mass. 399; Beard v. Roth, 35 Fed. 397; Merrells v.Phelps, 34 Conn. 109.

The appellant relies upon Knepper v. Glenn, 73 Iowa 730, wherein the court says:

"It is true that the undertaking of the surety in the bond was against the default of the guardian in the future. The conditions of the bond were not retrospective."

The bond in said case was an original bond (not a "substitute bond"), and it was the contention of the sureties that the guardian had secured possession of the funds converted, and appropriated the same to his own use, prior to the time of his qualifying by the execution of the bond upon which they were sureties. However, the court made the finding that the guardian had defaulted, and was liable to the extent of the amount named in the order, and recovery was upheld, as against the sureties. It is manifest that said case is no authority for the appellant in the instant case.

The appellant also relies on Bockenstedt v. Perkins, 73 Iowa 23, wherein it is stated:

"It is true that defendants' undertaking was for the performance in the future of the duties of the guardianship. They are not responsible for any default which may have occurred before they signed the bond."

The bond in said case was an original bond, and not a "substitute bond," and the claim of the sureties was that the guardian received the money on the 13th day of October, and that he did not qualify by giving the bond on which they were sureties until the 19th day of October. However, under the facts of the case, the sureties were held liable. Thus said case is not authority for the contention of the appellant in the instant case.

By the great weight of authority, even where a so-called "substitute bond" is executed upon the valid release of the former sureties, the sureties on the latter bond are held liable for defalcation occurring prior to the time of the execution of said latter bond. The duty devolves upon the subsequent surety to ascertain to his own satisfaction with reference to the condition of the estate before binding himself as surety upon the bond. The obligation of the bond is to pay the funds of the estate to the person entitled thereto, upon the order of the court. There is no breach of this obligation until there is a failure to pay. The subsequent surety is not permitted by the law to bind himself to the performance of said duty and then say that the devastavit occurred prior to the time when he became liable on the bond. By reason of his execution of the so-called "substitute bond," the administration of the estate is allowed to continue, and in the case of an infant, may continue for years, and in the case of an incurably insane person, must continue until his death, or until all of the funds have been expended in his behalf, or a new guardian appointed. The delay for final settlement, brought about by reason of the execution and acceptance of the so-called "substitute bond," may render the one finally entitled to the estate helpless, unless the surety on the latter bond is held liable for prior defalcations. If no subsequent bond had been executed, the probability is that the administration of the estate in the hands of the present principal would come to an end. It is true that a valid release of the former sureties only relieves them from liability for future acts (Des Moines Sav. Bank v.Krell, 176 Iowa 437); but lapse of time for the final settlement, induced by the execution of the subsequent bond, may bring about the death or a condition of insolvency of the former sureties which did not exist at the time of the execution of the latter bond. Reason and the great weight of authority impel us to hold that, although the bond may be a so-called "substitute bond," the sureties thereon are liable for defalcation occurring prior to the time of its execution.

There is still a third reason why the appellant in the instant case cannot prevail. While it is conceded that the former guardian appropriated to his own use the estate, prior to October 13, 1923, the date of the execution of the bond in suit, and while the record shows that the former guardian was insolvent on the date of his death, December 9, 1924, it is not shown that he was insolvent October 13, 1923, the date of the execution of the bond. Whatever amount Kirk Milnes owed by reason of his misappropriation of the funds was an asset which belonged to his ward. McEwen v. Fletcher, 164 Iowa 517; Armon v. Craig, 203 Iowa 1338; In re Estate of Donlon, 203 Iowa 1045. For reasons hereinbefore given, the appellant is liable for the prior defalcations or devastavits of the former guardian; and this is true regardless of the solvency or insolvency of said guardian at the time of the execution by appellant of the bond. This holding makes it unnecessary to inquire whether the appellant is liable in the light of the cases last above cited; but if we should so inquire, the burden would be upon appellant to establish the fact, if it be a fact, that Kirk Milnes, at the time when it assumed liability on the bond, was insolvent, and remained insolvent until the time of his death. This they have not done. See McEwen v. Fletcher, supra; In re Estate of Donlon, supra.

Before the trial the appellant filed a motion asking that Moore and Kingsbury, the former sureties, be made 3. PARTIES: parties defendant, for the reason, as claimed, defendants: that a determination of the controversy between action on the parties before the court could not be made bond: prior without their presence. The court overruled the sureties. motion, and the appellant now assigns said ruling as error. Under Section 10975 of the Code of 1924, the plaintiff could sue any one or more of the sureties upon the two bonds. There is no necessity of the presence of the others in court for the determination of the matters in litigation between the parties to this suit. Whatever rights of contribution may exist as between the sureties is still a matter for determination as among them. There was no error at this point.

For the foregoing reasons, the judgment of the trial court is correct, and the same is hereby affirmed. — Affirmed.

ALBERT, C.J., and EVANS, STEVENS, and MORLING, JJ., concur.

De GRAFF, J., dissents.

KINDIG, J., takes no part.