First National Bank v. . Wood , 1877 N.Y. LEXIS 517 ( 1877 )

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The defendant was an indorser upon the notes in suit, for one Devenport, who kept an account with the plaintiff, and had arranged for a line of discounts, which was secured by mortgages upon real estate. The defendant set up in his answer, and offered to prove that he indorsed said notes for the accommodation of the maker, without any security or protection whatever, except such as was afforded by the mortgages above mentioned, which by their terms were executed and delivered as security for paper of this character; that the plaintiff had full knowledge of the character of the indorsement, and knew that the defendant relied upon the mortgages as the primary fund out of which the debt represented by the notes was to be paid. That the plaintiff did not actually lend or advance any money to the said Devenport on the pretended discounts of the said notes, or any of them, but they were passed to the credit of said Devenport as a mere colorable deposit of money, out of and from which other paper was in form paid and retired, and that the liability and indebtedness was a mere extension and renewal of the original indebtedness secured by said mortgage.

We think that the testimony offered established no defense to the action, and did not entitle the defendant to the equitable relief demanded by the answer. The defendant claims that the mortgage was the primary security for the indebtedness, and the notes mere collateral promises to pay the same debt or liability secured by a lien on the real estate, and no action can be maintained on the notes, but the remedy must be confined to the mortgage as the higher security. The authorities relied upon to sustain this position do not uphold the doctrine contended for in cases where commercial paper is discounted and collaterals taken to secure the same. The character of such paper is well understood, and it would be overthrowing long-established rules seriously affecting the rights and liabilities of parties, to hold that resort must be first had to a mortgage or other instrument taken as a collateral to secure the same. In such cases the money is not loaned on the mortgage, but it is given merely to make the notes discounted more safe and secure, and according to the intention of the parties is not to be considered as the principal debt. Much embarrassment and perplexing complications would arise, if holders of such instruments who had discounted paper upon the faith of such security should be compelled to resort to the same primarily for the collection of their demands. It would in fact throw the burden of a litigation upon the party who was intended to be relieved from the same, and tend to thwart the purpose in view. We have been referred to no authority which upholds and sustains any such principle.

While an accommodation indorser may be regarded as surety in some cases, and under certain circumstances, and has all the rights applicable to that relationship, yet as between him and a bona fide holder where his liability has become fixed, he becomes the principal debtor, and if he desires the benefit of any security held by the creditor, he must pay up the debt, fulfill the contract and enforce the right of subrogation to the holder as to the securities held by him. (SeeRoss v. Jones, 22 Wallace, 576, 592; In re Babcock, 3 Story, 393, 398, 399.)

The indorser cannot compel the holder to sue the maker first, or to enforce his security, and in the absence of an additional and controlling equity, to resort to a collateral security. The uniform current of authority fully sustains the views expressed, and most of the leading cases bearing upon the question discussed, are so fully considered in the opinion of the General Term, that with perhaps some few exceptions further examination of the cases is not required.

As to the Atlantic Bank v. Franklin, (55 N.Y., 235;Powers v. French, 1 Hun, 582), and some other decisions cited in connection with them to sustain the position that the plaintiff was not entitled to the rights of a bona fide holder without notice, by passing the proceeds of the discount to Devenport's credit, it is perhaps sufficient to say that they are not in point, and each of them presents entirely a different state of facts from that which arises in the case at bar. The notes in question were used by Devenport in his dealings and business with the plaintiff, and there is no valid ground for the assumption that the discount of them was fictitious, or a mere matter of form, or that the business was in any respect conducted differently from the ordinary and accustomed mode pursued in similar transactions.

Several cases are cited by the appellant's counsel which were not especially considered by the General Term, to sustain the doetrine that a surety may compel the creditor to sue for and collect the debt of the principal debtor, or to exhaust his collateral before resort is had to the surety. (Wright v.Austin, 56 Barb., 13; Soule v. Ludlow, 6 N.Y. [T. C.], 24; Matthews v. Aikin, 1 Comst., 595.) In each of those there was some special equity, or some agreement which took them out of the general rule herein before referred to, and which does not in any way interfere with the same. Under circumstances like those here presented, it can scarcely be claimed that the surety would be entitled to the enforcement of the rule contended for, without an offer on his part to pay the expenses which might necessarily be incurred by this course of procedure.

The remedy of the defendant, in accordance with the views expressed, clearly was to pay up the indebtedness to the plaintiff, thus asserting his right to be subrogated, and to take under his control and enforce the securities in question. The fact that other parties besides the defendant occupied the same position as he did, and were interested to the same extent, or in a similar manner in enforcing the security, presents no valid objection to requiring that the defendant should adopt such a course, for he could only avail himself of such benefit as is really conferred by the securities, and that they are an advantage to some one else besides himself, does not impose upon the plaintiff the costs and expense of prosecuting them before bringing an action against the indorser. The defendant in claiming the right of subrogation can only take the securities as they actually are, with their burdens and advantages, and beyond this he has no rights and no valid claim for protection.

The offer of the defendant to prove the taking of excessive interest in the transactions between the plaintiff and Devenport, and a greater rate than is allowed by the laws of this State, was properly refused. The proposition embraced transactions with which the defendant was not connected, and therefore the offer was too broad and comprehensive. Had it been confined to transactions between the plaintiff and Devenport, with which the defendant was connected, and to the notes indorsed by him, a more serious and difficult question would arise, but in the form in which the offer was made the point raised is not in the case.

The alleged parol agreement in regard to the release, prior to its execution, was properly excluded by the court for the reason that it would contradict and vary the terms of the release as well as the notes.

No other question raised demands discussion, and the judgment should be affirmed, with costs.

All concur, except CHURCH, Ch. J., absent.

Judgment affirmed.