Liquidating Midland Bank v. Stecker

This action comes into this court on a petition in error to the common pleas court of Cuyahoga county, in which court the plaintiff in error was plaintiff and the defendants in error were defendants; the petition having been filed by the plaintiff in the court below to recover something like $90,000 upon a guaranty of payment against the defendants below — a written guaranty of payment of certain bonds issued by the Arline Realty Company and secured by a mortgage upon the premises. The Midland Bank, afterwards the Liquidating Midland Bank, was named as trustee in the bonds and the mortgage. The bonds that were issued by the Arline Realty Company were dated November 1, 1923, at which date the bonds and the mortgage securing them were apparently signed, and probably these bonds and mortgage were delivered to the Arline Realty Company. Apparently afterwards a sale of these bonds was negotiated with the Union Mortgage Company, which agreed to become the purchaser of these bonds, but as a condition to its becoming the purchaser it demanded that the decedents of two of the present defendants, and Stecker, the third defendant, who were the principal stockholders in the Arline Realty Company, should guarantee the payment of the obligations created and issued by the Arline Realty Company. So on the 19th of November of the same year, the written guaranty was signed by Stecker, and the two decedents who were represented by the defendants in the present lawsuit, a proper claim having been filed with them as legal representatives of the estates of the decedents, which claims had been rejected and refused, all of which is set up in the petition, and so the suit was brought against them.

The petition of the plaintiff sets up at great length, and quotes the salient terms of, the written guaranty of November 19th, which was signed by Stecker and the defendants' decedents, who were, as already stated, the principal stockholders in the Arline Realty Company.

It will be noticed that the suit was brought upon the guaranty, and no effort was made apparently to exhaust the property upon which the mortgage securing the bonds was given, nor was there any allegation to that effect in the petition.

To the petition filed, as outlined above, demurrers were filed on the ground, first, that the Liquidating Midland Bank had no legal capacity to sue, that there was a misjoinder of parties plaintiff, and that the petition did not state facts sufficient to constitute a cause of action. The demurrer was sustained, and an amended petition was filed which set up substantially the same thing, and, I believe, a demurrer to that amended petition was sustained and another amended petition was filed which set up in substance the same thing as the other petition and amended petition had set up; differing somewhat in statement, but substantially the same thing. Upon motion this amended petition was struck off and judgment was entered for the defendants, and it is to reverse that judgment that error is prosecuted here. So the only and real questions are: Did the petition state facts sufficient to constitute a cause of action; was there a misjoinder of parties plaintiff, or a nonjoinder; and did the plaintiff have capacity to sue?

Well, taking them up in their order, first, it must be remembered that the suit was brought upon this written guaranty which was made upon the 19th day of November. It is alleged in the petition that it and the issuing of the bonds were simultaneous and constituted a part of the same transaction. Whether this was so or not, I think that it is a matter of no importance, as will be demonstrated later on.

The petition, as already stated, was based upon this written guaranty, and that guaranty, so much as is pleaded in the petition, states that it was upon the consideration of the Midland Bank, later the Liquidating Midland Bank, having become trustee for these bonds, and, further, upon consideration of the fact that the Union Mortgage Company had agreed to become the purchaser upon the condition that the principal holders of the stock in the Arline Realty Company should guarantee the payment of the principal and interest of the bonds as they matured. That was made jointly and severally for the benefit of the various holders of the bonds and the trustee. That would permit any one of the holders, or the trustee, to maintain this suit without joining other benefited parties, for the bondholders would be bound of course by the rules applying to persons who are jointly and severally bound. One could bring an action alone, or, if he would join some of them with him, he must join them all. In the instant case the Liquidating Midland Bank brought the suit in its own name, and I maintain that, inasmuch as it was a trustee of an express trust and was specifically so named in this written contract of guarantyship, it might maintain this action without joining any other person than itself as party plaintiff. Nor does the mere fact that the bondholders have subsequently or prior thereto brought an action militate against its right to maintain its suit. Several parties to whom the defendant is severally liable may simultaneously bring suits. A judgment and satisfaction upon the judgment in any one of the suits, of course, would bar any further recovery, so that if these persons should pay the bondholders it would be a complete defense to the trustee's maintaining this suit, and if the trustee should obtain a judgment and satisfaction of the same it would be a complete defense to the bondholders recovering. So that eliminates that proposition.

I think under this guarantyship upon which this suit is founded the Liquidating Midland Bank can maintain the suit in its own name, and had a right to maintain the suit without joining any other person, and so far as the court sustained the demurrer in these respects, the court erred, and for that reason the judgment should be reversed unless there is something else in this case which would make the ruling the other way, and that something else has caused me more difficulty than the propositions already discussed, and that question is whether this guaranty was an absolute liability imposed upon the guarantors or a conditional liability.

Ordinarily a guaranty of payment is an absolute liability, and the guarantor becomes liable upon default of the principal, without exhausting the principal's assets. If, however, it were a guaranty of collectibility, or a guaranty of the soundness or goodness of the security, or any words which would import that the guaranty should only be available after the principal had been exhausted, then it would become a conditional liability and could only be enforced after the principal's liability had been exhausted, and, in order to state a cause of action, the petition would have to state that the principal's credit had been exhausted and the petitioners were unable to collect. That would be a condition precedent, and, if the petition did not state that, it would be demurrable for not having stated a cause of action.

In this connection I wish to state the law as laid down in Stearns on Suretyship, Section 62: "A guaranty of collectibility is distinguished from an absolute guaranty of payment. The latter imposes a liability to pay if the principal does not, and the former if the principal can not. No liability attaches upon guaranty of collectibility or solvency until in some way it is made to appear that the principal was not able to pay at maturity. Mere failure to pay the debt at maturity will fix the liability upon the promisor in an absolute guaranty of payment, but it is necessary to show more than mere default of the principal to bind the guarantor of collectibility. Such a promise is conditional, and if the creditor by due diligence might have recovered from the debtor at maturity, or at any other time before bringing his action against the guarantor, then the guarantor is exonerated, for his promise is upon the condition that such diligence will be used."

Now if this be the law, and I think it is, it becomes necessary for me to construe the following words in this contract of guarantyship:

"Whereas The Midland Bank has agreed to act as such Trustee, and the Union Mortgage Company has agreed to purchase said bonds from said Company, only upon condition that the undersigned will jointly and severally guaranty payment of the principal of, and interest on, said bonds according to their terms and tenor; and the undersigned have agreed to guarantee such payment according to the terms hereof:

"Now, therefore, the undersigned, in consideration of the acceptance of said trusteeship and the purchase of said bonds, hereby jointly and severally guarantee to The Midland Bank, as Trustee for the holder or holders of said temporary bond, (until the same is surrendered for exchange) and said definitive bonds (when so exchanged), and to said holder or holders individually, jointly or severally, the full, prompt and punctual payment of the principal of and interest on said temporary bond or definitive bonds, as the case may be, according to their terms and tenor.

"And we hereby waive all notice, presentment and demand whatsoever, and agree to be and remain bound hereunder until said principal and interest shall be fully paid, notwithstanding any act or omission of or on the part of said Trustee or The Arline Realty Company."

From the wording of this contract it would seem to be guaranty of payment and not one of collectibility, which if true, would make the guarantors liable in the first instance upon the failure of the principals to pay in accordance with the tenor of their obligation. It is claimed, however, that inasmuch as this guaranty is upon a separate paper, it cannot be construed to be a contract equivalent to that of suretyship; that it means that the principal obligor must be first exhausted. I do not think that that is the law. Of course, in this instant case, it is alleged in the petition that the papers were issued "simultaneously," and as part of one and the same transaction; but, as already stated, I do not think that so important. Assuming that it was upon a separate paper, there is no doubt but that both a contract of suretyship and of guarantyship may be upon separate paper, and of a later date, and at later times than the principals' obligation was created. The only question would be, if it were upon the later paper, the consideration that warranted the issuing of the original documents would not suffice to bind the guarantors upon the subsequent one. There must be another good and sufficient consideration.

To illustrate: If A borrows $1,000 from a bank and gives his note for it, if a surety or guarantor signs simultaneously before A gets the money, they are bound from that time, and the same consideration which binds the principal would bind both. But if A goes to the bank and gives his obligation, and gets the money, and afterwards the bank wants a surety or a guarantor, and a surety or guarantor gives a written obligation, it must be based upon a different and distinct consideration, either a payment or something of value given to the surety or guarantor, or an extension of time or other benefit to the principal. That is the only difference between signing on the original document and upon a subsequent document.

Now reverting to the instant case, and the document upon which this suit is brought, it sets forth the consideration thus: "On consideration that The Midland Bank becomes trustee and on consideration of The Union Mortgage Company taking these bonds, these guarantors sign this obligation." Now if the Midland Bank had already become trustee, then as to it there might not be a sufficient consideration, but the Union Mortgage Company having taken these bonds upon the strength of this guarantyship, there is a sufficient consideration, and that would inure to the benefit of the Midland Bank as well as to the Union Mortgage Company or any of the purchasers of the bonds. So there is a distinct consideration in the instant case, and the guaranty being clear, I think the guarantors became liable upon the failure of the principals to comply with their obligation, and the plaintiff did not have to exhaust the principals' property before it could revert to the guarantors.

Now this proposition is sustained in the case of Clay v.Edgerton, 19 Ohio St. 549, 2 Am. Rep., 422, and in the case ofNeil v. Trustees, 31 Ohio St. 15. But a case more in point is the case of First National Bank v. Jones, 219 N.Y. 312, 114 N.E. 349, the syllabus of which reads as follows: "Defendant's intestate procured from plaintiff a loan to a corporation, of which he was a stockholder, upon its promissory notes aggregating a certain amount, and also a loan to an individual upon his promissory notes, indorsed by the said corporation, for a similar amount, and gave to the plaintiff a contract in writing reciting said loans, and providing: ``Now, therefore, I hereby covenant and agree with said bank to guarantee, and I do hereby guarantee the full, prompt, and ultimate payment of all of said notes, aggregating twenty thousand dollars and of any and all renewals thereof or of either of them when the same shall become due and payable, until all of said loans and notes and any and all renewals thereof are fully paid and discharged.' The notes were renewed from time to time for several years, when defendant's intestate died, at which time there remained unpaid of said loans one note covering the whole of the loan to the corporation and one note of the individual debtor indorsed by the corporation for part of the original loan. Neither of these notes was paid when due and the bank commenced this action against defendants, as executors of said guarantor, to recover under the contract of guaranty, and the only question involved is whether the plaintiff was required to make diligent effort to collect the notes from the makers and indorsers thereof before insisting upon payment thereof from the defendants. Held, upon examination of the agreement, that the word ``ultimate' was used to cover notesultimately given in whole or in part in renewal of the notes given at the time of the guaranty and thus to clearly continue the obligation of guaranty so long as the loans were extended; that it appears from the contract that the parties intended an unconditional guaranty and this intention must control."

That case is decisive, I think, of the point in question in this case. The only difference between the words in that contract and in this is the word "ultimate," and the court of last resort in New York in passing upon that proposition held that the word "ultimate" did not modify or change the liability of the guarantors so as to make it one of collectibility only. Now it is important to read the language of the court in that case in connection with the language of this guaranty. The guaranty, after guaranteeing the payment in the instant case, goes on to say that the guarantors waive notice of demand and protest, and agree to be bound until all of the principal and interest is paid. That would seem to indicate that they contemplated that the payment be made out of the principals first; but, upon an analysis of those words, in connection with the other words, one can see a reason why these words were used by the careful writer of this document. Ordinarily a guarantor or a surety does not expect to pay the obligation of the principal, and there is a great line of authorities which hold that if the creditor has unduly delayed, where through his negligence the principal's property is allowed to escape, whereas if a prompt suit had been brought the guarantor or surety could have protected himself by paying the claim and having it assigned to him, or be subrogated to the rights of the creditor so that he could pursue his remedy against the principal debtor — I say there is a great line of authority to the effect that where undue delay has taken place so that it damages the surety or guarantor of payment, it would operate as a defense, and could be set up as a defense to a recovery against the surety or guarantor, not that they are entitled to notice of non-payment, and so forth, but so that they could protect themselves against undue delay.

Now apparently the purpose of this latter part of this guaranty, above referred to, was that no matter what the delay might be in the collecting of the money from the principal debtor, the guarantor in this instance could not avail himself of the delay as a defense to a suit that might be brought against him. Of course, when one signs as a guarantor of payment, or as a surety, he contemplates that the obligation is going to be paid by the principal, and he does not anticipate that he is going to be called upon, but that does not affect the law on this proposition, and the only question here in this respect is whether this was a guaranty of payment, and so an absolute liability in case of default of the principals, or whether it was a guaranty of collectibility; and a plain reading of the words indicates without dispute that it was a guaranty of payment, and the sole claim that I have heard that it was a guaranty of collectibility only was that the guaranty was upon a separate paper.

Now there has been no authority shown which would indicate that the guaranty had to be upon the same paper, otherwise it was a guaranty of collectibility and not of payment. What authorities I have examined are all to the contrary, and the only question, as before outlined, as to whether a contract on a separate paper could be enforced, made at a separate time, would be one of consideration, and that is obliterated in the instant suit.

A great many cases have been cited in the careful briefs that have been prepared in this action, and I have examined with interest the authorities cited in the very able supplemental brief filed by the defendants in error, some of which authorities seem to support their contention; but I do not think that they overturn the authorities on the other side. For example, the second syllabus in Middle States Loan, Building ConstructionCo. v. Engle, 45 W. Va. 588, 31 S.E. 921, appears to be in point; but an analysis of the opinion shows that the facts in that case were entirely different from those in the instant case, and the authorities given to support the judgment of the court were in the main based upon cases where the documents under construction were those of guaranty of collectibility merely, and not of payment.

I think that on the whole the authority is clear that the trustee in the instant case had the right to mainain his suit in its own name; that it did not have to join either the mortgage company or the bondholders, or any one of them, and inasmuch as this was an action upon the guaranty alone, the written paper, and that was a guaranty of payment upon the default of the principals, it did not have to allege or prove that the principals' property had been exhausted; that the petition, in other words, stated a cause of action, and the court should have overruled the demurrers to all the petitions, and the court erred in striking off the petition for noncompliance with its order and entering a judgment against the plaintiff in error, the plaintiff below, and for that reason I think the judgment should have been reversed and the cause remanded to the common pleas court with instructions to overrule the demurrer.

For the above reasons I deem it my duty to dissent from the majority of the court in affirming the judgment of the court below.