First Nat. Bank of Bellville v. Wheeler

This is a suit filed October 22, 1892, in the District Court of Lampasas County, by the First National Bank of Bellville, located at Bellville, Texas, against defendants, W.E. Wheeler, F. Bernhard, Wm. Geisweidt, F. Kothman and Martin Moran, all residents of Mason County, Texas. The suit is upon a promissory note for $5000, executed May 19, 1891, by defendants W.E. Wheeler, F. Bernhard, together with one C. Crosby, in favor of the First National Bank of Bellville, due 60 days, with interest from maturity. The note is joint and several in form, but in fact Wheeler was the principal beneficiary in the note, and Bernhard and Crosby were sureties. Crosby died insolvent, before the trial, and the case was dismissed as to him.

In the year 1891 Wheeler was heavily in debt, owing numerous parties in large amounts, to whom he had executed promissory notes. There were ten of these notes, including the note due plaintiff and here sued upon, amounting to $22,300, upon which defendants, Bernhard, Geistweidt, Kothman, Moran and said Crosby, were sureties; that is, some two of them were sureties upon each note.

On October 8, 1891, Wheeler, as the petition alleges, in order to secure the payment of these notes, including plaintiff's, and thereby protect his sureties, executed to them (the sureties) a mortgage upon 5000 head of cattle.

Wheeler, Crosby and Bernhard thereafter became insolvent; the cattle were turned over to the sureties and sold by them; and this suit, so far as defendants Geistweidt, Kothman and Moran are concerned, is to subject the proceeds of the cattle, alleged to be in their hands, to the payment of the debts secured by the mortgage, and to recover from them plaintiff's pro rata share of such proceeds.

The case was tried on November 26, 1894, and the court sustained a demurrer to the petition in so far as it sought a recovery against defendants Geistweidt, Kothman and Moran, and gave plaintiff judgment against defendants Wheeler and Bernhard, for the amount of the note; from which judgment of the court sustaining the demurrer, plaintiff gave notice of appeal, has assigned error and brings the case to this court.

The petition, after averring the liability of Wheeler as principal on the note sued on, and that Bernhard and Crosby were sureties, and that all are insolvent, and that Crosby is dead, alleges that:

"During the year 1891 and before that time, defendant Wheeler was to a large extent financially involved, owing numerous parties in large amounts, to whom he had executed promissory notes with personal security. That on, to wit, October 8, 1891, among other liabilities, he was indebted by promissory notes upon which defendant Wm. Geistweidt and said C. Crosby were sureties, to the following parties, and in the following amounts, to wit:

Emil Wahrmand ........................................... $3050 August Wahrmand ......................................... 350 Adolph Wahrmand ......................................... 400 Louis Fischer ........................................... 300 Paul Harnisch ........................................... 900 T.D. Smith .............................................. 2800 ------ Total ................................................. $7800

To T.D. Smith, with defendants Crosby and Kothman, sureties ................................................ 4000 To Ann Martin Sons, with defendants Crosby and Moran, sureties ................................................ 1500 To F. Landon, with defendants Bernhard and Kothman, sureties ................................................ 4000 To plaintiff, with defendants Bernhard and Crosby, sureties .............................................. 5000 ------ Making a total of, to wit ............................ $22300

Plaintiff further says that on, to wit, said 8th day of October, 1891, defendant Wheeler, for the purpose of securing the payment of his aforesaid promissory notes, including plaintiff's, and thereby protect his aforesaid sureties from harm by reason of their respective liabilities on the notes above mentioned, all of which sureties (except C. Crosby, now dead) are defendants in this suit, executed and delivered to them (said sureties) a mortgage upon, to wit, five thousand head of cattle, which mortgage was duly accepted by the mortgagees and properly authenticated and promptly recorded in the proper counties; a copy of which is hereto attached, marked exhibit A, and is made a part of this petition.

Plaintiff further says that thereafter, to wit, to the February term, 1892, of the District Court of Mason County, Texas, suit was brought upon the aforesaid notes described as payable to Emil Wahrmand, August Wahrmand, Adolph Wahrmand (sued upon in the name of Eliza Wahrmand) Louis Fischer and Mrs. Ann Martin Sons, upon which judgments were obtained on, to wit, March 2, 1892, in favor of each of the plaintiffs for the amount of their respective demands.

Plaintiff further says that thereafter, to wit, March 12, 1892, defendants Bernhard, Kothman, Geistweidt, Moran and said Crosby, in order to carry out a contract of sale of 2300 head of said cattle which had previously been made by said Wheeler, for the sum of, to wit, $16,000, delivery to be made on or about April 8, 1892, to one Felix Mann as agent of the purchaser, entered into a written agreement, with the approval of defendant Wheeler, by which they selected defendant Geistweidt from their number to act as agent for the parties interested in the proceeds of the cattle, to collect and deliver said cattle to Mann and receive the checks and money therefor, which was payable on delivery, and apply it to the payment of the aforesaid claims of the above named creditors of Wheeler, which were mentioned in and secured by said mortgage, a copy of which agreement is hereto attached and made a part hereof, marked "Exhibit B."

Plaintiff further says that defendant Geistweidt delivered 508 head of said cattle to Mann in accordance with the contract and in pursuance of his agency as above stated, which 508 head so sold amounted to the sum of, to wit, $3783, out of which he is entitled to a credit as follows:

Taxes on the cattle for 1891 .......................... $147.90
Paid Grote expenses taking care of cattle .............   72.70
Expenses of gathering .................................  139.30     359.90
--------  --------
Thus leaving a balance of ...........................           $3378.10

arising from the sale of said 508 head of cattle, to be applied by him towards the pro rata payment of the debts secured by said mortgage. Plaintiff further says, that shortly after the appointment of defendant Geistweidt as agent as aforesaid, to wit, March 19, 1892, defendant Crosby, being insolvent, disposed of all of his property subject to execution, by deed of trust for the benefit of his creditors, giving preference to those who were his individual creditors, and thereafter, to wit, March 28, 1892, defendant Wheeler executed a conveyance of all his property, real and personal, except such as was exempt from forced sale, to one J.C. Butler as trustee, or assignee, for the benefit of his creditors, which trust said Butler accepted, and thereafter, to wit, the ______ day of May, 1892, said Butler turned over said cattle, or what was left of them, as they run, to defendants Geistweidt, Kothman and Bernhard for the purpose of being sold by them and the proceeds applied to the payment of the several creditors whose claims were secured by the mortgage in accordance with their respective rights thereunder.

Plaintiff further says that prior to the turning over of said cattle by Butler to defendants Geistweidt, Kothman and Bernhard, said Crosby, on account of his insolvency and transfer of his property for the benefit of his creditors, declined to have anything to do with said cattle, but left the cattle and the debts secured thereby to his co-sureties to manage as best they could, and defendant Moran, prior to the turning over said cattle by Butler as aforesaid, having ceased to be interested in them by reason of the debt upon which he was surety that was secured by the mortgage, to wit, the Anna Martin Sons note for $1500, having been paid off in full, also took no further interest in the cattle, and hence all the cattle were turned over by Butler to defendants Geistweidt, Kothman and Bernhard, as above stated.

Plaintiff further says that thereafter, to wit, in the month of November, 1892, defendants Geistweidt, Kothman and Bernhard sold the entire remnant of said cattle, which upon being gathered was found to be, to wit, 2219 head, to one R.R. Russell at $6 per head, amounting to the sum of $13,314, which amount was received by them.

Plaintiff further says that by reason of the facts above stated, defendant Geistweidt, as it is advised, believes and so charges, became individually liable to plaintiff for its pro rata share, along with the other creditors secured by the mortgage, of the net proceeds of said 508 head of cattle delivered by him to Felix Mann, to wit, the sum of $3378.10, and also that defendants Geistweidt, Kothman and Bernhard, as agents for the creditors named in the mortgage, are jointly and severally liable to plaintiff for its pro rata share of the proceeds of the 2219 head of cattle turned over to them by Butler for the benefit of said creditors and sold by them to R.R. Russell, as above set forth, amounting to the sum of $13,314.

Plaintiff further says that it is informed, believes and so charges the fact to be, that defendant Geistweidt, by virtue of his respective agencies above mentioned, has received much the larger share of all the moneys arising from the sales of said cattle, and has to a large extent misapplied the same, to wit, to the extent of $4000."

The petition concludes with a prayer for an accounting of the proceeds of the property that went into the hands of Bernhard, Kothman, Moran and Geistweidt, and that said parties be retained in the case for that purpose, and that plaintiff recover such interest in said proceeds as it may be entitled to, or judgment against the parties that appropriated such property for the pro rata interest of plaintiff.

We have met with some difficulty in determining the legal effect of the instrument executed October 8, 1891, by Wheeler for the protection of his sureties. The difficulty was whether it should be held a security for their benefit for the purpose of securing the debts, or simply a naked contract of indemnity for their benefit only in the event they sustained damages or loss by reason of the suretyship. But viewed in the light of the facts stated that the principal and sureties of the notes sued on are insolvent, coupled with the fact that a part of the property encumbered by this instrument was actually delivered to the sureties for the purpose of applying it to the debts for which the sureties were bound, we are disposed to treat the contract of indemnity to this extent as of the nature of a security of the debt which the creditor may be subrogated to. When the principal debtor, as is the case here, executes and delivers to his sureties a mortgage indemnifying them against loss, and accompanies such instrument with a delivery and possession of property to secure it, it would be inequitable, upon the insolvency of the principal and sureties, to construe the contract one of personal indemnity to the sole benefit of the sureties and relieve them from liability to account for the property they have received from the principal. Sheldon, Subrogation, secs. 159-163; Owens v. Miller, 29 Md. 161; Moses v. Murgetroyd, 1 Johns., Ch. 129; Pratt v. Adams, 7 Paige, 617.

If the instrument was in terms a mortgage for the purpose of securing the surety or the debt, in the light of all the authorities upon the subject, it would be held that the creditor's right of subrogation unquestionably exists, and that in such a case the creditor would have the right to enforce the mortgage for his benefit, thus by subrogation working out the right of the surety. Assuming that in this case the instrument which the creditor here is seeking to be subrogated to is not of the class just named, but is technically a contract of indemnity to the surety against loss, would not the surety who has in his possession under that instrument the property therein described, upon the insolvency of his principal and when his liability for the debt had become fixed, be authorized to apply the property so delivered to him by the principal debtor to the payment and satisfaction of the debt? Van Orden v. Durham, 35 Cal. 145. If such a right be conceded, and as to its existence there ought to be no question, why would not the creditor, upon the refusal of the surety to so apply the property, be subrogated to the rights of such a surety, especially if he is insolvent. Equity confers upon the creditor just such rights to the indemnity as exists in the surety, and if the surety is permitted to enforce the indemnity and apply the property, the same rights are conferred upon the creditor.

A contract indemnifying the surety only against loss may in law be construed as a naked indemnity, and that no right exists to foreclose unless the surety has actually sustained a loss, but when, in addition to this, the incumbered property is actually delivered to the surety by the debtors, and he holds it and retains it for the purpose of his security, or to be applied to the debt, then the transaction should be treated as the parties have treated it and in equity held to be a security. If a personal indemnity is accompanied with a delivery of property to be applied to the debt, it is treated as a pledge or trust which the creditor may follow. 2 Brandt, Suretyship, sec. 328.

The averments are to the effect that defendant Geistweidt was made the agent of Bernhard and other sureties of Wheeler to deliver to one Mann certain cattle, and to receive the proceeds, which were to be applied to the payment of the debts mentioned in the contract of indemnity. The effect of this was to place in Bernhard's hands, with the others named, the property as pledged, which was to accompany the indemnity personally executed by Wheeler and which was to be applied to the debts there stated, of which this plaintiff's claim is one. The remedy exists in Bernhard, if he was so disposed to pursue it, to require Geistweidt to account to him for the pro rata share of the amount received by him in the sale of the cattle, and which he received as Bernhard's agent, to the end that Bernhard may apply it to the debt for which he is liable and which is mentioned in the contract of indemnity executed to him and the other sureties. The plaintiff has become subrogated to Bernhard's rights in this matter, and it will be permitted to hold the defendants liable to the same extent as would be granted to Bernhard if he had pursued his remedy looking to this end.

There is another aspect of the case which requires us to hold that the court erred in sustaining the demurrers. Those allegations of the petition which charge that the principal debtor, Wheeler, executed to one Butler a deed of trust upon his property to secure his creditors, and that such property was turned over and delivered to defendants Geistweidt, Kothman and Bernhard for the purpose of being applied to the payment of the claims of the several creditors, create against the defendants named a liability to the creditors secured and that accepted the benefits of the trust. The trustee, Butler, may not have had the power to substitute some one in his place to execute the trust, but when he diverted the property by placing it in the hands of others who knew that it was charged with the trust, he and those that received it became liable to the beneficiaries for its value not to exceed the amount of their claims. 2 Pomeroy's Equity, secs. 994-996, 1048, 1049, 1051, 920 (page 1309), 1080; Martin v. Bank, 31 Ala. 121; Sheldon on Subrogation, secs. 163, 166, 167.

This action by the plaintiff is equivalent to an acceptance of the benefits of the trust. We decide the case solely as presented by the petition, and we do not wish to be understood as holding that the rules of law as stated shall govern the final disposition of the case, for the facts may not entitle the plaintiff to any relief.

Judgment reversed and cause remanded.

Reversed and remanded.