Chester v. Bank of Kingston — 16 N.Y. 336

Majority

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Chester and others v. The Bank of Kingston.

Headnote

Parol evidence is admissible to show that a bond for the payment of money, absolute in its terms, was delivered under an agreement by which it was to be held by the obligee as collateral to a debt of third parties, and to be canceled upon his obtaining payment from them.

Where a creditor makes an agreement by which a security is rendered valueless to a surety who is entitled to be subrogated in respect thereto, tho surety who has paid the creditor, after a judgment obtained against him in ignorance of such agreement, is entitled to recover from the creditor the,,; amount of the defeated security. ;

The Bank of Kingston discontinued a suit which it had brought against tli makers and indorsers of a promissory note discounted by it, upon tli execution of a bond, by three of the parties to the note, conditioned for tl. payment of the amount due thereon in eight months, and such bond we delivered under a secret agreement, that the bank would endeavor-to collei ; the amount secured thereby from the plaintiffs in this action, who were i fact only secondarily liable, the primary obligation being upon the obligoi > in the bond and the other parties to the note for which it was giyen. Tli • plaintiffs being ignorant of this condition, afterwards paid a judgment recovered against them by the bank for the same debt, and the bond was thereupon transferred to them by the bank; Held, that the bond having, by virtue of the condition on which it wras delivered, become satisfied when the bank obtained payment from the plaintiffs, the latter were, in equity, entitled to recover back the amount paid upon the judgment.

Appeal from the Supreme Court. Marcus Wilbur, being indebted to the Kingston Bank, procured the plaintiffs to make for his accommodation, and without any consideration, their promissory notes, one for $1500, payable ninety days from the 11th May, 1837, the other for $1331.15, payable ninety days from April 38, 1837, which he indorsed, and delivered, before their maturity, to the bank, to hold as collateral security for his liabilities to it, whether primarily oías an indorser, informing the bank, at the time, of the character of the notes. Wilbur was then indebted to the bank in the sum of $945, for which it held his promissory note, and was also contingently liable as the indorser of a business note for $1530.34, made by W. & D. Swift, pay

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able to the order of and indorsed by Pierson & Co., and to become due November 25, 1837, which had been discounted for him. This note bore the indorsement of other persons, subsequent to that of Wilbur, and which he had procured for the greater security of the bank. In January, 1838, the bank commenced a suit against the maker and indorsers of the Swift note, to enforce its payment. They having interposed a defence, the bank, in September, 1838, commenced a suit against the .plaintiffs in this action upon their accommodation notes. In November, 1838, the defendants in the suit upon the Swift note agreed to withdraw their defence, and three of them executed a bond to the bank, conditioned to pay $1729.35, the amount due upon that note, with the costs of the action, in eight months. This bond was given under a secret parol agreement between the bank and the obligors, that the former would endeavor to collect the amount secured thereby from the makers of the accommodation paper, held by the bank as collateral security for Wilbur’s indebtedness, and that if it should be successful in so doing, the bond should be returned to the obligors.

In January, 1842, the bank recovered judgment against the plaintiffs in this action for the amount of their notes, with interest and costs, and claimed to hold the judgment for the amount of Wilbur’s individual note, before mentioned, with interest, and of the Swift note, with interest and the costs of' the suit upon it. On the 25th May, 1842, the plaintiffs satisfied the judgments by paying $3936 .(of which $2133 was on account of the Swift note), and thereupon the bank transferred to them the Swift note and the bond given for it, as before mentioned. - The plaintiffs commenced suits upon, and attempted to collect, first the bond and then the Swift note; but having become satisfied that they could not recover, by reason of the arrangement entered into by the bank on the taking of the bond, and which, so far as the proofs showed, then first became known

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to them, they abandoned the suits, and filed their bill in the late Court of Chancery to recover back from the bank the amount they had paid on account of the Swift note. The cause, on the dissolution of the Court of Chancery, was tried in the Supreme Court, which, at general term in the first district, rendered judgment for the plaintiffs for the amount paid by them on account of the Swift note, with interest. The defendant appealed to this court.

William, C, Noyes, for the appellant.

Samuel A. Foot, for the respondent.

When the bank had discounted the Swift note for Wilbur, the situation of the parties was this : Wilbur still owed the bank $945, and he was liable as indorser on that note. The bank held the respondent’s accommodation notes as collateral merely to the remaining debt of Wilbur and to his indorsement of the Swift note.. As to the $945, the primary fund was the liability of Wilbur. As to the sum represented in the Swift note, the liability of the makers, and of Wilbur as indorser, were both primary in respect to the respondents. If immediately after the dishonor of the Swift note the respondents had paid the amount of it to the bank, they would have been entitled to subrogation, and to proceed at once against makers and indorsers for their reimbursement. From these relations of the. parties it results that the bank had no right so to deal with the.Swift note as to postpone the remedies to which the respondents were entitled on being subrogated to that security. If they did so deal without the assent of the plaintiffs, the latter were, to the amount of the note, discharged in equity if not at law. If, however, they assented to the dealing, or have placed themselves in a situation where they cannot object, then their liability still remains, unless they have some other answer to it.

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The transaction between the bank and the parties to the Swift note probably postponed the collection of the money, which that security represented, for eight months. The bank had sued the note, and a defence had been interposed. The suit was compromised by taking a bond for the alleged debt and costs, payable in eight months, made by the same persons who were parties to the note, except D. D. Smith, one of the makers. The proof also tends to show that the bond was intended as an extinguishment of the note. Upon these facts, the bank having put it out of its power to proceed upon the primary liability until the period of extension should expire, the plaintiffs, whose liability was secondary and collateral, might have insisted that they were discharged in equity to that extent. But instead of doing so, they, in May, 1842, paid the bank in full, and took an assignment of the Swift note and the bond. After this, they cannot, in my judgment, complain that the bank thus dealt with parties to that note. I lay out of view the force of the judgments recovered against them, and on which they paid the money. It is extremely doubtful whether the facts stated would have been a defence at law. Be that as it may, it appears that the plaintiffs suffered the judgments in ignorance of the transaction, and therefore I concede that, notwithstanding the judgments, they might insist in equity that they were exonerated. But, instead of taking that ground, they paid up the bank, and took from it the primary fund in the condition it then was, and they still hold it. It is not pretended that this was done in ignorance of their rights; certainly not in ignorance that the bond on time had been substituted in place of the note. So far as appears, everything was known to them except the secret condition on which the bond was given, which I shall presently notice. I am speaking thus far of the bond only as an extinguishment of the note and a postponement of the liability for eight months; and not of the secret condition which -was to extinguish the bond also. Knowing, then, that the Swift

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note was extinguished, or at least that the right to collect the money was postponed, the plaintiffs paid the bank and took the primary securities into their own hands. Having thus taken that fund away from the bank, they have, so far, no ground of complaint. If they had refused to pay, the securities surrendered to them might still be of value to the bank. They must be deemed upon their own theory to have paid voluntarily, with full knowledge of the facts which they now claim exonerated them, and on paying they have received, so far as the case has yet been stated, just such subrogation to the primary fund as they asked for.

It is proved, however, that when the parties to the Swift note gave the bond, there was a secret agreement, by parol, that it should become void, provided the bank could collect the amount of the note from other securities which it held, including the accommodation notes of the plaintiffs. The plaintiffs afterwards paid their notes upon the judgments recovered upon them, and, as the demand of the bank was thereby satisfied, it is claimed that the bond cannot be enforced. The plaintiffs, when they paid and took the assignment of the bond, were ignorant that a secret condition attended it, by force of which, at that very moment, it became extinguished. • Upon this, as a distinct ground, they claim to recover back the money so paid, and if, by reason of these facts, they cannot enforce the bond, then' claim is well founded. The plaintiffs, on paying their accommodation notes, were entitled to be subrogated to the bond; but if that security became invalid as soon as it reached their hands, by reason of the unknown condition on which it was given, then the bank must pay back the money. Here, again, it should be observed, the judgments are no answer. This defence, if available at law, was 1 unknown to the plaintiffs until after the judgments were paid, and there is no suggestion that there was anything to put them, on inquiry after the facts.

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I think the question, then, is, whether the bond is an available instrument in the hands of the plaintiffs. No weight, in my opinion, can be given to the circumstances that serious doubts were entertained as to their right to recover upon it, and that by advice of counsel they discontinued their suit to enforce it. The true point of an .inquiry is, have the makers any legal defence. If they have not, then the plaintiffs have in their hands all that they expected to get when they received the subrogation and assignment. If there is a defence to that instrument, under the parol agreement made at the time it was executed, then, as they paid then: money when they were not bound in equity to pay it, and in ignorance of the facts, they are entitled to recover it back.

Where, as in this case in respect to the bond, there is a perfect delivery of a written obligation, it is plain that evidence cannot be given of a cotemporaneous parol agreement, contradicting the terms of the instrument or impairing its force. But this rule does not exclude evidence to show that the obligation is collateral to some other debt of the obligor or of a third person, and is to become extinct when the debt is paid. Thus A. may be a creditor of B., and take the common bond of C. for the same debt. The bond, is discharged when the debt of B. is paid, and it may be shown by parol that such was the agreement and such the purpose of the obligation. Such evidence is not regarded as contradicting the written undertaking, but as tending to show that it has been paid and discharged by another person bound for the same debt. It seems to me that the question, before us must be determined under this rule. The bond was given as a substitute for the Swift note. The bank held the plaintiffs’ notes for the same debt, and by the parol agreement the bond was to become extinct when that debt should be collected of them. The substance of the transaction was, that the bond should be held as collateral merely. It is true, the bank and the parties to

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the Swift note had no right to enter into such a transaction. It was in fraud of the plaintiffs’ equitable rights. Their liability was only secondary, whereas by this agreement the attempt was made to render it primary. But this objection comes with no grace from the bank, and it cannot be listened to. The bank must, take the agreement as it was, and can-lot be allowed to urge that it was intended as a fraud upon the plaintiffs, and is therefore ineffectual. Putting that objection aside, therefore, I am of opinion that, in a suit upon the bond, it would be competent, within the rule which has been stated, to prove the agreement under which it was to be held as collateral, and so to show that the obligation is satisfied.

The judgment should be affirmed.

The Swift note, in reference to its relation to the notes of the respondents, was the primary security for the payment of Wilbur’s debt to the appellant. The legal effect of the parol agreement entered into between the appellant and William Swift, &c., in November, 1838, when the bond was accepted by the former as a substitute for the Swift note, was to make the bond, as between the parties to it, a collateral security for the notes of the respondents, and to extinguish the right of action of the appellant on the Swift note, and also to make the receipt by the appellant of the amount of that note from the respondents operate as a satisfaction of the bond. The appellant, by this agreement, and the acceptance of the bond as a substitute for the Swift note, changed the character of the indebtedness of the parties to that note from a primary to a secondary indebtedness, and deprived the respondents, in the event of their paying the Wilbur debt, of their right of subrogation to the original remedy of the appellant upon the Swift note, and thereby discharged their liability to the appellant as sureties for Wilbur and for the parties to the Swift note. The respondents having voluntarily paid to the appellant the

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Wilbur debt, without notice of the parol agreement between the appellant and the Swifts, and having received from tne appellant a transfer of the Swift note, and an assignment of the bond by virtue of their right of subrogation, the principal, if not the only real question in this case is, whether either the note or bond is an available security in the hands of the respondents. The determination of this question depends upon the decision of another, viz., whether evidence of the parol agreement which accompanied the execution and delivery of the bond was admissible as a defence to an action upon the bond. If this evidence went merely to show that the bond was given as collateral security for the payment of the notes of the respondents, it was admissible.

Parol evidence, to show the purpose and intent for which a security was executed, is not regarded as contradicting or varying its terms or legal effect. This principle was advanced by Judge Jewett, with the concurrence of all his associates, in Truscott v. King (2 Seld., 147, 161). In that case a judgment had been confessed for a specific sum of money; and parol evidence was received to show that the judgment was given as a security for future advances.

From an early day it has been held, in courts of equity, that parol evidence was admissible to show that a deed absolute on its face was intended as a mortgage, and also that it was admissible to prove a resulting trust. (1 John. Ch. R., 594; 6 id., 417; 4 Seld., 416 ; 2 John. Ch. R., 409, 416 ; 2 Barb., 135 ; 5 id., 153 .)

Parol evidence is also admissible to show that one of several joint makers of a bond or note signed it as a surety, although there is nothing indicating it on the face of the instrument. This is clearly so in a court of equity. (2 Cow. & Hill's Notes, 1465, 1466.) ' And the rule is now well established that parol evidence is admissible to show that a deed, mort gage or other security was given as collateral security. (4 Seld., 416; 1 Hill, 629 ; 18 John., 169 ; 4 John, Ch. R., 118, 129.) The bond in question having been given as collateral

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security for the notes of the respondents, evidence of the parol agreement would be admissible to show that the payment of the Wilbur debt by the respondents satisfied the bond. This evidence will not contradict the terms of the bond. It merely goes to show the purpose and intent for which it was given, and that it had been paid by the respondents, who were liable for the same debt.

The judgment should be affirmed.

All the judges concurring,

Judgment affirmed.