Koehler v. Farmers & Drovers' National Bank — 21 N.Y. St. Rep. 361

Majority

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Herman Koehler, App’lt, v. The Farmers and Drovers’ National Bank of Somers et al., Resp’ts.

(Supreme Court, General Term, First Department,

Filed January 28, 1889.)

Headnote

Bills and notes—Surety—When stay oe proceedings not granted.

A creditor will not be restrained in the enforcement of his contract with a surety, until a dispute between the surety and a third person is settled, concerning the application of Collaterals held by the creditor, for the security of the debts of the principal debtor.

Appeal from an order vacating a stay of proceedings on the bank stipulating and agreeing to hold the collaterals mentioned in the action, or their proceeds, for the payment of the claims thereon, to abide the event of this action.

E. J Myers, for app’lt: William A. Abbott, for résp’ts.

The plaintiff is the maker of á promissory note for the payment of the sum of S3,893 in five months after the 4th of June, 1887. This note was made to the order of Mr Shaleck and delivered to George K. Chase, for his use and accommodation. He transferred the note, to the Farmers & Drovers’ National Bank of Somers as further security for ah indebtedness. contracted by him, and existing against him, in favor of the bank. Preceding transactions had taken place between the parties, but they do not essentially affect their rights, or obligations, and therefore require no notice, or examination, for the decision of the appeal. The plaintiff brought this action to secure the application of collaterals deposited by Chase with the bank or their proceeds, to the payment of the note, and for his exoneration from liability thereby. It proceeded upon the theory that he had become in this manner a surety fob Chase, who afterwards • departed this life, and was- at the time of his decease insolvent.

It appeared from the complaint and the affidavits that other persons had incurred similar obligations for Chase to the bank, who claimed to be protected and indemnified by means of these collaterals, and one of the objects of the action was to settle the rights of these contesting parties, and to determine the amount, or proportion, of the col-laterals which might be applied to the payment of this indebtedness.

Shortly after this suit was commenced the bank brought an action upon the note against the plaintiff ih this suit, and an application was then made, upon affidavits as well as the complaint, for an injunction restraining the prosecution of that action, until the hearing and decision of this case. The order containing the injunction clause was afterwards vacated, with liberty to the plaintiff to apply for a stay of proceedings in the action brought by the bank,

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and an order for that object was obtained requiring the bank to show cause why further proceedings in its action should not be stayed until the disposition of this case. Upon the heating of the application under that order the order from which the appeal was taken was made, denying the application upon the bank stipulating to retain the collaterals, or their proceeds, in its possession for the payment of the claims thereon, to abide the event of this action, and a stipulation to that effect was afterwards made and filed on behalf of the bank.

It was further shown by the affidavit of the cashier of the bank that the collaterals would probably prove deficient in amount to pay the obligations which Chase was under to the bank, and additionally thereto it was shown that there was a controversy between the personal representatives of the estate of Chase and the plaintiff, whether his note was an accommodation note, and whether the note of another person, held by the bank, was of that description. It further appeared from the complaint that the other defendants in this action also claimed that the proceeds of the collaterals should be applied to the discharge of the several obligations of Chase himself to the bank, and to the discharge of the obligations for which they were severally liablé to the bank for the indebtedness of Chase, in preference to the plaintiff. "■

These were controversies so far as they related to the several sureties in which the bank itself had ño interest, but they were to be settled between the plaintiff and the other defendants in. the action, and no rule of equity has .proceeded so far as to restrain the creditor under these .circumstances from proceeding to collect its debt upon the note, or other obligation of a surety, until these disputes are settled by litigation between the other parties.

It is true that. the. plaintiff, as the accomodation maker of the note, was entitled to the benefit of the collaterals in the hands of the bank, received from the principal debtor, so .far as they or their proceeds could equitably be made applicable to the payment of this indebtedness. But that did not entitle the plaintiff either to an injunction restraining its suit on the note or to a stay.of proceedings in that ■ action.

The bank had the right to prosecute the maker of the . note and recover its debt of him, leaving him to avail hirm self of the protection which could be afforded by the application of the collaterals, or their proceeds to his reimbursement, after the dispute between himself and the others should be settled. Neither the authorities referred to on .behalf.of the plaintiff, nor any others which have been found, sustain any greater right on the part of the plaint

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iff than this, under the circumstances here presented. The case of Irick v. Black ( 17 N. J. Eq., 189 ), and Thompson v. Taylor ( 11 Hun, 274 ), and Phil., etc., R. R. Co. v Little (5 Cent. Rep. 57), were sustained Upon the ground of special equities vested in the surety, and subordinated-, to no preceding controversy, of the description of that disclosed in this proceeding. And it may be where the col-laterals are readily available to the creditor, and can be applied by him, without the settlement of any dispute, to-the payment of the indebtedness in exoneration of the surety, .with the same facility and certainty as a proceed-' ing against the surety himself, that the court would direct that disposition to be made of the securities in a case where the principal debtor is himself insolvent. The law was so considered in McConnell v. Scott (15 Gris. Ohio Rep., 401).

It was there said, in the ’ course of the opinion, that there is.no adequate remedy at law when the principal debtor is insolvent, by which his effects and credits in:the hands of others can be made to be applied for the benefit, of the surety. Certainly, not»as we have already said, without the surety first pays the debt. . And such payment may be attended with great inconvenience and-severe sacrifice of property—burdens which ought not to be imposed if they can with propriety and justice be avoided.”. " EL, 403. And this rule was followed in Wilcox v. Todd, ( 64 Mo., 388 ), and Wooten v. Buchanan ( 49 Miss., 386 ).

It was held in the last ¡case that the remedy the surety has when his property as well as that of the principal has been levied upon, is to force his creditor first to exhaust (he' remedy against the principal debtor before a sale of. his own" property under the judgment. If the principal had other property that also could be indicated as a primary fund to satisfy the debt. He has also the clear right to point out other property of the principal debtor if he can, and compel his judgment creditor to satisfy his debt out of that. Id., 391 . But this cannot be done to the prejudice or injury of the creditor, in the. collection of his debt.

The courts of this state, however, have not yet so fully adopted this liberal and equitable principle in favor of the surety. Neither has it been rejected. But the plaintiff clearly is not entitled to invoke it under the principle of these authorities as long as a dispute stands between him and the right to appropriate the collaterals for his benefit, with other persons claiming priority over him. Gary v. Cannon, 3 Iredell Eq., p. 64.

The case of Wright v. Austin, 56 Barb., 13 , states the rule as to the right of the surety to compel the principal to apply collaterals in his hands to the satisfaction of the debt very broadly, but the point was not so broadly presented by thé

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facts, for the decision of the court, and even there it was qot extended so far as to support the right to the stay claimed on behalf of the plaintiff. In First Nat. Bk., etc. v. Wood, 71 N. Y., 405 , the subject was further considered. But this principle was not held to have extended so far as to entitle a surety to this species of relief. Id., 410-412 .

The case of Neimcewicz v. Gahn, 3 Paige, 614, proceeded Upon an entirely different state of facts. That was an action for the foreclosure of a mortgage, and it has been the constant practice of courts of equity in foreclosure suits, to Order the property of the principal debtor to be first sold for the. payment of the mortgage indebtedness, and in support of the direction which was then given it was said that “ the application of this equitable rule of throwing the 0¡barge upon the property of the principal debtor, and extinguishing that fund in the first place, in exoneration of the estate of the surety, is of every day occurrence. Id., 640. And that beyond doubt is the rule followed and applied in fpreclosure suits.

And if other cases are to be controlled by it, the qualification must be attached to it, that the creditor has the unqualified power ,to pay the debt out of collaterals without delay, or any legal impediment. It has no application to a case of this description, in which the courts have never undertaken to restrain a creditor in the enforcement .qf the contract of the surety, until disputes may be settled Concerning the application of collaterals held by the creditor for the security of the debts.

f'he order in this case afforded the plaintiff all the relief ifhich, under the facts appearing, he was entitled to claim, and it should he affirmed, with ten dollars costs and the disbursements.

Bartlett, J. concurs.