Hyperlawhypertext legal database Germania Bank v. Frost 43 N.Y. Super. Ct. 117

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Germania Bank v. Frost

43 N.Y. Super. Ct. 117 11 Jones & S. 117 Court N.Y. Super. Ct. Decision date 1878-01-07 English

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THE GERMANIA BANK OF THE CITY OF NEW YORK, Plaintiff, v. HESTER FROST, Defendant.

Headnote

INDORSER OF PROMISSORY NOTE, LIABILITY OF.
A holder of a note cannot, by any agreement with the maker, without the consent of the indorser, change the original contract, or affect the remedies of the indorser against the maker, without discharging the indorser.
When judgment has been confessed upon a promissory note, exe
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cution issued, and levy made upon property of the maker as security, the payee discharges the indorser by satisfying such judgment without the indorser’s knowledge or -assent.
Decided January 7, 1878.
An indorser of certain promissory notes, having consented that the .holder might compromise with maker, and agreed to still remain liable as indorser for full value of notes, and said holder, with other creditors, having signed a composition deed agreeing to take fifty per cent, of their claims, which was the compromise to which the indorser" consented, and said holder afterwards, in violation of said agreement, having demanded and received, in lieu of the original notes, without the indorser’s knowledge or assent, notes for one hundred per cent, of his said claim, such notes are void as being in fraud of creditors, and the indorser is released from his agreement.
Before Curtis, Ch. J., and Sanford, J.
At the trial of this action, after the testimony was taken, the court directed a verdict for the defendant, and ordered the' exceptions to be heard in the first instance at the general term.
The complaint was upon two promissory notes, charging the defendant as indorser. There was evidence that Richard W. Frost, defendant’s son, confessed judgment on the notes in question, May 26, 1874, that an execution issued, under which a levy was made on defendant’s property, and that the plaintiff satisfied the judgment August.7, 1874. There was also placed in evidence a "composition agreement of Richard W. Frost with his creditors, signed, among others, by the plaintiff. The plaintiff, after signing the composition agreement, refused to accept fifty per cent, in the notes of R, W. Frost, according to the agreement, but insisted upon and received from Frost his notes for the full amount. The defendant put in evidence the following, signed by the defendant:
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“ June 22, 1874.
“ Germania Bank :
“I being aware of the agreement entered.into between Richard W. Frost and the Germania Bank, with reference to two notes amounting to $1,250 made by Richard W. Frost, and indorsed by me, I consent that the Germania Bank may compromise with Mr. Frost, and that I am to remain liable as indorser on said notes to the full amount thereof," until they are paid.
“Yours, &c.,
“Hester Frost.”
Subsequently the plaintiff executed and delivered to Richard W. Frost the following receipt and release :
"Received from Richard W. Frost, of the city of Hew York, his three promissory notes, as follows : one dated July 1, 1874, payable four months after date, for $416.66-100; one dated same day at five months for $416.68-100, and one dated same day for $416.66-100, payable six months after date, reserving, however, our rights against the indorser on the original notes, and we do hereby release and discharge the said Richard W. Frost from all claims and demands of every nature or kind we have or had against him, excepting the promissory notes above mentioned.
At the trial, after the closing of the testimony, the defendant moved to dismiss the complaint on these grounds: 1st. The defendant being indorser on the two notes in suit, and Richard W. Frost, the maker, having confessed judgment to the plaintiff to secure the same, on which execution was issued, and a levy made on the property of Richard W. Frost, and the
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plaintiff having, without the consent of the defendant in this action, satisfied the judgment, she is discharged from liability as indorser on said notes.
2nd. The plaintiff having executed Richard W. Frost’s composition deed, to accept 50 centum of its debt against him, without reserving its rights in the deed against the surety, discharged the defendant as such surety.
3rd. The plaintiff having executed the composition deed, in and by which it agreed to accept 50 per centum of its indebtedness against Richard W. Frost, in his notes in full payment and discharge of such indebtedness, and having refused to accept the same, unless 100 per centum in his notes were given, which the plaintiff accepted; such acceptance was a fraud upon the creditors and discharged the defendant as surety.
4th. The defendant’s consent that the plaintiff might compromise with Richard W. Frost, was a consent to compromise, in accordance with the terms of the composition deed, and the plaintiff having failed to compromise in accordance therewith, the consent thereupon became void.
5th. The case arising in questions of this character, was not whether the act of the plaintiff was an injury to the surety, but whether it might have been injurious.
The court directed a verdict for the defendant, exceptions to be heard in the first instance at the general term, and the plaintiff’s counsel excepted.
William A. Coursen, of counsel, for plaintiff, among other things, urged :
—I. The confession of judgment did not, in any wise, invalidate the claim of the plaintiff against the defendant (the indorser of the notes in controversy) (Mohawk Bank v. Van Horn, 7 Wend. 117 ; Sizer v. Heacock, 23 Id. 81).
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II. If there were any reason why the bank should be restrained in any way in compromising with the maker, it can hardly be contended that a change in terms in favor of the holder of the note, as against the maker, can injuriously affect the indorser. Thus, if the original composition paper would secure from the maker a. certain percentage on the whole amount, and thus save the indorser an ascertained portion of liability, very surely, if by any composition, the bank (or holder of the notes thus indorsed) can secure a greater percentage from the maker of the note—so far will the indorser be benefited (See Lynch v. Reynolds, 16 Johns. 41 , 42; Bruen v. Marquand, 17 Id. 61 ; Edwards on Bills, 571, and cases there cited).
III. We may here advert to the well-known law that the note of a debtor does not operate as payment of a debt, unless the note is actually paid (See Coles v. Sackett, 1 Hill, 516 ; Hill v. Beebe, 13 N. Y. 556 ; Bradford v. Fox, 38 Id. 289; Winsted Bank v. Webb, 39 Id. 325).
C. Bainbridge Smith, of counsel, for defendant, among other things, urged :
—I. The defendant being the indorser on the two notes in suit, and the plaintiff having procured the maker, Richard W. Frost, to confess judgment, to secure the same, and having issued execution on the judgment, and caused a levy to be made on the property of Frost, a satisfaction of this judgment without the assent of the defendant discharged her as such indorser (Vose v. Florida R. Co., 50 N. Y. 369 , 374; Ducker v. Rapp, Id.; S. C., 4 N. Y. Weeldy Dig. 174; Bangs v. Strong, 10 Paige, 11, 16; Boyd v. McDonough, 39 How. Pr. 389 ; English v. Darley, 2 Bos. & Pul. 62; Mayhen v. Crockett, 2 Swanst. 191; Reese v. Barrington, 2 Ves. Jr. 542; Eyre v. Bartop, 3 Mad. 225; Bank of Steubenville v. Leavitt, 5 Ham. 207). 1. The defendant as surety was en
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titled to be subrogated to all the rights of the plaintiff, and had a right to claim the judgment recovered by the plaintiff against the principal debtor : the satisfaction of the judgment operated to discharge the surety. (Boyd v. McDonough, 39 How. Pr. 389 ; Vose v. The Florida R. Co., 50 N. Y. 369 , 378). 2. The defendant as indorser and surety was discharged from liability upon the notes by reason of the time given to the drawer of them without her assent (Ducker v. Rapp, 4 N. Y. Weekly Dig. 174; Reese v. Barrington, 2 Ves. Jr. 540; Summer’s Ed. note A). 3. The question is not whether the arrangement did prove injurious, but whether it might have been injurious to the surety (lb.).
II. The plaintiff executed Richard W. Frost’s composition deed agreeing to accept fifty per cent, on the dollar against him without reserving its rights -in the deed against the surety. The deed in such cases operates as a discharge to the surety. (See composition deed, p. 11, 12; Exp. Glendenning Bucks, B. C. 517; Cullingworth v. Lloyd, 2 Beav. 385; Lewis v. Jones, 4 B. & Cress. 506; S. C., 10 E. C. L. R. 393; Wilson v. Lloyd, 16 Eq. 60.)
III. The plaintiff having executed the composition deed, in which it agreed to accept in Richard W. Frost’s notes fifty per cent, of its indebtedness against him in full payment and discharge of such indebtedness, and having refused to accept the compromise notes or discharge Frost unless his notes were given for the full amount which the plaintiff accepted; such acceptance was a fraud upon the creditors and discharged the defendant as surety (Breck v. Cole, 4 Sandf. 79 ; Pineo v. Higgins, 12 Abb. 334 ; 1 Story's Eq. Jur. §§ 378, 379; Lawrence v. Clark, 36 N. Y. 128 ).

—The defendant

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having consented to the making of the compromise between the plaintiff and Richard W. Frost, with reference to the two notes, amounting to §1,250, made by him and indorsed by her, and agreeing to remain liable as indorser on the same, to the full amount, or until paid, is not in a position to dispute her liability as indorser, unless she is discharged by some act on the part of the maker, or the plaintiff, having in law the effect of releasing her from this agreement.

It is contended by the plaintiff, that this consent of the defendant was in general terms, and does not, and was not intended to limit the parties to any particular terms or manner of‘compromise as a condition of the indorser remaining liable. The evidence in the case tends to show the contrary. The consent of the defendant was made on June 22, 1874, and upon its face refers to some existing agreement of compromise between the plaintiff and .the maker of" the notes, of. which the defendant is aware, and apparently in consequence of which the defendant signs the consent. The composition agreement between the maker of the notes and his creditors, including the plaintiff, to accept fifty cents on the dollar in his notes for their respective claims, appears to have been made some time prior to July 1, 1874, and seems to be the agreement referred to in her consent, and not the one entered into on July 14, 1874, by which the plaintiff releases the maker from all claims against him in consideration of one hundred cents on the dollar in his notes. As this latter transaction was a departure from the terms of the composition agreement, and occurred over three weeks after the defendant signed the consent, it must, in the absence of proof to the contrary, be assumed that it was entered into without the knowledge or concurrence of the defendant, and that her agreement to remain liable was based upon the existence and fulfillment of

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the composition agreement referred to in the instrument executed by her.

If the plaintiff elected to make a new compromise, and take new notes from the maker, and to release him the original notes, the indorser is released, .notwithstanding any reservation as to her liability as indorser which the plaintiff and the maker may agree upon without her assent. If the plaintiff wished to hold the defendant as indorser, the composition in reference to the making of which she consented to remain liable as such should not have been abandoned. Her consent extended to no other compromise than that referred to in her consent, and the substitution of a different one was a breach of the condition on which she consented to remain liable, irrespective of the question whether she would be benefited or not by the substitution.

It is also evident that the plaintiff by entering into this second composition agreement with the maker of the notes, and discharging him from all liability thereon, placed itself in the position where it was obliged to satisfy the judgment it held against the maker as collateral security for the original notes, after having-issued execution and having caused a levy to be made on the property of the maker, thus depriving the defendant of the benefit of this collateral security, and destroying its value, without the assent or knowledge of the defendant. It is well settled that a creditor cannot, without the assent of the indorser, by any agreement with the maker of the note, change, as in this case, the original contract, or affect the remedies of the indorser against the maker, without discharging the indorser ; nor has the creditor the right to release and discharge the collateral securities, and collect from the indorser what should have been paid out of the property of the maker who is primarily liable (Vose v. Florida R. R. Co., 50 N. Y. 374 ; Bangs v. Strong, 10 Paige, 16).

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It is apparent that the plaintiff, having signed the composition deed, is debarred from profiting by any private agreement that secures to it any advantages that are not shared in by the other creditors. The act of the plaintiff in taking additional security is in violation of that good faith, that all were to share alike, which naturally induced the other creditors to sign, and the realization of its additional security to that extent diminishes the ability of the debtor to comply with his agreement with the other creditors. Such an agreement for additional security is a fraud upon the other creditors, and consequently all the notes that were given as the fulfillment of such an agreement are illegal and void (Breck v. Cole, 4 Sandf. 79 ).

The plaintiff having taken, in lieu of the original notes, these notes that were fraudulent and void, has destroyed the value of what the defendant would be entitled to be subrogated to, and by its own acts has prevented the defendant from ever being in a position to enforce them against the maker. To hold the surety liable after such acts on the the part of the creditor, would be inconsistent with the requirements of good faith, and conflict with established legal principles.

The remaining exception presented by the appellant, was to the admission of a question addressed to a witness at the trial; but as no ground was then stated for objecting, there is no occasion for considering it.

The plaintiff’s exceptions are overruled, and the defendant is entitled to judgment upon the verdict, with costs.

Sanford, J., concurred in the result.

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