Dupee v. Blake , 148 Ill. 453 ( 1893 )

By the terms of the bond sued upon, as the same is described in the declaration, it was conditioned that J. C. Ferguson Co. should at all times faithfully perform the duties of a warehouse proprietor or manager, and should "promptly pay or cause to be paid any damages sustained by any person or persons on account of neglect of duty, fault or fraud by said J. C. Ferguson Co. as proprietor or manager of a warehouse for the storage of provisions." Appellant, as one of the sureties on the bond, obligated himself that the firm of J. C. Ferguson Co., as constituted at the date of the bond, towit: on January 31, 1884, would perform the duties and pay the damages specified in the bond. Although the declaration fails to state who composed the firm of J. C. Ferguson Co. when the bond was executed, yet it appears from the first and third pleas filed by the defendant, that the bond was executed by N. M. Neeld, J. C. Ferguson and E. W. Ferguson "and their sureties." Hence, the sureties in the bond only bound themselves for the faithful performance of said duties, and the prompt payment of said damages, by the said firm when consisting of the three last named persons.

The declaration avers, by way of showing a violation of the condition of the bond, that more than two years after the date of the bond, towit: on May 16, 1886, J. C. Ferguson Co. borrowed $20,000.00 of the Metropolitan National Bank, giving their note for that amount payable on demand, and pledged as collateral security therefor ten warehouse receipts for 2500 barrels of mess pork, dated May 1, 1886, and signed by J. C. Ferguson Co., each acknowledging the receipt of 250 barrels of mess pork stored in said J. C. Ferguson Co.'s warehouse; that said firm became insolvent, and fraudulently removed from said warehouse the property called for by said receipts while the same were outstanding and said note was unpaid, whereby the collateral securities became of no value, and the Bank sustained damages to the amount of $5000.00.

It appears from the first and third pleas of the defendant, that said firm of J. C. Ferguson Co. consisted of N. M. Neeld, J. C. Ferguson, E. W. Ferguson and E. B. Howard when said loan was made and said warehouse receipts were pledged as collateral security, and when the receipts were made worthless by the fraudulent removal of the property therein described. Hence, the firm which violated the condition of the bond was not the firm of J. C. Ferguson Co., composed of Neeld and the two Fergusons, but the firm of J. C. Ferguson Co., composed of Neeld, the two Fergusons and E. B. Howard.

By demurring to the defendant's first and third pleas, the plaintiff admitted the truth of the averments therein contained; and therefore admitted that a firm composed of Neeld and the two Fergusons executed the bond as principals, and that a firm composed of Neeld, the two Fergusons and Howard failed to perform the duties and pay the damages named in the condition of the bond. A demurrer to a plea submits the whole record to the consideration of the court; and the court must give judgment to the party who, on the whole, appears entitied to it. (1 Chitty on Plead. page 668; Murphy v. Richards, 5 Watts Serg. 279; Hall v. Hurford, 2 Clark, (Pa.) 291; Iglehart v. State, 2 Gill Johns. 235; 5 Am. Eng. Enc. of Law, page 560 and cases in note 9). The demurrer to the pleas, therefore, presents the question whether a surety, who guarantees the performance of a condition by a firm, can be held liable for the default of the firm after it has been changed by the addition of a new member. We think that this question, arising out of such a state of facts as is presented by the pleadings in this record, must be answered in the negative.

The rule is that, if a surety engages for an individual, the engagement is understood to extend to the acts of that individual alone, and will not continue if he takes in a partner. In other words, the surety for a single individual is not liable for a partnership of which such individual is a member. A surety, who guarantees that a firm composed of particular individuals will do certain acts or discharge certain duties, can not be held liable where there is a change in the firm, although the firm name is not changed. As the surety's liability is trictissimi juris and cannot be extended by construction, his guaranty to a partnership is extinguished if any partner is taken into or retires from the partnership, unless it appears from the terms of the instrument, that the parties intended the guaranty to be a continuing one without reference to the composition of the firm. A party may be induced to become surety for the individuals who compose a firm because of his confidence in their integrity, prudence, accuracy and ability as business men, but he cannot be presumed to have intended to become responsible for the possession of such qualities by some third person, who may be afterwards taken into the firm without his knowledge or consent. It is often in the power of one partner, by want of discretion or integrity, to ruin another. (Barnett v. Smith, 17 Ill. 565; Brandt on Suretyship and Guaranty, secs. 98-100; 2 Parsons on Contracts, page 19, note (q); Theobald on Prin. and Surety, page 72; Bellairs v. Ebsworth, 3 Camp. 52; Palmer v. Bagg, 56 N. Y. 523; Shaw v.Vandusen, 5 Up. Can. Q. B. Rep. 353; Spiers v. Housten, 4 Bligh's New Rep. 515; Dry v. Davy, 2 Perry Dav. 249; Backhouse v. Hall, 6 Best Smith Q. B. 507). It follows, that appellant, who became surety for J. C. Ferguson Co. when that firm was composed of Neeld and the two Fergusons, did not continue to be liable as surety for the firm after it was changed by the admission into it of E. B. Howard.

The first and third pleas set out in hæc verba the instrument of release, which was executed by the Bank on March 15, 1887, and aver that the firm of J. C. Ferguson Co., consisting of Neeld, the two Fergusons and Howard, were thereby released and discharged from their liability for said loan of $20,000.00; that said debt was thereby settled and satisfied; that said warehouse receipts, held by the Bank as collateral security for the payment of said debt, were thereby released as such security, and discharged of all claims thereon by the Bank; and that the Bank was not damnified by reason of any thing contained in the condition of said bond. The third plea alleges that this release was made without the consent of the defendant, Dupee.

It is provided in the release, that the Bank, in consideration of the conveyance of certain real estate by Neeld, the Fergusons and Howard, and of the assignment of certain contract rights by "said J. C. Ferguson Co.," composed of said four persons, "does from all debts due and owing from them to said bank hereby release said Neeld, Edward W. Ferguson, Howard, and John C. Ferguson, and each of them as to all money, property, claims, demands, rights and interests which they may hereafter obtain or acquire, except their liability or the liability of any or either of them upon a certain bond," namely, the bond above described, upon which this suit is brought. One of the debts due from Neeld, Howard and the Fergusons to the Bank was said note for $20,000.00, given by the firm of J. C. Ferguson Co. of which they were members, and secured by the pledge as collateral security of said warehouse receipts so issued by said last named firm. It is manifest, that the Bank accepted the consideration named in the release in discharge of the liability of said four persons composing the firm of J. C. Ferguson Co., unless such discharge was saved or prevented by the exception of "their liability or the liability of any or either of them" upon said bond. It will be observed, that the exception does not reserve the liability of any of said four members of said firm upon the note which they executed, but does reserve such liability as may exist upon the bond, the note and bond being separate and distinct instruments. That the only liability reserved was the liability upon the bond appears from the following language of the release: "it being intended hereby not to in any way release or impair the obligations of the parties to said bond." The parties to the bond, besides the obligee, were J. C. Ferguson Co., composed of Neeld and the two Fergusons, principals, and Baldwin and appellant, sureties. Howard was not a party to the bond, nor was the firm, of which Howard was a member, a party thereto.

The exception in the release reserved the liability of the sureties upon the bond. What was that liability? As has already been shown, the sureties had rendered themselves liable for the faithful performance of the duties of a warehouse proprietor or manager by J. C. Ferguson Co. composed of Neeld and the two Fergusons, and for the payment of such damages as should result from the neglect of said duties by said firm. The sureties were not liable for the acts or the default of Howard or of the firm to which he belonged, nor did the release reserve any remedy against him or his said firm upon the bond.

In releasing Howard from his liability on the note for $20,000.00, the release does not reserve the liability of Neeld and the two Fergusons upon that note. In releasing the four partners from liability upon the note, the instrument of release does not reserve the right of the Bank to proceed against Baldwin and Dupee as sureties upon the note, or as joint obligors thereon, because they did not sign the note and were in no way parties to it. It has been held that, where a creditor releases the principal debtor, and, at the same time and in the same instrument, reserves his remedy against the surety, the latter will not be released. In such case the release will be regarded as a covenant not to sue the principal, and the surety retains his right of contribution from the principal. So, where one co-obligor is released with a provision that the rights of the creditor against the other co-obligors shall not be affected, the latter will not be discharged, because the release is treated merely as a covenant not to sue, and the right of contribution is preserved. (Brandt on Sure. Guar. sec. 123; Pitman on Prin. Surety, page 189; Fell's Guar. and Suretyship, page 236, note 1; Colebrook on Collat. Securities, page 324, sec. 250). It will generally be found, however, upon an examination of the cases which uphold this doctrine, that the principal, or obligor, as to whom there is a covenant not to sue, and the surety, or co-obligor, against whom the remedy of the creditor is reserved, are signers of, or parties to, the same obligation. The rule is thus clearly stated by Colebrooke in his work on Collateral Securities, (sec. 250supra): "An agreement, upon valuable consideration, by a creditor to release and discharge a principal debtor, but expressly reserving in such instrument of release, and as a part of the same transaction, the right of the creditor to proceed as against a surety bound upon the sameobligation, does not affect, in equity or at law, the continuing liability of the latter." (Parmelee v. Lawrence, 44 Ill. 405;Mueller v. Dobschuetz, 89 id. 176.)

In the present case, if the appellant had signed the note for $20,000.00 with Neeld, Howard and the Fergusons as surety for them, and the release, executed to them by the Bank of their liability upon said note, had reserved its rights and remedies against appellant upon the note, appellant could not claim to be discharged under the doctrine announced in Parmelee v.Lawrence, supra, and Mueller v. Dobschuetz, supra, and other cases. But appellant was not a surety for the makers of the note, and, therefore, when the makers of the note were released, there could be no reservation of any rights as against appellant. It follows that the release of Neeld, Howard and the Fergusons, composing the firm of J. C. Ferguson Co., from their liability upon the note was an absolute release, and not a qualified or conditional suspension of the right of action.

The indebtedness upon the note having thus been released, the warehouse receipts, which were pledged as collateral security for that indebtedness, were also thereby released. The only damage alleged in the declaration to have resulted from a violation of the condition of the bond was the loss of what was due on the note by reason of the fraudulent character and consequent worthlessness of the collateral security. But when the note was discharged for the consideration named in the instrument of release, the interest of the Bank in the warehouse receipts was at an end, and the makers of the note were entitled to a return of the receipts. (Bowditch v. Green, 3 Metc. 360; Colebrooke on Coll. Secur. secs. 102, 115, 129, 448). The Bank having taken real estate and contract rights in full settlement of the note, all claim which it had upon the collateral security was gone. The extinguishment of the debt operated as a waiver of the damages incurred by the worthlessness of the collateral security, because there was no way of estimating those damages except by the amount of the debt. The reservation of the right to sue on the bond was the reservation of the right to sue for the fault or neglect of the principals thereon, namely: Neeld and the two Fergusons composing the firm of J. C. Ferguson Co., but there was no reservation of the right to sue for damages on account of the character of the warehouse receipts, pledged by J. C. Ferguson Co., composed of Neeld and the two Fergusons and Howard, to secure an indebtedness of the latter firm, which was cancelled and discharged.

For the reasons stated we think that the demurrer to the first and third pleas should have been overruled.

Accordingly, the judgments of the Appellate and Circuit Courts are reversed, and the cause is remanded to the Circuit Court for further proceedings in accordance with the views herein expressed.

Judgment reversed.