Kramer & Rahm's Appeal , 37 Pa. 71 ( 1860 )

The opinion of the court was delivered, by

Thompson, J.

— In Curtis v. Taylor & Allen, 9 Paige 432, Chancellor Walworth asserted and sustained by many authorities, the equitable principle “ that where a surety or a person standing in the situation of a surety for the payment of a debt, receives a security for his indemnity, and to discharge such indebtedness, the principal creditor is, in equity, entitled to the full benefit of that security. And it makes no difference, that such principal creditor did not act upon the credit of such security in the first instance, or even know of its existence.” Maure v. Harrison, 1 Eq. Cas. Abr. 1692, is to the same effect. So also is Heath v. Hand, 1 Paige 329; Paris v. Hulott, 26 Vermont Rep. 308; Ohio Life Ins. Co. v. Ledyard, 8 Mav. Rep. 866; Branch Bank of Mobile v. Robertson, 19 Ala. Rep. 798; Clarke v. Eby, 2 Sandf. Rep. 166; Ten Eyck v. Holmes, 3 Sandf. C. R. 428. So in Cornwell’s Appeal, 7 W. & S. 306, Justice Kennedy announces the same rule, saying “it is a well-established principle in equity that a creditor is entitled to all the securities taken by the surety of his debtor, either for the purpose of securing the payment of the debt to the creditor, or for the purpose of indemnifying himself.” To the same purpose are Erb’s Appeal, 2 Penna. Rep. 296; Hines v. Barnitz, 8 Watts 39; Carman v. Noble, 9 Barr 366; Hancock’s Appeal, 10 Casey 155. The authorities place the principle upon the ground that as the security is a trust created for the better securing of the debt, it attaches to it, and hence it is that it may be made available by the creditor, although unknown to him at the time of the purchase of the security, for which it may have been given as an indemnity. The effect of such a transaction is the placing of means in the hands of the surety by the principal debtor to meet liability on account of his contract of suretyship. It is consequently a trust for that specific purpose, and equity will control the legal title to it in the hands of the surety, so that it may be applied to the object intended, viz. the payment of the debt to the holder.

Did King, who, it clearly appears, was an accommodation acceptor for Baker, stand in the “ situation of a surety,” as was said by the chancellor in Curtis v. Taylor & Allen ? As between him and Baker, he certainly did. As between them, he was not the principal debtor, although by the law merchant he would be so to bond fide holders of the acceptance. But this would not change his relative position to Baker. In his hands and in the hands of assignees not bond fide and for value, the indemnity afforded by the judgment on the note of 13th November 1857 would be applicable to the payment of the acceptances. This was the trust on which it was given, as King in his receipt for it of the same date says, “to hold as security for the amount of my account against him.” There is no dispute but that the acceptances of Kramer & Rahm, F. Sellers & Co., and Bryan, Gardner & Co., together with other acceptances afterwards taken up by Baker, and some items of commissions and expenses, constituted King’s account for which the note stood as security. The indemnity was not to apply in any order of priority to parts of the account: it attached to it all and every part alike. The acceptances went of course, as they were intended to do, into other hands, and the security pledged by the principal debtor for the payment must go to the extinction of debts created by them so far as they remain unpaid by Baker, or the principle asserted in the outset of this opinion — that when a surety for the payment of a debt receives a security for his indemnity, the principal creditor is in equity entitled to the full benefit of that security — will be subverted, the security still remaining within the reach of equity, as will be seen hereafter. There are many cases in the books, of the application of this doctrine to cases of surety strictly so. But that it cannot be supposed to be limited and controlled by the mere form of the transaction, is apparent from the remarks of the chancellor in Curtis v. Taylor & Allen, by the qualified expression of “ standing in a situation of a surety.” The case of Heath v. Hand et al., 1 Paige 329, is a case of the direct application of the principle to a transaction like the present. A judgment had been given to secure advances and acceptances. The holders of the indemnity assigned it to one of their own personal creditors for anterior responsibilities incurred for them, but on a bill being filed by the defendant in the judgment (the party giving it as a security against acceptances made for his benefit), the collection of the judgment by the assignee was restrained, and the proceeds directed to be applied to the payment of the bills accepted by the assignees; the chancellor declaring that “ to that extent the holders of these notes and drafts accepted and endorsed by Hand and Kenyon have an equitable interest in the judgment (Bank of Auburn v. Throp, 18 John. Rep. 405), which being prior to the assignment to Lightbody, must prevail.” So also to the same effect is Eastman v. Foster, 8 Metcalf 19. These authorities, and many others might be added, show clearly the application of the principle to acceptors and endorsers in favour of creditors as well as cases of surety in form. The case of Heath v. Hand et al. is also authority for another point in this case, if authority be needed; that the assignment of the judgment for an antecedent debt or liability did not constitute the assignee a purchaser for value. See also Clark v. Ely, 2 Sandf. C. R. 166, and the citation of authorities therein in the affirmation of the principle by the assistant vice-chancellor of the 1st circuit of the state of New-York.

These principles established, how stands the case in hand? Baker secured King’s account to the extent of the judgment-note of $10,500, payable four months after date; to be cancelled on the delivery of pig metal and blooms to the amount of it, within that time, to the latter at Pittsburgh. This metal he never did deliver. The judgment-note therefore remained as security for King’s account. On March 5th 1858, judgment was entered in favour of King on the judgment-note. Previously thereto, King had accepted all the bills which constitute the claims of Kramer & Rahm, F. Sellers & Co., and Bryan, Gardner & Co., together with other notes not necessary to be mentioned. These acceptances with some items of expenses and commissions, constituted King’s account, and it cannot be doubted but that if he had paid them himself, the judgment would have stood good to him as security from which to reimburse himself. He did not pay any of the bills in the hands of the holders named, but on May 4, 1858, he assigned to Kramer & Rahm $7513.50 as collateral “security” for the payment of their drafts, and to Sellers & Co. $2501.44, also as collateral security for the payment of theirs. These assignments would amount to their respective claims in full, leaving seven or eight hundred dollars, which King says he agreed should go to Bryan, Gardner & Co. Kramer & Rahm and F. Sellers & Co. have at considerable expense enforced the payment of the judgment by Baker, and they claim, that, by virtue of' this and their assignments from King, they are entitled to receive their whole claim out of the indemnity in exclusion of Bryan, Gardner & Co., excepting as to the balance of the judgment after paying them.

The auditors and the court below were of a different opinion, and, with the exception of certain modifications hereinafter to be noticed, we think they were right. As already indicated, the judgment-note was given by the principal debtor to his accommodation acceptor, a party standing in the situation of a surety for him, and it was for the purpose of saving him harmless; a trust was thereby created in favour of him, and, upon the principle already stated, in favour of the holders of the acceptances: 26 Vermont Rep. 308; 8 Metcalf 20. If a trust was thus created to secure the debt, it necessarily attached to the debt and will go in satisfaction of it in default of payment otherwise, unless divested by a bond'fide assignment for value and without notice of its character. But this element does not exist in this case. The assignment was not, in the legal sense of the term, bond fide. It was merely as “ collateral” security for the payment of the drafts for which it was given as security in the first place. No present value was given or securities parted with, and for this reason, it remained subject to the equities of others interested, just as if no assignment had been made: Clark v. Ely et al., supra, and cases there cited. Under these circumstances, the assignment had no effect on the relative rights of the parties interested whatever. They stand as they did at the creation of the trust, their rights neither impaired nor strengthened by the act of the trustee. Equality is equity; and as the judgment was for the security of the entire account of King, consisting of accommodation acceptances made or to be made, we think the holders of the acceptances are entitled to it, and equally to a pro rata share of the amount raised from the original debtor.

The maxim “prior est in tempore, potior est in jure," is strictly a legal maxim. In a case like the present, it cannot be allowed the effect contended for, because the assignment was not a sale for value, but a pledge with notice, or an opportunity to know by inquiring the true character and purpose of the judgment assigned. It is with the equities of the parties, and not with legal rights, we are dealing.

The argument of the appellants, that if metal had been delivered as agreed, it would have extinguished the bond and King would have been obliged to give it up to Baker, and that the money received from the sale of the metal could then have been disposed of by King, as he pleased, in payment of the acceptances, in any order he might choose, and that equity could not have compelled a pro rata distribution under such circumstances, proves nothing against the principle asserted, even if true; for we deal with a different state of facts — with a security that equity can follow — a trust property; and will follow and appropriate it in accordance with the trust. The force of the proposition lies in the difficulty assumed of following and identifying the money substituted in lieu of the judgment, and not in the fact that equity would not treat it precisely in the same way as the judgment, if it had come into court for distribution. The argument does not disprove the principle, but only shows the difficulty of its application under a different state of facts.

Again it is contended that Bryan, Gardner k Co. cannot compel this distribution against the claimants under King until they do equity towards King, who, it is alleged, has a claim for that part of his account which consists of expenses and commissions. It is enough to say that King himself claims nothing out of the judgment. He' assigned it all, as already noticed. His claim on the fund is therefore extinguished, and Kramer & Rahm and F. Sellers & Co. cannot now set it up to embarrass Bryan, Gardner & Co., and as a shield for themselves.

It was urged that Bryan, Gardner & Co. took King’s notes as security for the payment of the bills held by them, and that they were embraced in King’s mortgage to Florence Kramer and secured by it. • And also that the same debt was included in a judgment confessed by Baker to Floyd for the use of certain creditors. It is not easy to see how these facts, growing out of the vigilance of Bryan, Gardner & Co., should destroy their right to another and independent security. It wants a consideration somewhere to establish the relinquishment of a right, but none such exists here, nor did such vigilance injure the other claimants. There is no pretence that either of these securities was taken in satisfaction of Bryan, Gardner k Co.’s claim. Their equity is not prejudiced, therefore by these considerations, nor is there any better reason for holding them postponed by their inaction in the litigation that Kramer & Rahm and Sellers & Co. sustained. Their entire ignorance of the existence of the security until the last moment, would not have prejudiced them, as we have seen, if it turned out that the judgment was a security for their claim, for they ought in the distribution to be required to bear their share of the expenses of the litigation; and, as the assets were equitable, to be distributed according to equity, I see no reason why the distribution may not be made on the principle of equality in this respect, and upon this principle the auditors very prqperly acted, partially, at least, if not to the full extent.

We do not, however, agree with the auditors in their treatment of the independent securities held by Bryan, Gardner & Co. They do not find them to be worthless, but propose that, in the event of their proving of value, Kramer & Rahm and F. Sellers & Co. may be subrogated to the rights of Bryan, Gardner & Co. in them, after the latter are satisfied. This does not comport with the equitable principle governing the case of a party having only one security, and another the same and an additional one. There equity, in a proper case, will require the latter to take his satisfaction out of the security which was not common to the latter, unless it trenched injuriously, in some way, upon the vested 'rights of the latter. We think that the rule should be applied in this case. That Bryan, Gardner & Co. should be required to exhaust their independent security in the first place, before taking any part of the fund out of court, or satisfy the court that they are worthless. This will enable the court to administer equity fully between the parties. Kramer & Rahm and F. Sellers & Co. may in the mean time be allowed to take out of court their pro rata of the proceeds of the judgment; and whether they shall be entitled to more will afterwards depend on how much, if anything, may be realized by Bryan, Gardner & Co. upon their securities. If nothing can be realized by them, or not enough to satisfy their claim, they will, in the first contingency, be entitled to take out their pro rata share of the judgment, and, in the second, so much out as, with what may have been received by them from their independent securities, will satisfy them in full, provided that does not exceed their pro rata share in the judgment. We see no other error in the decree.

And now, to wit, October 3d 1860, it is adjudged and decreed that there be paid and distributed of the fund in court to Kramer and Rahm the sum found by the auditor, $5635.20, together with such other sum out of the pro rata share of Bryan & Gardner as the court shall find to be their fair pro rata share of expenses and costs to be paid of the litigation to recover the said money, if not already fully accounted for in the auditor’s report; and to F. Sellers & Co. the sum of $1974.55, the sum found by the auditor in their favour, together with their fair pro rata share of the costs and expenses of collection to be paid as aforesaid; the costs and expenses to be borne equally in proportion to the amount of their claims respectively ; and that distribution to Bryan, Gardner & Co. be suspended until they shall have exhausted their other securities, after which distribution to them to be made upon the principles of this opinion if they shall not receive an amount sufficient to pay’ or satisfy the acceptances of King as shown to he held by them before the auditor, and in case of full satisfaction by them from such other securities, then distribution to be made of the fund in court to Kramer & Rahm and E. Sellers & Co. in satisfaction of their claim. Each party to pay their own costs of this appeal.

Lowrie, C. J., and Woodward, J., dissented.