Opinion
Argued December 5, 1900
Decided January 22, 1901
H.C. Sholes for appellant.
William Nottingham for respondents.
On February 20, 1889, Cornelia Hall executed and delivered to George L. Parker her bond, conditioned for the payment of four thousand dollars on February 28, 1892, with interest payable semi-annually, and as security therefor a mortgage of certain lands in the county of Orange. George L. Parker, on July 19, 1889, assigned the said bond and mortgage to Sarah C. Parker. On such assignment the defendants, by a separate instrument under seal, guaranteed to Sarah C. Parker the payment of said bond and mortgage. In April, 1890, default having been made in the payment of the previous half year's interest, Sarah C. Parker instituted an action to foreclose the mortgage, declaring her election that the principal should become due according to a stipulation to that effect contained in the mortgage. At this time one Penoyer had become the owner of the equity of redemption, but had not personally assumed the payment of the mortgage debt. Evidence was given on the trial to the effect that after the commencement of the foreclosure suit an agreement was made between Penoyer and Mrs. Parker, whereby, in consideration of the payment of the interest and costs and the delivery of further security for the payment of the debt, the default in interest was waived and the mortgage reinstated in accordance with its original terms. When the mortgage became due in 1892 Angelina R. Ketchum was the owner of the mortgaged premises, but was not personally liable for the mortgage debt. Evidence was given on the trial showing that at this time, in consideration of the execution and delivery of the personal bond of Angelina Ketchum, Mrs. Parker agreed to extend the mortgage for a further term of three years. In 1896 the mortgaged property was sold under the foreclosure of a prior mortgage and brought only sufficient to pay that mortgage and the expenses of foreclosure. Thereafter, the plaintiff, who had become the owner of the bond, mortgage and guaranty, brought this action to recover the amount due on the mortgage. The defendants answered, setting up among other defenses the two extensions of time already recited, by which it was claimed they were discharged from liability. The plaintiff had a verdict at Trial Term. The defendants' motion for a new trial was denied and judgment entered on the verdict. On appeal the judgment and order denying a new trial were reversed and a new trial ordered. The order entered by the learned Appellate Division is somewhat peculiar, as it affirmed the findings of the jury on some of the issues in the case and reversed them on others. It is not necessary to give the details of this order; it is sufficient to say that concededly the appeal before us is in such shape that if it should be held that the extensions referred to wholly discharged the defendants from liability, the order of the Appellate Division must be affirmed.
The contention of the appellant is that as neither Penoyer nor Ketchum was personally liable for the mortgage debt, the extensions granted those persons did not discharge the original debtor, Cornelia Hall, entirely from her obligation, but only to the extent of the value of the mortgaged lands (of which no proof was given on the trial), and that the defendants were relieved from liability on their guaranty to no greater extent than their principal was discharged. The first proposition, that the bondsman was discharged only to the extent of the value of the land, is undoubtedly the law of this state. ( Murray v. Marshall, 94 N.Y. 611.) But the second proposition, that the extent to which the bondsman is discharged measures the extent of the discharge of the guarantors, does not follow. The ground on which the decision in Murray v. Marshall proceeded is, that where property is conveyed subject to a mortgage, the payment of which is not assumed by the grantee, the mortgagor becomes a surety for the debt only to the extent of the value of the land, and beyond that amount remains the principal debtor. The situation of the defendants is radically different; they at all times have borne the relation of mere sureties. It is settled law that the obligation of a surety "is strictissimi juris and he is discharged by any alteration of the contract, to which his guaranty applied, whether material or not, and the courts will not inquire whether it is or is not to his injury." ( Page v. Krekey, 137 N.Y. 307; Paine v. Jones, 76 N.Y. 278; Brandt on Suretyship, § 378.) At the same time, it is also the rule that where the creditor has security for a debt which he relinquishes or as to which he misconducts himself, the surety is not wholly discharged, but only to the extent to which he is injured, that is to say, the value of the security. This last rule, however, is not of universal application. In Brandt on Suretyship (§ 429) it is said: "When by the act of the creditor the surety has been deprived of the benefit of a fund for the payment of the debt, and the contract by which the surety is bound is not changed, he is only discharged to the extent that he is injured, as in such case it is the fact that he is injured which entitles him to the discharge. But where the creditor relinquishes a security for the debt, and thereby materially alters the contract, the surety is wholly discharged, whether he is injured or benefited, because in such case it is no longer his contract." In Watts v. Shuttleworth (7 Hurlstone Norman, 353) a contract was made to furnish and complete certain fittings for a warehouse, to be paid for in installments. The contract provided that the owner should insure the fittings from injury by fire in an amount to be determined by the architects. The defendant guaranteed the performance of the contract. The plaintiff (the owner) took out no insurance and the fittings were destroyed by fire. To replace them, the contractor having failed, the plaintiff was compelled to spend a sum in excess of the contract price. It was held that plaintiff's failure to insure discharged the guarantor in toto and not merely to the amount for which he should have insured. In Polak v. Everett (L.R. [1 Q.B. Div.] 669) the defendant guaranteed the performance of an agreement by which his principal undertook to repurchase of the plaintiffs certain shares of stock and pay therefor the sum of £ 6,000. The agreement provided that book debts belonging to the principal should be transferred to the plaintiffs, and one-half of the amounts collected thereon should be applied on account of the purchase money of the stock. An agreement was subsequently made between the plaintiffs and defendant's principal whereby the former released the book debts. One-half of these book debts, had they been collected in full, would not have amounted to the plaintiffs' claim. It was held that this subsequent agreement between the plaintiffs and defendant's principal was a material alteration of the contract, the performance of which the defendant had guaranteed; that the rule as to a creditor's release of security did not apply, but that the defendant was entirely discharged, regardless of the extent of his injury. In the case before us the defendants guaranteed the payment, not of a bond alone, but of a "certain bond and mortgage." The mortgage, which contained a covenant to pay the debt, is treated as a part of the security, the payment of which is guaranteed, and the terms and conditions of the mortgage must be held essential elements of the defendants' contract of guaranty equally with the terms and conditions of the bond. The mortgage so guaranteed was by its terms payable in February, 1892. By the act of the mortgagee this mortgage was modified so as to become payable in February, 1895. The defendants never assumed responsibility for such a security and the agreement by which the terms of the original mortgage were so modified was a material alteration of the defendants' contract which discharged them from liability.
This case differs in principle from that of Vose v. Florida Railroad Co. ( 50 N.Y. 369). In that case the defendant Yulee indorsed certain notes of Finnegan Company given to the plaintiff as security for the payment of rails sold by them to Finnegan Co. As further security Finnegan Co. had deposited certain railroad bonds with the plaintiff. By a written agreement between these last-named parties the plaintiffs were authorized on default in the payment of the notes to sell the bonds at auction, except those held as collateral for the notes indorsed by Yulee, as to which it was provided that thirty days' notice of the sale should be given to J.T. Souter of New York. The bonds were sold by the plaintiffs without giving the prescribed notice. It was held that the indorser Yulee was not discharged entirely, but only to the extent of the value of the bonds sold. In that case, however, Yulee was not a party to the agreement under which the bonds were pledged. His contract was solely that of indorser on the notes. Therefore, the sale of the bonds without notice in no respect altered the surety's contract, and he was entitled only to the benefit of the rule relating to a creditor's release of securities already stated. This distinction is stated with great clearness in the brief of the successful counsel in the case cited: "The provisions as to notice are no part of the contract with the indorser of the notes and have no direct connection therewith. Whatever rights the indorser has to the securities, are not legal rights founded upon contract quo ad him, but mere equitable rights, to have by subrogation or otherwise, the substantial benefit of such securities proceeding from the principal debtor." In the present case the time for which the mortgage was to run was an essential condition of the contract which the defendants guaranteed.
The order appealed from should be affirmed and judgment absolute directed for defendants on the stipulation, with costs.
PARKER, Ch. J., GRAY, BARTLETT, MARTIN, VANN and WERNER, JJ., concur.
Order affirmed.