Summary
In American Guild v. Damon (186 N.Y. 360) the head note in part reads: "A plaintiff is not precluded from contesting a counterclaim by a failure to serve a reply unless the counterclaim is distinctly named and pleaded as such in the answer."
Summary of this case from Young v. Stillwater Crushed Stone Co.Opinion
Argued October 17, 1906
Decided November 13, 1906
Louis J. Bedell, William Kennedy and Nelson L. Lansing for appellants. Wallace Thayer for respondent.
The action is brought by the plaintiff, a Virginia corporation, as the assignee of the Safety Fund Insurance Society, a New York corporation, to foreclose a mortgage executed by the two appellants, husband and wife, to said last named corporation to secure the payment of a joint and several bond executed and delivered to the same party at the same time. The defendants pleaded as a defense and set-off a claim held by the defendant Joseph Damon against the plaintiff's assignor on two participation certificates issued by that corporation, the nature of which certificates is not material to this discussion. On the trial it appeared that the plaintiff and its assignor had entered into what is called a consolidation agreement by which the plaintiff was to acquire all the assets of its assignor and to administer those assets in discharge of its assignor's obligation, but the debts of the assignor were in no degree to be assumed by the plaintiff. The Special Term found the maturity of the participation certificates before the assignment of the mortgage in suit to the plaintiff and the liability thereon of the plaintiff's assignor to the defendant Joseph. It made a decree in favor of the defendants canceling the bond and mortgage and awarding them judgment against the plaintiff for the excess of the amount due on the certificates over that due on the bond and mortgage. The Appellate Division reversed this judgment and ordered a new trial. The unanimous order entered upon this decision reversed the judgment on questions of law only, and affirmatively declared in the body of the order that the facts had been examined and no error found therein. From the order of the Appellate Division the defendants have appealed to this court, giving the requisite stipulation.
Under the form of the order of the Appellate Division the facts found by the trial court are conclusive on this court. The only question before us is whether those facts justified or required a reversal of the judgment rendered thereon by the Special Term. That the plaintiff, under its agreement with its assignor, was not liable personally for the debts of the latter corporation is entirely clear. Therefore, the Appellate Division was doubtless correct in reversing so much of the judgment as awarded a recovery against the plaintiff for the excess of the sum due on the certificates over that due on the bond and mortgage, unless, as the appellants' counsel contends, the plaintiff was foreclosed by its failure to serve a reply to the defendants' answer. This position of counsel cannot be upheld. In the answer the certificates are pleaded as a set-off and defense, and in the prayer for judgment, where the only mention of counterclaim is found, it is asked that they be allowed as a counterclaim, defense and set-off, and that the bond and mortgage be canceled. No recovery against the plaintiff for the amount of the certificate is asked. It is the settled law in this state that for a defendant to preclude a plaintiff from contesting a counterclaim because of a failure to serve a reply, the counterclaim must be distinctly named as such in the answer. ( Acer v. Hotchkiss, 97 N.Y. 395; Equitable Life Assurance Society v. Cuyler, 75 id. 511.) But though the judgment was properly reversed in this respect, it not being possible on another trial to vary the proof as to the liability of the plaintiff, a new trial should not have been ordered, but the judgment merely modified, unless as a matter of law the certificates were not a valid set-off to the bond and mortgage. ( Freel v. County of Queens, 154 N.Y. 661; Heerwagen v. Crosstown Street Ry. Co., 179 id. 99.)
This brings us to the principal question in the case, which is, whether the claim on the certificates which was held by only one of the defendants was a good set-off against the plaintiff's claim. Under sections 502 and 1909 of the Code of Civil Procedure the assignment to the plaintiff was subject not only to every defense but to every counterclaim that might be set up against its assignor. Therefore, the question presented here is the same as that which would arise had the action been brought by the original mortgagee, and may be examined and considered from that point of view. At common law and under the Revised Statutes in an action against more than one defendant there could be interposed only a set-off due to all the defendants jointly. (2 R.S. p. 354, sec. 18.) That rule still obtains in this state, where the suit is on the joint obligation or liability of the defendants. Where, however, the liability of the defendants is several, under the express provisions of section 501 of the present Code, which in this respect is but a re-enactment of section 150 of the former Code, as amended in 1852, a defendant against whom a several judgment may be rendered can interpose a counterclaim existing in his own favor. In Parsons v. Nash (8 How. Pr. 454), which was an action against the maker and sureties on a promissory note, it was held that as a several judgment might be rendered against either defendant, each could plead a counterclaim held by himself. In Briggs v. Briggs (20 Barb. 477) it was held that in an action against several defendants jointly and severally liable, either of them might set off individual debts due to him by the plaintiff or might avail himself thereof by way of counterclaim. (See, also, Newell v. Salmons, 22 Barb. 644.) The authority of these earlier decisions has never been impunged, and Newell v. Salmons is cited with approval in Bathgate v. Haskin ( 59 N.Y. 533). In the present case, as already said, the bond of the defendants is joint and several, and, therefore, a several judgment could have been had against either defendant. The fact that the action was in form joint does not affect the principle involved. When the defendants "In an action are jointly and severally liable, although sued jointly, a counterclaim, consisting of a demand in favor of one or some of them, may, if otherwise without objection, be interposed." (Pomeroy's Remedies and Remedial Rights, sec. 761; Dunn v. West, 5 B. Monroe, 376, 381.) Therefore, had the defendants been sued on the bond in an action at law the defendant Joseph could, under the authorities and the rule obtaining in this state, have interposed as a counterclaim the amount due him on the participation certificates. In such case it is plain that the counterclaim so interposed would necessarily have inured to the benefit of all the defendants. The plaintiff had but one claim and but one cause of action. Payment by a stranger to the obligation would not discharge it, but payment by anybody liable thereon, whether jointly or severally, would necessarily satisfy it. ( Cockcroft v. Muller, 71 N.Y. 367. ) Any other rule would permit a creditor to recover his claim as many times over as he had parties severally liable for the debt. We are not considering a case where the creditor has released one of his debtors, either without consideration or for less than the debt, reserving his right to proceed against the others. Such settlements are authorized by our statutes. But where a debt has been paid in full by one debtor, it is satisfied as to all. ( Coonley v. Wood, 36 Hun, 559.) The same rule must obtain in the case of a counterclaim as in that of payment. It is in fact a payment by the set-off of an outstanding claim against the creditor. Had the bond not been assigned and the plaintiff's assignor brought an action upon it, the defendant Joseph interposing his counterclaim, the judgment in the action would extinguish pro tanto the claim of that defendant against the plaintiff. If it were allowed to recover against the other defendant it would be recovering twice over; first by the extinguishment of its debt, and second by the amount recovered against the other defendant. Whenever in a suit on a money obligation a counterclaim is allowed in favor of one of several defendants it must, from the nature of the case, necessarily inure to the benefit of all the defendants liable on that obligation. A several defendant need not interpose such a counterclaim and give his co-defendants the benefit thereof; but whether he shall do so or not is solely his concern.
It is urged that the plaintiff might have proceeded against the other defendant, the wife, alone, in which case the counterclaim would be inadmissible. We may assume that this position is correct, but the plaintiff must take the consequences of the form of action it has elected to bring. The case is not singular. Where a creditor sues the principal debtor and surety in the same action, either can interpose a counterclaim which inures in favor of both. If, however, he sues the surety separately the surety cannot interpose a counterclaim in favor of his principal ( Gillespie v. Torrance, 25 N.Y. 306), though if the principal be insolvent the surety may have relief in equity. The form of the action brought by the creditor may, therefore, substantially affect his rights, but that is a matter for him to consider.
We think that the rule which would apply in the case of a common-law action on the bond controls the disposition of the present action, which is not only to foreclose the mortgage, but to recover a money judgment against each defendant for any deficiency that may arise on the sale of the mortgaged property. It was said in National Fire Insurance Company v. McKay ( 21 N.Y. 191) by Chief Judge COMSTOCK: "In a foreclosure suit a defendant who is personally liable for the debt, or whose land is bound by the lien, may probably introduce a set-off to reduce or extinguish the claim." In that case the remark of the learned judge was obiter, but in Hunt v. Chapman ( 51 N.Y. 555) the proposition was decided. Bathgate v. Haskin ( 59 N.Y. 534) is to the same effect, though much of the discussion in that case is not germane to this. There the bond to the plaintiff was the joint bond of the owner of the mortgaged premises and another person, and to bring the case within the general rule it was necessary to show that the co-obligor was merely a surety. On the trial of this action the plaintiff put in evidence a deed to the defendant Phebe tending to prove that the title to the mortgaged premises was solely in her. We do not see that this fact affects the question before us. There is nothing in the case to show that the loan was not made to both defendants, and on the face of the bond and mortgage the debt appears to be that of both. However that may be, the plaintiff has sought to recover on a personal claim against the defendant Joseph and by seeking such relief it subjected its whole cause of action to any valid counterclaim that Joseph might have.
We are of the opinion that the counterclaim in favor of the husband extinguished the liability on the bond and mortgage, and that both instruments were properly held by the trial court to be discharged. The Appellate Division, therefore, instead of ordering a new trial, should have modified the judgment by striking out the recovery against the plaintiff of the excess due on the certificates.
The order of the Appellate Division should be reversed and the judgment of the Special Term modified so as to strike out the award of a money judgment against the plaintiff, except for costs, and as thus modified affirmed, without costs to either party in this court or in the Appellate Division.
HAIGHT, VANN, WERNER and WILLARD BARTLETT, JJ., concur; GRAY, J., absent; HISCOCK, J., not sitting.
Ordered accordingly.