Opinion
No. 34482
Decided March 28, 1956.
Debtor and creditor — Refinancing indebtedness with different creditor — Third person executing note and assigning collateral to new creditor — Principal debtor to pay indebtedness and release collateral — Third person a surety for principal debtor — Surety may sue principal to compel discharge of debt — Section 12206, General Code.
1. Where a person incurs an indebtedness for which he is principally liable, and, in order to refinance such indebtedness with a different creditor under more favorable terms, such debtor persuades another person to execute a note for the amount of the indebtedness and to assign collateral for its payment to the new creditor, with the agreement that the principal debtor will fully pay the indebtedness and release the collateral, the person signing the note and assigning the collateral is a mere surety for the principal debtor, even though such person may be primarily liable to the new creditor.
2. Under such circumstances, after such debt becomes due, the surety may maintain an action under Section 12206, General Code (Section 1341.19, Revised Code), against the principal debtor to compel him to discharge the debt for which such surety is bound.
APPEAL from the Court of Appeals for Stark County.
Appellant herein, Jacob R. Brenckle, hereinafter designated plaintiff, instituted an action against appellees herein, Raymond Jacob Brenckle and Myrtle E. Brenckle, hereinafter designated defendants, in which action Society for Savings in the City of Cleveland, hereinafter designated society, intervened and became a new party defendant.
In plaintiff's petition, filed November 17, 1951, in the Court of Common Pleas of Stark County, he alleges that he is the owner of three policies of life insurance issued by the Reliance Life Insurance Company of Pittsburgh, Pennsylvania, and one policy issued by The Lincoln National Life Insurance Company; that defendants, who are plaintiff's father and mother, used plaintiff's policies as collateral for loans which they obtained, assigning the policies to various creditors without the knowledge and consent of plaintiff; that on September 6, 1945, defendants represented to plaintiff that, if he would sign an assignment to the society, a new creditor, they would repay all the previous unauthorized loans, borrow $8,900 from the society and repay it in full upon maturity, thus releasing the policies which had been pledged as collateral; that defendants combined and secured additional loans from the society, using plaintiff's policies, signing his name to the notes payable to the society, without plaintiff's knowledge and consent, drawing the money without his knowledge and consent, and endorsing the checks without his knowledge and consent, for the sole purpose of using such money for their own use, the total amount of the additional loans being $8,100; that plaintiff did not know about the additional loans until January 24, 1951, and immediately made demand on defendants to pay their debts and release his policies, which the defendants refused to do; that the debts incurred are primarily defendants' own debts; that the notes which have been signed have matured and are due and payable; that unless they are paid the society will utilize the policies under the terms of the assignment, reimburse itself, and destroy the value of the policies to plaintiff and his beneficiaries; and that defendants have placed plaintiff in the position of being a surety on their own debts to the society. Plaintiff prays that defendants severally and jointly be compelled to discharge their debts and relieve the plaintiff of the obligations they have created.
The society filed an answer and cross-petition, setting up that it had no knowledge of any of the acts alleged in plaintiff's petition to have been committed by defendants, and that it is entitled to obtain the loan or cash-surrender value of the policies and apply the proceeds to the payment of the amount due it in the sum of $17,000, with interest at the rate of two and one-half per cent from February 19, 1951.
Plaintiff filed a reply to the answer and cross-petition of the society, to which the society filed a reply; and defendants filed an answer to plaintiff's petition, to which plaintiff filed a reply.
Upon the trial of the cause in the Court of Common Pleas, that court granted in full the prayer of plaintiff's petition and found that on September 14, 1945, plaintiff executed and delivered to the society his promissory note in the amount of $8,900 and, together with defendants, assigned to the society as collateral security for any and all liabilities of any of them the policies of insurance; that plaintiff is the sole owner and entitled to possession of the policies, subject only to the rights of the society; that plaintiff executed the promissory note and assigned the policies solely for the benefit of defendants, which note defendants promised and agreed to pay in full; that subsequent to September 14, 1945, and without the knowledge or consent of plaintiff, defendants borrowed additional sums from the society and affixed the signature of plaintiff to certain promissory notes, the last of which is dated August 21, 1950, in the amount of $17,000, with interest, paid in advance, of two and one-half per cent, and permitted and instructed the society to hold the policies on the life of plaintiff as security for the total of the borrowings, amounting to $17,000, with interest at the rate of two and one-half per cent from February 19, 1951; that, as to the obligation to the society in its entirety, plaintiff is surety only and defendants are obligated for the payment thereof; that plaintiff is entitled to avail himself of the provisions of Section 12206, General Code (Section 1341.19, Revised Code), and has the right to compel defendants to discharge the obligation in full; that on July 12, 1951, plaintiff, for a valuable consideration, entered into a written agreement with the society, by the terms of which agreement the society was granted the right to exercise any and all rights granted it under the assignment of the policies if the principal amount of $17,000 was not paid in full by December 1, 1951; that no partnership or joint enterprise existed between plaintiff and defendants; and that, instead, the obligations are the principal obligations of defendants, and, as between plaintiff and them, plaintiff is not obligated except as surety.
The court ordered that, within 10 days of the entering of the court's order, the defendants pay such obligation to the society in full, including interest, and rendered judgment in favor of plaintiff and the society against the defendants in the sum of $17,000, with interest, and in favor of the society against plaintiff in the sum of $8,900, with interest; that, in the event defendants fail to pay such judgment within 10 days and plaintiff fails to pay such judgment against defendants within 20 days, the society is authorized to apply the proceeds from the policies to its claim, any balance remaining therefrom to be delivered to plaintiff; that plaintiff is authorized, at his option, to pay the society the amount of its judgment against defendants; and that in such event the society shall deliver to plaintiff all the policies in its possession, with such documents and endorsements as may free the policies from all claims of the society.
On appeal to the Court of Appeals on questions of law, that court reversed the judgment of the Court of Common Pleas as to the sum of $8,900 and interest, which is the amount of the original loan by plaintiff and defendants from the society, and affirmed the judgment as to the remaining $8,100 and interest.
The cause is before this court upon the allowance of a motion to certify the record.
Additional facts are stated in the opinion.
Messrs. Black, McCuskey, Souers Arbaugh, for appellant.
Messrs. Burt, Carson, Burt Keinzle and Mr. John B. Nicklas, Jr., for appellees.
The present action was instituted by plaintiff under the authority of Section 12206, General Code (Section 1341.19, Revised Code), which reads:
"A surety may maintain an action against his principal to compel him to discharge the debt or liability for which the surety is bound, after it becomes due."
The question presented to us is whether a part or all of the debt due to the society is the principal obligation of defendants, and the obligation of plaintiff of such debt is that of surety only.
It appears that plaintiff and defendants were residents of Pittsburgh, Pennsylvania, and that defendants were the owners of a farm at Hartville in Stark County.
Plaintiff was between the ages of 10 and 16 years when the various policies were issued. He was the insured in the policies and defendants were the beneficiaries.
Plaintiff testified that when the policies were taken out by defendants they told him that they were taken out for him and they would give them to him when he was 21 years of age; that the policies were to be part payment for his work; and that when he was 14 years of age he quit school, managed the farm and worked on it until he was 21 years of age in 1940.
Produce was raised on the farm, which plaintiff transported to Pittsburgh and which defendants sold in the markets there.
When plaintiff became 21 years of age he married, and defendants promised to turn the policies over to him at that time, which they did not do, and, as a result of their failure to do so, he left the farm and worked two years for a concern in Pittsburgh.
Thereupon, defendants asked plaintiff to come back to the farm and stated that if he would do so they would live up to their agreement and turn the policies over to him. At that time defendants told plaintiff that they owed premiums on the policies, which they had borrowed from the insurance companies. Defendants told plaintiff that, if he would come back to the farm and work for them, managing the farm and helping defendants out in every way that he could, they would clear the policies of the indebtedness of $8,900 which defendants had incurred on them, and that when the policies were cleared defendants would turn them over to plaintiff and he could do with them as he wished. Pursuant to such representation, plaintiff returned to his work on the farm and continued his work there for at least six years.
In 1945 defendants asked plaintiff to assign the policies and to sign a note to the society, which would take over the obligation at a lower rate of interest, if plaintiff, as the insured, assigned the policies and signed the note.
Plaintiff had had nothing to do originally with the incurring of the obligation as to the $8,900.
Defendant Myrtle E. Brenckle testified:
"$8,900 was premiums and as they went along I paid what I had to, and the interest to be added to it, and it didn't take too long to get there. My interest rates were high and I took it to the Society for Savings so that I could get on my feet and pay it."
In December 1945 the farm had had a very good season. A considerable amount of money was made from it, all the debts of the farms and houses were paid off with the exception of the insurance policies, and defendant Myrtle E. Brenckle told plaintiff that the very next thing which would be paid off would be the debts on the policies.
Plaintiff's testimony was corroborated by his wife.
It appears that thereafter defendants secured two additional loans from the society in the sums of $6,600 and $1,500. The original $8,900 was merged with these loans so that finally the society held a note for $17,000, signed with plaintiff's name but without his knowledge or consent.
Plaintiff had been told that the loans against the policies had been paid off and the policies were in his mother's desk, and he knew nothing about the note for $17,000 or the fact that an additional loan of $8,100 had been made, until some time in February or March 1951. One of the defendants had not only signed plaintiff's name to the note for $17,000 but as endorser on the checks for $6,600 and $1,500, which had been made payable to plaintiff, without his knowledge or consent, and the money was used by defendants for purposes which they did not detail.
When the society, in conference with plaintiff, learned of the situation with reference to its loans, it entered into an agreement with plaintiff to the effect that plaintiff did not sign the note for $17,000 and disclaimed all liability thereon except as to the sum of $8,900 for which plaintiff did sign a note to the society; that in consideration of the society taking no action with respect to the policies prior to December 1, 1951, plaintiff would pay the premiums up to date on the policies; and that if the principal amount of $17,000 should not be paid in full with interest on or before December 1, 1951, the society might exercise all the rights granted to it under the assignments without, however, asserting any personal claim against plaintiff beyond the sum of $8,900.
It is apparent that the society is entitled to full payment of its note for $17,000, with interest, regardless of the legal relation as to liability between plaintiff and defendants. That leaves the sole question as to what that legal relation is.
It is axiomatic that if one person is principally liable for a debt and another person is a mere surety for the payment of that debt, the latter, if he is compelled to pay the debt, has a just claim for full reimbursement from the principal debtor.
Under the statute above quoted, the surety may maintain an action against the principal to compel the principal to discharge the debt after it becomes due.
It must be remembered that the appeal to the Court of Appeals in the present case was on questions of law only. In that appeal there was no assignment of error to the effect that the judgment of the Court of Common Pleas is against the weight of the evidence, and no such finding was made.
There were only three witnesses in the trial of the cause, the plaintiff, his wife, and defendant Myrtle E. Brenckle. The latter's denials of plaintiff's testimony were vague and general.
Plaintiff's testimony, if believed, was sufficient to support the trial court's findings, and, therefore, since the Court of Appeals did not reverse on the weight of the evidence, those findings are binding unless unjustified as a matter of law.
The Court of Appeals was of the opinion that because plaintiff himself signed the $8,900 note he is principally liable for that sum, although not liable for the $8,100 in the merged note for $17,000 to which his signature was affixed without his knowledge or consent.
In our opinion such a conclusion is not justified. The $8,900 was borrowed by defendants, who had taken out the policies on plaintiff's life and kept them. Plaintiff knew nothing about such a borrowing until he was asked to sign the note for $8,900 to the society in order that defendants might refinance their debt at a lower rate of interest. It was still defendants' debt, as was testified by not only plaintiff but defendant Myrtle Brenckle.
Plaintiff signed the $8,900 note only because the society would not refinance defendants' debt without plaintiff's signature to the note, since he was the insured in the policies.
It seems obvious to us, therefore, that plaintiff is only a surety on the $8,900 obligation of defendants, is not obligated in any way as to the additional $8,100 of defendants' indebtedness and is not even a surety thereon except to the extent that he signed an agreement that the society might avail itself of its rights under the policy assignment by forbearing to exercise such rights until a definite future time.
It is clear, therefore, that by virtue of Section 12206, General Code (Section 1341.19, Revised Code), the Court of Common Pleas was not in error in arriving at its judgment.
The judgment of the Court of Appeals is reversed and that of the Court of Common Pleas affirmed.
Judgment reversed.
WEYGANDT, C.J., MATTHIAS, HART, ZIMMERMAN, BELL and TAFT, JJ., concur.