Opinion
No. 20419
Decided October 19, 1927.
Guaranty — Payment of money and credit limited to fixed sum — Creditor extended credit in excess of amount stated in contract — Debtor insolvent and dividend paid upon creditor's entire claim — Dividend applied pro rata upon secured and unsecured portions thereof.
Where a guarantor in writing guarantees the payment of money and credit thereafter to be extended, which guaranty is a continuing guaranty and by its terms limits the credit to be extended to a fixed sum, and the creditor extends credit in excess of the amount stated in the contract of guaranty, and the debtor becomes insolvent and in course of administration of his estate by the court a dividend is paid upon the entire claim of the creditor, the dividend so paid should be applied pro rata upon the secured and unsecured portions thereof.
ERROR to the Court of Appeals of Madison county.
This action was instituted originally in the court of common pleas of Madison county to recover upon a written guaranty given by defendants in error, who were defendants in the trial court, to the Madison National Bank, under date of September 26, 1916. The pertinent portions of the written guaranty are as follows:
"We jointly and severally hereby guarantee the payment of all money and credit which you may from time to time advance or give to the London Grave Vault Company, not exceeding in the aggregate an indebtedness of ten thousand dollars; for which sum this shall be a continuing guaranty," etc.
Thereafter the London Grave Vault Company was merged into the London Orville Company, a new corporation, which acquired the assets and assumed the liabilities of its predecessor, and on the same date Jacob Weber and Mary G. Weber wrote another letter, the substance of which was that they agreed that their guaranty should continue in all respects to the London Orville Company as it had theretofore existed to the London Grave Vault Company. Thereafter the bank continued to loan to the London Orville Company sums of money aggregating $11,500, for which it took the notes of the company, one in the sum of $7,000, one for $3,000, and one for $1,500. In the year 1922 the London Orville Company became involved, and in the course of the administration of its affairs, on August 17, 1922, the bank presented all of said notes to the receiver for allowance, then amounting in the aggregate, with interest, to the sum of $11,635, and the same were in fact allowed, and dividends aggregating 25 per cent. were paid thereon to the bank, in the sum of $2,908.90. Thereupon the bank applied said dividend first upon payment of the $1,500 note, which was then surrendered to the receiver, and applied the balance upon the other two notes. The bank then demanded from Jacob and Mary Weber the entire balance of money due it from the London Orville Company, but payment in full was refused. The Webers, acknowledging liability for $8,190.50, paid that amount, but refused payment of the balance, $1,347.09. Action was then brought to recover that sum, and issue was joined by the defendants upon the right of the bank to apply the dividend first in payment of the entire excess over $10,000, the Webers insisting that $10,000 was the limitation of their guaranty and that the dividend upon the sum of $10,000 should have been applied upon the amount thus guaranteed, leaving the guarantors liable for only the balance. In the court of common pleas judgment was rendered in favor of the defendants. The Court of Appeals affirmed the judgment. The cause has been admitted to this court upon allowance of motion to certify the record.
Messrs. Murray Emery, for plaintiff in error.
Mr. Luther L. Boger, for defendants in error.
There are certain salient facts in this case which must be kept clearly in mind and in order that the proper rule be applied to the admitted facts each fact must be weighed and considered in its relation to every other fact in attempting to steer a clear course between decisions which on a cursory reading appear to be in conflict.
The guaranty in the instant case was given before any credit was extended by the bank, and the guaranty is limited to an indebtedness of $10,000, and the bank extended credit in the sum of $11,500, and thereafter the debtor became insolvent, whereupon the creditor submitted, and a receiver appointed by the court allowed, the entire claim of the bank, and in the distribution of assets paid a general dividend of 25 per cent. To state the proposition negatively in order to stress the decisive features of the case, the guaranty was not to secure an indebtedness already existing. The Webers were not sureties or insurers. The payment of $2,908.90 was not made voluntarily by the debtor while he was solvent, but, on the contrary, the payment was made by process of law out of a trust fund then in course of administration for the equal benefit of all creditors. It must further be borne in mind that the Webers were guarantors, and not sureties or insurers, and, while these terms have in many instances been employed indiscriminately, there are certain well-defined distinctions and differences in the nature of the legal obligations created.
A surety is primarily and jointly liable with the principal debtor. His obligation is created concurrently with that of the principal debtor. An action can be maintained against both jointly, even without statutory authority so to do. The obligation of a guarantor is collateral and secondary to that of the principal debtor and is fixed only by the inability of the principal debtor to discharge the obligation for which he is primarily liable. The contract of a surety is made at the same time and usually with that of the principal, while that of a guarantor is a contract separate and distinct from that of the principal. Unless authorized by statute, a guarantor cannot be sued jointly with the principal debtor. These elementary principles have been made the basis of certain well-defined rules of law which are decisive of the controversy in the instant case.
A large number of authorities have been cited by counsel for the respective parties which have been industriously examined. All of the authorities upon the subject of the liability or nonliability of the Webers by reason of the form of the contract will be omitted from the discussion, because the court is unanimously of the opinion that a valid obligation was created and that the extension of credit beyond the limit of $10,000 did not discharge the Webers from liability pro tanto. Other authorities will be disregarded, because the language of the guaranty in those cases widely differed from the form of the guaranty in the instant case. Counsel for plaintiff have cited a number of authorities involving the principle of suretyship, and we have reached the conclusion that those cases are not applicable where the question involved relates to the application of dividends paid out of a fund then in process of administration for the benefit of all creditors. Where the indebtedness has been created before the guaranty is given, the authorities are quite uniform that the guarantor will be treated as an insurer and that the creditor must be made whole, even to the full limit of the liability of the guaranty, and that any dividends not voluntarily paid to the creditor should not constitute a defense pro tanto on the part of the guarantor. These cases, therefore, have no application.
Another line of cases holds that a surety, being jointly and concurrently liable with the principal debtor, may likewise be held to the full limit of his contractual liability, and that, therefore, involuntary payments made after insolvency cannot accrue to his benefit.
There is, on the other hand, a line of cases directly in point, based on facts in all respects parallel to the instant case. The earliest authorities are found in the English reports. Hobson v. Bass, 6 Chancery Appeals (L. R.), 792, was decided in 1871. That case involved a guaranty of payment of all goods to be supplied, the guaranty not at any time to exceed the sum of 250 pounds. A credit of 657 pounds was extended. The debtor then became bankrupt. Proof in bankruptcy was made of the whole claim and certain dividends paid thereon and demand was then made upon the guarantor for the payment of the full amount of the guaranty in the sum of 250 pounds. The court held that the guarantor was entitled to a part of the dividend paid in the ratio which the guaranty of 250 pounds bore to the entire claim of 657 pounds. It was stated in the opinion that the surety did not guarantee the ultimate balance to the extent of 250 pounds, but the debt to that extent.
In the case of Bardwell v. Lydall, 7 Bingham, 489, 131 Eng. Rep., 189, the facts were exactly parallel to the case of Hobson v. Bass. In the opinion it is stated:
"We are of opinion that such deduction ought to be made. If the whole amount of the debt from Mayhew had not exceeded the £ 400, it is clear that the defendant would have received the full benefit of the dividend of 8s. 7d. in the pound, as he could not have been answerable under the guaranty for more than the remainder, after the deduction of such dividend."
Again it is stated:
"Suppose the sum which exceeds the £ 400 had been covered by the guaranty of another person, could it be contended that the plaintiffs might have applied the whole of the dividends to either part of the demand at their own election, and thus have varied, at their own pleasure, the extent of the responsibility of the two sureties?"
A further hypothesis is stated:
"Again, suppose in the principal case the defendant had paid the £ 400 to the plaintiff's before the plaintiffs had made their claim against Mayhew's estate. There could be no doubt, in that case, that if they proved the whole demand, they would have been trustees for the defendant for the dividend on the £ 400; or, if they had declined to prove, that the defendant might have received the dividend on that sum, if the trust deed admitted of such an arrangement. And what difference can it make in the equitable rights of the defendant, whether such payment is made before, or is sought to be enforced against him after, the payment pro rata out of the estate of the principal?"
In both of the English cases it is held that the payment of a dividend is to be applied to each and every part of the demand, and should operate as a part payment of that portion of the debt which is guaranteed, as well as that portion which is in excess of the guarantee.
In the case of Ellis v. Emmanuel, 1 Law Rep. Excheq. Div., 157, the court reviews all of the English cases theretofore decided and draws a distinction between guaranties given before the indebtedness is created and guaranties given to insure indebtedness theretofore created, and clearly lays down the rule that dividends paid otherwise than voluntarily by the debtor himself must be applied pro rata upon each dollar of the indebtedness of the debtor. These cases have been followed by many courts of the United States. In Olds Wagon Works v. Bank of Louisville, 10 Ky. Law Rep., 235, the principle of pro rata payments was applied, and it was declared that there was a lien upon the fund for the benefit of all the debts. The same principle was followed in Blackstone Bank v. Hill, 10 Pick. (27 Mass.), 129, and in Commercial Bank v. Cunningham, 24 Pick. (41 Mass.), 270, 35 Am. Dec., 322.
We have omitted discussion of any case cited by counsel on either side based upon facts other than the salient admitted facts of this controversy. We have confined the discussion to the application of payments made by process of law or in invitum. It may be admitted that a solvent debtor would have the right to direct the application of payments, or, in the event of his failure to direct such application, that the creditor could apply them. In insolvency proceedings, or where a general judgment has been rendered covering secured and unsecured claims, and there is a fund for distribution, such fund becomes a trust fund and every debt and every part of every debt is a lien upon such fund. Both debtor and creditor have lost the right to make application of the payment of dividends. Applying this rule, the dividend should be applied equally upon the $7,000 note, the $3,000 note, and the $1,500 note, and it makes no difference that the $1,500 note was given at an earlier date than the $3,000 note. If the dividend is applied upon all notes alike, and if the dividend is applied ratably upon each note, the result must be the same.
The judgment of the Court of Appeals will be affirmed.
Judgment affirmed.
DAY, ALLEN, KINKADE, ROBINSON and MATTHIAS, JJ., concur.
JONES, J., not participating.