now is that while payment of the principal's liability by the surety "discharges the debt and extinguishes all the securities so At law, the assignment of the judgment against the principal by the obligee to the surety, on its payment, extinguishes it. Bank of Salina v. Abbot et al. (1846) 3 Denio (N. Y.) 181. "The law is that if a surety pays a bond of his principal, for which there is no collateral security, the bond is thereby extinguished, unless he takes an assignment to a trustee. But in equity it is held that if the creditor has taken a collateral security for the debt, the surety on payment, is subrogated to the rights of the creditor in the security, without an express agreement." McCoy v. Wood (1874) 70 N. C. 125, 129. It may be practical to determine whether the bond was extinguished when paid by the surety. If so, as held in Copis v. Middleton, the surety is a simple contract creditor of the principal and is not a preferred creditor as is one who holds a specialty. This distinction having been abolished by 32 & 33 Vict. ch. 46, makes it unimportant in England at the present time. Most American states have abolished distinctions between various classes of creditors, and, in most jurisdictions, it would be of little practical importance. However, a few states give preference to specialty debts. See 8 Am. & Eng. Encyclopedia of Law, pp. 1040-1041. That Alabama, North Carolina, and Vermont are the only states following the doctrine as declared in Copis v. Middleton, and the other earlier cases, see Preslar v. Stallworth (1861) 37 Ala. 402; Liles et al. v. Rogers et al. (1893) 113 N. C. 197, 201, 18 S. E. 104, 37 A. S. R. 627; Sands, Adm'r et al. v. Durham (1900) 98 Va. 392, 36 S. E. 472; rehearing 99 Va. 263, 38 S. E. 145, 86 A. S. R. 884. In England the situation has been affected by the statute of 19 & 20 Victoria, c. 97, Sec. 5, which reads in part: "Every person who, being surety for the debt or duty of another, or being liable with another for any debt or duty, shall pay such debt or perform such duty, shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other security which shall be held by the creditor in respect of such debt or duty, whether such judgment, specialty, or other security shall or shall not be deemed at law to have been satisfied by the payment of the debt, or performance of the duty, and such person shall be entitled to stand in the place of the creditor, and to use all the remedies, and if need be, and upon a proper indemnity, to use the name of the creditor, in any action, or other proceeding, at law or in equity, in order to obtain from the principal debtor, or any co-surety, co-contractor, or co-debtor, as the case may be, indemnification for the advances made, and loss sustained by the person who shall have so paid such debt, or performed such duty, and such payment or performance so made by such surety shall not be pleadable in bar of any such action or other proceeding by him." See In re M'myn (1886) 33 Ch. Div. 575; In re Lord Churchill (1887) 39 Ch. Div. 174. far as concerns the creditor, such is not its effect as between the principal and the surety and all who stand in the shoes of the former." 53 Under this view, whatever rights and priorities were possessed by the creditor would be transmitted to the guarantor.54 If the creditor has reduced his claim against the principal to judgment, so that it becomes a lien on his realty, the surety, upon payment, becomes entitled to the benefits of such judgment by operation of law, even though the judgment has been marked satisfied, if it was not marked satisfied at the instance of the surety.55 § 139. Compensated surety entitled to subrogation. Neither the character of the obligee, whether it be a person or the State, nor the fact that the surety is paid a premium for becoming bound, will prevent the right of subrogation from arising. So far as the rights between the principal and surety are concerned, they are the same in the case of gratuitous and compensated guarantors. The motive of the surety in signing the bond, or any benefit accruing to him, will not prevent his substitution to the creditor's rights. The only question for the court's consideration is whether the surety was compelled to pay. If he was under a legal duty to discharge the principal's obligation, the general rules of subrogation will be applied.56 53 Hill v. King (1891) 48 Oh. St. 75, 26 N. E. 988. Accord: Talbot et al. v. Wilkins et al. (1876) 31 Ark. 411; Manford v. Firth et al. (1879) 68 Ind. 83; Smith v. Rumsey (1876) 33 Mich. 183, 194; German American Savings Bank V. Fritz (1887) 68 Wis. 390, 32 N. W. 123. See Chandler et al. v. Higgins et al. (1884) 109 Ill. 602; Langdell, “A Brief Survey of Equity Jurisdiction," (1887) 1 Harvard Law Rev. 55, 68. 54 Lidderdale's Executors v. Executor of Robinson (1827) 12 Wheat. 594; Smith et al. v. Swain (1854) 7 Richardson Eq. (S. C.) 112; Taul v. Epperson (1873) 38 Texas 492; "Subrogation-A Chap ter in Modern Legal History' (1923) 21 Mich. Law Review 795. 55 Yates v. Mead (1891) 68 Miss. 787, 10 So. 75. See German American Savings Bank v. Fritz (1887) 68 Wis. 390, 32 N. W. 123. 56 Lewis' Adm'r et al. v. United States Fidelity and Guaranty Co. (1911) 144 Ky. 425, 138 S. W. 305, Ann. Cases 1913-A, 564; Gilbertson v. Northern Trust Co. (1925) N. Dak. 207 N. W. 42; Wasco County v. New England Equitable Insurance Co. et al. (1918) 88 Oregon 465, 172 Pac. 126, L. R. A. 1918-D 732. In Fidelity & Deposit Co. of Maryland v. State Bank of Portland (1926) 117 Oregon 1, 242 Pac. 823, § 140. Subrogation by insurance companies. Ordinarily, it is stated that fire insurance companies are entitled to be subrogated to the rights of the insured.57 But a contract between a common carrier and the owner of goods shipped that the former shall have the benefit of any insurance, is valid; and such an agreement will naturally prevent the insurer from recovering from the carrier which injured the goods, even if the owner paid the premium, because the owner disposed of his right to do so. The law was thus stated by Mr. Justice Shiras, speaking for the Supreme Court of the United States: "It is too well settled by the authorities to admit of question that, as between a common carrier of goods and an underwriter upon them, the liability to the owner for their loss in destruction is primarily upon the carrier, while the liability of the insurer is only secondary. The contract of the carrier may not be first in order of time, but it is first and principal in ultimate liability. In respect to the ownership of the goods, and the will incident thereto, the owner and the insurer are considered but one person, having together the beneficial right to the indemnity due from the carrier for a breach of his contract or for non-performance of his legal duty. Standing thus, as the insurer does, practically in the position of a surety, stipulating that the goods shall not be lost or injured in consequence of the peril insured against, whenever he has indemnified the owner for the loss he is entitled to all the means of indemnity which the satisfied owner held against the party primarily liable. His right rests upon familiar principles of equity. It is the right of subrogation, dependent not at all upon privity of contract, but worked out through the right of the creditor or owner. Hence it has often been 825, it is said: "There is no distinction between the right of a paid surety to subrogation, and one who has entered gratuitously into a contract of suretyship. Both are clothed with all rights, remedies, priorities, and securities of the party to whom the debt of the principal was paid, and stand in his shoes, whether the creditor be a sovereign state or a private individual. This arises from the universal application by courts of equity of well-settled principles of equitable jurisprudence, defining the rights of a subrogee." 57 St. Louis, Iron Mountain and Southern Ry. v. Commercial Union Ins. Co. (1891) 139 U. S. 223, 11 Sup. Ct. 554, 35 L. Ed. 154. But not life insurance companies. The Mobile Insurance Co. V. Brame (1877) 95 U. S. 754, 24 L. Ed. 80. ruled that an insurer, who has paid a loss, may use the name of the assured in an action to obtain redress from the carrier whose failure of duty caused the loss.58 § 141. Ignorance of surety as to securities. The surety's right to subrogation is not affected by his ignorance of the existence of the securities, or his right to them, at the time he became joined with the principal in his obligation.59 Nor does the fact that the security came to the creditor after the surety became bound deprive the surety of his right to it.60 § 142. Subrogation to the rights of the state. A statute making a bond of an official a lien on his property from the date of its execution for any judgment rendered against him in his official capacity, gives the surety on such bond the right to avail himself of the lien created thereby; and subsequent purchasers' rights are inferior to those of the surety, because they are charged with notice of the lien.61 58 Wager v. Providence Insurance Co. (1893) 150 U. S. 99, 107, 14 Sup. Ct. 55, 37 L. Ed. 1013. See Nord-Deutscher Lloyd v. President etc. of Insurance Co. of North America (1901) 110 Fed. 420, 49 C. C. A. 1; St. Louis, Iron Mountain and Southern Railway Co. v. Commercial Union Insurance Co. (1891) 139 U. S. 223, 11 S. Ct. 554, 35 L. Ed. 154; Luckenbach et al v. McCahan Sugar Refining Co. et al. (1918) 248 U. S. 139, 39 Sup. Ct. 53, 63 L. Ed. 170; Chicago and Alton R. R. Co. v. Glenny (1898) 175 Ill. 238, 51 N. E. 896; (1924) Iowa Law Bulletin Vol. 9, p. 291. Distinguish American Central Insurance Co. v. Weller (1923) 106 Oregon 494, 212 Pac. 803. 59 Duncan, Fox & Co. et al. v. North & South Wales Bank et al. (1880) 6 App. Cases 1; Dempsey v. Bush (1868) 18 Oh. St. 376. 60 See Pearl Street Congregational Society v. Imlay (1854) 23 Conn. 10. 61 Knighton et al. v. Curry et al. (1878) 62 Ala. 404; Turner et al. v. Teague et al. (1883) 73 Ala. 554; Watts v. Eufaula National Bank (1884) 76 Ala. 474; Cummings v. May (1896) 110 Ala. 479, 20 So. 307; Irby v. Livingston et al (1888) 81 Ga. 281, 6 S. E. 591; Hook v. Richeson (1886) 115 Ill. 431, 5 N. E. 98; Lewis' Adm'r v. United States Fidelity and Guaranty Co. (1911) 144 Ky. 425, 138 S. W. 305, Ann. Cases 1913-A, 564. The surety may ask the aid of equity to require the land of the office holding principal, under such a statute, to be sold to pay a judg ment against him, even though it may have come into innocent han is. Crawford et al v. Richeson et al. (1882) 101 Ill. 351. § 143. Surety's priority to money due from obligee to the principal on completing construction contract. Frequent provisions in a building or construction contract are that it is for the benefit of materialmen and laborers having a just claim against the principal, and also that in case of abandonment the surety may complete the work. If the principal, prior to abandoning the work, assigned funds owing him by the obligee for work already done, and subsequently the surety is compelled to complete the work under the contract, and pay materialmen and laborers, is the surety entitled to be subrogated to the rights of the obligee? If so, is his right superior to that of the assignee of the principal? Certainly, if the assignee had made a loan to the principal to disburse as he saw fit, in return for such an assignment of funds, knowing of the rights of the surety, the equity would be inferior to that of the surety.62 The assignee in loaning the money to the principal is a volunteer.68 There seems to be a lack of harmony in the decisions; 64 but, inasmuch as the surety has a right to be subrogated to the funds of the principal in the creditor's hands, complete when he performs the abandoned contract, but incipient when it was entered into, it would appear correct to say that the surety's equitable right to the money is superior to any assignment given by the contractor-principal to a third person subsequent to the inception of the right of subrogation. And the conclusion reached is not affected by the fact that the surety is compensated.65 62 Henningsen v. United States Fidelity and Guaranty Co. of Baltimore (1907) 208 U. S. 404, 52 L. Ed. 547, 28 Sup. Ct. 389. 63 Prairie State Bank v. United States (1896) 164 U. S. 227, 232, 41 L. Ed. 412, 17 Sup. Ct. 142. 64 See Fidelity and Deposit Co. of Maryland v. City of Stafford et al. (1914) 93 Kan. 539, 144 Pac. 852. 65 In a four to three decision, speaking for the majority of the Ohio Supreme Court, the Chief Justice said in State ex rel. Southern Surety Co. v. Schlesinger (1926) 114 Oh. St. 323, 151 N. E. 177, 179: "It may clearly be deduced from all the foregoing authorities, and it must further be resolved upon principle that the right of subrogation in the surety operates as an equitable assignment, and that, inasmuch as the surety is a party to the origi nal contract, such equitable assignment takes priority over any assignment, legal or equitable, which may be given by the contractor to any third party who enters the transaction after its inception." |