sheriff.77 Likewise, the extension of the boundaries of the district of a public official, whose added duties required him to collect fees and taxes within the newly created territory, effects a change in the nature and duties of the official, and discharges his surety.78 § 120. Liability of sureties for defaults occurring during prior employment. The responsibility of a surety must always depend upon the language of his undertaking. He frequently engages that the principal will account for and pay over to the obligee the funds coming into his hands. Suppose the principal abstracted funds during former employment by the same obligee, and repays the deficiency with money taken during a subsequent period. Are the sureties for the second period liable? That the misapplication of funds occurring during the second term of employment is within the surety's undertaking would seem unquestionable.79 The payment by the principal to the account of a wrong year is as much a misapplication of funds as a misappropriation for any other purpose.80 The incumbent of a public office for several successive terms, if a shortage in his funds is discovered, is presumed to have caused the shortage during his last term, and the sureties on the bond for that term are responsible. Proof to the contrary may overthrow the inference that he had the money in his 77 White v. East Saginaw (1880) 43 Mich. 567, 6 N. W. 86. 78 Denio et al. v. The State to the use of Warren County (1883) 60 Miss. 949. See Miller v. Stewart et al. (1824) 9 Wheat. 680, 6 L. Ed. 189, where the collector added a township to the territory of his deputy. His sureties were released. 79 Board of Commissioners of Pine Co. v. Willard, Treasurer, et al. (1888) 39 Minn. 125, 39 N. W. 71, 1 L. R. A. 118, 12 A. S. R. 622. 80 Gwynne v. Burnell et al. (1839) 7 Clark & Finney 572, 7 Eng. Reports Reprint 1188; Myers et al. v. State (1886) 66 Md. 80, 5 Atl. 410; American Bonding and Trust Co. V. Milwaukee Harvester Co. (1900) 91 Md. 733, 48 Atl. 72; Inhabitants of Colerain v. Bell et al. (1845) 9 Met. (Mass.) 499. In Maryland Casualty Co. v. Citizens' National Bank (1925) 8 Fed. (2d Ser.) 216, 219, this view is expressed: "The chief objection seems to be, however, that there was no loss to the employer, since all moneys received by the secretary through the conversion of the warehouse receipts were used by him in discharging other obligations of his employer. If the moneys were used in the discharge of then present and existing obligations of the em hands at the end of the prior terms of office.81 An officer reporting certain funds in his hands at the expiration of one term is, in contemplation of the law, in possession of it. The sureties for the last term alone are liable for a failure to account at the end of the period, even though the misapplication of the funds occurred during a former term of employment.82 § 121. Set-off and counterclaim. Is the surety or guarantor entitled to the benefit of a set-off or counterclaim of which the principal might take advantage if sued? To give an answer to the question which would be accepted by all courts, would be impossible, because of the variant language used in the statutes. At common law there was no right of set-off to a claim not reduced to judgment. It is a creature of the statute.83 Whether the principal and surety are sued jointly, is a material factor. It seems to be recognized that if they are sued in the same action, a debt owing from the plaintiff to the principal which he might set off, may be set off by the surety who is also a defendant.84 The reasoning seems to be on the analogy that the surety would have a right, on paying the debt, to any security belonging to ployer, there would be much force in this contention. But they were not so used. They were in fact used to discharge obligations thereafter incurred by the secretary, and which never would have been so incurred were it not for the fraud and deception practiced by him." See concluding part of the opinion in Magee et al. v. The Manhattan Life Insurance Co. (1875) 92 U. S. 93, 23 L. Ed. 699. 81 Independent School District v. Hubbard (1899) 110 Ia. 58, 81 N. W. 241, 80 A. S. R. 271; Kelly et al. v. State of Ohio (1874) 25 Oh. St. 567, 579; Hetten et al. v. Lane (1875) 43 Texas 279. 82 In contemplation of law, the money mentioned in his report was in the hands of the supervisor, and the undertaking of the sureties on his bond was that he should account 83 Raymond Bros. v. Greene and Co. (1881) 12 Neb. 215, 10 N. W. 709, 41 Am. Rep. 763. 84 Bechervaise v. Lewis (1872) L. R. 7 C. P. 372; Bathgate v. Haskin (1874) 59 N. Y. 533. A note signed by principal and surety may be set off against one signed by the same creditor payable to the principal. Andrews v. Varrell (1865) 46 N. H. 17. the principal possessed by the creditor. While the debt owing by the creditor to the principal is not security, it is equitable that the surety have the benefit of it. Also, allowing the set-off will prevent a multiplicity of suits.85 While the right to set-off claims does not exist except as authorized by statute, judgments obtained in cross actions may be set-off against each other in the absence of legislation. A judgment given in favor of a principal may be set-off to satisfy one against him and his sureties. As one opinion stated the acknowledged view: "It is well settled, both in England and in this country, that judgments in cross actions may be set off, the one against the other, when the parties in interest are the same, on motion addressed to the court in which one or both of the actions is pending. If the amounts are equal, both will be satisfied. If the amounts are unequal, the smaller will be satisfied in full, and the larger to the extent of the smaller, and an execution will issue for the balance. Nor will it make any difference that one of the judgments is against a principal and his sureties. A judgment in favor of the principal alone may be applied in satisfaction of one against him and his sureties. And the right of setoff in this class of cases is not dependent upon statutory law. It exists at common law. All of these propositions are sustained by adjudged cases as well as the leading text books. 1786 It seems as well established that when the surety is sued alone, the principal may intervene for the purpose of setting off a claim against the plaintiff; for should the plaintiff recover, the surety could compel reimbursement from the intervener.87 Likewise, when both principal and surety are sued, the surety may set off any claim the obligee owes him individually.88 85 Mahurin V. Pearson et (1837) 8 N. H. 539. al. 86 Peirce v. Bent (1879) 69 Me. 381, rad et al. (1893) 114 Mo. 651, 21 S. W. 839. 87 Becker v. Northway (1890) 44 Minn. 61, 46 N. W. 210, 20 A. S. R. 543. 88 Clark v. Sullivan (1891) 2 N. D. 103, 49 N. W. 416. But when the surety is sued alone, and the principal does not intervene, the language of the statutes permitting a set-off will not authorize the courts to reach the same conclusions as to the right of the surety to set off an unliquidated claim of the creditor owing to the principal. Some jurisdictions refuse to permit the surety to set up a counterclaim of the principal, who is not a party to the action, against a suit by the creditor. It is said. the surety has no authority to do so, and the principal cannot be bound by a judgment to which he is not formally a party.89 In other jurisdictions, the right of the principal to a set-off, such as a breach of warranty, is available to the surety. Because the principal may discharge himself in whole or in part by proof of a breach by the plaintiff, or a debt owing by him, the reasoning is that the one whose undertaking is merely collateral may discharge himself in the same manner. 90 The right to a set-off has been greatly enlarged in equity and is there administered in cases where at law it would not be available, so that the surety may take advantage of an equitable set off to which the principal would be entitled.91 89 Glazier v. Douglass (1865) 32 Com. 393; Purdy v. Forstall et al. (1893) 45 La. Ann. 811, 13 So. 95; Gillespie et al. V. Torrance (1862) 25 N. Y. 306, 82 Am. Dec. 355; Phoenix Iron-Works Co. V. Rhea et al. (1897) 98 Tenn. 461, 40 S. W. 482. 90 Scroggin et al. V. Holland (1852) 16 Mo. 419, 426; Aultman and Taylor Co. v. Hefner et al. (1886) 67 Tex. 54, 2 S. W. 861, 864. 91 Bechervaise v. Lewis (1872) L. R. 7 C. P. 372. See Armstrong v. Warner et al. (1892) 49 Oh. St. 376, 31 N. E. 877, 17 L. R. A. 466; Craighead v. Swartz et al. (1907) 219 Pa. St. 149, 67 Atl. 1003. The Chancellor said in Brewer v. Norcross (1865) 17 N. J. Eq. 219, 226: 'Courts of equity exercise a jurisdiction in matters of set-off, independent of the statutes upon the the subject. They look beyond the form of the contract, to its real character; and beyond the nominal parties, to the parties to be affected by the decree. Wherever it is necessary to effect a clear equity, or to prevent irremedial injustice, the set-off will be allowed, though the debts are not mutual.' CHAPTER VI. RIGHTS OF THE SURETY OR GUARANTOR PRIOR TO PAYMENT OF THE PRINCIPAL'S DEBT: EXONERATION. § 122. The doctrine of Pain v. Packard.1 Over a century ago, in a leading New York case, the view was taken that a surety was discharged in an action at law against him, if after the principal debt became due, the defendant-surety could show that (a) he had verbally made a special request of the creditor to proceed against the principal, and (b) as a consequence of the neglect to comply with the request, neither the creditor nor surety would be able to collect from the principal. While the court recognized that neglect of the creditor in collecting from the principal, unaccompanied by any enforceable agreement affecting the contract, would be no defense to the surety when sued, yet a specific, unheeded demand by the surety upon the obligee that the principal be proceeded against would release him from liability. The surety might pay the debt and proceed against the principal for reimbursement, yet he is not legally required to do so. Pain v. Packard found little support in other states. Fifteen years later, it was severely criticised by the Chancellor, who submitted to its authority, though limiting it to the facts in the case decided. In applying the doctrine subsequent cases re 1 (1816) 13 Johns. (N. Y.) 174, 7 Am. Dec. 369. 2"This decision (Pain v. Packard) was made without argument, and two, at least, of the judges who concurred therein, afterwards ex pressly dissented from it, and declared themselves satisfied it was wrong. It was also overruled by Chancellor Kent, in King v. Baldwin (1817) 2 Johns Ch. 554, and although Ch. J. Spencer afterwards |