ties placed by the principal in the hands of the surety for A distinction has been made between cases of that kind, 189 Where the security given the surety is that of a stranger to the transaction, even if it belongs to the principal's wife, though the husband join in the execution in order to release his inchoate interest therein, no trust attaches, and no rights accrue therein to the creditor. Such a transaction is one to save the surety 89 Henderson-Achert Lithographic Co. v. The John Shillito Co. (1901) 64 Oh. St. 236, 250-252, 60 N. E. 295. Accord: Homer et al. v. The Savings Bank of New Haven (1829) 7 Conn. 478; Taylor v. Farmers' Bank of Kentucky (1888) 87 Ky. 398, 9 S. W. 240; Osborn et al. v. Noble (1872) 46 Miss. 449; Morrill v. Morrill et al. (1880) 53 Vt. 74, 38 Am. Rep. 659. It was said in Macklin et al. v. Northern Bank of Kentucky (1885) 83 Ky. 314, 318, that: "The rule is, that when the security is given with the intention that it shall be applied to the payment of the debt in order to relieve the surety, or to enable the creditor to make his debt, he will be substituted to the rights of the surety; but when the pledge of the property is to indemnify the surety only against payment, it becomes personal, and presents an entirely different question." See contrary statement in Ijames v. Gaither et al. (1885) 93 N. C. 358, 362. In the case of In re Walker (1892) L. R. 1 Ch. 621, 629, Stirling, J. said: "and upon principle, I cannot see why a surety who takes from the principal debtor a bond or indemnity at once becomes a trustee of that for the principal creditor.'' harmless, and is not given for the payment of the debt. In such a case, neither the creditor is entitled to that security, nor is the co-surety, even if the principal is insolvent, unless he can show a loss.90 Securities given by co-sureties, each to the other, in the absence of the creation of an express trust, cannot avail the creditor. Such securities are similar to those given by a stranger.91 It is always important to determine in each case whether the surety holds securities as trustee or for his indemnity. If for the former purpose, the creditor has a vested interest therein, which cannot be released or transferred without his consent, except as to bona fide purchasers without notice. If the security is held as indemnity, the surety may release or transfer it without the creditor's consent. Once the surety's right is extinguished in this way, the creditor's right of subrogation is terminated.92 Once the principal has deposited money with the surety to pay his debt, even if after the relationship exists, and before the debt matures, it cannot be revoked without the consent of the principal.98 A deed or mortgage of land or personalty by the principal to the surety, given prior to a judgment by the obligee, cannot be set aside at the suit of the obligee. This is true, even though the grantee or mortgagee did not take possession immediately. Such a conveyance is prior to any judgment lien procured by the obligee.94 Of course, after the statutory period for presenting a claim against the estate of a deceased or bankrupt principal has ex principal debtor, and cannot be util ized as against cosureties."’ Dinsmore v. Sachs (1919) 133 Md. 434, 105 Atl. 524, 525. 92 Brandt (1905, 3d Ed.) Sec. 357; Jones et al. v. The Quinnipiack Bank (1860) 29 Conn. 25; Sumner et al. v. Bachelder (1849) 30 Me. 35. 93 Mandigo v. Mandigo (1873) 20 Mich. 349. 94 State V. Hemingway et al (1891) 69 Miss. 491, 10 So. 575. pired, the creditor cannot compel the surety, even if he might do so voluntarily, to bring an action to recover assets from the principal for the obligee's use.95 § 150. One surety's subrogation to the right of the creditor against a co-surety. In an opinion, the Pennsylvania Supreme Court said: "In America, and certainly in Pennsylvania, a surety paying the debt of his principal is entitled to be subrogated to all the rights and remedies of the creditor, as against his co-sureties in precisely the same manner as against the principal debtor, and as substituted in the place of the creditor and entitled to enforce all his liens, priorities and means of payment, and by the Act of 19 & 20 Vict. c. 97, Sec. 5, this is now the law of England." 96 The same case held that where the principal and one of two sureties were insolvent, the solvent surety who paid the debt, and took a transfer from the obligee, was entitled to a dividend on the entire debt, just as the creditor would have the right to do, and he was not limited to recover one-half, as in the case of contribution. But on this point, there are cases contrary.97 95 McCollum v. Hinckley (1837) 9 Vt. 143. 96 Hess's Estate (1871) 69 Pa. St. 272, 275. See Williston on Contracts (1920) Vol. 2, Sec. 1271; "Rights of Surety in Securities Held by Cosurety" (1903) 16 Harvard L. Rev. 439. 97 In the opinion in New Bedford Institution for Savings et al. V. Hathaway (1883) 134 Mass. 69, 75, 45 Am. Rep. 289, after reviewing the conflicting cases, it is said: "In this conflict of authority, we are brought to the conclusion that neither in his own name nor in that of the creditor ought the surety paying the debt to enforce any claim against his co-surety, except for the amount actually paid by him for his 20-surety, and if by reason of the insolvency of such surety, there is a loss, it is one to which the relation in which they stand to each other compels him to submit. . . The argument that the paying surety should be allowed to retain and avail himself of the proof of the whole debt made by the creditor, because he will thereby obtain only the amount which his co-surety ought to and would pay if he were not insolvent, is fallacious. He should be allowed to use the creditor's name, or the security the creditor has obtained, only to enforce the right which he has against the co-surety by reason of the payment which he has made on his account, and that was a payment of but one-half the debt. As between himself and his co-obligor, it was A mere promise to indemnify one surety, or a transfer to him of security by the principal after an adjustment of the loss between co-sureties, does not give a right to be subrogated.98 § 151. The surety's right to be subrogated to the remedies of the principal against the creditor. It frequently occurs that the creditor owes the principal a sum, which the principal would be entitled to set off in an action against him. The surety, upon paying the creditor, is entitled to be substituted in the place of the principal for the enforcement of this right against the creditor. This statement has received judicial sanction: "By the common hw a surety, upon satisfying his principal's obligation, is entitled to be subrogated, not only to the rights and remedies of the creditor against the principal connected with the debt, but is also entitled to be subrogated to the similar rights and remedies of the principal against the creditor.99 § 152. Duty of creditor to the security. The security given the creditor by the principal is not only for the former's protection, but for the surety's indemnity as well.100 Therefore, his own duty to pay the other half. Because the creditor might have proved and received a dividend upon the whole debt, this affords no reason why the paying surety should. To the creditor the co-surety had promised he would pay the whole debt, but as between the sureties each was a debtor only to the amount of his proportion. To allow a co-surety to exaggerate this claim would do injustice to other creditors of the insolvent surety. It would be using the fiction of law that the debt is still unpaid,-which is adopted in equity to protect the paying surety by keeping the debt alive in order that securities may be realized for his benefit,—so that unfair advantage would thereby be taken of other creditors of the insolvent. It is true, that as the cred itor may think fit to proceed, different results to the surety may sometimes occur. If the creditor takes full payment from the solvent surety, it will be for the advantage of the estate of the insolvent surety. If, on the other hand, he proceeds in the first instance against the estate of the insolvent surety, it is for the advantage of the solvent surety. This result is produced by the different liability which the sureties owe to the creditor, and that which they are under each to the other, but it affords no reason for enlarging the latter." 98 Hall v. Cushman (1845) 16 N. H. 462, 43 Am. Dec. 562. 99 In re Elizalde's Estate (1920) 182 Cal. 427, 188 Pac. 560, 562. 100 Beaver V. Slanker, Adm'r (1879) 94 Ill. 175, 182. the obligee owes a duty to do nothing which will impair the security. Collateral held by the obligee may be exchanged for other collateral, if it is made in good faith, and without prejudice to the surety. For the release of security the surety is pro tanto released; but if there is no injury to him, there is no release.1 In a leading case, the defendant was purchaser of a note, secured by a mortgage which the defendant knew was usurious, and, though all the parties resided in New Jersey, the defendant sued the plaintiff-surety on the note, in New York, while he was there temporarily. The plaintiff-surety brought suit to enjoin the obligee from prosecuting his claim at law. The injunction was granted by Chancellor Kent, on the ground that the defendant should be required to try out the validity of his mortgage security in New Jersey, "and not to compel the plaintiff to pay, and then turn over to him a pledge which, if frail and insecure, has been rendered so by his own illegal act."2 § 153. Subrogation, indemnity, contribution and exoneration compared. Subrogation and exoneration are enforceable in equity only. Indemnity, though controlled by equitable principles, is enforceable in a law action. Contribution, likewise, is based upon equitable principles, but is usually in a law court. Subrogation is usually by the surety against the creditor, though by analogy, the creditor may force the surety to give him securities belonging to the principal which he holds for the payment 1 State Bank V. Smith et al. (1898) 155 N. Y. 185. 2 Hayes v. Ward et al. (1819) 4 Johns. Ch. (N. Y.) 123, 8 Am. Dec. 554. While this reasoning has been criticized (see Stearns on Suretyship [1922, 3d Ed.] note, p. 183), it is believed to be sound. It is tre, as the criticism referred to states, that if the mortgage is invalid, the surety has left his right of indemnity; but it is well established that if a creditor releases any security he possesses, the surety is pro tanto discharged. Why should not the same principle apply where by his own wrongful act the creditor has acquired security which he must release? Further, as the court said, if the mortgage is usurious, "the plaintiff, on paying, might be deprived of all indemnity from his principal, by reason of the conduct of the creditor." Previously, the Chancellor had stated that "the right of substitution is a valuable right belonging to a surety, and the creditor must do nothing to impair it." |