author: Harris, J.

text:
    Schroeppell vs. Shaw.
    Mere indulgence tp the principal debtor, at the will of the creditor, however long continued, and whatever may be the consequences, will not operate to discharge a surety.
    And the rule is the same whether the indulgence is -extended towards the principal debtor, or towards a third person liable to the creditor upon a collateral security.
    The plaintiff, as surety for others, executed with them a note to the defendant for $2000, payable in a year. One of the principals at the same time assigned to the defendant as collateral security a bond and mortgage of a greater amount against third parties, which fell due by successive installments after the maturity of the note. Held, that the passive neglect of the creditor (there being no request on the part of the surety) to enforce the bond and mortgage, afforded no ground to relieve the surety even in equity, although the neglect continued for a long time, and the value of the security was thereby lost.
    And although the creditor after waiting two and a half years, commenced without . request, a foreclosure suit upon the bond and mortgage in season to haye sold the, mortgaged premises pnder his decree, and then to have docketed the decree for the deficiency in time to acquire a general lien upon property of the mortgagors, sufficient to pay the debt or some part thereof, but conducted his proceedings so negligently that before he docketed his decree their property was encumbered by other liens to its full value, and the debt secured by the bond and mortgage became thereby lost; yet held, that the plaintiff as surety was entitled to no relief at law or in equity.
    Whether the negligence or misconduct of a creditor in respect to a collateral security in his hands may not be set up by a sqrety as - a defence at law wherever it would be available in equity. Quere.

    In general, the same facts which will exonerate a surety in equity will constitute a good defence at law. Per Harris, J.
    And whenever e party has had an opportunity to avail himself of a defence at law and has omitted to do so, he can not afterwards resort to a court of equity to obtain the benefit of the same defence.
    A surety, upon payment of the debt, has a right to the benefit of all the collateral securities held by the creditor.
    Appeal from the supreme court, where Schroeppell filed his bill against Shaw to be relieved against a judgment at law The case, as it appeared on the pleadings and proofs, was as follows: On the 4th of April, 1837, the plaintiff, as surety foi Baker, Wood and Lawrence, executed with them a note for $2000 to the defendant, payable in one year; and at the same time, Baker, one of the principals, for the purpose of securing the note, assigned to the defendant a bond and mortgage against Joseph I. Bradley and William Jackson, given on the 30th Hay, 1836, for $3000 payable in five equal annual installments, with annual interest on the whole sum. The first payment and interest had been received by Baker, before the assignment. The mortgage covered twelve acres of land in the city of Syracuse.
    Default was made in the payment of the note, but there was paid thereon, April 21, 1838, $140, and May 18, 1839, $141. The bond and mortgage remained in. the defendant’s hands, and he took no steps to collect it, until November 3,1840, more than two and a half years after the note fell due. In the meantime there had become due and remained unpaid upon the bond and mortgage, the following sums :
    May 30,1838, principal, $600, interest, $168, $768,00
    “ “ 1839, “ $600, “ $168, 768,00
    “ “ 1840, “ $600, “ $168, 768,00
    $2304,00
    The evidence tended to show that during all that time, Bradley, one of the mortgagors,, was responsible, and that if the defendant had foreclosed the mortgage and docketed his decree for any deficiency remaining after a sale of the premises, it would have been a lien on property sufficient for its payment. Particularly, Bradley owned two brick stores, worth $9000 in cash, the only incumbrance on which until October 25. 1839, was a mortgage of $3350; and then the only additional incumbrance was another mortgage of about $2000. He was also during all that time engaged in considerable business, was in good credit, and owned a considerable amount of personal property.
    On the 3d of November, 1840, the defendant commenced in the court of chancery, a foreclosure suit against Bradley and Jackson on the above mentioned bond and mortgage. He was the sole complainant in that suit, and the proceedings were conducted by his own solicitors. On the 10th of March, 1841, the defendant obtained default the usual decree of foreclosure and sale, and on the 84th of that month, the mortgaged premises were advertised to be sold under the decree, on the 8th of May ensuing. On the day last mentioned, the sale was postponed until the 15th of June, when a further postponement was had until 1st of July, and then a further one until the 15th of July, 1841, when the premises were sold and purchased in by the defendant Shaw, for the sum of $375, subject to a prior lien of about $1200, held by one Colvin. All the postponements of sale were by the direction of the defendant, or by arrangement between him and Bradley, the plaintiff being a stranger to the proceedings. To procure one of the postponements, Bradley gave his note to the defendant for $200.
    The evidence also tended to show that if the defendant had docketed his decree, and issued execution for the deficiency within a reasonable time after the sale, the whole or a considerable part of it might still have been collected out of the real and personal property of Bradley. It appeared that the j uni or mortgage above mentioned on the two stores was foreclosed, and the property sold February 9, 1843, subject to the senior mortgage, and produced about $1000 of surplus money, which in the due order of liens, went to pay judgments against Bradley, in favor of other persons, docketed on and after October 8, 1841. The defendant did not however cause his decree to be docketed in the county of Onondaga, where the mortgagors resided, so as to obtain a general lien on their property, nor cause execution to be issued against them, until May 9, 1842. It was then too late. Bradley had failed, and Jackson’s failure and insolvency had occurs. red at a much earlier date. There was no allegation in the bill, nor any evidence, that the plaintiff or any of the makers of the note in question, had ever requested the defendant to take proceedings on the bond and mortgage.

    In September, 1842, the defendant brought an action on the note, against the plaintiff and the other makers. The plaintiff pleaded to the action, but did not set up as a defence the negligence of the defendant in respect to the bond and mortgage of Bradley and Jackson, held by him as collateral security. After issue was joined, the plaintiff agreed that a verdict might be taken against him at the circuit, and the defendant agreed that in taking the verdict, he would allow the payments on the note before mentioned, (one of which had not been indorsed,) also the sum bid by him at the sale under the decree, deducting the costs of foreclosure. A verdict was accordingly taken against the plaintiff and all the makers of the note, and judgment perfected for $2814,64 damages and costs, on the 29th of August, 1843 ; but the payment not indorsed on the note and the sum bid as aforesaid were not deducted.
    Against that judgment the plaintiff, by his bill in this cause, claimed relief on the ground that he was in equity discharged from the note, in consequence of the neglect and misconduct of the defendant in relation to the bond and mortgage against Bradley and Jackson, insisting that thereby the value of those securities had been lost. The bill also insisted that the payments and the sum bid by the defendant at the sale under the decree should be allowed against the judgment; also that the defendant should be decreed to hold the mortgaged premises so bid in by him as a trust fund for the payment of the judgment, and that the premises should be sold for that purpose. The-defendant, in his answer, insisted that the case furnished no ground for equitable relief; that the alledged negligence and misconduct in relation to the bond and mortgage might have been set up at law in the action on the note; that the judgment was a bar, &c.
    The supreme court sitting in the fifth district made a decree, directing the allowance of the payments claimed, declaring also that the mortgaged premises, notwithstanding the foreclosure against Bradley and Jackson, were still held by the defendant as 9. security for the debt, and directing a sale thereof, but overruling the claim to relief on the ground of negligence in respect to the bond and mortgage. [See 5 Barb. 580.) The plaintiff appealed from the decree, except so far as it was in his favor.

      Geo. F. Comstock, for appellant.
    I. The negligence and misconduct of the defendant in respect to the collateral securities in his hands constitute a ground of relief against the note, in favor of the surety, which was not and could not be set up in the action at law. (Taggard v. Curtenius, 15 Wend. 155; Kelley v. Sparks, 10 East, 369.)
    II. The judgment at law therefore is no defence to the suit. (2 Story’s Eq. §§ 874, 886, 887; King v. Baldwin, 17 John. 384; Marine Insurance Co. v. Hodgson, 7 Cranch, 332; Norton v. Woods, 5 Paige, 245.)
    III. The bond and mortgage assigned to the defendant constituted a fund to pay the note of which he was the trustee, and such fund having become lost or worthless by his inaction and gross neglect, the surety is entitled in equity to relief on that ground. (1 Story’s Eq. § 326; Mayhew v. Crickett, 1 Swanst. 185, 191, and note (a); Capel v. Butler, 2 Sim. & Stu. 457; Ex parte Mure, 2 Cox, 63; Burgeon Suretyship, 180; Williams v. Price, 1 Sim. & Stu. 583; 4 Ves. jr. 833; 8 Pick. 122; Pitman’s Pr. and Surety, 113, 203, 204, (40 Law Library;) Theob. on Pr. and Surety, 146; 2 Am. Leading Cases, 127 ; 1 John. Ch. R. 119, 129; 3 id. 614, 622, 624.)
    IT. And if this doctrine is sound, it covers the whole case; for upon the facts there is no question but that if the defendant had proceeded upon the bond and mortgage within any reasonable time, the entire amount thereof, which exceeded the amount of the note, would have been made secure, and collected as it became due.
    T. But even if the defendant is not chargeable with the consequences of his neglect prior to November 3, 1840, because no request to prosecute the bond and mortgage is shown, there is no such question after that date, for he then .actually commenced proceedings. (Williams v. Price, 1 Sim. & Stu. 581; and see authorities already cited.)

    VI. The neglect and misconduct of the defendant in the conduct of the foreclosure suit and proceedings were gross and inexcusable, and the debt was lost thereby, except the small sum bid on the sale. This exonerates the appellant. (Williams v. Price, supra.) Especially there can be no question 1 hat the defendant should be charged with the $1000 proved to have been lost in consequence of not docketing his decree for the deficiency within a reasonable time after the sale so as to secure a general lien on the real estate of the mortgagors. The surplus money raised on the sale of Bradley’s stores amounting to that sum, would, as the evidence demonstrates, have gone toward the satisfaction of the decree, if it had been docketed so as to become a lien.

      H. Ballard, for respondent.
    I. There is no equity in the bill. Every allegation on which the claim for relief is founded, might have been set up as a defence in the suit at law upon the note.
    The rule then applies, that where a party has neglected to set up his defence, in a suit at law, he can not be relieved in equity. (Clark v. Niblo, 6 Wend. 236, opinion of Chancellor ; Sailly v. Elmore, 2 Paige, 497; Fonblanque’s Equity, 133, 134, book 1, chap. 3, § 3; Story’s Equity, vol. 1, § 146; Penny v. Martin, 4 John. Ch. Rep. 566; Beggs v. Butler, 9 Paige, 226; Crane v. Bunnell, 10 id. 333; People v. Jansen, 7 John. Rep. 332.) Schroeppell knew when he signed the note that the bond and mortgage was at the same time assigned to Shaw as collateral security.
    II. The note became due on the Ath of April, 1838. At the time the bond and mortgage were assigned to Shaw, nothing was due upon them, until the 30th day of May, 1838.
    On the debt becoming due, the surety should have paid it, and asked to be substituted in the place of the creditor, as to all the securities held by him, or taken steps to compel the principal debtor to discharge the debt. It is for the surety to move hi the matter.
    There is no positive duty incumbent on a creditor, to prosecute measures of active diligence, and therefore, mere delay on his part, unaccompanied by any valid contract for such delay, will not amount to laches, so as to discharge the surety. .(1 Story’s Eq. 330, 1,656; Lenox v. Prout, 3 Wheat. 520; United States v. Simpson, 3 Penn. Rep. 437; Mundorff v. Singer, 5 Watts, 172.)
    III. The proceedings to foreclose the mortgage were not tardily conducted, as the proofs show. The decree for the sale was obtained as early as the rules and practice of the court permitted. The postponements of salé were not unreasonable. Shaw writes to Lawrence, the master, that he had no objections to the postponement to the 15th of July, “if it could be done without prejudice to the future collection of the money.”
    IV. After the sale, Shaw had the right to remain inactive, as to further efforts to collect the bond and mortgage. He did not act, and made no agreement, inconsistent with the rights of the surety. If Schroeppell Avislied further steps taken under the decree or Avislied his principal sued on the note, he should have requested the creditor so to do, and indemnified him for the risk, delay and expense of such proceedings. (2 Story’s Eq. 171.)
   Harris, J.

Courts of law and of equity are governed by the same principles in determining whether a surety has been discharged by any thing done by his creditor. Defences of this character, Avhatever they once may have been, are no longer the subject of exclusive equity jurisdiction. Now, the same facts which will exonerate the surety from liability in equity, will constitute a sufficient defence at law.

It is also a familiar principle, that Avhere a party has had' an opportunity to avail himself of a defence at law, and has omitted to do so, he can not afterwards resort to a court of equity to obtain the benefit of such defence. Before a court of equity Avill interfere to deprive a party of the benefit of a judgment he has recovered at law, it must not only appear that it Avould be against good conscience to enforce the judgment, but also, that the party complaining could not have defended himself at larv. (2 Story’s Eq. § 887; Marine Ins. Co. v. Hodgson, 7 Cranch, 332; Norton v. Woods, 5 Paige, 249.)

In view of these principles I have been unable to see how a court of equity could obtain jurisdiction of this case. The facts, upon Avhich the plaintiff relies, were, I think, equally available as a defence at larv, as in equity. He omitted to make that defence at larv. To permit him now to escape from the consequences of his neglect, by the interference of a court of equity, would, as it seems to me, be a violation of one of the first principles of equity jurisdiction.

It was said by the learned judge who delivered the opinion of the supreme court, that “ a dealing by the creditor with the principal, in respect to a second or-collateral security,'will not, at law, discharge the surety from the payment of the principal debt, although he might have been discharged, had the creditor-dealt with the principal, in the same manner, with respect to the original security.” The authorities cited in support of this distinction are Pitman's Pr. and Surety, 203; Twopenny v. Young, (3 Barn, & Cress. 208 ;) and Taggard v. Curtenius, (15 Wend. 155.) It is indeed said, by Pitman, that a dealing by the creditor with the principal, in respect to the second security, will not, at law, have the effect of discharging the surety on the original security. The only authority upon which he re-, lies to sustain this position, is Twopenny v. Young. No such doctrine, however, will be found in that case. The facts were, that Young, the defendant, had signed a note to the plaintiff as surety with one Rummen. Subsequently Rummen had assigned to the plaintiff, as a further security, his household.goods. The assignment contained a stipulation that Rummen should have the possession of the goods, until after three days’ notice. The grounds of defence were, that the note was merged in the assignment, that being a security of a higher nature; and, secondly, that the agreement to give three days’ notice was giving time to the principal, and therefore discharged the surety. It was held, very properly, that, the deed did not extinguish or suspend the remedy on the note. But it is nowhere said in the case, that if the effect of the second security had been to extinguish or suspend the remedy upon the first, it would not have been available as a defence to the surety in the action upon the note. Taggard v. Curtenius has quit.e as little to do with the question. Indeed, the relation of principal and surety is not to be found in that case. The action was against the makers of two promissory notes. The defendants had deposited with the payees of the notes certain stock. They agreed to use due diligence in disposing of the stock, and to apply a portion of the proceeds to thq payment of the notes. It was alledged that the payees of the notes had neglected to dispose of the stock, until it had become worthless. It was held that these facts did not constitute a defence at law. There is no allusion in the ppinion of the court to the effect which such a transaction might have had upon the obligation of a surety. The distinction, therefore, must be regarded as unsustained by any adjudged case.

Nor do I think there is any thing in the nature of the defence itself, which should make it peculiarly the subject of equity jurisdiction. But it may be that the case of King v. Baldwin, (17 John. 384,) should be considered as authority for the interference of a court of equity to relieve a surety after judgment. In that case, the principal debtor being in embarrassed circumstances, the surety had repeatedly urged the creditor to collect his debt, but he refused to do so. The principal debtor was discharged under the insolvent act, and after this a suit was brought against the surety. Upon the trial of the action at law, the surety offered to prove these facts as a defence, but the judge, at the circuit, held that they did not make out a defence. No motion was made for a new trial. Judgment was entered up against the surety, and then he filed his bill in chancery, to obtain a perpetual injunction, to restrain the plaintiff from enforcing his judgment. The chancellor dismissed the bill, but upon appeal the decision of the chancellor was reversed. The circumstances under which this decision was made were somewhat peculiar, and such as, in my judgment, materially detract from the, weight of its authority-. The case was determined by the casting vote of Lieut. Gov. Taylor. The only opinion in favor of reversing the chancellor’s decree, was delivered by Chief Justice Spencer. Justices Van Ness, Platt and Yates, were in favor of sustaining the chancellor’s decision. Among other distinguished lawyers, then members of the court, Senators Van Burén and Van Vechten voted for affirmance. The latter senator delivered a very able opinion, showing conclusively, as I think, that the plaintiff was concluded by the recovery against him at law. Chief Justice Spencer himself admits, that it was then settled that the defence might have been set up at law; but he says that “ until the case of Pain v. Packard, (13 John. 174,) the principle had not been distinctly settled in the supreme court, and, in similar cases, in the English courts, relief had been usually afforded in equity.” “ If it be doubtful,” says he, whether a court of law can take cognizance of the defence, and there'exists no doubt of the jurisdiction of a court of equity, and, if in such a case, a defendant at law, under the influence of such doubt, omits to make his defence, or if he bring it forward and it be overruled, under the idea that it is not a defence at law, it is not granting a new trial for a court of equity to afford relief, notwithstanding the trial at law.” I have been accustomed to regard the opinions of this great judge with the greatest deference, but I can not assent to the soundness of the doctrine upon which he advocates the right of a court of equity to take jurisdiction of a matter, which might have been set up as a defence at law, after judgment has been rendered in the action. There are cases where a pending litigation may be transferred from law to equity, on the ground that the remedy at law is uncertain or difficult; but, except in this single instance, I have never known this ground of jurisdiction assumed to sustain a suit in equity after tire litigation at law had terminated.

But let it be assumed that the plaintiff is not concluded by the recovery against him at law from obtaining relief in equity, then the question arises, whether, upon the case presented, he is entitled to the relief sought.

The ground upon which the plaintiff claims that he is, in equity, entitled to be discharged from his liability, is the alledged gross negligence of the defendant in the collection of the bond and mortgage assigned to him as collateral security for his debt. In the consideration of this question, I shall, at least for the present, assume it to be true, as the plaintiff alledges, that by the exercise of promptness and vigilance, the defendant might have secured the payment of the bond and mortgage, and thus have relieved the plaintiff from his liability.

In considering the obligations of the parties to each other, as creditor and sdrely, it is to be borne in mind, that the plaintiff had, by signing the note, guarantied that his principals should, in one year from the date of the note, pay the amount, with interest, to the defendant, or that he would himself be liable for its payment. Before the first installment upon the bond and mortgage had become payable, the note had become due, and the plaintiff, as well as his, principals, was in default. The right of the defendant to sue the plaintiff for the recovery of the note at any time after it became due, will not be denied. Suppose a suit had been brought, and judgment had been recovered, before the alledged default of the defendant, in not securing the payment of the bond and mortgage, had occurred, can it be pretended that the subsequent neglect of the defendant could have the effect of an equitable discharge of the plaintiff’s liability to pay the judgment? It seems to me that to sustain this bill, it is necessary to violate one of the cardinal principles of equity.. The plaintiff was the party first in default. If he had performed his obligation to the defendant, he would have had the control of the' bond and mortgage before any part of it became due. There was no time after the first installment upon the bond and mortgage became due, when the plaintiff was not in default, and liable to be sued for such default. To allow him to take advantage of any want of diligence in the defendant in collecting the bond and mortgage, under such circumstances, seems very much like allowing a man to take advantage. of his own wrong. If the defendant was guilty of negligence the plaintiff was guilty of a positive omission of duty. The defendant was under no higher obligation to collect the bond and mortgage, than the plaintiff was to pay the note, and take the bond and mortgage himself.

But let us consider more attentively what constitutes such gross negligence as will operate to discharge a surety, when he is not himself in default. A surety has an undoubted right, upon the payment of the debt, to have the full benefit of all the collateral securities which the creditor has taken as an additional pledge for his debt. It is hardly possible,” said Lord Brougham in Hodgson v. Shaw, (3 M. & Keen, 190,) to put this right of substitution too high.” The surety,” says chancellor Kent, “ by his very character, and relation of surety, has an interest, that the security taken from the principal debtot should be dealt with in good faith, and held in trust, not only for the creditor’s security, but for the surety’s indemnity. The creditor must do no wilful act, either to poison it, in the first instance, or to destroy or cancel it, afterwards.” (Hayes v. Ward, 4 John. Ch. 130.) “ But this qualification should be added, says Story, that a mere omission by the creditor to collect the debt due of the hypothecated property, so that it is lost by his laches; will not discharge the sureties. The creditor must be guilty of some wrongful act, as by a release, or fraudulent surrender, of the pledge, in order to discharge the surety.” (1 Story’s Eq. §§ 501, 639.)

Thus, it will be seen, that, in reference to collateral securities, the rule is the same as in reference to the collection of the debt of the principal debtor. The creditor is under no obligation of active diligence for the protection of. the surety, so long as the surety himself remains inactive. Until the surety moves in the matter, it is enough that the creditor holds himself in readiness to transfer to him, when he applies, all the securities he holds, that he may have the benefit of such securities in aid of his own responsibility.

The authorities upon which the plaintiff relies, will, upon examination, be found to harmonize with these general principles. The first case cited is that of Mayhew v. Crickett, (2 Swanst. 185.) In that case, the defendants held a warrant of attorney to confess judgment, executed by one Batteley, to secure the balance of his account to them, as bankers. Mayhew and one Gent, had also, each of them, signed a promissory note with Batteley, to secure the same indebtedness. The defendants had entered up judgment on the warrant of attorney, and had taken the goods of the principal debtor in execution, and had, afterwards, withdrawn their execution. They then sued Mayhew upon the note signed by him as surety. He filed his bill in chancery to stay the proceedings at law, and to be relieved from his liability as surety. Upon a motion to dissolve the injunction which had been granted, Lord Eldon said he had always understood, that if a creditor takes out execution against the principal debtor, and waives it, he discharges the surety, on an obvious principle which prevails both in courts of law and courts of equity. The principle is, that he is a trustee of the execution, for all parties interested. Here, it will be perceived, there was something more than mere negligence on the part of the creditors. They had, by taking the goods of the principal debtor in execution, acquired a lien upon them. That lien was a security, not only for their debt but for the surety’s indemnity. Good faith towards the surety required that they should not relinquish the security, thus acquired, without his consent, and having done so, the case is brought within the principle which discharges a surety, when the creditor has knowingly done any thing which deprives him of the benefit of the security held by the creditor. It was a violation of the trust which resulted from the relation in which the creditors stood to the surety.

The case of Capel v. Butler, (2 Sim. & S. 457,) I think, within the same principle. There one White had agreed to sell to Butler an annuity. To secure the payment of the annuity various securities were given, and among other things, White executed an assignment of two vessels to one Pruen, in trust for that purpose. The payment of the annuity was further secured by the bond of White and the plaintiff, as his surety. It was one of the conditions of the bond, that, after the expiration of two years White should be at liberty, upon certain terms, to repurchase the annuity. The transfer of the vessels was not perfected according to the forms prescribed by the registry acts, and, taking advantage of this omission, White had sold the vessels and applied the proceeds to his own use. The annuity being in arrear, Butler brought an action upon the bond. Capel, the surety, filed his bill to restrain the action, and claimed the right to repurchase the annuity according to the terms stipulated in the condition of the bond, and to have the value of the vessels deducted from the amount which he would otherwise have been required to pay upon such repurchase. The vice chancellor was of opinion that the plaintiff, as surety, was entitled to take advantage of the proviso for re demption, and that the value of the two vessels being lost to him by the neglect of the defendant Butler, he was entitled to deduct that value from the stipulated price of redemption. It appeared, by the recitals of the bond, that the plaintiff had become surety on the faith of the vessels being effectually assigned as a security for the annuity. For the defendant to omit an act necessary to render the assignment effectual, was equivalent to a surrender of the security to the principal debtor. It was like the case of a creditor taking a mortgage upon personal property and omitting to file it, or the omission of the creditor to protest a note held by him as collateral security, so as to charge the indorser. In these and similar cases a surety, whose means of indemnity had been impaired by the neglect of the creditor to do what was necessary to protect the security, might well insist upon his right to be discharged, to the extent of the loss sustained by reason of such neglect. If, for example, in the case under consideration, the mortgaged premises had been sold upon the foreclosure of the prior mortgage, the defendant would have been bound to take the necessary measures to secure the surplus moneys arising from the sale. Common justice would have required him to do this. The omission to do it, would have furnished strong ground upon which the plaintiff might claim to be discharged from his liability. Such cases of negligence, however, differ very widely, in principle, from mere inactivity in the collection of a debt held as collateral security. It was well said by the court below, in noticing the case of Capel v. Butler, that the nature of the security required something to be done at once, by the creditor," to make it a valid security, and hence the law should, as it doubtless did, imply an agreement on his part, to perform that act without which the security was. invalid. An omission to do this, would be gross neglect in an agent, bailee, or trustee, and would be a breach of good faith on the part of the creditor towards the surety.” It is this kind of negligence, undoubtedly, to which Justice Story refers when he says, (Story’s Eq. § 326,) that if the creditor has any security from the debtor and by his gross negligence it is lost, that will operate, at least to the value of the security, to discharge the surety.” In support of this position he refers to this case of Capel v. Butler, and Mayhew v. Crickett, together with Law v. The East India Co. (4 Vesey, 833.)

In the latter case Law had signed a bond with one Tierney, who had been appointed to the office of military paymaster to the East India Company. The penalty of the bond was sicca rupees 100,000, conditioned for his duly accounting. Upon the death of Tierney, his accounts were stated, and a balance of sicca rupees 50,548 was found in his favor, which was paid to his administrator. Subsequently it was ascertained that Tierney -was in fact indebted to the company to an amount exceeding the penalty of the bond. It was held that to the extent of the amount paid to the estate of Tierney, the surety was discharged. The mere statement of the case is sufficient to show that it is not an authority for granting the relief sought in this case.

Two other cases were relied upon by the plaintiff’s counsel,to sustain the position that the defendant was bound to diligence in the collection of the bond and mortgage. These cases are Ex parte Mure, (2 Cox, 63,) and Williams v. Price, (1 Sim. & Stuart, 581.) Neither of these cases involved the relation of principal and surety. In Ex parte Mure, a debtor, holding a bond and warrant of attorney from his debtor, assigned them absolutely to his creditor towards satisfaction of his debt, making his creditor his attorney, and granting him all necessary powers to collect the debt. The creditor omitted to enter up judgment on the warrant of attorney for five months, in consequence of which the debt was lost. The lord chancellor said, “I am of opinion that whoever takes a bond in the manner this was taken, makes it his own to the effect of binding himself to make it available as far as he can by ordinary diligence. Generally speaking, that which would be negligence in one employed to make the bond available, must be so in one who has taken upon himself to make it applicable in payment of the debt of the assignor, and who is invested with complete authority for that purpose.” Again he says, “ The case of sureties, being co-obligors on a bond, differs materially from this: for there, it would most certainly belong to the sureties to make application to the creditor to sue. There would be no pretence of equity, if the sureties were to lie by. But here, the assignee was in all respects the master of the bond.”

Williams v. Price, is very similar, in its principal features, to that of Ex parte Mure, and was decided upon the authority of that case. There, a judgment was assigned by a debtor to his creditor as security for his demand. The vice chancellor said, “ In referring it to the master to take an account of what the defendant has received, or might have received, without his wilful default or neglect, in respect of the judgment assigned to him, I am, in truth, following the authority of Ex parte Mure, without thinking it necessary, for the purposes of this case, to adopt all the principles which are there stated.” The plaintiff’s counsel, in arguing that case, relied upon distinguishing it from the case of a surety. In a case like the present,” said Mr. Sugden, where a debtor assigns to his creditor a debt due to him from a third person, it is not necessary, in order to discharge the assignor, to prove such a giving of time by the assignee to the debtor, as is required for the purpose of discharging a surety in a suit between him and the creditor. There, it is necessary to show that the creditor has actually tied himself up from suing. Here, it is only necessary to prove a general course of forbearance on the part of the assignee, during which the circumstances of the debtor have been failing, and the debt is ultimately lost.”

I have thus noticed, in detail, all the cases cited by the plaintiff’s counsel to show that upon the facts presented in this case, the plaintiff should he relieved from the payment of the judgment against him, and have examined the principles upon which those cases were decided, that it might be apparent that, in no single instance, has it ever been held that the mere passiveness of the creditor, in the collection of his debt, either of the principal debtor or from collateral securities held by him, is sufficient ground for discharging the surety from his liability. No rule is more uniformly recognized than that mere indulgence, at the will of the creditor, however long, or whatever may be the consequences, will not operate to discharge the surety. I think it may safely be added, that this rule is equally applicable, whether the indulgence is extended towards the principal debtor, or towards a third person, liable to the creditor upon a collateral security. The criterion by which to determine in any and every case, whether a creditor has done, or omitted to do, any thing which will have the effect to exonerate the surety, is stated, as I think, with perfect accuracy by Judge Story, as follows: “ If a creditor does any act injurious to the surety, or inconsisten with his rights; or. if he omits to do any act, when required by the surety, which his duty enjoins him to do, and the omission proves injurious to the surety; in all such cases the latter will be discharged, and he may set up such conduct as a defence to any suit brought against him, if not at law, at all events in equity.” (1 Story’s Eq. § 325.) After a very diligent examination of the authorities bearing upon the question, -I feel great confidence in asserting that a surety has in no case been held to be discharged by the act, or omission of the creditor, where such act or omission has not been within the terms of this rule. Can it be pretended that the plaintiff’s case is within either of the predicaments here stated ? It is not pretended that the defendant has done any affirmative act, which has been either injurious to the plaintiff or inconsistent with his rights. Nor is it pretended that the defendant has omitted to doany thing which the surety had requested him to do. The case made by the plaintiff is one of mere voluntary forbearance and delay on the part of the creditor, without any agreement or obligation for such forbearance or delay, which forbearance, as I have assumed for the purpose of the discussion, has resulted in an injury to the surety. There never has been a moment when, if the plaintiff had seen fit to discharge his own obligation to the defendant, by paying the amount of his debt, he might not have received the collateral security in question, free from any stipulation or obstruction, which had been interposed by the defendant to prevent the utmost promptness in its collection. There never has been a time when the defendant has not been in a situation to proceed at once, upon the plaintiff’s request, to enforce the collection of the collateral security. He has at all times been at liberty to terminate, at pleasure, his forbearance. Under these circumstances, can it be said that the defendant has been guilty of any greater laches or neglect than the plaintiff himself? And if not, shall a court of equity be called into activity to relieve the plaintiff from the consequences of his own default? I am persuaded there is no principle of equity which goes so far. To me there seems to be nothing in the case which, upon the most liberal application of the most favorable decisions, would entitle the plaintiff to a discharge from the payment of the judgment against him. I am of opinion, therefore, that the case was properly decided in the court below.

The other members of the court, without passing upon the question whether the defence was available in the action at law, if any where, concurred in the opinion that the facts did not constitute a ground of relief in equity.

Decree affirmed.


source: Caselaw Access Project

author: Taylor, J.

license: Public Domain

text:
    The Rochester White Lead Company vs. The City of Rochester.
    The corporation of the city of Rochester, having power “ to cause common sewers, drains, &c. to be made in any part of the city,” directed a culvert to be built for the purpose of conducting the water of a natural stream which had previously been the outlet through which the surface water of a portion of the city had been carried off. A freshet having occurred, the culvert, in consequence of its want of capacity and the unslrilfulness of its construction, failed to discharge the waters, so that they were set hack upon the factory of the plaintiffs and injured their property situated therein. Held, that the city corporation was liable for the damage.
    And líéld further that the city was liable although their surveyor (not a professional engineer) advised and directed in respect to the capacity of the culvert.
    A municipal corporation, in the construction of its sewers, drains, &c. is bound to exercise that care and prudence which a discreet and cautious individual would use if the whole loss or risk were to be his own. Per Taylor, J.

      Where a duty of a judicial nature is imposed upon a public body, the members of the body, it seems, are exempt from responsibility by civil action for the manner in which the duty is performed.
    But where a duty, purely ministerial, is violated or negligently performed by a public officer or body, an injured party may have redress by action.
    An ordinance of a city corporation directing the construction of a work within the general scope of its powers, is a judicial act, for which the corporation is not responsible; but the prosecution of the work is ministerial in its character, and the corporation must therefore see that it is done in a safe and skilful manner.
    Whether a municipal corporation is liable for an injury resulting to the property of another, from an act strictly within its powers, and unattended by any circumstances of neglect or malice, qnere.

    The Rochester White Lead Company brought an action on the case against the city of Rochester, to recover damages on account of an injury done to the plaintiffs’ factory and to a quantity of white lead situated therein, occasioned, as alledged, by the negligence of the defendants in the construction of a culvert. The case was heard before referees, who reported in the plaintiffs’ favor, for the sum of $1652,56. The supreme court sitting in the seventh district, refused to set aside the report, and rendered judgment thereon. The defendants appealed to this court. A statement of the facts, as found by the referees, was incorporated into the record, and the case was this:
    A small natural "stream of water, having its source about 80 rods west of State-street, in the city of Rochester, crossed that street near the factory of the plaintiffs. This stream was the outlet to the surface waters of about 400 acres of land. In 1835, State-street, at the place where it was crossed by this stream, was directed by the common council of the city to be graded. This was done under the direction of the city authorities, and the grade raised from 4 to 6 feet at the place intersected by the stream. A culvert was constructed under the street for the passage of the water. In 1844 the common council directed the culvert to be extended further west, and to be constructed in such a manner as to carry off all the water of the stream. The culvert was accordingly carried 106 feet further west, the extension being of the same dimensions as the original culvert under State-street. The whole work was done under the direction of the city superintendent, and the dimensions were such as the city surveyor, who was not a professional engineer, advised would be sufficient. It was built of rough stone and there were two or three angles in it calculated to impede the flow of the water. In March, 1845, after the extension of the culvert, a flood occurred from the rain and the melting of the snow on the tract of land drained through this channel, producing an amount of water which the culvert was unable to pass, in consequence of which the water set back upon the premises of the plaintiffs and injured a quantity of white lead belonging to them.
    The referees found that the culvert, in consequence of the smallness of its size and the want of skill in its construction, was insufficient to carry off the water when a great fall of rain and melting of snow occurred, although it was abundantly large for the natural stream. The immediate cause of the injury was the flood before mentioned. Several engineers, who were sworn on the hearing, stated that the culvert was much smaller than it should have been. It was proved to be the practice among skilful engineers, to build culverts large enough to provide against accidental obstructions and extraordinary freshets, and that within this rule the culvert in question should have been at least one-third larger.

      N. Hill, Jr. for appellants.

      E. Darwin Smith, for respondents.
   Taylor, J.

A preliminary question is, whether all reasonable precaution, against possible or contingent injuries, was taken ; and whether the culvert was built in a manner so skilful, as to shield the corporation of Rochester from the charge of malfeasance in the execution of their duty. In the construction of a work like this, they were bound to exercise that care and prudence which a discreet and cautious individual would‘brought to use, if the whole loss or risk were to be his alone. The counsel for the city contends that as it was larger than the city surveyor thought necessary, there could no blame attach to the city authorities. The city had seen fit to select for the responsible duty of adviser in these important matters, a man who laid no claim to the skill of a professional engineer. He was their agent; and it will not answer for an individual or a corporation to select an incompetent agent, and then shield themselves from the consequences of his injudicious acts, by justifying under his advice. No careful and prudent man would employ an agent to direct so important a work, destitute alike of education and skill in his particular department of professional science. It seems from the testimony that a skilful engineer would have so directed the construction of the culvert, as to have prevented the injury to the plaintiffs, for which they prosecute this suit. I have no doubt of the insufficiency of this ground of defence. (Bailey v. The Mayor of N. Y. 3 Denio, 540.)

The principal question is whether the corporation of a city are exempt, in consequence of any immunity inherent in their municipal character, from those liabilities for malfeasance, for which individuals and other corporations would be liable in a civil action, by the party injured.

A good deal of obscurity has, in times past, rested upon this subject, arising from the incident, that some duties of such cor-, porations are judicial in their nature, while others purely ministerial have to be executed by them; and these duties sometimes so mingle as not to be easily distinguished from each other. Wherever duties of a judicial nature are imposed upon a public officer, the due execution of which depends upon his own judgment, he is exempt from all responsibility by action, for the motives which influence him, and the manner in which such duties are performed. If corrupt, he may be impeached or indicted; but he can not-be prosecuted by an individual to obtain redress for the wrong which may have been done.

But this judicial immunity can be extended no further. The civil remedy depends exclusively upon the nature of the duty which has been violated. When duties which are purely ministeral are cast upon officers whose chief functions are judicial, and the ministerial duty is violated, the officer, although for most purposes a judge, is still civilly responsible for such misconduct. (Wilson v. The Mayor of New York, 1 Denio, 599.)

The charter of the city of Rochester confers 'upon the common council “ power to cause common sewers, drains, vaults and bridges to be made in any part of the city.” The ordinance of the common council directing such public improvements is judicial in its nature, and extends immunity from private action for damages to those who perform the duty. But there, this immunity ends. The further prosecution of the work is purely of a ministerial character; the agents to perform it are of their own selection, and they are bound to see that it is done in a safe and skilful manner.

On the argument, the counsel for the appellants cited 2 John. 286. This was an action not against a municipal corporation, but against the Western Inland Lock Navigation Company. It was decided that as damages had already been awarded and compensation made to the plaintiff in the first instance, for running the canal through his land, no cause of action existed on that ground. The other point decided was that the law necessarily imposes on the company the duty of keeping this canal in repair; and in all such cases, where an injury has been sustained by the want of due care and caution of another, such person must be responsible for the damage occasioned by his neglect and omission. In Martin v. Mayor, &c. of Brooklyn, (1 Hill, 545,) the decision is placed by the judge upon the ground that the act complained of was judicial and not ministerial, In the course of his opinion, Cowen, J. says: I speak not of private corporations, nor of turnpike companies, who are certainly liable for their agents’ omissions to keep their road in repair. I concede the liability also of municipal corporations for like omissions, where the duty of repair, or the like, is absolute, and due from them as a corporation. (Mayor of Lynn v. Turner, Cowp. 86.)

In the casé of Bailey v. The Mayor, &c. of New York, (3 Hill, 531,) the principal ground taken at the circuit, and upon which the cause is supposed to have turned there, was that the defendants were not chargeable for negligence or unskilfulness in the construction of the dam, inasmuch as the water commissioners were not appointed by them, nor subject .to their direction or control. In other words, the commissioners not being their agents in the construction of the dam, the rule respondeat superior could not properly be applied. But Nelson, Ch. J. says, “ If a public officer be guilty of negligence in the discharge of duties to be performed by himself, he will be held responsible.” “ Municipal corporations, in their private character as owners and occupiers of lands and houses, are regarded in the same light as individual owners and occupiers, and are dealt with accordingly.” As such they are bound to repair bridges and highways, and to the discharge of any other duty or obligation to which an individual owner would be subject. (Bailey v. The Mayor, &c. of New York, supra, and authorities there referred to.) In the same case in the court of errors, (2 Denio, 433,) the chancellor remarks, that “although it was once doubted whether an action of trespass, or trover, or an action on the case for malfeasance would lie against a corporation, it is now settled in England as well as in this state, that such an action may be maintained. It is well settled that a municipal corporation may be made liable civiliter in certain cases, like any other corporation or associate person, though it is created mainly for the purpose of local government and is for that purpose intrusted with some of the ordinary attributes of sovereignty.”

In the case of Furse v. The Mayor, &c. of N. Y., (3 Hill, 612,) Nelson, C. J. says: “ The sewers in question were con structed by the corporation under the power conferred by the section of the statute (substantially the same as that in the charter of Rochester) already mentioned. If, therefore, we concede that the exercise of the power was in the first instance optional on the part of the corporation, yet, having elected to act under it, they must be held responsible for a complete and perfect execution“ It would be highly unjust to allow, that after constructing these works, the corporation might refuse to keep them in repair, and thus leave the street on which they have been placed in a worse condition than before they were put

there. The owners and occupants of houses and lots in the neighborhood having been charged with the expense of the sewers, acquired a right to the common use of them; and a corresponding duty devolved upon the corporation to keep them in proper condition and repair.” By parity of reason, the corporation having undertaken to build sewers, in pursuance of the power conferred by the charter, they were bound to exercise such skill in the construction, and to give such sufficiency of capacity to the drain, as that it should not become a nuisance to the property of those persons who resided in the neighborhood. Or, in other words, having elected to act under the power granted, by charter, they must be held responsible for a complete and perfect execution. (See Henley v. The Mayor, &c. of Lyme Regis, 5 Bing. 91.) In principle, there can be no possible difference. It is the duty of a municipal corporation to build a sewer, so that it shall not become a nuisance, to the neighborhood, as much as it is to avoid the same result, by keeping it in repair, after it has been built. (People v. Corp. of Albany, 11 Wend. 543.) I have not deemed it necessary to rely upon the cases in point, decided in the supreme court of Ohio. In McCombs v. The Town Council of Akron, (Ohio R. vol. 15, p. 476, and see cases there cited,) the court hold that a municipal corporation can be made liable for an injury, result ing to the property of another, by an act of such corporation, strictly within the scope of its corporate authority, and unattended by any circumstance of negligence or malice. It is not necessary to take that extreme ground in the decision of the case before us. The doctrines heretofore held by eminent judges in our own courts, are sufficient, and we must affirm the judgment of the court below.

Judgment affirmed.


author: Hurlbut, J.

text:
    The Farmers’ Loan and Trust Company vs. Clowes and Wife.
    The plaintiffs were incorporated in February, 1823, with power to make loand, insure lives, and grant annuities. The charter was limited to fifteen years, except as to insurances and annuities. In April of the same year, by another act containing no limitation of time, they were authorized to increase their capital, to take and hold property in trust, and to assume and execute trusts. By another act passed in April, 1836, the name of the corporation was changed, the directors classified-, and the amount of property which it might hold in trust limited. This act was also silent as to the duration of the charter. Under these several acts, held, that the charter did not expire at the end of the fifteen years, hut continued to exist indefinitely after that time.
    ‘The express power to make loans originally granted, expired with the fifteen years, but held nevertheless that the power continued after that time as incidental to the other powers of the corporation, and therefore that a bond and mortgage taken for a loan after the fifteen years had run out were valid.
    A corporation authorized by its charter to insure lives, grant annuities, hold property in trust, and execute trusts, has power by implication to loan and invest the funds intrusted to its care.
    And where a loan made by such a corporation is Contested by the borrower, on the ground of a want of power to make it, it rests upon him to show affirmatively that the loan was not made in the proper exercise of the powers expressly granted.
    í'he original charter required that bonds and mortgages taken dn loans should be conditioned for payment in not less than one year, with annual interest. This requirement, it seems, expired with the express power to make loans, so that a bond and mortgage, with, a different condition in respect td time of payment, taken for a subsequent loan, would be valid.
    But if otherwise, a bond and mortgage dated in August, 1837, and conditioned for payment in “ one year from date, with interest, payable yearly as the same should accrue, on the first day of November in each year,” was a compliance with the requirement of the charter. The interest, it seems, could not be exacted until November, 1838.
    Where a lender advanced the full amount of the securities received by him on the loan, held, there Was no usury, although the borrower sustained a loss in consequence of an arrangement made by him with a third person, through whom the loan was effected, it not appearing that the lender had any knowledge of the arrangement, or received any benefit therefrom.
    Appeal from a decree of the supreme court affirming a decree of foreclosure, &c. granted by the vice chancellor of the first circuit. The facts are stated in the opinion of the court.

      N. Hill, Jr. for appellants.

      Wm. Curtis Noyes, for respondents,
   Hurlbut, J.

The-bill in this case was filed for the foreclosure of a mortgage given by the defendants to the plaintiffs, bearing date the 19th day of August, 1837, to secure the payment of $3000 in one year from date, with interest at the rate of seven per cent, payable yearly as the same should accrue, on the first day of November in each year, until the principal, which had been loaned by the plaintiff to Mr. Clowes, should be paid.

The defendants rely upon the following grounds of defence: 1. That the charter of the company had expired at the time of the loan. 2. That if in existence the company had no authority to make a loan. 3. That the bond and mortgage were not conformable to their charter, and therefore void; and 4. That they were void for usury.

The plaintiffs were incorporated by an act of the legislature passed on the 28th of February, 1822, under the name of “ The Farmers’ Fire Insurance and Loan Company,” with power to make loans on the security of bonds and mortgages, and certain stocks mentioned in the act, and to receive such conveyances óf real and personal property as might be necessary to enable them to obtain payment and satisfaction of such loans. They were also atithorized to insure all kinds of property against loss or damage by fire, to insure upon lives, and to grant annuities. Their capital was fixed at $500,000, with power to increase it to a million; and the charter was limited so as to expire at the end of fifteen years, except as to insurance upon lives and the granting of annuities. By a subsequent act passed on the 17th of April, 1822, the company was authorized to take by deed or devise any effects or property which might be left or conveyed to them in trust, and to assume and execute any trust which might be created by deed or devise, in the same manner and to the same extent as any trustee. This statute allowed of an increase of their capital to one million of dollars, more than was authorized by the original act, but contained no limitation as to the duration of the powers conferred by it.

A statute of April 30,1836, changed the name and style of this corporation, to that of “ The Farmers’ Loan and Trust Company.” Except as to this change and the classification of directors, the provisions of this act were of a restrictive character. It limited the amount of property which the company might at any time hold in trust to five millions of dollars, and declared that nothing contained in it should be construed to confer on the corporation any powers other than those conferred by the original act of incorporation, and the act amending it, except in relation to the change of its name and the election and classification of directors. This act also was silent as to the duration of the charter.

These statutes taken together leave no room to doubt that the charter of the company was in existence at the time of the loan, which is the subject of this controversy. Their corporate capacity remained, with power to insure upon lives, to grant annuities, and to assume and execute trusts. These powers were conferred without any limitation in respect to the time of their duration, and must exist until they are repealed by an act of the legislature. In respect to them the charter is perpetual.

But the defendants still insist that the company had no express power to loan money, that power having expired by limitation at the end of fifteen years, and that such a power can not be raised by implication after an express withdrawal of it by legislative design.

Although the act of April, 1836, designates this corporation as a loan company, it did not confer any powers which could warrant that title, and all it did in this respect was to create a misnomer. So that the authority of the company to make loans of money can only be upheld as an incident to the other powers conferred by their charter. It has been seen that by the original act of incorporation -this power was not only expressly conferred, but was put forth as the leading one with which the legslature saw fit to clothe the company. They were authorized to increase their capital to a million of dollars mainly, as it would seem, for the purpose of accommodating borrowers, and care was taken that they should loan a large share of their capital to persons residing without the limits of the city of New-York. This power ceased at the expiration of the period mentioned, after which the company no longer existed for the express purpose of loaning money, but nevertheless remained a corporation for other declared purposes, with precisely the same rights and powers as though those purposes had alone been the object of their original creation. They are not forbidden to loan money after the expiration of fifteen- years, but they were not thereafter expressly authorized to do so. They were no longer a loan company, but were now a life insurance and trust company, with power to grant annuities, and having a right to employ all their original capital in the business to which they had become restricted, and to hold property in trust to the amount of five millions of dollars. It could hardly have been contemplated by the legislature that their capital should remain unproductive in their vaults, and especially not that the funds held by them in trust should remain uninvested. It was their very business to see that they were safely and properly invested, as well for the security of the beneficiaries, as for their own protection. In no other way could they preserve their existence and solvency, or execute trusts in the manner of other trustees. The case differs from the N. Y. Fireman’s Insurance Company v. Ely and Parsons, (5 Conn. Rep. 560; 2 Cowen, 278;) where the charter provided amply for investing the funds of the corporation, and pointed out the manner in which it should be done, while it expressly denied banking powers; and the court held that the discount of a note by a fire insurance company, under such a charter, was unauthorized and void.

I think the true view of the powers of the plaintiffs under their charter was taken by the learned assistant vice chancellor, in the case of The Farmers’ Loan and Trust Co. v. Perry and others, (3 Sandf. Ch. R. 339,) where their authority to make loans upon bond and mortgage was sustained as a proper and necessary means of enabling them to effect the purposes for which they were incorporated, and especially to fulfil their duties and obligations in respect to the trust powers con ferred by their charter. Assuming, then, that the plaintiffs were authorized for that purpose to make loans, it rested upon the defendants to show expressly that the loan in question was not made in the proper management or investment of the funds intrusted with the company, as in the absence of proof to the contrary, it will be intended that the company were pursuing their lawful business when they advanced the money to the defendants upon the securities in suit. The evidence adduced by them on this subject, does not establish with any certainty from what fund the loan proceeded, and I think the defence upon this ground must be deemed to have failed.

The next objection is, that the bond and mortgage were not taken according to the charter, the third section of which provides that any such loans on bond and mortgage or other securities on real estate, shall not be made payable in a shorter time than one year, and the interest payable annually.” This section appears to have related to the securities to be taken on the loans which the company were expressly authorized to make during the first fifteen years of their existence, and I incline to think, became inoperative when the express power of the company to make loans ceased. But if not, I am unable to perceive that the securities in the present case were taken in violation of this provision of the statute. The bond and mortgage were payable in one year, with interest to be paid yearly as the same should accrue on the .first day of November in each year. Their language in this respect is capable of being construed in harmony with the provisions of the third section of the act, by disregarding the first November after the date of the securities, as a time of payment, and treating the first payment of interest as having accrued on the first day of November, 1838, which it seems proper to do, in order to carry out the intention very clearly expressed that the interest should be payable as the same should accrue yearly.”

Nothing remains to be considered but the defence of usury, which as it seems to me, has altogether failed. The plaintiffs advanced their checks for the precise amount of the securities received from the defendants; and it was by no act of the former that Mr. Clowes came to receive less than the full amount of the loan in money. His arrangement with Judge Cushman, by which the latter induced him to receive stock in lieu of a part of the money, is not shown to have been known to the company, nor does it appear that they were, or could have been benefited in any manner by the transaction.

The decree of the supreme court must be affirmed.

Decree affirmed.


author: Gardiner, J.

text:
    Bradley vs. Angel, executor, &c.
    A court of equity will, it seems, enforce a set-off of cross-demands where the defendant is insolvent, although the debt of the complainant to the defendant is not due. But the rule is otherwise if the debt of the defendant to the complainant is not due.
    The complainants were indebted to the defendant's testator in the sum of between three and four thousand dollars, to recover which the defendant, as executor, brought an action at law. The complainants thereupon filed their bill to compel a set-off of certain notes given to them by the testator which were not yet due, and to restrain the action at law. The estate of the testator was insolvent. Held, nevertheless, that the bill could not be sustained.
    The bill in this cause was filed in May, 1843, by Amos Bradley, Javan Bradley, Chester Bradley, Lucius Bradley, and Benjamin Bradley) against Angel, the surviving executor of Justus Hall, deceased, praying that certain demands in favor of the plaintiffs might be set off against a demand due from them to the defendant’s testator. The case was this:
    From the 1st of September, 1834, to the 1st.of April, 1837, Benjamin Bradley, one of the plaintiffs, and Justus Hall, the decedent, were partners in the mercantile business. On the day last mentioned their partnership was dissolved, and another partnership was formed, consisting of all the plaintiffs and Justus Hall. This firm continued until April, 1840, when it was dissolved, and Mr. Hall purchased the partnership property, and gave the plaintiffs therefor his four promissory notes, one for $500 payable in one year, one for $500 payable in two years, one for $1000 payable in three years, and one for $1000 payable in four years. After the dissolution, Justus Hall, the testator, carried on the business until the 23d of April, 1841, when he died insolvent, the plaintiffs during that time having dealt with him at his store to the amount of $4000.
    The plaintiffs alledged in their bill, that there was an agreement between them and Mr. Hall that the goods they should purchase of him should be applied as payment upon the notes given by him to them as before stated, in case any event should occur making it necessary for him to discontinue business-, but this allegation was denied by the answer, and there was no proof to sustain it. The defendant in his answer insisted that the stock of goods purchased by Mr. Hall as aforesaid was old and unsaleable; that at the time of the sale, and as an inducement thereto, it was agreed that the plaintiffs should purchase of him all the merchandize they might need for their families or the operatives in their employ, and at the close of every six months should execute drafts on New-York for the balance due from them to Mr. Hall. A witness testified that he told one of the plaintiffs that Hall had made a foolish trade in buying out the goods, and the reply was that the pay would be easy, as the plaintiffs were going to do their trading with him, and were to pay him every six months.
    After deducting the note of $500 falling due to the plaintiffs in April, 1841, with the interest thereon, and the interest accruing and due on the other three notes which were not due, there was a balance of between three and four thousand dollars due from the plaintiffs to the estate of Mr. Hall, to recover which the defendant, as executor, commenced a suit in October, 1841, and the plaintiffs thereupon filed this bill to compel a set-off of the three last notes above mentioned, and for an injunction against the suit at law. The vice chancellor of the eighth circuit dismissed the bill, and his decree was affirmed by the supreme court sitting in the eighth district. The plaintiffs appealed to this court.

      S. Stevens, for appellant.

      J. Dickson, for respondent.
   Gardiner, J.

The vice chancellor and the supreme court have adjudged that the complainants have no claim against the estate of the decedent, Justus Hall, on account of the old debts of Hall & Bradley and J. Hall & Co., or either of them. There is nothing in the pleadings or proofs to impugn this decision. I shall assume it to be correct upon this question, which is one of fact merely.

The set-off claimed by the complainants, of the three notes made by Hall, mentioned in the pleadings, was undoubtedly the occasion of filing the bill, and presents the only important question in the cause. One of these notes matured on the 28th of April, 1842, the second on the 28th of April, 1843, the third on the 28th of April, 1844, in the aggregate amounting to $2500. In October, 1841, the executors of Hall commenced a suit at law against the complainants, for a balance of account due to the estate of their testator, for goods sold to them upon a credit of six months. And the complainants insist in their bill upon the right in equity to set off these notes against the demand of the executors, upon the ground that their debtor is dead and his estate insolvent.

The proposition is, in effect, to change the contract of the parties, in some of its most important provisions, in order to meet a supposed equity arising from matters ex post facto.

If we except a class of decisions depending upon the language and construction given by the English courts to their bankrupt act, it is not claimed by the complainants that there is any adjudged case in this country or England, that carries the doctrine of equitable set-off to this extent; but it has been held in this state that A. having a demand against B. which is due, p.nd B. one against A. not due, A. may in equity compel a set-off if B. is insolvent, notwithstanding, Lindsay v. Jackson, (2 Paige, 581, and cases cited.) The principle thus settled, it is insisted, will embrace the present case.

If this reasoning is just, it would prove that the courts had gone too far already, in varying the agreement of parties, and would be to my mind a strong argument against extending the doctrine to new cases. But there is no analogy between the case cited and the present. Where a debt is due from an insolvent debtor, the right of the creditor to payment is absolute.' Natural equity and the law unite, in binding the debtor to a fulfillment of his obligation. If the latter holds a demand against his creditor not due, he has no right to retain it, as an investment. The law by sequestration and sale would compel him at once, to apply the proceeds in discharge of the debt due from him. Equity by compelling a set-off, under such circumstances, with the consent of the person entitled to the credit, and where third persons are not injured, follows the law. It creates no new obligation, and deprives the insolvent of no right, or privilege, which he could justly exercise. This distinction is recognized in the ease cited. By allowing a set-off in this case, the executors would be deprived of a legal right, secured to their testator by contract, and the complainants would obtain payment of their debt before it became due, and to the prejudice of other creditors of the decedent.

By the agreement and understanding of Hall and the complainants, the price of the goods purchased by the latter was to constitute a fund applicable to the payment of all debts of Hall without distinction. The complainants assumed, therefore, the risk of the death, and insolvency of the testator, and have no equity, natural or otherwise, to claim a preference, in opposition tq their contract, and to the prejudice of other creditors.

The judgment of the supreme court should be affirmed,


author: Bronson, Ch. J.

text:
    Gillet, receiver of the St. Lawrence Bank, vs. Moody.
    Where a banking association formed under the general law, being insolvent, transferred to one of its directors certain Arkansas bonds in exchange for shares of its own stock, held, on bill filed by the receiver of the bank subsequently appointed, that the transaction was illegal and void under the statute (1 R. S. 589) “ to prevent the insolvency of moneyed corporations and to secure the rights of creditors,” and that the receiver might reclaim the bonds for the benefit of creditors.

      Also held, that the transaction was void as to creditors upon general principles and irrespective of the statutory prohibition.
    Banking associations organized under the general law are moneyed corporations, and as such are within the statute above mentioned.
    It seems that a bank formed under the general law, although it has no board of directors, is nevertheless within those provisions of that statute which declare it to be unlawful for the “ directors” of any moneyed corporation to do certain prohibited acts.
    The intention of the statute, it seems, was to prohibit the acts specified therein, ' whether done by directors or by any other instrumentality.
    The receiver of an insolvent corporation represents both the creditors and stockholders, and may assert their rights when affected by the fraudulent or illegal acts of the institution.
    The St. Lawrence Bank was organized in the year 1838, under the general banking law of that year, and commenced business early in 1839, at Ogdensburgh, in the' county of St. Lawrence. In the winter of 1841-2, the bank commissioners filed a bill and obtained an injunction against the institution. In February, 1843, Mr. Gillet was appointed receiver of the effects of the banks by an order of the chancellor made in that suit, and in October of the same year, he filed the bill in this cause for the purpose of annulling an agreement made between the directors and the defendant, in February, 1842, in pursuance of which the defendant received from the bank, certain bonds of the state of Arkansas, and for the purpose of reclaiming those bonds. The cause was heard ón pleadings and proofs before the assistant vice chancellor of the first circuit, who in April, 1847, dismissed the bill with costs. His decree was affirmed by the supreme court, (see 5 Barb. 185,) and the complainant appealed to this court. The facts are sufficiently stated in the opinion of Bronson, Ch. J.

      S. Beardsley, for appellant.
    The bank was insolvent when the transfer of the Arkansas bonds was made. (Bayly v. Schofield, 1 M. & S. 338; Williams on Per. Prop. 126; De Tastet v. Le Tavernier, 1 Keen, 161; Herrick v. Borst, 4 Hill, 652; 3 Stark.Ev.7th Am.ed.pt. 1, p.173,note; id.pt.2,p. 1444; 2 Sug. on Vend. 6th Am. ed. 318; Biddlecomb v. Bond, 4 A. & E. 332; Shears v. Rogers, 3 B. & Adol. 362 ; Shone v. Lucas, 3 D. & R. 218.) That the property of a debtor, except such as may be exempt from legal process, should be applied to the payment of his debts, is a principle equally applicable to artificial and natural persons. When a corporation, therefore, becomes insolvent, its wliole property, if needed for that purpose, should be applied to satisfy its creditors; and until they are paid in full, no stockholder, as such, has any claim, nor can he be allowed to share in such property. (2 Story's Eq. Juris. § 1252; Wood v. Dummer, 3 Mason, 308; Scott v. The Eagle Fire Co. 7 Paige, 198; Nathan v. Whitlock, 9 id. 152; Morgan v. The New York & Albany Railroad Co. 10 id. 290; 5 Ohio, 164; Johnson v. Bush, 3 Barb. Ch. 207.) The receiver represents the rights and interests of the creditors and stockholders of the bank. (2 R. S. 469, § 67; 464, § 41.) . Banking institutions formed under the general bank law, are not only corporations in the strict sense of that term, but they are moneyed corporations, and as such are subject to most, if not all of the provisions of the revised statutes in respect to that class of corporations. (The Supervisors of Niagara v. The People, 7 Hill, 504; Gifford v. Livingston, 2 Denio, 380; 1 R. S. 598, §§ 51, 52 ; id. 414, tit. 4; id. 589, Art. 1; Gillett v. Campbell, 1 Denio, 523; Sagory v. Dubois, 3 Sand. Ch. R. 485; The People v. The Assessors of Watertown, 1 Hill, 607; Leavitt v. Tylee, 1 Sand. Ch. R. 207; 2 R. S. 463, §§ 39, 42; Boisgerard v. The N. Y. Bank. Co. 2 Sand. Ch. R. 23.) The transfer of these Arkansas bonds to the defendant, a stockholder and director of this insolvent bank, was, therefore, not only illegal on general principles, but was in violation of the express provisions of the revised statutes. (1 R. S. 589, § 1, sub. 2, 5; id. 603, § 4; id. 591, § 9 ; Johnson v. Bush, 3 Barb. Ch. R. 207; Bowen v. Lease, 5 Hill, 221.)

      J. Rhoades, for respondent.
   Bronson, Ch. J.

The bank was in a sickly condition early in the year 1841, and was only kept up by pledges of the individual credit of the directors to raise funds. In March of that year, the agents of the bank in Albany ceased for several weeks to redeem its circulating notes; and on the third day of December following, the bank formally suspended specie payments, and never afterwards transacted any regular banking business. On the same day all the funds of the. bank were assigned to Egbert N. Fairchild, the cashier, to secure and indemnify the directors against the personal liability which they had previously incurred in raising money to carry on' the business of the bank. At this time some of the directors hoped, and probably believed, that the bank was not irretrievably insolvent, and that they should be able to make such arrangements as would set the institution again in motion. But they were mistaken. Stopping payment is of itself sufficient evidence of the insolvency of a bank, within the principle of the cases cited at the bar; and when, as in this case, there is nothing to rebut the presumption, the evidence of insolvency is conclusive. There is, however, other proof beyond that of stopping, payment; and clearly this must be regarded as a broken bank on the third of December, 1841.

The defendant was an original stockholder.to the amount of five thousand dollars, and was one of the directors of the bank from the time it commenced business in 1839, until after the transaction of which the receiver complains. He gave the bank his bond and mortgage for the amount of his stock, payable in October, 1843, with semi-annual interest. On the 23d of December, 1841, he made an agreement with the directors to take up his bond and mortgage by paying the amount, at the end of six weeks, in the circulating notes of the bank, which were then at a large discount; and the agreement was subsequently carried into execution. The receiver does not complain of this transaction.

On the 24th of February, 1842, the board of directors—the defendant being present and acting as one of the number— agreed to purchase the defendant’s stock in the bank, amounting to five thousand dollars, and pay him for the same an equal amount in Arkansas bonds, which were then worth about eighteen cents on the dollar of their par value. The bill was filed to set aside this transaction; and I do not see how it can be supported. Creditors are entitled to a preference over stockholders in distributing the effects of an insolvent corporation. The principle is so obviously just, that I shall spend no time in attempting to prove it.

But it is said that the agreement to purchase the defendants stock was part of the arrangement made in December for paying the bond and mortgage—the entire contract being, that if the defendant would pay the mortgage, which was not then due, and surrender his stock, the bank would give him five thousand dollars in Arkansas bonds. Although there is some evidence going to support this view of the case, it does not, in my judgment, establish the fact that the agreement for the payment of the mortgage, and that for the purchase of the defendant’s stock, were both made at the same time. So far as the written evidence goes, they were separate and distinct transactions, with a period of two months between them. It is true that the resolution of the 24th of February speaks of purchasing the stock as agreed by the board of directors with Mr. Moody on the 23d of December, 1841but this is not very high evidence that there was such an agreement at that time. There may have been some conversation on the subject prior to the resolution of the 23d of December; but if the parties had come to an agreement—if there was one entire contract, as is now alledged, for the payment of the mortgage and the purchase of the stock, it is strange that half, and only half of the agreement, should have been reduced to writing ?.l the time, while there was no written evidence of the other half until another resolution was passed two months afterwards.

Some of the witnesses speak of a general understanding or agreement among the directors of the bank, that any stockholder who would pay up his bond and mortgage and surrender his stock should receive from the bank state stocks to the amount of the stock surrendered; but they leave it doubtful when the directors came to this conclusion; and their resolution to that effect was not passed until the 4th of March, 1842, eight days after the arrangement with the defendant, in both its branches, had been completed.

I am not satisfied that the fact on which the main argument for the defence is founded has been made out by the proofs; but as there is some evidence tending to the conclusion that the defendant paid the mortgage in the expectation of receiving the Arkansas bonds on surrendering his stock, I will now assume that such was the agreement of the parties. How does the case then stand ? The defendant paid the mortgage before it became due; but for anticipating the day of payment, he had what must be deemed a full legal equivalent in stopping the interest, which was payable semi-annually. But he saved, moreover, from a quarter to one half the amount of the debt by paying in the bills of the bank at their par value, when they were at a discount at from twenty-five to fifty per centum in the market. It is impossible, therefore, to regard the payment of the mortgage as a valuable consideration to the bank for the other branch of the agreement. The stock which the defend ant surrendered was worthless, so that he neither lost, nor did the bank gain any thing by the surrender. It follows that the Arkansas bonds which the defendant got from the bank, and which were then worth about nine hundred dollars, were, in effect, a mere gift of so much money to the defendant; and that too, when he was one of the directors, and bound as a faithful trustee to protect the property for the creditors of the corporation. It would be difficult to defend such a transaction.

The only possible answer to this view of the matter is, that the directors thought the bank was not so utterly ruined but that it might be again set in motion, if those who had given mortgages for stock could be induced-to pay their debts at once, instead of waiting until the stipulated term of credit had expired ; and in that belief made very liberal offers to the mortgagors for the purpose of accomplishing the object. I do not doubt that the officers of a bank may properly make sacrifices of the corporate property for the purpose of passing a crisis in the affairs of the institution. But such an act can only be justified when the object is to protect the rights of creditors, and do equal justice to all the stockholders of the corporation. It must not be an act for the exclusive benefit of a particular individual, especially if he be one who has been intrusted with the management of the funds of the institution. Now in this case, paying off the defendant’s mortgage was but a drop in the bucket towards what was necessary to set the bank in motion; and there does not appear to have been any resolution of the board offering similar terms to the other stockholders until the 4th of March, 1842, more than two months after the case of the defendant had been specially provided for by the board. There is evidence of a general understanding among the directors, that, inducements of a like nature should be offered to all of the stockholders to pay up their mortgages; but there is great difficulty in believing that the directors had come to a final conclusion on the subject as early as the 23d of December, 1841; for if they had, there would probably have been a general resolution of the board, providing alike for all the stockholders, instead of providing specially for the case of the defendant, and for no one else. And it must be added, that when the board, two months afterwards, offered state stocks to all who would pay up their mortgages and surrender their bank stock, the resolution did not give the other stockholders the privilege which had been accorded to the defendant, of paying their mortgages in the depreciated bills of the bank. The case of the defendant seems to stand alone; and I think he, as a director, was not at liberty to make such a bargain with himself as an individual; nor were the other directors at liberty to make such a bargain with one of their associates. Although there may have been no actual intention to do a wrong, still if the transaction is allowed to stand, it will operate as a fraud upon the creditors, or—if by any possibility the fund should prove more than sufficient to satisfy them—upon the other stockholders of the bank.

.But if the purchase of the defendant’s stock with the funds of the bank could be justified at the common law, the act was, I think, expressly forbidden by .the statute “ to prevent the insolvency of moneyed corporations, and to secure the rights of their creditors and stockholders.” The words are—“ it shall not be lawful for the directors of any moneyed corporation—-to divide, withdraw, or in any manner pay to the stockholders, or any of them, any part of the capital stock of the corporation ; or to reduce such capital stock, without the consent of the legislature or to apply any portion of the funds of their corporation, except surplus profits, directly or indirectly, to the purchase of shares of its own stock.” (1 R. S. 589, § 1.) The case falls so plainly within these prohibitions that no question is made on the subject, if the statute applies to associations under the general banking law—the St. Lawrence bank having been organized under that law. That these associations are corporations, and “ moneyed corporations,” has been directly and expressly adjudged by the highest courts in the state. They are not corporations in a qualified sense, as within the intent and meaning of some particular statute ; but are corporations to all intents and purposes. If any thing can be settled by judicial decisions, this is settled. (The People v. Assessors of Watertown, 1 Hill, 616 ; Willoughby v. Comstock, 3 id. 389 ; The People v. Supervisors of Niagara, 4 id. 20, and S. C. in error, 7 id. 504 ; Leavitt v. Tylee, 1 Sandf. Ch. 209; Boisgerard v. New York Banking Co., 2 id. 23; Sagory v. Dubois, 3 id. 466, 485 And see Gifford v. Livingston, 2 Denio, 380 ; DeBow v. The People, 1 id. 9.) There was a difference of opinion between the supreme court and the court of errors on the question whether the constitution applied to the free banks—the supreme court holding that it was applicable alike to all corporations, while the court of errors thought it applied only to corporations created by special charter, and not to those formed under gene ral laws. But both courts were agreed, that the free banks are corporations. If there was room for a doubt on this point after the decision of the court of errors in Warner v. Beers, (23 Wend. 103,) the decision of the same court in The Supervisors of Niagara v. The People, (7 Hill, 504,) removed all ground for such a doubt. And yet I notice that some of the free banks still keep up a practice which was adopted when it was thought necessary to use some such device to get round the constitution; and add the name of the president to the corporate name of the institution in bringing suits. It was long since held that this was unnecessary, and that the free banks might sue and be sued in the same corporate name which is used in transacting their other business; (The People v. The Assessors of Watertown, 1 Hill, 621;) and as it is now settled that the free banks have a legal existence, it may be hoped that the inconvenient practice of using the name of the president in bringing suits by and against the corporation will be given up.

But as the statute makes it unlawful for “ the directors of any moneyed corporation” to divide capital, purchase stock, &c. and the free banks are not required by law to have directors, it is insisted that those banks are not within the prohibition, although, as in this case, they may in fact have a board of directors. It was held in the Matter of the Bank of Dansville, (6 Hill, 370,) that the statute giving the supreme court summary jurisdiction over the election of directors of moneyed corporations did not apply to the free banks. But the decision went upon special grounds, which are not applicable to the case under consideration. Gillet v. Campbell, (1 Denio, 520,) is more like this case. It was there held, that an assignment by the president and cashier of a part of the effects of a free bank, exceeding one thousand dollars in value; to secure a debt due from the bank, did not come within the eighth section of the statute to prevent the insolvency of moneyed corporations; and that the assignment was valid, although it had not been authorized by a previous resolution of the board of directors. Although I delivered the opinion of the court in that case, I do not feel entirely certain that the decision stands on a firm foundation. But it is enough for the present to say, that there is a plain distinction between the two cases. In Gillet v. Campbell there was nothing to show that the directors had any power to authorize the assignment, or to pass any resolution whatever on the subject; while here, the very act complained of was done by the directors: they purchased the defendant’s stock, and paid for it with the funds of the bank; and it has not been denied that they had authority to do the act, if it was not forbidden by the statute. The case-comes, in every particular, within the express words of the prohibition. This is a moneyed corporation ; it has directors; and they have applied the funds of the institution to a forbidden object.

The case is not only within the letter, but it is, if possible, still more plainly within the policy of the statute. The object of the legislature, as appears from the title of the act, was to prevent the insolvency of moneyed corporations, and to secure the rights of their creditors and stockholders.” The section in question was made for the special purpose of securing the capital stock to the creditors of the company, instead of allowing it so be divided among the stockholders; and no reason can be assigned why the prohibition should not extend to the free banks, as well as to all other moneyed corporations.

This is a beneficial statute, and it should not be defeated by a narrow construction. Although this case falls within the letter, as the illegal act was done by the directors, I do not doubt that the act would have been equally void if there had been no directors, and the purchase of the defendant’s stock had been made by any other otficer or agent of the bank, having control of its funds. The legislature has declared, that the term “directors,” as used in this statute, “ shall be construed to embrace all persons having by law the direction or management of the affairs of any such corporation, byr whatever name they may be described in its charter, or known in law.” (§ 53.) The evident intention was, to prohibit a division of the capital, or any portion of it, among the stockholders, by whatever instrumentality the powers of the corporation in doing the act might be exerted.

Every director who violates any provision of this statute is made personally liable to the creditors and stockholders respectively of the corporation, to the full extent of any loss they may respectively sustain from such violation. (§ 10.) The defendant was a director, and he was present as á member of the board when the resolution was passed to give him Arkansas bonds for his stock. He, as a director, has violated one of the provisions of the statute; and I see no good reason why the receiver has not taken the proper course to charge him personally, by annulling the transaction, and compelling a restoration of the bonds. In this way the funds which have been illegally diverted, will be secured to the creditors; and if there should be more than enough to satisfy them—of which there is little probability—the balance will be distributed equally among all the stockholders. The receiver stands as the representative of both creditors and stockholders.

But if the receiver has not taken the most appropriate remedy in reference to the 10th section of the statute; and should it also be conceded that the act would not have been void if the funds of the bank had been improperly used in purchasing the stock of one who was not a director, still as the defendant was a director, and one of the board which ordered this illegal transaction, I can not think that he got a good title to the bonds as against the creditors and stockholders of the bank, who are represented in this action by the receiver; and if the 10th section "does not help, it does not stand, in the way of the remedy which the receiver has taken.

I am of opinion that the decrees of the courts below are erroneous and should be reversed, and that a decree should be entered in accordance with the prayer of the bill, with costs to the complainant in the courts below.

Decree accordingly.