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§ 43. Information requested by surety. If the surety asks the creditor for information as to the subject matter of the proposed suretyship, the creditor must, if he answers at all, make a full disclosure of everything within his knowledge that would tend to influence the decision of the surety to sign or not to sign the contract. He must disclose all facts, including those he might have concealed had no inquiry been made. He may refuse to answer at all, if he so desires; but, as a practical matter, such refusal would probably cause the proposed surety at once to refuse to enter into the obligation.

§ 44. Retention of principal in employment after knowledge of dishonesty. When a surety signs a bond guaranteeing the integrity of a principal while in service of the obligee, the obligee is bound to discharge the principal from his employment as soon as he discovers any dishonesty of the principal, or the surety will be discharged as to all defaults arising after the obligee obtains such knowledge; or else the obligee must immediately notify the surety of such dishonesty of the principal and obtain from him a waiver. It is a breach of good faith for the employer or obligee to continue the servant in a place of trust after discovering his dishonesty or defalcation, which is presumptively and in fact unknown to the surety, without notifying the surety of the fact and thus giving him an opportunity to elect whether he will continue the risk. When there is misconduct or negligence but no fraud and dishonesty on the part of the principal, the surety is not released if not notified of such misconduct. Thus, where the defendants in a suit on a bond were sureties for the integrity

of an employee of the plaintiff's corporation, they set up in defense of the suit that the principal had not rendered monthly accounts and paid the balance due each month as required by the plaintiff's corporate by-laws. The principal had not paid the balance due from him for a long time, and had finally died insolvent owing a large sum to the plaintiff, for the recovery of which suit was brought against the sureties. The court held the defendants were not released; saying that where there is no fraud or dishonesty on the part of the principal, which is known to the plaintiff, mere inaction on the part of the plaintiff will not discharge the defendant from liability (35).

§ 45. Negligence in not discovering dishonesty. Collateral misconduct. If the dishonesty of the principal is not known to the obligee, the surety continues liable for subsequent defaults of the principal, even though the obligee be grossly negligent in not knowing of the dishonesty. Retention of the principal in service, after knowledge of his immorality in matters foreign to the subject matter of the suretyship, does not release the surety. Only those things which have an actual bearing on the employer's integrity or his probable ability to meet the obligation need be disclosed. The fact the employer discovered his employee was an adulterer would have no bearing on the latter's financial integrity.

§ 46. Misconduct of principal towards surety. In general, fraud or other misconduct of the principal toward the surety does not discharge the latter, where the creditor is ignorant of such fraud or misconduct. A surety

(35) Watertown Fire Insurance Co. v. Simmons, 131 Massachusetts, 85.

may sign upon the understanding with the principal that certain conditions are to be performed before he shall become liable; if the creditor does not have notice of such conditions the surety is bound though they are not fulfilled. The creditor is perfectly innocent in such cases, as he does not know what arrangements there may be between principal and surety. The surety, on the other hand, while innocent of any wrongdoing, has, nevertheless, by allowing the principal to have some apparently perfect note or other instrument, placed him in a situation where he can mislead the creditor. In a leading case on this point, a surety signed a negotiable note on condition that the principal was to get a certain other man to sign as surety. The principal got a different person to sign as surety and delivered the note to the payee for value without notice of these facts. The payee sued the surety on the note and the above facts were set up in defense to the suit. It was held that since the surety had placed an apparently complete note in the hands of the principal-the proper person to deliver it to the payeethe latter, who took it in good faith for value without notice of the condition, could enforce the note against the surety (36). The surety in the above case also claimed that there was an alteration of the note because another surety had signed it, but the court held that before delivery of the note the principal had implied authority to secure additional sureties. Securing a new surety would clearly not prejudice one who was already surety on the note. The doctrine of the above case applies where the

(36) Ward v. Hackett, 30 Minnesota, 150.

principal, to induce the surety to sign, forged the name of another surety to the instrument. Such forgery does not release the surety as against a bona fide holder for value (37).

§ 47. Same (continued). In a New York case (38), there is another illustration of when the surety may be held liable for loss caused by the dishonesty of the principal. The surety raised a sum of money to pay the note on which he was surety, and gave the money to the principal to give to the creditor. The principal paid this money to the creditor, but owed the creditor on another note and did not tell him which note to apply this money on. The creditor applied it on the note on which there was no surety, and, when he sued the surety on the first note, the court held the latter was still liable, for the creditor got the money without qualification from his debtor and could apply it to either note. In all these cases the surety has entrusted something to the principal and the latter has used it wrongfully, but had apparent authority to do as he did with it. As between the creditor and the surety the latter must bear the loss. Not only is the surety liable to an innocent holder, when he entrusts an instrument to the principal who delivers it contrary to agreement, but the surety is liable if he intrusts it to a stranger who misdelivers it. In either case the instrument got into circulation by the act of the surety and he is liable to one who took it bona fide without notice and paid value for it.

§ 48. Same: Constructive notice to surety. If an instrument on its face shows that it is not complete, then the (37) Stoner v. Millikin, 85 Illinois, 218.

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creditor cannot hold the surety, because the irregularity on the face of the instrument should put him on his guard. Thus, if there is a co-surety named in the body of the instrument, but no signatures appear on the note, this is constructive notice of a conditional delivery to the principal by the surety who did sign it. Absence of the principal's signature, by weight of authority, raises the presumption that the surety who has signed does not mean to be bound unless the principal signs also.

§ 49. Dealings or relations between creditor and cosurety. A surety, if he pays the debt, has a right to have any co-sureties contribute their proportions of the sum he paid, and can enforce this right of contribution against them. If A, B, and C are co-sureties and A pays the entire debt, he is entitled to recover one-third the amount he paid from each of the co-sureties, B and C. Furthermore, in order to enforce this right of contribution, a surety has a right to be subrogated to any right which the creditor has against the co-surety. Any act of the creditor, or any dealing between creditor and one surety, will release any co-surety to the extent to which he might possibly be prejudiced by such act of the creditor. Any such act by the creditor, as to one surety, releases cosureties, just as an act in respect to the principal debtor's obligation will release sureties. It should be noted, however, that, since a surety's right against his co-surety is to recover contribution, he can be released only to the extent of the amount he might be entitled to recover from co-sureties if he paid the debt. In a Louisiana case (39)

(39) Gosserand v. Lacour, 8 Louisiana Annual, 75.

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