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§ 67. Payment of specialty debt by surety. When a bond or other specialty is paid, it is at law extinguished, but when paid by a surety the rule in equity is different in most jurisdictions. The general rule is that payment of a specialty by a surety does not, in equity, extinguish it as to such surety; but it is kept alive for his benefit, and he may be subrogated to the creditor's right on it. Thus, in a certain case (12) an indorser paid a bill of exchange and then filed a bill in equity for contribution against the estate of a co-indorser, who had become insolvent, claiming that he should be subrogated to the creditor's right on the bill and that he was then entitled to the rank of a specialty creditor in the division of the assets. The case arose in Virginia, by the law of which state at that time one who held a bill of exchange was entitled to rank with judgment creditors and therefore was entitled to payment from the assets of an insolvent estate prior to ordinary creditors. Other creditors claimed the payment extinguished the bill of exchange and the surety could only rank as an ordinary creditor in the distribution of assets. The court held that, though extinguished at law, the bill of exchange in equity would nevertheless be kept alive for the benefit of the surety, and therefore he would rank with judgment creditors. The creditor would have had this privilege had he not been paid, and the surety has the same right. This represents the weight of authority on this question.

§ 68. Payment of judgment debt. As to a judgment, the general rule is that payment by the surety of a judg

(12) Lidderdales v. Robinson, 12 Wheaton, 594.

ment rendered against him and the principal or against an insolvent principal alone, will entitle the surety to subrogation to the benefits of such judgment, which he may enforce against the principal. In the case of Hill v. King (13) certain judgments were obtained against a principal and the sureties on a bond. The principal became insolvent, after conveying to the defendant in this suit his land on which the judgments were liens. One of the sureties, the plaintiff in the suit, paid the judgments, and sought to enforce the lien of the judgments against the land conveyed by the principal to the defendant. The defendant claimed that payment of the judgments extinguished them and removed the lien from the land, but the court held that since the plaintiff had paid the judgments he was entitled, in equity, to enforce the lien of such judgments against the land in defendant's possession; for, as between the principal and surety, the judgments were not extinguished. The judgments in this case were paid prior to the conveyance of the land to the defendant, but the rule is the same where the conveyance is subsequent to the judgment but prior to the payment by the surety (14). While the above is the general rule, there are several states which hold that payment of a judgment by a surety extinguishes it completely as between principal and surety and the latter cannot be subrogated to it. But equity and justice would appear to be with the weight of authority on this point.

§ 69. Extent of subrogation: Against principal. A

(13) Hill v. King, 48 Ohio State, 75.

(14) Perrin v. Higgins, 101 Indiana, 178.

surety who pays the principal's debt is entitled to indemnity from the principal, and his right of subrogation, given by equity as an additional right to enable him to indemnify himself, entitles him to only the amount he has actually paid, together with interest from the date of payment, and costs. He is entitled to no more than repayment of the amount he has actually expended. To illustrate: There were two sureties on a note for $16,000. One surety died insolvent, and the other surety paid the note and filed his claim against the insolvent estate for the whole debt, the principal being also insolvent. Being a co-surety he was entitled to contribution for one-half, or $8,000. The other creditors of the deceased surety claimed he could prove his claim and receive dividends. only on the basis of an $8,000 debt. It was held, however, that since the creditor could have proved his claim and received dividends on the entire debt, and since the surety who paid the debt was entitled to be subrogated to the creditor's rights, he could prove his claim and receive dividends on the entire $16,000, until the amount of the dividends received by him equalled the amount he was entitled to receive as contribution. Thus he could collect dividends to the extent of $8,000 (15). This case shows that subrogation is often better than indemnity; for, had the surety in this case claimed contribution only he could have proved his claim for only $8,000, the extent of his right of contribution; but, being subrogated to the creditor's right, which was for $16,000, if the estate paid fifty cents on the dollar he would get his $8,000 in full.

(15) Pace v. Pace's Administrator, 95 Virginia, 792.

If the surety pays the debt in depreciated currency, he can recover only the actual value of what he paid at the time of payment. If he settles the debt for less than its face value, he can recover only what he actually settled for. He may pay the debt in his own obligations or by means of a set-off against the creditor, and such payment will be regarded the same as if made in money.

§ 70. Same: Against other persons. As has already been indicated, the surety's right of subrogation extends not only to the creditor's right against the principal, but to all the rights of the creditor respecting the debt which the surety pays. A Massachusetts case (16) furnishes a good example of this. A was surety on the probate bond of B, a trustee. B pledged stocks belonging to the trust estate to secure a personal debt due to C. At the request of B, C sold the stock and applied the proceeds to the payment of B's debt to him. The stock showed on its face that it was trust property, so C was not a bona fide purchaser of it. B was removed as trustee and a new trustee appointed, who sued A on the bond and compelled him to pay the value of the stock appropriated by B. A sought to be subrogated to the trust estate's right against C, but C insisted that the stock was not pledged for the debt that A paid, and therefore he had no right against C. The court held that A, having replaced the fund lost, was entitled to subrogation to all the trust estate's rights to recover the fund, and one of these rights was to follow it into the hands of the defendant, C. In other words, the surety

(16) Blake v. Traders' National Bank, 145 Massachusetts, 13.

who pays the debt may proceed against anyone who is primarily liable for it.

§ 71. Debt barred against principal. The right of action in favor of the surety arises when he pays the debt, and is not based on the contract itself but upon a contract implied by law between the principal and the surety. If this right against the principal is barred as between the principal and the surety by the statute of limitations, and the creditor has any right which would not have been barred as between the creditor and the principal had the debt not been paid, the surety may be subrogated to such right of the creditor. This is of advantage to the surety, because his right of indemnity, being on an implied contract, is often barred in a comparatively short time, usually five or six years, while the creditor may have rights which are not barred until after fifteen or twenty years. Thus, a plaintiff was surety on a promissory note and paid it when due. In Iowa, when the action was brought, an action on implied contract was barred after five years, but an action on a promissory note was not barred until ten years had elapsed. The plaintiff sought subrogation to the creditor's right on the note more than five years after paying the debt, but before the statute had run on the note. It was held he had a right to enforce the note as long as the creditor could have enforced it (17). The right of subrogation, then, exists until the creditor's right would have been barred, and no longer.

§ 72. Surety of a surety. As stated above (18), a surety who pays the debt has the right of subrogation to (17) Harrah v. Jacobs, 75 Iowa, 72.

(18) §§ 80-70.

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