CHAPTER XV. DISCHARGE OF SURETY: DEALINGS WITH § 1. INDORSER AS SURETY. IF the doctrines of the law pertaining to the contracts of guaranty and suretyship in regard to dealings with the principal debtor were confined to those two subjects, this chapter would be unnecessary; at any rate, it would only be necessary to say that dealings with the principal debtor have the same effect upon the contract of a guarantor or a surety in contracts of the law merchant as elsewhere in the law. But those doctrines are not confined to guaranty and suretyship; they apply to indorsement as well, indorsement itself being in reality a contract of assurance, though in a sense of its own; indeed, for the purposes in question, indorsement is often called a contract of suretyship. It is obvious that each indorser is then a surety, not merely for the maker or acceptor, but also for all parties before him; all prior parties, in other words, are principal debtors in relation to any particular indorser, and so the matter must be understood in this chapter. The fact should, therefore, be stated that dealings with the principal debtor which would have the effect to discharge a surety in the ordinary sense will have a like effect upon an indorser. The chief cases of the kind may be stated in order to a clear understanding of the matter. One of the chief rules of suretyship is that the creditor must not surrender to the principal debtor securities placed in his hands to assure performance of the contract or payment of the debt, on the ground that the surety, in virtue of a doctrine of equity called subrogation, would be entitled to such securities for the same purpose in case he should be compelled to pay, or being bound to pay should pay voluntarily. The surrender of such securities, without the surety's consent, would, therefore, be a violation of the surety's rights, and hence would discharge him. That rule applies as well in favor of an indorser in the case of dealings of the kind between the holder of the paper and any party before the indorser. § 3. AGREEMENT FOR TIME: COMPOSITIONS : Another of the chief rules of suretyship is this: The creditor must not discharge the principal debtor, or make any binding agreement with him to extend the time of performance agreed upon in the contract with the surety, without the surety's consent, unless (in cases where he may) he plainly reserves his rights against the surety. To give such a discharge, or to make such an agreement, without the reservation of rights, would discharge the surety. That rule also applies to indorsers; binding agreements of the kind, without consent of the indorser and without a reservation of rights against him, operate as a discharge of the indorser's liability. In regard to discharges, the rule is that a discharge of any party to a bill, note, or cheque is a discharge of all subsequent non-consenting parties, not merely where the discharge granted in favor of the earlier party is effected by payment of the paper by him, but presumptively where it arises from mere agreement to compound or release liability. Payment of the paper extinguishes it, and hence the liability of all parties to it; agreement to compound discharges the party towards the holder, and so may well. be treated as a presumptive discharge of all who follow as sureties for him. For example: The defendant is second indorser, with liability once duly fixed, and the plaintiff is holder of a promissory note. The plaintiff gives a discharge, without the defendant's consent, to the first indorser of the note, by contract under seal; that party's liability also having been duly fixed. The defendant is discharged.1 It is true that in such a case the defendant, if compelled to pay, would have recourse over against the prior party discharged; but the practical result of such recourse in most cases would be that the party who gave the discharge would have to defend the suit, or would be liable for the amount of the judgment obtained. To hold, then, that that party cannot sue the later indorser prevents needless circuity of action.2 Still the resulting discharge of the later party is deemed presumptive only, and the presumptive intention may in some cases be rebutted. That may be accomplished by the holder's reserving his rights, so far as he may, against the subsequent parties, as where the indorser himself is a party to the discharge granted to the earlier party. For example: The defendant is indorser with liability once fixed, and the plaintiff is holder, of a promissory note payable to A, who indorses it to the defendant, who indorses it to the plaintiff. The maker and A make a composition deed with their creditors, conveying all their estate to trustees, among them the 1 Newcomb r. Raynor, 21 Wend. 108, L. C. 597. 2 Id. defendant, and are discharged, the deed, however, containing a proviso that it shall not operate in favor of or be construed to release any persons or person who may be bound' for the maker or A, 'or who may have indorsed any note or notes drawn or indorsed by' both or either of them. The defendant, being a party to the composition deed, is not discharged.1 A like case would be made where the discharge arises from a merely personal agreement by the holder not to sue the party in whose favor the discharge runs; for in such a case the person so agreeing would not incur any liability if another should sue, and hence he would not have to defend suit brought by the later party against the one discharged by agreement, nor would he be affected in any way by judgment obtained by the plaintiff in such suit. True, the party discharged might not gain much by the agreement, as would be the case where the later party, compelled to pay, should sue him upon his indorsement or other contract; but that would be his own affair, and would not affect the case. The presumptive intention to discharge the later party would be duly rebutted.2 It must be understood, however, that the composition deed, or other agreement of discharge, does not amount to a release in the technical sense of the common law. A release in that sense is a conveyance (by deed) of all the releasor's interest, as is shown by the English common law mode of conveying land by lease and release; and if a man has once conveyed away all his rights, there is nothing left for him to reserve. The attempted reservation. 1 Pannell v. McMechen, 4 Har. & J. 474; L. C. 598. See also Sohier v Loring, Cush. 537; Morse v. Huntington, 40 Vt. 488; Hagey v. Hill, 75 Penn. St. 108; Overend . Oriental Corp., L. R. 7 H. L. 348. 2 Compare Sohier v. Loring, supra; Kearsley v. Cole, 16 Mees. & W. 128. would be repugnant to the deed, and hence would be void. If, however, the instrument, though in general form a release, can be construed an agreement not to sue, the reservation may be good.1 In regard to indulgence, there must be a plain agreement to extend the time of payment; it is not enough that there is a delay to sue, however long, within the period of limitation, even though the indorser suffer damage by reason of the delay. And the agreement must, of course, be valid. But an express agreement is not necessary, and difficulty is encountered in some cases in determining whether the facts amount to an agreement for extension. That is apt to be the case where an additional security is taken from the principal debtor without any express understanding on the point of time. The effect of such a transaction is reached in certain cases by presumption. How the courts have treated the taking of security may be shown by a few brief statements and one or two examples. Where the holder, at maturity of the paper in question, takes a further security due thereafter, a presumption arises that it was understood that the time of payment of the paper already due was to be extended, at least where the security was, as it usually is, to be considered in satisfaction, if paid, of the paper thus secured. And the result will be that non-consenting indorsers are discharged, rights against them not having been reserved. For example: The defendant is indorser, and the plaintiff holder, of a promissory note now sued upon, upon which the usual steps to fix the indorser's liability have been taken. At the maturity of the note the holder takes from the maker a cheque on others payable six days thereafter, 1 Sohier v Loring and Kearsley v. Cole, supra, explaining some of the cases. 2 Allen v. Brown, 124 Mass. 77. 3 Infra, p. 237. |