Story Case

Walter Davison, Richard Tuthill, and Carl Limbach were co-sureties on a note for $400. The note was not paid by the principal at its maturity, and when presented to Davison, he paid the entire sum without first requesting his co-sureties to share the payment with him. Limbach was insolvent, and nothing could be collected from him. Davison gave Limbach a release from contribution, at his request, thinking the release would not injure his own right to contribution from Tuthill. Subsequently, Davison demanded $200 from Tuthill as his share of the debt. Tuthill put in defense that he was not liable, since Davison had released his rights against Limbach. Is this a good defense?

Ruling Court Case. Kaighn Vs. Paulin, Volume 29, New Jersey Law Reports, Page 480

Kaighn, Paulin, and one Cooper executed to William Champion a bond, as sureties, for the sum of money due Champion from the South Camden Ferry Company. The bond, as all bonds do, implied at the time of its execution, that each of the obligors would pay one-third of the debt, if the company failed to pay it. The company did not pay; Kaighn and Cooper each paid one-half. Kaighn now brought this suit against Paulin for one-sixth of the debt, being the amount he paid for Paulin.

Paulin showed in evidence that the ferry company gave to Kaighn and Cooper a mortgage of its property to secure them for this and other liabilities, to the amount of $30,000, and that Kaighn and Cooper later cancelled and surrendered the mortgage following their payment to Champion on the bond. This surrender was done without the consent of Paulin. He contends, therefore, that his obligation as co-surety was thereby also cancelled.

Justice Haines gave the opinion of the court: "It is not questioned but that the co-sureties are entitled not only to contribution to each other for moneys paid in discharge of their joint liabilities, but also for the benefits of all the securities which any of them may have acquired to indemnify himself; nor is it disputed that where one holds security for his indemnity, the mere fact of his holding such security will not bar recovery on his part against the co-sureties, in an action for contribution. After such recovery and payment by the co-surety, the latter may enforce his right of subrogation, and so obtain the benefit of the indemnity. All the sureties have an equal interest in the indemnity and the money realized from it. The surety who held the indemnity has no right to appropriate to his own use the money realized from the indemnity; nor has he the right to deprive his co-surety, without his consent, of the benefits to be derived from it. The one holding the indemnity becomes trustee thereof, and as such must faithfully hold the securities for the benefit of his co-surety. He has no right, without the latter's consent, to cancel, surrender or transfer his security. The surrender, without the consent of Paulin was a fraud upon him." Judgment was, therefore, given for Paulin.

Ruling Law. Story Case Answer

The rules with reference to the rights of a surety when a creditor has relinquished or negligently lost his security, are similar to the rules governing the rights of co-sureties with reference to security held by one or more of them. If one co-surety has security which he surrenders or loses, he loses his right of contribution to the extent of the security relinquished. Thus, where a surety neglects to record a mortgage, and thereby loses its worth, his right of contribution is affected. But if the act of the co-surety does not in fact destroy the security, his right to contribution is not affected, although in form he has apparently a security. Thus, if one co-surety releases another who is in fact insolvent, the right of the first to contribution from a third co-surety is not affected. Therefore, in the Story Case, Davison can collect $200 from Tuthill, as his proportionate share of the debt. Had Limbach not been insolvent and Davison had released him, Tuthill would have been compelled to pay only one-third of the total indebtedness.