Samuel G. Doughty and another vs. Samuel G. Savage

Samuel G. Doughty and another vs. Samuel G. Savage. A composition agreement signed by the plaintiffs and other creditors of G contained a condition that it should not be binding unless signed by all the creditors. Composition notes were delivered to the plaintiffs under the agreement,indorsed by the defendant as surety for G. The agreement was not signed by all the creditors, but the fact was not known to the defendant when he indorsed the notes. Held that he could set up, in his defense, the non-compliance with the condition, in a suit brought upon the notes so indorsed by him. It was agreed between the plaintiffs and G, as a condition of their signing the composition agreement, that he should assume and include in the indebtedness, which was the basis of the compromise, a debt due them from another party, for which he was not liable, and that he should give his note, which he did, for the balance of tbe indebtedness not covered by tbe composition notes; but this arrangement was unknown to the defendant. Held that the arrangement was, in both particulars, a fraud upon the defendant, of which he could take advantage in a suit brought upon the notes indorsed by him. Held also that, aside from the special rights of the defendant as a surety, the taking of the note of G, for the balance of the indebtedness not covered by the composition notes, was such a fraud upon tbe other creditors as rendered void, not only the note so taken, but the composition notes themselves. Assumpsit, upon an indorsement, by tbe defendant, by the name of Savage & Co., of a note made by one Dan Gaines for $220, dated July 30, 1856. The defense was, that [ *147 ] the *note was indorsed for the accommodation of Gaines, and delivered to the plaintiffs under a composition agreement between Gaines and his creditors, and that the note was void by reason of the fraudulent conduct of the plaintiffs in the transaction. The plaintiffs were partners under the name of S. G. Doughty & Co. The case was tried to the jury. The composition agreement was as follows: “ We, the undersigned, creditors of Dan Gaines, and Gaines and Jerome, of Malone, Franklin county, New York, in consideration of their having become insolvent and unable to pay their liabilities in full, agree to accept from the said Dan Gaines, his notes satisfactorily indorsed, payable in two separate payments, viz., one at eight months, and one at twelve months, with interest from this date, for fifty cents on each and every dollar of our separate claims ; and we do hereby agree with the said Dan Gaines, that when he shall produce and deliver to us the said notes so indorsed for one half of our respective claims and demands against him and the firm of Gaines & Jerome, that we will give them a full discharge from the same. This agreement is not to be considered binding unless signed by all tlie creditors. Dated New York, July 80, 1856. Hurlburt & Pierson, $1,176.25. Southworth, Miller & Co., $2,678.73. D. S. Arnold & Co., $1,453.76. S. G. Doughty & Co., about $850.” [and others.] The defendant claimed in the first place, that the agreement was void because not signed by all the creditors, and offered evidence to show that one John Woolsey, whose name did not appear upon it, was a creditor of Gaines to the amount of $813, and that the said Woolsey was applied to at the time but refused to sign the agreement. He also offered evidence to show that the defendant did not know that the agreement was not signed by Woolsey until long after the note ip suit had been indorsed by him and delivered to the plaintiffs. *The defendant next claimed and offered evidence [ *148 ] to prove that the plaintiffs, without his knowledge, charged over to the account of Gaines an individual indebtedness of M. J. Jerome, who was at that time insolvent, and included the amount in the sum which was made the basis of the compromise ; which he claimed to be a fraud upon him which rendered the note void. The defendant further claimed that the plaintiffs, at the same time that they received the composition notes indorsed by him, took also the note of Gaines for $436, the balance of the indebtedness not covered by the composition notes. The fact that such a note was given, and was then held by the plaintiffs was not denied. The defendant claimed that the taking of such note was a fraud that vitiated the whole transaction. The plaintiffs claimed that the agreement was not a “ composition agreement ” within the legal import of that term, and was not governed by the rules applicable to instruments of that kind; but that there was, in fact, a separate arrangement with each creditor, which was complete, so far as the obligation of the notes and indorsements was concerned ; and that the failure of Gaines to secure the signatures of all the creditors could not affect the rights of the plaintiffs. They also claimed, upon the evidence, that the note given by Gaines for. the balance of the indebtedness, was given after the composition notes had been executed, and not as a part of the condition on which such notes were accepted, and that if the jury should find such to be the fact, neither the composition notes, nor the note so given, were invalid. They also insisted-that, if the note was given at the time the composition notes were given, and as a condition upon which they were accepted, so that the note thus given would be void, yet that the composition notes would not be rendered invalid thereby. They further claimed, upon the evidence, that the individual debt of Jerome had been assumed by Gaines, and had thus become his own debt, and insisted that the plaintiffs had [ *149 ] *a right to agree with Gaines that the debt should thus be assumed by him, and that, when thus assumed, it became the debt of Gaines, and was properly included as such in the amount of the indebtedness which -was made the basis of the compromise; and that the defendant, having indorsed the notes made by Gaines, in settlement of the account thus adjusted between them, could not now set up in defense the fact that the account included the original indebtedness of Jerome. The parties severally requested the court to charge the jury in conformity with their respective claims as above stated. The court instructed the jury, that they were to inquire whether the indorsement of the defendant was made pursuant to the terms of the composition agreement, and upon the conditions contained therein ; that if there was no condition attached to the note when ■ indorsed and delivered to Gaines by virtue of that agreement, the plaintiffs were entitled to recover; but that, if the defendant wras an accommodation indorser, and the indorsement ■was made and delivered subject to the conditions of the compromise agreement, or similar conditions, by agreement between Gaines and Savage, and the conditions were not substantially fulfilled, or there was fraud, the plaintiffs could not recover. That if the jury should find that the indorsement was subject to such conditions they should go further and inquire: First, as to the agreement with Woolsey; that if that arrangement was made, as claimed by the defendant, without his knowledge, and Woolsey did not agree to the compromise, the plaintiffs could not recover, unless the defendant waived the agreement as to him ; and that indorsing the note in suit, with knowledge of the arrangement with Woolsey, would be such a waiver: Secondly, whether the plaintiffs stipulated with Gaines as a condition on which they would execute the compromise agreement, that he should give his individual note for the balance of the debt, and he gave it pursuant to such stipulation ; and that if they did so, •vs claimed, and without the knowledge of the defendant, the plaintiffs, were not entitled to recover: Thirdly, [ *150 ] *whether the plaintiffs included in the settlement, a debt of-M. J. Jerome, for which neither Gaines nor the firm of Gaines & Jerome were liable, and as a condition of the compromise, and without the knowledge of the defendant, and that if they did so they were not entitled to recover. The jury having returned a verdict for the defendant, the plaintiffs moved for a new trial for error in the charge. They also moved for a new trial on the ground that the verdict was against the evidence, but, as the question involved in this part of the motion is wholly one of fact, the evidence is omitted. Pardee, in support of the motion. 1. The instrument signed by the plaintiffs in this case, was not a “ composition deed” according to the legal understanding of that term. A composition in the legal sense implies, 1st. A meeting of creditors, or that which is equivalent. 2d. An agreement with each other that they will accept a certain sum as a compromise. 3d. An inducement to each creditor growing out of the agreement of the others. Here, each creditor, as lie was called upon, signed the paper and took his composition notes, without any reference to what others might afterwards do, and without communication with the others. If Gaines failed to get the signatures of all the creditors it was not the fault of the plaintiffs, and he could not set up the fact in defense against his note, nor could the defendant who stood on the same ground with him, the note having been voluntarily indorsed and given without reference to what might or might not be afterwards done by other creditors. Forsyth on Composition, 191. Butler v. Rhodes, 1 Esp., 236. Butten v. Hughes, 5 Bing., 460. Howden v. Haigh, 11 Adol. & El., 1033. Leicester v. Rose, 4 East., 372. Tuck v. Took, 9 Barn. & Cress., 437. 2. The composition is not vitiated by the plaintiffs’ including the Jerome debt in the amount. Gaines had a right to assume that debt and make it his own, and *had [ *151 ] done so before the composition agreement was signed. 3. If the agreement signed by the plaintiffs is to be regarded as a “ composition deed,” and governed by the rules applicable to, such agreements, then we claim that it js not invalidated by the taking of the note of Gaines for the balance of the debt. The only effect would then be, that the note thus taken of Gaines would be invalid, while the composition notes would remain good. So are all the authorities for a hundred years back, down to the case of Howden v. Haigh, 11 Adol. & El., 1033. This decision, we admit, was approved in the case of Higgins v. Pitt, 4 Weis., Hurls. & Gord., 312, but it is spoken of disapprovingly by the court in the case of Davidson v. McGregor, 8 Mees. & Wels., 755. The ancient English doctrine is the more reasonable one, and prevails generally in this country, and espacially in the state of New York, where this contract was made. Hughes v. Alexander, 5 Duer, 488. Russell v. Rogers, 10 Wend. 473. Breck v. Cole, 4 Sandf. Sup. Ct., 79. Weed v. Bentley, 6 Hill, 56. Stuart v. Blum, 28 Penn., 225. See also Collingworth v. Lloyd, 2 Beaven, 385. Fellowes and W. D. Shipman, contra. 1. The composition agreement not having been signed by all the creditors, as required by the very terms of the agreement is void. There was, therefore, no consideration for the composition notes, and especially none for the defendant’s endorsement. The whole transaction was void. Forsyth on Composition, 61. Johnson v. Baker, 4 Barn. & Ald., 440. Enderby v. Corder, 2 Car. & P., 203. 2. The plaintiffs, by a private and fraudulent arrangement with the debtor, obtained a preference and advantage over the other creditors. This they did in two ways; first, by taking the debtor’s note for the balance of their entire debt: secondly, by adding to the amount of that debt, a debt not included in the composition agreement—the debt against M. J. Jerome. All this was done without the knowledge of the defendant, and was especially a fraud upon him. The effect was to render the whole transaction void—the composition [ *152 ] agreement, the note of $436, given by the debtor *for the balance, and also the composition notes. Forsyth on composition, 104. Knight v. Hunt, 5 Bing., 432. Howden v. Haigh, 11 Ad. & El., 1033. Cockshot v. Bennett, 2 T. R., 763. Jackson v. Duchaire, 3 id., 552. Mallalieu v. Hodgson, 5 Eng. L. & Eq., 289. Stone v. Compton, 5 Bing., N. C. 142. Cecil v. Plaistow, 1 Anst., 202. 3. Especially was this conduct of the plaintiffs a fraud upon the defendant, since it wrought an entire failure of the consideration for the indorsement, which was to free the debtor from his debts, and also made the defendant liable, as surety, for the debt of M. J. Jerome, not embraced in the composition agreement; thus making him responsible for a contract different from the one for which he agreed to be responsible, and also concealing from him a fact material to the risk. Theobald on Surety, secs., 152, 177. Pidcock v. Bishop, 3 Barn. & Cress., 605. Whitcher v. Hall, 5 id., 269. Weed v. Bentley, 6 Hill, 56. 4. It does not avail the plaintiffs that the individual note of Gaines was void. The defendant was no party to that note and could not defend against it. The effect of taking it was to leave the defendant in the hands of the plaintiffs and Gaines. Besides, the plaintiffs can not set up their own fraud. [MAJORITY — Stokes, C. J.] Stokes, C. J. It is unnecessary to consider the law as applicable to the claim of the plaintiffs, that the indorsement bv the defendant of the note in question was made in pursuance of, and to carry into effect, an agreement of an isolated and independent character between the plaintiffs and Gaines, which had no connection with, and was not to be affected by, the action of any of the other creditors of the latter; because the existence of such an isolated or independent agreement was negatived by the jury. For, under the charge of the court, they must have found that the indorsement of the defendants was made in pursuance of the agreement of July 80,1856, between Dan Gaines, and Gaines & Jerome, and their creditors, which was given in evidence on the trial, and which is nothing, more or less, *than what is termed a composition agreement, [ *153 j constituting a contract between the debtors and each and all of the creditors therein mentioned, as well as between those creditors themselves, and which is to be governed, as to its validity and effect, by the general principles of law applicable to such contracts. Whether, under that charge, the jury were warranted in finding the existence of such a composition agreement, can be considered only upon that branch of the motion which claims that the verdict was against the evidence. The fact, for the purpose of considering the correctness of the charge in point of law, must be deemed to be established. The jury were instructed that if they found the indorsement in question to have been made pursuant to the terms of, and to carry into effect, the composition agreement, they should render a verdict for the defendant, if they should also find, first, that the signing of that agreement by Woolsey, one of the creditors of Gaines, was not waived by the defendant, either expressly, or by his having indorsed the note in question with the knowledge of an arrangement between the debtors and creditors, by which the execution of the contract by Woolsey should be dispensed with ; or 2d, that without the knowledge of the defendant, the plaintiffs stipulated with Gaines, as a condition on which they would execute the compromise agreement, that he should give his individual note for the balance of the debt, and he gave it pursuant to such stipulation; or, 3d, that a debt of M. J. Jerome, for which neither Gaines nor Gaines & Jerome were liable, was included in the note now in question, as a condition of the compromise, and without the knowledge of the defendant. This charge is plainly correct in regard to the effect of a non-execution of the agreement by Woolsey, without any such waiver. The validity of the defendant’s indorsement must depend upon the validity of the compromise agreement which it was designed to effectuate,'and to which the indorsement was, like other contracts of suretyship, accessory or collateral. In regard to that agreement, it was one of its express stipulations that it should not be binding on any of the parties, [ *154 ] unless it should be-signed by *allthe creditors of the debtors therein mentioned.- No authority can be necessary to show that, without a compliance with' that stipulation, the agreement would not take effect as a consummated contract, unless the - execution of it by some of the creditors should be dispensed with. In regard to the effect of such a dispensation, the jury were instructed that it would be a waiver of the execution of the agreement by such creditors, and render it valid as to the parties who should sign it. This part of the charge was obviously favorable-to the plaintiffs, arid they, .therefore, can not complain of it, although we- think that it was entirely correct. In regard to the stipulation that Gaines should give his individual note for the balance of -the debt beyond what was secured by the defendant’s indorsement, it is clear, and indeed it is not controverted by the-plaintiffs, that such stipulation would be void, and that the note given in pursuance of it would be invalid ; and that even its amount, if it had been paid by Gaines, could be recovered back by him from the plaintiffs. They, however, claim that although the note would be thus void, the contract evidenced by the indorsement of the defendant ivas valid, and can therefore be enforced by the plaintiffs. The earlier cases appear to favor this claim. But the more recent decisions hold that, in such a case, both the note given by the debtor for the balance of his debt, and also the agreement made or security given for the compounding or compromise of the original debt, would be equally void, and that, therefore, neither can be enforced. We are of the opinion, for thp reasons given by the court in Howden v. Haigh, 11 Ad. & El., 1033, without going into a more particular examination of the question, that such a stipulation as has been mentioned is not only of itself invalid, but that it also invalidates the whole of the compromise agreement with-which it was connected, on the ground that such a stipulation is a fraud upon the other creditors, and that it is so connected with and a part of the compromise agreement, that-it can not be-separated [ *155 ] *from, and therefore fatally taints that agreement. Previous to the decision of that case, it would seem that the courts, treating this subject as- one of public policy, were 'disposed to invalidate only that part of the agreement which provided for the payment of the balance of the debt beyond that part of it which was secured by the composition, and to let the composition itself stand good. And they were probably further influenced to this course by the consideration of the inconvenient and injurious consequences which might flow from setting aside the whole composition. We do not, however, well see how, on principle, the part of the agreement respecting the payment of the balance, if it were a fraud upon the other creditors, could on that ground be invalidated, without its affecting in tlie same way the validity of the compromise agreement of which such confessedly fraudulent stipulation is a part. But, apart from the principles which apply peculiarly to composition agreements, and looking at those only which are established in respect to the relation between sureties and those to whom they become bound, we are further of the opinion, that it was the duty of the plaintiffs in this case to inform the defendant before the latter assumed the obligations of a surety, that Gaines had agreed to pay the balance of the debt beyond what was secured by the defendant’s indorsement, and that the concealment of it from the defendant exonerated him from the obligations of his indorsement. It is a clear and well settled principle that a security given by a surety is voidable on the ground of fraud, if there is, with the knowledge or assent of the creditor, such a misrepresentation to, or concealment from the surety, of the transaction between the creditor and his debtor, that, but for the same having taken place, either the suretyship would not have been entered into at all, or being entered into, the extent of the surety’s liability might be thereby increased. Stone v. Compton, 5 Bing. N. C., 142. Pidcock v. Bishop, 3 B. & C., 605. S. C., Dow. & Ry., 505. Cecil v. Plaistow, 1 Anst., 202. Nerot v. Wallace, 3 T. R., Middleton v. Onslow, 1 P. Wms., 768. Tapp v. Lee, 3 Bos. & Pul., 371. Burge on Suretyship, Ch. 9. The stipulation ^now in question was one which, if known to the defendant, would plainly have been calculated to influence him materially *in determining whether he would [ *156 ] become surety for that part of the debt which was to be secured, according to the composition agreement, by his indorsement. The object of that agreement manifestly was, to relieve the debtors, for whom the defendant was to become surety, from their liability for a proportion of their debts, on giving security for the payment of the remainder; and it was to favor the debtors in this respect, that the defendant was induced to become their surety for such remainder. It is, however, obvious that that object would be frustrated, if the debtors were still to remain liable for the balance of what was not so secured. The ability of the debtor, in this case, to indemnify the plaintiffs for what they might be compelled to pay on the obligation they had assumed, would, moreover, be essentially impaired, by leaving the debtor still liable for that balance. Nor do we think it a sufficient answer in the mouth of the plaintiffs, that the stipulation for the payment of such balance could not be enforced. The contract of the defendant was one which he would not have made if he had been aware of all the facts in the case, and it would not be just to place him in a situation where he might not be able to ferret out such a secret and fraudulent arrangement, or control or prevent, at least without great expense and trouble, the effect- of it. We, therefore, think that on this subject also the charge below was correct. We are further of the opinion that the" defendant should not be held liable on the note in question, if, without his knowledge, a debt of M. J. Jerome, for which neither Gaines nor the firm of Gaines & Jerome was liable, was included in the note, as a condition, between the plaintiffs and Gaines, of the compromise. Such a debt was not one which, by the terms of the compromise agreement, was to be secured to the plaintiffs. That agreement, by a just construction, contemplated that the security therein mentioned should be given only to the respective creditors themselves, for a proportion of their own debts. If, indeed, the defendant, knowing that the debt of M. J. Jerome had been assigned to the plaintiffs, consented to include it in the notes, he could not object on that account. But it [ *157 ] ought *very clearly to appear that it was understood by him that it was so included. It is not enough for a creditor to say to a surety for his debtor, that the effect of departing from or varying the agreement of the surety has not been injurious to him. Such agreements are to be construed favorably for sureties, and it is sufficient for them to reply that they are not held by any other than the strict terms of their engagements. On the remaining question, whether the verdict is against the evidence, we are of the opinion that, in regard to the character of the agreement in pursuance of which the note in question was executed, the jury were not only warranted in the verdict they rendered, but that the evidence would have justified no other; and although, as to the facts upon which the other branches of the case depended, the evidence was not decisive to the same degree, it was such that we do not feel at liberty to pronounce the verdict to be manifestly against it. A new trial is not advised. In this opinion the other judges concurred. New trial not advised.