Story Case

The World Film Corporation borrowed $10,000 from the Equity Trust Company, giving its own note, with Walter Johnson, its president, and George Simpson, a director, as co-makers. It also delivered one hundred and fifty shares of its own stock, par value at $100 each, as additional security. The note matured on May 1, 1915, and the corporation failed to meet it. Thereupon, Johnson gave his own note, due in one year, as payment of the obligation, taking back the stock of the film corporation, but delivering to the trust company one hundred shares of the Film Photo Magazine Company as security for his own note. Immediately following this transaction, Johnson demanded $5,000 from Simpson, as his part of the obligation on the original note. Simpson refused to pay, on the ground that Johnson had in fact paid nothing in settlement of the obligation, and, second, that he had acquired the security which he should sell before demanding contribution. Has Simpson a good defense?

Ruling Court Case No. 1. Henderson Vs. Mcduffee, Volume 5 New Hampshire Reports, Page 38; Volume 20 American Decisions, Page 557

R. Henderson, J. McDuffee, and Joel Varney made their joint promissory note for $2,000 to cover their joint debt. Joel Varney became insolvent; the note was not paid, and judgment was secured thereon, and Henderson was required to pay. Since nothing can be collected from Varney, the question is how much can Henderson collect from McDuffee?

The following is the opinion of the court: Since the note was given by Henderson, McDuffee, and Varney, for their joint debt, each may be considered with respect to the other two, as principal, to one-third of the debt, and as surety in relation to the other two-thirds. As to the one-third owed by Varney, which he could not be compelled to pay, Henderson and McDuffee are co-sureties. Therefore, Henderson can now recover from McDuffee what he has paid on account of McDuffee; that is, one-third of the entire sum, and also one-half of the sum he paid for Varney, which amounts to one-sixteenth of the indebtedness. Judgment was given for Henderson for these two sums, which amounted to one-half of the total indebtedness.

Ruling Court Case No. 2. Williams And Johnston Vs. Riehl And Kelly, Volume 127 California Reports, Page 365; Volume 59 Pacific Reports, Page 762; Volume 78 American State Reports, Page 60

Johnston, Smith, Lufkin, and Kelly became sureties on the bond of Riehl, who was guardian for one Carver, a minor. Carver died, and Riehl failed to account to his estate for $10,000. Judgment was secured against Riehl and his sureties for this amount. Johnston, Smith, and Lufkin paid the judgment. They then took property from Riehl valued at $5,000 to secure them for part of the money. Without realizing anything on this property, and while holding it, they now seek to have contribution from Kelly for his portion of the moneys paid.

Kelly contended that they should try first to get the money out of the property they received before going against him.

The opinion of the court was delivered by Justice Matt F. Johnson: "The surety may maintain an action against his co-surety for the sum he is entitled to, regardless of any indemnity the first may hold. In such a case, whatever may afterwards be secured by a sale of the indemnity, shall be accounted for to all of the sureties, share and share alike. It would not be fair to compel one surety to pay and recover nothing until he can realize upon some collateral security, which may require years, while his co-surety, who is as much bound as himself by the bond, has paid nothing. This would not make the burden of the cosureties equal." Judgment was given against Kelly for his portion of the payment.

Ruling Law. Story Case Answer

If one co-surety pays more than his proportion of the debt due, he can have reimbursement from the other sureties, according to their proportionate shares. The law implies this agreement, in the absence of an express contract governing the rights of the parties. The rules governing the liability of the principal to the surety, and of co-sureties to each other with reference to contribution are similar. This right of contribution is not affected by the fact, that the co-surety who has paid the debt, holds security, or has not paid in actual cash. Although he holds security, he may have contribution; but, as soon as proceeds accrue from the security, he must account for the same to those who have contributed. Payment by the co-surety's own note is considered payment of the obligation, and he is not required to await payment of actual money or property before seeking contribution, lest some of the co-sureties become insolvent before the money is paid. Payment in land or other property is sufficient to compel contribution from co-sureties.

In the Story Case, Johnson can compel contribution from Simpson, and the latter's defense is not good.