lief depend upon the bankruptcy of both the debtor and the surety.1

§ 524. That a creditor did not rely upon securities given by the debtor to a surety, and did not know of their existence until long after they were given, does not prevent his claiming the benefit of them whenever he may learn of their existence. This point was established in an early and leading case in this country, where a bill was brought by the holder of indorsed paper to have securities given by the debtor to the indorser applied for the creditor's benefit. The indorser set up in defense that he had assigned the securities, and also that he was a general creditor of the debtor, who had become insolvent. Chancellor Kent held that the creditor was entitled to the benefit of the indorser's securities, saying: "These collateral securities are, in fact, trusts created for the better protection of the debt, and it is the duty of this court to see that they fulfill the design. And whether the plaintiffs were apprised at the time of the creation of this security is not material. The trust was created for their benefit, or for the better security of their debt, and when it came to their knowledge they were entitled to affirm the trust and enforce its performance."

It is not necessary that the creditor should know that the debtor has secured the surety in order to enable him to claim the benefit of the security as a trust in his behalf, because the trust being for his benefit it is presumed that it has his assent.3 "The authorities place the principle upon the ground that as the security is a trust created for the better securing of the debt, it attaches to it, and hence it is that it may be made available by the creditor, although unknown to him at the time of the purchase of the security, for which it may have been given as an indemnity. The effect of such a transaction

1 Ex parte Waring, 19 Ves. 345.

2 Curtis v. Tyler, 9 Paige (N. Y.) 432; Pratt v. Adams, 7 Paige (N. Y.) 615; Keyes v. Brush, 2 Paige (N.Y.) 311; Haggerty v. Pittman, 1 Paige

(N. Y.) 298, 19 Am. Dec. 434; Moses v. Murgatroyd, 1 Johns. Ch. (N. Y.) 119, 7 Am. Dec. 478.

McMullen v. Neal, 60 Ala. 552; Kramer's Appeal, 37 Pa. St. 71.

is the placing of means in the hands of the surety by the principal debtor to meet liability on account of his contract of suretyship. It is, consequently, a trust for that specific purpose, and equity will control the legal title to it in hands of the surety, so that it may be applied to the object intended, viz., the payment of the debt to the holder.""

§ 525. In several states, however, the creditor's equity is merely a right to be subrogated to the securities held by the surety, or a right to be substituted in the surety's place for the enforcement of any securities he may have taken from the principal debtor. The creditor's right in respect to securities. in the hands of the surety is regarded as resting upon the same ground as the surety's right in respect to securities held. by the creditor. "This arises not from any notion of mutual contract between the parties, that in providing for the surety the creditor shall be equally provided for, but from a principle of natural equity independent of contract; namely, that to prevent the surety from being first harassed for the debt or liability, and then turning him round to seek redress from the collateral security given by the principal, a court of equity will authorize, and even encourage, the creditor to claim through the medium of the surety all the rights he has thus acquired to be exercised for his benefit, and in discharge of his obligations. The claim of the creditor, therefore, is as much founded on the well-known doctrine of substitution, as the claim of the surety to stand in the place of the creditor who has received collateral security from the debtor; and, in my opinion, it has no other foundation. For when the principal debtor conveys property to his surety, not specifically bound to the creditor, he has no intention of giving any lien to the creditor, or to pledge the property to him for the debt; and as

'Kramer's Appeal, 37 Pa. St. 71, Dec. 583; Kramer v. Farmers' Bank, per Thompson, J.

2 Virginia: Hopewell v. Cumberland Bank, 10 Leigh 206; Bank v. Boisseau, 12 Leigh 387. Ohio: McConnell v. Scott, 15 Ohio 401, 45 Am.

15 Ohio 253; Ohio Loan & Trust Co. v. Reeder, 18 Ohio 35. Mississippi: Osborn v. Noble, 46 Miss. 449; Carpenter v. Bowen, 42 Miss. 28; Bibb v. Martin, 14 Sm. & M. 87.

he has a right to dispose of his property as he pleases, provided he commits no fraud, the court will not construe the instrument giving the lien beyond the intent; although it will, to effect the exoneration of innocent sureties, permit their substitution to the creditor's rights, or his substitution to theirs.""

§ 526. A distinetion is to be observed between cases where the security has been given to the surety for the payment of the debt and cases where it has been given solely for his indemnity. In the first class of cases the primary purpose of the debtor may fairly be taken to be to secure the payment of the debt; while in the latter class of cases his purpose seems to be primarily to secure the surety. In the former class of cases the creditor may fairly be regarded as a direct beneficiary in the property placed in the control of the surety; but in the latter class of cases the creditor is secured only indirectly through the surety. There is, however, much difficulty in determining whether a case falls within one class or the other, from the fact that directly opposite views are taken in different jurisdictions of instruments of the same tenor. "Thus, where a mortgage is given in terms conditioned to save the surety harmless, and to pay the notes, the former clause has been held by some courts to give the controlling character to the instrument as an indemnity; while with others the latter clause has been viewed as decisive that it created a direct trust to pay the debt. "'5

1 Hopewell v. Bank of Cumberland, 10 Leigh (Va.) 206, 221, per Parker, J.

2 In New Bedford Inst. Sav. v. Fairhaven Bank, 9 Allen (Mass.) 175, the security was merely for the indemnity of the surety; and the distinction between an indemnity and a direct trust for the payment of the debt was pressed upon the court, but was rejected as immaterial. See also, Black v. Kaiser, 91 Ky. 422, 16 S. W. Rep. 89.

314 Am. Law Rev. 855.

As in Connecticut: Thrall v. Spencer, 16 Conn. 139; Jones v. Quinnipiack Bank, 29 Conn. 25. Mlinois: Constant v. Matteson, 22 Ill. 546. Kentucky: Havens v. Foudry, 4 Metc. (Ky.) 247. Missouri: Haven v. Foley, 18 Mo. 136.

5 As in Massachusetts: Eastman v. Foster, 8 Metc. 19. Mississippi: Ross v. Wilson, 7 S. & M. 753. Tennessee: Saylors v. Saylors, 3 Heisk. 525. Vermont: Paris v. Hulett, 26 Vt. 308. Maryland: Kunkel v. Fitzhugh, 22 Md. 567; Boyd v. Parker, 43 Md. 182.

§ 527. As between the doctrine of the creditor's equitable lien and the doctrine of his right of subrogation, the weight of authority seems to be clearly in favor of the former. The former properly applies to cases where the securities have been placed in the surety's hands for the payment of the debt; and the latter to cases where the securities have been placed in his hands purely for his indemnity. In fact, however, there is no such sharp distinction in the application of these doctrines to these different classes of cases; for, as already noticed, similar instruments have been regarded by different courts as falling under each of these classes. We have noticed, too, the tendency of the courts to regard the security in the surety's hands as a trust for the payment of the debt rather than as a mere indemnity to the surety. To regard it as a trust seems better to satisfy the natural equities of the transaction. "We think, says Mr. Willard, "that subrogation fails to exhaust and satisfy the equities of the various modes in which securities are delivered for the surety's indemnity, in that, first, it overlooks the real sense of the transfer, which is to reimburse the surety only if he has paid, and if he has not paid, then, to enable him to do so; in a word, to pay the debt, but through the surety. Secondly, by adhering so literally to the words of the transfer, it confers upon the surety an absolute control over the security, which may, and often does utterly defeat the payment of the debt. Thirdly, it is, in practice, a rule of very difficult application, because of the widely differing forms in which this indemnity is given, in some cases directly to the surety, in others in trust for him, where he can assert a control only by himself becoming a suitor in law or equity; in other cases, again, no instrument defining the terms of the transfer, but only a simple delivery of the security being made to the surety.""

§ 528. The creditor is entitled at any time after the delivery of the security to control or enjoin any misappropriation of

1 Lewis v. DeForest, 20 Conn. 427, 442, 443.

2 Rankin v. Wilsey, 17 Iowa 463.

$ 14 Am. L. Rev. 851.

the security, where the creditor's right is regarded as a trust, though until the maturity of the debt, his trust lien does not fully attach to the security. Thus, if the surety has been indemnified by receiving collateral notes from the debtor, he will be regarded as holding such notes as trustee for the benefit of the creditor who may obtain an injunction restraining him from negotiating the notes.'

Inasmuch as the creditor's right rests upon the trust in his favor he has an interest in the securities from the time they are given which he may interfere to protect, and he need not wait till the surety's liability has become fixed.

A surety who has received in pledge a negotiable note can, of course, before its maturity and while it is not subject to equities, transfer it; and any one taking it for value and in good faith will not be affected by any trust in favor of the creditor, nor will he be responsible for the manner in which the surety applies the proceeds.2

§ 529. But where the creditor's right is one of substitution merely he can not assert it until the surety's liability has become fixed, whether by maturity of the debt, or by demand or by judgment. Until such time the surety has full control of the securities, and may dispose of them as he pleases. Thus, where rents were pledged to a surety, and before his liability was fixed, he purchased the fee of the premises, it was held that they were placed beyond the creditor's reach by the merger. The doctrine of the creditor's equitable lien has been criticised because it impliedly overrides the surety's proper control of his indemnity, while he remains solvent; and on the other hand the doctrine of subrogation is criticised because it denies to the creditor the just protection to which he is entitled. Until the surety's insolvency he would seem to be primarily entitled to control the security, because until

166.

Clark v. Ely, 2 Sandf. Ch. (N. Y.)

2 Commercial Bank v. Rochester City Bank, 46 Barb. (N. Y.) 371.

3 Rankin v. Wilsey, 17 Iowa 463.

14 Am. Law Rev. 852.