that occurs the presumption is that he will pay the debt; but in the meantime the creditor should be entitled to enjoin the surety from willfully misappropriating the security. Upon the insolvency of both the principal and the surety, the creditor is entitled to the benefit of security held by the surety merely for his indemnity;' and he is entitled to it upon the insolvency of the surety alone. It is even said that "While in no view does the insolvency of the principal debtor create the equity, although it may be a material point in defining when the creditor's claim matures, excusing demand or the like; on the other hand, the insolvency of the surety seems an indispensable element to the enforcement of that equity, and to give to it vitality." 12 § 530. The discharge of the surety does not bar the creditor's right to claim the securities, which the debtor has placed in the surety's hands for the payment of the debtor for his indemnity where the creditor does not claim by subrogation, or through the surety, but by virtue of a trust which a court of equity will protect and enforce for the creditor's benefit. The trust survives the surety's discharge.' But where the creditor's right is one of subrogation, it is clear that the discharge of the surety before his liability becomes fixed will bar the creditor's right to receive and enforce the surety's securities." § 531. A surety holding collateral security may transfer it to the principal creditor, who is entitled upon default to proceed to make the money out of such security before suing the 1 In re Foye, 16 N. Bank. R. 572; 23 Ala. 797; Crosby v. Crafts, 5 Hun In re Fickett, 72 Me. 266. (N. Y.) 327; Helm v. Young, 9 B. Mon. (Ky.) 394. 214 Am. Law Rev. 852; Lewis v. DeForest, 20 Conn. 427; Jones v. Quinnipiack Bank, 29 Conn. 25. 3 Roberts v. Colvin, 3 Gratt. (Va.) 358, 359; Eastman v. Foster, 8 Metc. (Mass.) 19; Cullum v. Branch Bank, Osborn v. Noble, 46 Miss. 449; Bibb v. Martin, 14 Sm. & M. (Miss.) 87; Hopewell v. Cumberland Bank, 10 Leigh (Va.) 206. principal note. The rule is not changed by the fact that such security is another note and mortgage.1 But a surety holding property in pledge to indemnify him for his liability upon a note, has no right to transfer the property to the holder of the note in satisfaction of it; and if he does, the transfer does not change the status of the property as a pledge, or deprive the pledgor of his right to redeem it.2 If a surety exchanges the securities he has received for others, or receives others in payment for the original securities, he will hold the new securities for the benefit of the creditor upon the same trust that he held the original securities.* § 532. One may hold a pledge both as creditor and as surety. Thus it may be given him to secure a debt due to himself, and also to indemnify him against a debt for which he is surety; and in that case though it has been said that as between himself and the creditor the latter is entitled to be first paid out of the proceeds of the property, because the surety is regarded as a quasi-trustee for the creditor as to such property; yet the better rule would seem to be to apply the security pro rata, or if the surety has himself obtained the security, that he should be entitled to appropriate so much of it as might be necessary for the payment of his own demand in full." A creditor holding in pledge his debtor's goods to a greater value than the debt due him, entered into an arrangement with another creditor of the pledgor whereby he transferred the goods to the other creditor, who thereupon guaranteed the payment of this debt. The debtor, though not a party to this arrangement, afterwards assented to it; and the goods subsequently having been attached as the debtor's property, it was 1 Wells v. Smith, 2 Utah 39. And see Phillips v. Thompson, 2 Johns. Ch. (N. Y.) 418, 7 Am. Dec. 535. 2 Morgan v. Dod, 3 Col. 551. 'Ten Eyck v. Holmes, 3 Sandf. Ch. (N. Y.) 428. 5 Moore v. Moberly, 7 B. Mon. (Ky.) 299; Ross v. Wilson, 7 Sm. & 3 Clark v. Ely, 2 Sandf. Ch. (N. Y.) M. (Miss.) 753. 166. Brown v. Ray, 18 N. H. 102, 45 Am. Dec. 361. held that although the first pledgee lost his lien upon the goods by surrendering them to the other creditor and taking his guaranty, the latter by the debtor's assent to the arrangement, acquired as pledgee a valid lien on the goods for the payment of both debts; a lien for the debt due to him, and a lien to indemnify him against the liability incurred by his guaranty.' § 533. A dividend received in bankruptcy or insolvency by a creditor whose claim is in part secured by a pledge given by a surety should be applied ratably to the whole demand; that is, ratably upon the secured and the unsecured portion of the whole demand. The surety is regarded as having secured a limited part of an entire debt, and not the unpaid balance of a debt with a limitation as to the amount of the liability. If security be given for a separate and distinct part of a debt, then a dividend arising from that part of the debt must be applied to the discharge of that part. The intention of the parties to the transaction is to be considered. If a surety pledge bonds to secure an unpaid balance of one hundred thousand dollars upon a much larger debt, and a dividend in bankruptcy of fifty per cent. be paid upon the whole debt, it is immaterial to the surety how or by whom the balance be paid, so long as one hundred thousand dollars remain unpaid; but if the dividend reduce the balance below that amount the surety is entitled to the benefit of the reduction, because upon payment of the debt he would be subrogated to the creditor's lien upon the bonds." § 533a. A surety is not released by the substitution, by the creditor, of one collateral security for another, when made in good faith and apparently for the benefit of all concerned. Thus, a surety is not released by the exchange, by a creditor bank, of a judgment against an insolvent principal debtor, whose property has been exhausted, for an agreement by its 1 Treadwell v. Davis, 34 Cal. 601, 94 Am. Dec. 770. Dumont v. Fry, 14 Fed. Rep. 293, 12 ib. 21, 13 ib. 423. president individually to pay the debt out of the proceeds of the property of the debtor purchased by him at execution sale, after he has realized enough to pay an indebtedness to himself, when no bad faith appears and it is not shown that the substituted security was worth less than the judgment. The court of appeals of New York, so holding, said: "The sureties were not injured in fact, nor were they injured in law, unless the exchange, under any circumstances, of one collateral security for another, is so inconsistent with the legal rights of a surety as to raise a conclusive presumption of injury therefrom. No authority has been cited, and we have been able to find none, holding that a surety may not in good faith endeavor to better his situation by exchanging one kind of collateral for another that he regards as more valuable. If a bank holds bonds of doubtful value as security for a note. made by sureties for the principal debtor, may it not exchange those bonds for others that it regards of greater value without releasing the sureties? If it can not, the law deprives it of the right to make the best use of its collateral that it can and compels it to refrain from trying to better its condition, lest, although acting honestly and for what it regards as its own interest as well as the interest of the sureties, it may make a mistake to their detriment. The rule that a surety is discharged pro tanto through the surrender of security by the creditor does not rest on contract, but upon the equitable principle that the property of the debtor, pledged for the payment of the debt, should be applied on the debt. In such a case the surety is discharged to the extent that he is injured. A diversion of security which results in no injury to the surety does not affect his liability, for payment of the debt with the accompanying right of subrogation would be of no value.” 1 State Bank v. Smith, 155 N. Y. J., affirming 85 Hun 200, 32 N. Y. 185, 199, 49 N. E. Rep. 680, per Vann, Supp. 999. III. The Mutual Equities of Co-Sureties to Claim the Benefit of Each Other's Securities. § 534. There is also a mutual equity between co-sureties that securities placed by the principal debtor in the hands of one surety to indemnify him for his liability, inure to the benefit of all other sureties for the debt.' Like the other equities already spoken of, this is a natural equity, and does not depend upon any contract; though it is said that it may be presumed that the debtor in securing one surety intended that all the sureties should share in the benefit of the security unless there be something to show that such was not his intention; for in securing one surety he may expressly exclude his co-sureties from the benefit of the security given. § 535. But a creditor is not entitled to the benefit of securities placed by one surety in the hands of another for his indemnity. Thus, where co-sureties upon a bond agreed between themselves that each should be liable for the payment of a certain part of the bond, and that each should indemnify the other from all claim by reason of his liability upon the bond in excess of the sum or proportion which each was to be liable for, and each gave to the other security for the performance of his agreement; it was held upon the insolvency of the sureties as well as the principal debtor, that the securities given by the sureties to each other were not in equity securities for the payment of the principal debt, which would inure by way of subrogation to the benefit of the creditor. Mr. Justice Matthews, after stating the equitable rule and the grounds of it, as quoted in a preceding section, declared that the present 'Hampton v. Phipps, 108 U. S. 260, 2 S. C. Rep. 622, per Matthews, J.; Aldrich v. Hapgood, 39 Vt. 617; Fishback v. Weaver, 34 Ark. 569; Sheehan v. Taft, 110 Mass. 331; Lane v. Stacy, 8 Allen (Mass.) 41; Hartwell v. Whitman, 36 Ala. 712. 'Dering v. Winchelsea, 1 Cox 318; Brown v. Ray, 18 N. H. 102, 45 Am. 3 Moore v. Moore, 4 Hawks. (N. C.) 358, 15 Am. Dec. 523. Hampton v. Phipps, 108 U. S. 260, 2 S. C. Rep. 622. 5 § 514. |