Beruflich Dokumente
Kultur Dokumente
xfcrRACTUAL
BLIGATIONS
"(a) Absolu
1I.Accessorial (1) Negotiable
and (b)
(c) Condit
Contin
Nonnegotiable d) Paymc
Contracts of
B. Secondary Guarantor (e) Collect
1 (f) Genera
(g) Specia
that the debt will be paid, while the latter guarantees the solvency
of the principal. In effect the surety says to the obligee: "If
the principal does not pay, I will pay." The guarantor says to
the obligee: "Proceed first against the principal, and, if he should
not be able to pay, then you may proceed against me." 22 The
criteria by which it may be determined whether one is a surety
or a guarantor was thus expressed in a recent opinion:
"The general test of whether a person is a surety or a
guarantor is determined by the test as to whether the per-
son undertaking to pay binds himself to do so at all events,
or absolutely, or whether he merely undertakes to bind him-
self for the payment, provided it cannot be made out of the
principal." 23
(c) The surety joins with the principal in his contract, and
is an original party with him. The guarantor becomes liable
on an agreement independent of the one on which the principal
is bound.2 One who contracts jointly with the principal cannot
be a guarantor.2 5, (d) The surety's agreement is supported by
becomes liable for the consequent damages. In the case of the indorser of a
negotiable promissory note, however, the liability does not become absolute
unless due notice of non-payncnt is given to the party whom it is intended to
charge. That is not because the indorser has thus stipulated in terms, but it
is a condition annexed by the rules of commercial law. In the case of a guar-
antor there is nothing to exempt him from the ordinary liability of parties who
have broken their contracts, which is direct and not conditional. No condition
requiring notice is inserted in the contract, nor is any inferred by any rule
of law."
Trust Co. v. National Bank, ioi U. S. 68 (1879). See Aniba v. Yeomans,
.39 Mich. 171 (1878).
'Hendrix v. Bauhard Bros., 138 Ga. 473, 75 S. 1. 588 (1912). The prior
cases were reviewed in the opinion in this case, in which it was said: "No
reason appears why an indorser may not enlarge his liability, as well as limit
it. The writing of his name upon the back of a negotiable note by the payee
thereof constitutes an indorsement."
'In Elgin City Banking Co. v. Zelch, 57 Minn. 487, 59 N. NV. 544 (1894),
the brief opinion stated that: "Whether these indorsements be construed as
constituting a single contract, or two distinct and separate contracts, we are
clear that they constitute an 'indorsement,' in. the commercial sense, and that
the transferee is an 'indorsee' and entitled to protection as such, under the
law merchant. The fact that Dunham enlarged his responsibility beyond that
of 'indorser.' by guarantying payment, did not change or affect the character
of his indorsement." See Lemert v. Guthrie. 69 Neb. 499, 95 N. W. 1046
(i9o3). Pattillio v. Alexander, 96 Ga. 60, 22 S. E. 646 (1895) ; McNary et al.
v. Farmers' -National Bank, 33 Okla. 7, 124 Pac. 286 (1912).
Where the payee "assigns and transfers the within note," it was said that
.'any one receiving it with such a transfer in blank may treat it as a blank
48 UNI'ERSITY OF PENNSYLVANIA LAW' REVIEW
recovery is had against him, he, in turn may sue his principal
43
for reimbursement for his outlay on his account.
The surety then, being liable with the principal, and to the
same extent, is entitled to no notice of the principal's default.
Indeed, in the absence of statute, no indirect act, except a sub-
sequent, valid, enforceable agreement between the obligee and
the surety altering the original contract, or affecting the rights
4 4 But with
thereunder, will release the latter from his promise.
the guarantor, the situation is frequently different. To calculate
the consequences of a guarantor's contracts, it is necessary to
determine first, whether it is a negotiable or a non-negotiable
instrument; second, whether it is an absolute or a conditional
guaranty; third, whether it is a continuing guaranty.
Whether one who indorses nonnegotiable paper is the payee
of or a stranger, is very material in the presumption raised by
it
such an indorsement.
"If the payee or assignee of paper, not negotiable, en-
dorse his name in blank on the back of it. he is prima fade
assignor, but if a stranger endorse his name in blank on the
back of paper not negotiable, he is prima facie guarantor,
but this presumption may be rebutted by showing the orig-
inal understanding of the parties, by showing an express
agreement otherwise, or by showing circumstances from
which one may be inferred." 4a
'Beal v. Brown, 13 Allen (Mass.) ir4 (z866) ; Lee and Co. v. Stowe and
Wilmerding, 57 Texas 444 (1882).
"Courtis v. Dennis, 7 Met. (Mass.) 510 (1844): "A surety is not, as a
matter of course, entitled to notice, and is not discharged by the insolvency of
the principal debtor, for want of notice, although the principal was solvent
when the debt became due."
" Kearns v. Montgomery, 4 W. Va. 29, 40 (W 87). See Barden v. Horn-
thal a aL, 151 . C. 8, .65 S. E. 513 (1909).
5o UNIVERSITY OF 'ENVSIYLVANIA LAW REVIEW
on the note, is bound without notice, where the maker of the note was insolvent
at its maturity. That his liability continues, unless he can show he has sus-
tained some prejudice by want of notice of a demand on the maker of the
note, and non-payment."
'Tanner v. Gude, ioo Ga. 137, 27 S. E. 938 (1897).
"Good v. fartin, 95 U. S. go (x877).
'Pattillio v. Alexander, 96 Ga. 6n. 22 S. E. 646, 65o (x895).
PRIM.IRY AND SECONDARY OBLIGATIONS
of the one signing his name on the back.5 (d) Other courts
have held such signing before delivery to the payee to constitute
an indorsement.5 7 This is the rule under the Negotiable Instru-
ments Law; " and the logic of this view requires the exclusion
of parol evidence as to the intent of the person signing. 9
Where the payee attempted to recover from the accommoda-
tion indorser, the rule worked well. But suppose the payee in-
dorsed the instrument and by mesne transfers, he again came into
possession as a holder in due course? The accommodation in-
dorser is the first one, the payee being second, and subseqeuntly
became holder. The anomaly of circuity of action is presented,
which would allow an indorsee to sue the payee, who could then
sue the accommodation indorser. The New York Court of
Appeals worked out the fiction, first, that the payee is the first
indorser, and second, that the payee is conclusively presumed to
have indorsed the instrument w.ithout recourse to the accommo-
dation indorser, who in turn indorsed it back to the payee, so
that the latter is not liable on it to the accommodation in-
dorser."' The necessity of determining whether the accommo-
dation party signed as first or subsequent indorser does not arise
in negotiable instruments executed after the Negotiable Instru-
ments Law was adopted in any state, since it provides for his
liability. " ' Under that Act, parol evidence to show that the
party signing otherwise than as maker, drawer or acceptor in-
tended not to be held as indorser, is not admissible in an action
'The N. I. L., Sec. 63 provides: "A person placing his signature upon -an
instrument otherwise than as maker, drawer or acceptor, is deemed to be an
indorser, unless he clearly indicates by appropriate words his intention to be
bound in some other capacity." Sec. 64 provides in part: "Where a person.
not otherwise a party to an instrument, places thereon his sgnature in blank
before delivery, lie is liable as indorser, in accordance with the following rules:
" See Rockficld c a!. . First National Bank of Springfield, 77 Oh.
St. 31j, 83 N. E. 392 (1907); P,aunmeister v. Kuntz, 53 Fla. 3.10, 42 So. 886
(1907).
These sections of the Negotiable Instrument Law apply only to irregular
indorsers who place their signatures on the instrument before delhery to the
payee. A plaintiff seeking the benefit of this act must bring himself within it
by appropriate allegations. If the indorsement is after delfery of the instru-
ment to the payee, the plaintiff must allege and sustain the burden of proving
that the accommodation indorser signed his name in order to lend credit to the
maker and with the intent of charging limseli thereon to the payee. Kohn v.
Consolidated Butter and Egg Co., 63 N. Y. Supp. AS6 (i9oo).
'First National Bank v. Bickel et al., 143 Ky. 754, t37 S. W. 790 (191).
".Moore v. Cross. i9 N'. Y. 227 (1859). See Temple v. Baker et al., 125 Pa.
634, 17 Atl. 516 (i1.89) ; Eilbert v. Finkbeiner, 68 Pa. 243 (1871). See the
comments in 23 HARv. L. Rvv., 396 (1910). and D.4T1. oN .FX.OTIAHt.F INSTRU-
MENTS. Sec. 713-e, 6th Ed. (1919).
' N. I. L., Sec. 64.
56 UNIVERSITY OF PENNSYLVANI.A LAW REVIEW
v. Kearsley, 36 Cal. App. 431, z72 Pac. 404 (1918); Evans v. Freeman, 142
X. C. 61, 54 S. E. 847 (I906) ; Merrill v. Hurley el al.,
6 S. Dak. 592, 6z N. W.
958 (1895).
A decision under the Negotiable Instruments Law, where the payee of a
note, wrote on the back of it, "I here by assine this note," and signed h- name,
held the payee to be an indorser, and the makers could not set up the defenses
against a holder :n due course, which could be set up against the payee. Con-
us:n prior to and after the Negotiable Instrutnents Law was admitted. The
opinion states: "The authorities seent to be in utter and hooeless confusion
concerning the effect of the transfer of a negotiable instrument by words like
those used here. The confusion existed prior to the passage of the uniform
Negotiable Instrument Law, and still exis-s. The weight of authority vas
and is, that this is a commercial indorsecment. We are of the opinion that the
"assignment' of t:s note is an indorsement thereof. under the Negotiable
Instruents Law; that Farnsworth is a holder irdue course; and that the
makers of the note cannot set up the defcnses against the note that could have
be-en set up against it in the hands of Wheeler." Farnsworth v. Burdick, 94
Kan. 749, 147 Pac. 853 (1915). The same court the year previous held that
where the payee wrote on the back of a note, "Ihereby assign the within note
and coupons, together with all my interest in and all my rights. . . without
recourse," t was an assignment, and not an indorsement, and the transferee took
only the rights of the payee. Nelson v. Southworth, 93 Kan. 532, 144 Pac.
N35 (1914). See also Markey v. Corey, io8 Mich. 184, 66 N. W. 493 (1895).
DANIEL ON NEGOTIABLE INSTRU.MENTS, Sec. 688-c. 6th Ed. (1919), did not
take this view of it,though admitting "the question arising in such cases is a
nice one." The author said: "Does the writing over a signature on express
assignment which the law imports from the signature per se exclude and nega-
tive the idea of conditional liability which the law also imports if such assign-
:nent were not expressed in full? We think not. . . Did the payee
intend merely to pass the title lie should use the words 'without recourse' or
-wne phrase of equal import. His liability is implied without words expressly
creating it. To be negatived, words should be.used which negate the implica-
tion." See Maine Trust and Banking Co. v. Butler. 45 .Minn. 5o6, 48 N. W.
333 (igi) ; Leahv v. Haworth, 141 Fed. 85o, 73 C. C. A. 84 (i9o5); Sears
v. Lantz ct a.. -7 Ia.658 (xS;8) ; Markey et al. v. Corey, io8 Mich. 184, 66
N'.V.493 (1805) ; Copeland v.Burk, 59 Okla. 219, 158 Pac. 162 (I916).
' Aniba v.Yeomans. 39 Mich. 171 (1878) ; Gale v.Mayhew, 16t Mich. 96,
125 N. V.78t (191o) ; Hatch v. Barrett el al.. 34 Kan. 223, 8 Pac. 129 (1885).
N. I.L., Sec. 41. Voris v. Schoonover et al.. 91 Kan. 530, 138 Pac. 6o7
(1914).
%.8 UNIT'ERSITY OF PENNSYLVANIA LAW REVIEW
other joint payee, authorizes the latter to indorse for him, which
when done, makes both indorsers.7 0
However, if the payee indorses the note in due course, stat-
ing "I guarantee payment of the within note, and waive demand,
notice and protest," it was held to be an indorsement, and the
indorser liable as such. The reasoning was that in a guaranty,
in the jurisdiction deciding the case, no demand or notice of
non-payinent was necessary to fix the guarantor's liability. Pre-
suming the parties used the clause waiving notice for some pur-
pose, and such language being unnecessary if a guaranty was
intended, but effectuating a purpose if the defendant intended
to be an indorser, the court held the above constituted an in-
dorsement. 7 1
In cases of negotiable instruments, not controlled by the
Negotiable Instruments Law, it has been held quite uniformly
that one who signs his name on the back, impliedlv authorizes
the payee to write over his name such contract as is consistent
with the agreement of the parties. For instance, if one not a
party to a promissory note, indorses it in blank, the payee has
implied authority to overwrite the signature: "I guarantee the
prompt payment of the within note at maturity with interest."
Since the contract created by such accommodation indorsement
was then interpreted to be a guaranty, the payee was warranted
in writing an express guaranty over the signature. 72 The effect
of an indorsement in blank of a negotiable instrument was thus
stated by the Kansas Supreme Court:
"'XWe decide the questions raised upon these instructions
as follows:
"First. The indorsenient of the name of a third per-
son in blank upon the back of a promissory note is prima
facie evidence of a contract of guaranty...
Tidioute Savings Bank v. Libbey et al., xoi Wis. i93, 77 N. -W. x8z
(1898).
' Bassett v. Perkins ct al.,
6i Misc. Rep. 1o3, 119 N. Y. S.354, 359 (1o9).
)Samuell v. ilowarth. 3 Merivale -72 (I8i7).
"*Union Trust Co. v. McGinty, 212 Mass. 2o5, 98 N. E. 679 (1912), says:
". i." . no relation of principal and surety is established by any of its
between the holder of the instrument and the principal for the
extension of time of payment, although upon a valuable con-
sideration, and without the consent of the surety." 1 A surety
(i920), is critical of the prevailing view, as stated in the text of the article.
which is followed by most of the states, and gives his view in this language:
62 UNIVERSITY OF PENNSYLF.VINA LAW REVIEW
"Itis submitted that the decisions in these cases are at variance with well
established doctrines of suretyship, .. . and are not required by the pro-
visions of ii9 and i2o. The discharge of a party, who, though primarily
liable, is known to the holder to be a surety, by giving time to the principal
debtor seems to be covered by ix9-4. But if this is not so, then, since the
discharge of a surety-maker or surety-acceptor by an extension of time granted
to the principal by a holder with knowledge of the relation, is neither a dis-
charge of the instrument nor a discharge of a party secondarily liable, this
should be regarded as an omitted case and, therefore, to be governed by the
law merchant under x96:'
The majority rule was also criticized by Professor C. D. Henning in 59
U. OF PA. L Ray., 532.
Northern State Bank of Grand Forks v.Bellamy, 19 X. Dak. 509, 125
N. W. 888 (xgio). See N. I. L., Sec. ig.
"See Crawford v. Turnbaugh, 86 Oh. St. 43, 98 N. E. 858 (1912).
'Beardsley v. Hawes et al., 71 Conn. 39, 40 AtL 1o43, 1o44 (1898) ; Cownie
v.Dndld. 167 Ia. 627, 149 N. AV. 904 (914).
PRIMARY AND SECONDARY OBLIGATIONS
Lefkovitz v. First National Bank of Gadsden, 152 Ala. 521, 44 So. 613,
615 (i9o7) ; Heyman v. Dooley, 77 Md. 162, 26 Ati. 117 (1893); Booth v. Ir-
ving National Exchange Bank, 116 Md. 668, 82 Atl. 652 (91ii); Hubbard v.
Haley et al., 96 Wis. 578, 71 N. V. 1o36 (1897).
' Great Western Printing Co. v. Belcher, 127 Mo. App. 133, 104 S. W.
894 (go7) ; March v. Putney, 56 N. H. 34 (1875).
' Lemmon el al. v. Strong, s5 Conn. 443, 13 AtI. 140 (1888) ; Loomis Inst.
v. Hurd. 57 Conn. 435, I8 Atl. 669 (1889); Brown v. Wilcox, 73 Conn. ioo,
46 AtI. 827 (19oo) : The Woodstock Bank v. Downer, 27 Vt. 539 (1855).
The same principle is applicable in the case of a guaranty of a non-nego-
tiable instrument. Garland v. Gaines. 73 Conn. 662, 49 Ad. 19 (i9o) ; Pleasant-
ville Mutual Loan and Building Society v. Moore et al., 7o N. J. I. 306, 57 At.
1034 (1904).
"Cowles, Executor v. Peck, 55 Conn. 251, to Ad. 569 (1887). But see
Donley v. Camp, 22 Ala. 659 (1853).
64 UNIVERSITY OF PENNSYLVANIA LAW REVIEW
But the defenses which will release the indorser are en-
tirely different from those availal)Ie to the guarantor. This is
because of the difference in the two contracts. The guarantor
promises to pay if the obligee can not recover from the principal.
This presupposes (a) diligence on the part of the obligee to col-
lect from the principal, and (b) notice to the guarantor. Failure
to perfom. this duty by the obligee will release the guarantor
only to the extent he has been injured thereby. But the drawer
and indorser of a foreign bill of exchange are absolutely dis-
charged for failure to protest it,'0 a or generally for failure to
present any negotiable instrument for payment,"' or to give
notice of the non-acceptance or dishonor of any negotiable in-
strument.oa. Both the guarantor and indorser, being "secondary
parties." will he absolutely discharged from liability on any
negotiable instrument by the discharge of the instrument, can-
cellation of his signature, discharge of a prior party, release of
the principal without reservation of right against the person
secondarily liable, or by any binding contract between the holder
and the principal to extend the time for payment.100 The in-
dorser's liability is an outgrowth of the law merchant which
held that his contract "is to pay upon demand by the holder upon
the drawer, and notice of nonpayment or of dishonor to him." 107
The surety assumes a.primary liability, and in the absence
of statute, the obligee is not required to exercise- due diligence
to collect from the principal, is not required to demand payment
from the principal, and need not give notice of his principal's
default. 10 So far as negotiable instruments are concerned, a
surety, being primarily liable, under the Negotiable Instruments
Law, can be discharged only by the payment of the instrument
in due course, its cancellation, by an act which would discharge
a simple contract, or when the principal becomes holder in his
own right after maturity.' But the common law defenses
available to a surety are not changed in the case of nonnegotiable
instruments.
It is well settled that a surety remains liable even though the
principal be discharged because of being a married woman in-
capable of contracting,11 an infant,"' a person non conpos
entis,112
-
a corporation whose contract is ultra sir-s,"t3 or if
the principal's contract be unenforceable because it is hot in writ-
ing as required by the statute of frauds.'14 Neither is the surety
on a building contract discharged if the obligee has failed to
record the building contract, where such failure by statute makes
it void, and the surety has not stipulated that it must be rec-
orded." The defense of the principal in such cases is personal
to him, and affords no ground for the surety to escape liability.
even though lie was ignorant of the facts. The disability of the
'Holm v. Jamieson. 173 II1. 2(5, 50 N. E. 702, 704 (1898). See Veazie
v. Willis, 6 Gray (Mass.) 90 (i856) ; Jones ct al. v. Thayer, 12 Gray (Mass.)
443 (x859). Apparently contra is Bennett v. Corey, 72 Ia. 476, 34 N. W. 29t
(1887).
'Nelson et al. v. Hinchman, zi8 Fed. 435, 55 C. C. A. 251 (I902).
PRIMARY AND SECONDARY OBLIGATIONS
'Tandy v. Elmore-Cooper Live Stock Commission Co., 113 'Mo. App. 409,
87 S. W. 614 (x9o5). The same Court had said in a prior case that: "We have
no doubt, however, on reason as well as authority, but that the guarantor may,
by the terms of his contract, make himself liabile for the principal debt, al-
tfhough it be invalid." The Sedalia, Warsaw and Southern Ry. Co. v. Smith,
27 .Mo. App. 378 (1887).
The Tennessee court held the guarantor liable where the consideration of
the principal's note was Confederate money, and therefore, the principal was
not bound. It does not appear whether this was an absolute guaranty or not.
Laughmiller v. Syler, 7 Cold. (Tenn.) 158 (1869).
': Merchants' National Bank v. Citizens' State Bank, 93 Ia. 65o, 61 N. V.
io65 (1895). See Jack i-. Sinsheimer, 125 Cal. 563, 58 Pac. 130 (1899) ; United
States Gypsum Co. v. Central Railway Equipment Co., 152 IIl. App. 467
(igo) ; Henr' v. Fry, 78 'Misc. 130, 137 N. Y. S. 894 (xgxz); Howard v.
Smith ct aL., 91 Tex. 8, 38 S. W. 15 W896).
A conditional guarantor was liable where the principal's contract was
rendered non-enforceable because the statute of limitations had become a bar.
Miles v. Linnell, 97 'Mass. 298 (1867.)
See Putnam v. Schuyler, 4 Hun. (N. Y.) x66 (1875).