Dewey v. W. B. Clark Investment Co.

One Paulson executed a promissory note to one Penney, and at the same time executed to him a mortgage on certain real estate to secure its payment. Penney was the secretary of the defendant company, and, although the fact does not distinctly appear, and probably is not material, we infer that the note and mortgage, although taken in the name of Penney for convenience, were in fact the property of the defendant. Subsequently, and before the maturity of the note, the defendant sold it to the plaintiff, guarantying its collection, and at the same time, and as part of the same transaction, sold and transferred to plaintiff the mortgage, and caused Penney to execute to him the proper instrument of assignment. Paulson, the maker, is utterly insolvent, but the plaintiff has never resorted to the mortgage security, or attempted in any manner to collect the note out of it, although it is sufficient to pay the debt. A demurrer to an answer setting up these facts as a defense to an action brought on the guaranty presents the question whether, upon the facts stated, defendant’s contract of guaranty is conditioned upon plaintiff’s first resorting to and exhausting the mortgage security. The first step towards ascertaining defendant’s liability is to determine the meaning of a contract guarantying collection. The whole law oh this subject, stated generally, is that the guarantor agrees to pay the debt in case it cannot be collected out *133of the principal debtor by the exercise of due or reasonable diligence. The condition of the guarantor’s liability is the exercise of this degree of diligence on part of the creditor, and his inability thereby to collect the debt, and the corresponding duty of the creditor is to exercise such diligence before resorting to the guaranty. Courts, in attempting to give a fixed and inflexible meaning to a term, which is in its nature incapable of it, have sometimes defined “due or reasonable diligence” in such cases as a resort to “the ordinary course of the law,” which, in turn, they have defined as obtaining judgment, issuing an execution, and its return unsatisfied. An illustration of this is found in Stone v. Rockefeller, 29 Ohio St. 625, cited by plaintiff. As an almost necessary result of such definitions, some courts have held, on the one hand, that due diligence requires the creditor to first prosecute an action against the principal debtor to judgment with a return nulla bona, although it is absolutely certain in advance that this will be fruitless, and, on the other hand, that this is all that due diligence requires, and that the creditor is not required also to resort to mortgage or other collateral securities, although they may be in all respects ample and available. In view of the fact that the end to be attained is the collection of the debt, the consistency of such rulings, or why due or reasonable diligence should necessarily be limited in all cases to the prosecution of a personal action against the debtor, is not entirely apparent. But without deciding what the rule is where the mortgage security was given by the-debtor-directly to the creditor, and not furnished by the guarantor, we think that, upon both principle and authority, it must be held that where a party holding a note secured by mortgage sells the note, guarantying its collection, and at the same time, and as part of the same transaction, assigns the mortgage, thereby furnishing the purchaser the means of obtaining payment, in whole or in part, the plain import of the guarantor’s contract is that he will pay the debt, provided, on due diligence, it cannot be collected out of the debtor or out of the mortgage. Construed in the light of the facts, this must have been the understanding of the parties. A person guarantying such a debt, and assigning the mortgage with it, must have contemplated a collection by means of the mortgage, and that he would npt.be looked to,until the *134creditor had resorted to that, if available. Barman v. Carhartt, 10 Mich. 338; Johnson v. Shepard, 35 Mich. 115; Borden v. Gilbert, 13 Wis. 670; Brainard v. Reynolds, 36 Vt. 614. We have found no case to the contrary, except Day v. Elmore, 4 Wis. 190, which is silently overruled in Borden v. Gilbert, supra. Jones v. Ashford, 79 N. C. 172, is really not an authority, for in that case the purchaser positively refused to take an assignment of the note and mortgage, saying that he preferred the guaranty alone, and no formal assignment of the mortgage was ever made. Gases of sureties and guaranties of payment are, of course, n'ot'in point.

Order affirmed.

(Opinion published 50 N. W. Rep. 1032.)