Story Case

The towns of Louisville and Princeton, North Dakota, voted a bond issue of $20,000 to aid in the construction of the Corn Belt Railroad. To make these bonds more salable, the Corn Belt Railroad Company also guaranteed their payment. In 1915, the town of Louisville failed to meet these bonds at their maturity, and when demand was made upon the railroad company, it defended, on the ground that it had not the power to enter such a transaction, and its guaranty was void. Is this a good defense?

Ruling Court Case. Whitley, Faster And Kelly Company Vs. Nixon, Volume 120 Indiana Reports, Page 360

The company appointed Mrs. Nixon, a married woman, whose husband was living, as its agent to sell farming implements. The contract between them stipulated that when implements were sold, for which cash was not paid, Mrs. Nixon should become responsible for the amount due. She sold certain implements to one Joseph Maginnis, who gave his note for the purchase price. This note Mrs. Nixon indorsed as follows: "For value received, I guarantee the payment of the within note." When Maginnis failed to pay the note, this action was brought against Mrs. Nixon. She pleaded that she was incompetent to bind herself in the manner attempted, because of a statute which provided that a married woman shall not enter into any contract of suretyship, whether as indorser, guarantor, or in any other manner, and such contracts as to her shall be void. The question involved was whether or not Mrs. Mary F. Nixon was a surety in any sense.

Mr. Justice Coffey said: "This contract between Mary F. Nixon and the company was that she should become surety to the company for the makers of notes, like the one in question, which she took for the purchase price of implements and machines sold by her on credit. This is forbidden by statute; consequently, the undertaking of Mrs. Nixon is void." Judgment was given for Mrs. Nixon.

Ruling Law. Story Case Answer

In general, any person capable of entering into any other contract may enter into a contract of suretyship. The general rules concerning the capacity of parties to a contract of suretyship are the same as those governing the formation of ordinary contracts. Occasionally, however, there are added restrictions with reference to suretyship, for instance, in cases where a married woman cannot enter into such a contract, although she may become a party to other contracts. Corporations, also, as a general rule, have no implied power to make contracts of suretyship. This power must be conferred upon them expressly. In these days many corporations have been formed for the express purpose of becoming sureties. It has been held, however, that this may be an incidental power of a corporation, provided the transaction is for the purpose of increasing its trade or business, and is within the scope of business for which the company was organized. Thus, a bank can guarantee payment of notes which it rediscounts, but it could not guarantee the note of some third person, as an accommodation to him. A railway company cannot guarantee the payment of bonds issued by another corporation, unless done to promote its own business.

In the Story Case, the railway company could hare issued bonds for the purpose of building the road, and, therefore, it can guarantee bonds which accomplish the same end. The Corn Belt Railroad Company is liable on the bonds.