Story Case

William Sievers, while talking to the banker at Lyons, Colorado, learned that his friend, Peter Von Steen, had borrowed a large sum of money from the bank in order to plant his spring crops. The banker said he had hesitated long before making the loan, but finally decided that he would trust Peter Von Steen. Mr. Sievers spoke enthusiastically of his friend, "You need never fear to trust Peter. I'll act as his surety any time. If you desire, I '11 sign for him now." The banker produced materials with which Mr. Sievers signed. In June, 1915, Peter Von Steen was called to the standard of the Kaiser, to fight in the great war, and was shot in battle on August 1, 1915. His crops failed, and the executor could not pay Von Steen's debts. The banker demanded payment of Mr. Sievers, by the latter refused to pay, declaring, "There was no contract. I was given nothing for my promise." Is this a valid reason for refusing to pay?

Ruling Court Case. Bank Of Carrollton Vs. Latting, Volume 130 Pacific Reports, Page 144

The Carrollton Cotton Oil Company was overdrawn in its account with the Bank of Carrollton, to an amount of $948.86. Mr. Latting, secretary and treasurer of the company, visited the bank, and gave it a note for that amount. Several days later, he went to the bank again and affixed his personal signature to the note. This was an action against Latting, as surety, on the note in question.

Latting contended that he was not liable on the note, because there was no consideration for his promise to pay, in case the corporation did not.

Mr. Sharp, Chief Justice, said: "The transaction between the principal, the mill company, and the creditor, the bank, upon the execution and delivery of the note, became an executed one, and apparently the bank was satisfied with the manner in which the transaction was closed. It had extended credit to the mill company by permitting it to overdraw its account, and accepted its demand note in settlement of the overdraft. It does not appear that, at the time of the execution and delivery of the note, any request for security in any form was made. The subsequent undertaking of Latting was, therefore, a collateral one. The indebtedness was that of the mill company. There must, of legal necessity, be a sufficient consideration in order to render valid the contract of suretyship or guaranty. This consideration is usually either of benefit to the principal or surety, or of detriment to the creditor. But, where the consideration between the principal and the creditor has passed and become executed before the contract of the surety or guaranty is made, and such contract was no part of the original debt, such consideration is not sufficient to support such contract." Judgment was given for Latting.

Ruling Law. Story Case Answer

A contract of suretyship, like any other contract, in order to be a valid undertaking, must be supported by a sufficient consideration. The consideration for the contract of suretyship is usually not a benefit running to the surety. This is illustrated by the cases involving accommodation indorsers or accommodation comakers. The consideration which supports the original obligation between the principal and the third person is sufficient to support the undertaking of the surety, if his obligation was assumed at the same time that the original contract was executed. If the original obligation is already existing when the surety assumes his obligation, there must be a new and independent consideration therefor. This is usually true in cases of guaranty where a new consideration must be given to the guarantor to make his promise binding. In the Story Case, the banker had already given Peter Von Steen credit on his own integrity. There was no consideration for Mr. Siever's promise, and hence his contract to pay for Peter Von Steen could not be enforced.