George Frey became surety on a note to the amount of $400, for the accommodation of Henry Howett. This note was indorsed to Victor Larsen, who, after its maturity and non-payment, secured judgment against Howett for the full amount plus the interest. This judgment by the state law became a lien upon Howett's real estate for one year, but not upon personal property, unless execution was levied. If execution was not levied on the property before the end of the year, the lien was also discharged as to real estate. Larsen failed to follow up his judgment by levying an attachment upon the property, and therefore, lost his lien on the real estate. Subsequently, he attempts to hold Frey, the surety, upon the note. The latter maintains in defense that Larsen had failed to follow his security, and had lost that which he had acquired; therefore, he, as surety, is discharged. Is this a good defense?

Ruling Court Case No. 1. State Vs. Sullivan, Volume 59 Arkansas Reports, Page 47; Volume 26 Southwestern Reports, Page 194

One H. E. Collum, executed his note to T. M. Evarts, treasurer of Scott County, Arkansas, for money loaned to Collum out of the school fund of the state. The defendant Sullivan, signed as security on Collum's note. The latter, at the same time, executed a mortgage upon his property to Evarts to secure the loan. Evarts failed to record this mortgage. Subsequently, Collum made a second mortgage upon the property to G. H. Lyman, who was not aware of the first mortgage executed to Evarts. Collum became insolvent, and departed from the state, failing to pay either Evarts or Lyman. Since Evarts failed to record his mortgage, Lyman was enabled to satisfy his claim out of the land, leaving nothing for Evarts. Therefore, the latter, in the name of the state, brought this action against Sullivan, as surety on the note.

Justice Edgar E. Bryant rendered the decision: "When Collum executed the mortgage to secure the note, it was the duty of the county treasurer to file the same for record, in order to preserve the security he had thereby acquired. Having failed to do this, he must suffer the loss occasioned thereby, and Sullivan is exonerated from all liability to pay the note, since the value of the land mortgaged exceeded the amount due on the note." Judgment was given for Sullivan.

Ruling Court Case No. 2. Ward Vs. Hayes And Beach, Volume 4 Johnson Chancery Reports, New York, Page 123; Volume 8 American Decisions, Page 554

Hayes, for the accommodation of Beach, indorsed several notes, which were later indorsed by Beach over to Ward, who paid value therefor. At the time of taking the notes, Ward also took a bond and mortgage from Beach as further security for payment of the note. Upon failure of Beach, the principal debtor, to pay the notes, this action was brought against Hayes. The question in this case is whether Ward ought to be required to resort, in the first instance, to the mortgage which he took from Beach, which is sufficient to satisfy the note.

Hayes maintained that the mortgage security is destroyed by the original agreement between Beach and Ward, whereby the latter demanded usurious interest. Hayes contends that, should he pay the note and have the bond and mortgage assigned to him, which, as a surety, he would have a right to demand by way of substitution and indemnity, he cannot collect thereon, because the bond is void. Therefore, he should not be compelled to pay the note in the first instance now.

The following opinion was given by the Chancellor: "A creditor, taking a mortgage from the principal debtor, does so, not only for his own security, but for the indemnity of the surety, and he must not do any act by which the indemnity may be invalidated in the first instance, or be subsequently defeated or destroyed. If the creditor has, in the first instance, destroyed the validity of his own security, taken from the principal debtor, he cannot have recourse to the plaintiff. This is true because he has voluntarily disabled himself from affording the surety the requisite substitute. The surety, by his very character and relation as surety, has an interest that the mortgage taken from the principal debtor should be dealt with in good faith, and held in trust not only for the creditor, but for the surety's indemnity." Judgment was, therefore, given for Hayes.

Ruling Law. Story Case Answer

If the surety pay his principal's debt, he has the right to be subrogated to all securities held by the creditor. If the creditor has, by any act, deprived the surety of such securities, and of thus reimbursing himself, to that extent the surety is discharged. This is the law, although the creditor has secured his security following the time when the debt was created, or has acquired it from some third person, such as a mortgage or pledge of property. The rule is applicable no matter how the security has been acquired. If the creditor has secured a judgment against the principal which has become a lien upon his property, and this is released, its surrender will release the surety to the same extent. The rule holds true where the creditor negligently loses his security, as where he fails to record a mortgage, and thereby gives a subsequent mortgagee prior rights.

The rule, however, does not go to the extent of compelling the creditor to acquire or prolong securities, or to renew them when they expire. Thus, although a judgment becomes a lien upon property, enabling the creditor to satisfy his claim out of the property by an execution levy, and a release of this judgment would discharge the surety, or a release of the execution levy, provided it is made, would discharge the surety; the creditor is not required to prosecute a suit to judgment; in the first place, having secured a judgment, he is not required to have an execution levied, and his failure to do so will not affect his rights, unless his action in substance amounts to a release of the lien of the judgment. The failure to follow the security offered by the possibility of levy upon personal property, in the Story Case, is no defense to Frey. The writer is also of the opinion that most courts will not hold Larsen responsible for failure to renew his lien upon the real estate. Therefore, Frey's defense is not good.