Story Case

Mr. Brubaker of Holmesville, Nebraska, while on a visit to Chicago, became interested in a piano in Lyon and Healy's show window, and tried to purchase the instrument. He could not pay cash, and his credit was such that his note was unacceptable to the piano house, but he persuaded his Chicago friend, Mr. T. D. Powers, who was financially responsible, to agree to sign a note with him. Under this arrangement, Lyon and Healy sold the coveted piano to the man from Nebraska. Mr. Powers signed the note, "payable in ninety days, Mr. T. D. Powers, surety." When the note fell due, Mr. Brubaker requested Lyon and Healy for more time, and secured another thirty days in which to settle. At the end of this time, Mr. Brubaker disappeared, without having paid his note. Lyon and Healy sue T. D. Powers, who says: "You gave the man more time without my consent." Will this point carry any weight with the court!

Ruling Court Case. Sheldon Vs. Smith, Volume 35, Michigan Reports, Page 42; Volume 24, American Reports, Page 529

Place, Smith, and Owens had been partners in trade under the firm name of Place, Smith and Owens. While engaged in business, they became indebted to Sheldon in the sum of $969. In June of 1867, the firm was dissolved by mutual consent. Place purchased the interest of his co-partners, and agreed to pay all firm debts. He informed Sheldon of this arrangement, and gave him a note for the $969, the amount owed, although Smith and Owen knew nothing of the transaction. Place, in five years, became insolvent, and Sheldon then demanded payment of this note from Smith. Smith refused to pay the debt, and this suit was brought against him. He contended that he was not liable upon this note. He said that the arrangement made between the three former partners made Place the principal debtor, and that he and Owen were only sureties; that the acceptance of this note from Place was an act injurious to them as sureties. Therefore, he contended, in accordance with the law, they should be discharged.

Mr. Justice Cooley said: "Now a surety, as we understand it, is a person who, being liable to pay a debt or perform an obligation, is entitled, if it is enforced against him, to be indemnified by some other person, who ought himself to have made payment or performed, before the surety was compelled to do so. It is immaterial in what form the relation of principal and surety is established, or whether the creditor is or is not contracted with in the two capacities, as is often the case when rates are given or bonds taken. The relation is fixed by the arrangement and equities between the debtors or obligors, and may be known to the creditor, or wholly unknown. If it is unknown to him, his rights are in no manner affected by it, but if he knows that one party is surety merely, it is only just to require of him that in any subsequent action he may take regarding the debt, he shall not lose sight of the surety's equities."

Smith and Owen, in this case, were only sureties for Place, as principal debtor, since, in the law of partnerships, when one partner retires, and the remaining one assumes the obligations, the creditors who know of them must treat him as the principal debtor. But Sheldon, by accepting the note from Place, given without the knowledge of the sureties, created an entirely new transaction, and rendered himself unable to demand payment from the former partners. Therefore, they are discharged.

Ruling Law. Story Case Answer

Suretyship is that relation, created by contract, whereby one person, commonly called the surety, agrees to answer for the debt, default, or obligation of another, called the principal debtor. The surety is directly liable to the creditor for the act to be performed by the principal; that is, he makes an unconditional promise to pay the debt, whether or not the principal has defaulted in his obligation. The chief object is to secure the creditor, and this is done by making the surety liable in the same manner as the principal, and usually on a joint contract with him. Such is the case when two persons sign a promissory note, and only one receives the money, and for this reason is the principal, with the other as surety.

In the Story Case, Mr. Powers, by signing as surety, was liable, under the exact terms of the note. That is, he agreed to pay Mr. Brubaker's debt only under the particular conditions set forth in the contract. Therefore, he is not liable as the case now stands.