Present: Carrico, C.J., Compton, Stephenson, Lacy, Keenan, and
Koontz, JJ., and Cochran, Retired Justice
HERMAN L. COURSON,
ET AL.
v. Record No. 951295 OPINION BY JUSTICE BARBARA MILANO KEENAN
March 1, 1996
MARGARET N. SIMPSON,
TRUSTEE, ET AL.
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Rosemarie P. Annunziata, Judge
In this appeal, we consider whether a surety was discharged
from its obligation by Code §§ 49-25 and -26, 1 after giving
written notice to the creditor to institute suit against a debtor
corporation which the surety concedes was insolvent.
In 1981, Springfield Associates, Inc. borrowed $28,460.50
from a trust established by the estate of Robert C. Nicoll (the
1
Code § 49-25 provides, in relevant part:
The surety . . . of any person bound by any contract
may, if a right of action has accrued thereon, require
the creditor . . . by notice in writing, to institute
suit thereon . . . . Such written notice shall also
notify the creditor . . . that failure to act will
result in the loss of the surety . . . as security for
the debt in accordance with § 49-26.
Code § 49-26 provides, in relevant part:
If such creditor . . . shall not, within thirty days
after such requirement, institute suit against every
party to such contract who is resident in this
Commonwealth and not insolvent and prosecute the same
with due diligence to judgment and by execution, he
shall forfeit his right to demand of such surety . . .
the money due by any such contract for the payment of
money, or the damages sustained by any breach of the
collateral condition or undertaking specified as
aforesaid; but the conditions, rights and remedies
against the principal debtor shall remain unimpaired
thereby.
Nicoll trust). The loan was secured by a deed of trust on the
personal residence of Eleanor E. and Herman L. Courson. Mr.
Courson was vice president and one of the principal stockholders
of Springfield Associates, Inc. However, neither he nor Mrs.
Courson was a party to the original note establishing the debt.
The following words were typed above the original note,
"secured by a deed of trust on Lot Three (3), West Hill
Subdivision, Fairfax County, Virginia." No reference to the deed
of trust was included in the body of the note.
In a 1984 letter, Springfield Associates, Inc., Carl H.
Hellwig, president of Springfield Associates, Inc., and Herman L.
Courson acknowledged to Robert F. Silver, one of the co-trustees
of the Nicoll trust, that the corporation owed money to the
Nicoll trust, and that the Courson deed of trust secured
performance of the corporate note. Later, Springfield
Associates, Inc. defaulted on the note.
In 1987, the Coursons attempted to obtain a release of the
deed of trust on their residence. On January 19, 1987, they
assigned to The George Mason Bank (the Bank) a sum sufficient to
pay the note. The Coursons directed that the assignment would
terminate only on fulfillment of one of three conditions: (1)
entry of a court order on behalf of the Nicoll trust against
Springfield Associates, Inc. and payment by the Bank from the
proceeds of the assignment in discharge of the obligation; (2)
foreclosure under the Coursons' deed of trust and payment by the
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Bank from the assigned funds an amount necessary to discharge the
lien of the deed of trust; or (3) entry of a court order
declaring that the Coursons' obligation with respect to the note
was discharged, and that the deed of trust was released.
Also on January 19, 1987, the Coursons sent a letter, by
certified mail, to Margaret N. Simpson, whom they believed to be
the sole surviving trustee of the Nicoll trust. 2 The letter
informed Simpson that the Coursons had assigned a sum sufficient
to discharge the full indebtedness on the note of Springfield
Associates, Inc. The letter also stated that if Simpson did not
institute suit for breach of the obligation of Springfield
Associates, Inc., the Coursons' obligation under the deed of
trust would be released, pursuant to Code §§ 49-25 and -26.
Simpson did not file suit on the note. The Coursons then
filed a bill of complaint for declaratory judgment, asking the
trial court to declare that the deed of trust was released by
2
When the trust was established, Silver and Simpson were co-
trustees. Silver died in 1985. In August 1985, the Alexandria
Circuit Court appointed Gordon P. Peyton as substitute trustee.
This substitution, however, was not recorded in the fiduciary
records in the Alexandria Circuit Court. In resolving the issues
presented, we will assume, without deciding, that the January 19,
1987, notice to Simpson constituted sufficient notice to Peyton
and to the Nicoll trust.
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operation of Code §§ 49-25 and -26. Simpson was served
personally with the bill of complaint, but did not file an
answer. In May 1987, a final decree was entered by default,
releasing the deed of trust and extinguishing the Coursons'
obligation as sureties. Thereafter, the Bank released the
assigned funds back to the Coursons.
In July 1987, Gordon P. Peyton, one of the two co-trustees
of the Nicoll trust, filed a motion to intervene, and Simpson
filed a motion to set aside the May 1987 decree. The trial court
granted both motions. 3
The Coursons filed an amended bill of complaint against
Christopher A. Nicoll and Lynne Nicoll Fuller, the beneficiaries
of the Nicoll trust (the beneficiaries), Simpson, and Peyton.
Simpson and Peyton (the trustees) did not respond to the amended
bill, but the beneficiaries did file an answer.
At trial, the uncontroverted evidence showed that
Springfield Associates, Inc. was insolvent. Mr. Courson
testified that, at the time he sent the demand letter to Simpson,
he knew that Springfield Associates, Inc. had no assets. In
addition, the evidence showed that the Coursons were not
personally liable on the note of Springfield Associates, Inc.
The trial court denied the Coursons' request for declaratory
judgment relief. The court held that, because the sole principal
3
These rulings are not assigned as error in this appeal.
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debtor on the note was insolvent, Code § 49-26 did not release
the Coursons from their obligation under the deed of trust. In
addition, the court held that Code § 49-26 did not require the
trustees to institute suit against the Coursons as sureties after
Simpson received the Coursons' demand, but only required the
trustees to sue any solvent principal debtors. This appeal
followed.
The issues before us are ones of first impression. The
Coursons first contend that, although Springfield Associates,
Inc. was insolvent, the corporation was "not insolvent for the
purposes of this specific debt," because the Coursons had
assigned sufficient funds to discharge the obligation of
Springfield Associates, Inc. Second, the Coursons argue that
Code § 49-26 required the trustees to sue every party to the
transaction, including the surety, after receiving a demand
notice from the surety under Code § 49-25. Therefore, according
to the Coursons, since the trustees did not institute suit
against them after receiving their January 19, 1987, letter, Code
§ 49-26 extinguished the Coursons' liability as surety. We
disagree with both contentions.
Initially, we note that a surety makes a direct promise to
perform an obligation in the event the principal debtor fails to
perform. As between the principal debtor and the surety, the
ultimate liability rests on the principal debtor, but the
creditor has a remedy against both. First Virginia Bank-Colonial
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v. Baker, 225 Va. 72, 77, 301 S.E.2d 8, 11 (1983); see also
Restatement of Security § 82 (1941).
Code § 49-25 allows a surety to require a creditor to
institute suit against the principal debtor if a right of action
has accrued on the principal debtor's obligation. Code § 49-26
provides that, if the creditor fails to institute such suit
within thirty days of the written demand notice sent by the
surety, the surety's obligation to the creditor is discharged.
However, the creditor's obligation to sue is not absolute.
Code § 49-26 requires a creditor to bring suit against a
principal debtor only if that debtor is "not insolvent." A
debtor is insolvent, within the meaning of Code § 49-26, when it
has insufficient property to pay all its debts. See Hudson v.
Hudson, 249 Va. 335, 340, 455 S.E.2d 14, 17 (1995); McArthur v.
Chase, 54 Va. (13 Gratt.) 683, 694 (1857).
The evidence showed that Springfield Associates, Inc. was an
insolvent corporation when the Coursons sent the demand letter.
As stated above, Mr. Courson's testimony established that
Springfield Associates, Inc. had no assets when the demand letter
was sent.
The Coursons have not cited, and we have not found, any
authority to support their contention that a corporation
simultaneously can be insolvent and yet "solvent for purposes of
a specific debt." We find no merit in the Coursons' contention,
because Code § 49-26 refers only to the solvency of the party to
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the contract, not to any single debt on which that party is
obligated. Thus, since the sole principal debtor on the note,
Springfield Associates, Inc., was insolvent, Simpson was not
required by Code § 49-26 to sue that debtor.
We next address the Coursons' contention that the January
19, 1987, demand letter required the trustees to institute suit
against the Coursons, as well as against Springfield Associates,
Inc. The Coursons urge us to adopt the majority holding in
Colonial American National Bank v. Kosnoski, 617 F.2d 1025, 1027
(4th Cir. 1980), in which the Court of Appeals ruled that the
term "every party" in Code § 49-26 includes the surety. We
decline to do so.
A surety relationship is based on two separate contractual
obligations. The first contract establishes the debt between the
principal debtor and the creditor. The second contract, between
the surety and the creditor, secures the principal debt. See
Bourne v. Board of Supervisors of Henrico County, 161 Va. 678,
684, 172 S.E. 245, 247 (1934). In considering whether the
Coursons are entitled to the remedy of discharge under Code
§ 49-26, we must determine which contract is referenced in that
statute.
Code § 49-26 requires a creditor, who receives a notice to
institute suit pursuant to that section, to sue "every party to
such contract who is resident in this Commonwealth and not
insolvent." (Emphasis added.) The antecedent to the term "such
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contract" is found in Code § 49-25, which states that "the surety
. . . of any person bound by any contract may, if a right of
action has accrued thereon, require the creditor . . . to
institute suit." (Emphasis added.)
This language in Code § 49-25 indicates that the contract on
which the creditor must institute suit is the contract by which
the principal debtor is bound, not the contract by which the
surety is bound. Thus, Code § 49-26 obligates the creditor, on
proper demand by the surety, to institute suit against any
principal debtor who is not insolvent. This section does not
obligate the creditor to bring suit against the surety in order
to prevent the surety from obtaining a discharge under the
4
statute.
Here, the contract which bound the principal debtor was the
1981 note between Springfield Associates, Inc. and the Nicoll
trust. Thus, the only contract on which the trustees would have
been obligated to institute suit, pursuant to the Coursons'
demand letter, was the note between Springfield Associates, Inc.
and the Nicoll trust. As stated above, the insolvency of
4
As Kosnoski addresses, the predecessor statute to Code §
49-26, originally enacted in 1794, was amended in 1849 to include
the phrase "every party." 617 F.2d at 1027. We believe that the
intention of this amendment was to require the creditor to bring
suit against every party to the principal debt.
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Springfield Associates, Inc. eliminated this requirement.
Further, since the Coursons were not personally liable on that
note, the trustees had no obligation to sue them.
We disagree with the Coursons' contention that the trial
court erred by failing to take the amended bill of complaint as
confessed to the trustees. Although the trustees were sued in
their representative capacity for the Nicoll trust, its
beneficiaries had timely answered the amended bill of complaint.
The beneficiaries were entitled to assert every position that
the trustees were entitled to assert. Thus, we find no error in
the trial court's decision not to enter a default decree against
the trustees.
We also find no merit in the Coursons' assertion that the
1984 letter to Robert F. Silver made the Coursons a party to the
original contract between the Nicoll trust and Springfield
Associates, Inc. That letter merely acknowledged the existing
obligation of Springfield Associates, Inc. to the Nicoll trust,
and the existing obligation of the Coursons to the Nicoll trust.
Likewise, the Courson's deed of trust was not incorporated by
reference into the note because the body of the note contained no
reference to the deed of trust.
For these reasons, we will affirm the trial court's
judgment.
Affirmed.
JUSTICE COCHRAN, with whom JUSTICE COMPTON and JUSTICE STEPHENSON
join, dissenting.
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I take a different view of this appeal.
The majority assumes, without deciding, that the January 19,
1987, notice from the Coursons to Margaret N. Simpson constituted
sufficient notice to Gordon P. Peyton and to the Nicoll trust. I
consider this initial question to be highly significant in the
appeal. The Coursons presented evidence in the trial court
sufficient to make a prima facie case that the required notice
was given, and this evidence was not rebutted. Accordingly, I
would hold, rather than assume, that there was sufficient notice
to Simpson, Peyton, and the Nicoll trust.
What then were the trustees, Simpson and Peyton, and the
beneficiaries of the Nicoll trust (Nicoll and Fuller) required to
do under the provisions of Code § 49-26? According to the
majority they were required to do nothing, because the principal
debtor, Springfield Associates, Inc., was insolvent under the
common definition of insolvency that its liabilities exceeded its
assets. It is undeniable, however, that they could have
instituted suit against the principal debtor, even if insolvent,
and recovered the full amount of the obligation for which the
Coursons were sureties. The Coursons had assigned to The George
Mason Bank a sum sufficient to discharge the obligation in full,
regardless of the financial status of the principal debtor. I
would hold that under these circumstances, the debtor was not
insolvent as to this obligation, and the Coursons were entitled
to have suit instituted against Springfield Associates, Inc.
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Having eliminated the principal debtor as a target because
of insolvency, the majority then concludes that there was no
other party to the contract against whom suit must be instituted.
To reach this conclusion the majority holds that the sureties
were not parties to the contract between the principal debtor and
the creditor, but were parties to a second contract securing the
indebtedness. I disagree with this unduly restrictive
interpretation of Code § 49-26. As a remedial statute, Code
§ 49-26 should be liberally construed for the benefit of
sureties. Wright's Administrator v. Stockton, 32 Va. (5 Leigh)
153, 159 (1834); see Univ. of Virginia v. Harris, 239 Va. 119,
124, 387 S.E.2d 772, 775 (1990).
In Colonial American Nat'l Bank v. Kosnoski, 617 F.2d 1025
(4th Cir. 1980), a majority of the panel (Judges Bryan and
Winter, Judge Murnaghan dissenting) ruled that the words "every
party" in Code § 49-26 include sureties. The opinion pointed out
that the original 1794 statute was amended in 1849 to
substantially its present form to require a creditor to institute
suit against every party to the contract who is resident in
Virginia and not insolvent. The opinion noted that the amendment
would have been unnecessary if the General Assembly had intended
that the guarantor could demand suit only against the principal.
I agree with this construction of Code § 49-26.
The note of Springfield Associates, Inc. dated September 30,
1981, in the principal sum of $28,460.50 states that it was
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secured by a deed of trust on property identified as that of the
Coursons. This reference, in my view, incorporated the deed of
trust into the contract between principal and creditor. See High
Knob Assoc. v. Douglas, 249 Va. 478, 487-88, 457 S.E.2d 349, 354-
55 (1995).
Moreover, by letter dated May 9, 1984, Springfield
Associates, Inc., and the Coursons reaffirmed the agreement, and
the Coursons further verified that their residence remained as
additional security "behind the corporate note."
Having concluded that the Coursons were parties to the
contract in question, it follows that I would hold that they
could and did demand that suit be instituted against them as
sureties. No such suit was instituted and I would hold that the
Coursons did what was required of them and are now entitled to
relief under Code § 49-26. For these reasons, I would reverse
the judgment of the trial court and enter final judgment in favor
of the Coursons.
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