In the early case of Maure v. Harrison, 1 Eq. Cas. Abr. 93 K. 5, decided in 1692, it was held that a bond creditor was entitled to the benefit of all counter bonds, or collateral securities given by the principal debtor to his surety; and that the holder of a bond was therefore entitled to the benefit of a bond and mortgage given by the principal debtor to his surety in the bond for the indemnity of the surety. In 1 Sto. Eq. Jur., s. 502, it is laid down that "if a surety was a counter bond or security from the principal, the creditor will be entitled to the benefit of it, and may in equity reach such security to satisfy his debt." And in s. 638, "if a principal has given any securities to his surety, the creditor is entitled to all the benefit of such securities in the hands of the surety to be applied in payment of his debt." Kent, in 4 Kent Com. 307, says "Collateral securities given by a debtor to his surety are considered as trusts for the better security of the creditor's debt, and chancery will see that their intention be fulfilled." This doctrine is the corollary of the doctrine that a surety is entitled to the benefit of any security which the creditor may have taken from the principal. "The creditor and the surety have correlative rights; they are each entitled to the benefit of the securities held by the other for the payment of the debt." Sheld. Sub., s. 154; Saylors v. Saylors, 3 Heisk. 525; Osborn v. Noble, 46 Miss. 449; Wright v. Morley, 11 Ves. 22; Ex parte Perfect, Mont. Bk. L. 25; Bank v. Throop, 18 Johns. 505; Pratt v. Adams, 7 Paige 617, 627; Curtis v. Tyler, 9 Paige 432, 435; Parsons v. Briddock, 2 Vern. 608; Ex parte Waring, 19 Ves. 345; Ex parte Parr, Buck 191; Ex parte Prescott, 3 Deac. Ch. 218; Com. Dig. Ch. 4 D. 6.
The right of subrogation is a doctrine of equity jurisprudence. It does not depend upon privity or contract, expressed or implied. Only so far as the known equity may be supposed to be imported into any transaction, may it be said to raise a contract by implication. Mathews v. Aiken,1 N. Y. 595, 600. It is a mode which equity adopts to compel the ultimate discharge of a debt by him who in equity and good conscience ought to pay it; and is so administered as to secure justice without regard to form. Wall v. Mason,102 Mass. 313; New Bedford Inst. for Savings v. Bank, 9 Allen 175; Sheld. Sub., ss. 1, 11; Hauser v. King, 76 Va. 731. In Eastman v. Foster, 8 Met. 19, 24, Shaw, C. J., said, — "The effect of the mortgage [from the principal to the surety] was, in equity, to pledge the property in the form of a hypothecation, to the surety, for the payment of the mortgagor's debt; and the pledge is not redeemed, nor the equitable lien upon it discharged, until the debt is paid." "This decision," said Bigelow, J., in Rice v. Dewey, 13 Gray 47, 49, "rests on the broad principle of equity, that the estate of the mortgagee is to be treated as a mere security for the debt, and when the debt is assigned by the mortgagee, it carries with it in equity, as an incident, a right to have the estate *Page 176 appropriated for the payment of the debt in the hands of the assignee. To carry out and enforce this equity, the mortgagee is regarded as the trustee of those to whom he has assigned the debt secured by the mortgage, and can be compelled to appropriate it for their benefit." See, also, Vail v. Foster, 4 N.Y. 312; Paris v. Hulett, 26 Vt. 308; Homer v. Bank,7 Conn. 478, 484, 485; Bank v. Lee, 11 Conn. 112; Ex parte Gee, Glyn J. 330; King v. Baldwin, 2 Johns. Ch. 554; Miller v. Ord, 2 Binn 382; Russell v. Clark, 7 Cranch 69, 97; Kip v. Bank, 10 Johns. 63; 2 Sto. Eq. Jur. 1016.
In some cases an attempt has been made to raise a distinction between a mortgage executed by the debtor to his surety to secure the debt, and a mortgage simply to indemnify the surety. Thus, in Jones v. Bank,29 Conn. 25, it was held that such a mortgage merely indemnifying the surety does not in the first instance attach itself to the debt as an incident to it; but whatever equity arises in favor of the creditor in regard to the security arises afterwards, and comes into existence only upon the insolvency of the parties holden for the debt; and until this equity arises the surety has a right in equity as well as at law to release such security. But upon the insolvency of the principal and surety the creditor will be entitled to the benefit of the security held by the surety from the principal. See, also, Sheld. Sub., ss. 160, 161 162; In re Foye, 16 Nat. Bank. Reg. 572; In re Fickett, 72 Maine 266; Keyes v. Brush, 2 Paige 311; King v. Harman, 6 La. 607.
In Hayden v. Smith, 12 Met. 511, the principal debtor had given his surety a mortgage simply indemnifying him against the debt, which the surety assigned to the creditor in consideration of his release by the creditor from any other liability than the use of his name in the collection of the original debt; and it was held that the assignment did not operate as an extinguishment of the security, but that the creditor could hold the mortgaged premises until redeemed by the payment of the debt.
In New Bedford Inst. for Savings v. Bank, 9 Allen 175, where the mortgage from the principal debtor to his surety merely stipulated that he should indemnify the surety, and made no mention of the payment of the debt, the court said, — "But it is well settled by the authorities that the creditor has an equitable claim to the security, as well when the mortgage is given for mere indemnity as when the condition is added that the principal shall pay the debt. . . . . The equitable right of the creditor does not rest upon contract, but he is put upon the same equitable footing with a co-surety. The law has been long settled, and the distinction taken in the present case is novel. . . . . It cannot be that if an indorser, who has been made liable by demand and notice, goes into insolvency, the mortgage taken by him for indemnity is thereby released. It ought to be held by his assignee for the benefit of his estate. But it was taken for the general benefit of all his creditors, and its object was to indemnify his *Page 177 estate from the payment of the particular debt. Primarily, therefore, it would seem to be the proper course to apply the security to the payment of that debt, and thus leave the other creditors of the indorser in the same condition as if the indorsement had not been made." Moses v. Murgatroyd, 1 Johns. Ch. 119; Phillips v. Thompson, 2 Johns. Ch. 418; Ten Eyck v. Holmes, 3 Sandf. Ch. 428; Aldrich v. Martin, 4 R. I. 520; Hopewell v. Bank, 10 Leigh 214, 221.
In this case it appears that the principal debtor and the sureties are all insolvent, and under such circumstances the creditor, according to all the authorities, is entitled to the benefit of the security held by the sureties. In re Jaycox Green, 8 Nat. Bank. Reg. 241, and cases cited; In re Foye, 16 Nat. Bank. Reg. 572, and cases cited; In re Fickett, 72 Me. 266, and cases cited; 1 Lead. Cas. Eq. (ed. 1859) 163;
Hall v. Cushman, 16 N.H. 462, was a petition by a subsequent mortgagee to redeem a mortgage executed to the defendant by one Fay as indemnity for signing a note as surety for Fay. The defendant contended that his co-surety was entitled to the benefit of the mortgage. It appeared that after the loss had been adjusted by each surety paying one half of the debt, the defendant took the mortgage in question. All the case necessarily decides is, that one surety is not entitled to the benefit of a mortgage given to his co-surety after the loss had been adjusted by each of the sureties paying one half of the sum for which they were bound. But some remarks of Judge Parker, not necessary to the decision of the case, are to the effect that the principle that a surety is entitled to the benefit of security held by a co-surety "cannot be applied to mere promises to indemnify which rest in action, even if a security also resting in action is given to secure the performance of the promise." The reasoning of the opinion is opposed to the conclusion reached in this case. But in that case neither the creditor nor the defendant's co-surety was a party asking to have the security applied to the payment of the debt. There was no discussion how for the security would be regarded in equity as a trust fund for the payment of the debt, nor what were the equitable rights of the creditor. Inasmuch as the question now before us was not and could not be considered, because not then before the court, that case cannot be regarded as an authority to be followed upon this question. In Hayes v. Davis,18 N.H. 600, the same learned judge held that where security is taken for the indemnity of two co-sureties, one of them has no power to discharge it to the prejudice of the other, and remarked that if the security had been in the name of one surety alone, the other having paid would be entitled by way of subrogation to the benefit of it. See, also. Brown v. Ray,18 N.H. 102; Riddle v. Bowman, 27 N.H. 236; also, the comments of Bellows, C. J., upon Hall v. Cushman, in Putnam v. Osgood, 52 N.H. 148, 152. *Page 178
This application is an equitable proceeding in which substantial Justice without regard to form may be done. The plaintiffs have an equitable claim to the security in the hands of the sureties, provided they do nothing to the prejudice of the creditors of the sureties. It is only just that the plaintiffs should have the benefit of the security set apart for the indemnity of the sureties. It has become a trust fund for the better protection of the debt. The principal debtor is bankrupt, one of the sureties insolvent, and the other died insolvent. To treat the security as released is in effect to surrender it, not to the creditors of the bankrupt or of his sureties, but to the purchaser of the equity of redemption with notice, and who, it is claimed and not denied, paid a nominal sum merely for the security. By giving the plaintiffs the benefit of the security the debt will thereby be discharged out of the property set apart by the principal debtor, the creditors will be satisfied, and the sureties relieved. All will be accomplished in this proceeding, and circuity of action, delay, and the useless accumulation of costs will be prevented. All the equities are with the plaintiffs, and exact justice will be done by holding them entitled to the benefit of the security.
The third ground of demurrer is overruled. The plaintiffs have not an adequate remedy at law, and equity is peculiarly adapted for affording relief by enforcing securities of this kind, if, indeed, it is not the only proceeding by which relief can be afforded.
Case discharged.
STANLEY, J., did not sit: the others concurred.