strictly speaking, a lien upon any money or property belonging to Hurst, and while the surety could not, perhaps, by paying this debt to the bank, have become entitled to demand of it repayment out of Hurst's deposit, which is laid down by some of the authorities as the true test, yet it seems to us, that this bank, by the voluntary surrender to the principal of money more than sufficient to pay this debt, and which it is conceded that it had a right to apply to that purpose, has been equally reckless of the interests of this surety as though it had surrendered a security on which it had a specific lien. As said by the text-writer, above quoted from, in criticising this case in 76 Indiana: "If the bank at the maturty of a note held by it holds funds that, by the scratch of a pen, it could apply upon the note, thus securing itself, it is difficult to see why neglecting so easy a means of security is not as improper as giving up collateral expressly designated for the purpose of securing the note." 2 Morse on Banks and Banking, 3d ed., §563.

The right on part of this bank to retain a sufficiency of Hurst's deposit gave it the absolute control of an ample security for the payment of this debt. A lien by pledge could give no higher right to the security than this bank had. It had the unquestioned right to actually appropriate and apply this money, which it owed to Hurst, to the payment of Hurst's debt to it. It matters not whether the right to the security has its origin in the doctrine of setoff or under a pledge as collateral. It is the extent of the right to the security, rather than the source from which that right springs, that should determine the question whether the creditor can voluntarily surrender the security without releasing the surety; and, having had in its hands a fund which it could, by the mere exercise of its option to do so, have used for the satisfaction of this debt, and which, we may assume, the dictates of ordinary diligence and of prudent banking would have prompted it to thus use, this bank has, in our judgment, been guilty of bad faith toward the surety, who, according to the facts as they are admitted here, knew of this large deposit to the credit of his principal, who received no notice of the non-payment of the note until nearly four years thereafter, and who assumed, as he had a right to do under these circumstances, that the note had been paid at maturity.

If the facts be as alleged in the answer and admitted by the demurrer, and as we are bound, therefore, to assume them to be, this bank has shown such an utter disregard of, and such absolute indifference to, the interests of the surety, as to entitle him to a release from the liability which would have been satisfied by the principal, if the bank had simply chosen to have it satisfied,

and had exercised the option in favor of, instead of against, the surety.

Wherefore, the judgment of the lower court sustaining the demurrer to the answer and rendering judgment against appellant is reversed, and the action is remanded for further proceedings consistent with this opinion.

$283. Releasing of Surety. Note in 26 Harv. L. Rev. 763."The maker of a note after its maturity had general deposits with the bank holding the note sufficient to cover the debt, but afterwards withdrew them. Held, the surety is not released. National Bank of Commerce v. Gilvin, 152 S. W. 652 (Tex., Ct. Civ. App.).

The bank had the undoubted right to apply the deposit to discharge the debt. Bank v. Brewing Co., 50 Oh. St. 151; Clark v. Northampton Bank, 160 Mass. 26, 35 N. E. 108. Any release by the creditor of securities, though acquired subsequent to the debt, releases the surety to the value of the security. Baker v. Briggs, 8 Pick. (Mass.) 122; Rogers v. School Trustees, 46 Ill. 428. If this is solely because the surety loses his right of subrogation against the security, it has no application in the principal case where there is no security. National Mahaiwe Bank v. Peck, 127 Mass. 298. For the bank has no lien on the deposits. Thus it cannot hold the deposit if the note is not due. Merchants' National Bank v. Robinson, 97 Ky. 552; Columbia National Bank v. German National Bank, 56 Neb. 803, 77 N. W. 346. If there were a lien, though the deposits were insufficient to cover the debt, their payment would discharge the surety pro tanto. Wharton v. Duncan, 83 Pa. St. 40; Cummings v. Little, 45 Me. 183. But such is not the law. People's Bank v. Legrand, 103 Pa. St. 309; Bacon's Administrators v. Bacon's Trustees, 94 Va. 686, 27 S. E. 576. But the creditor's duty to the surety is more than mere refraining from interference with his right to subrogation. Thus he must register documents if necessary to protect the security. State Bank v. Bartle, 114 Mo. 276, 21 S. W. 816. He must notify the surety in certain cases. 1 Brandt, Suretyship, 3 ed., c. viii. He must accept a tender by the debtor. Curiac v. Packard, 29 Cal. 194; Spurgeon v. Smitha, 114 Ind. 453, 17 N. E. 105. But he owes no duty to

accept burdensome security. Fuller v. Tomlinson Brothers, 58 Ia. 111, 12 N. W. 127. Nor to prosecute his claim against the estate of a deceased debtor within the short period allowed. Sibley v. McAllaster, 8 N. H. 389; Villars v. Palmer, 67 Ill. 204. Contra, Bridges v. Balke, 106 Ind. 332, 6 N. E. 833. Nor to prevent a judgment lien from expiring. Kindt's Appeal, 102 Pa. St. 441. Nor to prove against the estate in bankruptcy or insolvency. Clopton v. Spratt, 52 Miss. 251; Schott v. Youree, 142 Ill. 233, 31 N. E. 591. See 20 Harv. L. Rev. 502. Nor to sue the debtor though requested by the surety. Hickok v. Farmers' & Mechanics' Bank, 35 Vt. 476; Harris v. Newell, 42 Wis. 687. Contra, Pain v. Packard, 13 Johns (N. Y.) 174. An affirmative duty, then, is imposed when slight action by the creditor will greatly benefit the surety. In the principal case, only a transfer in the bank's books is required, and it seems that the duty should be imposed. Pursifull v. Pineville Banking Co., 97 Ky. 154, 30 S. W. 203; Commercial National Bank v. Henninger, 105 Pa. St. 496. The weight of authority, however, holds the opposite result necessary to preserve the fluidity of bank deposits by protecting the bank in paying any check covered by a deposit. Davenport v. State Banking Co., 127 Mass. 298. National Mahaiwe Bank v. Peck, 126 Ga. 136, 54 S. E. 977. There seems no reason for distinguishing between deposits at and those after the debt's maturity, but this has been done in one state. People's Bank v. Legrand, supra; Commercial National Bank v. Henninger, 105 Pa. St. 496."

$284

SMITH v. SHELDEN et al.

Supreme Court of Michigan, 1876. [35 Mich 42.] COOLEY, C. J.: The legal questions in this case arise upon the following facts:

Prior to June, 1867, Eldad Smith, Isaac Place, and Francis B. Owen were partners in trade under the firm name of Place, Smith & Owen, and as such became indebted to defendants in error in the sum of $969 on book account.

In the month mentioned the firm was dissolved by mutual consent. Place purchasing the assets of his co-partners and agreeing to pay off the partnership liabilities, including that to the defendants in error. On the second day of the following

month Place informed the defendants in error of this arrangement, and that he had taken the assets and assumed the liabilities of the firm, and they, without consent or knowledge of Smith and Owen, took from Place a note for the amount of the firm indebtedness to them, payable at one day with ten percentum interest. They did not agree to receive this note in payment of the partnership indebtedness, but they kept it and continued their dealings with Place, who made payments upon it. The payments, however, did not keep down the interest. Place, in 1872, became insolvent and made an assignment, and Smith was then called upon to make payment of the note. This was the first notice he had that he was looked to for payment. On his declining to make payment suit was brought on the original indebtedness and judgment recovered.

The position taken by the plaintiffs below was, that as they had never received payment of their bill for merchandise they were entitled to recover it of those who made the debt, the giving of the note which still remained unpaid being immaterial.

On behalf of Smith it was contended that, by the arrangement between Place and his co-partners, the latter, as between the three, became the principal debtor, and that from the time when the creditors were informed of this arrangement they were bound to regard Place as principal debtor and Smith and Owen as sureties, and that any dealing of the creditors with the principal to the injury of the sureties would have the effect to release them from liability. And it is further contended that the taking of the note from Place, and thereby giving him time, however short, was in law presumptively injurious.

Upon this state of facts the following questions have been argued in this court:

1. Was the note given by Place in the co-partnership name for the co-partnership indebtedness, but given after the dissolution, binding upon Smith and Owen?

2. If Smith and Owen were not bound by the note, were they entitled to the rights of sureties? And

3. Did the taking of the note given by Place discharge Smith and Owen from their former liability?

On the first point it is argued in support of the judgment that when a co-partnership is dissolved the partner who is entrusted with the settlement of the concern should be held to have implied authority to give notes in settlement. On the other hand it is insisted that in law he has no such authority, and' that if he assumes, as was done in this case, to give a note in the partnership name, it will in law be his individual note only.

Whatever might be the case if the obligation which was given had been a mere acknowledgment of the amount due, in the form of a due bill or I. O. U., we are satisfied that there is no good reason for recognizing in the partner who is to adjust the business of the concern any implied authority to execute such a note as was given in this case. This note was something more than a mere acknowledgment of indebtedness, and it bore interest at a large rate. It was in every respect a new contract. The liability of the parties upon their indebtedness would be increased by it if valid, and their rights might be seriously compromised by the execution of paper payable at a considerable time in the future if the partner entrusted with the adjustment of their concerns were authorized to make new contracts. assumed in F. & M. Bank v. Kercheval, 2 Mich. 506-519, that the law was well settled that no such implied authority existed, and we are not aware that this has before been questioned in this state. See Pennoyer v. David, 8 Mich. 407. We think it much safer to require express authority when such obligations are contemplated, than to leave one party at liberty to execute at discretion new contracts of this nature, which may postpone for an indefinite period the settlement of their concerns, when a settlement is the very purpose for which he is to act at all.

It was

For a determination of the question whether Smith and Owen were entitled to the rights of sureties, it seems only necessary to point out the relative position of the several parties as regards the partnership debt. Place, by arrangement, had agreed to pay this debt, and as between himself and Smith and Owen, he was legally bound to do so. But Smith and Owen were also liable to the creditors equally with Place, and the latter might look to all three together. Had they done so and made collections from Smith and Owen, these parties would have been entitled to demand indemnity from Place. This we believe to be a correct statement of the relative rights and obligations of all.

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 the two capacities, as is often the case when notes 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