28 U.S. 470 - John M'Donald v. George B Magruder

This is a writ of error to a judgment rendered by the circuit court of the United States, for the county of Washington, in the district of Columbia, in an action of indebitatus assumpsit, brought by the first indorser of a promissory note against the second indorser, to recover half its amount. The note was made by Samuel Turner, Jun. and indorsed George B. Magruder, John G. M'Donald. At the trial of the cause a case was agreed by the parties, and the judgment of the circuit court was rendered in favour of the plaintiff on a verdict given by the jury, subject to the opinion of the court.

That a prior indorser is, in the regular course of business, liable to his indorsee, although that indorsee may have afterwards indorsed the same note, is unquestionable. When he takes up the note he becomes the holder as entirely as if he had never parted with it, and may sue the indorser for the amount. The first indorser undertakes that the maker shall pay the note; or that he, if due diligence be used, will pay it for him. This undertaking makes him responsible to every holder, and to every person whose name is on the note subsequent to his own, and who has been compelled to pay its amount.

This is the regular course of business where notes are indorsed for value: but it is contended that where less than the amount is received, the indorser is responsible to his immediate indorsee only for the sum actually paid; consequently, if nothing is paid, the mere indorsement does not bind the indorser to pay his immediate indorsee any thing. If B. indorses to C. the note of A. without value, and A. fails to take it up, it is as between B. and C. a contract without consideration, on which no action arises. This is undoubtedly true if C. retains the note in his own possession; and may be equally true if he indorses it for value. When he repays the money he has received, he is replaced in the situation in which he would have been had he never parted with the note. If he puts it into circulation on his own account, new relations may be created between himself and his immediate indorsee, which may be affected by circumstances. In the case under consideration, the note took the direction intended by all the parties. It was indorsed by Magruder for the purpose of enabling Turner to discount it at the bank. To insure this object, Turner applied to M'Donald, who placed his name also on the paper. No intercourse took place between the indorsers. No contract express or implied existed between them other than is created by their respective liabilities, produced by the act of indorsement. What are these liabilities? The first indorser gave his name to the maker of the note for the purpose of using it in order to raise the money mentioned on its face. He made himself responsible for the whole sum upon the sole credit of the maker. His undertaking is undivided. He does not understand that any person is to share this responsibility with him.

But either the bank is unwilling to discount the note on the credit of the maker and his single indorser, or the maker supposes his object will be insured by the additional credit given by another name. He presents the note therefore to M'Donald, and asks his name also. M'Donald accedes to his request, and puts his name on the instrument. If the maker passes the note for value, the liability of M'Donald to the holder is the same as if that value had been received by M'Donald himself. Why is this? No consideration is received by M'Donald, and this fact is known to the holder and discounter of the note. But a consideration is paid by the holder to the maker, and paid on the credit of M'Donald's name. He cannot set up the want of a consideration received by himself; he is not permitted to say that the promise is made without consideration; because money paid by the promissee to another, is as valid a consideration as if paid to the promissor himself.

In what does the claim of the second on the first indorser differ from that of the holder on the second indorser? Neither has paid value to his immediate indorser; but the holder has paid value to the maker on the credit of all the names to the instrument. The second indorser, if he takes up the note, has paid value to the holder in virtue of the liability created by his indorsement. If this liability was founded equally on the credit of the maker and of the first indorser, if his undertaking on the credit of both subjects him to the loss consequent on the payment of the note; how can the contract between him and his immediate indorser be said to be without consideration?

If it be true, as we think it is, that Magruder, when he indorsed the note, and returned it to the maker to be discounted, made himself responsible for its amount on the failure of the maker, if this responsibility was then complete, how can it be diminished by the circumstance that M'Donald became a subsequent indorser? How can the legal liability of a first indorser to the second, who has been compelled to take up the note, be changed otherwise than by an express or implied contract between the parties?

This question has arisen and been decided in the courts of several states. Wood vs. Repold, 3 Harris & Johns. 125, was a bill drawn by A. Brown, Jun. at Baltimore, on Messrs Goold and Son of New York, in favour of G. Wood & Co., and indorsed by G. Wood & Co. and afterwards by Repold, the plaintiff. The bill was drawn and indorsed for the purpose of raising money for the drawer, and was discounted at the bank of Baltimore. On being protested for non-payment, it was taken up by Repold, and this suit brought against the first indorser. Payment was resisted because the indorsement was, without consideration, for the accommodation of the drawer; but the court sustained the action. The same question arose in Brown vs. Mott, 7 Johns. 361, on a promissory note, and was decided in the same manner. In that case the court said, that if he had taken it up at a reduced price, it would seem that he could only recover the amount paid. Undoubtedly, if M'Donald had been compelled to pay a moiety of this note, he could have recovered only that moiety from Magruder.

The case of Douglass vs. Waddle, 1 Hammond, 413, was determined differently. This case was undoubtedly decided on general principles; but the custom of the country and a statute of the state are referred to by the court as entitled to considerable influence. The weight of authority as well as of usage is, we think in favour of the liability of the first indorser.

The claim of Magruder has also been maintained on the principle that they are co-sureties, and that he who has paid the whole note may demand contribution from the other.

The principle is unquestionably sound if the case can be brought within it. Co-sureties are bound to contribute equally to the debt they have jointly undertaken to pay; but the undertaking must be joint, not separate and successive. Magruder and M'Donald might have become joint indorsers. Their promise might have been a joint promise. In that event each would have been liable to the other for a moiety. But their promise is not joint. They have indorsed separately and successively, in the usual mode. No contract, no communication, has taken place between them which might vary the legal liabilities these indorsements are known to create. Those legal liabilities therefore remain in full force.

Upon this question of contribution, the counsel for the defendants in error rely on two cases, reported in 2 Bos. & Pull. 268 and 270. The first, Cowell vs. Edwards, was a suit by one surety on a bond against his co-surety for contribution. It was intimated by the court that each surety was liable for his aliquot part, but not liable at law to any contribution on account of the insolvency of some of the sureties. The party who had paid more than his just proportion of the debt could obtain relief in equity only.

The second case, Sir Edward Deering vs. The Earl of Winchelsea, Sir John Rous, and the Attorney General, was a suit in chancery, in the exchequer. Thomas Deering had been appointed receiver of fines, &c. and had given three bonds conditioned for faithful accounting, &c. In one of these the plaintiff was surety, in another lord Winchelsea, and in the third, sir John Rous. Judgment was obtained on the bond in which the plaintiff was surety, and this suit was brought against the sureties to the two other bonds for contribution. It was resisted on the ground that there was no contract between the parties, they having entered into special obligations. The lord chief baron was disposed to consider the right to contribution as founded rather on the equity of the parties than on contract, and the court decreed contribution.

In this case the parties were equally bound, were equally sureties for the same purpose, and were equally liable for the same debt. Neither had any claim upon the other superior to what that other had on him. The parties stood in the same relation, not only to the crown, to whom they were all responsible, and to the person for whom they were sureties, but to each other. Under these circumstances contribution may well be decreed ex equali jure. But, in the case at bar, the parties do not stand in the same relation to each other. The second indorser gives his name on the faith of the first indorser as well as of the maker. The first indorser gives his name on the faith of the maker only. Unquestionably these liabilities may be changed by contract; but no contract existing between these parties, it is not a case to which the principle of contribution applies.

No notice has been taken of the form of the action. It is admitted that Magruder, having paid the whole note, may recover a moiety from M'Donald, if their undertaking is to be considered as joint; if he, as first indorser, is not responsible to M'Donald for any part of it which M'Donald may have paid.

The judgment is to be reversed, and the cause remanded, with directions to set aside the verdict, and enter judgment as on a nonsuit.