§ 26-1. Surety and principal distinguished in judgment and execution.
In the trial of actions upon contracts either of the defendants may show in evidence that he is surety, and if it be satisfactorily shown, the jury in their verdict, or the magistrate in his judgment, shall distinguish the principal and surety, which shall be endorsed on the execution by the clerk of superior court.
(1826, c. 31, s. 1; R.C., c. 31, s. 124; Code, s. 2100; Rev., s. 2840; C.S., s. 3961; 1973, c. 108, s. 14.)
A guaranty of payment is an absolute promise by the guarantor to pay a debt at maturity if it is not paid by the principal debtor. This obligation is independent of the obligation of the principal debtor, and the creditor's cause of action against the
guarantor ripens immediately upon the failure of the principal debtor to pay the debt at maturity. Exxon Chem. Ams. v. Kennedy, 59 N.C. App. 90, 295 S.E.2d 770 (1982).
A surety is bound with his principal as an original promisor. Coleman v. Fuller, 105 N.C. 328, 11 S.E. 175 (1890).
Surety Must Pay Debt When Principal Fails to Do So. - The surety's promise is to pay a debt, which becomes his own debt when the principal fails to pay it. Coleman v. Fuller, 105 N.C. 328, 11 S.E. 175 (1890).
The liability of a surety cannot be enlarged by construction. George D. Witt Shoe Co. v. Peacock, 150 N.C. 545, 64 S.E. 437 (1909).
Liability of Principal and Surety Limited to Terms of Contract. - The principal and his surety are liable under a contract expressed in definite terms and their liability cannot be carried beyond the fair meaning of those terms. State ex rel. Duckett
v. Pettee, 50 N.C. App. 119, 273 S.E.2d 317 (1980).
Obligation of Surety on Corporate Debt Is Measured by Obligation of Corporation. - While a surety's liability is primary, its liability for a corporate debt is not indistinguishable from that of the corporation. The obligation of the surety is ordinarily
measured by the obligation of the corporation, and a surety has usually been held to his or her contract, except where the entire agreement is unenforceable. Colonial Acceptance Corp. v. Northeastern Printcrafters, Inc.,
75 N.C. App. 177, 330 S.E.2d 76 (1985).
Order of Liability. - The order in which parties to a security are liable at law is the order in which, independently of contract, they will be held bound in equity. Smith v. Smith, 16 N.C. 173 (1828).
Where it appeared that a negotiable instrument was signed by three persons other than the principal obligor, and it also appeared from a writing executed some time thereafter by one to indemnify the other two that they (the other two) "signed as co-sureties"
of the third, it was held that the character of suretyship in which all three signed was sufficiently established. Southerland v. Fremont, 107 N.C. 565, 12 S.E. 237 (1890).
Parol Evidence to Show Coprincipals. - In Williams v. Glenn, 92 N.C. 253 (1885), the note (under seal) was made with W. "as principal" and B. and G. "as sureties, " yet as between the obligors the court held that parol evidence was admissible to show that Boyden and Glenn were coprincipals, and that the rule of contribution obtained among them. Smith v. Carr, 128 N.C. 150, 38 S.E. 732 (1901).
While all of the makers may appear as principals upon the face of the paper, or some principals and some sureties, yet it may be shown that while appearing as principals they were in fact sureties, or some principals and others sureties; and upon the
establishment of the fact of co-suretyship, the right of contribution follows. Smith v. Carr, 128 N.C. 150, 38 S.E. 732 (1901).
Issue Submitted. - In an action against the maker and endorsers of a note, an issue would be submitted as to whether or not the endorsers were cosureties, or whether one was a supplemental surety to the other. Parish v. Graham, 129 N.C. 230,
39 S.E. 825 (1901).
Suretyship May Be Alleged and Proved. - If the appellee was surety, as he alleges, he might, as allowed by the statute (this section), have shown, by proper evidence on the trial in the actions in which the judgments were obtained by the appellant, that he was such surety, and the jury in their verdict, or the justice of the peace in his judgment, would have distinguished him as surety, and the executions would have been issued with a proper endorsement to that effect; and in that case the sheriff would have levied the sum required to be collected, first, out of the property of the principal if he had sufficient for that purpose. Gatewood v. Leak, 99 N.C. 357, 6 S.E. 635 (1888).
When sued, either of the defendants could allege that he was surety, and, if the allegation was proven, the jury in their verdict and the court in the judgment would distinguish the principal and surety, and it would be so endorsed on the execution issued for the collection of the judgment. Bank of Commerce & Trusts v. McArthur, 261 F. 97 (E.D.N.C. 1919), aff 'd, 265 F. 1019 (4th Cir. 1920), aff'd, 265 F. 1019 (4th Cir. 1920).
Practice of Courts. - It is not the practice of the courts to see that evidence of suretyship is produced and such fact inserted in the judgment, in the absence of the defendants and without any averment or request on their part. Morehead Banking Co.
v. Duke, 121 N.C. 110, 28 S.E. 191 (1897).
Effect of Not Alleging Suretyship. - It would not seem that, by failing to set up his suretyship in the action brought by the American National Bank on the note, McArthur lost any equitable rights against McBryde to which he was entitled as surety. It is true, as held in Gatewood v. Leak, 99 N.C. 357, 6 S.E. 635 (1888), that the surety, who has failed to set up the fact and have it found as provided by the statute, cannot enjoin the plaintiff in the judgment from proceeding to sell his land for its satisfaction. Neither McArthur nor plaintiffs may enjoin the bank from enforcing its judgment against himself until it has exhausted McBryde's property. Bank of Commerce & Trusts v. McArthur, 261 F. 97 (E.D.N.C. 1919), aff 'd, 265 F. 1019 (4th Cir. 1920).
The magistrate is not bound to discriminate except upon the application of, and due proof by, the surety. Stewart v. Ray, 26 N.C. 269 (1844).
Effect of Finding of Jury. - Where a suit is brought at law against two persons, a finding of the jury that one of the defendants is principal, and the other surety, if binding at all between the parties, does not in equity establish the relation of suretyship.
Lowder v. Noding, 43 N.C. 208 (1851).
When Execution Does Not Distinguish. - Where an execution against two does not distinguish which is principal and which surety, the sheriff has a right to collect it from either; and the sheriff may collect it from the surety, though the plaintiff in
the execution directed him to collect it from the other. Shuford v. Cline, 35 N.C. 463 (1852).
Right of Surety to Assign Judgment. - It was stated in Barringer v. Boyden, 52 N.C. 187 (1859): "The right of a surety to keep alive a judgment, which he has paid, by having an assignment made to a stranger for
his benefit, is unquestionable. When he advances the money, he has a clear equity (if he desires it) to be subrogated to the rights of the creditor, and to use the creditor's judgment for the purpose of coercing payment against the principal.
Whether money advanced in such a way be an extinguishment or a purchase seems to be a question of intention. If it be paid, and nothing be said or done to show a contrary intendment, an extinguishment will be presumed; but if an assignment
be made to one party, so as to show a purpose to keep it alive, it is sufficient. That a party defendant furnishes the money, and that the assignment is made on a day subsequent to the advancement of the money, can make no difference, provided
it was intended, at the time it was advanced, as a purchase and not as a payment." Bank of Commerce & Trusts v. McArthur, 261 F. 97 (E.D.N.C. 1919), aff 'd, 265 F. 1019 (4th Cir. 1920), aff'd, 265 F. 1019 (4th Cir. 1920).
Signing on Faith of Creditor's Representations. - Persons signing a note as surety upon faith in the creditor's representation that another will sign as cosurety, leaving the note with the creditor for that purpose, are not bound thereon to such creditor
upon the failure of the fulfillment of the representation. Bank of Benson v. Jones, 147 N.C. 419, 61 S.E. 193 (1908).
Bond Joint and Several on Face. - Although a bond is joint and several on its face, it can be shown by parol that a party thereto is a surety. Coffey v. Reinhardt, 114 N.C. 509, 19 S.E. 370 (1894).
Statute of Limitations. - If the purchaser of a note before maturity, for value and without notice, subsequently receives notice that a party thereto is a surety and delays action for three years after maturity, the surety will be protected by the three
years' statute of limitations. Coffey v. Reinhardt, 114 N.C. 509, 19 S.E. 370 (1894).
Surety Held Liable for Face Value of Its Bond. - Where individual defendant as guardian of an incompetent and defendant insurance company as surety executed a bond and where nothing in the language of the bond indicated any intent that the bond be anything
other than continuous, the bond clearly went to the entire administration of the estate, not to a single year of the administration and, thus, defendant insurance company's maximum liability over the entire term of guardianship was the face
amount of the bond. State ex rel. Duckett v. Pettee, 50 N.C. App. 119, 273 S.E.2d 317 (1980).
Usury Defense Precluded. - A surety for a corporate debt answered "in behalf" of the corporation, within the plain meaning of G.S. 24-9, and was,
under the plain meaning of that section, precluded from raising the defense of usury. Colonial Acceptance Corp. v. Northeastern Printcrafters, Inc., 75 N.C. App. 177, 330 S.E.2d 76 (1985).
Discharge in bankruptcy of debtor does not affect liability of any other entity on such debt. Exxon Chem. Ams. v. Kennedy, 59 N.C. App. 90, 295 S.E.2d 770 (1982).
§ 26-2. Principal liable on execution before surety.
When an execution, indorsed as aforesaid, shall come to the hands of any officer for collection, he shall levy on all the property of the principal, or so much thereof as shall be necessary to satisfy the execution, and, for want of sufficient property of the principal, also on the property of the surety, and make sale of all the property of the principal levied on before that of the surety.
(1826, c. 31, s. 2; R.C., c. 31, s. 125; Code, s. 2101; Rev., s. 2841; C.S., s. 3962.)
Surety's Interest in Collateral. - The surety is entitled to the benefit of every additional or collateral security which the creditor gets into his hands for the debt for which the surety is bound, as soon as such a security is created, and by whatever
means the surety's interest in it arises; and the creditor cannot himself, nor by any collusion with the debtor, do any act to impair the security or destroy the surety's interest. First Nat'l Bank v. Homesley, 99 N.C. 531,
6 S.E. 797 (1888).
§ 26-3. Summary remedy of surety against principal.
Any person who may have paid money for and on account of those for whom he became surety, upon producing to the clerk of superior court, a receipt, and showing that an execution has issued, and he has satisfied the same, and making it appear by sufficient testimony that he has expended any sum of money as the surety of such person, may move the clerk for judgment against his principal for the amount which he has actually paid; a citation having previously issued against the principal to show cause why execution should not be awarded; and should the principal not show sufficient cause, the clerk shall award execution against the principal.
(1797, c. 487, s. 1, P.R.; R.C., c. 110, s. 1; Code, s. 2093; Rev., s. 2842; C.S., s. 3963; 1973, c. 108, s. 15.)
Legal Periodicals. - Assignment of rights and delegation of duties or conditions, see 13 N.C.L. Rev. 116 (1935).
I. GENERAL CONSIDERATION.
Constitutionality. - This section, providing that a surety who shows that he has paid out money upon a judgment against his principal and himself may have a citation issued to the principal by the clerk to show cause why execution should not be awarded
him therefor, is constitutional. Bank of N. Wilkesboro v. Wilkesboro Hotel Co., 147 N.C. 594, 61 S.E. 570 (1908).
A surety who has paid money for his principal cannot sue him in tort. Ledbetter v. Torney, 33 N.C. 294 (1850).
Notice to Corporation to Show Cause. - A notice issued by a court of competent jurisdiction, served upon the secretary and treasurer of a corporation, to show cause why an execution should not be awarded in favor of a surety who had paid a judgment against
the corporation and himself, which set out the date and amount of the judgment, the relation of the parties, that the surety had actually expended money in payment of said judgment, and that the principal had not reimbursed him, was in compliance
with the section. Bank of N. Wilkesboro v. Wilkesboro Hotel Co., 147 N.C. 594, 61 S.E. 570 (1908).
Validity of Order. - While the court could not revive a dormant judgment against the principal and the surety, an order otherwise valid was not rendered void by the addition of the words "that the judgment heretofore rendered is hereby revived, to the
end that execution may be issued." The last sentence would be regarded as surplusage. Bank of N. Wilkesboro v. Wilkesboro Hotel Co., 147 N.C. 594, 61 S.E. 570 (1908).
When Surety Entitled to Action for Money Paid. - A judgment against a surety will not entitle him to maintain an action for money paid to the use of the defendant, until it has been satisfied. Hodges v. Armstrong, 14 N.C. 253 (1831).
To enable a surety to recover for money paid to the use of his principal, he must prove an actual payment in satisfaction of the debt. Hodges v. Armstrong, 14 N.C. 253 (1831).
The principal is not obligated to his surety until his surety has made a payment. American Nat'l Fire Ins. Co. v. Gibbs, 260 N.C. 681, 133 S.E.2d 669 (1963).
Right of Surety When Funds Misapplied. - Where a surety prays a judgment against his principal, he may recover any funds wrongfully converted or misapplied by the principal. Fidelity Co. v. Jordan, 134 N.C. 236,
46 S.E. 496 (1904).
Surety Cannot Trace Property. - A surety who has to pay the debt has no equity to follow the specific property which the principal debtor purchased with the borrowed money. Carlton v. Simonton, 94 N.C. 401 (1886).
Bank Deposits. - Where the principal debtor borrowed a sum of money, which he deposited in a bank which soon afterwards became insolvent, and the surety had to pay the debt, the debt, the surety had no equity to enjoin the principal debtor from collecting
the dividends from the insolvent bank, until he could recover a judgment. Carlton v. Simonton, 94 N.C. 401 (1886).
Where a writ is issued against two copartners for partnership debt, and one of them is arrested and gives bail, such bail, upon being afterwards compelled by due course of law to pay the debt, has no remedy except against the individual for whom he became
bail. He has no claim upon the other partner. Foley v. Robards, 25 N.C. 177 (1842).
Where one indorsed a note at the request of a member of a firm for the purpose of obtaining money for the use of the firm, and the proceeds were so used, the indorser, upon payment of the note, can recover therefor against the firm, though no member of
such firm signed the note. Springs v. McCoy, 122 N.C. 628, 29 S.E. 903 (1898).
Property mortgaged by an administrator to a surety to secure him against loss may be subjected to payment of estate debts, though the personal liability of the surety is barred. Hooker v. Yellowley, 128 N.C. 297, 38 S.E. 889 (1901).
A mortgage given by an administrator to a surety on his bond to secure the latter against loss inures to the benefit of the creditors of the estate. Hooker v. Yellowley, 128 N.C. 297, 38 S.E. 889 (1901).
The obligation of a bond for the forthcoming of property is only that the property shall be delivered to the officer at the time designated, and not that the execution shall be delivered to the officer at the time designated and not that the execution
shall be satisfied; and therefore, if a surety to the forthcoming bond before it is forfeited discharges the execution without the request of his principal, such surety cannot maintain an action against his principal for money expended for
the latter's use, although by the payment of the money in satisfaction of the execution the bond was discharged. Gray v. Bowls, 18 N.C. 437 (1836).
Bond of Guardian in Suit on Behalf of Ward. - Where a guardian, having given a bond for the prosecution of a suit by him on behalf of his ward and having signed the same individually, was compelled to pay the costs of the suit out of his individual estate,
he could not recover the same under the provisions of this section, which gives a summary method for reimbursement of a surety who has paid money for another. Green v. Burgess, 117 N.C. 495, 23 S.E.
Subrogation Explained. - Subrogation is the substitution of another person in the place of a creditor, so that the former can succeed to the rights of the latter in relation to the debt; to entitle one to such equitable relief, he must have paid the money upon request or as surety or under some compulsion made necessary by the adequate protection of his own rights. Liles v. Rogers, 113 N.C. 197, 18 S.E. 104 (1893).
Legal subrogation is based upon payment and exists where one who has an interest to protect or is secondarily liable makes payment, while conventional subrogation, so named from the convention or agreement of the civil law, is founded upon the agreement of the parties, which really amounts to an equitable assignment. Liles v. Rogers, 113 N.C. 197, 18 S.E. 104 (1893); Commercial & Farmers Bank v. Scotland Neck Bank, 158 N.C. 238, 73 S.E. 157 (1911); Journal Publishing Co. v. Barber, 165 N.C. 478, 81 S.E. 694 (1914); Joyner v. Reflector Co., 176 N.C. 274, 97 S.E. 44 (1918).
The doctrine of equity, by which subsequent cases have been ruled, was first announced in the following terms: "By the fact of payment the surety becomes an equitable assignee of all such securities, and is entitled to have them assigned and delivered up to him by the creditor, in order that he may enforce them for his own reimbursement and exoneration. If, therefore, the creditor refuses to surrender up such securities, the surety may maintain an equitable suit to compel their assignment and surrender." Bank of Commerce & Trusts v. McArthur, 261 F. 97 (E.D.N.C. 1919), aff 'd, 265 F. 1019 (4th Cir. 1920), aff'd, 265 F. 1019 (4th Cir. 1920).
It is held that an endorser on a note may pay it and demand its delivery, and if the contract has been merged into a judgment, his right is to an assignment of the judgment and to enforce it for his own benefit. The principle is clearly stated by Prof. Langdell: "If payment of a debt be secured by a pledge of the debtor's property, and also by the obligation of a personal surety, and the surety pay the debt, equity will compel the creditor to deliver the pledge to him and not to the debtor, though the latter has a clear legal right to receive it, the debt being paid and extinguished; i. e., equity destroys the legal right of the debtor, and converts the creditor into a trustee for surety. This is done upon the theory that the debt is not paid by the surety, but is purchased by him, and that he is therefore entitled to the pledge as an incident of the debt. This, however, is only a fiction - a fiction, moreover, which is contrary to law, for the payment by the surety extinguishes the debt. Equity does this under the name of subrogation, and perhaps her best justification is that she borrowed both the name and the thing from the civil law." Bank of Commerce & Trusts v. McArthur, 261 F. 97 (E.D.N.C. 1919), aff 'd, 265 F. 1019 (4th Cir. 1920), aff'd, 265 F. 1019 (4th Cir. 1920).
A surety paying the debt of his principal is entitled to be subrogated to all the rights of the creditors, against a co-surety as well as against the principal, and this includes the right to have a judgment which he has paid assigned to a trustee for his benefit, so as to compel his co-surety to pay his pro rata part. Peebles v. Gay, 115 N.C. 38, 20 S.E. 173 (1894).
A surety who pays the debt of his principal is entitled to subrogation to a mortgage given by the principal to the creditor for the security of the debt, and he may with or without a formal assignment thereof, have the same foreclosed in his own name,
for his benefit. Tripp v. Harris, 154 N.C. 296, 70 S.E. 470 (1911).
Where a surety, as such, paid the whole of a debt, then the section gives him a right of action against co-sureties at law, and also such priority as the creditor would have had as a claimant against his principal's estate. Holden v. Strickland,
116 N.C. 185, 21 S.E. 684 (1895).
Rights Acquired. - The party for whose benefit the doctrine of subrogation is invoked and exercised can acquire no greater rights than those of the party for whom he is substituted, and if the latter had not a right of recovery the former can acquire none. Sheldon on Subrogation, G.S. 6; Clark v. Williams, 70 N.C. 679 (1874); Liles v. Rogers, 113 N.C. 197, 18 S.E. 104 (1893).
A surety to an administration bond who paid one half of a debt recovered against the insolvent administrator is not subrogated to the rights of the creditor whose debt he paid, but to the right of the administrator for whom he paid it. Clark v. Williams, 70 N.C. 679 (1874).
An endorser or surety who pays the indebtedness is subrogated to the rights of the creditor as against the property of the debtor. Ex parte Pittinger, 142 N.C. 85, 54 S.E. 845 (1906).
Liens and Securities. - A surety who pays the debt is subrogated to all the specific liens and securities which the creditor has against the principal debtor. Carlton v. Simonton, 94 N.C. 401 (1886).
When Doctrine Cannot Be Invoked. - Where several or successive obligations of suretyship are not in substance and nature for the same thing and have no relation to or operation upon each other, the doctrine of subrogation cannot be invoked. Liles v. Rogers, 113 N.C. 197, 18 S.E. 104 (1893).
If a surety pays a judgment and has it entered "satisfied," without having it assigned to a trustee for his benefit, the remedy of subrogation is lost. Peebles v. Gay, 115 N.C. 38, 20 S.E. 173 (1894).
Corporation Note. - The endorsers on a note of a corporation secured by mortgage on its property are not entitled to subrogation, either legal or conventional, when it is ascertained that the note was paid by the corporation, and not the endorsers, and
where there is evidence that the latter had paid it, the question should be submitted to the jury. Joyner v. Reflector Co., 176 N.C. 274, 97 S.E. 44 (1918).
Rights of Surety Against Party Receiving Money with Full Knowledge. - A surety company which has been called upon to pay a devastavit committed by its principal, an administrator, is entitled to be subrogated to the rights of the creditor against a party
who received the money with knowledge of its wrongful appropriation, and his rights are exactly those of the creditor. Caviness v. Fidelity Co., 140 N.C. 58, 52 S.E. 265 (1905).
A surety, omitted in the deed of trust to secure the sureties, is entitled to be subrogated to the rights of his co-sureties pro tanto, if he has paid the debts, and the payees in the notes have a superior equitable right of subrogation to the benefit
of any security given by the principal debtor to his sureties. Wiswall v. Potts, 58 N.C. 184 (1859); Harrison v. Styres, 74 N.C. 290 (1876); Ijames v. Gaither, 93 N.C. 358 (1885); Sherrod v. Dixon, 120 N.C. 60, 26 S.E. 770 (1897). And this is true whether they knew of it or not. Matthews v. Joyce, 85 N.C. 258 (1881); Blanton & Co. v. Bostic,
126 N.C. 418, 35 S.E. 1035 (1900).
Preservation of Lien by Assignment. - A surety may preserve the lien of judgment against the principal and himself by paying the judgment creditor and having the judgment assigned to a third person for his own benefit; and this also applies to a judgment against his co-sureties and himself in enforcing an equality of obligation between them. Fowle v. McLean, 168 N.C. 537, 84 S.E. 852 (1915).
A surety who pays the amount recovered against him and his principal, or co-sureties, may have the judgment assigned to another in trust for his use, and it will continue in force for his benefit; and he may, upon motion in the cause, have satisfaction
of the judgment entered, even against the consent of the assignee. State v. Hearn, 109 N.C. 150, 13 S.E. 895 (1891).
Assignment of Right by Surety. - Where one of two defendants has paid a joint judgment upon a note against them both, and has the judgment assigned to another for his use, who brings action to recover against the other judgment debtor, he may, as between
themselves, show that the defendant in the second action was the principal payee, and that he, the plaintiff, was an endorser, though not pleaded in the original action, and recover the full amount of the judgment he has paid, the action being,
in substance, one by the surety on the note to recover against the principal thereon. Haywood v. Russell, 182 N.C. 711, 110 S.E. 81 (1921).
When One Half of Judgment Is Paid and the Other Assigned. - Where a surety paid and had satisfaction entered as to one half of a judgment against himself, his principal and a co-surety, and procured the judgment as to the other half to be assigned to
a trustee for his benefit, it was in effect the same as if he had procured the whole judgment to be so assigned. Peebles v. Gay, 115 N.C. 38, 20 S.E. 173 (1894).
When Assignment of Security Is Taken. - If an assignment of the security is taken, the surety may have his redress upon it immediately in the name of the creditor, but, while it is not in force, the surety can not maintain an action for the money paid
for the assignment. Hodges v. Armstrong, 14 N.C. 253 (1831).
When Person Is Charged with Notice of Assignment. - Where a judgment against a principal and the sureties on a note is paid by the sureties, and an assignment thereof is made to a trustee for the benefit of the sureties, but by a mistake payment is entered
on the judgment record, which is afterwards corrected by the entry thereon of the assignment, a person taking a mortgage on the property of the judgment debtor, after the assignment is entered on the record, takes with notice of the assignment.
Patton v. Cooper, 132 N.C. 791, 44 S.E. 676 (1903).
§ 26-3.1. Surety's recovery on obligation paid; no assignment necessary.
- A surety who has paid his principal's note, bill, bond or other written obligation, may either sue his principal for reimbursement or sue his principal on the instrument and may maintain any action or avail himself of any remedy which the creditor himself might have had against the principal debtor. No assignment of the obligation to the surety or to a third-party trustee for the surety's benefit shall be required.
- The word "surety" as used herein includes a guarantor, accommodation maker, accommodation indorser, or other person who undertakes liability for the written obligation of another.
(1959, c. 1120.)
A surety paying the debt of his principal is entitled to be substituted to all the rights of the creditor. Exxon Chem. Ams. v. Kennedy, 59 N.C. App. 90, 295 S.E.2d 770 (1982).
Sureties on bonds issued by principal cannot sue principal before paying all or part of the penal amount of the bonds. Harshaw v. Mustafa, 321 N.C. 288, 362 S.E.2d 541 (1987).
Reimbursement from estate. - Surviving spouse was entitled to reimbursement from the estate of her late husband because the survivor's payments made to a mortgagee pursuant to a guaranty agreement on a note executed by the late husband vested her with
a statutory right under G.S. 26-3.1 to seek reimbursement from the estate. Furthermore, the surviving spouse did not waive this right in the prenuptial agreement she entered into with her late husband. Liptrap v. Coyne, 196 N.C. App. 739, 675 S.E.2d 693 (2009), review denied, 363 N.C. 805, 690 S.E.2d 701, N.C. LEXIS 80 (2010).
Time of Suit. - This section allows a surety to sue a principal on the original instrument or for reimbursement on the surety agreement. After three years, a suit on the latter theory would be barred by G.S. 1-52.
Where surety elects to sue on the underlying note under seal, he has the same rights the bank had on the original note. Thus, the 10-year statute of limitations, G.S. 1-47,
would apply. Adams v. Bass, 88 N.C. App. 599, 364 S.E.2d 194 (1988), cert. denied, 326 N.C. 363, 389 S.E.2d 810 (1990).
Debtor Was Not Creditor's "Principal" on Debt. - Creditor asserted that debtor was obligated to her for the amount of her certificate of deposit (plus interest) that was applied to a developer's debt by the bank pursuant to her guaranty; she based her claim on principles of surety or subrogation. G.S. 26-3.1(a) provided that a surety "who has paid his principal's note" could sue his principal, but here, debtor was not her "principal" on the debt; her principal was the developer. In re Spicewood Dev., LLC, - Bankr. - (Bankr. W.D.N.C. Apr. 27, 2010).
§ 26-4. Subrogation of surety paying debt of deceased principal.
Whenever a surety, or his representative, shall pay the debt of his deceased principal, the claim thus accruing shall have such priority in the administration of the assets of the principal as had the debt before its payment.
(1829, c. 23; R.C., c. 110, s. 4; Code, s. 2096; Rev., s. 2843; C.S., s. 3964.)
Scope. - This section, which confers on the claim of a surety paying the debt for which he is surety the dignity, in the administration of the assets of the principal, which the debt, if unpaid, would have had, applies to a judgment, whether the payment
be made before or after the death of the principal. Drake v. Coltrane, 44 N.C. 300 (1853).
When Co-Surety Deemed Bond Creditor. - A co-surety, who pays the bond debt for which the other surety is equally bound, shall be deemed a bond creditor in the administration of the estate of the deceased co-surety, under the Act of 1828. Drake v. Coltrane, 44 N.C. 300 (1853); Howell v. Reams, 73 N.C. 391 (1875).
When a plaintiff, a co-surety, discharged the bond debt, for the payment of which the defendant's intestate was equally bound, he became a bond creditor as to the assets of the intestate; and when, pending an action for contribution, the administrator
paid off the bonds voluntarily, of equal dignity with said surety debt, having previously paid an open account, he committed a devastavit to the extent of the plaintiff's claim for contribution, such claim being for a sum smaller than the
bonds so preferred and the open account. Howell v. Reams, 73 N.C. 391 (1875).
For case in which this section was applied in subrogating widow to rights of mortgagee where policy in which she was named beneficiary was assigned to and paid to mortgagee, see Russel v. Owen, 203 N.C. 262, 165
S.E. 687 (1932).
Cited in Brown v. McLean, 217 N.C. 555, 8 S.E.2d 807 (1940).
§ 26-5. Contribution among sureties.
Where there are two or more sureties for the performance of a contract, and one or more of them may have been compelled to perform and satisfy the same, or any part thereof, such surety may have and maintain an action against every other surety for a just and ratable proportion of the same which may have been paid as aforesaid, whether of principal, interest or cost.
(1807, c. 722, P.R.; R.C., c. 110, s. 2; Code, s. 2094; Rev., s. 2844; C.S., s. 3965; 1957, c. 981.)
- I. The Right to Contribution Generally.
- II. When Surety Obtains Advantage over Co-Sureties.
- III. Contribution Enforced.
I. THE RIGHT TO CONTRIBUTION GENERALLY.
Rule of Contribution. - The rule of contribution is founded upon the maxim that "equality is equity," and not upon contract. It is a rule of a common justice whereby parties who undertake to account for the default or miscarriage of another should equally
bear the burden imposed by a failure of their principal. As between them, there is no agreement implied, but an equitable presumption raised by the fact of the payment by one, that the others will equalize the burden thus borne by him, by
paying to him such sums as will make the loss equal upon each, which can be rebutted by showing that there was an agreement, whether verbal or written, to the contrary. Smith v. Carr, 128 N.C. 150,
38 S.E. 732 (1901). See Allen v. Wood, 38 N.C. 386 (1844).
This maxim can only be applied to those whose situations are equal; otherwise equality is not equity, and hence if one surety stipulates for a separate indemnity, the equality of situation between him and his co-surety ceases, and the maxim does not apply.
Moore v. Moore, 11 N.C. 358 (1826).
Distinction between actions at law and suits in equity. - It is broadly stated in 2 Brandt Suretyship 309, that "A surety who pays his principal's debt is entitled to be subrogated to all the rights and remedies of the creditor against his co-surety in
the same manner as against the principal." This is founded in reason and justice, and up to the adoption of our present Constitution was enforced in the courts of equity. N.C. Const., Art. IV,
1 abolished the distinction between actions at law and suits in equity, leaving such rights and remedies to be enforced in the one court, which theretofore had administered simply legal rights. Peebles v. Gay, 115 N.C. 38,
20 S.E. 173 (1894).
The liability of sureties among themselves is controlled by the equitable principle of equality arising out of a common risk, and in case of insolvency or nonresidence these rights are adjusted by reference to the number of sureties who are solvent or
who have property available to process within the jurisdiction of the court. Fowle v. McLean, 168 N.C. 537, 84 S.E. 852 (1915).
Primary and Conditional Liability. - The equitable doctrine of contribution is enforced upon the principle that those engaged in a common hazard in the same degree or relation should bear the loss equally, but where one is surety and the others endorsers,
the liability of the former is primary and of the latter a conditional one, and not being in the same situation with regard to the hazard, the surety is not entitled to contribution from the endorsers. Edwards v. Jefferson Std. Life Ins. Co.,
173 N.C. 614, 92 S.E. 695 (1917).
Rebuttable Presumption of Equal Liability. - Co-principals and co-sureties are presumed to assume equal liability, but this presumption may be rebutted by parol evidence. Smith v. Carr, 128 N.C. 150, 38 S.E. 732
Surety for Other Sureties. - It is entirely competent for one person to become surety for other sureties, or to limit the extent of his liability with respect to other sureties. The test of liability is the intent of the parties as indicated by their
agreement. Citizens Nat'l Bank v. Burch, 145 N.C. 316, 59 S.E. 71 (1907).
Sureties on Successive Guardianship Bonds. - The sureties to the successive bonds of a guardian stand in the relation of co-sureties, one bond to the other or others, and are liable, in case of insolvency of the guardian, to contribution in proportion to the amount of the several penalties of the bonds. The risk they take is a joint risk, and there is an implied engagement or obligation, each set of sureties with the other, to bear any loss which may fall on them proportionally, as above stated; or, if it is borne by one class, to contribute by way of reimbursement. Bell v. Jasper, 37 N.C. 597 (1843); Jones v. Hays, 38 N.C. 502 (1845); Bright v. Lennon, 83 N.C. 184 (1880).
Where a guardian gives several successive bonds for the faithful discharge of his trust, the sureties on each bond stand in the relation of co-sureties to the sureties on every other bond; the only qualification to the rule being that the sureties are bound to contribution only according to the amount of the penalty of the bond in which each class is bound. Jones v. Hays, 38 N.C. 502 (1845).
All the bonds given by a guardian are but securities for the same thing, and the sureties on each are bound to contribution, but their liabilities are in proportion to the amount of their respective bonds. Jones v. Blanton, 41 N.C. 115 (1848).
When Surety Should Answer for Default and Stop Costs. - As a general rule, upon the default and insolvency of a principal, a surety should answer for the default, and not unnecessarily let costs be run up where the liability and amount thereof is clear. But where the guardian claimed to have settled with and paid the wards, it was prudent in plaintiff in regard to his own interests and as an act of justice to his co-sureties on other bonds to incur costs to the point of developing how the fact of alleged settlement was, and to this effect are the authorities. Bright v. Lennon, 83 N.C. 184 (1880).
The costs incurred by one surety, or one set of sureties, are not always to be regarded as a loss borne to which in equity contribution may be had, but it would seem to depend on the prudence and bona fides of the defense by which they were incurred.
Bright v. Lennon, 83 N.C. 184 (1880).
Assets Given Up by Mistake of Law. - Where A and B were co-sureties on an administration bond, and were sued upon the same by one of the next of kin, and while the suit was pending compromised the same under the advice of counsel and from an honest belief
that both were liable to a larger sum on account of the devastavit and insolvency of their principal, and it was afterwards discovered that B, who had administered on the estate of the principal, had, by a misapprehension of law, but acting
under legal counsel, and in good faith, erroneously given up assets of their principal to another claim, which, if they had been held by him, would have saved them both from loss by this suretyship, it was held that A could not sustain a bill
to throw the whole loss on B, there being no evidence that B had concealed from A the fact of having thus parted with the assets, there being no allegation of fraud or imposition on the part of B. Brandon v. Medley, 54 N.C. 313 (1854).
Release of Principal. - A surety who seeks to recover from a co-surety a ratable part of money paid must take care to do no act which will prevent the co-surety from having recourse against the principal. If, therefore, he releases the principal, it is
a discharge of the co-surety. Draughan v. Bunting, 31 N.C. 10 (1848).
Sureties on Sheriff's Tax Bond. - The right of contribution does not exist between sureties of the different bonds of a sheriff as tax collector. McGuire v. Williams, 123 N.C. 349, 31 S.E. 627 (1898).
When One Surety in Fact Surety for Co-Surety. - Where A and B signed a negotiable note apparently as joint principals, when, in fact, the latter was surety for the former and the appellant signed the note by writing his name across the back, with the
word "surety" underneath, it was held that in the absence of any evidence that appellant knew of the relation between the makers, he was surety for the two, and that surety B could not compel contribution. Citizens Nat'l Bank v. Burch,
145 N.C. 316, 59 S.E. 71 (1907).
Release by Securing Part of Debt. - If there are several sureties for the same principal, and one of them is fixed with the payment of the whole debt, or of more than his ratable part thereof, the others, who are solvent, shall be compelled to contribute,
in order to equalize the loss. But if by any agreement between the sureties, one of them is released by the creditor, upon his securing the payment of a certain part of the debt, he shall not afterwards be called upon to contribute to one
or more of the remaining sureties, for a loss arising from the deficiency of another to them. Moore v. Isley, 22 N.C. 372 (1839).
Agreement Between Sureties. - There can be no doubt that after two persons have become sureties for a common principal they may, by agreement between themselves, renounce their right to take benefit from any securities they may respectively obtain, and each look out for himself exclusively for an indemnity from the principal or for contribution from another co-surety. Long v. Barnett, 38 N.C. 631 (1845); Commissioners of McDowell County v. Nichols, 131 N.C. 501, 42 S.E. 938 (1902).
Where the land of one of two sureties of a third person was sold under execution for the debt, and the other surety and a third person bid it off, it was held that an agreement by the surety who owned the land to take the whole debt upon himself and satisfy the execution in return for an assignment of the bid to him was a promise to pay his own debt and was not affected by the statute of frauds; and in such case the surety who paid could not obtain contribution from his co-surety. Hockaday v. Parker, 53 N.C. 16 (1860).
Where one of two sureties claims to be a supplemental surety by agreement, the burden is upon him to show the agreement. Carr v. Smith, 129 N.C. 232, 39 S.E. 831 (1901).
Surety May Contract for Different Indemnity. - This section does not say that parties may not by contract agree to different rights than are provided by the statute. A surety may contract for a different indemnity than he would be given by law in the
absence of such an agreement. Hofler v. Hill, 58 N.C. App. 201, 293 S.E.2d 238 (1982), modified and aff'd, 311 N.C. 325, 317 S.E.2d 670 (1984).
Doctrine of Contribution Applied. When A endorsed a note for the maker, and subsequently, but before it was discounted, F endorsed it. The principal became insolvent and left the State. A paid the note. The court held that F was a co-surety and that the
doctrine of contribution was applicable for A's benefit. The court said that the decision was governed by Daniel v. McRae, 9 N.C. 590 (1823) and Dawson v. Pettway, 20 N.C. 531 (1839); - Atwater v. Farthing, 118 N.C. 388, 24 S.E. 736 (1896).
II. WHEN SURETY OBTAINS ADVANTAGE OVER CO-SURETIES.
Property Advanced by Principal to One of Sureties. - Where money is advanced by the principal to one of the sureties, to discharge the debt, before the debt is actually discharged, the co-surety may file his bill in equity for an account and for relief, but if the money is paid by the principal after the debt has been discharged by the sureties, to one of two sureties, to reimburse both, then the co-surety has his remedy against the surety receiving the money, by an action at law for money had and received, and therefore cannot support a suit in equity. Allen v. Wood, 38 N.C. 386 (1844).
An indemnity obtained from a principal by one of two co-sureties, after the risk is incurred, inures equally to the benefit of both. Pool v. Williams, 30 N.C. 286 (1848).
Where the principal placed property in the hands of a surety sufficient to satisfy the debt, and then left the State, it was held that a third person, also bound for the debt as surety, having been compelled to pay it, might recover its amount from the person who had received the property without making a previous demand. Parham v. Green, 64 N.C. 436 (1870).
When two persons engage in a common risk as sureties for a third and one of them subsequently takes an indemnity from the principal debtor it inures to the benefit of both. Fagan v. Jacocks, 15 N.C. 263 (1833);
Gregory v. Murrell, 37 N.C. 233 (1842); Hall v. Robinson, 30 N.C. 56 (1847).
Separate Indemnity. - In Long v. Barnett, 38 N.C. 631 (1845), the court said: "As one, when he is about to become a surety with others, may stipulate for a separate indemnity from the principal to him, and the
co-sureties would be only entitled to a surplus after his reimbursement. Moore v. Moore, 11 N.C. 358, 15 Am. Dec. 523 (1826)." Commissioners of McDowell County v. Nichols, 131 N.C. 501,
42 S.E. 938 (1902).
When Indemnity May Be Reached. - The indemnity taken by one surety can be reached by the other only in two cases, either when it was taken in fraud, or for the benefit of the other. Moore v. Moore, 11 N.C. 358 (1826).
Before and After Severance of Relationship. - While the relation of joint sureties exists, funds received by one of them (except under special circumstances) for the discharge of, or as an indemnity against, his liability, are to the applied for the common
benefit of the sureties. But after that connection has been severed by an agreement among the sureties, each of them has his distinct and several claim to prosecute, because of what he has paid for his principal, or for an insolvent joint
surety; and the others have no right to demand participation in what his diligence may enable him to procure, while thus prosecuting his several claims. Moore v. Isley, 22 N.C. 372 (1839).
When Advantage Lost by Laches. - Where the surety merely had a deed of trust for certain property, as an indemnity, executed by the principal, and neglected to have it registered, so that the property was sold by other creditors, the co-surety was not
entitled, on account of this laches, to make him responsible for the value of the property. Pool v. Williams, 30 N.C. 286 (1848).
Parties. - One of three joint solvent sureties cannot sustain a bill against either of his co-sureties for contribution out of a fund alleged to have been received by that surety for this indemnity from the estate of an insolvent co-surety, without making
the other a party. Moore v. Isley, 22 N.C. 372 (1839).
III. CONTRIBUTION ENFORCED.
A. IN GENERAL.
Accommodation Maker and Endorser. - An accommodation maker who pays a note may recover contribution from an accommodation endorser of the note where they intended to become co-sureties. Gilliam v. Walker, 189 N.C. 189,
126 S.E. 424 (1925).
Co-Surety Paying Bond Debt Deemed Bond Creditor. - In Howell v. Reams, 73 N.C. 391 (1875), it was held that a co-surety who pays the bond debt, for which the other surety is equally bound, shall be deemed a bond
creditor in the administration of the estate of the deceased co-surety. Peebles v. Gay, 115 N.C. 38, 20 S.E. 173 (1894).
Liability for Ratable Part of Debt Only. - The section provides that where one or more sureties have been compelled to satisfy the contract of their principal, they may sue their co-sureties for their ratable part of the debt paid for the principal. Peebles v. Gay, 115 N.C. 38, 20 S.E. 173 (1894).
There was a judgment against the principal and two sureties, and an execution levied on the property of one of the sureties. A bought this property from this surety, pending the levy, and afterwards obtained an assignment of the judgment to enable him
to have the whole amount satisfied out of the property of the co-surety, and issued an execution for that purpose. It was held that he was restrained from collecting out of the co-surety more than the fair proportion which the latter owed,
whether A had actual notice of the lien of the execution or not. Dobson v. Prather, 41 N.C. 31 (1849).
Rights of Surety Paying Entire Debt. - Under the Act of 1807, now this section, one surety may recover at law from another his ratable proportion of the debt of the principal, but the rights of the surety who pays the debt are not enlarged, nor is the co-surety deprived of any just grounds of defense which would before have been available to him in equity. Hall v. Robinson, 30 N.C. 56 (1847).
A surety who, pursuant to his contractual obligation, pays the debt of his principal has a right of action to recover the sum so paid. American Nat'l Fire Ins. Co. v. Gibbs, 260 N.C. 681, 133 S.E.2d 669 (1963).
This section affords a right to one surety, who has paid a debt for which he and another are equally liable, to call on the other for contribution. American Nat'l Fire Ins. Co. v. Gibbs, 260 N.C. 681, 133 S.E.2d
In Case of Absent Co-Surety. - A co-surety must make contribution, without regard to the share of contribution which the absent co-surety would have had to pay had he been within the reach of the process of North Carolina courts. Jones v. Blanton,
41 N.C. 115 (1848).
Accommodation Endorser Not Liable as Co-Surety. - Where A, as surety, signed the note of B, payable to C, and it was endorsed by C, at the request and for the accommodation of B, there being no contract between A and C whereby they agreed to become co-sureties
of B, it was held that A had no right to contribution from C. Smith v. Smith, 16 N.C. 173 (1828).
Liability Need Not Be Fixed by Judgment. - It is not necessary, to entitle a surety to maintain an action for contribution, that the amount of his liability which was paid by him should be fixed by a judgment. Bright v. Lennon, 83 N.C. 184 (1880).
Statute of Limitations. - In the case of a surety's payment and action for contribution against the co-surety, the statute of limitations runs only from the payment. Sherrod v. Woodward, 15 N.C. 360 (1833); Craven v. Freeman, 82 N.C. 361 (1880).
A surety who pays money for his principal may maintain an action against his co-surety for his ratable part, without first making a demand, and the statute of limitations begins to run from the time of the payment of the money. Sherrod v. Woodward, 15 N.C. 360 (1833).
While the right to contribution among co-indemnitors or sureties has common law origin, since 1807 it has been a statutory right under the provisions of this section; accordingly, the applicable statute in this case provided that an action upon a liability
created by statute must be brought within three years. Finch v. Barnes, 102 N.C. App. 733, 403 S.E.2d 552, rev'd on other grounds sub nom. State v. Case, 330 N.C. 192, 410
S.E.2d 57 (1991).
Failure to Plead. - A surety when sued is not bound to plead the statute of limitations, but may or may not according to his discretion. Jones v. Blanton, 41 N.C. 115 (1848); Street v. Board of Comm'rs, 70 N.C. 644 (1874); Craven v. Freeman, 82 N.C. 361 (1880). And if so, the withdrawal of such a plea or a waiver of it ought not to affect and does not affect the right to contribution. The design of that plea is to protect against a false and unjust claim or one of whose discharge the evidence is lost, but it is not obligatory in morals or law to use it to defeat a just debt. Bright v. Lennon, 83 N.C. 184 (1880).
A surety to a guardian bond, when sued by the wards, is not bound to avail himself of the statute of limitations, and a failure to do so does not release co-sureties. Jones v. Blanton, 41 N.C. 115 (1848).
B. ACTIONS AND INCIDENTS THEREOF.
A surety's right of action accrues at the time of payment, not before. American Nat'l Fire Ins. Co. v. Gibbs, 260 N.C. 681, 133 S.E.2d 669 (1963).
Action at Law for Aliquot Parts. - An action at law by surety for contribution lies only against the co-sureties, severally, for the aliquot part due from each. Adams v. Hayes, 120 N.C. 383, 27 S.E. 47 (1897).
Where two sureties on a note to a bank agreed, after the insolvency of their principal, to employ a broker to buy notes of the bank to an amount sufficient to pay the debt, and one of them paid the broker for notes purchased by him, and discharged the
debt, it was held that he could maintain an action on the case against his co-surety for contribution. DeRossett v. Bradley, 63 N.C. 17 (1868).
Surety Should Allege Principal's Insolvency. - When one surety brings a bill for contribution against a co-surety, he should at least allege that the principal is insolvent, so that he can have no redress against him; for the equity of a plaintiff, seeking contribution from a co-surety, lies in the insolvency of the principal. Allen v. Wood, 38 N.C. 386 (1844).
A surety has no right to call upon his co-surety in equity for contribution, without showing that he could not obtain satisfaction for the amount he has paid from their common principal. Rainey v. Yarborough, 37 N.C. 249 (1842).
When Insolvency Not Alleged and Improper Relief Asked. - Where a complaint in an action by a surety for contribution joined the principals as parties, and alleged the contract of suretyship, payment by the plaintiff and demand of the co-sureties "for
their contributive shares," and asked judgment against all, but did not allege insolvency of the principal except by the averment that plaintiff was compelled to pay the debt, it was held that, though the proper relief was not asked, and the
insolvency of the principals was imperfectly alleged, the cause of action would be construed, on demurrer, as equitable rather than legal, in order to confer jurisdiction below. Adams v. Hayes, 120 N.C. 383,
27 S.E. 47 (1897).
Costs Paid by Plaintiff. - In an action by a surety of an insolvent guardian for contribution against other sureties, it is proper to include in the sum adjudged to be raised by contribution costs which were paid by plaintiff in an action against him
as a condition for leave to plead the statute of limitations. Bright v. Lennon, 83 N.C. 184 (1880).
When Surety Must Show Actual Money Payment. - Where a surety brings an action of assumpsit, for money paid for the use and at the request of the defendant, against his co-surety, to obtain contribution, it is not sufficient for him to show that he has
given his note for the debt due by the principal, and that the same has been accepted by the creditor as a payment and discharge of the debt. To entitle him to recover in his action, he must prove an actual payment in money, or in money's
worth, such as bank notes, the note of a third person, or a horse or the like, which is valuable in itself to the surety who parts with it. Brisendine v. Martin, 23 N.C. 286 (1840).
Notice. - In an action for contribution by a surety against four different guardian bonds, with different penalties and different sureties, some solvent and some otherwise, it is not necessary that notice should be given before the action is brought.
Bright v. Lennon, 83 N.C. 184 (1880).
Right to Demand Waived. - Where the plaintiff brings suit for contribution against a co-surety on a note, alleging defendant's liability as such, and that defendant had failed or refused reimbursement to the extent of his liability to the plaintiff, who
had paid the same, and the defendant answers, denying liability, and there is no averment that demand had been previously made on the defendant, the right to a demand is waived by the answer, and the statement of the cause of action, being
only defective, is cured. Shuford v. Cook, 164 N.C. 46, 80 S.E. 61 (1913).
What Co-Sureties Must Be Made Parties. - A surety who has been compelled to pay the debt of his principal must make all his co-sureties parties to a bill for contribution if they are in this State and solvent. But where one is out of the jurisdiction
of the court, and others are within it, the plaintiff, by stating the fact in his bill, is at liberty to proceed against the latter alone. Jones v. Blanton, 41 N.C. 115 (1848).
Principal or Executor Party Defendant. - To a bill brought by one surety against his co-surety for contribution, their common principal, or, if he be dead, his executor or administrator should be made a party defendant. Rainey v. Yarborough,
37 N.C. 249 (1842).
Bankruptcy of Principal. - Where it appeared that the principal on a note had secured his discharge in bankruptcy from his obligations, including a note paid at maturity by one of two sureties thereon, and that a few months thereafter the surety who paid
the note brought his action for contribution against his co-surety, who had paid nothing, the right of action given by Revisal, G.S. 2844, now this section, would not, without more, be denied upon the ground that it required the insolvency
of the principal, in such cases, to be shown at the institution of the action. Shuford v. Cook, 164 N.C. 46, 80 S.E. 61 (1913).
Interest on Collaterals. - In an action against an alleged co-surety to recover money paid in settlement of their joint liability, the amount received by the plaintiff as interest on collaterals deposited should be deducted from the amount paid by plaintiff.
Carr v. Smith, 129 N.C. 232, 39 S.E. 831 (1901).
Discharge of Levy by Co-Surety. - A, having a judgment against B, as principal, and C, as surety, C, without the consent of A, has an execution issued and levied upon B's property. A has a right to withdraw the execution and discharge the levy, without
making herself liable to C. Forbes v. Smith, 40 N.C. 369 (1848).
Principal's Reputation as Evidence of History of Insolvency. - In an action for contribution by a surety against his co-surety, the plaintiff may offer evidence of their principal's insolvency by showing his general reputation, and this even after direct
evidence of the said principal's insolvency. Leak v. Covington, 99 N.C. 559, 6 S.E. 241 (1888).
Record of Judgment in Evidence. - A surety seeking contribution from a co-surety can offer in evidence the record of a judgment against the surety as such, which, in the absence of any suggestion of fraud or collusion in procuring the same, is prima facie
proof of the damages suffered by the said surety. Leak v. Covington, 99 N.C. 559, 6 S.E. 241 (1888).
Operation of Parol Evidence Rule. - The rule that parol evidence cannot be admitted to contradict a written contract applies to actions on the contract itself, but not to such as arise collaterally out of it. So where it appeared on the face of a note
that certain parties thereto were sureties, in an action for contribution, parol evidence was admissible to show that they were really principals. Williams v. Glenn, 92 N.C. 253 (1885).
§ 26-6. Dissenting surety not liable to surety on stay of execution.
Whenever any judgment shall be obtained against a principal and his surety, and the principal debtor shall desire to stay the execution thereon, but the surety is unwilling that such stay shall be had, the surety may cause his dissent thereto to be entered by the judge or clerk, which shall absolve him from all liability to the surety who may stay the same. And the sheriff or other officer, who may have the collection of the debt, shall make the money out of the property of the principal debtor, and that of the surety for the stay of execution, if he can, before he shall sell the property of the surety before judgment.
(1829, c. 6, ss. 1, 2; R.C., c. 110, s. 3; Code, s. 2095; Rev., s. 2845; C.S., s. 3966; 1973, c. 108, s. 16.)
§ 26-7. Surety, indorser, or guarantor may notify creditor to take action.
- After any note, bill, bond, or other obligation becomes due and payable, any surety, indorser, or guarantor thereof may give written notice to the holder or owner of the obligation requiring him to use all reasonable diligence to recover against the principal and to proceed to realize upon any securities which he holds for the obligation.
- The surety, indorser or guarantor who gives notice to the holder or owner of the obligation as provided by subsection (a) shall forthwith give written notice to all co-sureties, co-indorsers and co-guarantors of the fact that such notice is being given to the holder or owner of the obligation, and such co-sureties, co-indorsers and co-guarantors shall have ten days after receipt of the notice in which themselves to give written notice to the holder or owner of the obligation and to their co-sureties, co-indorsers, and co-guarantors, that they join in or adopt the notice given pursuant to subsection (a). Failure of such surety, indorser or guarantor to give the required notice to co-sureties, co-indorsers or co-guarantors whose names and residences are known to him or can be obtained by due diligence bars such surety indorser or guarantor from any of the benefits of G.S. 26-9.
- The holder or owner of the obligation shall on demand disclose to any surety, indorser, or guarantor of the obligation the names and addresses of all other sureties, indorsers and guarantors which appear on the obligation or of which he has knowledge.
- Nothing herein contained shall apply to official bonds, or bonds given by any person acting in a fiduciary capacity.
(1868-9, c. 232, s. 1; Code, s. 2097; Rev., s. 2846; C.S., s. 3967; 1951, c. 763, s. 1.)
Cross References. - As to statute of limitations, see G.S. 1-52(1) and (6).
Legal Periodicals. - For brief comment on the 1951 amendment of this section and G.S. 26-8 and 26-9, see 29 N.C.L. Rev. 413 (1951).
I. GENERAL CONSIDERATION.
Scope of Protection. - G.S. 26-7, while it provides guarantors with certain protections, does not protect them from litigation in the event that the creditor fails to exhaust his remedies against the principal; rather, the statutory scheme created by the North Carolina legislature permits a court to discharge the obligation of the guarantor to the extent that the guarantor is prejudiced by the creditor's delay in proceeding against the principal; so the guarantor's argument that the application of G.S. 26-7 required a federal court to abstain from exercising its jurisdiction was without merit. Nat'l Textiles, LLC v. Daugherty, 250 F. Supp. 2d 575 (M.D.N.C. 2003).
"Principal". - This section does not refer to the principal of the guaranty, but rather, it refers clearly to the principal debtor on the indebtedness or obligations underlying the guaranty. Gillespie v. DeWitt, 53 N.C. App. 252, 280 S.E.2d 736, petition for cert. denied, 304 N.C. 390, 285 S.E.2d 832 (1981).
Finding that language in guarantees served only to identify the guaranty as guaranty of payment and was not intended to waive this section comported with the rules of construction and the case law and would be upheld. Federal Land Bank v. Lieben, 89 N.C. App. 395, 366 S.E.2d 592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
In the parties' guaranty agreement, defendant promised not only to be liable for the entire balance of the note when it became due and payable upon a default, but also to make payment of any delinquent full installment, including delinquent interest 30
days after he had been given written notice of the default. Thus defendant's written promise to pay each individual installment upon default created an obligation covered by subsection (a) of this section. Federal Land Bank v. Lieben,
89 N.C. App. 395, 366 S.E.2d 592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
To be relevant on issue of implied waiver, evidence must show that defendant acted in manner which induced plaintiff to believe defendant intended to waive provisions of this section. Federal Land Bank v. Lieben, 89 N.C. App. 395, 366 S.E.2d 592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
Duty to mitigate arises only in tort actions and breach of contract actions. Defendant's rights and remedies are statutorily mandated by this section through G.S. 26-9. These statutes do not require defendant, as guarantor, to mitigate the damages he
suffered because of plaintiff's failure to comply with this section. Therefore, the court declined to expand the scope of the duty to mitigate. Federal Land Bank v. Lieben, 89 N.C. App. 395, 366 S.E.2d
592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
Evidence Held Sufficient. - Where note installment payment became due and payable on 1 January 1982, plaintiff notified defendant of the payment's delinquency on 19 January 1982, and defendant informed plaintiff on 25 January 1982 that he was exercising his rights under this section through G.S. 26-9, the trial court's findings and conclusion, holding that defendant properly invoked subsection (a), were based on sufficient evidence. Federal Land Bank v. Lieben, 89 N.C. App. 395, 366 S.E.2d 592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
Under this statute, plaintiff's refusal to move against either farm or the farm's collateral to collect the balance of the note due released defendant, as guarantor, only to the extent he was prejudiced. If the solvency of the farm and the value of its
collateral were equivalent to the same values existing when note became due, when defendant gave plaintiff this section's notice, defendant would not have been prejudiced by plaintiff's failure to act and would have continued to be liable
for the entire amount of the note he originally guaranteed. Federal Land Bank v. Lieben, 89 N.C. App. 395, 366 S.E.2d 592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
Applied in Borg-Warner Acceptance Corp. v. Johnston, 97 N.C. App. 575, 389 S.E.2d 429 (1990).
Cited in Regions Bank v. Baxley Commer. Props., LLC, 206 N.C. App. 293, 697 S.E.2d 417 (2010).
II. DECISIONS UNDER PRIOR LAW.
Editor's Note. - The cases cited below were decided prior to the 1951 amendment, which rewrote this section.
Reasonable Compliance. - The requirements of this section are reasonably complied with when the holder of a negotiable note, after receiving notice in accordance with this section, within thirty days causes the maker to be a party defendant, and it is
made to appear that he is a nonresident. Taylor v. Bridger, 185 N.C. 85, 116 S.E. 94 (1923).
Written Notice Required. - To have the benefit of the next preceding section and so that there may be no controversy as to whether the demand is sufficient to have this effect, a notice in writing must be given to the creditor; and its benefits are secured
to such only as give the notice if there is more than one surety. First Nat'l Bank v. Homesley, 99 N.C. 531, 6 S.E. 797 (1888).
Protection Secured. - Payment made by a principal upon a bond, before the cause of action thereon is barred against the sureties, arrests the operation of the statute of limitations. Moore v. Goodwin, 109 N.C. 218, 13 S.E. 772 (1891).
This section affords relief to securities in cases not provided for in the preexisting law, by requiring the creditor, at the instance of the surety who considers himself in danger of loss from his contingent liability, to bring suit, and use reasonable diligence in making his money from the principal, and saving harmless the surety, at the hazard of losing his claim upon the latter, if negligent in doing so. But official bonds or securities held as collateral are excepted from the operation of this section; nor does it reach a case where the requirement of the sureties was verbal only, if in other aspects applicable to such case. First Nat'l Bank v. Homesley, 99 N.C. 531, 6 S.E. 797 (1888).
Where an action was brought upon a negotiable instrument the defendants on its face being joint makers, the mere fact that the plaintiff had told one of the defendants, without the knowledge of the other, "that he would take up and carry the note until
fall," was held to constitute an extension of payment for a "fixed and definite" period, which would operate as a release to such other from liability, but his remedy was by quia timet notice under this section. Roberson-Ruffin Co. v. Spain,
173 N.C. 23, 91 S.E. 361 (1917).
Endorser in Blank of Nonnegotiable Paper. - The rights of an endorser in blank upon a nonnegotiable note are sufficiently protected under the section, which provides that a surety or endorser on any note, bill, bond or written obligation, except those
held in trust or as collateral, may notify, in writing, the payee or holder, requiring him to bring suit and use all diligence to collect, and if the payee or holder refuses to bring action within thirty days, the surety or holder giving notice
is discharged. Johnson v. Lassiter, 155 N.C. 47, 71 S.E. 23 (1911).
Surety Released After Thirty Days. - The surety can give the holder written notice quia timet to bring suit under this section, and if the holder does not do so within thirty days the surety will be released. Cole v. Fox, 83 N.C. 463 (1880); Coffey v. Reinhardt, 114 N.C. 509, 19 S.E. 370 (1907).
Legal Duty of Principal. - Except when required by written notice under this section, it is not the legal duty of the principal to institute a suit against the debtor, or to pursue such a suit with diligence and to call to his aid all of the remedies
provided by the law. Bell v. Howerton, 111 N.C. 69, 15 S.E. 891 (1892).
When Inapplicable. - Where there is an agreement in a negotiable note that the endorsers will continue to be bound notwithstanding an extension of time granted to the maker, the endorsers cannot avail themselves of the provisions of this section, when
the maker is a nonresident, and demand for payment after dishonor has been made upon the resident endorsers, defendants in the action, and they have delayed to give the statutory notice until after action has been commenced. Taylor v. Bridger,
185 N.C. 85, 116 S.E. 94 (1923).
§ 26-8. Notice; how given; prima facie evidence thereof.
Any notice authorized or required to be given by G.S. 26-7 shall -
- Be served by the sheriff by delivering a copy thereof to the person entitled to the notice, or
- Be sent by the person giving notice, by registered mail, with return receipt requested, to the last known address of the person being notified.
- Upon serving the notice, the sheriff shall return the original thereof, with his return thereon, to the person who caused the notice to be given.
- The sheriff's return, when the notice is served by the sheriff, or the return receipt, when the notice is sent by registered mail, shall be prima facie evidence of the giving of the notice.
(1868-9, c. 232, s. 3; Code, s. 2099; Rev., s. 2848; C.S., s. 3968; 1951, c. 763, s. 2.)
§ 26-9. Effect of failure of creditor to take action.
If the holder or owner of the obligation refuses or fails, within 30 days from the service or receipt of such notice, to take appropriate action pursuant thereto, the following persons shall be discharged on any such note, bond, bill or other obligation
to the extent that they are prejudiced thereby:
- The surety, indorser or guarantor giving such notice, and
- All co-sureties, co-indorsers or co-guarantors joining therein or adopting such notice as provided by G.S. 26-7, and
- All the co-sureties, co-indorsers, or co-guarantors whose names or addresses such holder or owner of the obligation failed to disclose on demand as required by subsection (c) of G.S. 26-7.
- The fact that an instrument contains a provision waiving any defense of any surety, indorser or guarantor by reason of the extension of the time for payment does not prevent the operation of this section. Any such notice to the holder or owner of the obligation as is authorized by G.S. 26-7 may be given at or subsequent to the time such obligation is due or at or subsequent to the termination of a period of extension.
- The failure of any co-surety, co-indorser or co-guarantor to join in or adopt a notice to the holder or owner of the obligation as authorized by subsection (b) of G.S. 26-7 does not prevent such co-surety, co-indorser or co-guarantor from giving a separate notice as authorized by subsection (a) of G.S. 26-7.
(1868-9, c. 232, s. 2; Code, s. 2098; Rev., s. 2847; C.S., s. 3969; 1951, c. 763, s. 3.)
Extension of Time. - Where a creditor enters into a binding contract with his principal debtor for an extension of time, without consent of sureties, this ipso facto discharges them, and also any security given for the debt. Hinton v. Greenleaf,
113 N.C. 6, 18 S.E. 56 (1893); Smith v. Building & Loan Ass'n, 119 N.C. 257, 26 S.E. 40 (1896); Jenkins v. Daniel, 125 N.C. 161, 34 S.E. 239, 74 Am.
St. R. 632 (1899); Flemming v. Bordon, 127 N.C. 214, 37 S.E. 219, 53 L.R.A. 316 (1900).
Receipt of interest in advance is prima facie evidence of a binding contract of forbearance. Hollingsworth v. Tomlinson, 108 N.C. 245, 12 S.E. 989 (1891); Scott v. Fisher, 110 N.C. 311,
14 S.E. 799, 28 Am. St. R. 688 (1892); Smith v. Parker, 131 N.C. 470, 42 S.E. 910 (1902).
Where a plaintiff creditor made a parol contract with principal to extend the time of payment of bond beyond the date of the commencement of a suit thereon, without the knowledge or consent of the surety, it was held that such contract had the effect
of suspending the plaintiff's right of action and of exonerating the surety from liability. Carrier v. Duncan, 84 N.C. 676 (1881).
An agreement with a principal on a sufficient consideration to forbear to sue for a fixed period, without reserving the right to proceed against the surety, made without his assent, will exonerate him from liability. The exoneration grows out of the agreement
to forbear and is not affected by the creditor's breach of it. Forbes v. Sheppard, 98 N.C. 111, 3 S.E. 817 (1887).
Duty to mitigate arises only in tort actions and breach of contract actions. Defendant's rights and remedies are statutorily mandated by G.S. 26-7 through this section. These statutes do not require defendant, as guarantor, to mitigate the damages he
suffered because of plaintiff's failure to comply with G.S. 26-7. Therefore, the court declined to expand the scope of the duty to mitigate. Federal Land Bank v. Lieben, 89 N.C. App. 395, 366 S.E.2d
592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
Evidence Held Sufficient. - Where note installation payment became due and payable on 1 January 1982, plaintiff notified defendant of the payment's delinquency on 19 January 1982, and defendant informed plaintiff on 25 January 1982 that he was exercising
his rights under G.S. 26-7 through this section, the trial court's findings and conclusion, holding that defendant properly invoked subsection (a), were based on sufficient evidence. Federal Land Bank v. Lieben, 89 N.C. App. 395, 366 S.E.2d 592, aff'd, 323 N.C. 471, 373 S.E.2d 439 (1988).
Applied in Colonial Acceptance Corp. v. Northeastern Printcrafters, Inc., 75 N.C. App. 177, 330 S.E.2d 76 (1985).
Cited in Community Bank & Trust Co. v. Copses, 953 F.2d 133 (4th Cir. 1991); Nat'l Textiles, LLC v. Daugherty, 250 F. Supp. 2d 575 (M.D.N.C. 2003); Regions Bank v. Baxley Commer. Props., LLC, 206 N.C. App. 293, 697 S.E.2d 417 (2010).
§ 26-10: Repealed by Session Laws 1943, c. 543.
§ 26-11. Cancellation of judgment as to surety.
Whenever a judgment shall be rendered in any court in accordance with the provisions of G.S. 26-1 and the surety, endorser or other person shown in said judgment to be secondarily liable thereon and having the rights as by this chapter prescribed against the person or persons primarily liable, and the surety, endorser or other person so shown in the judgment to be secondarily liable, shall pay the said judgment or shall be compelled to pay an execution issued thereon and such fact shall appear to the satisfaction of the clerk of the superior court of the county in which the said judgment is rendered and docketed, such judgment shall be canceled as to said surety, endorser or other person secondarily liable and shall ceased to be a lien upon his real estate and other property, but such cancellation shall not have the force and effect nor operate as a cancellation and discharge of the judgment as to any other person against whom the said judgment shall be rendered and the person so paying the said judgment shall have all the rights given to a surety who has been compelled to pay a judgment against the principal debtor and co-sureties which are given in this chapter, notwithstanding the cancellation of the said judgment as herein provided for.
(1925, c. 38.)
§ 26-12. Joinder of debtor by surety.
- As used in this section, "surety" includes guarantors, accommodation makers, accommodation indorsers, or others who undertake liability on the obligation and for the accommodation of another.
- When any surety is sued by the holder of the obligation, the court, on motion of the surety may join the principal as an additional party defendant, provided the principal is found to be or can be made subject to the jurisdiction of the court. Upon such joinder the surety shall have all rights, defenses, counterclaims, and setoffs which would have been available to him if the principal and surety had been originally sued together.
(1959, c. 1121.)
Guarantors' Liability. - When a bank sought a deficiency judgment, following foreclosure, against a borrower and guarantors, a trial court did not improperly reduce the guarantors' liability pursuant to G.S. 45-21.36 by allowing the guarantors to re-join the borrower after the bank dismissed the borrower, when a jury found the fair market value of the foreclosed property was more than the bank paid for the property at foreclosure, because the guarantors
were only liable for the debt of the borrower, which could legitimately claim an offset pursuant to the jury's fair market value determination. High Point Bank & Trust Co. v. Highmark Props., LLC, 231 N.C. App. 31, 750 S.E.2d 886 (2013), aff'd in part and modified in part, 368 N.C. 301, 776 S.E.2d 838, 2015 N.C. LEXIS 936 (2015).
Defendant guarantors could not avail themselves of the rights and privileges afforded by this section where the principal filed bankruptcy and was subject to the exclusive jurisdiction of the United States District Court for the Western District of North
Carolina; the statute expressly states that the principal must be joined as a party and to do so requires the surety to show that the State courts have jurisdiction over the principal. Borg-Warner Acceptance Corp. v. Johnston,
97 N.C. App. 575, 389 S.E.2d 429 (1990), cert. denied, 333 N.C. 254, 424 S.E.2d 918 (1993).
Borrower Properly Rejoined in Deficiency Judgment Suit Pursuant to Guarantors' Motion. - When a bank sought a deficiency judgment, following foreclosure, against a borrower and guarantors, and then dismissed the borrower, the borrower was properly re-joined
pursuant to the guarantors' motion because (1) G.S. 26-12(b) granted a trial court such discretion, and (2) the re-joinder did not improperly expand the guarantors' defenses. High Point Bank & Trust Co. v. Highmark Props., LLC,
231 N.C. App. 31, 750 S.E.2d 886 (2013), aff'd in part and modified in part, 368 N.C. 301, 776 S.E.2d 838, 2015 N.C. LEXIS 936 (2015).
Joinder Proper. - Law allows permissive or discretionary joinder, and the argument that the standard of review for discretionary joinder should shift based upon a party's future course of action as a result of the joinder is unpersuasive, because the
statute allows joinder for the explicit purpose of giving the surety access to all defenses available to the primary borrower; the guarantors were permitted to move for joinder and the trial court committed no abuse of discretion by joining
one party to this action. High Point Bank & Trust Co. v. Highmark Props., LLC, 368 N.C. 301, 776 S.E.2d 838 (2015).
Cited in Resolution Trust Corp. v. Southwest Dev. Co., 837 F. Supp. 122 (E.D.N.C. 1992); Poughkeepsie Sav. Bank v. Harris, 833 F. Supp. 551 (W.D.N.C. 1993).