In Re Mitchell; Freelove v Mitchell

[1913] 1 Ch. 201
[1912 M. 670.]

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(Judgment by: Parker J (including background))

In Re Mitchell
Between: Freelove
And: Mitchell

Court:

Judge:
Parker J

Subject References:
PRINCIPAL AND SURETY
Right of Principal to Indemnity by Surety against Liability
Will
Construction
'Debts'

Judgment date: 4 December 1912

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Judgment by:
Parker J (including background)

A surety's equitable right to be indemnified by the principal debtor does not create any debt before the surety has been called on to pay anything under his guarantee.

Held, accordingly, that a release of "all debts" to a principal debtor by the surety's will did not affect the right of the executors to come on the principal debtor's beneficial interest under the will for indemnity against claims under the guarantee made by the creditor after the testator's death.

Joseph Mitchell made his will, dated November 16, 1907, and clause 13 thereof was, so far as material, as follows:

"I bequeath .... to my nephew John Joseph James Mitchell 2000l. and I forgive the said John Joseph James Mitchell all debts owing to me from him up to the time of my decease and all interest and arrears of interest thereon. And I bequeath to him the same and all documents which I shall hold by way of security for the same, but upon condition that he shall not be entitled to receive or retain the amount that shall be due from me to him up to the date of my death, whether for goods sold or upon any other account."

The testator appointed Mary Mitchell, H. Freelove, G. H. Long, and E. Vinter executors and trustees of the will, and died on July 7, 1911.

J. J. J. Mitchell was a nephew of the testator, and at the time of the death of the testator no sum was due from him to J. J. J. Mitchell for goods sold. The testator held various promissory notes from J. J. J. Mitchell, some of which were apparently statute-barred, but one of which, for 1000l., was not so barred. In 1904 J. J. J. Mitchell had borrowed money from the Cambridge branch of Barclay & Co., Limited, bankers, and on September 26 the testator deposited with the bank the title deeds relating to certain properties to secure the advances made to J. J. J. Mitchell. On October 5, 1904, the testator gave to the bank a written guarantee, which was of a continuing nature, whereby he guaranteed to the bank all sums due by J. J. J. Mitchell, the testator's liability thereunder being limited to 4000l.

On October 29, 1908, some of the deeds deposited were returned to the testator, who, in substitution for them, deposited with the bank the title deeds relating to other property, and on the same day he gave to the bank another written guarantee, which was in substance to the same effect as the one previously given.

At the date of the testator's death the second guarantee was subsisting, the title deeds were still held by the bank, and money was due from J. J. J. Mitchell to the bank.

On July 12, 1911, the executors gave formal notice to the bank determining the guarantees, and on August 17, 1911, the bank demanded payment by the executors of 4000l. The executors paid the bank 3100l., part of that amount.

On September 11, 1911, J. J. J. Mitchell executed a deed of assignment to trustees for the benefit of his creditors, and this deed was registered on September 15, 1911.

Freelove, Long, and Vinter, three of the executors and trustees, took out an originating summons against Mary Mitchell, the other trustee and executrix and also a beneficiary under the will, A. H. Mitchell, J. G. Mitchell, Kate Payne and Dorothy Payne, also beneficiaries thereunder, and E. G. Bell and C. Boardman, the trustees of the deed of assignment, for the determination of certain questions, one of which was whether, on the true construction of clause 13 of the will, the trustees and executors were entitled and ought to retain the amount of all or any payments made or to be made out of the testator's estate in respect of the guarantees and the charge (of September 26, 1904),

"all of which were given by the testator as surety for the said John Joseph James Mitchell to Barclay & Co. Limited, together with interest, .... out of all or some and which of the interests given to the said John Joseph James Mitchell under the said will."

Under the will, besides the legacy and forgiveness above mentioned, J. J. J. Mitchell was entitled to one fifth of a sum of 3000l. in reversion and to one fourth of the residuary estate.

Wilfrid Hunt, for the plaintiffs, stated the facts and the question involved.

Romer, K.C., and T. J. C. Tomlin, for Mary Mitchell. The forgiveness in clause 13 is confined to debts actually due and owing to the testator at the time of his death.

A surety has a right to come into equity for the purpose of being indemnified against a debt before he has paid anything himself; and Wickens V.-C. said that this right created an equitable debt: Ferguson v. Gibson. ^[F1] Where an executor had become surety for his testator's debt, but before the testator's death had not been called on to pay anything in respect of the suretyship, Pearson J. held that nothing was due to him in respect of the suretyship - in other words that there was no debt - and that although he subsequently was called upon to pay, when no money of the testator was in his hands, he could not afterwards retain what he had paid: In re Harrison. ^[F2] On the other hand, Kekewich J. held that the right of indemnity belonging to an executor who was surety for an unpaid debt of his testator created an equitable debt in respect of which he might exercise the right of retainer: In re Giles. ^[F3] Where a testator had deposited money with a bank as a continuing security for money owing to the bank by his two sons, and by his will had given legacies to the sons, and at the testator's death the sons owed the bank more than the amount deposited, and, the sons having become bankrupt, the bank were about to appropriate the deposit in part payment of the sons' debt, North J. held that the trustees of the will were not entitled to retain the sons' legacies against the liability of the father's estate as surety: In re Binns. ^[F4]

[PARKER J. The other cases you cited were apparently not referred to in that case.]

North J. seems to have been embarrassed by the rule in bankruptcy against double proof. The nature of the surety's right against the principal debtor has been recently explained by Swinfen Eady J. in Ascherson v. Tredegar Dry Dock and Wharf Co. ^[F5] The decisions shew that a mere right to be indemnified cannot be considered as a debt. [They also referred to In re Akerman. ^[F6] ]

T. Arnold Herbert, for beneficiaries in the same interest, adopted the same argument.

A. Grant, K.C., and J. G. Wood, for the trustees of J. J. J. Mitchell's deed of assignment. Clause 13 of the will is a complete gift by the testator of all debts, that is to say, all money claims or things which may ripen into money claims; and it makes a clean sheet between J. J. J. Mitchell and the testator. The contrary argument is an attempt to construe the word "debts" in a strictly common law sense.

The right of the surety to be indemnified is an equitable debt, and it is of such a nature that it justifies proceedings for indemnity and administration of the estate of the principal debtor: Wooldridge v. Norris. ^[F7] The liability of the principal debtor is like the liability of a principal to indemnify his agent, which may be proved for in the administration of the principal debtor's estate: Crowley's Claim. ^[F8] The mere allowance of a claim by the principal creditor against the estate of a deceased surety is equivalent to a judgment, that is to say, the surety's representative, although he has paid nothing, can maintain an action against a co-surety to compel him to contribute: Wolmershausen v. Gullick. ^[F9] A surety who has a right of proof in bankruptcy in respect of his contingent liability is a "creditor" within the meaning of s. 48 of the Bankruptcy Act, 1883: In re Paine; ^[F10] In re Blackpool Motor Car Co. ^[F11] In re Giles ^[F12] is a distinct authority that the surety's right constitutes an equitable debt. An administrator who has joined with the intestate as surety in giving a security for loans has a right of retainer, although he has not paid the loans: In re Orme. ^[F13] [They also referred to Willes v. Greenhill (No. 1). ^[F14] ]

[PARKER J. referred to In re Sewell. ^[F15] ]

T. J. C. Tomlin in reply.

PARKER J. In this case I have to put a construction upon clause 13 of the will of the testator, who died on July 7, 1911, the will itself being dated November 16, 1907. The words of the clause are as follows:

"I bequeath .... to my nephew John Joseph James Mitchell the sum of 2000l. and I forgive the said John Joseph James Mitchell all debts owing to me from him up to the time of my decease and all interest and arrears of interest thereon. And I bequeath to him the same and all documents which I shall hold by way of security for the same, but upon condition that he shall not be entitled to receive or retain the amount that shall be due from me to him up to the date of my death, whether for goods sold or upon any other account."

At the date of the will the circumstances of the case were as follows. The testator held various promissory notes given to him by his nephew, John Joseph James Mitchell, some of which appear to be barred by the Statute of Limitations, but one of which was not so barred, namely, a note for 1000l.

Further, it appears that in 1904 the nephew John Joseph James Mitchell had borrowed money from his bankers, and the testator had in the first instance deposited with the bankers certain securities or title deeds of his own to secure the advances to the nephew, and a day or two afterwards he entered into a guarantee, which was of a continuing nature, and guaranteed to the bank all sums due by the nephew to the bank, provided that the testator's liability under the guarantee should be limited to 4000l. Some years afterwards a second guarantee was given which is substantially to the same effect, the reason for giving it appearing to be that the testator placed some additional security with the bank for the purpose of covering his liability on the guarantee, and at the date of his death there was money due from the nephew to the bank, and the latter guarantee was still subsisting, the securities or title deeds which had been deposited still remaining in the hands of the bank.

The question I have to decide is whether the clause in the will to which I have referred can be construed as a gift to the nephew of 4000l. or some other sum in aid of the money due by the nephew to the bank. That, of course, depends upon what construction I put upon the words "all debts" contained in the clause in question.

Now, I have heard a good deal of argument on the nature of the right which a surety has against the principal debtor, and I may say at once that it appears to me that, until the surety is called upon to pay and does pay something under his guarantee, there is no debt or right at law at all; until then, a surety's right is confined to a right to come into equity in order to get an indemnity against his liability to the creditor. That, I think, has long been well-known law, and at any rate it is made reasonably clear by the case, recently before Swinfen Eady J., of Ascherson v. Tredegar Dry Dock and Wharf Co. ^[F16]

I have also had various cases cited to me as to the position of an executor who has entered into a guarantee of the sort in question, with regard to his right of retainer, and those authorities do not appear to me to be entirely consistent. Fortunately, I have not in this case to decide any point as to retainer. In the cases which have been cited to me there are, however, expressions which seem to imply that there is in equity a debt due from the person who is guaranteed to the guarantor even before the guarantor has paid any money under the guarantee. That, I think, is merely a mode of expressing what the rights in equity are. There is no doubt that there is the right to come to equity for the purpose of obtaining the indemnity even before the money has been paid under the guarantee. It is possible to call that right an equitable debt, but as a matter of fact it does not appear to me to carry the matter any further by using that term. The right is not really a debt; it is a right to come, for the purpose of indemnity, to a Court of Equity.

If I look at the particular words used here, it appears to me that what the testator is really considering is debts in the proper sense of the word, that is to say, moneys actually due and owing, capable too of carrying interest if such is the bargain between the parties, and not contingencies which may ripen at some future date, by reason of a number of events that may happen, into a debt at law or in equity in the ordinary sense of the word. It does not appear to me that the words are meant to include contingencies of this sort. It might be, for instance, that at the date of his death the testator had been called upon to pay, and had actually paid, money under the guarantee. In that case there would be no doubt that that would be a debt due from the principal debtor to the surety. On the other hand, he might not have been called upon to pay and might not have paid anything, and it does not follow at the date of his death that he must necessarily be called upon to pay or must necessarily pay anything; it might happen that the principal debtor might pay off the bankers' liability, and in that case there would never be any debt at all.

I hold, therefore, that in the present case the words "all debts" do not include any equitable right which the surety may have had at the time of his death to come into equity to obtain indemnity, and I do not think that that conclusion is disturbed in any way by the argument which I have heard from Mr. Grant and Mr. Wood, to the effect that the object of the clause was to make a clean sweep of all transactions between the testator and his nephew in order that the nephew might have a clear title to the 2000l. and the other bequests given to him by the will. The truth is that in these matters, when a surety gives his contract of guarantee to the bank, though he contemplates the possibility of being called upon to pay, he expects payment to be made by the principal debtor, and if the payment is made by the principal debtor, the liability of the surety never ripens into a debt at all. I do not think the testator in this case intended to include such matters as that in the release which he gave, and, that being the case, it appears to me that the release must be confined to the indebtedness of the testator in the stricter sense of the word, that is, so far as I have heard the facts, the moneys due upon the promissory notes, and does not include anything with reference to the guarantee.

There will be a declaration that the clause in the will does not extend to any moneys which the testator's estate may be called upon to pay to the bank under the guarantee, and that the executors are entitled to retain the beneficial interest of J. J. J. Mitchell under the will to make good those sums together with interest from the date of payment.

Solicitors for the plaintiffs and the defendant Mary Mitchell: Mackrell & Ward, for Ernest Vinter, Cambridge.

Solicitors for the other defendants: P. J. Rutland: F. J. Perks, for T. Bates, Haverhill.