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Post. Administrator, r. Losey et aL
The mortgage in suit was executed in 1875. Under the statutes then in force, such a mortgage was valid. Its validity was not affected by the change in the statutes. It is well settled that a wife who has mortgaged her separate property for her husband's debt, when she may do so, is in the position of a surety, and entitled to all the rights of a surety, and that her liability and the mortgage lien are discharged by an extension of time of payment without her consent, if the extension be a binding obligation upon the mortgagee. Her rights in this respect are the same as if she were sole. Trentman v. Eldridge, 98 Ind. 525 (534), and cases there cited; Bank of Albion v. Burns, 46 N. Y. 170; Smith v. Townsend, 25 N. Y. 479.
Relying upon this rule of law, counsel for Emma J. contend that the agreement between the husband and the decedent, the payee, endorsed upon the back of the note, operated as an extension of the time of payment, and thus released her property.
In response to that contention, counsel for appellant contend, in the first place, that the evidence does not show that the decedent, payee, at any time had notice that Emma J. was surety for her husband, and that, hence, she can not avail herself of the rule which releases a surety by an extension of the time of payment; and, in the second place, that she can not avail herself of that rule for the reason that the husband had been discharged in bankruptcy, and thereby became a stranger to the note. These in their order. In order that an extension of the time of payment may release the surety, it is essential that the payee shall have knowledge of the suretyship. Davenport v. King, 63 Ind. 64; McCloskey v. Indianapolis, etc., Union, 67 Ind. 86 (33 Am. R. 76); Arms v. Beitman, 73 Ind. 85; Gipson v. Ogden, 100 Ind. 20.
When, however, a person accepts a mortgage in his favor upon the separate property of a married woman, knowing her to be a married woman, and that the property is her separate property, he is bound to inquire concerning the conPost, Administrator, r. Losey et aL
eideration, and ascertain, if he may, by reasonable inquiry from her, whether it is for the benefit of another; and unless misled by the conduct or representations of the wife, he will be held to have acquired knowledge of the facts which prudent inquiry would have discovered. Cupp v. Campbell, 103 Ind. 213. See Smith v. Townsend, supra.
Under this rule, and under a less liberal rule, there is evidence sufficient to justify the court below in finding that the payee knew that Emma J. was a married woman, and that she was mortgaging her separate real estate to secure a debt of her husband, notwithstanding she signed the note with him. Being a married woman, she was not personally liable upon the note.
There was in the mortgage an agreement to pay the amount thereby secured. That agreement made the mortgage effective so far as the right to foreclose was concerned, but created no personal liability against her. Trentman v. Eldridge, supra. Robert C. Losey was discharged in bankruptcy from all his debts, including that for which the mortgage in suit was given. That discharge released him absolutely from all legal and personal liability upon the note, and the agreement to pay contained in the mortgage. Root v. Espy, 93 Ind. 511. Ordinarily a surety is released when the debt for which he is surety is discharged; and ordinarily a mortgage given to secure the payment of a debt, and having in it no promise to pay such debt, becomes ineffectual, and is barred when the debt is barred or in any way discharged. Lilly v. Dunn, 96 Ind. 220; Bridges v. Blake, 106 Ind. 332.
Those general rules apply where the discharge of the principal debt and debtor is by some act or neglect of the creditor, and not to a discharge by operation of law, being as it is, against the consent and beyond the power of the creditor. Phillips v. Solomon, 42 Ga. 192. In speaking of the rights and liabilities of sureties, and the effect of the bankrupt law thereon, the court there said: "We are inclined to think * * * that it was not the intent of Congress to do anything Post, Administrator, r. Losey el al.
more than to declare that the act should not be construed so as to discharge sureties, and that this was done not so much to fix the law of the case, as by way of caution to prevent the act from being construed to have an effect that, by its terms, it would not have. In other words, the contract of a surety, as it is understood in the commercial world, is always conditioned that the surety shall not be discharged by the bankruptcy of the principal."
It was further said that the sections of the bankruptcy law upon the subject of sureties were only in furtherance, and declaratory of, what would have been true had those sections not been put in the act. The court also quoted with approval the following from Theobald on Principal and Surety: "The obligation of the surety also, in general, becomes extinct, by the extinction of the obligation of the principal debtor. An exception to this rule takes place, whenever the extinction of the obligation of the principal arises from causes, such as bankruptcy and certificate, which originate with the law, and not in the voluntary acts of the creditor." See, also, Gregg v. Wilson, 50 Ind. 490; and, to the same effect, 1 Parsons Notes and Bills, p. 249; 1 Parsons Contracts, 29; Ward v. Johnson, 13 Mass. 148; Blumenstiel Law and Practice in Bankruptcy, p. 543.
Whatever may have been the purpose or necessity of it, the bankrupt law under which Losey was discharged provided in explicit terms, that no discharge under it should release, discharge, or affect any person liable for the same debt for or with the bankrupt, either as endorser or surety, etc. Bump Law and Practice of Bankruptcy (9th ed.), p. 732, and cases there cited. Sec, also, King v. Central Bank, 6 Ga. 257; Hall v. Fowler, 6 Hill, 630; Camp v. Gifford, 7 Hill, 169; Knapp v. Anderson, 15 N. B. P*. 316; Gregg v. Wilson, supra.
The above mentioned provision of the bankrupt act, as interpreted by the courts, and the general principles of the law, require a holding here that the mortgage in suit was not Post, Administrator, r. Losey et aL
discharged by the discharge in bankruptcy of Robert C. Losey, the principal debtor. In re Hartel, 7 N. B. R. 559. See, also, Catterlin v. Armstrong, 101 Ind. 258.
Emma J. having mortgaged her property for the debt of Robert C, and thus occupying the position of surety, he was liable to her for whatever might be collected from her property in payment of the debt. In that sense, he was her debtor. She was in a position to have caused the debt, to secure which the mortgage was given, to be proved against the estate of the bankrupt debtor, in order that it might be reduced by whatever dividends were made, if any. Such proof was expressly authorized by the bankrupt law. And because that proof might have been made, the discharge of Robert C. Losey discharged him from all liability to Emma J., by reason of the mortgage. Blumenstiel Law and Practice in Bankruptcy, p. 545; Bump Law and Practice of Bankruptcy, p. 582; Mace v. Wells, 7 How. (U. S.) 272; Baker v. Vasse, 1 Cranch C. C. 194; Hunt v. Taylor, 4 N. B. R. 683; Kerr v. Hamilton, 1 Cranch C. C. 546; In re Perkins, 10 N. B. R. 529; Brandt Suretyship, section 189.
It results from what we have said, that after the discharge of Losey in bankruptcy, he was neither liable upon the note or otherwise to the payee, nor was he in any way liable to Emma J., who, by reason of the mortgage upon her separate property, occupied the position of surety.
Didjthen, the agreement between the bankrupt debtor and the payee and mortgagee, release her and her property as surety?
The rule is universal, that an extension of the time of payment by the creditor, by a binding contract with the principal, and without the knowledge and consent of the surety, will release the surety.
While there is no substantial disagreement between law authors and courts as to the reasons upon which the rule rests, there is some diversity in the statement of those reasons.
It is sometimes said that the reason why an extension of Post, Administrator, v. Losey et aL
the time of payment discharges the surety is, that he would be entitled to the creditor's place by substitution, and the creditor, by agreement with the principal debtor for an extension of the time, without the surety's consent, disables him from suing when he would otherwise be entitled to do so, upon payment of the debt. The case of Tiernan v. Woodruff, 5 McLean, 3-,0, was made to rest upon that reason. There, after the maturity of the note, and after the discharge iu bankruptcy of the principal debtor, the creditor entered into a scaled agreement with him, without the knowledge or consent of the surety, and for a valuable consideration, that he, the creditor, would not, for the space of two months, commence any proceedings in law or equity, or otherwise, against him, the principal debtor, upon the note. It was held that our bankrupt law extinguished the debt of the bankrupt, even against the surety; and that after the discharge of the principal debtor, the surety had no remedy but to present his demand against the estate of the bankrupt, and that he had no recourse against the bankrupt.
At the close of the opinion it was said: "The time given to Ronicyn (the bankrupt), under these circumstances, by no possible means, could have operated to the prejudice of the defendant (the surety). The settled rule of law, therefore, as to the effect of giving time to the principal debtor, does not and can not apply in this case. After the extension complained of, as well as before it, the endorser could have proved the extent of his liability against the bankrupt's estate, and that was the only remedy, which, under the circumstances, the law gave him."
The same reason for the rule has been made prominent in some of our own cases. In some of the cases it has been said, that the agreement must be such as to tie the hands of the principal debtor, and fetter and embarrass the surety. Wingate v. Wilson, 53 Ind. 78; Bucklen v. Huff, 53 Ind. Vol. 111.—6