119 Tenn. 548 | Tenn. | 1907
delivered the opinion of the court.
This bill was filed by the Elgin City Banking Company, a corporation chartered under the laws of the State of Illinois, and having its situs and principal place of business at Elgin, in said State, against the defendants, who are all residents of Bradley county, Tennessee, for the collection of two promissory notes, together with the accrued interest. Complainant claims to be an innocent holder of said notes, and purchased them before maturity, in due course of trade, without notice of any outstanding equities against them. A copy of one of said notes, together with the indorsements thereon, is in the words and figures following, to wit:
“400.00 Cleveland, Tenn., Oct. 1st, 1903.
“On or before the first day of September, 1905, for value received, we jointly and severally promise to pay to the order of Dunham, Fletcher & Coleman, of Wayne, Ill., four hundred dollars ($400.00), payable at the Cleveland National Bank, with interest at five per cent, per annum, payable anually from date, until paid.
“Jeep Hall.
“C. T. Carroll, Jr.
“L. L. Callaway.
“L. P. Sullivan.
“T. J. MoKamy.
“Edward H. Thurston.”
*552 “Pay to the order of W. S., J. B. & B. Dunham, without recourse to us.
“Dunham, Flbtci-ieR & Coleman.”
“W. S., J. B. & B. Dunham.”
“For value received, we hereby guarantee,' the payment of the within note at maturity, or at any time . thereafter, with interest at five and one-half per cent, per annum until paid, and we agree to pay all the costs and expenses paid or incurred in collecting the same, hereby waiving demand of payment and notice of nonpayment.
“W. S., J. B. & B. Dunham.”
Defendants answered the -bill, in which they admitted the execution of the notes, but denied that complainant is an innocent purchaser of said notes, for value, and in due course of trade. It is averred that said notes were procured by fraud and misrepresentation on the part of Dunham, Fletcher & Coleman, the payees; and as a further defense it is averred that the consideration for said notes has wholly failed.
The more specific averments of the answer are that the notes in suit represented in part the purchase price ($1,600) of a certain horse; that at the time of said purchase the payees, Dunham, Fletcher & Coleman, delivered to respondents a written statement or guaranty of the soundness of said animal and that he possessed all the qualities represented by the seller, but on delivery of the horse it was soon ascertained that he was a stump
It is further averred that the agent of the payee of said notes, at the time the defendants agreed to purchase the horse, made secret and fraudulent contracts with certain of said purchasers, in whose judgment as* horsemen defendants had confidence, whereby said parties. were induced to represent themselves as willing to enter into said purchase as equal partners, and pretended to join with defendants as purchasers, and also pretended to pay or become liable for said sum of $200 each for a one-eightli interest in said horse, for the fraudulent purpose of inducing defendants to enter into said contract; whereas, in-fact, neither of the parties to said
It is averred that the purchase by each of the said eight alleged purchasers was a material part of the consideration for said purchase by all the other purchasers. Defendants, therefore, aver that, because of the fraud, misrepresentations, and concealments on the part of the payees in procuring said contract and notes, and because of said failure of consideration they are not liable to complainants for the amount of said notes or other sum.
It appears that the notes in question were indorsed by the payees, Dunham, Fletcher & Coleman, to another firm, of which W. S. Dunham was a member, and by that firm transferred before maturity to complainant *bank. It is claimed by the complainant that it had no notice of any equities existing against the notes. The complainant bank claims to have purchased the notes by placing the amount paid for them to the credit of W. S., J. B. & B. Dunham (the second indorsers, for whom the notes were discounted) in the First National Bank of Elgin, 111., a different bank from complainant, which is the Elgin City Banking Company, as already stated.
Proof was taken and on the hearing the chancellor
The first inquiry naturally arising is whether there was fraud in the original inception of this contract, for which the notes in question were executed in part fulfillment. ,
It is shown on the record that one Campbell, the agent of the payees, Dunham, Fletcher & Coleman, brought the first horse in question to Cleveland, and, having failed to sell him, proposed to six of the defendants to purchase the horse for $1,600, as equal partners. It is shoAvn by the proof that said agent stated, to the defendant E. H. Thurston that several others would join in the purchase if Thurston would become interested, and proposed that Thurston should hold himself out as a purchaser and affect to pay said sum of $200 with the others, but he should pay only $100, and the remaining $100 would be repaid to him; and it is shown that Thurston, under this secret contract, did thereafter pretend to join with the others as an equal partner in said purchase. It is also shown that said seller approached one M'. L. Beard, of Cleveland, an old and experienced
It is also shown that said agent agreed with J. T. Hall, another of said purchasers, to pay said Hall the sum of $50 for his services in inducing the others to join in said purchase. It is shown that none of the other purchasers knew or suspected these secret and fraudulent contracts had been made, but supposed-that all the others Avere entering into the purchase on equal terms of partnership. It was represented to the five' purchasers Avho received no secret consideration that seven-others had agreed to join, and that it was only necessary that he agree to join to complete the purchase. It is further shoAvn that when the eight purchasers met with said seller to complete the purchase and sign the notes for the purchase money, Thurston and Hall, at the request of the seller, signed the notes with the others, and-the seller then secretly paid to them in cash the'sums of $1'00 and $50 respectively, according to their secret arrangement. The seller also desired said Beard to sign said note and receive $200 in cash; but Beard ob
We think, upon the facts shown in the evidence, that this contract and these notes were not enforceable against the original makers, on account of the fraud and misrepresentation practiced by the agent of the payees, Dunham, Fletcher & Coleman.
As already seen, said notes were first indorsed “without recourse” by Dunham, Fletcher & Coleman, the payees, to W. S., J. B. & B. Dunham, and said notes were then delivered to complainant bank by said W. S., J. B. & B. Dunham under a written guaranty on the back of the notes, by Avhich said firm guaranteed the payment of said note with interest at five and one-half per cent, per annum, together with all the costs and expenses of collection, and also waived demand and notice of nonpayment.
It is suggested that the indorsement “without recourse” was sufficient to put the purchaser upon notice, and destroyed the negotiability of the instrument; but we think it is well settled that an indorsement without recourse is not sufficient to put the purchaser upon notice. 2 Randolph, Commercial Paper, section 1008; 7 Cyc., 954, and numerous cases cited.
Moreover, the matter is set at rest by our negotiable instrument law (Acts 1899, p. 148, c. 94 section 38), wherein it is provided that “such an indorsement does not impair the negotiable character of the instrument.”
Again, it is insisted that complainant bank holds another indorsement or guaranty by which the guarantors agree to guarantee payment of the note at a different and higher rate of interest than the note bears, and
It has been observed that the notes bear interest at five per cent., while the guarantors agreed to pay interest at five and one-half per cent. It is argued that this is a new, independent, and different contract, and not merely a transfer of the notes. It is conceded that many of the authorities hold that a mere guaranty of a note will constitute the purchaser an indorsee, within the rule protecting an innocent holder; but it is insisted that this rule cannot apply to a guaranty changing the rate of interest and also agreeing to pay expenses of collection. It is argued that, if this can be done without destroying the negotiability of the paper, ■then each indorsee can, of course, change the rate of interest or the amount of the note, and each be liable for a different amount.
■ It is unnecessary to decide this question, since it appears that the notes were indorsed in blank by W. S., J. B. & B. Dunham, and the guaranty did not, of course nullify their prior blank indorsement.
In Elgin City Banking Co. v. Zelch, 57 Minn., 487, 59 N. W., 544, the indorsements were:
“Pay Elgin City Banking Co, D. Dunham.”
“Payment guaranteed. D. Dunham.”
The court said:
“■Whether these indorsements be construed as constituting a single contract, or two separate and distinct*560 contracts, we are clear that they constitute' indorse-ments in the commercial sense, and that the transferee is an indorsee, and entitled to protection as such under the law merchant. The fact that Dunham enlarged his responsibility beyond that of an indorser by guaranteeing payment did not change or affect the character of his indorsement.”
In Cover v. Myers, 75 Md., 406, 23 Atl., 850, 32 Am. St. Rep., 394, it is held that a guaranty added to an in-dorsement is not notice of defenses. Louisville Trust Co. v. L., N. A. & C. R. Co., 75 Fed., 433, 22 C. C. A., 378.
The determinative question presented on the record is whether the complainant bank is a holder for value. Our negotiable instrument laAv (section 25) provides:
“Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value and is deemed such whether the instrument is payable on demand, or at a future time.”
“Sec. 26. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who became such prior to that time.”
“Sec. 52. A holder in due course is a holder who has taken the instrument under the following conditions: .
“(I) That it is complete and regular upon its face.
“(2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact.
*561 “(3) That he took it in good faith and for value.
“(4) That at the time it was negotiated to him he had no notice of. any infirmity in the instrument, or defect in the title of the person negotiating it.”
“Sec. 55. The title of a person who negotiates an instrument is defective within the meaning of this act, when he obtained the 'instrument, or any signature thereto, by fraud, duress or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.
“Sec. 56. To constitute notice of an infirmity in the instrument, or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.
“Sec. 57. A holder in due course holds the instrument free from any defect of title of prior ^parties, and free from defenses, available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.”
“Sec. 59. Every holder is deemed prima facie to he a holder in due course, but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that*562 he, or gome person, under whom he claims acquired the title as a holder in dne course.”
While we find some facts and circumstances in the record tending to show that complainants were put on inquiry as to defenses against this note, we cannot say that complainant “had actual knowledge of the infirmity or defect or knowledge of such facts that its action in taking the instrument amounted to bad faith.”
It is matter for observation that at the time of purchasing this paper the officials of the complainant bank made no inquiry in respect of the makers or as to the consideration of the notes, although it is admitted they knew nothing as to the commercial standing or solvency of the makers.
Again, it appears that in enforcing the collection of the notes complainant has ignored the guarantors and is only suing the original makers. This is worthy of comment, since the guaranty was for the payment of all expenses of collection and additional interest. It appears the guarantors are solvent and reside within seven miles of complainant’s place of business, and yet, passing them, complainant sent this paper to Cleveland, Tennessee, for collection, thereby seeking a lower rate of interest and incurring attorney’s fees in the prosecution of the suit. There was no obstacle in the way of a primary suit against the guarantors on this form of guaranty. It is well settled in Tennessee that, when the guaranty is absolute, no demand or exhaustion of the maker is required; nor is any notice required of the
The only explanation of this unbusinesslike procedure on the part of complainant bank is that the firm of guarantors did a valuable business with the bank and that complainant would do anything to protect them.
The main proposition presented by counsel for defendants is that complainant is not a holder of said paper for value within the meaning of our negotiable instrument law. It is said it is not shown that complainant has ever paid anything in money, or the equivalent, for said paper; but the cashier of the bank merely testifies that he gave said firm “credit for the amount at the First National Bank of Elgin.” It is said it is not shown that said credit was ever used by said indorsers, W. S., J. B. & B'. Dunham. The entire testimony on this subject is found in the deposition of A. 0. Hawkins, cashier of the complainant, Elgin City Banking Company. He tells of the purchase of said notes, -together Avith sundry other notes, in one lot, from W. S. Dun-ham, of the firm of W. S., J. B. & B.. Dunham, paying therefor the full amount of said notes, with accrued in
The law seems to be settled that, when a bank simply discounts a note and credits the amount thereof on the indorser’s account, without paying to him any value for it, it is not enough to constitute such bank a prima fade purchaser for value of the note. Selover, Neg. Inst. Laws, p. 217; 2 Amer. & Eng. Ency. of Law, 391, 392; Warman v. First Nat. Bank, 185 Ill., 60, 57 N. E., 6, 49 L. R. A., 412.
The reason is that the proceeds of the discount may be credited to the bank by making a change of entries on its own books. It is said, however, that this rule of law has no application where the credit to the seller of negotiable paper is given by the purchaser, not on its own books, but in a different bank. It is said the presumption must be, in such case, that the purchaser has paid money, surrendered securities, released an obligation, or
It is well settled that a purchaser of commercial paper is a holder for value and in due course of trade, when he “has given for the note his money, goods, or credit, at the time of receiving it, or has on account of it sustained some loss or incurred some liability.” Nichol v. Bate, 10 Yerg., 429; Kimbro v. Lytle, 10 Yerg., 417, 31 Am. Dec., 585; Bank v. Johnston, 105 Tenn., 521, 59 S. W., 131.
As already séen, by section 25 of our negotiable instrument law (Acts of 1899) it is provided: “Value is any consideration sufficient to support a simple contract.” There is no trouble, therefore, in holding that, if the complainant bank had obtained credit in favor of the seller in a solvent bank for the amount of the discounted paper, that would be a sufficient consideration to constitute the purchaser a holder for value.
The difficulty presented arises out of the indefiniteness of the testimony. The witness was not asked by counsel on either side for an explanation of his statement, “I gave them credit for the amount at the First National Bank at Elgin.” It does not appear from the record that this credit was.ever used by W. S., J. B. & B. Dunham. It does not appear how the credit was given,
The fraud that vitiated the original transaction was the conduct of the agent, Campbell, in representing to five of the purchasers that Beard, Hall, and Thurston had become equal partners in the purchase of the horse, wheu this agent had secretly arranged with these three parties to pay them a consideration to allow the use of their names as purchasers and to release them from the payment of their quota of the purchase money.
Affirmed.