Farmers & Mechanics' Bank v. Rathbone

26 Vt. 19 | Vt. | 1852

The opinion of the court was delivered by

Isham, J.

This action is brought on two. bills of exchange, drawn by Caleb E. Barton on the defendant, Henry Rathbone, of the city of New York; both of which were duly' accepted, and before maturity, were discounted, and transferred by endorsement, to the plaintiffs. When the bills matured, they were dishonored, duly protested, and notice thereof given to the drawer.

On the trial of- the case, at the circuit, the defendant insisted, that the bills were accommodation bills; and, upon the facts stated in the bill of exceptions, he now insists, that the bills are of that character, that the drawer is the person primarily liable, that the acceptor stands as his surety, aiid that the release of the drawer, by the plaintiffs, operates as a discharge of the defendant, as acceptor. It is admitted, that if these bills are not accommodation bills, but are really bills for value, the release will not affect the liability of the acceptor. It will discharge all persons intermediate between the holders and drawer, but not those prior on the bills, nor those on whom rests a primary or absolute liability to pay them. English v. Derby, 2 B. & P. 61. Bailey, J., in Claridge v. Dalton, 4 M. & S. 226. Chit, on Bills, 451.

We are not satisfied that these bills are to be treated as accommodation papers. It is true the fact is found in the case, “ that at the maturity of the bills, the drawer was indebted to the acceptor on account, apart from the bills in suit, and that the latter had no funds in his hands of the former, wherewith to meet them.” But, in connection with this statement, it equally appears from the exceptions, that during the season of 1844, the drawer, at different times, consigned to the defendant as commission merchant, for sale on his account, a quantity of cheese, the gross proceeds of which amounted to $7848 78 ; and from the statement in the account of sales we perceive, that a much larger amount than the sum of these bills, was realized therefrom, after these acceptances were given. The account arising from the sale of this property commenced in July, 1844, and closed inNovember of thatyear. There .has been no statement of that account rendered, or balance ascertained by the parties. As between them, the whole account remains open and subject to their future liquidation. While this account was accruing, these bills were drawn and accepted, obviously and with the understanding, that they were to be paid by the defendant, -and the amount so paid be entered into their general account.

During that period, they doubtless anticipated, that the balance would be sufficient to pay these bills, and have been respectively disappointed in the amount finally realized therefrom; so that there is now a balance due the acceptor, as stated in the account of sales. But as these bills, at first, were drawn upon property consigned to the acceptor, and he accepted them with the same means of knowledge, which the drawer had, and thereby assumed the primary obligation to pay them, there is no propriety in treating the bills otherwise than as creating obligations of that character, after they have passed, in due course of business, into. the hands of an endorsee. In so treating them, we are manifestly carrying into effect the mutual intention of the parties when the bills were drawn and accepted; for it is distinctly stated in the case that both the drawer and the drawee supposed and believed, that there were funds sufficient in the hands of the drawee to pay them at maturity, and under that belief the drawer made such representations to the plaintiffs, at the time of their endorsement and discount.

The legal effect and character of bills of exchange, so drawn- and accepted, is not changed, or affected, by any alteration of the-balance of the account, nor even by the fact if it should be afterwards ascertained, that there was an indebtedness, at the time of the acceptance, from the drawer to the acceptor. This principle is fully illustrated by the case of Bagnall v. Andrews, 7 Bing. 217. Indeed, the facts in that case, and the principles there established, have such a direct application to this case, that we cannot consider these bills otherwise than as bills for value, without entirely disregarding the authority and principles of that decision. In that case when tjie bill was drawn, the drawer had an open account with the acceptor, for goods which he was in the course of sending to him for sale; neither of them at that time knew the state of the account ; “ and it afterwards turned out, that the drawer was, at the time of the acceptance, indebted to the acceptor, instead of the acceptor being indebted to the drawerBefore the bill became due, the drawer became bankrupt and endorsed the bill to the plaintiff, who was ignorant, that an act of bankruptcy had been committed. The drawer being called as a witness, was objected to as being interested, on the ground that this was an accommodation bill, and that if the plaintiff recovered, he would be responsible to the defendant, not only for the amount of the bill, but for the costs of that suit. Tindall, Ch. J., after remarking that such consequences would follow, if this was an accommodation hill, and that the witness would be incompetent, observed, that “ we think, upon “ the facts in the case, the bill was not an accommodation bill. At “ the time it was drawn, the drawer had an open account with the “ defendant for goods sent, and which he was then in the course “ of sending to him for sale. The drawer might, at that time, “reasonably expect, that the acceptor would pay the bill out of “ funds that might be in his hands, when the bill arrived at matu- “ rity; for the evidence is express, that, at the time the bill was “ drawn, neither the drawer, or acceptor, knew the state of the “ account. A bill so drawn and accepted cannot be treated as an “ accommodation bill, nor, consequently, is there any implied obli- “ gation, on the part of the drawer, to indemnify the acceptor “ against the costs of any action which may be brought against “him.” 1 Phil. Ev. 61. 9 S.& R. 237.

If that case is to be treated as sound in principle, it makes a final disposition of the case under consideration ; for under that authority, these bills cannot be considered as accommodation bills, but must be treated as bills for value ; the acceptor being the party primarily liable and the drawer considered only as his surety, or guarantor. In such case it was properly remarked, that the release of the drawer was a relinquishment merely of so much security, which the plaintiffs had for the payment of the debt, and which in no event can affect the liability of the acceptor.

It is very evident, also, that the plaintiffs could have sustained ■ no action against the drawer of these bills, unless they had been duly protested and notice given. This principle is founded on the consideration, that a primary liability for their payment rests only upon the acceptor; while that of the drawer is contingent and collateral, and arises upon the default of the acceptor. The necessity of protest and notice, in such cases, is not avoided by a fluctuating balance in their accounts, nor even by the fact, where there exists an open account, that there is an indebtedness from the drawer to the acceptor. Orr v. Megennis, 7 East. 359. Blackburn v. Doren, 2 Camp. 503. In re Brown, 2 Story’s C. C. 521. Story on Bills, § 311. 2 Smith’s Lead. Cas. 29. Smith’s Merc. Law, 315. 15 Pet. 393.

But if these bills are to be regarded strictly as accommodation bills, the same result, we think, must follow. In such case, it is insisted, that the drawer is the person primarily liable; that the acceptor is to be treated as his surety, and that the holder of the bills, is bound so to regard and deal with them, notwithstanding the terms of the bill, whenever he has notice, that the acceptance was for accommodation; whether that notice was received at the time he took the bills, or at any subsequent period.

It is proper to observe, that this question does not now arise between the drawer and acceptor; as between them, the consideration may be inquired into and the true relation of the parties shown; but the question is presented iri a case between the acceptor and an endorsee for value, without notice, that the bill was ior accommodation, at the- time he became the holder. When these bills were received by the plaintiffs, they were invested with those legal rights, and became subject only to those duties, that arose from what appeared on the face of the bills. Their legal effect and the relative liability of the drawer and acceptor could not be changed or altered by any fact not then appearing.

These principles have a peculiar application to bills of exchange, as they are designed for commercial purposes; and their application is required to impart to them that credit and currency, which is necessary to insure the purposes, for which they were intended. At the time the plaintiffs became endorsees, they had the right, on the one hand, and were bound, on the other, both at law and in equity, to regard the acceptor as primarily liable, and the drawer as his surety; they could have released, compounded with, or given time to the drawer, without in any way affecting their right to hold the ultimate liability of the acceptor. Story on Bills § 429, 430. 15 Pet. 393. 1 M. & W. 374. Such being their right at the time they became the holders of the bills, there is no propriety or authority in saying, that that right can be subsequently changed, or affected, by a mere notice from the acceptor to the holder, that the drawer had neglected to provide funds for the payment of the bills ; or by any act of the drawer and acceptor, to which the plaintiffs were not a party, and to which they have never given their assent. Theob. on Pr. & Sur. 216.

The plaintiffs, as holders of these bills, were not subject to any of the equities existing between the original parties, and without their assent those equities cannot be imposed upon them. The case of Mallet v. Thompson, 5 Esp. 178, was an action by an endorsee against tbe maker of an accommodation note for tbe payee. Tbe holder received part payment, under a composition, from the payee, and covenanted not to sue him, which is a virtual release, knowing when he received the bill, that it was given for accommodation. Lord Ellenborough ruled, that the maker was liable, notwithstanding the payment and release; for his liability on the face of the note was primary and principal, and that of the endorsers was collateral and secondary; and whatever may be their liabilities between themselves, such was their liability to the holder. It was also held, that the release would have no effect between the maker and payee; for whatever the maker was compelled to pay he might call upon the payee to repay; the release in no way disturbed their relations. On the application of the same rule to this case, whatever the Receptor may be compelled to pay, he ean call upon the drawer to repay, notwithstanding the release; for their relations are not disturbed by its execution. It is evident, also, in this case, from the release itself, that a discharge of the bill was not intended by the parties, but simply a release of the drawer, by the holders, from any farther claim which they had personally on him, leaving the holders to pursue their remedy against the acceptor, as the party primarily liable. Story on Pr. Notes, § 423.

In the case of Laxton v. Peat, 2 Camp. 185, and Collot v. Haights, 3 Camp. 281, a different doctrine was applied to accommodation bills, where the holder, at the time he received the bills, knew that they were for the accommodation of the drawer. Lord Ellenborough remarked, “that as it was an accommodation bill, of which all parties had notice, the acceptor can only be considered as a surety for the drawer ;” and the acceptor was discharged by time being given the drawer. If these cases can be sustained on principle, they have no application to this case ; for it may be said with more propriety, that if one take a bill of exchange, knowing at the time that it was for accommodation, he thereby assents to receive and hold it subject to that equity of the parties; while no such suggestions can be made in this case, as these plaintiffs had no such notice, when the bills were received and discounted.

The doctrine of those two cases was, however, subsequently shaken by Justice Gibbs, in Kerrison v. Cooke, 3 Camp. 362, and was afterwards overruled in the Common Pleas, in the case of Fentum v. Pocock, 5 Taunt. 192, in which Mansfield, Ch. J., observed “ that the case of Laxton v. Peat was the first, in which it was held, that the acceptor was not the first and last person compelled to pay the bill to the holder; and that they were compelled to differ, and hold, that it is impossible to consider the acceptor of an accommodation bill in the light of a surety for the drawer; and that if the holder had known, in the clearest manner, that at the time of giving the bill, it was for accommodation, it would make no manner of difference.” With this view of the case, Heath, J. and Chambre, J. agreed. It will be at once perceived, that in this case, the acceptor was held as the principal and primary debt- or on an accommodation lili, known to be such by the holder, when he received, it; and that act of the holder, which would have discharged a surety, was held not to affect his liability. We are not called upon, in this case, to approve or disapprove of the doctrine of that case, to the extent to which it was carried; but it is a decided authority for saying, that an endorsee for value, of a bill of exchange, who became such before its maturity, and in ignorance that it was given for accommodation, has a right to treat all parties thereon as liable to him according to their relative positions on the bill, and to regard the acceptor as the principal debtor, and the liability of the drawer as collateral; and that this right is unaffected by any subsequently acquired knowledge, that the bill was given for accommodation. In such cases it is regarded as a mere truism to say, that a release of the drawer, by the holder, has no effect on the ultimate liability of the acceptor.

The case of Fentum v. Pocock, has been sustained and approved by the subsequent cases in England; Price v. Edmonds, 10 B. & C. 584. Nichols v. Norris, 3 B. & Ad. 41. Harrison v. C_, ib. 36. Rolfe v. Wyatt, 5 C. & P. 181. 1 M. & M. 14. Yallop v. Ebers, 1 B. & Ad. 703. It is to be observed, also, that the same view of the subject is entertained by the different elementary authors. Chit, on Bills, 344. Smith’s Merc. Law, 332. 3 Kent’s Com. 104. Bayley on Bills, 364. Story on Pr. Notes, § 418, 423.

This subject has arisen before many of the courts in this country, and the rule is generally sustained, “ that the parties to a bill, or note, are bound by the character which they assume upon the face of tlie bill; if by that they are liable as primary debtors, or as principal, then, as to the holders, they are bound as such; and his knowledge, at the time when he takes the bill, that they or either of them are accommodation parties, will not vary the case.” Montgomery Bank v. Walker, 9 Serg. & R. 229. S. C. 12 Serg. & R. 382. White v. Hopkins, 3 Watts & Serg. 99. Lewis v. Houchman, 2 Bau. 416. Commercial Bank v. Cunningham, 24 Pick. 275. Church v. Barlow, 9 Pick. 551. In re Babcock, 2 Story’s C. C. 398. Sanford v. Lambert, 2 Blackf. 137. Chopper, Admr. v. Union Bank of Maryland, 7 Har. & I. 92.

In the case of Claremont Bank v. Wood, 10 Vt., 582, where several, some of whom were sureties, signed a note, “ each as principals,” and promised to pay, it was held, that as to the holders, they were to be regarded as principals, and not as sureties; and yet the primary liability of the acceptor, and the secondary liability of the drawer, is as expressly set forth on these bills, as if it were written out in full over their respective signatures. In either case, to vary their respective liabilities, as they have assumed them on the face of the bills and note, would be to vary and control their intended operation, and, in effect, to enforce a contract, which the parties never made.

On this subject it is important to observe a material distinction between joint and several promissory notes, or obligations, and bills of exchange, or notes, on which the parties have assumed only successive liabilities. In the former case, as between the makers and the holders, who at the time received the note with notice of the circumstances, under which it was given, the strict relation of principal and surety may exist, and evidence of that fact is not considered as contradicting its specific provisions, but as consistent with its terms; and the right of contribution, arising out of that relation, exists between them. 2 Am. Lead. Cas. 289,303, in notes. But the drawer, and acceptor, and endorsers, of a bill or note, have not assumed a joint and several liability; neither are they strictly sureties; but are liable to each other, in the order of their becoming parties; and when the action is on the bill, or instrument, creating such successive liabilities, by an endorsee for value, without notice that the bill was given for accommodation, such testimony is inadmissable for the purpose of converting their successive liabilities into a joint and several obligation, or placing them in the relation of principal and surety. The testimony clearly contradicts the express provision of the bill, and materially changes its legal effect. Unquestionably those liabilities may be changed, as between the parties, by an express contract to that effect, which may be enforced between them. But this in no way affects the rights of a holder, who, at least, became such in ignorance of that arrangement. Under such circumstances, the holder has only to look to the bill itself and the genuineness of the signatures, to ascertain the nature and extent of the liability of the parties thereon; and they are liable to him in the successive order, in which their names appear upon the face of the bill. McDonald v. Magruder, 3 Pet. 471. Flint v. Day, 9 Vt. 328. Brown v. Mott, 7 Johns. 360.

This doctrine is sustained in Story’s Treatise on Promissory Notes, in which, sec. 418, he observes, “that the strong tendency of the more recent authorities, is to hold that, in all cases, the holder has a right to treat all the parties to a bill as liable to him exactly to the same extent and in the same manner, whether he knows, or not, the note to be an accommodation note; for, as to him, all the parties agree to hold themselves primarily, or secondarily, liable, as they stand on the note; and that they are not at liberty, as to him, to treat their liability as at all affected by any accommodation between themselves.” And in section 483, he farther says: “ Nor would it make any difference in the case, that the released party was, in point of fact, the party ultimately bound to pay the note, and that the other party was a mere accommodation maker, payee, or endorser, for his benefit; or at least, it would not make any difference, unless the fact of its being such accommodation note were, at the time of receiving the note, and not merely at the time of the release, known to the holder.” Story on Bills, § 291, 368, 432, 434. Chancellor Kent, 3 Kent’s Com. 104; also observes, “ that the acceptor of a bill is the principal debtor, and the drawer the surety, and nothing will discharge the acceptor, but payment or a release. Accommodation paper is now governed by the same rules as other paper. This is the latest and the best doctrine, both in England and this country.”

As these bills were received and discounted by the plaintiffs before their maturity, without notice that they were for accommodation, we are satisfied, from the authorities, that they had a right to treat the acceptor as the principal debtor, and the drawer as liable only on his default. In such cases there is no difference between accommodation bills, and bills for value: in either case, a release of the drawer from any farther liability to the holder, will have no effect, as a discharge of the acceptor from his primary liability on the bill; and this right, so to treat the parties on the bill, remains unaffected by any notice subsequently given, that the bill was for accommodation.

It is insisted, however, that the release of the drawer will in equity discharge the acceptor, and that the principles, which prevail in that court, are now equally available at law. From an examination of the cases in chancery, we entertain a decided conviction, that the same principles, on this subject, prevail in equity, as at law. If any diversity of opinion exists in that court, on this question, it has arisen more from a misapprehension of the rule at law, and a desire to conform to the principles there established, than from any rules prevailing in equity, at variance with them. There is much propriety in this ; for the principles regulating bills of exchange have their origin in mercantile usage, and have been adopted to meet the exigencies and wants of commercial transactions ; it is therefore equally the policy of courts of equity, as of courts of law, to make the application of, and enforce those principles, in relation to these securities, which experience has found necessary, to preserve their negotiability and credit.

In the case of the Bank of Ireland v. Beresford, 6 Dow, 233, Lord Eldon expressed his opinion of the case of Fentum v. Pocock, and observed, that, “ if it went on the principle, that inquiry is not to be made into the knowledge of the party, but that all shall be taken as appearing on the face of the bill, I think it a most wholesome doctrine.” The case is important only, as showing the individual opinion of Lord Eldon on that question, and as showing that no different rule had then prevailed in chancery. In the case of Glendenning, ex parte, 1 Buck, 517, Lord Eldon refused to adopt the principle of the decision of Fentum v. Pocock, and recognized the general doctrine, as held in Laxton v. Peat. That was the case of an accommodation acceptance, and known to be such, by the holder, when he received the bill. We are, therefore, not called upon to approve or disapprove of the doctrine of that case, for in this case, the plaintiffs had no notice, when the bills were received and discounted, that they were for accommodation.

If the plaintiffs in this case had received the bills, with knowledge that they were given for accommodation, we do not say hut that the defence would he available ; for when one takes a bill, even before maturity, with notice of a given fact, it is not unreasonable, that he should be charged with the consequences that result therefrom, as if the bill had been received overdue. But that principle does not apply, when the bill is taken before maturity, without notice, and for value; for the bill is then held independent of all equities existing between the original parties; and Lord Eldon, in that case, no where intimates, that the principle would have such an application. It is only to the case of an accommodation bill, and known to be such by the holder, when he received the bill, that he made the application of that rule.

The case, however, which should and does exert a controlling influence in our decision of this case, is that of Harrison v. Courtald, 3 B. & Ad. 36. That case, it will bé perceived, was sent from chancery, by the Master of the Rolls, for the opinion of the court of King’s Bench. This circumstance, alone, creates the inference, that in relation to bills of exchange, on which the parties have assumed successive liabilities, the principles of equity are the same as at law, and that, if the acceptor of these bills is not discharged at law, he wouldnot be in equity; for it would be an idle proceeding for chancery to send a case to a court of law, to ascertain the principles prevailing there, unless those principles have equal application in chancery. In that case, as we have assumed in this, the bill was accepted for the accommodation of the drawer, and was endorsed for value, before its maturity. In that case, as in this, the holder was ignorant, at the time he received the bill, that it was given for accommodation, but was afterwards informed of that fact, before the act was done, which the acceptor claimed operated as his discharge. It will at once he perceived, how very similar are the two cases, in every important particular. On the hearing of that case, the decisions at law and in equity were considered; and all the judges, Ch. J. Tenterden, and Park|, Taunton and Patterson, Justices, certified to the court of chancery, that the acceptor was liable, on the bill, the same as on a bill for value.

"Whether, therefore, we apply to this case the principles prevailing in equity, or at law, the result is the same. The plaintiffs having no notice, at the time they received the bills, that they were given for accommodation, had a right to treat the drawer as collaterally liable thereon, and the acceptor as the principal and primary debtor; and this right of the holder remains unaffected by any subsequent knowledge which he may have, that they were for the accommodation of the drawer. Under such circumstances, the release of the drawer, in no way affects the liability of the defendant, as acceptor. This view of the case renders it unnecessary to pass upon other questions, which were urged in the argument of the ease.

The result is, that the judgment of the county court must be reversed, and the case remanded.