200 P. 62 | Cal. Ct. App. | 1921
[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *95 This is an action on a promissory note for $1,000, dated May 29, 1919, and executed by defendants to one Akers as payment for certain hogs bought by defendants from Akers. The latter, before the maturity of the note, indorsed and delivered it to plaintiff, who, claiming to be an innocent indorsee in due course of business, for value and without notice of any infirmity in the instrument, sues defendants as the makers. The case was tried before a jury, the verdict was in favor of defendants, and from a judgment that he take nothing by the action plaintiff appeals.
In their answer, defendants set up two affirmative defenses and four counterclaims. In their first affirmative *96 defense (designated in the answer as the second defense, the first defense consisting of denials), defendants allege, in substance and effect, that plaintiff and Akers owned the hogs, or plaintiff had some interest therein; that defendants purchased the hogs for the purpose of fattening them for the market, which fact was communicated to plaintiff and Akers; that the hogs were not sound but were suffering from cholera; that plaintiff and Akers knew the condition of the hogs at the time of the sale but defendants did not; and that, by reason of the diseased condition of the hogs, their sale to defendants was illegal and contrary to public policy. There is no allegation that plaintiff or Akers misrepresented the condition of the hogs or that either withheld from defendants knowledge of their condition for the purpose or with the intent to deceive or defraud. In short, nowhere in defendants' first affirmative defense is there any allegation ofscienter or of fraudulent intent.
The second affirmative defense (designated in the answer as the third defense), after repeating the allegations of the first affirmative defense, alleges that plaintiff and Akers represented to defendants that the hogs were sound and free from disease; that, shortly after their purchase by defendants, some of the hogs, the aggregate value whereof was $764, died from cholera; and that by reason thereof there has been a failure of consideration for the note to the amount of $764.
In their counterclaims defendants allege that they purchased the hogs from plaintiff and Akers; that plaintiff and Akers falsely represented that the hogs were sound and free from all contagious or infectious diseases; that defendants relied upon such representations; that such representations, when made, were known by plaintiff and Akers to be false, and were made with the intent to defraud defendants; that upon discovering the falsity of the representations and that the hogs were suffering from cholera, defendants tendered them back to plaintiff and Akers and demanded a rescission of the contract of sale and the return of the promissory note, which, it is alleged, plaintiff and Akers refused to do; that, by reason of the cholera with which the hogs were affected, defendants were damaged in various sums, namely, $60 for veterinary *97 services and medicines furnished the hogs, $150 for wages paid a man to care for the hogs while they were suffering from cholera, $1,000 damages to defendants' ranch by reason of the presence of the diseased hogs thereon and the dissemination of the cholera germs, and $1,000 damages resulting from loss of profits that would have been made had the hogs been sound and had they been sold by defendants after they had been fattened for the market.
To each affirmative defense and counterclaim plaintiff interposed a general demurrer, which he claims should have been sustained.
[1] The first affirmative defense is fatally defective in that it fails to allege that either plaintiff or Akers made any false representation fraudulently, or that either of them concealed the condition of the hogs with intent to deceive. [2]
Where, as the result of fraud, there is a partial failure of consideration, and the amount of damages is definite and can be ascertained by calculation, the fraud may be pleaded in reduction of damages as a defense pro tanto (Russ etc. Co. v.Muscupiabe etc. Co.,
Respondents, as their sole reply to appellant's objection to the sufficiency of the first affirmative defense, contend that the defense is based, not on fraud, but on the illegality of the contract. There is no merit in this contention. Because the Penal Code makes it a crime to suffer infected animals "to be driven on the public highway" (Pen. Code, sec. 402d), respondents argue that the contract of sale was contrary to public policy and void. But there is no allegation that the contract of sale contemplated that the hogs should be "driven" on the public highway. For aught that appears from the allegations of the first affirmative defense, it is quite possible that the hogs were to be conveyed to respondents' ranch without being "driven" *99 thereto, or without being driven thereto on any "public highway."
What we have said of the first affirmative defense applies with equal force to the second, unless, as respondents claim, the second affirmative defense shows the breach of an express warranty. The sole basis for the claim that there was an express warranty is the allegation that, at the time of the sale, plaintiff and Akers "represented to the defendants that said hogs so purchased were in good health and sound physical condition and free from cholera or other infectious or contagious diseases and were merchantable hogs." There is a definite distinction between a fraudulent representation and a warranty. [3] A fraudulent representation is an antecedent statement made as an inducement to the contract, but is not a part or element of the contract. On the other hand, to constitute an express warranty the statement must be a part of the contract. (35 Cyc. 368, 372.) Although, to constitute an express warranty, no particular form of words is essential, and it is not necessary that the word "warranty" should be used, it must at least appear that the buyer understood that the seller's affirmation was a warranty, that is, that it was intended to be a part of the contract. (24 R. C. L., p. 167; 35 Cyc. 374.) [4] Here there is no allegation that plaintiff or Akers "warranted" the soundness of the hogs, nor is there any equivalent averment, as, for example, an averment that the buyer understood that the alleged representation was to be a part of the contract of sale. For these reasons we think that the demurrer to the second affirmative defense should have been sustained.
[5] Each counterclaim alleges that plaintiff and Akers falsely and fraudulently represented that the hogs were sound and free from disease. Akers is not a party to the action. A counterclaim must be one in favor of a defendant against a plaintiff "between whom a several judgment might be had in the action." (Code Civ. Proc., sec.
Appellant complains of certain instructions given by the court. From so much of the testimony as is set forth in the briefs, we infer that there was no evidence that appellant was a part owner of the hogs or that he had any interest therein or any direct connection with their sale. The theory that respondents adopted at the trial seems to have been substantially this, that appellant was not an indorsee of the note for value and in due course of business, and that, therefore, he held the note subject to respondents' defense of fraud in the sale of the hogs.
[6] By instruction No. 11 the court, in substance, charged the jury that if they believed from a fair preponderance of the evidence that Akers represented to defendants that the hogs were sound and free from disease, that defendants believed such representation and relied thereon, and that the hogs, when sold, were not sound, then that they should find that Akers had been guilty of fraud and deception and had received the note from defendants under misrepresentation. This instruction is assailed on the ground that it permits a finding of fraud in favor of defendants without requiring the jury to find ascienter. The criticism is that the instruction should have required the jury to find, not only that the representation was false, but that Akers had knowledge of its falsity, or what in law is equivalent to proof of the scienter. The criticism *101
is just. We are aware of no authority which will sanction a defense grounded on deceit unless the false representation has been made with knowledge of its falsity, or what in law is equivalent thereto, and with intent to deceive. A misrepresentation knowingly made is sufficient to warrant an inference of fraudulent intent; but to hold that the knowledge or the intent of the person making the misrepresentation is immaterial would be against principle and authority. (Trimble v. Reid,
Respondents remind us that the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true, is, in law, the equivalent of actual knowledge of the falsity. (Civ. Code, sec.
By instruction No. 12 the jury was told, in substance and effect, that if plaintiff purchased the note before maturity, for a valuable consideration and in good faith, without knowledge of the alleged infirmity in the instrument, and honestly advanced money upon the faith of the note, then he "would be entitled to recover only such sum or sums as he honestly advanced upon the face of said *102 note in good faith before he was notified or informed by the defendants that said hogs were suffering from cholera or other infectious or contagious diseases." Appellant claims that this instruction is misleading in that it assumes that, instead of purchasing the note outright, he made advancements thereon from time to time. Respondents, on the other hand, assert that appellant parted with nothing before he received notification of their rescission of the contract, and that, therefore, he stands in no better position than his indorser, Akers.
To understand the criticism aimed at this instruction, it is necessary to make a further statement of the facts. It seems that prior to and at the date of the sale of the hogs Akers was indebted to two banks in sums that aggregated $762. To each of these banks Akers had executed his promissory note for the amount of his indebtedness. Appellant, in some manner not disclosed by the record, but probably as an accommodation indorser, was liable for the payment of these notes. The record does not show when Akers' notes to the banks matured. We have no means of knowing whether either of them had matured prior to the transfer by Akers to appellant of the note that is in suit here. On the very day that respondents executed to Akers, as payee, their note for $1,000 in payment for the hogs, Akers indorsed and delivered it to appellant. At the same time appellant gave Akers $50, who, at the time, was further indebted to appellant in the sum of $36.20, the balance due appellant on a note previously executed to him by Akers. Some months after the transfer to appellant of the note in suit here — the note for $1,000 that respondents had given to Akers in payment for the hogs — appellant paid to the banks the amounts due upon the two notes upon which he was liable as a guarantor or surety for Akers. At the time when Akers indorsed and transferred to appellant the note in litigation here, they agreed that after appellant should succeed in collecting from respondents the principal and interest of the note, and after he had reimbursed himself for any sums that he might have to pay to the two banks on account of Akers' notes to those institutions, and after he had satisfied, from his collection on respondents' note, the other amounts owing him by Akers, namely, the sums of $50 and $36.20, respectively, *103 the balance of his collection on the thousand dollar note should be paid to Akers. From these facts it is apparent that the note in suit here was transferred by Akers to appellant as collateral security: (1) to secure an indebtedness of $86.20 then due to appellant from Akers, made up of the $50 that he then was loaning Akers — under the facts stated the $50 was received by Akers as a loan — and the $36.20 that was due to appellant as the balance of a note previously given him by Akers; and (2) to secure or indemnify appellant against any loss that he might sustain by reason of his liability on the two notes that Akers had executed to the banks — obligations for which, as between themselves, Akers was liable as the primary debtor and appellant as a guarantor or surety only. The day after Akers indorsed the note to appellant the latter was informed by respondents that they had rescinded the contract of sale on account of the alleged false representation, or fraudulent concealment, respecting the condition of the hogs.
If appellant was without notice of the alleged fraud at the time when respondents' note was indorsed to him by Akers, then without doubt instruction No. 12 is not only erroneous but prejudicial. For, in that event, appellant, regardless of any notice that he subsequently may have received respecting Akers' fraud in the sale of the hogs, would be entitled to recover from respondents the sum of $86.20 at least, i. e., the said sum of $50 that he loaned to Akers at the time when the note was indorsed to him and Akers' pre-existing indebtedness of $36.20, the balance due on the note previously executed by Akers to appellant. A more difficult problem is presented by the question whether, as to the $762 for which appellant was liable to the banks as an accommodation indorser for Akers, the former took the note in litigation as a holder for value and in due course of business.
[7] While there has been much conflict in the decisions, it is the established law in the federal courts and in most states, including our own, that an indorsee of a note merely as collateral security for a pre-existing debt owing to him by his indorser is a holder for value and in the usual course of business, and the note in the hands of such indorsee, if, at the date of the indorsement, it is taken *104
without notice of any infirmity in the instrument, is not subject to existing equities between the original parties. This is the majority rule and is usually referred to as the federal rule; while the contrary rule, which, until the adoption of the uniform negotiable instrument law, prevailed in New York and about a dozen other states, is frequently referred to as the New York rule. (8 Corpus Juris, 488.) The federal rule is, as we have said, the one that obtains in this state. (Sackett v. Johnson,
[8] The difficult question with which we are confronted is this: Under the so-called federal rule, is the indorsee of a note, indorsed, not to secure a pre-existing indebtedness due to him from his indorser, but to indemnify him against future loss on account of an existing liability to a third person, a transferee for value and in due course?
Though he was liable to each bank for the amount that it had loaned Akers, still, until appellant paid the amounts due the banks, Akers, who was primarily liable therefor, did not become appellant's debtor. As to the amounts that appellant was obliged to pay to the banks to satisfy these obligations for which Akers was primarily liable, the note in suit here was not indorsed to appellant by Akers to secure an existing indebtedness then owing to him by Akers. Rather, as to those amounts, the note was indorsed to appellant as indemnity to indemnify or secure him harmless against future possible loss, namely, loss in the event that he should thereafter become obliged to pay the amounts that Akers had borrowed from the banks. Under these circumstances, is appellant protected by the so-called federal rule? We have found no case directly in point. Of the cases to which our attention has been called, those most nearly in point are two Alabama cases — Bank ofMobile v. Hall,
So far as the question before us is concerned, we are unable to see any distinction between an antecedent debt in the form of an absolute obligation due to the transferee from his transferor and an existing but previously created liability upon which the transferee may suffer a future loss or damage, even though that loss may be contingent upon the failure of the transferor to pay the debt for which his transferee, for his accommodation, became liable as a guarantor or surety. It seems to us to be sufficient if the transferor of the collateral note is in such contract relation with his transferee as renders it advantageous to the latter to have additional security for the performance by his transferor of the antecedent obligation. This conclusion finds support in the reasoning pursued in the following cases: First Nat. Bank v. Busch,
We can see no force in the argument advanced by the Alabama court to the effect that because the transferee of the note given as collateral security may never have to pay anything on account of the pre-existing liability assumed by him for the benefit of his transferor, he, therefore, should not be regarded as a holder in due course. In every case where collateral is put up to secure the performance of an obligation, as, for instance, the payment of a debt immediately owing to the transferee by his transferor, it is possible that the security may never have to be enforced. It is always possible that the debtor may pay his debt without making resort to the security necessary. And yet no court, in a jurisdiction where the federal rule obtains, would for a moment hold that the indorsee of a note transferred to secure an antecedent debt due to him from *106 his indorser was not a transferee for value and in due course merely because the indorser might voluntarily pay the debt that he owes his indorsee without compelling the latter to have recourse to the note given as security.
The Alabama cases, it will be noticed, proceed upon the theory, not that value was not given for the note, but that the transaction is not a dealing in the usual course of trade. Such a holding is not warranted by the negotiable instrument law of this state. That law defines a holder in due course as one "who has taken the instrument under the following conditions: (1) 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; (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." (Civ. Code, sec. 3133; Stats. 1917, p. 1540.) If appellant had no notice of the infirmity in the note at the time when it was indorsed to him, then he took it under all the conditions prescribed in this code section as those necessary to constitute one a "holder in due course," unless it can be said that he did not take it for "value." Under the reasoning pursued by the courts in First Nat. Bank v. Busch,supra, Brown v. James, supra, State v. Holland, supra, Forstall v. Fussell, supra, and Lee v. Whitney, supra, appellant did take the note for value even though, with respect to his liability on Akers' notes to the banks, his danger of loss thereon was not absolute but contingent.
Moreover, appellant is a "holder for value" under the code definition obtaining in this state since the enactment of the negotiable instrument law. Section 3108 of our Civil Code now reads: "Where the holder has a lien on the instrument, arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien." [9] A person to whom a promissory note has been indorsed as collateral to indemnify him against possible future loss arising out of an existing liability incurred for and on behalf of his indorser has a lien on the note to the extent of any loss that he may sustain by reason of such liability. Plaintiff, therefore, became a holder of the *107 note for value to the extent of the amounts for which he was liable to the banks as a guarantor or surety for Akers.
[10] We are not unmindful that it also is provided by the negotiable instrument law (Civ. Code, sec.
For the foregoing reasons we conclude that the instruction No. 12 was misleading and not applicable to the facts of this case.
The conclusion at which we have arrived respecting instructions Nos. 11 and 12 renders it unnecessary to consider any of appellant's remaining assignments of error. What we have said should suffice to guide court and counsel on the retrial of the case.
There is one other fact that, perhaps, ought to be mentioned. Prior to the sale to respondents Akers had given appellant a chattel mortgage on the hogs. Though the evidence upon this phase of the case is exceedingly fragmentary and unsatisfactory, we infer that this mortgage had been given to appellant to indemnify him against any loss that he might sustain by reason of his liability on Akers' notes to the banks. Appellant did not release the chattel mortgage on the hogs until July 9, 1919, or about six weeks after the indorsement to him of the note that had been given by respondents for the purchase price of the hogs. Because appellant had agreed to turn over to Akers any balance of the proceeds of respondents' note, after he had reimbursed himself for all amounts previously loaned by him to Akers and any sums that he might have to pay to the banks on account of Akers' indebtedness thereto, we have concluded that the indorsement of the note to appellant was for the purpose of security only. We have inferred that the note was indorsed to appellant either as additional security to the chattel mortgage or as a substitute security. It is possible, however, that, when all *109 the facts are adduced on the retrial of the case, it may appear that it was agreed between Akers and appellant that the latter's surrender or release of the chattel mortgage should, of itself, constitute, in part at least, the consideration for Akers' indorsement of the note to appellant. If so, it may be that such agreement alone would constitute a sufficient consideration for the transfer, thus affording a different but sufficient ground for holding that appellant is a holder for value and in due course. However, as we have said, the evidence upon this phase of the case is hopelessly uncertain and indefinite, and for that reason we have preferred to reach our decision without considering what favorable effect, if any, this chattel mortgage and the release thereof may have upon appellant's claim to be a holder of the note for value and in due course.
The judgment is reversed and the cause remanded, with directions to the lower court to sustain appellant's demurrers to respondents' first and second affirmative defenses (designated in the answer as the second and third defenses, respectively), with leave to respondents to amend their answer should they be so advised.
Works, J., and Craig, J., concurred.