Tatum v. Commercial Bank & Trust Co.

69 So. 508 | Ala. | 1915

MAYFIELD, J.

This is the second appeal in this case. See report of former appeal, 185 Ala. 249, 64 South. 561, for a statement of the issues, facts, and law of the case on that appeal. The issues and facts shown by the record of this appeal are, to some extent, the same as'on the former appeal, .and some questions of law are raised again on this appeal. As to these questions, we see no reason to change, on this appeal, the rulings announced on the original appeal, as we still deem them correct.

The action was on 33 promissory notes, payable to L. B. Williamson, aggregating, with interest, more than $10,000. The notes appear to have been executed at the same time, and to mature at different dates, the first on June 14, 1911, and the last September 30, 1911, each payable four months after date. It is averred that each of said notes was dated at Louisville, Ky., being negotiable and payable at the Commercial Bank & Trust Company, that each bore interest from date of execution at the rate of 6 per cent, and that each of said notes was past due and unpaid, and was the property of the plaintiff, having by the payee therein been indorsed in blank, and the plaintiff having become the purchaser of each of them in due course for value received and before maturity. The recitals of the record as to the issue or issues upon which the trial was had are as follows: “The plaintiff, with leave of the court, amends his complaint, and then demurs to pleas numbered 7, 8, 9, 10, 12, 13, 14, and 15, and-said demurrer being understood by the court, it is considered by the court, and it is the judgment of the court, that said demurrers be sustained as to pleas numbered 7, 8, 9, 10, 12, 13, and 14, and overruled as to No. 15, and thereupon the plaintiff files replication to plea No. 15, and thereupon issue was joined between plaintiff and the defendant.”

The record shows that five special replications were filed to this plea, but no general one. There appears in the record a demurrer to these replications, but it does not appear to have been filed, and there appears to have been no ruling thereon; hence it cannot be considered on the appeal.

(1, 2) The first error insisted upon is in sustaining plaintiff’s demurrer to plea 14, which plea was as follows : “Comes the defendant, and for answer to the complaint as amended says that the several notes which are the foundation of this suit were signed by the defendant in blank and delivered to L. B. Williamson, whose name appears on each of said notes as payee, for the accommodation of said Williamson, and said notes matured variously on dates ranging from October. 14, 1911, to January 30, 1912, and that after the maturity of all of said notes the plaintiff had funds of the said Williamson in its possession in amount larger than the sum, with interest, sought to be recovered in this cause, but it allowed said Williamson, without defendant’s consent, to withdraw said funds in an amount larger than the sum, with the interest, sought to be recovered in this cause, and plaintiff had notice of the accommodation character of said notes at the time it acquired the same; and defendant further avers that he did not receive any of the consideration for said notes paid by the plaintiff, if such consideration there was; that the said Williamson has become insolvent since the said funds were withdrawn from the bank. Wherefore the defendant says he was and is discharged from all liability by reason of any and all of said notes.”

The demurrer contained a number of special grounds. Those important to be considered were that: “(3) Said plea fails to set up that Williamson was not otherwise indebted to plaintiff in sums other than as indorser of the notes here sued on.

“(4) Said plea fails to set out any duty on the part of the plaintiff to apply said alleged funds to these particular notes.

“(5) Said plea does not sIioav the state of the account of Williamson with plaintiff as to' debits and credits at any particular time.

“(6) The defendant, under the pleading, was and is the party primarily liable under the Negotiable Instruments Law.

“(7) Said plea shows that said alleged deposit and withdrawal was as to defendant res inter alios acta.”

We do not think this plea was subject to any of the grounds of demurrer assigned, and our statute limits us to a consideration of those only which are assigned. We do not mean to say, however, that it is or is not subject to successful attack on any ground. The plea showed that the defendant was not the principal debt- or, but signed each of the notes for the accommodation of the payee; that the plaintiff, at the time of the execution of the notes and before it acquired the notes, had knowledge of the fact that this defendant maker was not a principal, but that he signed the notes for the accommodation of the payee; that after these notes were due, and should have been paid by the principal, the principal had on deposit in that bank money sufficient to pay the notes; and that the plaintiff bank failed to so apply the deposit to the payment of the notes past due. The reasoning applicable to the facts stated in this plea, is thus stated by Mr. Morse in his book on Banks and Banking: “If the bank, at the maturity of a note held by it, holds funds that, by the scratch of a pen, it could apply upon the note, thus securing itself, it is difficult to see why neglecting so easy a means of security is not as improper as giving up collateral expressly designated for the purpose of securing the note.” — 2 Morse on Banks and Banking (3d Ed.) § 563.

This was approved by the Kentucky court in the case of Pursiful v. Pineville Banking Co., 97 Ky. 154, 30 S. W. 203, 53 Am. St. Rep. 409, and by the Indiana court in the case of Bank v. Hill. 76 Ind. 223, 40 Am. Rep. 239. A note to the report of the Kentucky Case, 53 Am. St. Rep. 414, thus sums up the holdings of other cases: “When a bank is a bona fide holder of a note at its maturity, and also holds funds of the maker, it is bound to consider the interests of the indorsers or sureties, and to apply such funds to the payment of the note. If it allows the maker to withdraw his funds after protest, causing the indorsers to lose thereby it is liable to them. — Mechanics’, etc., Bank v. Seitz, 150 Pa. 632 [24 Atl. 356], 30 Am. St. Rep. 853, and note. A bank, holding a depositor’s note past due, is entitled to set it off against the amount due him upon his deposit' account, and is therefore under no obligation to pay his check drawn against such account, if it is exhausted before the check is presented by charging against it the amount of such note. — Bank v. Windishchmulhauser Brewing Co., 50 Ohio St. 151 [33 N. E. 1054], 40 Am. St. Rep. 660, and note. See, also-, the extended note to National Bank v. Smith (N. J.) 23 Am. Rep. 50.

“In an action by a bank against sureties on a promissory note discounted by it, it is no defense that before maturity the principal directed the bank to pay the note at maturity out of his general deposit in the bank, that the bank failed to do so, and subsequently allowed the principal to check the money out of the bank, although it knew of the suretyship at all times, and deposit was sufficient to pay the note. — Second Nat. Bank v. Hill, 76 Ind. 223, 40 Am. Rep. 239. See, also, the case of National, etc., Bank v. Peck, 127 Mass. 298, 34 Am. Rep. 368.”

That a bank may so apply deposits has been decided by this court. In the case of Wynn, Adm’r, v. Tallapoosa County Bank, 168 Ala. 489, 53 South. 228, it is said: “As to a general deposit the bank has a right to set-off as for the balance of the general account of the depositor, and of course so long as that balance is in favor of the depositor the lien or right has neither existence nor validity; but the moment any advance or loan by the bank is made to the depositor — in the form of an overdraft, a discount, acceptance, etc. — then the lien Or right is born, and may be applied by the bank (and the bank only) to the payment of such indebtedness till it is fully discharged. — Morse on Banks and Banking, §§ 324, 334; Lehman’s Case, 64 Ala. 567; Dean v. Allen, 8 John. (N. Y.) 390.”

This court has also decided that the failure of the bank to so apply the deposit discharges the surety. In the case of White v. Life Association, etc., 63 Ala. 430, 35 Am. Rep. 45, it is said: “In McDowell v. Bank, 1 Har. (Del.) 369, the creditor, a bank, had on general deposit moneys of the principal, sufficient to pay the debt, but permitted the principal, from time to time, after maturity of the debt, to withdraw them by checks, and the surety was held discharged. The same principle is recognized in Dawson v. Real Estate Bank, 5 Ark. 296-299. The cases of Martin v. Merchants’ Bank, 6 Har. & J. [Md.] 235, and Voss v. German Am. Bank, 83 Ill. 599 [25 Am. Rep. 415], assert the contrary doctrine. Assuming, as we think it must he assumed, that a bank has a lien on any balance which may be due from it to a customer, on any moneys he may have on general deposit — not moneys deposited for special purposes, of which the bank is informed, and either expressly or impliedly consents to- hold it for such purposes — for the payment of a debt due to it for money borrowed or for a debt negotiated to it in the usual course of trade, we incline to the opinion that it cannot pay such balance, or such moneys, to the principal, without discharging the surety. It has not the option to part with the security it has acquired without the consent of the surety.”

(3, 4) It is insisted by appellee that, if sustaining the demurrer could be said to be error, it was error without injury, because the defendant failed to prove and could not have proved, the facts alleged. We cannot agree with appellee as to this insistence. Sustaining the demurrer prevented the defendant from even introducing evidence, or rather ruled that such evidence was not, or would not be, admiss-ibile, because no such issue was in the trial, and that, if it had been proven or conceded, it would be no defense. If the defendant had proven the plea by consent, the proof would not have been availing, because there was no such allegation or issue. Proof without allegation is as impotent as allegation without proof.

(5, 6) For the same reason pleas 12 and 13 stated good defenses to this action. These pleas alleged that defendant was in legal effect a surety on the notes, and that this was known to the plaintiff when it acquired the notes, and that the plaintiff held collateral security of the principal debtor sufficient to pay these notes, and that it released the collateral, or negligently allowed it to be withdrawn or otherwise appropriated, without the consent or the fault of the defendant surety. If these facts were true, and on demurrer they must be so accepted, then the defendant surety was discharged from liability on the notes as such surety. This proposition is so well settled that it needs no citation of authorities.

(7, 8) It is insisted by appellee, and must have been the view of the trial court, that this rule of law did not apply to this case, because the notes were governed by the Uniform Negotiable Instruments Law, and not by the common law merchant. Without deciding whether or not this rule of law would apply, if the case was brought Avithin the statute of Uniform Negotiable Instruments, it is sufficient to say that the complaint does not allege that any such statute exists in Kentucky, on the law of Avhich state the decision of this case must depend, because the contract was both made, and to be performed in that state. If such a statute existed in Kentucky Avhen the contract sued upon was made, then it should have been alleged, as well as proven, to be availing. — L. & N. R. R. Co. v. Cook, 168 Ala. 600, 53 South. 190. We cannot treat the ruling on demurrer as by what is, or is not, shown by the evidence, when there was no allegation as to the matter.

(9, 10) The plaintiff claims that it is not chargeable Avith notice that defendant was merely an accommodation indorser, or of other defenses set up to this action, because the transactions as to the making of the notes and the discounting of the same were had with its president, one Jones, and that Jones and the payee, Williamson, were engaged in a conspiracy to defraud the defendant hank, in that Williamson was paying Jones large sums of money to purchase or pay for accommodations which the bank was rendering as discounting his notes and lending him money, and that on this account the president of the bank had personal interests in the transactions adverse to the interest of the bank, and that for this reason the bank was not chargeable with notice given to the president in these matters, and was not bound by any knowledge which Jones held or acquired in the execution or discounting of the notes sued on. It is not claimed, however, that these particular notes were made or discounted by the bank, for the purpose of paying Jones for accommodations received at the hands of the bank; but it is claimed, or seems to be claimed by the bank, that the transactions as to these notes were a part of the accommodations which Williamson was receiving from the bank, and for ■which he was otherwise paying the president personally.

This alleged conspiracy between Jones, the president, and Williamson, the payee of the notes, was attempted to be shown by proof of conversations between the two, and by declarations of each, and by the circumstance that checks from Williamson to Jones for large amounts passed through the bank each month for a long while. The defendant, appellant here, objected to the introduction of each and all of these circumstances and facts, and excepted to the action of the court in admitting such proof of each of such circumstances or facts to go to the jury.

We are of the opinion that the trial court was in error in these rulings. If it had been shown, or if there was any evidence from which it could be inferred, that this defendant had any knowledge or notice of this conspiracy to defraud the bank, and this transaction was a part of it, or was had in furtherance of the fraudulent scheme or purpose, then such evidence might be admissible to show that the bank ought not to- be bound by the knowledge or notice of its president, which notice or knowledge he received in "perfecting his scheme to defraud the plaintiff bank. We are unable to- find in this record any evidence, direct or inferential, to the effect that this defendant had, or was chargeable with notice or knowledge of any such conspiracy or fraudulent arrangement between Jones and Williamson to defraud the plaintiff bank, or that Jones, in his dealings or conversations with this defendant, or with Williamson, as to the execution or discounting of these notes, was acting for the benefit of himself or Williamson, and not for the benefit of the bank. He was apparently and ostensibly representing the bank, and not himself or Williamson; the bank acquired the notes and claims them as its own. Jones was the bank’s sole and only representative in the matter, and it is claiming the fruits of the transaction. If Jones was a rascal and a grafter, as plaintiff claims he was, he was the plaintiff’s rascal and grafter, and not the defendant’s. The plaintiff had employed him to represent it in these matters, and held him out to the public for this purpose, inviting them to deal with him as its agent in all matters of this kind. So far as this record shows, defendant was one of the public who dealt with him as such agent and sole representative of the bank in the matter. It was while Jones was thus acting in the stated capacity that he acquired the knowledge and was notified that defendant was signing purely as an accommodation indorser, and that his liability and rights in the matter were those of a surety, and not those of a principal debtor; and the bank ought not to be allowed to avoid the burden of being chargeable with the notice and knowledge which its president, agent, and sole representative acquired in negotiating and consummating the loan or discount, even though it be conceded that the agent was violating the trust imposed by the principal, and ivas then carrying out a part of a scheme to defraud his principal. As before stated, if the suit ivas against Williamson, or if it was shown that this defendant had, or was chargeable with, notice or knowledge of the fraud intended on the part of the conspirators, then the rule is, and ought to be, different. The defendant then woud be in the position of having aided or abetted Jones and Williamson in their fraudulent scheme, and he would not be allowed to profit thereby.

How is a corporation to be charged with notice or knowledge of extrinsic facts, except through its agents or officers? If the agent or officer who has. the notice or knowledge of the extrinsic fact is the sole person or agency by which the corporation is represented in the matter, this notice to or knowledge of such agent or officer must of necessity be notice to or knowledge of the corporation, or it cannot have such notice or knowledge, or even be chargeable therewith. Consequently it is the settled law that corporations are chargeable with notice or knowledge acquired by their sole agent and representative in a given transaction in which such agent represents the corporation, although he may also have an individual or personal interest in the transaction, and he thereby promotes this personal interest. This forms a limitation upon, or qualification of, the exception to the rule that a corporation is not chargeable with, or bound by, notice to or knowledge of its agent or officer, when he is acting for himself, and not the corporation, or when he has an individual interest in the matter adverse to that of the corporation. The trial court overlooked this limitation upon, or qualification of, the exception, in its instruction to the the jury. In paid- the jury were instructed as follows: “Now, genetlemen, the issue in this case, as the court understands it, is whether or not the bank had notice of the infirmity which the defendant here says existed with respect to these notes. Now the plaintiff invokes this doctrine, that although the president of the bank was acting for it and actively its official head, .yet nevertheless, if he, at the time he received notice with respect to these notes, had an interest in them adverse to the interest of the bank, and was acting for the conservation of his interest, and not for the bank, then the bank is not charged with such notice as he may have received; and that is a correct proposition of law. A corporation must do its business through agents, and no corporation is chargeable with the false and fraudulent act of its agent in furthering his adverse interest as against the interest of the bank. So here, if you are reasonably satisfied from this evidence that Jones at the time of this transaction had an interest adverse to the interest of the bank, and that he was acting in furtherance of a scheme that would help him (Jones), and not in behalf of the bank, then the bank is not chargeable with notice which he may have received in that behalf.”

The trial court evidently attempted to follow the long-list of cases which form an exception to the general rule that the corporation is not so chargeable with knowledge of its agents or officers, if the agent or officer has an individual interest in the matter adverse to that of the corporation. We have a long line of these cases, many of which are cited in the brief of appellee. But this exception has a qualification or limitation as to cases like the one on trial; that is, where the corporation has no other agency or representative in the matter, and the party asserting the knowledge or notice on the part of the corporation is guilty of no negligence or fault in the transaction. The general rule as announced by text-writers, and repeatedly approved by this court, is that whatever notice or knowledge reaches the agent while he is acting within the line and scope of his authority, in connection with the principal’s business and as to matters over which his authority extends, also reaches the principal. — Mechem on Agency, §§ 719, 721. Mr. Mechem has an excellent statement of the rule, and of the reasons therefor, as follows, and is quoted with approval in many cases. See recent case of Bank v. Burns, 88 Ohio St. 434, 103 N. E. 93, 49 L. R. A. (N. S.) 768.

There is, however, a well-recognized exception to this general rule of the liability of the principal as fotr knowledge or notice reaching the agent, while acting within the line and scope of his authority. That exception is that the principal is not so chargeable with such notice of the agent when the latter is engaged in committing an independent fraudulent act, and the act or knowledge to be imputed relates to this fraudulent transaction. — 1 Am. & Eng; Ency. Law (2d Ed.) p. 1145, and authorities there cited. Mr. Pomeroy doubts whether this exception applies to the managing officers of a corporation. — 2 Pom. Eq. Jur. (3 Ed.) § 675, note 1. Some courts have declined to share this doubt with Mr. Pomeroy. See Brookhouse’s Case, 73 N. H. 368, 62 Atl. 219, 2 L. R. A. (N. S.) 993, 999, 111 Am. St. Rep. 623, 6 Ann. Cas. 675. However, the great weight and number of the courts assert positively, and decide, that the exception does not apply to the managing officers of corporations, through whom alone the corporation can and does act in doing the particular thing with which the corporation is sought to be charged. The decisions and cases are reviewed and examined in note to Brookhouse’s Case, 2 L. R. A. (N. S.) 993. In this note it is said in part, after citing many cases holding that the exception does apply in some cases as to which Mr. Pomeroy expressed a doubt: “There is, however, good authority, if not the weight of authority, in favor of a qualification of the foregoing exception, so as to exclude therefrom, and therefore to bring within the general rule which charges the principal with, knowledge possessed by the agent, cases where the officer, though he acts for himself or for a third person, is the sole representative of the corporation in the transaction in question. None of the cases above cited expressly denies, and few of them are necessarily inconsistent with, the existence of such qualification to the exception; and some of them — e. g., English-American Loan & T. Co. v. Hiers, 112 Ga. 823 [38 S. E. 103], National Bank v. Feeney [9 S. D. 550, 70 N. W. 874, 46 L. R. A. 732], and Commercial Bank v. Burgwyn [110 N. C. 267, 14 S. E. 623, 17 L. R. A. 326] — expressly admit the qualification. By reason of such qualification the application of the exception was denied in Brobston v. Penniman, 97 Ga. 527, 25 S. E. 350, holding that a bank was chargeable with knowledge of its president and cashier that the proceeds of the note of a firm, of which they were members, were to be used for their private purposes, and not for the purposes of the firm, they having represented the bank in making the loan and taking the note. So, in Morris v. Georgia Loan, Sav. & Bkg. Co., 109 Ga. 12, 34 S. E. 378, 46 L. R. A. 506, where the cashier of a bank, as an individual, had an interest in a promissory note which he knew was given without consideration, and, as cashier, discounted the note without reference to, or consultation with, any other officer of the bank, it was held that the bank was not a bona fide purchaser of the note, without notice.” — 2 L. R. A. (N. S.) 994. “The authorities, therefore, lend support to two qualifications of the exception applied in Brookhouse v. Union Pub. Co.: (1) That the exception does not apply when the officer of the corporation, though he acts for himself or a third person, is also the sole representative of the corporation in the transaction. This qualification, as applied by the cases, is not at all dependent upon the question whether or not the corporation would be benefited by the transaction as a whole, if the knowledge possessed by its officer were held not to be chargeable to it. (2) That the exception does not apply where the corporation, even if it were held not to be chargeable with notice of the fraud of its officer, would, as a result of the whole transaction, be in a better position, etc.” — 2 L. R. A. (N. S.) 996.

The latest case we find on the subject is Bank v. Burns, 88 Ohio St. 434, 103 N. E. 93, 49 L. R. A. (N. S.) 764. In the opinion in this case, which was a suit by a bank against the maker of a note, and in which the defense was the fraud of the president of the bank in regard to the note (as in this case) and the fact that he was adversely interested in the matter, and the sole question was the exact question here under consideration, it is decided that: “A corporation can act only through its oficers and agents, and the knowledge of such officers and agents in the transaction of the corporation’s business within the scope of their authority becomes at once the knowledge of the corporation, without any actual or presumptive communication from agent to principal.

“Where the officer is acting both for himself as an individual and as manager of a banking corporation in the purchase of a note from himself by the bank, and his action in that behalf is adopted and ratified by the bank, the manager’s knowledge as a man is equally his knowledge as manager of the bank. He cannot unknow as manager what he knows as man. To hold otherwise would be to promote fraud rather than prevent it.”

The indicated authorities were then quoted as follows : “Mechem, in his excellent work on Agency, lays down the rule in the following, apt and accurate language : ‘It is a general rule, settled by an unbroken current of authority, that notice to an agent while acting within the scope of his authority, and- in reference to a matter over .which his authoidty extends, is notice to the principal. In respect to this rule two important elements will be noticed. The first of these is that the notice or knowledge which will affect the principal is that only which is possessed by the agent while he is agent, and while he is acting within the scope of his authority. * * * The second element is that the notice or knowledge which shall be imputed to the principal is that only which relates to the subject-matter of that agent’s authority, or, in other words, is that only which relates to the business or transaction in reference to which that agent is authorized to act by and for the principal. Two general theories prevail as to the foundation upon which this rule is based, and the re-suits of these respective theories are not entirely alike. The first finds the reason of the rule in the legal identity of the agent with the principal — in the fact that the agent, while keeping within the scope of his authority, is, as to the matters embraced within it, for the time being the principal himself, or, at all events, the alter ego of the principal, the principal’s other self. Whatever notice or knowledge, then, reaches the agent' under these circumstances, in law reaches the principal.’” — 49 L. R. A. (N. S.) 768.

“It is well. settled that an officer or agent dealing with a corporation or his principal on his own account, is not presumed to communicate knowledge which it would be to his interest to conceal, and the corporation or principal is not chargeable with such knowledge. But there is no room for the application of this principle where the agent is the sole representative of both parties in the transaction. If Cornish was the sole representative of the bank in the tranasction with himself, there was no one from whom information could have been concealed, or to whom it could have been communicated. If he was the sole representative of each party, each must have had equal knowledge.”— First Nat. Bank v. Blake (C. C.) 60 Fed. 79, 49 L. R. A. (N. S.) 770.

See our case of Bank v. Allen, 100 Ala. 476, 483, 14 South. 335, 27 L. R. A. 426, 46 Am. St. Rep. 805.

“To the same effect is Brobston v. Penniman, 97 Ga. 527, 25 S. E. 350. The latter case is distinguished in English-American Loan & T. Co. v. Heirs, 112 Ga. 823, 38 S. E. 103.” — 49 L. R. A. (N. S.) 770.

To hold otherwise would open wide the door to all kinds of fraud; and the more atrocious and aggravated the fraud, the less would be the likelihood of fixing the liability upon tbe principal, because the agent would be less likely to communicate tbe fact to the principal. Such holding has no place in sound business or good morals, and ought not to be encouraged by our courts.

It therefore follows that the trial court erred in parts of its oral charge to which exceptions were reserved, raising the above question, and in giving the charge requested by plaintiff, as follows: “If the jury believe from the evidence that Sam Jones, at the time of the alleged conversation at the bank between Tatum and Williamson, was interested personally in the transaction adversely to the plaintiff bank, then no notice can be imputed to plaintiff, and the jury must find for the plaintiff.”

There was also error in refusing some of the defendant’s requested charges, which asserted the converse of the one given for the plaintiff.

Most all other questions of importance to this appeal were settled on the former appeal.

(11) If the deposits of Williamson were special, and could not therefore be applied to the payment of these notes sued on, as suggested by appellee in argument, then this should have been set up in the replications to the pleas which set up the discharge of defendant by failure to so apply the deposits after the notes were due.

Ppr these errors, the judgment is reversed, and the cause is remanded.

The judgment being reversed on the main appeal, consideration of the cross-appeal is not necessary, and cross-appellant can take nothing by reason of the cross-appeal.

Anderson, C. J., and Somerville and Titomas, JJ,, concur.

Case Details

Case Name: Tatum v. Commercial Bank & Trust Co.

Court Name: Supreme Court of Alabama

Date Published: Jun 3, 1915

Citation: 69 So. 508

Court Abbreviation: Ala.