Merchants' National Bank v. Smith

MR. JUSTICE HOLLOWAY

delivered the opinion of the court.

This action was brought to recover the balance due upon the following promissory note:

“Billings, Montana, May 7, 1917.

“Four months after date without grace, for value received, I promise to pay to the order of the Merchants’ National Bank *288 of Billings, Montana, thirty-five hundred dollars with interest from date at the rate of ten per cent per annum until paid, with an attorney’s fee in case payment shall not be made at maturity. Presentment for payment, protest and notice of dishonor waived by each maker, indorser and guarantor hereof.

“Thos. C. Smith.

“W. O. Lee.”

The complaint is in the usual form. By his separate answer, defendant Lee admitted the execution and delivery of the note and the payments made thereon by Smith, and by way of special defense set forth that he signed the note for the accommodation of Smith, and received no part of the consideration; that these facts were known to the bank; that on May 8, Smith made, executed and delivered to the bank a chattel mortgage upon property of a value equal to or greater than the amount of the note; that thereafter, and before the commencement of this action, the bank without his knowledge or consent released and discharged the mortgage, thereby depriving him of all benefit thereunder, and that immediately after the surrender of the security Smith became and ever since has been insolvent. Upon motion of plaintiff this entire special defense was stricken out, and judgment rendered and entered according to the prayer of ,the complaint. From that judgment defendant Lee appealed.

1. Appellant contends that, though upon the face of the note [1] he is a maker, he is in fact a surety, and invokes the provisions of sections 5680-5693, Revised Codes, which define the rights and liabilities of a surety. If these provisions are available to him, the portion of his answer stricken out states a complete defense, and the trial court erred in its ruling.

The sections enumerated, adopted in Montana in 1895, but crystallized and arranged in convenient form certain rules of the law-merchant applicable to suretyship, and it cannot be controverted that under the common law of commercial paper the release of security pledged by the principal debtor operated to discharge the surety, at least to the extent of the value of the *289 released property. (1 Brandt on Suretyship & Guaranty, 3d ed., secs. 480-483.)

In 1903 this state adopted the Uniform Negotiable Instruments Act (Laws 1903; Chap. 121; secs. 5842-6037, Rev. Codes), modeled after the English Bill of Exchange Act of 1882. The same statute has been enacted in forty-three states of the Union, in Alaska, District of Columbia, Hawaii, the Philippines, and in most of the Canadian' provinces. It was proposed by commissioners'from the several states and was designed to secure uniformity in the text of the law, and through that agency uniformity in construction, and to remove the uncertainty which arose from diverse judicial decisions among the states, to the end that this “currency of commerce” might pass/ through the channels of trade, unembarrassed by the conflicts of laws. It may not comprehend all the rules applicable to negotiable instruments, but, so far as it does undertake to declare the law, its provisions are exclusive.

It. could not be contended that the Act repeals the suretyship statute above. Sections 5680-5693 are in full force and effect so far as they operate upon non-negotiable instruments; but it is our judgment that the Act superseded those sections so far as the law of negotiable instruments is concerned. Nowhere in the Uniform Negotiable Instruments Act is the term “surety” mentioned, and its provisions are so inconsistent with the law of suretyship that they cannot be reconciled. For example: By section 5688 a surety may require the creditor first to proceed against the principal debtor under penalty of a release of the surety. By section 192 of the Act (Rev. Codes, see. 5844) all persons liable on a negotiable instrument are comprehended in one or the other of two classes. That section provides: “The person primarily liable on an instrument is the person' who by the terms of the instrument is absolutely required to pay the same. All other parties are secondarily liable.” In other words, the surety at common law is by the terms of this Act made primarily liable, and by signing as a maker he binds *290 himself absolutely to pay. (8 C. J. 73, 74; Edmonston v. Ascough, 43 Colo. 55 , 95 Pac. 313 .) Again, at common law an [2] extension of time to the principal debtor without the consent of the surety released the surety (1 Brandt on Suretyship & Guaranty, Chap. 14; 8 C. J. 445; 32 Cyc. 191); but that defense is now available, only to one secondarily -liable (sec. 120 [Rev. Codes, sec. 5968]; 8 C. J. 447; First State Bank of Hilger v. Lang, 55 Mont. 146 , 9 A. L. R. 1139, 174 Pac. 597 ).

Furthermore, suretyship furnished one of the most vexatious sources of litigation at common law, and was a subject upon which judicial decisions were most at variance. To confirm this statement one has but to review Chapters 3 to 18, 1 Brandt on Suretyship & Guaranty. If the primary purpose of this Act was to secure uniformity in the law of negotiable instruments, as is generally conceded to be the fact, it is inconceivable that the failure of the Act to mention suretyship is to be charged up merely as a casus omissus. It seems clear to us that it was the purpose of the legislation to supersede the law of surety-ship as theretofore applied to negotiable instruments, and to substitute therefor the láw as declared by the Act itself, and this is the view expressed by the courts quite generally. (Union Trust Co. v. McGinty, 212 Mass. 205 , Ann. Cas. 1913C, 525, 98 N. E. 679 ; Jamesson v. Citizens’ Nat. Bank, 130 Md. 75 , Ann. Cas. 1918A, 1097, 99 Atl. 994 ; Bradley E. & M. Co. v. Heyburn, 56 Wash. 628 , 134 Am. St. Rep. 1127 , 106 Pac. 170 ; Oklahoma etc. Bank v. Seaton (Okl.), 170 Pac. 477 ; Lumbermen’s Nat. Bank v. Campbell, 61 Or. 123 , 121 Pac. 427 ; Richards v. Market Ex. Bank, 81 Ohio St. 348 , 26 L. R. A. (n. s.) 99, 90 N. E. 1000 .)

The defendant Lee is not a surety, so far as the bank is concerned, and he may not invoke the provisions of sections 5680-5693 above.

2. Section 191 (Rev. Codes, sec. 5843) defines a holder as [3] ‘.‘the payee or indorsee of a bill or note, who is in possession of it.” The bank is therefore a holder, and, having parted with a valuable consideration for the note, is a holder *291 for value within the meaning of the same section and other provisions of the Act.

Lee signed the note without receiving value, and for the purpose of lending his name to Smith, and is an accommodation maker (sec. 29 [Rev. Codes, sec. 5877]), and since by the terms of the note he is absolutely required to pay it, he is a party primarily liable (sec. 192 [Rev. Codes, sec. 5844]).

Section 120 (Rev. Codes, sec. 5968) enumerates the several circumstances under any of which a party secondarily liable may be released. There is no express provision for the release of a party primarily liable, and for the obvious reason that none is necessary. Such a party is absolutely bound to pay in the first instance (see. 192), and can be relieved only by a discharge of the instrument itself (Farmers’ State Bank v. Forsstrom, 89 Or. 97 , 173 Pac. 935 ).

Section 119 (Rev. Codes, section 5967) provides: “A negotiable instrument is discharged: 1. By payment in due course by or on behalf of the principal debtor; 2. By payment in due course by the party accommodated, where the instrument is made or accepted for accommodation; 3. By the intentional cancellation thereof by the holder; 4. By any other act which will discharge a simple contract for the payment of money; 5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.” But appellant contends that he is released by virtue of the provisions of subdivision 4 of this section, for if the note in question were a simple contract, the release of the securities by the bank would operate to discharge him. Section 119 relates only to the discharge of the instrument and not to the discharge of the parties, though the greater includes the less, and it never was the law that the release of a surety or accommodation maker discharged the instrument itself. (Richards v. Bank, above.)

The meaning of subdivision 4 is apparent. Anything which will discharge, that is, destroy, a simple contract—literally blot it out of existence in contemplation of law—will discharge an *292 accommodation maker, but it will also release the principal debtor, and all other parties liable thereon.

And the fact that Lee signed the note without receiving any part of the consideration,'and for the purpose only of lending his name to Smith, does not alter his situation. He is liable notwithstanding the bank, at the time it took the note, knew him to be only an accommodation party. (Sec. 29.) In other words, the fact that he is an accommodation maker gives rise to a duty on his part to the holder for value, no greater, or less or different, than that imposed^ upon a maker who received value. (Wolstenholme v. Smith, 34 Utah, 300 , 97 Pac. 329 ; Union Trust Co. v. McGinty , above; Farmers’ State Bank v. Forsstrom , above.)

3. By its very terms the Act now under review has to do [4] only with negotiable instruments (United States Nat. Bank v. Shupak, 54 Mont. 542 , 172 Pac. 324 ), and with such instruments only so long as they are in the hands of holders in due course. Section 58 (Rev. Codes, see. 5906) declares: “In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses, as if it were non-negotiable. ” If the bank is not a holder in due course, this case is not within the purview of the Act, and its rights and Lee’s liability are to be determined by the law applicable to simple contracts generally, under which the defense of suretyship may be maintained.

Is the bank, the payee of the note in possession of it, prima [5] facie a holder in due course? Section 52 of the Act (Rev. Codes, sec. 5900) provides: “A holder in due course is a holder 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 has 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.”

*293 In submitting the draft of the Uniform Negotiable Instruments Act, the chairman of the committee in charge of it declared : ‘ ‘ The statute proposed will be found clear, concise, and thorough.” It may be thorough, and it may be conceded that much is expressed in few words, but the fact that courts of high repute have reached diametrically opposite conclusions as to the meaning of several sections suggests that the language is not as clear as its proponents believed it to be.

The phrase “holder in due course” appears in several sections of the Act, and the decisions upon the proper meaning to be given it are in hopeless conflict. Section 191 (Rev. Codes, sec. 5843) defines a “holder” of a note payable to order, as the payee or indorsee who is in possession of it. It follows, therefore, that the plaintiff bank is the holder. Section 59 of the Act (Rev. Codes, see. 5907) provides: “Every holder is deemed prima facie to be a holder in due course.” From this section the presumption arises that the plaintiff bank is a holder in due course, but the presumption is a disputable one, and the prima facie case made by the presentation of the note may be overcome, and the burden is upon defendant Lee, unless it appears that he- is relieved by plaintiff’s own pleading. How may he sustain this burden? Manifestly, by showing the absence of any one of the conditions enumerated in section 52, and not otherwise.

He does not contend that the note is not complete and regular upon its face, or that the bank did not become the holder before maturity and before it was dishonored, or that it did not take the note in good faith and for value. Assuming that the proper construction of subdivision 4 of section 52 compels the conclusion that to constitute the bank a holder in due course the note in question must have been “negotiated” to it, does it follow that by alleging that it is the payee in possession of the note it has pleaded itself out of court? Or, stating the question more succinctly: May the payee in possession of a note qualify as a holder in due course ? If negotiation to the holder is indispensable in order to constitute him a holder in due *294 course, and. if section 30 of the Act means that negotiation of a note payable to order can be effected only by indorsement and delivery, it follows that plaintiff bank is not a holder in due course, and the fact appears affirmatively from the face of the complaint.

In the following cases it is held, in effect, that negotiation to the holder is necessary to constitute him a holder in due course, and that delivery by the maker to the payee is not “negotiation” within the meaning of that term as employed in the Negotiable Instruments Act: Vander Ploeg v. Van Zuuk, 135 Iowa, 350 , 124 Am. St. Rep. 275 , 13 L. R. A. (n. s.) 490, 112 N. W. 807 ; Builders’ L. & C. Co. v. Weimer, 170 Iowa, 444 , Ann. Cas. 1917C, 1174, 151 N. W. 100 ; St. Charles Savings Bank v. Edwards, 243 Mo. 553 , 147 S. W. 978 ; Southern Nat. Life Realty Corp. v. People’s Bank, 178 Ky. 80 , 198 S. W. 543 ; Wood v. Finley, 153 N. C. 497 , 69 S. E. 502 .

In Lewis v. Clay, 67 L. J. Q. B. (n. s.) 224, the English court, in considering a section of the Bill of Exchange Act, substantially identical with our section 14 (Rev. Codes, sec. 5862), declared that a payee is not a holder in due course, and said: “A holder in due course is a person to whom after its completion by and as between the immediate parties, the bill or note has been negotiated.” In the later case of Herdman v. Wheeler, 5 B. R. C. 651, the pronouncement in Lewis v. Clay was declared to be dictum, as it was manifestly.

In Bowles Co. v. Clark, 59 Wash. 336 , 31 L. R. A. (n. s.) 613, 109 Pac. 812 , the court held that plaintiff in that action, payee of the check, was not a holder in due course, but did not discuss the provisions of the Negotiable Instruments Act.

In Long v. Shafer, 185 Mo. App. 641 , 171 S. W. 690 , the court held that delivery of a note by the maker to the payee did not constitute negotiation, and therefore the payee was not a holder in due course. When the case was certified to the supreme court, the decision of the appellate court was affirmed, but upon an entirely different theory. (Long v. Mason, 273 Mo. 266 , 200 S. W. 1062 .)

*295 In Bank of Gresham v. Walch, 76 Or. 272 , 147 Pac. 534 , it was held that the payee of a note is not a holder in due course within the meaning of these terms used in section 28 of the Act. There was not any discussion of the subject, and no reason assigned for the conclusion.

So far as our investigation has gone, these are the only decided cases which 'might, in principle, deny to this plaintiff the right to Recover. National Bank v. Farmers’ Bank, 87 Neb. 841 , 128 N. W. 522 , and Aurora State Bank v. Haynes-Eames Elev. Co., 88 Neb. 187 , 129 N. W. 279 , are cited by some authorities as bearing upon the question here involved, but' in our judgment neither is in point.

Counsel for appellant cite and rely upon the decision in Frazier v. First Nat. Bank, 34 Ohio C. C. 508. The action was by the bank upon two notes. The statement of the ease is that “each of these notes was indorsed by H. E. Frazier,” and the question arose upon the sufficiency of Frazier’s answer. Since Frazier was an accommodation indorser and only secondarily liable under section 192 of the Act, the case has no application here.

4. At common law (law-merchant) it was held generally that a payee in possession of a bill or note payable to order may be a holder in due course. (Watson v. Russell, 3 B. & S. 34, 122 Eng. Reprint, 14; affirmed, 5 B. & S. 968, 122 Eng. Reprint, 1090; Armstrong v. Bank, 133 U. S. 433 , 33 L. Ed. 747 , 10 Sup. Ct. Rep. 450 [see, also, Rose’s U. S. Notes]; J. G. Brill Co. v. Norton, 189 Mass. 431 , 2 L. R. A. (n. s.) 525, 75 N. E. 1090 ; First Nat. Bank v. Union Trust Co., 158 Mich. 94 , 133 Am. St. Rep. 362 , 122 N. W. 547 ; Jordan v. Jordan, 10 Lea (Tenn.), 124, 43 Am. Rep. 294 ; Lookout Bank v. Aull, 93 Tenn. 645 , 42 Am. St. Rep. 934 , 27 S. W. 1014 ; Brown v. Rowan, 91 Misc. Rep. 220 , 154 N. Y. Supp. 1098 , and cases cited.) But if, under the Negotiable Instruments Act, negotiation to the holder is indispensable to constitute him a holder in due course, and if negotiation of a promissory note payable to order can be effected only by indorsement and delivery, it fol *296 lows that the payee can never be a holder in due course, and that his common-law rights have been greatly curtailed by this Act.

It is inconceivable that it was the purpose of the Act to work a change in the law so radical without an express declaration to that effect, and we ought not tó draw the inference that such a result was contemplated unless compelled by the weightiest considerations. Section 30 of the Act (Rev. Codes, sec. 5878) provides: “An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indorsement of the holder completed by delivery.” It is upon the last sentence of the section that the courts which hold that the change has been wrought base their conclusions—conclusions which can be justified only by assuming that the last sentence is a part of the definition of the term “negotiated,” but that it is not seems to us certain..

The first sentence of the section is complete in itself, and expresses the meaning of the term “negotiated” as it was used in the law-merchant. In Baring v. Lyman, 1 Story, 416 , Fed. Cas. No. 983, Justice Story of the supreme court of the United States, at circuit, said: “A bill [of exchange] is properly said to be negotiated when it has passed into the hands of the payee or indorsee, or other holder for value, .who thereby acquires title thereto.” (Liberty Trust Co. v. Tilton, 217 Mass. 462 , L. R. A. 1915B, 144, 105 N. E. 605 ; Boston S. & I. Co. v. Steuer, 183 Mass. 140 , 97 Am. St. Rep. 426 , 66 N. E. 646 .) It is also the common and popular signification of the term. (Webster’s International Dictionary; Anderson’s Law Dictionary.) • The fact that it is generally employed to characterize the act of transferring a bill or note from one holder to another does not limit its meaning to such a transfer.

The last sentence of section 30 was manifestly intended only to describe the-method by which one holder may pass title to another, but was not intended to define the exclusive methods *297 by wbicb negotiation can be accomplished. In other words, it was never intended by the Act to place the payee in a worse position than he was before it was adopted. (Liberty Trust Co. v. Tilton, above; Brown v. Rowan , above; Fletcher Moulton, L. J., in Lloyd’s Bank v. Cooke, 1 K. B. 794, 5 B. R. C. 666; Ex parte Goldberg & Lewis, 191 Ala. 356 , L. R. A. 1915F, 1157, 67 South. 839 ; McDonough v. Cook, 19 Ontario, 267; Knetchel Furniture Co. v. Ideal House Furnishers, Ltd., 19 Manitoba, 652.) Indeed, the supreme court of Iowa, in Vander Ploeg v. Van Zuuk above said: “We do not mean to say that in no case can the person named as payee in a negotiable instrument be the holder thereof ‘in due course’ [giving an example of a supposititious case in which the payee would be a holder in due course at common law]. There is no reason to think the situation of the parties to such a transaction is different under the Act.” (The Uniform Negotiable Instruments Act.) And our conclusion is fortified by other provisions of the Act. The holder of a bill or note payable to order is the payee or indorsee in possession of it. (Sec. 191.) “Every holder is deemed prima facie to be a holder in due course.” (Sec. 59.) Substituting for the term “holder” in section 59 its equivalent as defined by section 191, and section 59 would then read: “Every payee in possession of a note is prima facie a holder thereof in due course”—a conclusion which is impossible if negotiation by indorsement and delivery is necessary to constitute one a holder in due course.

It seems necessary, in order to harmonize the .several provisions of the Act, to hold that the complete definition of “negotiated” is contained in the first sentence of section 30, and that a payee who has taken a note, complete and regular upon its face, before it was overdue, and for value and in good faith, may qualify as a holder in due course, and prima facie is such.

There is nothing in the complaint herein to negative the presumption that the bank is a holder in due course, and the fact that Lee is an accommodation maker does not overcome the presumption.

*298 The allegations stricken from the answer-do not constitute a defense, and the trial court properly so ruled.

The judgment is affirmed.

'Affirmed.

Mr. Chief Justice Brantly and Associate Justices Reynolds, Cooper and Galen concur.