NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

(01) POWELL & POWELL v. GREENLEAF & CURRIER.

[NO NUMBER IN ORIGINAL]

SUPREME COURT OF VERMONT

104 Vt. 480; 162 A. 377; 1932 Vt. LEXIS 169

October 18, 1932 May Term, 1932. Opinion filed October 18, 1932.

PRIOR HISTORY: [***1] ACTION OF CONTRACT. Plea, general issue. Trial by court at the March Term, 1931, Chittenden County, Buttles, J., presiding. Judgment for the defendants. The plaintiff excepted. The opinion states the case. DISPOSITION: Judgment reversed, and cause remanded. CORE TERMS: negotiability, negotiable, promise to pay, extrinsic agreements, signing, payee, promissory note, value received, extrinsic, destroy, true copy, entire agreement, recital, bill of exchange, contingency, destroyed, tenor, future time, time of payment, unconditional, determinable, collections, conditional, inspection, unaided, unconditional promise, order to pay, collateral contract, obligation to pay, monthly payments HEADNOTES

Bills and Notes--Requisites of Negotiability--Effect of Reference to Extrinsic Instrument--Effect on Negotiability of Provision That First Payment Is To Be Made upon Signing Instrument.

1. Instrument to be negotiable must contain, among other things, unconditional promise or order to pay sum certain in money.

2. Unqualified order or promise to pay is unconditional within meaning of statute though coupled with statement of transaction which gives rise to instrument.

3. Whether instruments are negotiable must be determined from language of instruments themselves, unaided by inspection of extrinsic instruments to which they refer.

4. To destroy negotiability of bill of exchange or promissory note, reference to collateral contract must show that obligation to pay is burdened with conditions of that contract.

5. Negotiability of instruments held not to be affected by reference therein to extrinsic agreements stating that instruments were "for and in consideration of a contract and agreement," etc., "whereby we are entitled to the use of said company's system of collections," and "we hereby acknowledge the receipt of a true copy of this entire agreement."

6. Instruments containing provision that first payment is to be made upon signing of instruments, held not to be rendered non-negotiable thereby, as contrary to requirement of G. L. 2871 that an instrument to be negotiable must be payable on demand at a fixed or determinable future time, signing of instrument determining time of payment, which is to be immediately thereafter. COUNSEL: Stanley C. Wilson and Guy M. Page for the defendants. Max L. Powell for the plaintiff. JUDGES: Present: POWERS, C. J., SLACK, MOULTON, THOMPSON, and GRAHAM, JJ. OPINION BY: SLACK OPINION

[**377] [*481] This suit is to recover the balance due on two instruments in writing dated, respectively, July 6, 1922, and June 7, 1923. The instruments are alike in all respects except the date, and are of the following tenor:

"$ 150.00 Newbury, Vt., (date)

For and in consideration of a contract and agreement entered into this day with us by Arthur A. Bishop & Co. of Boston, Mass., whereby we are entitled to the

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

use of said company's system of collections we hereby, for value received, promise to pay to said Arthur A. Bishop & Co., or order, at their office in Boston, Mass., the sum of one hundred fifty dollars, in twelve equal monthly payments of $ 12.50 each, the first monthly payment to be made upon the signing of this contract [***2] note, and the remaining eleven payments of $ 12.50 each to be made upon the same date of each succeeding month; provided, however, that upon the default on any one payment, the whole amount remaining then unpaid shall at once become due and payable, and we hereby acknowledge the receipt of a true copy of this entire agreement.

Signature of agent and witness C. J. White Client's signature Greenleaf & Currier."

The single question is whether these instruments are negotiable, so that plaintiffs can maintain this suit in their own names.

[1, 2] An instrument to be negotiable must contain, among other things, an unconditional promise or order to pay a sum certain in money. G. L. 2871. An unqualified order or promise to pay is unconditional within the meaning of the statute "though coupled with * * * a statement of the transaction which gives rise to the instrument." G. L. 2873.

[3] Whether these instruments are negotiable must be determined from the language of the instruments themselves, unaided by an inspection of the extrinsic agreements to which they [*482] refer.Utah Lake Irr. Co. v. Allen, 64 Utah 511, 231 P. 818, 37 A. L. R. 651; Paepcke v. Paine [***3] , 253 Mich. 636, 641, 235 N.W. 871, 75 A. L. R. 1205; Schmittler v. Simon, 101 N.Y. 554, 559, 5 N.E. 452, 54 A. R. 737; Waterbury-Wallace Co. v. Ivey, 99 Misc. 260, 163 N.Y.S. 719; Continental Guaranty Corp. v. People's Bus Line, 31 Del. 595, 1 W. Harr 595, 117 A. 275.

It is the general rule that wherever a bill of exchange or promissory note contains a reference to some extrinsic contract in such a way as to make it subject to the terms of [**378] that contract, as distinguished from a reference importing merely that the extrinsic agreement was the origin of the transaction, or constitutes the consideration of the bill or note, the negotiability of the paper is destroyed. First National Bank in Salem v. Morgan, 132 Ore. 515, 284 P. 582, 3 R. C. L. p. 883, par. 69.

But it is equally well settled that the negotiability of a bill or note is not affected by a reference which is simply a recital of the consideration for which the paper

was given, or a statement of the origin of the transaction, or by a statement that it is given in accordance with the terms of a contract of even date between the same parties. 3 R. C. L. 918, par. 112.

[4] In short, to [***4] destroy negotiability the reference to a collateral contract must show that the obligation to pay is burdened with the conditions of that contract.

Where the promise to pay is made "subject to" some other contract referred to, the authorities seem to be agreed that the obligation is conditional and negotiability is destroyed. Klots, etc., Co. v.Manufacturers', etc., Co. (C. C. A.), 179 F. 813, 30 L. R. A. (N. S.) 40, and note citing numerous cases; 8 C. J. 124, par. 216. Beyond this, the decisions are by no means harmonious.

Among the cases in which the reference to the extrinsic contract has been held to destroy the negotiability of the note are Chicago, etc., Bank v. Chicago T. & T. Co., 190 Ill. 404, 60 N.E. 586, 83 A. S. R. 138; Continental Bank & Trust Co. v. Times Pub. Co., 142 La. 209, 76 So. 612, L. R. A. 1918B, 632; Finance Corp. v. Drug Co., 144 Md. 303, 124 A. 891, 33 A. L. R. 1162; Central National Bankv. Hubbel, 258 Mass. 124, 154 N.E. 551; First National Bank, Statesville, N. C. v. Power Equipment Co., 211 Iowa 153, 233 N.W. 103, and other cases collected in 14 A. L. R. p. 1126, note.

[*483] On the [***5] other hand, the words "as per terms of contract," following the words "value received" in a promissory note was held not to affect its negotiability in National Bank of Newburyv. Wentworth, 218 Mass. 30, 105 N.E. 626. To the same effect are Strand Amusement Co. v. Fox, 205 Ala. 183, 87 So. 332, 14 A. L. R. 1121; International Finance Co. v. Northwestern Drug Co. (D. C.), 282 F. 920; Tyler v. Whitney-Cent. Trust, etc., Bank, 157 La. 249, 102 So. 325; and Waterbury-Wallace Co., Inc. v. Ivey, supra.

Negotiability is not destroyed by a statement that the note is part of a contract of a certain date, Utah Lake Irr. Co. v. Allen, supra; or by statement that note is "for payment under contract of even date," Slaughter v. Bisbee Bank, 17 Ariz. 484, 154 P. 1040; or by statement "in one machinery, as per contract" after the words "For value received," First National Bank of Richmond v. Badham, 86 S.C. 170, 68 S.E. 536, 544, 138 A. S. R. 1043; or by statement that note is one of a series "given in payment of land described in a contract this day executed," Coleman v. Valentin, 39 S.D. 323, 164 N.W. 67, [***6] 68; or by statement "this note is given in accordance with a land contract of even date between B. and C.," Doyle v. Considine, 195 Ill. App. 311. In First National Bank

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

of Hutchinson v. Lightner, 74 Kan. 736, 88 P. 59, 60, 8 L. R. A. (N. S.) 231, 118 A. S. R. 353, 11 Ann. Cas. 596, an instrument of the following tenor, "Pay to the order of the First National Bank of Hutchinson, Kansas, $ 1500, on account of contract between you and Snyder Planing-mill Company," was held to be a negotiable bill of exchange, payable absolutely on demand. In Markey v. Corey, 108 Mich. 184, 66 N.W. 493, 494, 36 L. R. A. 117, 62 A. S. R. 698, it was held that the words, "This note is given in accordance with the terms of a certain contract under the same date, and between the same parties," which appeared on the face of a note, did not affect its negotiability. Other cases of similar import are to be found in Uniform Laws Annotated, Vol. 5, p. 52, and in 14 A. L. R. p. 1129, note.

[5] The instruments before us contain two references to the extrinsic agreements: (1) "For and in consideration of a contract and agreement entered into this day with us by Arthur A. Bishop & [***7] Co., of Boston, Mass., whereby we are entitled to the use of said company's system of collections and we hereby, for [*484] value received," etc., and (2) "we hereby acknowledge the receipt of a true copy of this entire agreement."

It is not apparent how the negotiability of these instruments is affected by either of these references. The promise to pay is not "subject to" the extrinsic agreement, or "according to" such agreement, or subject to any contingency, but is absolute and unconditional.

The first reference is nothing more than a recital of the consideration, which does not affect the negotiability. 3 R. C. L. p. 883, par. 69, and page 918, par. 112. See, also, Daniel on Negotiable Instruments, Vol. I, (6th ed.) par. 351, where it is said: "The negotiability of the instrument is not impaired by recitals or statements upon its face, which merely state the consideration upon which it is made, and impose no other liability upon any party thereto than that for the payment of the sum of money therein expressed, as that it was given in consideration of a certain patent right,' or as part payment for a piano-forte,' or for any other consideration."

Nor is the negotiability [***8] of the instruments affected by the fact that it appears therefrom that they were given for or in consideration of service to be thereafter performed by the payee. Siegelv. Chicago Trust & Savings Bank, 131 Ill. 569, 23 N.E. 417, 7 L. R. A. 537, 19 A. S. R. 51, [**379] involved the negotiability of an instrument of the following tenor:

"$ 300.00 Chicago, March 5, 1887.

On July 1, 1887, we promise to pay D. Dalziel, or order, the sum of three hundred dollars, for the privilege of one framed advertising sign, size--x--inches, one end of each of one hundred and fifty nine street-cars of the North Chicago City Railway Co., for a term of three months, from May 15, 1887."

The Court said: "It is a promise to pay a certain sum of money at a day certain, for a consideration thereafter to be rendered, and depends for its validity upon the implied promise of the payee to furnish the consideration at the time and in the manner stipulated. That is, it is a promise to pay a sum certain on a particular day, in consideration of the promise of the payee to do and perform his part. A promise is a valuable consideration for a promise. * * * * * * The mere fact that the consideration for which [***9] a note is given is recited in it, although it may [*485] appear thereby that it was given for or in consideration of an executory contract or promise on the part of the payee, will not destroy its negotiability, unless it appears through the recital that it qualifies the promise to pay, and renders it conditional or uncertain, either as to the time of payment or the sum to be paid." And it was held that the instrument was negotiable.

In State National Bank v. Cason, 39 La. Ann. 865, 2 So. 881, 882, it is said: "It cannot affect the negotiability of a note that its consideration is to be hereafter realized, or that from some contingency, it may never be enjoyed."

Neither is the second reference such as to burden the instruments before us with the terms of the extrinsic agreements. It is a mere acknowledgment by the signers of the instruments of the receipt of a true copy of the entire agreement--nothing more, While it is notice, inferentially, that these instruments had their origin in some sort of an agreement between the makers and payee that is not fully embodied in the instruments themselves, since it does not make them "subject to" the terms of such agreements, [***10] or subject to any contingency whatever, it does not affect their negotiability, See cases cited above.

The defendant says that the instruments are bi-lateral contracts rather than promissory notes, and calls attention to certain provisions of the extrinsic agreements. It is enough to say concerning this that, since the instruments are not subject to such agreements, the terms thereof are immaterial.

[6] The defendants claim that the instruments are not negotiable because they provide that the first payment is to be made upon the signing of the instruments; and it is argued that, under G. L. 2871, an instrument to be

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

negotiable must be payable on demand or at a fixed or determinable future time. We think that the first payment is payable at a determinable future time within the meaning of the statute. It is payable upon the signing of the instrument. The signing of the instrument determines the time of payment, which is to be immediately thereafter.

It is urged that the instruments are not negotiable because the consideration for them was an executory contract or promise on the part of the payee. This claim is disposed of by what has already been said.

(02) Irving Trust Company, Respondent, v. Joseph Leff, Appellant

[NO NUMBER IN ORIGINAL]

Court of Appeals of New York

253 N.Y. 359; 171 N.E. 569; 1930 N.Y. LEXIS 840

March 19, 1930, Submitted May 6, 1930, Decided

PRIOR HISTORY: [***1] Appeal from a judgment, entered December 3, 1929, upon an order of the Appellate Division of the Supreme Court in the first judicial department which reversed an order of Special Term denying a motion by plaintiff for summary judgment and granted said motion.

Irving Trust Co. v. Leff, 227 App. Div. 283, reversed. DISPOSITION: Judgment accordingly.

CASE SUMMARY

PROCEDURAL POSTURE: Defendant appealed an order of the Appellate Division of the Supreme Court in the First Judicial Department (New York) that reversed an order denying plaintiff's motion for summary judgment and granted plaintiff's motion to strike out defendant's counterclaim.

OVERVIEW: Plaintiff, a bank, brought an action for money due on a promissory note made by defendant, an individual. Defendant delivered a conditional check drawn on plaintiff to another in a real estate transaction. The conditional check was stolen and plaintiff cashed the check without making any inquiry to defendant if the conditions on the check were met. Meanwhile, defendant had delivered an unconditional check to the thief to induce his surrender of the conditional check. Plaintiff cashed that check as well. Defendant's counterclaim alleged plaintiff's breach of contract to pay on defendant's account only upon his direction. The trial court denied plaintiff's motions for summary judgment and to strike defendant's counterclaim. On appeal, the appellate division reversed. The court affirmed the order as it granted summary judgment for plaintiff, because the unconditional check was a negotiable instrument, and plaintiff was not obligated to inquire regarding that check. The court, however, reversed the order as it granted plaintiff's motion to strike defendant's counterclaim, because the counterclaim stated a cause of action that was not put in issue by the pleadings.

OUTCOME: The court affirmed the order as it granted summary judgment, because the unconditional check was a negotiable instrument, and plaintiff was not obligated to inquire with defendant regarding the check. The court reversed the order as it granted plaintiff's motion to strike defendant's counterclaim, because the counterclaim stated a cause of action that was not put in issue by the pleadings and that, in the absence of a reply, was admitted.

CORE TERMS: counterclaim, delivery, depositor, negotiable instruments, non-negotiable, cause of action, surrendered, Neg Inst Law, unconditional, inception, presumed, bank to pay, order to pay, conclusively, conditional, signature, severed, street, holder, thief, void, promissory note, summary judgment, inquire, genuine, stolen, reply

LexisNexis® Headnotes

Contracts Law > Negotiable Instruments > Types > Bills of Exchange Contracts Law > Types of Contracts > Nonnegotiable Instruments

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

HN1

A check, strictly speaking, is a negotiable instrument, in effect, a bill of exchange drawn on a bank payable on demand, and it is a misnomer to speak of a non-negotiable check.

Banking Law > Depository Institutions > Customer-Bank Relations > General Overview Commercial Law (UCC) > Negotiable Instruments (Article 3) > Discharge & Payment > General Overview Contracts Law > Negotiable Instruments > Negotiation > Indorsement > Qualified Indorsements HN2

No duty rests on a bank to call up its depositor when a genuine check comes in to inquire whether it should be paid.

Contracts Law > Negotiable Instruments > Enforcement > Duties & Liabilities of Parties > Types of Parties > Holders in Due Course > General Overview Contracts Law > Negotiable Instruments > Enforcement > Proof of Signature Contracts Law > Negotiable Instruments > Negotiation > Delivery HN3

A check has no valid inception until delivery. Delivery means transfer of possession actual or constructive, from one person to another. Delivery is sometimes presumed, conclusively or subject to rebuttal, for the protection of negotiable paper. N.Y. Neg. Instr. Law § 35 provides that where the negotiable instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. But, this provision is peculiar to negotiable instruments.

Contracts Law > Types of Contracts > Nonnegotiable Instruments Contracts Law > Types of Contracts > Rights of Possessors HN4

In the case of non-negotiable instruments, a thief has no title and can give none. He cannot obligate a party or support a right.

Contracts Law > Negotiable Instruments > Negotiation > Delivery

Contracts Law > Types of Contracts > Nonnegotiable Instruments Criminal Law & Procedure > Criminal Offenses > Property Crimes > Larceny & Theft > Elements HN5

Act and intention are the essential constituents of a delivery which makes the instrument operative according to its terms. A valid and intentional delivery must appear. Possession and production of a non-negotiable instrument are not enough as against an allegation of no valid delivery. To "steal" means to take away from one in lawful possession without right with the intention to keep wrongfully. An allegation of theft puts in issue the delivery of a check.

HEADNOTES

Bills, notes and checks -- negotiable instruments -- banks and banking -- pleading -- practice -- order on bank to pay money, having on its face a statement that it is void except under a certain condition, is a non-negotiable instrument -- bank not under duty to inquire of maker if conditions have been met -- no valid inception where stolen from maker -- counterclaim, in action on promissory note, alleging that plaintiff's bank, with which defendant had an account, paid such a stolen check states a cause of action -- motion by bank for judgment on pleadings should have been granted as to amount due on note less counterclaim, action on counterclaim severed and motion to strike it out denied. SYLLABUS

1. A bank is under no obligation to inquire of the maker of a genuine non-negotiable check whether the conditions have been met [***2] but may obtain the information from other sources.

2. An order on a bank to pay money, in the form of a check, having on its face a statement that it is void except under a certain condition, is a non-negotiable instrument, and where it is stolen from the maker, has no valid inception to sustain payment by the bank on which it is drawn. Non-delivery is a valid defense.

3. In an action, therefore, brought to recover upon a promissory note, a counterclaim alleging that defendant, a depositor in the plaintiff's bank, having a checking account therein, delivered to a third party a check having on its face

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

the words "void unless and until title to premises 502-514 Liberty Street, Camden, New Jersey is taken by Joe Leff" (the defendant), and that thereafter the payee surrendered the check to defendant's attorney but subsequently stole it and plaintiff cashed it, states a cause of action.

4. It appearing from the pleadings that the amount due upon the note is correctly set forth, on motion by plaintiff, the trial court should have directed judgment in its favor for so much of its claim as the counterclaim does not seek to reduce, severed the action on the counterclaim from the cause of [***3] action set forth in the complaint and denied the motion to strike out the counterclaim. (Civ. Pr. Act, § 476; Rules Civ. Pr. 114.) COUNSEL: A. S. Cutler for appellant. The plaintiff's duty was to pay only upon authorization of the defendant depositor and the plaintiff's obligation was to make inquiry. ( Critten v. Chem. Nat. Bank,171 N. Y. 219; Crawford v. West Side Bank, 100 N. Y. 50; Bischoff v. Yorkville Bank, 218 N. Y. 106; First Nat. Bank v. National Bway. Bank, 156 N. Y. 459; Susquehanna Line, Inc., v. Auditore, 223 App. Div. 585; Baruch v. Buckley, 167 App. Div. 113; Farjeon v. Fulton Securities Co., 225 App. Div. 541; Fidelity & Deposit Co. v. Queens Co. Trust Co., 226 N. Y. 225.) The plaintiff cannot claim to be an innocent holder for value. The relation between the parties was that of debtor and creditor. ( Critten v. Chem. Nat. Bank, 171 N. Y. 219; Neg. Inst. Law, §§ 20, 91; Old Colony Trust Co. v.Stumpel, 126 Misc. Rep. 375; 247 N. Y. 538; Tisdale Lumber Co. v. Piquet, 153 App. Div. 266; Ward v. City Trust Co., 192 N. Y. 61; Davis Sewing Machine Co. v. Best, 105 [***4] N. Y. 59; Carnright v.Gray, 57 Hun, 518; 127 N. Y. 92; Seacord v. Burling, 5 Den. 443.) William A. Onderdonk and Paul E. Mead for respondent. The defendant's counterclaim is insufficient in law. ( Clarke v. Dillon, 97 N. Y. 370; Busch v. Interborough R. T. Co., 187 N. Y. 388; Rich v. N. Y. C. & H. R. R. R. Co., 87 N. Y. 382.) The Appellate Division properly reversed the order of Special Term denying plaintiff's motion for summary judgment. ( Fidelity & Deposit Co. v. Queens County Trust Co., 226 N. Y. 225; Trust Co. v. Conklin, 65 Misc. Rep. 1; Little Falls Dairy Co. v. Berghorn, 130 Misc. Rep. 454.) JUDGES: Pound, J. Cardozo, Ch. J., Crane, Kellogg, O'Brien and Hubbs, JJ., concur; Lehman, J., not voting. OPINION BY: POUND

OPINION

[*361] [**570] The Appellate Division, reversing the Special Term, granted plaintiff's motion to strike out the counterclaim set up in the answer and for summary judgment on the pleadings. The only question presented on this appeal is as to the sufficiency in law of the defendant's counterclaim.

The complaint states a cause of action for a balance of $ 4,933, with interest thereon [***5] from March 18, 1929, due on a promissory note made by defendant for $ 10,000 payable to himself and indorsed to plaintiff.

The answer denies that no part of the note has been paid except $ 5,067, but it appears that the amount due on the note is correctly set forth in the complaint. It further alleges by way of counterclaim that at all the times thereinafter mentioned defendant was a depositor in the plaintiff's bank and had a checking account with it; that on or about March 10, 1928, the defendant delivered to one Bragin a so-called check in the sum of $ 1,000, drawn on plaintiff and having on its face the following words: "Void unless and until title to premises 502-14 Liberty Street, Camden, New Jersey is taken by Joe Leff" (the defendant); that on or about March 16, 1928, Bragin surrendered this check to defendant's attorney and received in exchange therefor defendant's unconditional check for $ 1,000, drawn on plaintiff's bank, which check was paid to Bragin by plaintiff; that Bragin stole the surrendered conditional check from the possession of defendant's attorney and the plaintiff thereafter cashed the same without making any inquiry of the defendant as to whether the conditions [***6] on the face of the check had been met; wherefore defendant demands judgment for $ 1,000 against plaintiff. The counterclaim arises out of an alleged breach of contract between the bank and its depositor to pay on the depositor's account only upon the actual direction of the depositor. "The relation existing between a bank and a depositor being that of debtor and creditor, the bank can justify a payment on [*362] the depositor's account only upon the actual direction of the depositor." ( Critten v. Chemical [**571] Nat. Bank, 171 N. Y. 219, 224.)

Affidavits were read in support of the motion for summary judgment and in opposition thereto. The plaintiff bank was not shown to be chargeable with actual knowledge of the transaction between defendant and Bragin. The defendant proceeded on the theory that the bank should not have paid the check to Bragin without inquiring of him as to whether title to premises 502-14 Liberty street had been taken by defendant and that if such inquiry had been

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

made, although the bank would have learned that title had been taken it would also have learned that the check had been surrendered by Bragin to defendant and was no longer a [***7] valid obligation of the defendant.

HN1 A check, strictly speaking, is a negotiable instrument, i. e., a bill of exchange drawn on a bank payable on demand (Neg. Inst. Law [Cons. Laws, ch. 38] § 321, § 2), and it is a misnomer to speak of a non-negotiable check. This order on the bank was a non-negotiable instrument which we will for convenience continue to refer to as a check. It did not "contain an unconditional promise or order to pay." (Neg. Inst. Law, § 20, subd. 2.) The bank, of course, took the chance in paying that the condition expressed on its face had been performed. It might have obtained this knowledge from Bragin or from any other available source. HN2 No duty rests on a bank to call up its depositor when a genuine check comes in to inquire whether it should be paid. The defendant's signature was genuine. The instrument was complete in form. The condition precedent to payment had been fulfilled. On defendant's theory of a breach of duty of inquiry as to the fulfillment of this condition, he cannot prevail if the check was a valid instrument as between the maker and the bank.

On the pleadings, however, the further question arises as to whether the check when [***8] presented to the bank for [*363] payment was a valid instrument as between the maker and the bank. Although this question is not argued, it is considered in the opinion of the court below which disposed of it under the rule applicable to negotiable instruments.

To sustain plaintiff's recovery herein, the non-negotiable check must have had a valid inception. HN3 A check has no valid inception until delivery. ( Cowing v. Altman, 71 N. Y. 435, 441.) Delivery means transfer of possession actual or constructive, from one person to another. (Neg. Inst. Law, § 2.) Delivery is sometimes presumed, conclusively or subject to rebuttal, for the protection of negotiable paper. Negotiable Instruments Law (§ 35) provides: "Where the [negotiable] instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved."

But this provision is peculiar to negotiable instruments. HN4 In the case of non-negotiable instruments, [***9] the thief has no title and can give none. He cannot obligate a party or support a right. (Cf. Sabine v. Paine, 223 N. Y. 401.) Defendant may establish that when the check was surrendered to him in

exchange for his unconditional check, it ceased to be a legal order to pay money, conditional or otherwise; and that it was a nullity when it was presented to the bank for payment.

HN5 "Act and intention are the essential constituents of a delivery which makes the instrument operative according to its terms." ( Grannis v. Stevens, 216 N. Y. 583, 587.) The question is, did the defendant do such an act in reference to the check as evidenced the intention to give it effect and operation? Had he authorized the bank to pay the check? A valid and intentional delivery must [*364] appear. Possession and production of a non-negotiable instrument are not enough as against the allegation that no valid delivery had been made. To steal means to take away from one in lawful possession without right with the intention to keep wrongfully. An allegation of theft puts in issue the delivery of the check. In cases where the law does not protect holders in due course, inquiry by the bank [***10] of the maker is a necessary precaution for protection against imposition by a thief.

The counterclaim states a cause of action which is not put in issue by the pleadings and which, in the absence of a reply, stands admitted. No question of defendant's negligence is presented by the record.

Under the practice permitting a partial judgment, the court should have granted plaintiff's judgment for $ 3,933, and interest thereon from March 18, 1929, being so much of plaintiff's claim as defendant's counterclaim does not seek to reduce; severed the action on the counterclaim from the cause of action set forth in the complaint and denied the motion to strike out the counterclaim. [**572] (Civil Practice Act, § 476; Civil Practice Rules, rule 114.)

The judgment should be reversed with costs in this court and in the Appellate Division; the motion for summary judgment for plaintiff granted for $ 3,933, with interest from March 18, 1929; the order of Special Term so far as it denies the motion to strike out counterclaim affirmed and plaintiff given twenty days to serve a reply.

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

(03) GIUSEPPE INCITTI, PLAINTIFF, v. LUIGI FERRANTE AND EDOARDO C. YULIANO, DEFENDANTS.

[NO NUMBER IN ORIGINAL]

BERGEN COUNTY COURT OF COMMON PLEAS, NEW JERSEY

12 N.J. Misc. 840; 175 A. 908; 1933 N.J. Misc. LEXIS 32

February 14, 1933, Decided DISPOSITION: [***1] Motion denied.

CASE SUMMARY

PROCEDURAL POSTURE: Defendant note grantors sought grant of their motion to strike out the complaint by plaintiff note holder because it failed to state an action. The holder brought an action against the grantors to pay the note in Italian currency or its equivalent in U.S. currency.

OVERVIEW: The holder brought an action against the note grantors for payment on the promissory note in Italian lires, as provided for in the notes. The note was signed in New Jersey and was made payable at an Italian bank. There was no address provided for that bank. The holder's complaint failed to allege consideration for the note. The court denied the grantors' motion to strike the claim. The court held that according to the laws of New Jersey in the Negotiable Instruments Act, the note was a valid negotiable instrument. The court acknowledged that art. 1, § 1, subd. 2 of the Act provided that a negotiable instrument must provide an unconditional promise to pay a sum certain in money. The court ruled that the term money under the Act and the rules of law merchant meant currency that had its value fixed by law or authority of the laws of a county where it was payable. Because the Italian currency satisfied such a requirement, the claim stated a valid possible ground for relief and should not be struck.

OUTCOME: The court denied the grantors' motion to strike the holder's claim.

CORE TERMS: coin, negotiable, currency, negotiable instrument, foreign coin, lire, law merchant, gold, note payable, commodity, foreign country, lawful money, denomination, proclaimed, secretary, silver, mint, state banks, bank bills, bank notes, legal tender, civil war, place of payment, silver dollars, judicially notice, promissory note, negotiability, circulation, circulating, promissory

LexisNexis® Headnotes

Contracts Law > Negotiable Instruments > Discharge & Payment > Payment > General Overview Contracts Law > Negotiable Instruments > Enforcement > Defenses > Failure of Consideration

HN1

The Uniform Negotiable Instruments law of New Jersey provides in article 1, § 1, subdivision 2, that an instrument to be negotiable must contain an unconditional promise or order to pay a sum certain in money; and in § 6, subdivision 5, it is provided that the negotiable character of an instrument is not affected by the fact that it designates a particular kind of current money in which payment is to be made. The act further provides, article 2, § 24: Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. And in title 4, article 1, § 196, in any case not provided for in this act the rules of the law merchant shall govern.

Constitutional Law > Congressional Duties & Powers > Commerce Clause > General Overview Governments > Federal Government > U.S. Congress

HN2

U.S. Const. art. 1, § 8, provides that the Congress shall have power to coin money, regulate the value thereof, and of foreign coin, and under the power vested in it by this section of the constitution the Congress has from time to time established the value of foreign coins.

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Constitutional Law > Congressional Duties & Powers > Commerce Clause > General Overview

HN3

See 349 Stat. 25, the Act of August 27, 1894.

Contracts Law > Negotiable Instruments > General Overview

HN4

A bill or note may be payable in the money of any country, that is to say in its coins, such as guineas, ducats, louis d'ors, doubloons, crowns or dollars; or in the known currency of a country, as pounds sterling, livres, tournoises, francs, florins, &c.; for in all these cases the sum of money is fixed by the par exchange on the known denomination of the currency with reference to the par.

Contracts Law > Negotiable Instruments > General Overview International Law > Authority to Regulate > General Overview International Trade Law > General Overview

HN5

Where a note is made payable in a country in the money or coins of another country, which money or coins have a value fixed by the law or under the authority of the law of the country where the note is payable, and which value can by a simple mathematical calculation be expressed in the value of the lawful money of the latter country, that such note by the rules of the law merchant and under the Uniform Negotiable Instruments act is negotiable.

Contracts Law > Negotiable Instruments > General Overview International Law > Dispute Resolution > General Overview International Trade Law > Imports & Exports > General Overview

HN6

A promissory note must in order to come within the statute be payable in money only, in current specie; or, at least, in what can judicially notice as equivalent to money. This view is not incompatible with a bill or note payable in money of a foreign denomination or any other denomination being negotiable, for it can be paid in our own coin of equivalent value to which it is always reduced by a recovery.

HEADNOTES

1. Promissory note for 15,400 Italian lires held negotiable.

2. The negotiability of a promissory note payable in this state is determined by the law of this state.

3. If a note is payable in a country in the money of another country, which money has a value fixed by law of country where note is payable which can be expressed in the value of the money of country where it is payable, such note is negotiable under the law merchant and the Uniform Negotiable Instruments act.

4. Various cases, concerning payment of notes in money of country other than the country where it is payable, reviewed.

5. Value of foreign coin in money of United States is established by the director of the mint and proclaimed by the secretary of the treasury. 31 U. S. C. A., § 372. COUNSEL: For the plaintiff, Francis P. Oddo. For the defendants, James A. Major and Joseph H. Gaudielle. JUDGES: Delmar, C. P. J. OPINION BY: Delmar OPINION

[**909] [*840] On action upon a note.

Delmar, C. P. J. This action was brought by the plaintiff against the defendants upon a promissory note alleged to have been made by the defendants for the sum of "15,400 Italian lires." The complaint does not allege any consideration for the note and concludes with a prayer for judgment against the defendants for said sum of 15,400 Italian lires, or its equivalent in lawful money of the United States. The note is dated at Hackensack, New Jersey, and is made payable at the Bank Italia

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Company, and neither the complaint nor the note sets forth the address of said company, so that the presumption, therefore, is that the note is payable in the State of New Jersey.

[*841] Defendants moved to strike out the complaint on the ground that the same does not set forth a cause of action; and in the argument on said motion they contended that the note in question is not negotiable and that the complaint, therefore, must allege a consideration, which it does not do.

Upon the argument the [***2] point made by defendants' counsel was that the note was not made for money, but for a commodity and that, therefore, there is no presumption that it was made upon a legal consideration. In support of this contention counsel cites Thompson v. Sloan et al., 23 Wend. 71.

Whether the note in question is or is not negotiable must be determined by the laws of this state. Story Confl. L. (2d ed.), § 317; Thompson v. Taylor, 66 N.J.L. 253; 49 A. 544; Campbell v. Nichols,33 N.J.L. 81.

The note in question is negotiable in form unless the provision for the payment of the sum named in Italian lire makes it non-negotiable. HN1

The Uniform Negotiable Instruments law of this state provides in article 1, section 1, subdivision 2, that an instrument to be negotiable "must contain an unconditional promise or order to pay a sum certain in money;" and in section 6, subdivision 5, it is provided that the negotiable character of an instrument is not affected by the fact that "it designates a particular kind of current money in which payment is to be made." The act further provides, article 2, section 24: "Every negotiable [***3] instrument is deemed prima facie to have been issued for a valuable consideration." And in title 4, article 1, section 196, "In any case not provided for in this act the rules of the law merchant shall govern." This law, with but few variations, has been adopted in all the states of the union and in Great Britain. "It was clearly the intention of the legislature in passing the Uniform Negotiable Instruments act to cover the whole subject relating to negotiable instruments," the purpose being to secure uniformity in the law in the several states relating to negotiable instruments. Joyce Defenses to Commercial Paper (2d ed.) 1386.

If it had been the intention of the legislature to provide that a note in order to be negotiable must be payable in [*842] lawful money of the United States, or in legal tender, it would have been a simple matter to have used language appropriate for that purpose. The use of the words, "money and current [**910] money," indicate that such was not the purpose.

The question arises--what is money? Money is purely a legal institution; it is impossible without law. "Money is what the law or custom makes receivable for payments, taxes and debts. [***4] " SeeDelmar, The Science of Money (3d ed.) 25, 46. "Money by itself is but a mere device. It has value only by law and not by nature. So that a change of convention between those that use it is sufficient to deprive it of its value and of its power to purchase our requirements." Aristotle's Politica.

What then does our law provide?

HN2 The constitution of the United States, article 1, section 8, provides that the "congress shall have power to coin money, regulate the value thereof, and of foreign coin," "and under the power vested in it by this section of the constitution the congress has from time to time established the value of foreign coins. It is a matter of common knowledge that foreign coins of various nations such as England, Spain, France, Portugal and Mexico, passed as currency in the United States prior to the civil war. (Sometimes as legal tender under acts of congress.) In fact, they constituted at that time, with the exception of the note issues of the state banks, the bulk of the currency then in circulation. The congress from the earliest times has fixed the values of various foreign coins by statute. One of these statutes, namely, act of August 27th, 1894, [***5] chapter 349, section 25, provides, HN3 'The value of foreign coin as expressed in the money of account of the United States shall be that of the pure metal of such coin of standard value, and the values of the standard coins in circulation of the various nations of the world shall be estimated quarterly by the director of the mint and be proclaimed by the secretary of the treasury immediately after the passage of this act and thereafter quarterly on the 1st day of January, April, July and October in each year.'"

[*843] It is well established that HN4 a bill or note may be payable in

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the money of any country, that is to say in its coins, "such as guineas, ducats, louis d'ors, doubloons, crowns or dollars; or in the known currency of a country, as pounds sterling, livres, tournoises, francs, florins, &c.; for in all these cases the sum of money is fixed by the par exchange on the known denomination of the currency with reference to the par." Story Bills, § 43; Daniell Neg. Inst., § 58; Edw. Bills 137, 138. See, also, King v. Hamilton, 8 Sawy. 167, 12 F. 478, the material facts in which case are similar to those in the case at bar.

The law merchant is [***6] international in its character and was developed for the purpose of facilitating trade in commerce between different countries. It seems clear, therefore, that HN5 where a note is made payable in a country in the money or coins of another country, which money or coins have a value fixed by the law or under the authority of the law of the country where the note is payable, and which value can by a simple mathematical calculation be expressed in the value of the lawful money of the latter country, that such note by the rules of the law merchant and under the Uniform Negotiable Instruments act is negotiable. There is a scarcity of decisions in this country touching this question. The following cases, most of which have been cited by counsel for the plaintiff as authorities, bear on the point: Black v. Ward, 27 Mich. 191. In this case, however, the note was made in Michigan but was payable in Canada in Canada currency. It was decided that the note was payable in money and, therefore, negotiable. This can hardly be considered a precedent, because the note being payable in Canada was governed as to its negotiability by the law of that country, and, therefore, was payable [***7] in its own currency. Hogue v. Williams, 85 Tex. 553; 22 S.W. 580; 20 L. R. A. 481. The note in this case was made at Saltillo, in Mexico; no place of payment was specified but it was payable in one thousand Mexican silver dollars. The case was decided on the theory that Mexican silver dollars were recognized by the United States laws as money of the Republic of Mexico, and that, therefore, the note was negotiable; but since no [*844] place of payment was specified the note should have been construed under the laws of Mexico, and since it was payable in Mexican money, it was not an authority on the point in question.

In Thompson v. Sloan, supra, decided in 1840, the note was made and dated at Buffalo, New York, in the year 1836, for $ 2,500, payable in Buffalo, "in Canada money." This case is cited by counsel for the defendants as authority for the point argued by them that a note

payable here in the coin of a foreign country is not negotiable. The court said: HN6 "A promissory note must in order to come within the statute * * * be payable in money only, in current specie * * *; or, at least, in what we can judicially [***8] notice as equivalent to money. * * * Admitting that the note in question imports an obligation to pay [**911] in gold and silver current in Canada, I do not see on what principle we can pronounce it to be payable in money within the meaning of the rule. It is not pretended that coins current in Canada are, therefore, so in this state. As gold and silver they might readily be received and so might the coin of any foreign country, Germany or Russia for instance, but the creditor might, and in many cases doubtless would refuse to receive them because ignorant of their value. In law they are all collateral commodities like ingots or diamonds, which, though they might be received and be, in fact, equivalent to money are not yet goods and chattels. A note payable in either would, therefore, be no more negotiable than if it were payable in cattle or other specific articles. The fact of Canada coins being current here is not, at any rate, so notorious that we can judicially notice them as a universal customary medium of payment in this state, and if not, they are no more a part of our currency than Pennsylvania bank bills. * * * Nor do I perceive in the case any proof or offer to prove [***9] that such coins were of universal currency."

It must be borne in mind that at the time of this decision there was no country or province known as "Canada." "There were at that time the provinces of Upper Canada [Ontario], and the province of Lower Canada [Quebec], and it was not until the year 1841 that they were united into a [*845] single province, and not until many years later that the present Dominion of Canada was formed. At that time and for many years afterwards there was no currency issued in Canada. Both English and American coins circulated. The standard was gold, but there were different methods of counting, namely, English currency, Halifax currency and Canadian sterling, the respective ratios being 100:120:108. So that even if the note were held to be payable in gold coin current in Canada there was no way to determine the weight and fineness of the coin.

"It must also be remembered that prior to the civil war the circulating medium of the United States consisted almost entirely of bank notes issued by numerous independent corporations variously organized under state legislation of various degrees of credit and very unequal resources.

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'Acts of congress prohibited [***10] the receipt or disbursement in the transactions of the national government of anything except gold and silver and the laws of the states required the redemption of bank notes in coin on demand. There was no national currency excepting coin. There was no general regulation of any other by national legislation." Veazie Bank v. Fenno, 8 Wall. 533; 75 U.S. 533, 19 L. Ed. 482. The bulk of the currency circulating in New York in 1836 consisted of bank bills issued by various state banks and coins issued by the United States and a few foreign countries and the power of congress to issue paper currency had not then been determined. I do not, therefore, consider the decision in this case to be adverse to the contention of the plaintiff but rather as supporting it, especially so, as the court further stated, "this view of the case is not incompatible with a bill or note payable in money of a foreign denomination or any other denomination being negotiable, for it can be paid in our own coin of equivalent value to which it is always reduced by a recovery."

In Hebblethwaite v. Flint, 185 A.D. 249, 173 N.Y.S. 81, the note was made in Brazil [***11] and payable in the national currency of that country stabilized by a specific rate of exchange into British sterling. It is not stated where the note was payable. The court held that the note was negotiable by the law merchant, distinguishing this case from Thompson v. Sloan, [*846] supra, because the note in this case was made abroad, the court saying, "that cannot apply to notes made abroad which incidentally come before our courts."

In the case of Reisfeld v. Jacobs, 107 Misc. 1, 176 N.Y.S. 223, involving a contract for the purchase of Russian bank notes, it was held that such notes were not money. The court said, "in view of the fact that these notes were issued by a government now defunct and that the United States at present has no relations with any government in Russia, the court cannot take judicial notice that these notes are backed by the credit of a responsible government or that they even pass current anywhere as money." The court, therefore, found that the contract in question was a contract for the sale of goods.

A year prior to this decision, however, the same court in the case of Brown v. Perera, 176 N.Y.S. 215, [***12] affirmed an opinion of a referee holding that "foreign money is not, in legal contemplation, a legal commodity or article of merchandise, but that it was money, the title to which was acquired by the innocent holder, even though he

purchased it from one who had no title. As was said [**912] in the former case (Reisfeld v. Jacoby), the opinion in the latter case "concerns the question whether money issued under the authority of a responsible government and used generally for the purpose of convenient transaction is negotiable, and this has no application to the question presented in the case at bar."

The contract sued on here is a contract for the payment of money and not a commodity. It is also a contract for the payment of Italian lire and, therefore, within the purview of the act of 1879,supra, under which act the value of this foreign coin in money of the United States is established by the director of the mint and proclaimed by the secretary of the treasury. This note was made for a sum certain, because a note for any number of Italian lire is only another form of expression for the equivalent in dollars, which equivalent is now established under the authority [***13] of the legislation previously referred to. See King v. Hamilton, supra.

The motion to strike out the complaint is, therefore, denied.

(04) UTAH STATE NATIONAL BANK, a Corporation, Appellant, v. J. W. STRINGER, Respondent.

No. 4670.

SUPREME COURT OF IDAHO

44 Idaho 599; 258 P. 522; 1927 Ida. LEXIS 119

July 30, 1927, Decided PRIOR HISTORY: [***1] APPEAL from the District Court of the Eleventh Judicial District, for Cassia County. Hon. T. Bailey Lee, Judge.

Action on promissory note. Judgment for defendant. Reversed and remanded, with instructions to enter judgment for plaintiff. DISPOSITION: Reversed and remanded with instructions.

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CORE TERMS: stock, payee, indorsee, notice, holder, citizens' committee, finance, negotiated, cashier's check, procurement, inception, nominal, collateral, per annum, satisfaction, borrower, tainted, lender, bankers, burden shifts, negotiable instrument, written contract, fraudulently, practiced, buy, per share, amount claimed, enter judgment, attorney's fee, subscription HEADNOTES

BILLS AND NOTES--NOMINAL PAYEE, INDORSEE--FRAUD--BURDEN OF SHOWING--LENDER AND BORROWER--EXECUTION OF NOTE, EFFECT--USURY--LAW OF STATE GOVERNS.

1. Nominal payee of negotiable instrument may, in fact and in law, be shown to be really indorsee and stand in that relation to the paper.

2. Where fraud is shown in payee's procurement of note which has been negotiated and action is brought by the indorsee, burden shifts on indorsee to show to satisfaction of jury that he took instrument without notice of fraud, in view of C. S., sec. 5926.

3. Where note was executed for purpose of securing funds for purchase of bank stock, but payee did not sell stock nor buy paper belonging to one who sold stock, the relation of lender and borrower arose and note was not affected by statements and representations claimed to have been fraudulently made by others relative to value of stock purchased with its proceeds on theory that note was "tainted by fraud in the inception," since such term means the beginning, in the sense of fraud in consideration for note.

4. Note accepted and payable in Utah is governed by law of Utah authorizing written contract for interest at rate of 12 per cent per annum. COUNSEL: Merrill & Merrill, for Appellant. When a note made payable to the plaintiff is signed by the defendant and delivered to the plaintiff the alleged fraud of a third party is no defense to the note and it is error to admit evidence of what was said by a third party to the defendant to induce him to sign the note without first showing that such third party was the agent of the plaintiff or acted with its knowledge or consent. (Farmers Sav. Bank v. Grange, 199 Iowa 978, 203 N. W. 37; Mizell v. Farmers Bank, 180 Ala. 568, 61 So. 272; Roth v. Donnelly Grocery Co., 8 Ga. App. 851, 70

S.E. 140; Williams v. Garrett, 32 Ga. App. 762, 124 S.E. 811; First State Bank v. Utman, 136 Minn. 103, 161 N. W. 398.) If under the circumstances above recited the court concludes that the payee is a holder in due course of a negotiable note the burden of proof does not shift to the payee upon evidence of fraud because [***2] the payee does not receive the note from one having a defective title. (Brannan, Negotiable Instruments, 2d ed., p. 219; C. S., secs. 5897, 5922, 5926.) Before a party can be relieved from the payment of his note on the grounds of fraud he must plead and prove that the representations made the basis of the charge of fraud were made with authority; that they related to material facts and that they were false and known to be false. (Pocatello Security Trust Co. v. Henry, 35 Idaho 321, 27 A. L. R. 337, 206 P. 175; Kemmerer v. Pollard, 15 Idaho 34, 96 P. 206.) S. T. Lowe, for Respondent. The defendant alleged and proved fraud in the inception of the note. (12 R. C. L., p. 229, sec. 2; Swift v. Rounds, 19 R. I. 527, 61 Am. St. 791, 35 A. 45, 33 L. R. A. 561; Bigelow on Fraud, p. 484;Goodwin v. Horne, 60 N.H. 485; Salter v. Aviation Salvage Co., 129 Miss. 217, 26 A. L. R. 987, 91 So. 340; Cockrill v. Hall, 65 Cal. 326, 4 P. 33; Langley v. Rodriguez, 122 Cal. 580, 68 Am. St. 70, 55 P. 406, 68 P. 70; Brison v. Brison, 75 Cal. 525, 7 Am. St. 189, 17 P. 689.) "To constitute fraud in any case the facts misrepresented or concealed must have been material facts and they must [***3] also substantially affect the interests of the person alleged to have been defrauded." (12 R. C. L., p. 297, sec. 61.) "Where a party alleged and proved that he was induced by material, false and fraudulent representations to enter into a contract which he would not have entered into but for such false and fraudulent representations, a contract obtained thereby is voidable." (McLean v. Southwestern Casualty Co., 61 Okla. 79, 159 P. 660.) When fraud is shown to have existed in the inception of a promissory note, such fraud will defeat the enforcement of the note except in the hands of an innocent purchaser. (C. S., sec. 5922.)

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Whether or not the plaintiff was a holder in due course was a question for a jury. (Smith v. Gregg, 117 Kan. 507, 232 P. 217; Phillips v. Eldridge, 221 Mass. 103, 108 N.E. 909; 8 C. J., sec. 1376, p. 1063; Anthony v. Mercantile Mut. Acc. Assn., 162 Mass. 354, 44 Am. St. 367, 38 N.E. 973, 26 L. R. A. 406; Merchants Nat. Bank v. Haverhill Iron Works, 159 Mass. 158, 34 N.E. 93.) A payee of a negotiable promissory note can be a holder in due course. (Redfield v. Wells, 31 Idaho 415, 173 P. 640; Ex parte Goldberg & Lewis, 191 Ala. 356, 67 So. 839, [***4] L. R. A. 1915F, 1157; Baggish v. Offendgand, 97 Conn. 312, 116 A. 614.) JUDGES: MCNAUGHTON, Commissioner. Varian, Brinck, CC., Wm. E. Lee, C. J., Budge, Givens and Taylor, JJ., concurring. OPINION BY: MCNAUGHTON OPINION

[**522] [*601] McNAUGHTON, Commissioner.--This action is upon a negotiable promissory note for $ 1,254 dated April 22, 1921, due six months later. It provides for interest at twelve per cent per annum from maturity and is payable to the Utah State National Bank at its banking house in Salt Lake City, [*602] Utah. Defendant claims fraud in its procurement and no consideration as defenses, and also sets up the claim of usury. The nature of the case has required a thorough examination of all the evidence, but in the opinion only a general statement will be attempted.

From the testimony, it appears that on January 17, 1921, the Burley State Bank and the Bank of Commerce of the same place suspended business. The mayor of the city thereupon called a mass meeting, and at this meeting a citizens' committee was appointed to work upon a plan to relieve the situation. The work of the citizens' committee at the start contemplated the reopening or reorganization of the Bank of [***5] Commerce. The committee solicited aid from certain bankers in Council Bluffs, Iowa and also from the Utah State National Bank. After the citizens' committee had discussed the situation with certain bankers representing the interests of Council Bluffs people who were stockholders in the Bank of Commerce, and after advising with the commissioner of finance, and also, with the officers of the Utah State National Bank, it adopted a plan which was pursued and which in general was as follows:

A bank to be known as the Commercial State Bank, hereinafter referred to as the new bank, was to be organized with a capital of $ 100,000 and with $ 20,000 surplus. The $ 120,000 of new money thought to be necessary to finance the plan was to be raised by selling the stock at $ 120 per share. By this plan, the new bank was to take over the assets of both the closed banks and in consideration thereof was to assume liability of the closed banks to their depositors to the extent of eighty-five cents on the dollar; and also, was to assume their obligations to other banks, excepting the obligation of the Burley State Bank to the Federal Reserve Bank. The Burley State Bank, when it closed, was owing the [***6] Federal Reserve Bank, $ 545,468, and the latter held notes belonging to the Burley State Bank in the sum of $ 719,317, as collateral. The difference between the amount of this debt and the value of the notes pledged was [*603] called, and is referred to herein as the Federal Reserve equity. The only interest in those notes which the Burley State Bank could assign to the new bank was this equity. Ten per cent of the deposits in the closed banks was to be paid at once, the balance of the eighty-five per cent assumed was to be deferred; and also the indebtedness to other banks was to be deferred.

Plaintiff, Utah State National Bank, had no interest in either of the defunct banks and no interest in the new bank other than holding some of its stock as collateral to the note in question and other similar notes. [**523] The Citizens' committee procured the promise of the Utah bank to assist in the organization of the new bank by loaning as much as $ 90,000 to persons purchasing stock in the new bank upon their notes provided such persons could and would furnish satisfactory property statements, and provided further, that persons so borrowing from it would further secure the loan [***7] by a pledge of the stock as collateral to their notes.

After the books of the closed banks had been audited by the commissioner of finance and also by the auditor of the Utah State National Bank, another meeting was called at which the commissioner of finance, the auditor of the Utah State National Bank, certain Council Bluffs bankers who were aiding the committee, and Mr. Langlois of the citizens' committee, made speeches, announcing that a new bank was being organized and claiming that it would have the support of the Utah bank to assist in money and by management in organizing it and in running it; that no bad assets would be accepted from either of the closed banks; and that stock in it would be a good and sound investment. Defendant heard the speech of Mr. Langlois, and also that of Mr. Tinley, of Council Bluffs, but did not hear the others.

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Subscriptions for the new stock were taken at this meeting, but though defendant was a depositor in the Burley State Bank, he did not subscribe for any of the stock of the new bank at that time. Later Mr. Langlois of the Citizens' committee saw him and urged him to subscribe for the stock, [*604] as did also Mr. Rich who had been an [***8] officer in the Burley State Bank. It is testified that these men represented to him that the stock was a good investment at $ 120; that the Utah State National Bank was financially behind the new bank; that it would scrutinize the assets taken into the new bank; that only good assets would be taken; that it would send an officer to operate the bank; that it would be one of the strong banks of the country; and that the investment was a good one and one that the defendant ought to make as one of the leading citizens of the town. After the conference with these men, defendant subscribed for ten shares of the stock at $ 120 per share. He made out a property statement to the Utah State National Bank and executed the note in question. The note and property statement were sent to Salt Lake City and the Utah bank accepted them and sent its cashier's check payable to defendant to Burley for him. He indorsed the cashier's check over to the new bank, and received ten shares of its stock which he assigned in writing to the Utah State National Bank as collateral security to the note, with authority in the Utah bank to vote the stock. The new bank closed in November, and thereupon its stock became [***9] valueless.

It appears in the testimony that at the time the new bank closed $ 150,000 of the assumed obligations were about to fall due, and that little had been realized from the assets assigned to it by the old banks. It also appears that the Utah bank, the plaintiff, had refused to finance the new bank by loaning it this amount. The testimony also shows that the assets taken into the new bank proved bad; the Federal Reserve equity especially so. The citizens' committee and the bank examiner had passed upon the assets which were taken into the new bank. It appears they could not agree unanimously on the asset known as the Federal Reserve equity, which was being offered as an asset by the Burley State Bank at approximately $ 100,000. This matter was referred by the committee and the commissioner of finance to the officers of the Utah State National Bank, and they recommended receiving it upon the officers of the [*605] Burley State Bank executing a bond in the sum of $ 20,000, securing the Commercial State Bank against loss of principal in that amount, and on assignment by the Burley State Bank, or its officers, of all rents from the building which it owned and in which the [***10] new bank was located, as a further guarantee of payment of interest as it became due on the notes included in that equity.

At the trial, the theory of defendant was that there were misrepresentations amounting to fraud in the procurement of the note, and that, even if privity or knowledge of the fraud could not be shown in the Utah State National Bank, nevertheless, it, as a matter of fact, took the note by negotiation, and that when fraud in the inception of the note appeared, plaintiff had the burden of showing to the satisfaction of the jury that it had no notice of the alleged fraud. The verdict of the jury was for defendant.

On appeal, plaintiff claims error under sixteen assignments. By part of these, it is claimed error was committed in receiving in evidence statements of third parties not representing the Utah bank and in no way binding upon it. By other assignments, appellant points out wherein it is claimed the evidence was insufficient to justify the verdict or to support the judgment and claims error in the court's refusal to grant appellant's motion for directed verdict.

We think no fraud or knowledge of fraud was shown on the part of the Utah State National Bank or [***11] any of its officers or agents in the transaction. The acts and the statements relied upon by defendant as a defense were made by others who were not interested in the loan made to defendant, but were interested only in procuring his subscription for stock in the new bank, then in process of organization. If we assume that the statements and representations made by the citizens' committee and others in the organization of the new bank at Burley were [**524] such as to constitute fraud, the question arising in the case is: What relation, if any, that fraud had to the transaction. This requires a determination as to whether or not the real and [*606] virtual consideration for the note in question was the money represented by the cashier's check which the Utah bank parted with for it, or the ten shares of stock in the newly organized bank, and, therefore, whether the relation of the Utah State National Bank to the note in question was that of an indorsee, rather than an immediate party. The theory of the defense is that the plaintiff should be treated as an indorsee accepting paper tainted with fraud.

Under the decision in the case of Redfield v. Wells, 31 Idaho 415, 173 P. 640, [***12] in this jurisdiction, a nominal payee of a negotiable instrument may in fact and in law be shown to be really an indorsee and stand in that relation to the paper. And it is settled by the decisions that where fraud is shown in the payee's procurement of a note which has been negotiated and action is brought by the indorsee, the burden shifts to the indorsee to show to the satisfaction of the jury that he took the instrument without notice of the fraud. A fair example of this line of decisions is found in Wright v. Spencer, 39 Idaho 60, 226 P. 173, wherein the court says:

NEGOTIABLE INSTRUMENTS LAW ||Atty. Nick Nañgit ||CASE ASSIGNMENT nos. 01 – 08 || June 06, 2013 || ALFAFARA, RC K. & AQUINO, JP B.

"From the above sections, and particularly section 5926 as construed in First National Bank v. Hall, supra, we conclude that, when appellant alleged and proved that the title of the corporation which negotiated the instrument to respondent was defective, because of the fraud practiced, the burden was on respondent to prove that he acquired title to the note as a holder in due course. This included the burden of proving that, when it was negotiated to him, he had no notice of the infirmity in the instrument resulting from the fraud practiced by the corporation which transferred it back to him, [***13] lack of such notice being an element of the statutory definition of a holder in due course. Having proved the fraud, the burden was not upon appellant to prove that respondent took with notice of the fraud, but the burden was on respondent to prove that he took without notice.

The authority for these decisions is found in C. S., sec. 5926, which reads:

[*607] "Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired title as a holder in due course. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title."

It will be seen from an examination of C. S., sec. 5926, upon which the doctrine announced is based, that the rule contemplates one who has acquired title from some person other than the maker.

In this case, however, the note was delivered by the maker for the payee, and accepted from the maker by the payee. That is to say, no person between the maker and the payee had any title or interest [***14] in the note. The only title which the plaintiff acquired, or claims to have acquired, was that of the maker. Hence, there was no intermediate title which could be affected by fraud of third parties, thus casting a burden on plaintiff to show that it had no notice of it.

Defendant's case is based mainly upon his persistent claim that the representations and statements of the committee and others inducing the defendant to take stock in the new bank tainted the note with fraud in its inception. We do not think this position tenable, for "by fraud in the inception" is meant, the beginning, in the sense of fraud in the consideration for the note. The consideration for the note in question was not the stock in the Commercial State Bank which was purchased with the proceeds of the note, but the sole consideration was the cashier's check. The Utah bank did not sell defendant

stock of the Commercial State Bank, neither did it buy paper which nominally or in reality belonged to one who had sold him stock. It is our view that the evidence shows without contradiction that the true actual relation between plaintiff and defendant was purely the relation of a lender to a borrower of money; that [***15] the statements and representations claimed to have been [*608] fraudulently made in no manner entered into the consideration for the note, but constitute a separate and distinct matter between defendant and the Commercial State Bank or those making the statements. These statements have nothing to do with the relations between the Utah State National Bank and defendant, Stringer, and were immaterial to this action upon the note. (Farmers Sav. Bank v. Grange, 199 Iowa 978, 203 N.W. 37; Mizell v. Farmers' Bank, 180 Ala. 568, 61 So. 272; Roth v. Donnelly Grocery Co., 8 Ga. App. 851, 70 S.E. 140; Williams v. Garrett, 32 Ga. App. 762, 124 S.E. 811; First State Bank v. Utman, 136 Minn. 103, 161 N.W. 398.)

The note in question was a Utah note, accepted and payable at Salt Lake City, and we must hold that the law of Utah which authorizes a written contract for interest at the rate of twelve per cent per annum governs. (Zimmerman v. Brown, 30 Idaho 640, 166 P. 924.)

The Utah State National Bank being the nominal and true payee of the note for a consideration of $ 1,200 and no fraud chargeable [***16] against it being shown, we recommend that the cause be reversed and remanded to the district court with instructions to enter judgment for plaintiff in the amount of the note with interest, together with an attorney's fee to be fixed by the court, not to exceed the amount claimed in the complaint.

Varian and Brinck, CC., concur.

[**525] The foregoing is approved as the opinion of the court, and the judgment is reversed and remanded to the district court, with instructions to enter judgment for plaintiff in the amount of the note with interest, together with an attorney's fee to be fixed by the court, not to exceed the amount claimed in the complaint. Wm. E. Lee, C. J., and Budge, Givens and Taylor, JJ., concur.

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(05) PUGET SOUND STATE BANK v. WASHINGTON PAVING CO. et al.

No. 13607

Supreme Court of Washington

94 Wash. 504; 162 P. 870; 1917 Wash. LEXIS 726

February 2, 1917

PRIOR HISTORY: Appeal from a judgment of the superior court for Pierce county, Clifford, J., entered February 9, 1916, upon findings in favor of the defendants, in an action on promissory notes, tried to the court. DISPOSITION: Affirmed.

CASE SUMMARY

PROCEDURAL POSTURE: Plaintiff bank appealed a judgment that was in favor of defendant and entered by the Superior Court (Washington) in action brought by plaintiff to recover on promissory notes executed by defendant without an indorsement and negotiated to plaintiff.

OVERVIEW: Defendant paving company issued to depositor bank certain notes with the agreement of the bank that the notes would not be due on demand and not negotiated. Defendant was given a credit as a general depositor of depositor bank for the same sum, less a discount charged by that bank. Depositor bank subsequently transferred these notes to plaintiff bank without indorsement. When defendant learned of the transfer, it redeemed two of the notes remaining with depositor bank, which resulted in that deposit credit being reduced to an amount which was more than sufficient to satisfy the claim of plaintiff bank, if allowed as a set-off. At trial of plaintiff's action seeking to recovery on the notes in its possession, the court held that defendant was entitled to set-off, against the amount due thereon to plaintiff, a greater amount than was owing to it from the

depositor bank. On appeal, the court affirmed the judgment holding that the notes were not negotiable and plaintiff was not a holder in due course; therefore, the notes were subject to any defense that defendant had that existed at the time of the transfer to plaintiff.

OUTCOME: The judgment for defendant was affirmed on the ground that the notes were not negotiable and plaintiff was not a holder in due course; therefore, the notes were subject to any defense that defendant had which existed at the time of their transfer to plaintiff.

CORE TERMS: paving, deposit, payee, maturity, cause of action, negotiable, holder, nonnegotiable, indorsement, set-off, matured, insecure, transferred, delivery, contingency, deem, negotiability, declare, insolvency, speaking, commencement, overdraft, offset, notice, time of payment, happening, mature, telephone, banking, power to declare

LexisNexis® Headnotes

Contracts Law > Negotiable Instruments > General Overview

HN1

See Wash. Code § 3392.

Contracts Law > Negotiable Instruments > General Overview

HN2

See Wash. Code § 3395.

Contracts Law > Negotiable Instruments > Enforcement > Defenses > General Overview Contracts Law > Negotiable Instruments > Types > Promissory Notes

HN3

The making of the notes payable at a certain time, with the reserved power to the payee to declare them due before the stated time of maturity if he deems himself insecure, does not make them demand notes within the meaning of Wash. Code §§ 3392 and 3444. A court is constrained to hold that these notes are not negotiable, and are therefore subject to any defense the defendant may have against them, which existed at the time of their transfer.

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Contracts Law > Negotiable Instruments > Enforcement > Duties & Liabilities of Parties > Types of Parties > Assignees & Assignors

HN4

See Wash. Code § 3440.

Banking Law > Bankers Liens & Rights of Setoff > General Overview

HN5

See Wash. Code § 266.

HEADNOTES

WASHINGTON OFFICIAL REPORTS HEADNOTES

Set-Off and Counterclaim -- Bills and Notes -- Bank Deposits. Both at common law and under Rem. Code, §§ 264-266, in a bank's action upon notes given for a deposit credit, the depositor is entitled to offset the amount of the deposit and thus satisfy the debt, if it did not exceed the deposit credit.

Bills and Notes -- Negotiability -- Maturity -- Option -- Statutes -- Construction. A note containing a provision that it shall become due and payable on demand at the option of the payee when it deems itself insecure, is not negotiable, under Rem. Code, § 3392, providing that an instrument to be negotiable must be payable on demand or at a fixed or determinable future time, which, by Id., § 3395, means at a fixed period after the occurrence of a specified event which is certain to happen though the time of happening be uncertain; that section further providing that an instrument payable upon a contingency is not negotiable.

Same -- Negotiability -- Demand Notes. Such a note with a reserved power in the payee to declare it due before the stated time of maturity is not negotiable as a demand note under Rem. Code, §§ 3392 and 3444.

Same -- Holder in Due Course -- Delivery Without Indorsement. The transferee of a note by delivery without indorsement is not a holder in due course, in view of Rem. Code, § 3440, providing that, by such delivery, he acquires the right to an indorsement, but for the purpose of determining whether he is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.

Set-Off and Counterclaim -- Notes -- Bank Deposit -- "Demand" -- Statutes. A company's deposit credit in a bank, given in consideration of notes to the bank, is such an existing "demand" or cause of action as can be set off against the amount due upon the notes, after transfer to one who is not a holder of the notes in due course, although no demand has been made on the bank at the time of the transfer of the notes; in view of Rem. Code, § 266, providing that a defendant in a civil action upon contract may set off a "demand" of like nature against the plaintiff which existed and belonged to him at the time of the commencement of the action, and also against an assigned note, negotiated in good faith, provided such demand existed at the time of the assignment and belonged to the defendant in good faith before notice of the assignment, and might have been offset against the person originally liable.

Same. Such a deposit credit at least becomes a matured demand upon the insolvency of the bank. COUNSEL: [***1] Hudson, Holt & Harmon and Walter M. Harvey, all of Tacoma, for appellant. Hayden, Langhorne & Metzger, of Tacoma, for respondents. JUDGES: MORRIS, HOLCOMB, MOUNT, and FULLERTON, JJ., concur. OPINION BY: PARKER OPINION

[**871] [*505] PARKER, J.

The Puget Sound State Bank seeks recovery upon two promissory notes executed by the defendant, Washington Paving Company, payable to its own order, thereafter transferred by it to the Olympia Bank & Trust Company by indorsements making them payable to its order and thereafter transferred by that bank by delivery only, without indorsement, to the plaintiff. George Milton Savage and D. I. Cornell were made defendants because they indorsed the notes at the time they were transferred by the Washington Paving Company to the Olympia Bank & Trust Company. Trial in the superior court without a jury resulted

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in findings and judgment in favor of the defendants upon the ground that, while the notes evidenced legal obligations of the defendants, they were entitled to set-off against the amount due thereon to the plaintiff a greater amount which was owing to the Washington Paving Company from the Olympia Bank & Trust Company upon a deposit credit [*506] [***2] at the time of the transfer of the notes by that bank to the plaintiff. From this disposition of the case the plaintiff has appealed to this court.

Appellant, Puget Sound State Bank has been at all times here involved a banking corporation of this state engaged in the banking business in the city of Tacoma with H. N. Tinker as its president and manager. We shall hereafter refer to it as the Puget Sound Bank. Respondent, Washington Paving Company, is a corporation of this state engaged in street paving and other contract work, and at the time of the execution of the notes in question had a contract for the paving of certain streets in the city of Olympia. Respondent George Milton Savage was then and is now its president and manager. We shall hereafter refer to it as the paving company. The Olympia Bank & Trust Company was, at the time of the execution and transfer of the notes in question, a banking corporation of this state engaged in the banking business in the city of Olympia with W. D. Hayes as its cashier and manager. We shall hereafter refer to it as the Olympia Bank. It ceased to do business because of its insolvency on September 22, 1914.

About September 2 or 3, 1914, [***3] Mr. Hayes, cashier of the Olympia Bank, knowing that the paving company was about to enter upon the execution of a large paving contract in Olympia, solicited Mr. Savage, its president, to open an account and do its banking business with the Olympia Bank. The conversations, occurring between Mr. Hayes and Mr. Savage at that time and a few days later when the notes were executed, constitute an agreement with reference to which the trial court found as follows:

'At the time of the discount of said notes by the Olympia Bank & Trust Company, it was agreed between said bank and the Washington Paving Company that the same should be held by the Olympia Bank & Trust Company, and not sold, hypothecated, or otherwise disposed of to any other bank or banker without first notifying the Washington Paving Company and giving the Washington PavingCompany an opportunity [*507] to pay said notes, or the one of them proposed to

be sold, hypothecated, or otherwise disposed of.'

This finding, we think, is amply supported by the evidence. Indeed, it seems not to be seriously disputed by Hayes or any other witness. In pursuance of this agreement, on September 5, 1914, at the Olympia Bank, four [***4] notes for $ 5,000 each, payable 90 days after date, with 7 per cent. interest after maturity, were executed by appellant paving company by Savage, its president, the notes being made payable to its own order, and immediately transferred to the Olympia Bank by indorsement, making them payable 'to the order of Olympia Bank & Trust Co.' Thereupon the pavingcompany was given credit as a general depositor of the Olympia Bank for the sum of $ 20,000 less the amount of discount charged by the bank. This was the only deposit ever made by the pavingcompany with the Olympia Bank. We have then as this single transaction, united in all its parts, the execution of the notes; their transfer to and discount by the Olympia Bank; the agreement on the part of that bank not to transfer them; and the deposit credit given to the paving company for the proceeds of the notes less the discount charge. Each of these notes contains, among other provisions, the following:

'This note shall become due and payable on demand at the option of the payee, when it deems itself insecure.'

Up to and including September 22, 1914, the paving company had drawn checks upon its deposit credit in the Olympia Bank, reducing [***5] that credit to approximately $ 9,650. One of these checks constituting nearly the whole of such reduction was given to the Olympia Bank for the surrender of two of the notes on that day. This balance has never been further reduced, and is now claimed by the paving company as an offset against, and as greater in amount than, the balance due the Puget Sound Bank upon the notes.

On Saturday, September 19, 1914, the Olympia Bank became indebted by overdraft to its Tacoma correspondent, the Puget Sound Bank, in the sum of approximately $ 3,600. [*508] Thereafter on that day in a telephone communication, Mr. Hayes of the Olympia Bank promised Mr. Tinker of the Puget Sound Bank that this overdraft would be cared for 'either with exchange or in a manner satisfactory to' the Puget Sound Bank. But in no communication between the banks or their officers on that day was reference made to the notes of

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the paving company, [**872] all of which were still held by the Olympia Bank. On Monday, September 21st, at about 8 o'clock in the morning, Mr. Tinker again called Mr. Hayes by telephone, informing him that nothing had yet come to the Puget Sound Bank from the Olympia Bank to take care [***6] of this overdraft. It was then agreed that the Puget Sound Bank would purchase one of the paving company's notes from the Olympia Bank. Mr. Hayes accordingly then sent by mail to the Puget Sound Bank, not only the note agreed to be purchased, but also the three other notes. None of these notes were ever indorsed by the Olympia Bank, so that they were acquired by the Puget Sound Bank by delivery only. About noon on that day the Puget Sound Bank received from the Olympia Bank a telegram, requesting that $ 2,000 in gold be sent to it. The paving company's notes had not yet arrived at the Puget Sound Bank, and Mr. Tinker again called Mr. Hayes by telephone, and so informed him and reminded him that the $ 5,000 note agreed to be purchased would not cover the then existing overdraft and $ 2,000 additional. Mr. Hayes then informed Mr. Tinker that he had sent, not only the note which was agreed to be purchased by the Puget Sound Bank, but also the other three notes of the paving company, requesting that they be retained until the Puget Sound Bank should otherwise be reimbursed. Soon thereafter, early in the afternoon, the four notes were received by the Puget Sound Bank through the [***7] mail. When the notes were received Mr. Tinker called Mr. Savage of the pavingcompany by telephone, when a conversation was had between them concerning which Mr. Savage testified as follows:

[*509] 'I was called to the telephone and the man at the other end said he was Mr. Tinker of the Puget Sound State Bank, and wanted to know if we had executed some notes and deposited with the Olympia Bank & Trust Company; I told him we had, that we had executed four $ 5,000 notes. He said, 'Have you received the money?' I said, 'Not exactly; we have received credit in the bank, and checked out less than $ 200.' That was all the conversation we had in regard to the notes.'

There is some conflict between the testimony of Mr. Savage and Mr. Tinker as to the purport of that conversation; but we feel constrained to believe that Mr. Savage did not then make any statement that would lead Mr. Tinker to believe that the paving company had no defense or offset against the notes as against the Olympia Bank, nor any statement which Mr. Tinker could rightly construe as a consent of the paving company that the Puget Sound Bank might acquire the notes.

Two of the notes were sent back to the Olympia [***8] Bank that afternoon, one being retained as purchased by the Puget Sound Bank and the other retained by it to secure the overdraft which would be caused by sending the $ 2,000. Thereafter, late that afternoon or early the next morning, the Puget Sound Bank shipped to the Olympia Bank $ 2,000 in gold as requested. So that, as claimed by the Puget Sound Bank, there then became owing to it the whole of the note which it claimed to have so purchased, and approximately $ 700 upon the overdraft secured by the other note. About 10 o'clock the next morning, Tuesday the 22d, Mr. Savage went to the Puget Sound Bank and asked Mr. Tinker if it then had the notes, when he was informed that it had two of them, having returned the other two to the Olympia Bank. Mr. Savage then protested to Mr. Tinker against thePuget Sound Bank thus acquiring the notes, informing him that payment of them would be resisted as if they were held by the Olympia Bank. He then went to Olympia, where he had a somewhat strenuous session with Mr. Hayes relative to the Olympia Bank transferring the notes to the Puget Sound Bank, the details of which are not material here, and at that [*510] time took up the two notes [***9] which had been returned to the Olympia Bank, by giving the paving company's check against its deposit credit in that bank, which resulted in that deposit credit being reduced to approximately $ 9,650, which it will be seen is more than sufficient to satisfy the claim of the Puget Sound Bank, if allowed as a set-off. There is considerable testimony in the record relative to the insolvency of the Olympia Bank and as to when it actually became insolvent. This testimony came into the record in an effort on the part of counsel for respondent to show that the Olympia Bank was insolvent at the time it transferred the notes to the Puget Sound Bank, and to bring home to the Puget Sound Bank knowledge of such insolvency at that time. There is much in this evidence that suggests actual insolvency at that time and the Puget Sound Bank's knowledge thereof, or at least knowledge of such facts as to put it upon inquiry touching such insolvency. It is sufficient, however, for our present purpose to know that the Olympia Bank was insolvent upon the closing of business on September 22d, and that it closed its doors and went into the hands of the state bankexaminer on the morning of September 23d [***10] without opening for business on that day. The two notes in question matured December 5, 1914, and thereafter appellant Puget Sound Bank commenced this action for recovery thereon.

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It hardly needs argument or citation of authorities to demonstrate that if the Olympia Bank instead of the Puget Sound Bank was still the holder of and seeking recovery upon these notes, respondentpaving company could offset against the debt evidenced thereby the amount due to it upon its deposit credit in the Olympia Bank, and thus satisfy such debt if it did not exceed the amount of such deposit credit. Our statute relating to counterclaim and set-off and the most elementary principles of law at once renders [**873] this apparent, since the paving company's debt evidenced by the balance due upon the notes and the Olympia Bank's debt evidenced by the deposit credit would be mutual as between [*511] the Olympia Bank and the paving company. Our problem then is, Is thePuget Sound Bank wholly in the shoes of the Olympia Bank? If this question be answered in the affirmative, manifestly the Puget Sound Bank cannot recover in this action because the amount due it upon these notes is less than the [***11] amount of the deposit credit of the paving company in the Olympia Bank. Rem. Code, §§ 264, 265, 266.

Are the notes negotiable in the sense that their transfer to the Puget Sound Bank destroyed the defense of set-off invoked by the paving company? We have seen that each of the notes contains this provision:

'This note shall become due and payable on demand at the option of the payee when it deems itself insecure.'

In our Negotiable Instruments Act we read:

HN1 'An instrument to be negotiable must conform to the following requirements: * * * 3. Must be payable on demand, or at a fixed or determinable future time.' Rem. Code, § 3392.

'An instrument is payable at a determinable future time, within the meaning of this act, which is expressed to be payable. * * * 3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncertain. * * *

HN2 'An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.' Rem. Code, § 3395.

These provisions, we think, answer this question according to the contention of counsel for respondent. We think the word 'contingency' [***12] as here used refers to contingency as to time, though it may also refer to other contingencies. Let us, however, look to the law as found in the decisions of the courts, of which, after all, these statutory provisions are only declaratory. We note here that the above-quoted provision in these notes gives the Olympia Bank, the payee, the unrestricted power to declare the notes due at any time before maturity, and that the right to exercise such power, possessed by the payee is not dependent upon nor does it grow out of [*512] any act, promise, or agreement of the paving company, the maker of the notes. In other words, it is a contingency over which the maker of the notes has no control.

In Brooks v. Hargreaves, 21 Mich. 254, there was under consideration the question of the negotiability of a note which, while providing for payment one year after date, contained also the following:

'To be paid when any dividends shall be declared on such shares as Joseph Smith has been holding heretofore in the Agricultural & Broom Handle Manufacturing Company.'

Chief Justice Campbell, speaking for the court, while recognizing that the note would, in any event, become payable at the end of [***13] the year, held that the contingency specified in the above-quoted portion of the note was so uncertain as to time of payment as to render the note nonnegotiable, and observed:

'As the note on either hypothesis might have become payable at a time which could not be made certain by any attainable means, it cannot be regarded as a promissory note. That must be payable at a time which must certainly arrive in the future, upon the happening of some event or the completion of some period not depending on the future volition of any one. The maturity of this instrument was liable to be hastened or postponed by the action of the corporation.'

In First Nat. Bank v. Bynum, 84 N. C. 24, 37 Am. Rep. 604, the court had under consideration a note containing this provision:

'The express condition of the sale and purchase of the engine separator

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for which this note is given is such that the title, ownership, or possession does not pass from the said Taylor Manufacturing Company of Westminster, and said company have full power to declare this note due and take possession of said engine separator at any time they may deem this note insecure, even before the maturity of the same.'

Justice Ashe, [***14] speaking for the court and holding that this was a nonnegotiable note, said:

[*513] 'But there is another serious objection to the claim set up for the negotiability of this instrument. It stipulates that the payees shall have full power to declare the note due at any time they may deem the note insecure, even before the maturity of the same. This divests it of the quality of certainty in the time of payment, which, as has been shown, is one of the essential elements of negotiability. The time of payment may be hastened at the option of the payees, and is therefore uncertain. And it has been held in Michigan that it is essential to a promissory note that it be payable at a time that must certainly arrive in the future, upon the happening of some event, or the completion of some period, not depending upon the volition of any one. Brooks v. Hargreaves, 21 Mich. 254.'

In Carroll County Sav. Bank v. Strother, 28 S. C. 504, 518, 6 S. E. 313, 318, there was under consideration a similar note given as the purchase price of an engine and sawmill the title of which was to remain in the seller until payment of the note. The note contained a provision that the payee has 'full power [***15] of declaring this note due and take possession of said engine and sawmill at any time they may deem this note insecure, even before the maturity of the same.' Holding that this right of the payee to declare the note due at any time rendered it nonnegotiable, Justice McIver, speaking for the court, said:

'As to the other stipulation whereby the payee is invested with authority to declare the socalled note due whenever it is deemed insecure, it seems to us clear that it is sufficient, not only to deprive the paper of its negotiability, but also of its character as a note; for it renders the time of payment altogether uncertain, and dependent only upon the option of the payee.'

In Reynolds v. Vint, 73 Or. 528, 144 Pac. 526, a similar note was held nonnegotiable, wherein Chief Justice McBride, speaking for the court,

said:

'A note providing, as the note in suit does, that whenever Reynolds or his agents deem the [**874] note insecure they shall [*514] have power to declare it due, even before maturity, is nonnegotiable.'

In Holliday State Bank v. Hoffman, 85 Kan. 71, 116 Pac. 239, 35 L. R. A. (N. S.) 390, Ann. Cas. 1912D, 1, there was involved a note accompanied by collateral [***16] security specified therein, and containing the following:

'If, in the judgment of the holder of this note, said collateral depreciates in value, the undersigned agrees to deliver when demanded additional security to the satisfaction of said holder; otherwise this note shall mature at once.'

While recognizing that the note was nonnegotiable because of the promise to furnish additional security to the satisfaction of the payee, it was also held nonnegotiable because of the right of the holder to cause the note to mature at any time, Justice Porter, speaking for the court, observing:

'The note is nonnegotiable for the further reason that the same provision renders doubtful and uncertain the time at which it shall become due. If the maker shall fail when demanded to furnish additional security to the satisfaction of the holder the note shall mature at once. It is argued that this is no different in principle from the provision that default in the payment of any installment shall accelerate the maturity of the note, and cases are cited in which we have held that a similar provision will not render the note nonnegotiable. See Clark v. Skeen, 61 Kan. 526 [60 Pac. 327, 49 L. R. A. 190, [***17] 78 Am. St. Rep. 337]. The negotiable instruments law itself expressly declares that a negotiable instrument may contain provisions of this kind. Gen. Stat. 1909, §§ 5255, 5257. The distinction between such a stipulation and the one in question lies in the fact that in the one instance the maturity is accelerated by the default of the maker alone and the default is to consist in his failure to pay money. Here the maturity of the note is to be accelerated by the failure of the maker to do something in addition to the payment of money, and both contingencies are made to depend upon something over which he has not the absolute control. It is within the power of the holder, by refusing to assent to what the maker has done, arbitrarily to

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make the note due at any time between the date of its execution and six months thereafter. If the holder is not [*515] satisfied with the additional security the note matures at once, and thus the time at which it may mature would depend upon the time at which the holder declared himself dissatisfied with the security delivered by the maker. The effect of this stipulation is to leave the time when payable uncertain and indefinite.'

In Kimpton [***18] v. Studebaker Bros. Co., 14 Idaho, 552, 94 Pac. 1039, 125 Am. St. Rep. 185, 14 Ann. Cas. 1126, the note involved contained a similar provision, giving the payee the uncontrollable option to declare it due before its stated date of maturity; and, while it contained other provisions which may be considered as rendering it nonnegotiable, it was held that this option of the payee rendered it nonnegotiable.

It is true that the decisions above noticed, other than the Michigan case, relate to notes accompanied by some claim to or lien upon specified property as security, but it seems clear that in all of them the right of the payee of the note to declare the same due before maturity upon him deeming himself insecure was the controlling fact rendering the notes nonnegotiable. In other words, the question of the time of payment of the note in each of those cases was dependent absolutely upon the will and election of the payee of the note; that is, it was 'dependent on the future volition of' one other than the maker of the note, paraphrasing the language of Chief Justice Campbell, above quoted from Brooks v. Hargreaves. Such is the option of the Olympia, Bank as to these notes.

In Bright [***19] v. Offield, 81 Wash. 442, 450, 143 Pac. 159, we recognized this as being the correct doctrine, though the exact point was not there involved.

It might be contended that these notes, by reason of the power of election on the part of the payee as to their maturity, became in effect demand notes, and were therefore negotiable under Rem. Code, § 3392, above quoted, and that, being transferred to appellant Puget Sound Bank within a reasonable time after their execution, they would be freed [*516] from equitable defenses of the maker, as apparently is contemplated as to demand notes by Rem. Code, § 3444.

We think, however, the authorities above noticed answer any such contention, and render it clear that HN3 the making of the notes

payable at a certain time, with the reserved power to the payee to declare them due before the stated time of maturity if he deems himself insecure, does not make them demand notes within the meaning of sections 3392 and 3444. We feel constrained to hold that these notes are not negotiable, and are therefore subject to any defense the paving company may have against them, which existed at the time of their transfer to the Puget Sound Bank.

Aside from the [***20] question of the negotiability of the notes in form, did not their transfer to the Puget Sound Bank by the Olympia Bank, without indorsement and by delivery only, render them subject to defenses the paving company might have against them in the hands of the Olympia Bank? This question seems to be answered in the affirmative by Rem. Code, § 3440, as follows:

HN4 'Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferror had therein, and the transferee acquires, in addition, the right to have the indorsement of the transferror. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.'

This is but a statutory declaration of the general rule. 8 C. J. 388; Trust Co. v. National Bank, 101 U. S. 68, 25 L. Ed. 876.

Plainly the Puget Sound Bank never acquired the notes 'in due course' so far as the rights of the paving company are concerned, nor is the Puget Sound Bank aided in this particular by the fact that the notes were transferred to the Olympia Bank by indorsement of [***21] the paving company instead of by being made payable directly to the Olympia Bank, since that indorsement made then [**875] payable 'to the order of the Olympia [*517] Bank & Trust Company,' and they are upon their face made payable 'to the order of Washington Paving Company.' So they never became payable to bearer so as to be capable of passing their title by delivery only and freeing them from equitable defenses in the hands of the Puget Sound Bank.

Was respondent paying company's deposit credit in the Olympia Bank such an existing demand or cause of action at the time of the transfer of

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the notes by the Olympia Bank to the Puget SoundBank as can be set off against the amount due upon them in the hands of the Puget Sound Bank? That such deposit credit was then an existing demand in favor of the paying company against the Olympia Bank in the sense that it was then at least an existing unmatured debt of the Olympia Bank to the paving company is plain. Counsel for the Puget Sound Bank insist that since at that time no demand had been made by the paving company of the Olympia Bank for the payment of such debt, it was not then a matured cause of action, and for that reason [***22] incapable of being set off against the amount due upon the notes in the hands of the Puget Sound Bank. In other words, that whatever the right of set-off might be in favor of the paving company as against the Olympia Bank, no set-off can be invoked as against the Puget Sound Bank except such as constituted a perfect and matured cause of action in favor of the paving company and against the Olympia Bank at the time of the transfer of the notes to the Puget Sound Bank, even though the notes are not negotiable and were transferred without indorsement and by delivery only. Counsel invoke the general rule that a general deposit credit does not become a matured cause of action in favor of the depositor until demand therefor by the depositor, from which it is argued that for want of such demand by the paving company before the transfer of the notes to the Puget Sound Bank the paving company had no cause of action against the Olympia Bank, which was then or thereafter available as an off-set as against the Puget [*518] Sound Bank.

This contention we think is answered adversely to appellant by Rem. Code, § 266, reading as follows:

HN5 'The defendant in a civil action upon a contract expressed [***23] or implied, may set off any demand of a like nature against the plaintiff in interest, which existed and belonged to him at the time of the commencement of the suit. And in all such actions, other than upon a negotiable promissory note or bill of exchange, negotiated in good faith and without notice before due, which has been assigned to the plaintiff, he may also set off a demand of a like nature existing against the person to whom he was originally liable, or any assignee prior to the plaintiff, of such contract,provided such demand existed at the time of the assignment thereof, and belonging to the defendant in good faith, before notice of such assignment, and was such a demand as might have been set off against such person to whom he was originally

liable. * * *'

We have italicized the words of this section particularly to be noticed, and specially to call attention to the fact that the word 'demand' and not 'cause of action' is used as descriptive of the claim which may be available to a defendant as a set-off. It seems plain to us that the deposit credit was a 'demand' within the meaning of this section, existing and belonging to the paving company at the time [***24] of the transfer of the notes to the Puget Sound Bank, though possibly it was not then a matured cause of action for want of demand for its payment. Of course it existed before the paving company had notice of the transfer of the notes to the Puget Sound Bank because it existed before that transfer. It is equally plain that it is a demand which could have been set off against the Olympia Bank had it been seeking recovery upon the notes, as we think the mere demanding of it to be so set off would have made it a matured cause of action as against the Olympia Bank, though a mere claim of set-off in this case would not, of itself, make it a matured cause of action as against the rights of the Puget Sound Bank. It might well be argued that when the Olympia [*519] Bank breached its agreement with the paving company by the transfer of the notes to the Puget Sound Bank, that fact in any event matured the paving company's deposit credit in that bank as a cause of action without demand so as to render such deposit credit immediately available to the paving company as an offset to the notes, as against any holder thereof, they being nonnegotiable and transferred by delivery only. But, [***25] however that may be, that deposit credit in any event became a matured demand and cause of action upon the insolvency and closing of the doors of the Olympia Bank, which occurred long before the commencement of this action. 3 R. C. L. 568; 7 C. J. 664.

It seems plain to us, therefore, that since the paving company's deposit credit in the Olympia Bank was a 'demand' within the meaning of section 266, above quoted, existing in favor of the pavingcompany at the time of the transfer of the notes to the Puget Sound Bank and at least became a matured cause of action before the commencement of this action, and it being a demand greater than the total amount due upon the note purchased by the Puget Sound Bank and the amount secured to it by the transfer of the second note, such demand became available to the pavingcompany as a complete defense by way of set-off against the claims of the Puget Sound Bank upon the notes.

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The California court in St. Louis Nat. Bank v. Gay, 101 Cal. 286, 35 Pac. 876, has held in harmony with the conclusion we here reach, under a statute which refers to the claim which may be set up in defense as a 'cause of action.' At page 290 of 101 Cal., at page 877 of [***26] 35 Pac., Justice McFarland, speaking for the court, said:

[**876] 'By section 438 of the Code of Civil Procedure in an action on contract the defendant may set up any cause of action arising upon contract, and 'existing at the commencement of the action.' If Dare had kept his note and sued on it in August, 1892, respondent could unquestionably have set off the Collins note; and it seems a clear proposition of law, under the sections of our Code above stated, that in an [*520] action by the assignee of a chose in action not negotiable, the defendant may successfully plead any set-off which he could have so pleaded against the assignor if he had retained and brought suit on it, provided he acquired it before notice of assignment, and provided, further, that it was, 'existing at the commencement of the action.' It is contended that at the time of the notice of assignment the Collins note was not an 'existing' set-off because it was not then quite due, and therefore not presently suable. But the thing itself -- the note, the chose in action -- was then existing; and it was pleadable by counterclaim when this action was commenced.'

We conclude that the judgment must be [***27] affirmed. It is so ordered.

(06) REHABILITATION FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS and REALTY INVESTMENTS, INC., respondents. G.R. No. L-7185 August 31, 1955

Sixto de la Costa and Jose M. Garcia for petitioner. Juan T. Chuidian for respondents.

REYES, A., J.:

On June 17, 1948, Delfin Dominguez signed a contract with Realty Investments, Inc., to purchase a registered lot belonging to the latter, making a down payment of P39.98 and promising to pay the balance of the stipulated price in 119 monthly installments. Some three months thereafter, to finance the

improvement of a house Dominguez had built on the lot of Rehabilitation Finance Corporation—hereafter called the RFC—agreed to loan him P10,000 on the security of a mortgage upon said house and lot, and, at his instance, wrote Realty Investments a letter, dated September 17, 1948, requesting that the necessary documents for the transfer of title of the vendee be executed so that the same could be registered together with mortgage, this with the assurance that as soon as title to the lot had been issued in the name of Dominguez and the mortgage in favor of the RFC registered as first lien on the lot and the building thereon, the RFC would pay Realty Investments "the balance of the purchase price of the lot in the amount of P3,086.98." Complying with RFC's request and relying on its assurance of payment, Realty Investments, on the 20th of that same month, deeded over the lot to Dominguez "free of all liens and incumbrances" and thereafter the mortgage deed, which Dominguez had executed in favor of RFC three days before, was recorded in the Registry of Deeds for the City of Manila as first lien on the lot and the building thereon.

It would appear that once the mortgage was registered, the RFC let Dominguez have P6,500 out of the proceeds of his loan, but that the remainder of the loan was never released because Dominguez defaulted in the payment of the amortizations due on the amount he had already received, and as a consequence the RFC foreclosed the mortgage, bought the mortgaged property in the foreclosure sale, and obtained title thereto upon failure of the mortgagor to exercise his right of redemption.

Required to make good its promise to pay Realty Investments the balance of the purchase price of the lot, the RFC refused, and so Realty Investments commenced the present action in the Court of First Instance of Manila for the recovery of the said balance from either Delfin Dominguez or the RFC.

The trial court allowed recovery from Dominguez, but absolved the RFC from the complaint. But on appeal, the Court of Appeals reversed that verdict, declared the judgment against Dominguez void for having been rendered after his exclusion from the case, and sentenced the RFC to pay plaintiff the amount claimed together with interests and costs. From this judgment the RFC has appealed to this Court.

We find no merit in the appeal. While the amount sought to be recovered by plaintiff was originally owing from Dominguez, being the balance of the purchase price of the lot he had agreed to buy, the obligation of paying it to plaintiff has already been assumed by the RFC with no other condition than that

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title to the lot be first conveyed to Dominguez and RFC's mortgage lien thereon registered, and that condition has already been fulfilled.

It is, however, contended for the RFC that its obligation to pay "has been modified, if not extinguished" by plaintiff's letter of September 20, 1948, which reads as follows:

September 20, 1948

The R. F. C. Manila

SIRS:

In connection with your guarantee to pay us the balance of P3,086.98 of the account of Mr. Delfin Dominguez for the purchase of lot No. 15, block 7 of our Riverside Subdivision, which lot has been conveyed to him on the strength of your guaranty to us the said balance, we want to inform you that, at the request of Mr. Dominguez, we are agreeable to have that amount paid us at the second release of proceeds of his loan, which he informs us will be on or about October 15, 1948.

Yours truly,

REALTY INVESTMENTS, INC. C. M. HONSKINS & CO., INC. Managing Agents

By: (Sgd.) A. B. Aquino President

Passing upon the above contention, the Court of Appeals says: "As narrated in the statement of the case, both Dominguez and the appellee kept appellant ignorant on the terms and conditions of their agreement concerning the loan of P10,000 and of the manner that sum was to be released, and in such circumstances plaintiff's letter of September 20, 1948, cannot be construed in the manner contended by appellee and sustained by the court, for plaintiff merely said in substance and effect that it was agreeable to have the balance of P3,086.98 of the account of Delfin Dominguez paid to it 'at the second release

of proceeds of his loan, which he (Dominguez) informs us will be on or about October 15, 1948.' Defendant-appellee should know that it would be absurd for the plaintiff to waive appellee's guaranty contained in its letter of September 17, 1948, wherein Governor E. Ealdama bound the Rehabilitation Finance Corporation to pay the unpaid balance of the purchase price of the lot in question after title thereof was transferred in the name of Dominguez free from any incumbrance. If the Rehabilitation Finance Corporation was not to make any further release of funds on the loan, or if such release was to be subject to future developments, it was the duty of the Rehabilitation Finance Corporation to answer the latter's letter of September 20, 1948, and to inform appellant of the terms and conditions of the loan, but the officers of the appellee failed to do this. For this reason, appellee's contention in this respect is most unfair and cannot be upheld by the courts of justice. It was the Rehabilitation Finance Corporation that induced plaintiff to issue title to the lot free from all encumbrances to Dominguez on its guaranty, and it cannot now without any fault of the plaintiff keep the lot in question and Dominguez' building without paying anything to the plaintiff. Under the circumstance of the case, appellant was not under any obligation of assuming Dominguez' right of redemption of the property foreclosed just to save said lot, payment for which was guaranteed by the Rehabilitation Finance Corporation."

We are in accord with the above pronouncement. Plaintiff was induced to part with his title to a piece of real property upon RFC's assurance that it would itself pay the balance of the purchase price due from the purchaser after its mortgage lien thereon had been registered. Lulled by that assurance, plaintiff thereafter looked to the RFC, instead of the purchase, for payment. It is true that plaintiff later expressed willingness to have the payment made at a later date, when—so it was informed by the buyer—"the second release of proceeds of his loan" would take place. But it is evident that this period of grace was granted by plaintiff in the belief that the information furnished by the buyer was true, and, as found by the Court of Appeals (and this finding is conclusive upon this Court), RFC never made plaintiff know that said information was not correct. In those circumstances, we do not think it fair to construe plaintiff's letter to be anything more than a mere assent to a deferment of payment, and such assent should not be taken as willingness on its part to have the payment made only if and when there was to be second release of proceeds of the loan. It would be unreasonable to suppose that the creditor, already assured of payment by the RFC itself, would want to create uncertainty by making such payment dependent upon a contingency.

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In view of the foregoing, the decision appealed from is affirmed, with costs against the RFC.

Bengzon, Acting, C. J. Padilla, Montemayor, Jugo, Labrador, Concepcion and Reyes, J. B. L., JJ., concur.

(07) JOSE Ma. ANSALDO, petitioner, vs. COURT OF APPEALS, and PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.

G.R. No. 47696 August 29, 1989

Bito, Misa & Lozada for petitioner.

San Juan, Africa, Gonzalez & San Agustin for PCI Bank.

NARVASA, J.:

A corporation known as Transoceanic Factors Corporation (hereafter TFC) executed six (6) promissory notes in favor of Philippine Commercial & Industrial Bank (hereafter, PCIB). The notes were signed for the firm by its president, A.S. Moreno, over a span of some three (3) months, and were made out in various amounts. One was for P50,000.00; two (2) were for P15,000.00 each; two (2), for P 20,000.00 each; and the sixth, for P 30,000.00, or an aggregate of P 150,000.00, exclusive of interest. The interest was fixed at the rate of 10 % per annum for all the notes except the first, as to which the interest rate was set at 11 % per annum. The notes all had the same maturity date. 1

At about the same time and in separate transactions, TFC in its turn extended two (2) loans at interest of 14 % per annum: one to Jose Ma. Ansaldo, in the sum of P 28,967.39, another, to Teofilo Reyes, Jr., in the amount of P 26,000.00. Each obligation was evidenced by a negotiable promissory note 2 in which, among other things, each promissor (1) waived "demand, presentment, protest and notice of protest and non-payment" (of the note) and (2) undertook, in case of default-

(a) . . . to pay the holder an additional sum of ten (10%) per centum of the balance due on . . (the) note, as liquidated

damages; . . . (i)n case extra-judicial collection is indorsed to an attorney, . . . an additional sum equal to five (5 %) per centum of the amount due, or twenty-five (25 %) per centum of the amount due in case of suit, and an additional sum in case of appeal, as attorney's fees in addition to the legal costs provided in the Rules of Court;" and

(b) to waive "[i]n case of judicial execution . . . all rights under the provisions of Rule 39, Section 12 of the Rules of Court."

TFC paid to PCIB on account of its obligation to the latter in the total amount of P 150,000.00, as above stated only P 78,504.43, leaving a balance of P 71,495.57, exclusive of interest. 3

TFC also endorsed to PCIB "for value," the promissory notes of Ansaldo and Reyes . 4

Alleging that despite the obligations having matured, and notwithstanding repeated demands for payment thereof, TFC as well as Ansaldo and Reyes had failed to pay, PCIB subsequently filed suit in the Court of First Instance of Manila to enforce said prestations in accordance with the terms of the corresponding, written agreements. 5 The suit ultimately resulted in a judgment in PCIB's favor, 6 ordering:

1) TFC "to pay the plaintiff (PCIB) the sum of P 71,495.57, with interest at the rate of 10 % per annum from June 1, 1966 until full payment, plus the further sum of 10 % of the amount due for and as attorney's fees;"

2) Ansaldo "to pay the plaintiff the sum of P 28,967.39 under the promissory note Exhibit G, with interest at the rate of 14 % per annum, from December 29, 1964 until full payment minus the sum of P 3,011.42 previously paid by him to defendant (TFC) Transoceanic;" and

3) Reyes "to pay the plaintiff the sum of P 26,000.00 under the promissory note Exhibit H, with interest at the rate of 12 % per annum from August 2, 1965 until full payment."

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The Court declared, among other things, that:

1) in an assignment of credit, the consent of the debtor is not necessary to make him liable to the assignee (adverting to Articles 1625, 1626 and 1627 of the Civil Code), what the law requires being notice to the debtor and not consent of the latter;

2) the promissory note, being payable to order, may be negotiated by mere indorsement (Sec. 184, Negotiable Instruments Law);

3) the evidence sufficiently established that Ansaldo had received notice of the assignment of his promissory note; and

4) the requirement that the assignment be evidenced by a public instrument in Article 1625 of the Civil Code "is only necessary to produce effects against third persons, and Reyes . . . (like Ansaldo) is not a third person, he being the debtor of the credit which was assigned to the plaintiff.

Ansaldo and Reyes appealed to the Court of Appeals. 7 That Court rendered judgment in due course, affirming that of the Trial Court. The affirming judgment has since been appealed to this Court, but only by Ansaldo.

In its Decision, the First Division of the Appellate Tribunal, speaking through the Presiding Justice at the time, Hon. Magno S. Gatmaitan 8 held as regards Ansaldo's contentions, that---

1) it was TFC's right "to assign, in other words, sell" its credits against Ansaldo and Reyes, to a third person;

2) there was no need that the assignment be in a public document this being required only "to produce . . . effect as against third persons" (Article 1625, Civil Code), i.e., "to adversely affect 3rd persons," i.e., "a 3rd person with a right against original creditor, for example, an original creditor of creditor against whom surely such an assignment by his debtor (creditor in the credit assigned) would be prejudicial, because

he, creditor of assigning creditor, would thus be deprived of an attachable asset of his debtor . . . ;"

3) neither Ansaldo nor Reyes could complain against the assignment, "for whether assigned or not, their obligations were not changed nor enlarged; of course if they before notice of assignment, had paid unto Transoceanic, they should not be prejudiced either, such payments made previous to notice under the law, and in justice, should unto them be credited; as indeed, trial Judge credited Ansaldo with his payments made of P 3,011.42 previous to notice unto him. . . ;"

4) that it was the assignee (PCIB), instead of the creditor-assignor (TFC), which notified Ansaldo of the assignment is of no moment "irrespective of who notified him, . . . what is important is that he be notified; . . . it is assignee who is most interested to notify, not creditor-assignor who probably would have lost all interest after he has assigned; if it be argued that if it is assignee who notifies, that might be questionable, debtor might have his doubts, it is easy for him; to inquire from his creditor . . . ;"

5) that the assignment of Ansaldo's credit was made "after it had become long overdue," is also inconsequential, since this would not "mean that Ansaldo's obligation had thereby disappeared . . . , for the Negotiable Instruments Law itself says that presentment for payment is not necessary in order to charge the person primarily liable . . . ; indeed, it is most difficult to understand that just because demand was not made with presentation of evidence of the obligation within a reasonable time, the promissory note can already be said to have become a dead obligation . . . (and) original drawer, primarily liable, should wait until lapse of prescriptive period for him to claim that . . . ;" and

(6) the claim that the assignment had not been made by an authorized official of TFC was untenable not only because "for the first time raised on appeal but also . . . (because) absent any disauthorization from Transoceanic's board of directors, the act of its President of endorsing unto plaintiff

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Bank is not easy to see as outside of the ordinary prerogative of an official in his position, more than this, perhaps also that should be an intramural matter . . . between Board and President Moreno of Transoceanic, but when President endorsed to plaintiff Bank, and Bank by that got possession of the promissory note, it already became duty of debtor to pay unto Bank,--- it would on the contrary have been rashness if after notice of that, debtor should still pay unto Transoceanic, banking on alleged lack of authority of President of Transoceanic to sign the assignment . . . . "

Except for the question of the claimed lack of authority on the part of TFC's president to execute the assignment of credit in favor of PCIB --- improperly raised for the first time on appeal, as observed by the Court of Appeals---the issues raised by Ansaldo were set up by him in, and after analysis and assessment rejected by, both the Trial Court and the Appellate Tribunal. This court sees no error whatever in the appreciation of the facts by either Court or their application of the relevant law and jurisprudence to those facts, inclusive of the question posed anew by Ansaldo relative to the alleged absence of authority on the part of TFC's president to assign the corporation's credit to PCIB.

The only other issue set up by Ansaldo in this Court is what he alleges to be the failure of PCIB to exhibit to him his promissory note, invoking Section 74 of the Negotiable Instruments Law to the effect that "(t)he instrument must be exhibited to the person from whom payment is demanded, and when it is paid must be delivered up to the party paying it." It suffices to dispose of this issue by pointing out that it was never raised in either the Court of Appeals or the Trial Court, and cannot be raised for the first time in this Court. In any case, it is on its face a petty issue, for (1) if, according to him, such an exhibition was needful to give him an opportunity to determine the genuineness of the instrument, 9 this was rendered unnecessary not only by his omission to contest it, but also by his admission of the authenticity of the note implicit from his averment that he had made substantial payments thereon; 10 and (2) he had, moreover expressly waived "demand, presentment, protest and notice of protest and non-payment" of the note.

WHEREFORE, the appealed Decision of the Court of Appeals is hereby AFFIRMED, with costs against the petitioner.

SO ORDERED.

Cruz, Gancayco, Griñ;o-Aquino and Medialdea, JJ., concur.

(08) ALFARO FORTUNADO, EDITH FORTUNADO, NESTOR FORTUNADO and RAMON A. GONZALES, petitioners,

vs. COURT OF APPEALS, BASILISA CAMPANO, as City Sheriff of Iligan City, REGISTER OF DEEDS, Iligan City, ANGEL L. BAUTISTA and NATIONAL STEEL CORPORATION, respondents.

Ramon A. Gonzales and Manuel B. Imbong for petitioners.

Emilio G. Abrogena and R.C. Domingo Jr. & Associates for Angel L. Bautista. Sycip, Salazar, Hernandez & Gatmaitan for National Steel Corp.

1991-04-25 | G.R. No. 78556

D E C I S I ON

CRUZ, J.:

The petitioners assail the decision of the Court of Appeals 1 denying mandamus to compel the sheriff to execute a final deed of sale in their favor.

On April 21, 1981, the Regional Trial Court of Quezon City 2 rendered judgment in Civil Case No. Q-22367, entitled "Alfaro Fortunado vs. Angel Bautista," ordering the defendant to pay damages to the plaintiff. Pursuant to the said judgment, respondent Basilisa Campano, City Sheriff of Iligan City, levied upon two parcels of land registered in the name of Bautista located at Iligan City and covered by TCT Nos. T-7625 and T-14133. The latter lot had already been purchased by respondent National Steel Corporation as of August 17, 1983, but had not yet been registered in its name.

After due notice, these lots were sold at public auction to the petitioners as the only bidder on April 23, 1984. They were issued a certificate of sale which was registered on April 25, 1984.

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On January 10, 1985, NSC gave notice to the sheriff of its intention to redeem the lot covered by TCT No. T-14133. The sheriff suggested that as the two lots had been sold together for the lump sum of P267,013.00, both of them should be redeemed by NSC.

On February 11, 1985, NSC filed with the trial court an urgent motion to redeem both lots. This was opposed by the petitioners on the ground that the movant did not have the personality to intervene.

As the motion remained unresolved and the period of redemption would expire on April 18, 1985, NSC issued to the sheriff on March 20, 1985, PNB

Check No. 313551 in the amount of P296,384.43 as the redemption price for the lot covered by TCT No. T-14133. The sheriff acknowledged receipt of the check on the same date.

On March 21, 1985, Bautista sent the sheriff a letter bearing NSC's conformity in which he availed himself of NSC's check, which was sufficient to cover the full redemption price for both lots, to redeem the other lot covered by TCT No. T-7625. His letter contained the following reservation:

This redemption is made solely for the purpose of effecting the execution and delivery to me of the necessary certificate of redemption and the same shall not be taken to mean my acknowledgment of the validity of the aforesaid writ of execution and sale, both of which I shall continue to contest, nor shall this be taken to mean as a waiver on my part of any of the legal rights and remedies available to me under the circumstances.

The sheriff acknowledged receipt of the check as redemption money for the two parcels of land on March 21, 1985, and on March 22, 1985, issued a certificate of redemption in favor of NSC and Bautista.

On March 25, 1985, Bautista wrote the sheriff that he would no longer effect the redemption because there was nothing to redeem, the auction sale being null and void.

In an Urgent Motion dated March 27, 1985, Bautista prayed that the sum of P296,384.43 covered by the PNB check be delivered to and kept by the Clerk of Court of the Regional Trial Court of Quezon City until such time as all incidents

relative to the validity of the auction sale conducted by the sheriff were finally resolved.

On March 29, 1985, the sheriff wired the petitioners' counsel, notifying him of the deposit of the PNB check. The said counsel told the sheriff that he was rejecting the check because it was not legal tender and was not intended for payment but merely for deposit, as evidenced by Bautista's Urgent Motion of March 27, 1985.

On April 25, 1985, the petitioner requested the sheriff to issue a final deed of sale over the two lots and deliver the same to them on the ground that no valid redemption had been effected within the 12-month period from the registration of the sale. When the request was not granted, the petitioners filed with the respondent court a petition for mandamus.

According to the petitioners, NSC and Bautista failed to comply with the provisions of the Rules of Court in exercising their right of redemption. They invoked Article 1249 of the Civil Code, which provides that "the payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines." They argued that this provision was applicable to redemption under Rule 39, Section 30, of the Rules of Court.

They also contended that the check issued by NSC, not being legal tender, could not be considered payment of the redemption price. Moreover, the tender of the redemption price was not valid as the same was conditional under Bautista's letter to the sheriff dated March 21, 1985. And even granting the validity of the said tender, it was nevertheless withdrawn when on March 27, 1985, Bautista filed his Urgent Motion to deposit the redemption money with the clerk of court.

The petitioners added that since there was no delivery to the creditor of the redemption price, there was no payment within the meaning of Article 1233 of the Civil Code. This provides that "a debt shall not be understood to have been paid, unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be."

On November 10, 1986, the respondent court denied mandamus but granted injunction to restrain the registration of the certificate of redemption in favor of NSC and Bautista.

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The respondent court rejected the petitioner's contention that Article 1249 was applicable in cases of redemption and reiterated the settled jurisprudence that "the right of redemption is not an obligation nor is it intended to discharge a pre-existing debt, 3 the right of redemption being in fact a privilege."

Citing Javellana v. Mirasol, 4 the respondent court said that "the redemption was not rendered invalid by the fact that the officer accepted a check for the amount necessary to make the redemption instead of requiring payment in money." On the failure to deliver the redemption price to the petitioners directly, it said that the payment of the redemption money to the sheriff was legally sanctioned under Rule 39, Section 31, of the Rules of Court which provides that such payment "may be made to the purchaser . . . or . . . to the officer who made the sale."

The respondent court considered NSC"s redemption as absolute and unconditional in view of its refusal to join Bautista in contesting the validity of the sale and in withdrawing the redemption. But Bautista's reservation in his letter of March 21, 1980, and his repudiation of the redemption made by NSC, made his own redemption in officious.

The respondent court observed, however, that the validity of redemption was dependent on the validity of the certificate of sale, which had to be resolved by the trial court.

On November 22, 1986, the petitioners moved for partial reconsideration.

While their motion was pending, NSC filed a Manifestation dated March 18, 1987, informing the respondent court that the certificate of redemption had already been registered and TCT No. T-27154 had been issued in its favor on September 12, 1985.

On May 8, 1987, the respondent court denied the petitioners' motion for reconsideration. Hence, this appeal by certiorari on the grounds that the Court of Appeals erred in holding inter alia that Article 1249 of the New Civil Code does not apply to the payment of the redemption price of property sold at public auction and that the redemption of NSC is unconditional and without reservation.

The central issue in this case is whether or not redemption had been validly effected by the private respondents.

It is contended by the private respondents that Article 1249 of the New Civil Code is inapplicable as it "deals with a mode of extinction of debts" 5 while the "right to redeem is not an obligation, nor is it intended to discharge a pre-existing debt." 6

They rely on Javellana, where we held that "a redemption of property sold under execution is not rendered invalid by reason of the fact that the payment to the sheriff for the purpose of redemption is effected by means of a check for the amount due."

The petitioners, on the other hand, invoke Belisario v. Natividad, 7 where it was held that "even if the check had been good, the defendant was not legally bound to accept it because such a check does not satisfy the requirements of a legal tender." They also cite Villanueva v. Santos, 8 Legarda v. Miailhe, 9 New Pacific Timber and Supply Co., Inc. v. Seneris, 10 and Philippine Air Lines v. Court of Appeals, 11 all of which, they claim, have overruled Javellana.

The Court does not agree with these conclusions. It would appear from a study of the jurisprudence invoked by the parties that the case applicable to the present controversy is Javellana v. Mirasol.

The cases cited by the petitioners do not involve redemption by check. The check tendered in Belisario, was in the exercise of an option to repurchase; in Villanueva in connection with a pacto de retire; in Legarda and New Pacific as payment of a mortgage indebtedness; and in the PAL case in satisfaction of a judgment.

Toleration v. Court of Appeals, 12 besides citing Javellana, stresses the liberality of the courts in redemption cases. On the issue of the applicability of Article 1249 of the Civil Code and the validity of the tender of payment through a crossed check, this Court held:

. . . the aforequoted Article should not be applied in the instant case . . .

To start with, the Tolentinos are not indebted to BPI their mortgage indebtedness having been extinguished with the foreclosure and sale of the mortgaged properties. After said foreclosure and sale, what remains is the right vested by law in favor of the Tolentinos to redeem the properties within the prescribed period. This right of redemption is an absolute privilege, the exercise of which is entirely dependent upon the will and discretion of the

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redemptioners. There is, thus, no legal obligation to exercise the right of redemption. Said right, can in no sense, be considered an obligation, for the Tolentinos are under no compulsion to exercise the same. Should they choose not to exercise it, nobody can compel them to do so nor will such choice give rise to a cause of action in favor of the purchaser at the auction sale. In fact, the relationship between said purchaser and the redemptioners is not even that of creditor and debtor.

On the other hand, if the redemptioners choose to exercise their right of redemption, it is the policy of the law to aid rather than to defeat the right of redemption. It stands to reason therefore, that redemptions should be looked upon with favor and where no injury is to follow, a liberal construction will be given to our redemption laws as well as to the exercise of the right of redemption. In the instant case, the ends of justice would be better served by affording the Tolentinos the opportunity to redeem the properties in question other than the homestead land, in line with the policy aforesaid. . . .

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. . . And the redemption is not rendered invalid by the fact that the said officer accepted a check for the amount necessary to make the redemption instead of requiring payment in money. It goes without saying that if he had seen fit to do so, the officer could have required payment to be made in lawful money, and he undoubtedly, in accepting a check, placed himself in a position where he could be liable to the purchaser at the public auction if any damage had been suffered by the latter as a result of the medium in which payment was made. But this cannot affect the validity of the payment.

The check as a medium of payment in commercial transactions is too firmly established by usage to permit of any doubt upon this point at the present day. No importance may thus be attached to the circumstance that a stop-payment order was issued against check the day following the deposit, for the same will not militate against the right of the Tolentinos to redeem, in the same manner that a withdrawal of the redemption money being, deposited cannot be deemed to have forfeited the right to redeem, such redemption being optional and not compulsory. Withal, it is not clearly shown that said stop-payment order was made in bad faith. . . .

Although the private respondents in the case at bar did not file a redemption case against petitioners, it should not be noted that private respondents

NSC filed an Urgent Motion for Redemption dated February 11, 1985, and Bautista filed an Urgent Motion (To Deposit Redemption Money with Quezon City Clerk of Court) dated March 27, 1985. The motions were well within the redemption period.

In the United States, it has also been held and recognized that a payment by check or draft or bank bills or currency which is not legal tender is effective if the officer accepts such payment. 13 If in good faith the redemptioner pays, and the officer receives before the expiration of the time of redemption, an ordinary banker's check, the payment is regarded as sufficient. 14

We find nothing wrong with Bautista's letter of March 21, 1985, where he made his redemption of the lot covered by TCT No. T-7625 subject to the reservation that "the same shall not be taken to mean my acknowledgment of the validity of the aforesaid writ of execution and sale . . . nor . . . as waiver on my part of any of the legal rights and remedies available to me under the circumstances." Had he not done so, estoppel might have operated against him. As we held in Cometa v. IAC, 15 "redemption is an implied admission of the regularity of the sale and would stop the petitioner from later impugning its validity on that ground." In questioning the writ of execution and sale and at the same time redeeming his property, Bautista was exercising alternative reliefs.

In Javellana, it was contended that the position of Luis Mirasol as a litigant in the prior appeal was inconsistent with his position as litigant in the redemption case and that he was estopped from now claiming as redemptioner the property which he had earlier claimed as owner. The Court held:

We are unable to see any force in the suggestions; as the positions occupied by this litigant are based upon alternative rather than upon opposed pretension. No one can question the right of a litigant to claim property as owner and to seek in the same proceeding alternative relief founded upon some secondary right. The right of redemption, for instance, is always considered compatible with ownership, and one who fails to obtain relief in the sense of absolute owner may successfully assert the other right. That which a litigant may do in any one case can of course be done in two different proceedings.

We reiterated that same view in Ybañez v. CA, 16 thus:

Nor are the causes of action in the two (2) cases inconsistent with one another. As aptly pointed out by the respondent Appellate Court, there are issues in the

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Reconveyance Case that are set apart from the question of the validity of the auction sale, which is the subject of inquiry in the

Annulment Suit. The latter case alleged irregularities in the conduct of the public auction sale. . . .

On the other hand, the issues raised in the Reconveyance Case call for a separate determination of such questions as whether respondent Go had, in fact delivered the redemption money to one of the petitioners; whether or not such delivery, if there had been one, had been made on time, and whether or not another money judgment against respondent Go had already been satisfied. In effect, the Reconveyance Case presented an alternative cause of action.

Although Bautista repudiated his redemption in his letter of March 25, 1985, to the sheriff on the ground that the auction sale was illegal, he backtracked in his Urgent Motion dated March 27, 1985, wherein he prayed that

". . . Sheriff Basilisa Campano of Iligan City be directed and ordered to immediately transfer and deliver, upon his encashment of PNB Check No.

A-313551, the aforesaid sum of P296,384.43 deposited to her by the National Steel Corporation, through the authority of defendant, to the Clerk of

Court, Regional Trial Court of Quezon City, to remain thereat until the validity of the questioned orders and or decision in the above entitled case are resolved with finality or until further orders from the Honorable Court.

It is further prayed that the aforesaid amount be considered as sufficient redemption price if it shall finally be adjudged that plaintiffs are entitled thereto; otherwise, the said amount shall be returned and delivered back to herein defendant.

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Finally, the petitioners pray that we rule on the validity of the certificate of sale assailed by Bautista on the ground that it covers more than one lot and does not indicate the price paid for each parcel. They contend that Bautista has not shown that the parcel of land would have been sold for a better price had they been offered separately and that he had not asked that they be sold by parcels.

They also maintain that since we have the main jurisdiction to determine the validity of the redemption, we likewise have ancillary jurisdiction to rule on the validity of the sale.

The facts surrounding the sale are not before us. In response to a query from this Court regarding the status of CC No. Q22367, the clerk of the trial court replied that the records of that court were totally burned during the fire which razed the Quezon City Hall on June 11, 1988. Apart from the circumstance that we are not a trier of facts, the facts we are asked to try are not at hand.

We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor. What we are saying is that a check may be used for the exercise of the right of redemption, the same being a right and not an obligation. The tender of a check is sufficient to compel redemption but is not in itself a payment that relieves the redemptioner from his liability to pay the redemption price. In other words, while we hold that the private respondents properly exercised their right or redemption, they remain liable of course, for the payment of the redemption price.

WHEREFORE, the appealed decision is AFFIRMED, with the modification that the redemption made by Angel L. Bautista was also unconditional like that of the National Steel Corporation. Accordingly, the petition is DENIED, with costs against the petitioners.

SO ORDERED

Narvasa (Chairman), Gancayco, Griño-Aquino and Medialdea, JJ., concur.