First Nat. Bank of Gulfport v. Rau , 146 Miss. 520 ( 1927 )

^* Corpus Juris-Cyc. References: Bills and Notes, 8CJ, p. 275, n. 92; p. 278, n. 26, 27, 29. Appellant, First National Bank of Gulfport, brought this action in the circuit court of Harrison county, on a promissory note for one thousand three hundred seventy-five dollars against the Long Beach Canning Company, W. Estopinal, and appellee I.B. Rau. No defense was made by the canning company and Estopinal, and judgment was therefore taken against them for the amount sued for. Appellee Rau denied liability, and defended against appellant's right to recover as against him. There was a jury, verdict, and judgment for appellee. From that judgment appellant prosecutes this appeal.

The questions for decision arise out of undisputed facts. The Long Beach Canning Company borrowed from appellant the sum of one thousand three hundred seventy-five dollars, for the payment of which it executed its promissory note, payable to appellant, or bearer, with appellee as an accommodation indorser. The loan was made upon the indorsement of appellee, which indorsement took place before the delivery of the note to the appellant. Appellee indorsed the note upon its back. Above is signature there was printed a waiver as follows:

"We, the indorsers of this note, do hereby, each and severally, waive protest thereof, and agree that the time of payment may be extended without notice."

There was printed in the face of the note the following:

"I, or either of us, hereby waiving presentment for payment, notice of nonpayment, protest, and failure or want of consideration."

Appellee's defense was based on section 3731, Code of 1906 (section 2907, Hemingway's Code), which is as follows:

"Any person bound as surety or accommodation indorser for another, may, at any time after the debt has become due or liability been incurred, give notice in writing to the creditor to commence and prosecute legal proceedings against the principal debtor, if living and resident within this state, for the recovery of the debt; and if the creditor fail to commence legal proceedings by the next term of the court in which the same shall be instituted, to be held after the expiration of thirty days from the giving of the notice, and to prosecute the same to effect, the surety who shall have given the notice shall be discharged from liability. It shall not be lawful to plead or to give in evidence under this section a notice not in writing, and any act of the creditor shall not be a waiver of notice in writing as herein required."

After the note had been some time overdue, appellee gave the appellant written notice under the above statute to commence and prosecute action upon the note against the principal debtor, Long Beach Canning Company. Upon receipt of the written notice, appellant failed to commence legal proceedings by the next term of the circuit court of Harrison county, held after the expiration of thirty days from the giving of such notice. Appellee contends that the failure of appellant to so institute and prosecute action against Long Beach Canning Company had the effect, under the statute, of discharging appellee from further liability in the note. While appellant contends that the Negotiable Instruments Act (Hemingway's Code, sections 2579 to 2774, inclusive, especially sections 29, 63, 64, 119, and 120, of the act (Hemingway's Code, sections 2607, 2641, 2642, 2697, and 2698), had the effect of repealing section 3731, Code of 1906 (Hemingway's Code, section 2907). Appellant's position is that those sections of the Negotiable Instruments Act contain a complete codification covering the liability of an accommodation indorser, and how such indorsers may be discharged from liability.

Section 29 of the Negotiable Instruments Act, being section 2607, Hemingway's Code, as contended by appellant, fixes the liability of an accommodation indorser. It defines what an accommodation indorser is, and provides that such an indorser shall be liable on the instrument to a holder for value, notwithstanding at the time of taking the instrument such holder knew him to be only an accommodation indorser. In other words, this section makes an accommodation indorser a comaker, as between such indorser and payee, as well as any other holder, and, as contended by appellant, the act, in that respect, is merely declaratory of the common law as expounded by this court in several decisions, among which are Clopton v. Hall,51 Miss. 482; Thompson v. Jennings, 5 Smedes M. 630;Polkinghorne v. Hendricks, 61 Miss. 371; Pearl v.Cortright, 81 Miss. 300, 33 So. 72; Lindsay v. Parrot,108 Miss. 161, 66 So. 412. But the court in none of those cases was dealing with the question of the application of section 3731, Code of 1906 (section 2907, Hemingway's Code).

We will consider, first, the question whether section 3731, Code of 1906 (section 2907, Hemingway's Code), was necessarily repealed by the Negotiable Instruments Act. To sustain its position that there was such a repeal, appellant relies largely on Bank v. Stary, 51 N.D. 399, 200 N.W. 505, 37 A.L.R. 1186. We find, on examination, that case to be directly in point, and that it sustains appellant's contention, but we do not agree with the North Dakota court. We do not think its reasoning is sound. That was an action by the holder of a negotiable note against a known accommodation indorser, and so was the action in the present case. The defendant made defense on the ground that the plaintiff had failed to proceed against the accommodated maker of the note at a time when the latter was solvent, although the accommodation indorser had requested him to do so, and that the accommodated maker had since become insolvent. A statute of North Dakota gave this right to accommodation indorsers, and discharged them to the extent of the prejudice they suffered by failure of the holder to proceed by action. In deciding the question, the majority of the court took the position that the liability of an accommodation indorser was fixed by sections 29, 64, and 120 of the Negotiable Instruments Act, which are corresponding sections to sections 2607, 2642, 2698, Hemingway's Code, and held that an accommodation indorser became absolutely liable, and was not a surety under the laws of North Dakota; that the law merchant, in section 196 of the Negotiable Instruments Act, corresponding to section 2774, Hemingway's Code, did not include the common-law doctrines of suretyship. The court emphasized a clause in the note by the terms of which an accommodation indorser waived demand and notice, and consented to any extension of time of payment or renewal. One judge dissented, contending that ordinary suretyship defenses were not abrogated by the Negotiable Instruments Act. A note on this decision in 38 Harv. L. Rev. 954, criticises adversely the argument used by the majority opinion, excluding suretyship defenses under the Negotiable Instruments Act; the writer of the note taking the position that suretyship principles are part of the law merchant. We think the decisions of the supreme court of Oklahoma and Missouri holding contrary to the supreme court of North Dakota, in the Stary case, are better reasoned cases. Section 1058, Revised Laws of Oklahoma 1910, provided that a surety may require his creditor to proceed against the principal, or to pursue any other remedy in his power which the surety could not himself pursue, and which would lighten the burden of the surety; and, if the creditor neglect so to do, the surety should be exonerated to the extent he was thereby prejudiced. The supreme court of Oklahoma held, in construing that statute, that the statute was not in conflict with the provisions of the Negotiable Instruments Act, but was an enlargement of the grounds for discharge enumerated in sections 119 and 120 of the act, corresponding to sections 2697 and 2698, Hemingway's Code. Bank v. Lowrey, 57 Okla. 304, 157 P. 103. There was a Missouri statute similar to that of Oklahoma, in construing which the supreme court of Missouri held that an accommodation indorser, although primarily liable as between himself and the payee, was a surety in respect to the principal maker, and that his statutory right was not destroyed by the provisions in the instrument that the signers consented to an extension of time without notice. There will be found in Brannon's Negotiable Instruments Laws (Ann. 4th Ed.), pp. 720, 726, 758, and 767, a discussion of this question and kindred questions arising under sections 119 and 120 of the act, corresponding to sections 2697 and 2698, Hemingway's Code. The author says, among other things, the following:

"So far as concerns the questions involved in sections 119, 120, there is no longer any hope of uniformity. Not only have several states made changes in these sections before adopting the act, but in Iowa it has been held that under section 58 [Code Supp. 1907, section 3060a58], providing that ``in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable,' a maker, known to the payee to be a surety, was discharged by an extension given to the principal maker without the consent of the surety; the court considering the provisions of sections 119 and 120 as applicable only to holders in due course. . . .

"The confusion and ambiguities caused by these sections in attempting to deal with some cases of suretyship and omitting others, have been pointed out by Prof. Hening, and also by Prof. Greeley. The confusion is much increased by the absence of any definition in the act of the words ``principal debtor,' which are used both in section 119 and section 120. These words may mean either a party primarily liable or a party who, as between himself and another party or parties to the instrument, ought to pay it. And it is not always clear in which sense they are used in these sections. Prof. Hening argues that sections 120 and 192 should be totally repealed because, unless all defenses of the surety are codified, none should be, and that all cannot be successfully codified owing to the diversity of the suretyship rules under both the decisions and the statutes of the different states. It would seem, however, that it is advisable, in an act dealing with negotiable instruments, to have some provision dealing with the modes of legal discharge of the instrument and of a party or parties, leaving the instrument otherwise still in force."

We are of opinion that section 3731, Code of 1906 (section 2907, Hemingway's Code), lays down a just and wholesome principle governing the rights and obligations between accommodation indorsers and other sureties on the one hand, and creditors on the other; and the statute ought to be preserved unless it conflicts with the provisions of the Negotiable Instruments Act. We do not think it conflicts with that act, but, on the contrary, fits into the act and improves it, instead of marring it.

It is argued, however, by appellant, that, conceding that statute was not repealed by the Negotiable Instruments Act, under the stipulation over appellee's signature on the back of the note, by the provisions of which the appellee waived protest and agreed that the time of payment of the note might be extended without notice to him, in connection with the stipulation on the face of the note waiving presentment for payment, notice of nonpayment, protest, and failure or want of consideration, appellee consented to appellant's indulgence of the Long Beach Canning Company, the principal debtor, and thereby waived the right the above statute gave him to require appellant to pursue the canning company in the courts. The facts were that appellant did not make a contract with the canning company extending the time of payment of the note for any definite period. Appellant simply neglected to bring an action on the note against the canning company. There was no binding contract or agreement between appellant and the canning company with reference to the indulgence or extension of time. No consideration passed from the canning company to the appellant for the delay in suing. In order to constitute a valid binding contract for extending time of payment of a note, such extension of time must be for a definite period, and a valuable consideration therefor is essential. The mere granting to the maker indulgence is not an extension of time of payment. Bank v. Graham, 246 Pa. 256, 92 A. 198; Bank v. Breeden,130 Tenn. 465, 171 S.W. 86, L.R.A. 1915C, 831; Bank v. Farmers'Exchange, 120 Va. 771, 92 S.E. 918; Williams v. Grocery Co.,73 Fla. 937, 75 So. 517; Parker v. Guillot, 118 La. 223, 42 So. 782; Nalitzky v. Williams, 237 F. 802, 151 C.C.A. 44;Bank v. Douglass, 178 Mo. App. 664, 161 S.W. 601. Section 120 of the Negotiable Instruments Act (section 2698, Hemingway's Code), in subsection 6, provides that a person secondarily liable on an instrument may be discharged by agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument, "unless made with the assent of the party secondarily liable, or unless the right of recourse against such party is expressly reserved." Clearly, under the law, there was no binding agreement between appellant and the canning company to postpone time of payment, or to postpone appellant's right to enforce payment, because, as stated, there was only an indulgence by appellant of the canning company for which appellant received no consideration. It is true that appellee assented to the stipulation appearing over his signature on the back of the note, that appellant might extend the time of payment of the note without notice to appellee, but, as shown, that was not done. If it had been done, appellee could not have availed himself of section 3731, Code of 1906 (section 2907, Hemingway's Code), during the period for which the time had been extended. But appellee could have availed himself of the statute, as he did, during the period of mere indulgence of the canning company on the part of the appellant, because such indulgence was based on no binding agreement between the appellant and the canning company that would have prevented appellant from suing, at any time, during such period of indulgence.

Affirmed.