Douglas v. Waddle , 1 Ohio 413 ( 1824 )

*By the Court :

The principle that the indorsee of a negotiable promissory note may sustain an-action against a previous indorser, upon the indorsement alone, without showing other consideration, was originally settled upon sound and correct notions of justice. And, in its application to a proper case, it is a rule which ought not to be disturbed. A promissory note was created as evidence of a real debt due from the maker to the payer. It was received and held as such. If transferred or indorsed by the payee, the indorsement, was a real, separate contract between the indorser and indorsee of the note; the latter received it for a consideration paid, and hence, the indorsement, like the making, was held to be evidence of a debt due from the indorser to the indorsee. The same fact attended every subsequent indorsement, and attached to it the same consequences. As between parties to a note thus made and indorsed, the principle maintained by the plaintiff is well applied. But where the transactions of the parties are, in fact, of a totally different character, neither the reason of the rule, nor the justice of the case, admits its application.

The form of transacting a real business was in time used for the creation of an artificial credit. Notes were made, indorsed, and. thrown into the market for the purpose of raising money for one of the parties only, the others being in fact securities, and receiving nothing whatever upon their indorsements. It is urged that, in England and in some of our sister states, this species of notes is. placed upon exactly the same foundation with real paper, and that no distinction can be safely made between the two classes. So far as it relates to the interest of a bona fide holder, who has advanced his money, this is right and just; and so far the rule rests upon authority. There is no decision adduced by which it is adjudged that this rule is inflexible in its application to the original parties who made and indorsed the note, and between whom nothing was paid. And, if a direct authority did exist in another country, we should feel ourselves bound to examine the subject upon principle before we adopted it here.

In this country the parties to this description of paper usually understood their relation to be that of principal *and security, and upon this understanding they have generally acted, both in creating the paper, and in adjusting their liabilities upon it.. Were it fully admitted that no rule of law could be founded upon general understanding, the admission would have no bearing in this-case, where the inquiry is, whether the form of creating a note, and putting it into market, shall absolutely settle the rights of those concerned, contrary to their own understanding of the matter. When the litigation is between the original parties, we are-of opinion that the form of making and indorsing a note does not preclude an inquiry as to what the parties intended, and what was the real transaction between them. And the propriety of making-this investigation is the more manifest from the well-known fact, that many more notes like this are created artificially in this country than are made and indorsed upon actual dealings between the. parties.

The real principle upon which the plaintiff proceeds, is that he purchased the note from Waddle and paid him a consideration for it. He must be the owner of the note or he has no right to recover in an action founded upon an indorsement on it. It appears-from the evidence, that Waddle, when he indorsed the note, delivered it to Barnes, the drawer, who took it to the plaintiff and' obtained his indorsement. When the note was handed to Douglas it was not for the purpose of vesting in him any property. Suppose he had retained it then and brought this action; would any lawyer contend that parol evidence to explain when the note-was made, and bow Douglas became possessed of it, could not be received? It is assumed that no lawyer would attempt this, and-if Douglas had not then an interest in this note, upon which he-could sustain this action, how, and when did he acquire such an interest? He could not acquire this interest by subsequently paying half the money due upon it; for that payment only entitled him to demand the amount paid from him for whom it was-made; it could invest him with no new interest in the note. It is-therefore clear, that if Douglas can maintain an action upon theindorsement, it must be in consequence of the interest acquired in the note by Barnes’ handing it to him for indorsement; and that he then acquired no interest *upon which he could maintain an action, admits, we think, of no doubt. He knew that Waddle-did not, in fact, own the note, but had indorsed it for the aeeomdation of Barnes, as a security. He knew that he himself indorsed-it for the same purpose, and not as owner; it was intended to pay-.-a debt due from Barnes, who, and not Waddle, was the person to be benefited. Douglas himself never had a beneficial interest in the note; and the money paid by him was paid for Barnes, not for Waddle. He therefore can have no action against Waddle for the .amount.

Oases have occurred without number in which two or more persons have indorsed notes to be discounted in bank, when neither would have indorsed alone, because no one of them was willing to risk the payment of the whole debt; and when the requisite number of indorsers have been obtained, they have paid no attention to the order in which they placed their names on the .paper. Such was the fact in this very case. This could only arise from a distinct understanding among the parties, that the indorsers stood in the relation of sureties to each other.

By the nineteenth section of the act regulating judgments and executions,'we are directed to receive parol proof when one or more iof the defendants signed the note as' securities, and-it is made the duty of the clerk, upon such proof, to certify which of the defendants is principal debtor, and which is security, in order that the.property -of the first may be exhausted before execution can be levied on the latter. We have uniformly understood this law as applying to the indorsers upon accommodation notes, and have so applied it, and this .could be d.one upon no consistent principle but that of con.sidering such indorsers as securities.

The defendant, under this statute, might, when judgment was •rendered against the drawer, the plaintiff and himself, have applied to have the certificate made that he, with the plaintiff, were -.sureties. Upon the proof in this cause the certificate must have been made. It would be absurd -to consider and treat them as securities as be ween them and the creditor; but between them•selves as parties to separate contracts.

*Where the original transaction was in its character and object that of principal and security, the court, as between the original parties, will so consider them, no matter what form may have been giv.en to it; and where there are two or more indorsers upon an accommodation note, all of whom indorsed before the mote became operative by being transferred to some person not a party, for value received, and all of whom are charged by notice •of demand and non-payment, they shall be treated as co-securities, .and contribution shall be made between them as such. In this relation the plaintiff and defen'dant stood to each other. Each has-paid his half upon the principle of being joint securities. The plaintiff can not recover in this action.

With respect to the various difficulties urged by the plaintiff’s counsel as necessarily resulting from this decision, it appears to the court that the opposite counsel have sufficiently answered, them. If, however, the .salutary and just principle upon which this decision is predicated can not be extended to every case without too great innovation upon established doctrines, the only consequence will be, that it must be- limited to cases situate as this. It will be time enough to meet these suggestions when a case-arises in which they are presented for determination.

See Renner v. Bank of Columbia, 9 Wheat. 582.