First National Bank v. McCartan , 206 Iowa 1036 ( 1927 )

I. I concur in the reversing result reached in this case by the majority opinion. I do not, however, agree to the ground upon which it is predicated. I am fully persuaded that the finding of the district court to the effect that C.B. McCartan breached his authority in the manner of filling the blank note had no legal support in the evidence. I would reverse on this ground. The conversation between C.B. and J.H. McCartan upon which the breach of authority was predicated was a very brief one, and was had between these two alone, in a short walk from house to barn. Nothing was said in such conversation as to who should be payee of the note, nor how it should be negotiated. Furthermore, nothing was said to indicate that the McCartans were to sign ablank note. C.B. McCartan left J.H. McCartan a blank note, presumptively to be filled and signed on the following day (Monday). The amount of it was to be $7,500. No other feature of the note was mentioned in the conversation. R.B. McCartan was not present at the conversation. Instead of filling out the blank note on Monday morning, the McCartans signed the blank form, without filling any blanks therein, and mailed the same to C.B. McCartan, without any letter or advice whatever.

It is true that J.H. McCartan contended, as a witness, that the note was to be "for the bank." But, being fully interrogated as to the very conversation, he repeated the same a number of times. The detailed conversation repeatedly stated by him wholly failed to support his contention. His contention was wholly argumentative, and was a mere declaration of his own intention or understanding.

I confess that, upon my first consideration of the record, I was of opinion that a sufficient conflict was presented to forbid our interfering with the finding of fact. A more careful analysis of the evidence, however, has fully persuaded me to the contrary.

II. Division III of the majority opinion predicates reversal upon the theory that the defendants are estopped to question the authority of C.B. McCartan in filling out the blank spaces as he did. I am unable to agree with the doctrine therein set forth, in view of the fact that the instrument sued on was nonnegotiable, as held in Division I of the opinion. The doctrine is predicated largely upon the authority of Angle v. North-Western Mut. LifeIns. Co., 92 U.S. 330, and upon Bank of Pittsburgh v. Neal, 22 How. (U.S.) 96. The holding of the United States Supreme Court in the two cited cases was, in substance, that, where a party puts a blank note in the possession of another, to be filled, it will be conclusively presumed that the authority was as broad as the actual exercise of agency by the agent. Such a conclusive presumption would necessarily operate in favor of a holder of nonnegotiable paper, as well as of a holder of negotiable paper.

My contention is that this doctrine has been wholly superseded by Section 9474 (Code of 1924) of our Negotiable Instrument Law. This section is as follows:

"Where the instrument is wanting in any material particular, the person in possession thereof has a prima-facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima-facie authority to fill it up as such for any amount. In order, however, that any such instrumentwhen completed may be enforced against any person who became aparty thereto prior to its completion, it must be filled upstrictly in accordance with the authority given and within areasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time." (The italics are mine.)

It will be observed from a reading of this section that the authority of the "person in possession" to fill blanks is prima-facie only, except as to the holder in due course of anegotiable instrument.

As to a holder in due course of negotiable paper, the maker isconclusively bound by the act of the "person in possession." In all other cases, the maker may challenge the authority of the agent. If this be not the meaning of this section, then it performs no function whatever. I would hold, therefore, pursuant to the express terms of this section, that the maker did have a right to challenge the scope of the authority of the "person in possession" of his blank note, unless it had been negotiated toa holder in due course.

The answer of the majority opinion to this contention is that the maker would have such right except that he had estopped himself. The infirmity of this contention is that the very estoppel contended for is the mere fact that the maker had a defense to the note. If such contention be sound in this case, it would be equally sound in every case where a nonnegotiable note had been sold for full consideration to a purchaser without notice of any defense.

The trap, if any, into which the innocent purchaser in such a case falls, is precisely the same kind as that into which this plaintiff fell. If, on the one hand, it may be said that the plaintiff herein had a right to believe that the note purchased by it, though nonnegotiable, was, nevertheless, valid and collectible, yet, on the other hand, it may as properly be said that the makers of this note, when they signed it in blank, had a right to believe that they would be protected against any unauthorized act of the "person in possession" by the nonnegotiability of the note; and they had a right to believe that no person would buy a nonnegotiable note without inquiry. In such a case, the makers acted strictly within their legal rights; whereas the purchaser must be deemed, in law, to know that it was purchasing paper subject to defenses. Why, then, should an estoppel be deemed to arise as against the maker, who acted within the law, and in favor of the purchaser, who carelessly ignored the law? In my judgment, the doctrine of estoppel at this point was never sound, and that is doubtless the reason why it was intentionally superseded by Section 9474. The question here under consideration was forcefully discussed by us in FarmersNat. Bank v. Stanton, 191 Iowa 433, wherein we said:

"Every man executing a nonnegotiable note does it knowing it may be sold or disposed of to another, and every person buying such paper knows that he takes it subject to every defense which would have been available to the maker, had it not been negotiated. He owes the world no duty to stand on guard and publish warning to others that he preserves the right to defend against its collection by a transferee, if it shall happen that there is ground for such defense. The note itself carries such warning on its face."

But I am confronted in discussion with the contention that Section 9474 should not be deemed applicable to any other instrument than a negotiable one. To so contend is to conceive of the Negotiable Instrument Law as an independent body of law, separable from and unrelated to the great body of the law upon other subjects. This cannot be so. While this statute purports to be a complete enactment of the law relating to negotiable instruments, it by no means follows that it is separable from and unrelated to the great body of the law on other subjects. It still rests upon great general principles which permeate the larger body of the law. It cannot be carved out of such body of the law as a thing by itself. It is simply interwoven therein, and its threads are connected with legal principles which extend out into other subjects. In the codification of laws we gather into separate chapters the law relating to separate subjects. But underlying the law of every detailed subject are certain fundamental principles, which underlie many subjects and which relate the law of every subject to all the law there is. The particular propositions pertaining to particular subjects are usually predicated upon general principles which underlie many kindred subjects. These general principles are to some extent expressed, and to some extent implied, in codifying statutes. In Section 9474, the broader principle is expressed, and an exception is engrafted thereon in favor of a holder in due course of a negotiable instrument. The Negotiable Instrument Statute is a branch of the law of contracts, and it is inseparable from the principles underlying the law of contracts. The law of negotiable instruments is inseparable in its logic from the law of nonnegotiable instruments. To a large extent, the principles governing each run side by side. Indeed, the primary difference between them is that the one may be negotiated free of defense, and the other may not. In Section 9474, the first three sentences thereof lay down a broad principle of general application; whereas the next and last sentence thereof lifts a holder in due course of a negotiable instrument out of the operation of the broad principle first stated.

The principle laid down in the first three sentences is contradictory to the rule adopted by the United States Supreme Court in the cited cases of 50 years ago; but the next and concluding sentence of the section adopts such former rule, so far as it applies to a holder in due course of a negotiable instrument, and not otherwise. The presumption of authority is made conclusive in favor of a holder in due course only. If the purchaser of a negotiable instrument should take the same in good faith, for a full consideration, and without notice, but should take his title by assignment or delivery, without indorsement, he would not be a holder in due course, and would not be entitled to the benefit of the last sentence in Section 9474.

Under the majority opinion, however, if his note so taken had been nonnegotiable in form, he would take the same under the same protection as is afforded to a holder in due course of a negotiable instrument under the last sentence of Section 9474. The effect of the opinion is, therefore, to put the innocent holder of a nonnegotiable note upon higher ground than the innocent holder of a negotiable note not in due course. Such holding is inconsistent with the principle enunciated in this section, and is contradictory to its logic. This holding of the majority is not made under the compulsion of any precedent in this jurisdiction. It is simply a voluntary adoption of the rule which is approved in other jurisdictions, but which is inconsistent with our own statute.

Whether Section 9474 is to be deemed controlling or not, it would seem appropriate that, in the adoption of a rule for the first time in this jurisdiction, we should seek to be consistent with such statute, rather than inconsistent. I would hold that the innocent holder of nonnegotiable paper can occupy no better ground in such a case than the innocent holder of negotiable paper who has failed to become such in due course.

The foregoing is a sufficient indication of the reasons which impel me to disagree with the ground of the holding of the majority.

MORLING, J., joins in this special concurrence.