Second Nat. Bank of Hoboken v. McGehee ( 1922 )

(dissenting). While the writer did not announce any dissent when this case was originally decided by this court, he did not agree with his Associates in consultation, and reserved the right to file a dissenting opinion, if he desired to do so, when the case was finally disposed of; and, as the other members of the court have concluded that the former decision should be adhered to, and the motion for rehearing overruled, and as the writer is thoroughly convinced of the correctness of his original views, and as the question about which we differ is one of great importance, he feels constrained to dissent from the decision and the action of the court in overruling the motion for rehearing; and the reasons for such dissent will now be given.

As shown by article 307 of the Revised Statutes 1895, which was first enacted many, many years ago, it is the statutory law of this state that, when a negotiable instrument is assigned to a person not a party to the instrument, and he acquires it before maturity, for a valuable consideration, and without notice of any discount or defenses against it, then he is only compelled to allow discounts or offsets against himself. It is immaterial whether that statute followed the rule in equity, or enlarged or curtailed such rule. Ever since its enactment it has been, and is now, a part of the written law of the state, which it is the duty of the courts to enforce, no matter what may have been the reason which actuated the Legislature in its enactment, and regardless of the fact that its enforcement may result in a hardship to the maker of such an instrument. It is free from ambiguity, and this is especially true as to that portion of it which reads:

"But should he obtain such instrument before its maturity, by giving for it a valuable consideration, and without notice of any discount or defense against it, then he shall be compelled to allow only the just discounts against himself."

Its subject is the defenses which the maker and person primarily liable may interpose when suit is brought against him upon a negotiable instrument by an assignee who is not an obligor, and the concluding clause thereof declares, in plain and certain language, that, if the assignee obtained such instrument before maturity, for a valuable consideration, and without notice of any discount or defense against it, then he shall be compelled to allow only the just discounts against himself. The word "only" as incorporated in that statute has but one meaning, which is that, if the matter pleaded as a defense does not in law constitute a just claim against such assignee, although it may be such as against his assignor, the assignee shall not be compelled to allow the same.

It cannot be successfully denied that the Legislature had the power to enact that statute, and to declare that, when the conditions therein enumerated were shown to exist, the owner of the instrument should not be compelled to allow any discounts against his assignor, or any one else except himself; and the fact that the enforcement of the statute may, in a particular case, result in hardship to the maker can afford no excuse for the failure of the courts to refuse to apply it to such case. This is true because the Legislature has seen proper to make it a part of the statutory law of the state, and by the use of the word "only" that body, which is the lawmaking depart ment of the government, has declared, in effect, that no exceptions to the statute shall be made, regardless of what may be the surrounding circumstances of any particular case.

According to my view, that statute has direct application to this case. But the majority opinion proceeds mainly upon the theory that our Supreme Court has held otherwise in Van Winkle Gin Co. v. Citizens' Bank of Buffalo, 89 Tex. 147, 33 S.W. 862, although in that decision the court did not refer to or discuss the provision of the statute now under consideration. It is true, as stated in the majority opinion, that statute was cited in the original brief of the appellee, and also in the motion for a rehearing, and the writer is not prepared to say that the Supreme Court did not read the statute, and conclude that it did not apply to that case. However, it is not so stated in the opinion, and, with all respect for the Supreme Court, the writer believes that the decision is wrong, and ought to be overruled; and the reasons for that belief will now be stated.

Ruling Case Law, a modern and very valuable addition to our legal literature, contains the following text:

"Duty to Third Person to Exercise Right of Set-Off in General. — While a bank which is the holder of a note, and has on deposit at the time of maturity a sum to the credit of any party liable to it on the note, sufficient to pay it, and not previously appropriated by the depositor to be held for a different purpose, may apply the deposit to the payment of the note, yet it is not, in general, bound to do so. The cases where the right becomes a duty on the part of the bank rest on the special equity of the party — usually the indorser — to have the payment enforced against the depositor as the one primarily liable. But, where the bank holds funds of the maker when the note matures, it seems, according to the weight of authority, that it is bound to consider the interests of the indorsers or sureties, and, if it allows the maker to withdraw his funds after protest, and the indorsers are losers thereby, the bank cannot hold them liable on the note. The reason of this rule is that the maker is the principal debtor, and liable to all the indorsers, whose undertaking is to pay if he does not. If the holder surrenders the money or securities of the maker, he parts with that in which all who have a right to look to the maker for indemnity have a definite interest; and if his act inflicts loss on them he must stand, as to the money or securities surrendered, in the place of the maker. And, as has been said, if the bank at the maturity of a note held by it holds funds that by the scratch of a pen it can apply upon the note, thus securing itself, it is difficult to see why neglecting so easy a means of security is not as improper as giving up collateral expressly designated for the purpose of securing the note. Also, it is the extent of the right to the security, rather then the source from which that right springs, that should determine the question whether the creditor can voluntarily surrender the security without releasing the surety. If the deposit has not been specifically made applicable to a particular purpose, the fact that the depositor directs the bank not to apply the deposit to the payment of the note has been held not to affect the bank's duty to do so in exoneration of an indorser. If the deposit is specific, the bank itself has no right to apply it in payment of an indebtedness of the depositor, and of course it is under no duty to an indorser to make such application. Also, though the authorities are not in accord, it would seem that, in order to impose a duty upon the bank to apply the deposit of the maker to the payment of the note, the deposit must have been sufficient to pay the note, and it must have been sufficient at the time the note matured; the bank is under no obligation to indorsers or sureties to apply subsequent deposits to the payment of the note.

"Duty Restricted to Application of Deposit of Maker. — The duty of the bank to appropriate a deposit to the payment of a note has not been carried by any case beyond the deposit of the maker. Nor is it desirable that it should be. On the face of the paper, the maker is the party to pay, and, while the bank may, upon dishonor, secure payment from the deposit of any party liable to it, yet there is great force in the reasons for limiting its duty to do so to the party legally answerable in the first instance on the face of the paper. The rule thus rests on a liability fixed by law, and capable of immediate and conclusive determination by the evidence of the note itself. Otherwise it is thrown open to contest on the private arrangements of parties, to questions of notice and proof, and to all the uncertainties of the final ascertainment of the facts. While money deposited becomes the property of the bank, yet that result flows from the nature of money, which is to be measured by amount, and not by physical identity. Except for this characteristic, a deposit of money to be returned on demand would be, like the deposit of any other article, a mere bailment. But though, for this reason, the title to money deposited passes to the bank, yet the whole business of banking is founded on the faith of the immediate availability of the deposit, as money, for the use of the depositor; and any rule that interfered with the freedom of action of either bank or customer, by compelling a stop of their dealings with each other to examine the relations of other parties to the deposit, would go far towards destroying that instant convertibility which is the essence of the business. Under this rule a bank is under no obligation to apply the deposit of an indorser of a note to its payment; and this is true although the note was made for the accommodation of the indorser, who, so far as the maker is concerned, is primarily liable thereon. When a bank becomes the holder of an indorsed note, acquired before maturity, for value, and without any notice of equities, and its clerk charges the note to the account of the indorser upon its maturity and protest, but afterward, by direction of the bank cashier, corrects this, by entry of a credit, so as to make the indorser's account stand as before, the act of the clerk in so charging up the note is not a payment devesting the title of the bank, nor is the subsequent entry of the credit so made a new purchase of the note after protest, and subject to the equities between the original parties to it, but the bank may still recover on the note against the maker."

3 R.C.L. §§ 224-225. That text is followed up by another, beginning with the statement that there are a number of cases which deny that the bank is under a general duty to apply the deposit of the maker of a note to its payment, in exoneration of indorsers or sureties, and hold that its failure to do so, and permitting the depositor to subsequently withdraw the deposit, does not release the indorser or surety from liability, and that it has been held in some cases that the fact that the surety or indorser demands that the bank make the application is immaterial. 3 R.C.L. § 226. Decisions by several states are cited in support of that proposition, but, as that question is not involved in this case, they will not be cited here further than to say that one of the leading and ablest opinions upon that side of the question is that of Cobb, P. J. of the Supreme Court of Georgia, reported in Davenport v. State Banking Co., 126 Ga. 136, 54 S.E. 977, and 8 L.R.A. (N. S.) 944, 115 Am. St. Rep. 68, 7 Ann.Cas. 1000, and the latter report of the case is accompanied by a very full and interesting note, giving decisions upon both sides of the question.

The rule announced in Ruling Case Law, as copied above, to the effect that while a bank, who is the bona fide holder of negotiable paper, and entitled to protection as such, may apply a deposit in the bank, made by either the maker or surety, to the satisfaction of its debt, it is not compelled to do so as to a deposit made by the surety, and may permit him to withdraw the money thus deposited without in any wise affecting the liability of the maker, is well supported by an array of authorities and by sound reason. In fact, in so far as I have had time to trace the authorities, the statement in the text that the duty of a bank to appropriate a deposit to the payment of a note has not been carried by any case beyond a deposit of the maker, is correct up to the time our Supreme Court decided the Van Winkle Gin Case, which applied it to a deposit by a surety. If, as construed by my Associates, that case holds that, when there is a failure of consideration, as between the maker and the original payee, although the assignee thereof paid value for it before maturity and without notice of such failure of consideration, if he is subsequently notified thereof and thereafter fails to apply a debt owing by such assignee to the assignor, but pays it to the latter, the maker will be relieved from liability to the assignee, I am so firmly convinced that the decision is radically wrong, whether tested by the statute heretofore referred to or by the rules of the common law, and, if permitted to stand, will result in such detriment to the commercial interests of this state as to justify this protest against it, with the hope that the Supreme Court will reconsider the question, overrule that case, and re-establish the law of this state in harmony with that which prevails in other jurisdictions.

As heretofore shown, that decision is believed to be unsound because of the fact that it disregards and nullifies a plain provision of statute law, and requires an assignee of a negotiable instrument, who is a bona fide holder for a valuable consideration, and without notice, to allow as a satisfaction of the debt a claim against another party, and not against himself, although the statute referred to declares, in plain and distinct language, that any person so situated shall not be compelled to allow any claims other than those against himself. But, aside from the statute, that decision is believed to be radically unsound, for the reason that it proceeds upon the assumption that, because the plaintiff in that case had received deposits made by a surety and had the right to apply such deposits to the payment of the debt, for which both the maker of the instrument and the surety were liable, its failure to make such application after it was apprised of the fact that the consideration for the written obligation had failed created an equity in favor of the maker of the Instrument and entitled him to be discharged. This argument seems to overlook the fact that, as between the plaintiff and the maker of the instrument and the assignor, the maker was the principal obligor, who was primarily liable to the plaintiff, and the assignor was merely a surety, and only secondarily liable; and, if not unanimous, the authorities are overwhelmingly in favor of the proposition that the holder of a promissory note or other commercial paper may release a surety thereon from his entire liability without affecting the liability of the principal; and this may be done either with or without a consideration moving the assignee to pursue the course referred to. Therefore, while, if he chooses to do so, he may apply a debt which he owes to the surety to the satisfaction of the debt for which the surety is bound, he owes no duty to the principal to pursue that course, and the latter has no right to complain if he does otherwise. The relation of suretyship is created for the sole benefit of the creditor or payee in the instrument, and therefore, if he sees proper to release the surety, no matter how easy it may be to collect the debt from him, and how much hardship it may impose to compel the principal obligor to pay it, he has the right to do so, and the latter cannot be heard to complain. In other words, a principal debtor, on account of business reverses after executing the obligation, may not be able to pay it, and the surety thereon may be a millionaire, and able to do so without any inconvenience whatever; yet the payee of such instrument can voluntarily discharge the millionaire surety without affecting in any wise the liability of the poverty-stricken principal. It is not deemed necessary to cite authorities in support of that proposition; and, such being the law, upon what ground, equitable or otherwise, can it properly be held that anything short of the payment of the debt will release the liability of the maker when the written obligation is held by an assignee who occupies the position of bona fide purchaser. The failure to collect the debt from the surety when that could easily have been done does not amount to a payment, and, as such assignee has the right to voluntarily discharge the surety from liability, he certainly has the right to forego his privilege of collecting the debt from him without affecting the liability of the principal.

In the main, the correctness of these views concerning the difference between the liability of surety and principal is not denied by the opinion in the Van Winkle Gin Case, but Mr. Justice Denman, who wrote that opinion, attempts to draw a distinction because of what had been said by that court in a former case. In the Van Winkle Gin Case it is said:

"But while the law protects the innocent holder at the expense of the negligent but innocent acceptor, it does not permit the former to use his vantage ground for the purpose of going beyond his protection and willfully inflicting on the latter a wrong in order to favor the fraudulent indorser who in justice and good conscience ought to pay the bill.

"In discussing this principle, in the case of Wright v. Hardie,88 Tex. 657 (32 S.W.Rep. 887), this court, through Chief Justice Gaines, say: ``The doctrine which protects a bona fide purchaser of negotiable paper for value is maintained in part upon principles of commercial policy, but has a deeper foundation in the principle of an equitable estoppel. The maker of a promissory note, by signing and delivering it to the payee, asserts its validity, and by making it payable to the bearer, or to the order of the payee, holds out an invitation to all the world to deal with it, as evidencing a valid debt. For that reason, and upon the principle that he who trusts most should suffer most, the law shuts off, as against an innocent holder, any defense the maker may have against the payee, in so far as it may be necessary to protect such holder in the rights acquired by his transfer. A recovery of so much upon the collateral paper as is necessary to discharge the debt secured is requisite for the protection of an innocent holder, although, as between the maker and payee of the note, the hypothecation may have been fraudulent. More than this the holder cannot claim in his own right, nor can he claim as trustee of the transferer of the instrument, because the maker owes the latter nothing. Accordingly we find that it is generally held that the pledgee in such a case is limited in his recovery to the amount of his debt.'

"Whether the doctrine upon which the courts allow the innocent holder of commercial paper to recover against the negligent but innocent acceptor maker is based upon broad principles of public policy intended to foster commerce, or upon the principles of an equitable estoppel, or both, it is clear that it extends no further than is necessary to the complete protection of the innocent holder, and cannot be extended so as to allow such holder to pervert the equitable principles upon which it is based for the purpose of aiding one party to a commercial instrument in obtaining an undue advantage over another."

If in deciding the Van Winkle Gin Case, the Supreme Court construed Wright v. Hardie, 88 Tex. 653, 32 S.W. 885, therein referred to, as in any wise placing a limitation upon the right of the assignee to release from liability any one bound to such assignee or payee as a surety only, I submit that Wright v. Hardie does not warrant any such construction. In other words, it was held in that case that the bona fide holder of a negotiable instrument held as collateral for an existing debt was only entitled to recover the amount of the debt secured by such collateral, and it was in that connection that the court said:

"A recovery of so much upon the collateral paper as is necessary to discharge the debt secured is requisite for the protection of an innocent holder, although as between the maker and payee of the note, the hypothecation may have been fraudulent. More than this, the holder cannot claim in his own right, nor can he claim as trustee of the transferor of the instrument, because the maker owes the latter nothing."

In other words, it was there held that the plaintiff was only entitled to recover from the defendant such amount as was necessary to make the plaintiff whole, while in the Van Winkle Gin Case it was held that the defendant was released from all liability, and plaintiff not entitled to recover anything. The latter case seems also to proceed, in part, upon the proposition that, while, generally speaking, an assignee who is a bona fide holder of commercial paper is not compelled to apply a debt owed by him to a surety on such paper, and may pay the debt owing by him to the surety without affecting the liability of the principal, still, if he knows that the principal has a good defense as against the surety, who was the original payee, and thereafter pays to such surety the debt owing to him by the assignee, and the maker resides in a different state from that in which the surety resides, and such surety agrees to pay the expense of the suit brought against the maker, such conduct will constitute a fraud as against the maker, and release him from liability to the assignee. It is submitted that the holding of the Supreme Court in that respect is unsound for two reasons, which are: (1) The protection of such bona fide holder is secured by statutory enactment, and therefore he does not have to resort to any principle of equity as seems to be contemplated in the opinion in the Van Winkle Gin Case; and (2) as the obligation of suretyship is for the protection of the payee or other holder, and not in any wise for the benefit of the maker of commercial paper, the payee or person who is entitled to the benefit of such suretyship may release the surety at any time, and sue the maker alone, regardless of what may be his motive for so doing.

While in the Van Winkle Gin Case the Supreme Court did not mention article 307 of the Revised Statutes, nine months later, in the case of Word v. Elwood, 90 Tex. 130, 37 S.W. 414, in an opinion by the same judge who wrote the opinion in the Van Winkle Gin Case, that statute is copied and construed. The plaintiff in that case brought suit upon a promissory note upon the back of which was indorsed a written guaranty. The defendant pleaded a failure of consideration, but the trial court decided the case in favor of the plaintiff, on the ground that he was an innocent holder for value, etc. The Court of Civil Appeals for the Second District certified to the Supreme Court the question whether or not the indorsement on the back of the note constituted an assignment so as to bring the case within the meaning of the law merchant regulating the transfer of negotiable paper, citing certain authorities. The Supreme Court stated that the authorities cited indicated a conflict of opinion as to how the question should be answered under the law merchant, but said it was not necessary to decide that question, inasmuch as the law upon that subject is now regulated by article 307 of the Revised Statutes, which the court set out in full, and then proceeded:

"An instrument is ``assigned' within the meaning of this statute when it is transferred from one to another. The form of the transfer and whether written or verbal is immaterial. The statute extends its protection to all assignees coming within its terms, though they may not have acquired the instrument in accordance with the technical rules regulating transfers under the law merchant. Under our construction of the statute we do not deem it important in this case to determine whether the writing on the note constituted a technical indorsement, and therefore do not answer the question certified."

In that case the Supreme Court held, as it should have held in the Van Winkle Gin Case, that the law regulating the rights of a bona fide holder of negotiable paper is embodied in and fixed by the article of the statute referred to, regardless of what might have been the rights of the parties, if the statute had never been enacted. That article is a portion of title 16, Revised Statutes, which contains a number of articles relating to notes and other written instruments, and that entire title is part of the statutory law of this state, and those who come within its purview are subject to all the liabilities it places upon them, and entitled to all the benefits it secures to them; and it is my profound conviction that the decision in this case by the court below and its affirmance by this court has deprived the appellant of a plain statutory right.

Also, and aside from the statute, and for reasons heretofore stated, I think the decision is wrong, whether tested by the common law or the rules of equity. If the Van Winkle Case is permitted to stand as the law of Texas, instead of commercial paper being a courier without luggage, as it was long ago aptly described by an able judge, using as a metaphor an expression now in common use in this country, it will carry excess baggage, which will greatly retard its circulation and tend to impair its value as a commercial asset. To illustrate: When a bank has a customer who makes daily deposits, and from whom it purchases a negotiable instrument before maturity and pays value therefor without notice of failure of consideration, if the maker of the instrument notifies the bank that he contends there has been a failure of consideration, then, if thereafter the bank allows the original payee who has assigned it to the bank, and become liable as surety to check out all of his funds, the maker, if his contention be true, will be released from liability; in order for the bank to be safe, it will be compelled to collect the debt from the surety, and thereby force the latter to bring suit against the maker, although he may reside in a distant state.

Also it should be borne in mind that in the Van Winkle Gin Case and in this case the sureties were not parties to the litigation, and it may be that they could have produced testimony which would have overcome that submitted by the makers of the instruments. But, if the doctrine applied in these two cases is to stand as the law in this state, it is reasonable to suppose that in all such cases the bank or other innocent holder of such commercial paper will apply any debt such bank or holder may owe to the surety in satisfaction of the debt as soon as notice is received that the maker claims that there was a failure of consideration, and this will result in forcing the surety to sue the maker, although the latter may reside in another state, and although there may, in fact, be no failure of consideration; and, if equities are to be considered, it would seem that the courts ought not to so construe the law of suretyship as to place any such burden upon the surety, whose liability is solely for the benefit of the holder of the negotiable instrument, and not for the benefit of the maker.

The writer fails to see where there is any ground whatever in the Van Winkle Gin Case, or in this case, for claiming that any fraud had been perpetrated upon the maker of the instrument. The surety had not signed it for his benefit, and therefore had the right to enter into an agreement with the holder to the effect that, if he would sue the maker, and not the surety, the latter would pay the expense of the suit. Such an agreement violated no duty that the surety owed the maker, and therefore it is immaterial what, if anything, was the consideration for it. Nor was it material that the failure of the plaintiffs in the two cases to apply to the satisfaction of the debts so secured the debts which the holders owed to the sureties might have resulted in forcing the makers to bring suit against the sureties in another state from that in which the makers resided. The venue of suits is fixed by law, and the fact that the assertion of a legal right may result in compelling the defendant to bring a suit against a third person in another state is no evidence of fraud, and is utterly immaterial to any question in the case.

In conclusion, it may not be amiss for the writer to disclaim any sentiments of disrespect for our Supreme Court. On the contrary, I have at all times entertained great respect for that tribunal; and this is especially true of the three able members who constituted the court at the time the Van Winkle Gin Case was decided. During all the time I have served upon this court, in so far as I now recall, I have written but two other opinions known to be in conflict with decisions of the Supreme Court; and my only purpose in writing this opinion is to contribute something toward getting the law settled as I firmly believe it should be.

For the reasons here stated, I respectfully dissent.