National City Bank of St. Louis v. Taylor ( 1927 )

The court gave the defendants' and refused the plaintiff's requested peremptory instruction. Error is assigned upon the two rulings. Thus there are presented for our consideration the two questions: (1) Do the facts show an undertaking upon which a right of action could arise in favor of the plaintiff? and (2) If so, does the proof show such undertaking to be obligatory of performance, or not, upon the defendants? Each of these propositions is denied by the defendants. And it is of legal requirement that they both must be sustained by the proof in order to entitle the plaintiff bank to recover.

In the facts before us the note for $10,000 was signed by the makers and drawn "payable to the order of the Guaranty State Bank of Texarkana, Tex."; the latter by its cashier indorsed it "without recourse" and delivered it to the National City Bank, which passed the proceeds less the discount upon its books as a credit in the name of the payee bank. And we can assume for present purposes, from the standpoint of a peremptory instruction, the full fact to be that there was delivery and acceptance of the note at its inception, in the name of the Guaranty State Bank, and for its use and benefit as the true holder and payee, by the bank's officers. Then the note so drawn and discounted would be regarded as entirely and strictly within the class or description of notes covered by the terms of the guaranty, as being a note taken and held by the Guaranty State Bank as its property, and then "discounted for" the said bank by the plaintiff bank. As may be seen, the guaranty was an absolute, unconditional undertaking on the part of the guarantors, expressly stating the purpose and intentions of the guarantors to be to "guarantee" direct to the plaintiff bank "the prompt payment" of "all notes," acceptances, and other paper which have been or may be discounted for the said debtor (the Guaranty State Bank) by said bank (the plaintiff)," irrespective of "whether the same be made, drawn, accepted, or indorsed by the said Guaranty State Bank. The terms of guaranty would include, and not exclude, a note transferred for discount "without recourse." And it is immaterial that the note was offered for discount and was discounted as a single transaction and at a date subsequent to the time of the execution and delivery of the guaranty. As plainly expressed in the instrument, it was —

"intended to be and is a continuing guaranty, and shall apply to and cover all loans and discounts and renewals so made by said bank (the plaintiff) prior to notice in writing given to the cashier of said bank at the office of said bank by one of the undersigned that he will not be liable upon any such loans or discounts made by such bank after the receipt of such written notice."

The parties do not disagree that the written guaranty is legally classed as a continuing one. Gardner v. Watson, 76 Tex. 25, 13 S.W. 39; 28 C.J. p. 962; 12 R.C.L. p. 1061; 5 Elliott Co. § 3934. Therefore the facts go to show an undertaking and a transaction between the two banks upon which a right of action could arise against the guarantors in favor of the plaintiff bank.

There remains to be considered the question of whether or not the undertaking of guaranty was obligatory of performance in the circumstances. The guarantors insist that it was not because the transfer of the note by the officers of the bank was ultra vires, and void by positive provision of law, and the terms of the guaranty include only notes lawfully transferred for rediscount. As bearing upon this question, the full fact was shown that the board of directors of the Guaranty State Bank did not at the time authorize or consent to, by written record, the transfer, sale, or rediscount of the note. The directors, except two of them, were ignorant of the entire transaction until November 24, 1923, which was a time subsequent to the actual rediscount, but a time when the money remained to the credit of the Guaranty State Bank on the books of plaintiff bank. The statute expressly declares that "no officer or employee" of a state bank "shall have power to indorse, sell, pledge or hypothecate any note, bond or other obligation received by such corporation for money loaned, until such power and authority shall have been given such officer or employee by the board of directors in a regular meeting of the board, a written record of which proceeding shall have first been made upon the minutes of the corporation." Article 499, R.S. 1925. Also, "no bills shall ever be rediscounted by such bank [officers], except with the consent of the board of directors. Said consent to be a matter of record." Article 528, R.S. And undoubtedly the Guaranty State Bank in view of such facts and the law, were it a party to a suit based alone on the note, might successfully plead excess or lack of authority of its officers to transfer and rediscount the note. Hull v. Guaranty State Bank (Tex.Civ.App.) 270 S.W. 191; Farmers' State Bank Trust Co. v. Central State Bank (Tex.Civ.App.) 281 S.W. 632; and other cases. But, as fully appears from the statute, the act of the officers of the Guaranty State Bank, in transferring the note for rediscount in excess of authority, was not a contract or act such as would not bind the said bank, even though authorized by the board of directors. It differs from the contract to do or the doing of an illegal act forbidden to be done at all or according to any method. If the officers executing the transfer had been regularly authorized by the directors, it would unquestionably have been a valid transfer. For that reason it would not follow as a necessary legal consequence, merely because the transfer of the note was ultra vires and void, that the guaranty sued upon would also fail of enforced performance. Ordinarily mere excess of authority of an agent is a defense peculiar to the principal. If the note survives the transfer and is binding upon the makers, the guarantors also remain liable for the performance of their obligation, unless the obligation of the guarantors provides that it should be defeated by invalid transfers. It is believed that there lies the stress of the question considered.

A guaranty of the kind in suit is, in legal significance, a collateral and secondary contract, to be answerable for the payment of some debt of another person, who himself remains liable for his default. It is not a contract, as of suretyship, primary and direct. In the present case, in no wise is legal liability on such debt on the part of the Guaranty State Bank a prerequisite to liability of the guarantors to the guarantee; and it is conclusive that the makers of the note in the present case remain liable for the note, not-withstanding there was an invalid transfer by the officers of the bank as against the bank itself. The makers' promise to pay, and to pay when due, is not affected in any wise with the exceeded authority of the bank officers to transfer the note for rediscount for the bank. It has nothing to do with the consideration or the promise to pay. And the note, for reasons inherent in itself, was not legally void and unenforceable against the makers, who stood first bound to pay it. It was in all respects a valid and legal note, which was genuinely executed by the makers, and did not belong to a class reprobated by public policy, or in violation of positive law, or against morality. As firmly settled, it is only where the note or contract is void for illegality, in fact or declared so by terms of law read into it, that the guaranty must fall with it, because the court will not enforce a guaranty upon a note or contract where the contract or note itself ought not to be enforced against any one. Howard v. Smith,91 Tex. 8, 38 S.W. 15; Fuqua v. Brewing Co., 90 Tex. 298, 38 S.W. 29; Reed v. Brewer, 90 Tex. 144, 37 S.W. 418; 28 C.J. § 36, p. 909; 12 R.C.L. § 24, p. 1072; 2 Elliott Contracts, § 1094.

The law will not lend its support to a claim founded upon its violation. Shelton v. Marshall, 16 Tex. 344; Seeligson v. Lewis,65 Tex. 215, 57 Am.Rep. 593; 2 Elliott Contracts. §§ 645-650; Comstock v. Draper, 1 Mich. 481, 53 Am.Dec. 78. And it may be conceded that the courts, when it is permissible to do so, will read into a contract terms of an existing statute if by doing so a doubtful contract can be rendered legal rather than invalid. Trinity Portland Cement Co. v. Bonding Surety Co. (Tex.Com.App.) 229 S.W. 483; 9 Cyc. 582. Yet collateral contracts are not necessarily void. Floyd v. Patterson, 72 Tex. 202,10 S.W. 526, 13 Am. St. Rep. 787; De Leon v. Trevino, 49 Tex. 88, 30 Am.Rep. 101; Oliphant v. Markham, 79 Tex. 543, 15 S.W. 569, 23 Am. St. Rep. 363; Campbell v. Reeves, 14 Tex. 8; 2 Elliott Contracts, § 677. Neither is it an unlawful agreement, inherent in itself, to guarantee to make "prompt payment" direct to the guarantee of a note rediscounted to him, although it be not transferred by the officer acting for the bank in accordance with the method prescribed for him to follow and adopt. No law forbids the obligation of guaranty of mere excess of authority in the way it is done. The law does not give the effect of illegality to it unless tainted with fraud. It is an agreement no more inherently unlawful than a contract as generally done, against loss by theft, robbery, or burglary. The guarantors' promise to pay on default of the maker of the note is in no wise affected with the exceeded authority of the bank officer. 2 Elliott on Contracts, § 1078. And the guarantors' burden is no more increased or varied by ineffectual transfer than by reason of lawful transfer "without recourse." There is like effect in both instances. A lawful transfer "without recourse" imposes no obligation upon the payee to pay the note. Neither does the ineffectual transfer operate to impose any legal obligation upon the payee on the note itself. In neither instance is the debt against the maker extinguished by the guarantors' payment to the guarantee, and the guarantors' remedy of reimbursement exists. Although the guarantee bank could not assert ownership in the note as against the true owner in virtue of the ineffectual transfer by the officers of the bank, yet until the transfer was set aside the guarantee was in the position of holder of the note, at least as a bailee, by operation of law, and as such bailee in position to assert claim thereto as against all persons except the true owner. 6 C.J. § 111, p. 1149. The guarantors could not bring into question in this suit such possession; no fraud of the guarantee being involved. Therefore the guarantee had some possessory right in the note, within the purview of the guaranty contract. And the note was mere evidence in this suit of what it purported to be, the debt of the makers. The judgment in this case would be on the guarantee, and not in the name of the Guaranty State Bank. The Guaranty State Bank would not own or have any interest in such judgment.

We are therefore forced to look to the purposes and meaning of the guaranty as the parties might fairly and reasonably be expected mutually to understand. Cooper Gro. Co. v. Eppler (Tex.Civ.App.) 204 S.W. 338; 28 C.J. p. 930. The leading purpose of the guaranty was in furtherence of and to promote generally the transfer and rediscount of notes and payment of the consideration in reliance on and upon faith of specially guaranteed security of prompt payment when due, in commercial intercourse between the two banks, located in different localities. There was unequal opportunity to the guarantee of knowing the responsibility of the makers of the note for prompt payment, and of having timely or actual personal knowledge of the meetings and actions of the board of directors, and of special authority given to officers of the transferring bank; and the guaranty may have been required and taken, as fairly seems, in mutual consent for those very reasons. The mutual purpose of requiring and executing the undertaking was evidently to make good "the prompt payment" of transferred notes against some possible default or event in the future, such as in the contemplation of the parties might hinder, delay, or defeat the payment of money paid out. The very terms manifest the intention of both parties to make the guaranty unambiguous that the National City Bank, without taking further steps or the performance of any condition precedent, might securely look to the guarantors for "the prompt payment" of any "note" immediately upon merely the default of the principal debtor, which might be rediscounted for the said Guaranty State Bank, irrespective of whether the same be made, drawn, accepted, or indorsed by the Guaranty State Bank. The element of suretyship or indorsement, so as to create some legal liability on the part of the Guaranty State Bank as a prerequisite to liability of the guarantors to make "prompt payment" is thus eliminated by the very terms of the instrument. There is no other condition or contingency suggested by the language used upon which prompt payment" is to be made, beyond or outside of the fact that it was to be immediately upon merely the default in such respect of the maker of the note. The liability for the principal debtor's ability to perform the act of making due payment at maturity of the note is the thing guaranteed, and the guarantors undertake that the principal debtor is able to do so. It is not a guarantee that the note is collectable by due course of law. Evans v. Bell, 45 Tex. 553; Texas City Improvement Co. v. Griswold (Tex.Civ.App.) 41 S.W. 513.

The liability of the guarantors is to be measured by their agreement, and is not to be extended by construction. The extent of their obligation must be determined from the language used. And clearly the language used cannot be said to express or to imply intention of both parties that the obligation of guaranty should be defeated by invalid transfer of notes. The language does not even purport to cover only notes that are "lawfully transferred and discounted." On the contrary, the language used expresses the mutual purpose and intention to have the guaranty cover generally, without exception or qualification, "all notes" offered by the Guaranty State Bank "for discount." Simply adding the words, "lawfully transferred for discount," would have sufficiently disclosed such intention and purposes. The extent of the obligation not being in the least doubtful, the parties are presumed to have known the terms of the statute and to have bound themselves with reference thereto. 6 R.C.L. p. 855; Haugen v. Sundseth, 106 Minn. 129, 118 N.W. 666, 16 Ann.Cas. 259. It is not permissible to read therein any other condition than is already therein; the contract of guaranty being freely made by the guarantors and without any claim of fraud upon them in its inception. It is not perceived that any less effect can be ascribed by the courts to the terms of the guaranty than was mutually agreed to by the parties themselves.

Having disposed of the two legal questions so vitally important in this case, we come now to consider whether or not any question of fact arises for decision primarily by the jury. After much deliberation we conclude that, upon considering the evidence to the extent it will bear, the court would not be authorized to say, as a pure matter of law, that it was the purpose and intention of all the parties to take and accept the note in the name of the Guaranty State Bank as lender of the money, and that it was not made payable to the National City Bank as lender by name of Guaranty State Bank as a mere formality. The evidence appears to differ as to which, and it is a decisive fact for ascertainment.

According to the evidence of the president of the plaintiff bank, the note was purely taken and accepted by the officers of the Guaranty State Bank as the lender, made payable to it as an act of the officers, and by the cashier transferred in the name of the bank to plaintiff bank for discount for the said payee bank. Such fact, if so found by the jury, would be regarded, in view of other circumstances, as a sufficient recognition or adoption of the note by the said bank to render it binding upon all the parties. But the evidence of the cashier of the Guaranty State Bank leaves it to be inferred that it was understood by all parties that he was acting for Mr. Taylor to secure a loan direct from the National City Bank, and that the note was made and taken in the form done as a formality; that the Guaranty State Bank was not to be the lender or owner, or to advance money thereon. He said:

"In dealing with Mr. Edwards I was not acting on behalf of the bank, but altogether for Roy Taylor, as we had done in a number of instances. We made the note in the form of the Guaranty State Bank rather than making it direct to the National City Bank that it might have the security of Mr. Taylor's real estate, which our bank held. It was my idea and Mr. Edwards' belief that to do it that way would give them (the National City Bank) a lien along with the Guaranty State Bank in the mortgaged real estate. It was discussed from that standpoint. I did not do that in settlement of any indebtedness Roy Taylor owed our bank. The note never was in our bank, and Mr. Roy Taylor never was indebted to our bank on that note. * * * I have had various personal dealings with Mr. Edwards previous to this November, 1923. * * * It would be impossible for me to remember definitely about how many loans had been negotiated by us of this kind from Mr. Edwards' bank on behalf of Mr. Taylor."

However this evidence or the testimony as a whole may be regarded, an issue would arise primarily for the jury. The parties cannot, by any arrangement among themselves, affect the rights of the guarantors. Estoppel may be predicated against the Guaranty State Bank on such arrangement, if true, but not so against the guarantors, as in effect a legal fraud against them. If the note was not in fact the note of the Guaranty State Bank, then it was not within the undertaking of guaranty; otherwise it was, and the guarantors would be liable in this suit.

There is no other issuable fact presented in this record.

The judgment is accordingly reversed, and the case remanded for trial in accordance with this opinion.