Briscol v. American Southern Trust Co.

Appellant sued appellee in trover, charging it with the conversion of certain collateral which had been deposited with it to secure a note executed by his intestate. A general demurrer to the complaint was sustained, and, the plaintiff refusing to plead further, the action was dismissed. This appeal therefore involves the sufficiency of the complaint as tested by the demurrer.

Briefly stated, the allegations in the complaint were as follows: The appellee, a bank at Little Rock, held a negotiable promissory note of appellant's intestate, M. C. Pappas, in the principal sum of $700. This note was secured by a certificate of deposit in the Banque Nationale de Greece of the alleged value of $5,000. When this note matured, its maker had died, and the appellant, as administrator, was without funds with which to pay the note and redeem the collateral. At this time the appellant and H. C. Pappas, a brother of the deceased, entered into an agreement with the bank whereby they indorsed their names upon the past-due note of the deceased, and at the same time gave a new note executed by them individually, to serve as a renewal or a continuance of the old note.

The allegations with respect to the new note were as follows: "Plaintiff states that, after the death of the said M. C. Pappas, he, together with the said H. C. Pappas, a brother of deceased, put their indorsement upon said note past due, and also executed a new note individually to cover said loan and to serve as a renewal or continuance of said original note."

The complaint further alleges that the bank did not present its claim for allowance by the administrator and did not have it probated.

After the extension agreement above referred to, but before the expiration of the time for probating claims against the estate, the complaint alleges that the appellee "accepted payment of its note from H. C. Pappas, the brother of the deceased, and wrongfully delivered at the time to H. C. Pappas the said security held by it, which was of the value of $5,000, against his directions and over his protest, and refused to deliver same to this plaintiff, upon proper demand made therefor, thus converting said securities unlawfully to its own use." It is further alleged that the estate of the deceased was insolvent.

Appellant contends for a reversal of the judgment upon the ground that, after the maturity of the note and the death of the maker, it ceased to be negotiable, and that the delivery of the note, with the collateral attached, amounted to a conversion, for which the appellee was liable. He cites the case of Union Mercantile Trust Co. v. Harnwell, 158 Ark. 295, 250 S.W. 321, as controlling the judgment in this case. The appellant also contends that H. C. Pappas was not an indorser of the old note within the meaning of the law relating to the rights and liabilities of an indorser of commercial paper.

Whether or not an instrument is negotiable or nonnegotiable depends upon our statute (7767, C. M. Dig.). An instrument once negotiable continues to be negotiable until it is discharged in the manner prescribed by the law (7885-7886), or until it is restrictively indorsed. The note of the deceased at the time it was negotiated was without question a negotiable instrument, and, there being no contention that there was ever at any time a restrictive indorsement thereon, it continued to be negotiable, unless it had been discharged. Whether the act of H. C. Pappas, the brother of the deceased, in paying the note, operated as a discharge thereof, will be considered in a later portion of the opinion. We are now concerned with the effect, if any, upon the negotiability of the note of the fact that it had matured and its maker had died at the time of the execution of the so-called renewal note.

A majority of the court is of the opinion that the death of the maker and the maturity of the note did not destroy its negotiability. "The fact that a bill or note is transferred after maturity is of no importance except as to equities between prior parties, the rule being that an indorsee or a transferee after maturity takes subject to defenses between the original parties." 8 C.J., Bills and Notes, paragraph 58.

To hold that a note, once negotiable, becomes nonnegotiable after maturity or after the death of the maker, would entirely destroy that security which heretofore has attended the making and negotiation of commercial paper. The channels of commerce are daily flooded with millions of such instruments, and it is indispensable to the transaction of business that one who acquires such an instrument shall be protected in his ownership and shall not be required to ascertain what in the greater majority of cases would be an impossible thing, to-wit, whether the maker or drawer had died. One who makes and negotiates a promissory note obligates himself to pay the amount named therein upon its maturity, or at any time thereafter, until the paper is discharged in one of the ways recognized by the statute. The death of a maker of a note does not in any way affect its negotiability. Clark v. Thayer, 105 Mass. 216, 7 Am. Rep. 511. We therefore hold that the fact that the maker of the note was dead and the note was past due did not in any wise affect the rights of the bank with respect to its transfer, and that it had a right to sell this note, although its maker was dead and it was past due; and, having a right to sell the note, it also had the right to transfer the collateral as an incident of the sale.

A majority of the court is also of the opinion that any one who was secondarily liable on the note would, when compelled to pay the same, be subrogated to all the rights of the payee. It is conceded by the appellant that this is true with resect to indorsers, but it is contended that H. C. Pappas was not, in contemplation of law, an indorser. The right of subrogation extends not only to indorsers but also to sureties and guarantors. 37 Cyc. 402; Talbot v. Wilkins, 31 Ark. 411, 12 R.C.L., p. 1098.

It is thoroughly settled that, when one who is secondarily liable is required to pay a note secured by collateral, he acquires title to the note, which is not discharged by his payment, and becomes the owner of the attached collateral. In Goss v. Emmerson, 23 N.H. 38, a note was paid by an indorser who was secondarily liable thereon, and it was delivered to him, together with the attached collateral, and he had thereafter wrongfully converted such collateral to his own use. The court held that the indorser, being required by law to pay the note, was entitled to all of the rights against the principal creditor which had previously been held by the holder of the note, including the collateral, and that the fact that the indorser wrongfully converted this collateral to his own use would not render the holder of the note liable as for conversion. In Waddle v. Owen, 43 Neb. 489,61 N.W. 731, the note, secured by collateral, was paid by an indorser, and was by the holder transferred to the indorser, together with the attached collateral. The court held that the holder of a negotiable instrument secured by collateral had a right to negotiate it and to transfer the securities with it at any time before payment or tender of payment. The court said:

"The bill being negotiable, Waddle had a right to transfer it by indorsement to Hainer, and to transfer with it the accompanying securities. There is a vast difference between the position of a pledgee who retains the principal debt and wrongfully parts with the securities pledged thereto, and that of one who, in the regular course of business, transfers the debt, and with it the securities, without diverting the latter from the purpose for which they were pledged. The first act constitutes a conversion, the latter does not." See also Chapman v. Brooks, 31 N.Y. 75; Jones on Collateral Securities (3d ed.) 418, 421, 425.

It is equally well settled that the holder of negotiable paper secured by collateral may sell the paper with the collateral attached, and his purchaser takes title to the paper and such rights as he had in the pledged collateral. That was in effect the holding of this court in Whitney v. Peay, 24 Ark. 22.

In Bank of Forsyth v. Davis, 113 Ga. 341,38 S.E. 836, 84 Am. St. Rep. 248, the holder of negotiable paper secured by collateral sold the paper and transferred the collateral to a third person. The court held that this was not a conversion of the collateral, but that the purchaser of the note took title thereto and that the collateral passed to him as an incident of the transfer. "As the security (collateral) is a mere incident of the original debt, just as a mortgage is a mere incident of the debt secured, an assignment of the debt passes either a legal or an equitable interest in the pledge, unless it is otherwise agreed between the parties." Jones on Collateral Securities (3d ed.), 418. And the same author, at 425, says: "A payee of a negotiable note, holding other notes as collateral security, may lawfully transfer the collateral notes to an indorsee of the principal note, * * * and if the indorsee to whom the securities are transferred converts them to his own use, the original payee is not liable in trover for such conversion." See also on the general proposition: 31 Cyc. 849; Hawkins v. Fourth National Bank, 150 Ind. 117,49 N.E. 957.

When the maker of a note negotiates the same, with collateral attached, he is presumed to know that, under the law, the original payee has the legal right to sell the note and transfer the collateral, and this right exists in the original payee by virtue of his contract with the maker. "One who makes a negotiable promissory note and delivers it to another is charged by the law with notice that the payee of such note has the right to transfer it, by sale or otherwise, to whomsoever he may see proper." Bank of Forsyth v. Davis, supra. And, as stated above, the purchaser takes such collateral as may be attached as security to the note as a mere incident of the sale and transfer.

From what we have said above it is obvious that the appellee had the legal right to deliver the note, with attached collateral, upon its payment by any one whose liability thereon had been fixed either as surety, guarantor or indorser, and that it equally had the right to sell the note to a stranger and to transfer the collateral to the purchaser of the note. It is therefore now necessary to determine whether H. C. Pappas was liable as surety, guarantor or indorser, and, by reason of such liability, was required to pay the note, or whether H. C. Pappas was a stranger to the note, and, if so, whether, as such stranger, he paid the note in such a manner as would discharge it, or whether he purchased the same.

We are of the opinion that H. C. Pappas was not all indorser within the meaning of the Negotiable Instrument Law. Before the adoption of that law in this State, one who indorsed commercial paper after it had been put in circulation was not an indorser, but a guarantor. Killiam v. Ashley, 24 Ark. 511, 91 Am. Dec. 519; Scanlan v. Porter, 64 Ark. 470, 42 S.W. 897. The adoption of the Negotiable Instrument Law does not, in our opinion change that rule. Section 7830, C. M. Digest, prescribes the liability of an irregular indorser; that is, one who, not otherwise a party, places his name upon an instrument, and this indorsement must be before delivery of the paper. The liability of a general indorser is fixed by 7832, C. M. Digest, and, under this section, such indorser "engages that, on due presentiment, it shall be accepted or paid, or both, as the case may be, according to its tenor," etc. The note being past due at the time H. C. Pappas placed his name upon it, he could not have engaged that, upon due presentment, it would be paid according to its tenor. At that time there could be no due presentment and the note could not be paid "according to its tenor." But, because H. C. Pappas was not an indorser, it does not necessarily follow that he was a stranger to the note. He could, and did, make himself liable thereon to the bank by signing his name thereon and by executing the so-called renewal note. That, in our opinion, under the allegations of the complaint, was a separate and distinct contract, collateral to the original undertaking of the deceased, and supported by a sufficient consideration — the agreement of the bank temporarily to forego its undoubted right to foreclose its collateral.

It is sometimes hard to say whether a given contract is one of surety or guaranty. The terms are frequently loosely employed by the courts and in the textbooks. There are, however, certain well recognized distinctions between the two relations. The subject was considered by this court in Hall v. Equitable Ins. Co., 126 Ark. 535,191 S.W. 32; Shores-Mueller Co. v. Palmer, 141 Ark. 64,216 S.W. 295; Broomer Lbr. Co. v. Hickman, 71 Ark. 549,76 S.W. 559; Wilks v. Vaughan, 73 Ark. 174, 83 S.W. 913. See 28 C.J. 889-894.

But, whether H. C. Pappas was a guarantor or a surety, his right, upon being compelled to pay the note, to be subrogated to the rights of the payee and to receive the collateral, was the same. 37 Cyc. 402.

It is sufficient here for us to say that we believe the contract between the bank and H. C. Pappas, which was undoubtedly made for the benefit of the estate of the deceased, was a contract of guaranty.

We find it unnecessary to pass upon the question as to whether the administrator could consent to H. C. Pappas becoming a guarantor. One who becomes the guarantor of another's contract without the knowledge or consent of such person, and who, by reason of his guaranty, pays the principal creditor, becomes by operation of law the purchaser of the debt, stands in the shoes of the principal creditor, and, as such, is entitled to all collateral. Leslie v. Compton, 103 Kan. 92, 72 P. 1015, L.R.A. (N.S.) 1918F, 706; Teberg v. Swinson,32 Kan. 24, 4 P. 83; Carter v. Jones, 40 N.C. (5 Ired. Eq.) 196, 49 Am. Dec. 125; Wright v. Garlinhouse, 27 Barb. (N.Y.) 74; Marsh v. Hayford, 80 Me. 97, 13 A. 271; Hecker v. Mahler, 64 Ohio St. 176, 60 N.E. 555; Snell v. Warner,63 Ill. 176; Peak v. Dorwin, 25 Vt. 28.

It therefore becomes immaterial whether the administrator consented to the contract of guaranty or whether in law he could consent thereto.

The liability of a guarantor is secondary. C. M. Dig., 7762; Crawford v. Turnbaugh, 80 Ohio St. 43,98 N.E. 858; 2 Daniel, Negotiable Instruments, 1753-1754. It is otherwise with a surety. Hall v. Equitable Ins. Co., supra; Shores-Mueller Co. v. Palmer, supra. As said in the last cited case: "The contract of a surety starts with the agreement, and the liability of a guarantor is established for the first time with the default of the principal debtor."

In this case the act of the appellee bank in taking a new note executed by the appellant personally and by H. C. Pappas, the brother of the deceased, amounted to an extension of the debt. Until this extension note, which was in itself the contract of guaranty, matured, the appellee bank had no right to proceed against the estate of the deceased, nor had it any right to proceed against H. C. Pappas. His guaranty was that the estate of the deceased would pay the note on or before the maturity of his note. There was no liability upon his part to pay until his note matured. If he paid the note prior to that time, his act was tantamount to the act of a stranger, against whom there was no liability. In order that the guarantor may be subrogated to the rights of the creditor, upon paying the debt, the payment must be made at a time when he was legally required to make it. 37 Cyc. 375 et seq.; 37 Cyc. 407. The right to subrogation does not exist unless the payment was made by one who at the time was required by law to pay. 5 Pomeroy's Equity Juris., 2345 et seq.; 2 Story's Eq. Juris. (14 ed.), 717 et seq. Of course, if Pappas was not subrogated to the rights of the bank, it was not justified in delivering him the collateral. He was not legally required to pay the note of the deceased until the renewal note which he had executed matured, and if he paid it prior to that time, he will be regarded as a stranger to the debt. Martin v. Monger, 112 Ark. 394, 166 S.W. 566.

From this view of the law it becomes important to ascertain whether the complaint shows upon its face that, at the time H. C. Pappas paid the note of the deceased, he was legally required to pay the same — that is to say, that his note had matured. If this appears from the complaint, we unhesitatingly say that no cause of action was alleged against the appellee.

We are, however, from a careful examination of the complaint, unable to find any allegations from which a reasonable inference can be drawn that H. C. Pappas paid the note at a time when he was required to pay it under his contract with the bank. Indeed, the necessary inferences from the complaint are to the contrary. The complaint does not allege that H. C. Pappas was required by the bank to pay the note. On the other hand, it alleges that the appellee "accepted payment of its note from H. C. Pappas, the brother of the deceased, and wrongfully delivered at the time to H. C. Pappas the said security," etc. The inference is that the payment by H. C. Pappas was the result of a voluntary act upon his part, one not required by his legal obligation. The complaint alleges that the bank "accepted" payment, from which we are led to infer that the payment of the note by H. C. Pappas was not the result of his obligation, which might not yet have matured. The allegations as to the estate's insolvency, being referable to the date the complaint was filed (January, 1926) cannot aid us in reaching a conclusion contrary to the one expressed. We are therefore unable to say, from the facts alleged, giving them every possible intendment in favor of the correctness of the lower court's ruling on the demurrer, that it appears with certainty that at the time he paid the note he was legally bound to do so.

If the appellee bank desired to justify its act in delivering the collateral to a guarantor, and the complaint failed to show, as we hold, that at the time of the payment of the note and the delivery of the collateral the guarantor was legally bound and obligated to pay the debt, it should have, by motion in the lower court, requested that the plaintiff be required to allege the facts with more particularity.

It is earnestly insisted by the appellee that, if Pappas be considered a stranger to the transaction, his payment of the note and the assignment to him thereof, together with the attached collateral, would make him a purchaser of the debt and entitle him to receive the collateral.

It is undoubtedly true, as shown above, that a stranger may purchase negotiable paper either before or after maturity, in which event the paper is not discharged, and he becomes the holder of the same with all the rights of his assignor, including the right to receive such collateral as his assignor may have had. It is also undoubtedly true that, where a stranger pays another's note, he is presumed to have purchased the same, and the note is not discharged. Chappell v. McKeough, 21 Colo. 275,40 P. 769; Bank v. Friend, 80 Mo. App. 657; Van Standt v. Hobbs, 84 Mo. App. 628; Ketchum v. Duncan, 96 U.S. 659,24 L.ed. 868; Wood v. Guaranty Trust Co., 128 U.S. 416,9 S. Ct. 131, 32 L.ed. 472; Barney v. Clark, 46 N.H. 514; Dent v. Matthews, 202 Mo. App. 451, 213 S.W. 141; People's State Bank v. Dryden, 91 Kan. 216, 137 P. 928; McDonald v. Burns, 83 F. 866. The last cited case is an opinion by the Circuit Court of Appeals for the Eighth Circuit (judgment was rendered by Sanborn and Thayer, Circuit Judges). See also on this point, 3 Randolph on Commercial Paper, 1438-1446.

An examination of the authorities just cited will disclose the fact that, while the presumption is, as stated above, that the payment of a note by a stranger is a purchase thereof and not a discharge, yet, in the final analysis, it is a question of the intent of the parties, which is to be gathered from all the facts and circumstances. This presumption is not one of law, it is a presumption of fact, and may be rebutted.

In construing the allegations of the complaint with respect to whether or not the act of H. C. Pappas in paying the note (assuming that he was a stranger in so doing) amounted to a purchase thereof and not a discharge of the paper, we find that the complaint is silent on the question as to whether the original note, or any note, for that matter, was delivered to H. C. Pappas. It does not appear from the complaint whether the note was marked paid by the bank or whether it was delivered to Pappas with the intention and understanding that the note was not being discharged but that the title thereto was merely being transferred to Pappas as a purchaser, together with the collateral, which he was to hold as security for the payment of the note. We cannot say, as a matter of law, and in the teeth of allegations apparently to the contrary, that the payment of the note by H. C. Pappas made him a purchaser thereof, although, when the facts and circumstances are fully shown, such may, be the legal effect thereof.

Our statute provides that payment of a note by or on behalf of the maker will discharge it. C. M. Dig., 7885. Hence payment of such note by a stranger, if made for and on behalf of the maker, would discharge the debt. If H. C. Pappas paid this note for and on behalf of his brother, the note was discharged, and he was not entitled to the collateral. If, on the other hand, he paid it for and on behalf of himself, with the intention thereby of acquiring title to the note and its attached collateral, the note was not discharged, and the bank was justified in delivering him the collateral.

The complaint might have been fuller on this point, and a motion to make more definite and certain would lie. We cannot say, however, that it was bad upon demurrer, whether H. C. Pappas be treated as a party secondarily liable or as a stranger.

We may add that if H. C. Pappas was a purchaser of the note, or if he paid the same at a time when he was legally required to do so, the case of Union Mercantile Trust Co. v. Harnwell, supra, has no application.

From what has been said it follows that the judgment of the lower court is reversed, and the cause remanded with directions to overrule the demurrer and for further proceedings in accordance with law and not inconsistent with this opinion.

Mr. Justice SMITH, Mr. Justice HUMPHREYS and Mr. Justice McHANEY dissent.

Mr. Justice KIRBY did not participate.

DISSENTING OPINION.