City Nat. Bank v. Kelly

It is settled in this jurisdiction that one who takes a negotiable instrument as collateral security is a purchaser for value, and unaffected by any equities between the original parties to the note. Farmers' National Bank ofTecumseh v. McCall, 25 Okla. 600, 106 P. 866, 26 L. R. A. (N. S.) 217. It is also settled that the provision in a note, waiving presentment for payment, notice of nonpayment, and protest and consenting that time for payment may be extended without notice, does not render the note nonnegotiable (Missouri Lincoln Trust Co. v. Long, 31 Okla. 1, 120 P. 291), and this note having been given after the passage of the negotiable instrument law, the provision for an attorney's fee does not render it nonnegotiable (Rev. Laws 1910, sec. 4052, subd. 5). We therefore hold the note in question was a negotiable instrument. The question, however, still remains whether the bank lost its rights as an innocent holder when it obtained absolute title to the note in suit in June, 1911, the date that it took it in payment of the Denton note for an equal amount for which the note in suit was held as collateral. In other words, does the holder of negotiable paper for value, and without notice, lose his rights if, after notice, he takes the collateral in place of the original debt. In I Daniel on Neg. Inst. (6th Ed.) sec. 803, it is said:

"We have seen under what circumstances the purchaser of a negotiable instrument has a better right and title than his transferror. It is to be observed further that as a general rule the purchaser can never be placed on a worse footing than his transferror, although he himself could not, in the first instance, have acquired the vantage ground occupied by such transferror. And therefore, even, if he have notice that there was fraud in the inception of the paper, or that it was lost or stolen, or that the consideration has failed between some anterior parties, or that the paper be overdue and dishonored, he is nevertheless entitled to recover, provided his immediate indorser was a bona fide holder for value unaffected by any of these defenses. As soon as the paper comes into the hands of a holder, unaffected by any defects, its character as a negotiable security is established, and the power of transferring it to others, with the same immunity which attaches in his own hands, is incident to his legal right, and necessary to sustain the character and value of the instrument as property and to protect the bona fide holder in its enjoyment. To prohibit him from selling as good a right and title as he himself has would destroy the very object for which they are secured to him — would indeed be paradoxical. And it has been justly said that this doctrine 'is indispensable to the security and circulation of negotiable instruments, and is founded on the most comprehensive and liberal principles of public policy.' Nor is it a hardship to the maker or acceptor of the instrument. For, as said by Beck, C. J., 'The maker of the note would be liable to the transferror; his condition is made no harder by the note coming into the hands of one having notice of its infirmities.' "

The only exception we have been able to find to this rule is: (1) When the transferror himself has no title to the note, then in some cases — not necessary to be specified in the case at bar — a bona fide purchaser obtains no title (1 Dan. on Neg. Inst., sec. 802a; Gourley v. Pioneer Loan Co., ante, p. 434,151 P. 1072; and (2) when the note is invalid between the payor and payee, the payee himself cannot, by purchase from abona fide holder, become successor to his rights (1 Dan. Neg. Inst., sec. 805); but none of these reasons, in our opinion, apply to the conditions existing in this case. The bank had the right, in case the Denton note was not paid, to sell this collateral, and had it purchased it, it certainly would not have lost any of its rights as an innocent purchaser, and we can see no reason why its rights should have been changed by acquiring title to the note, which it then held as an innocent purchaser for value, in the manner above set out. As was said by the Supreme Court of Iowa:

"The maker of the note will be liable to the transferror; his condition is made no harder by the note coming into the hands of one having notice of its infirmities." (Simons v. Merritt, 33 Iowa, 537.)

But, in addition to this, the court charged the jury that the damages stipulated in the contract in favor of the defendant, Kelly, in the event of a breach, exceeded and entirely offset the defendants' obligation on the note sued on. From this instruction it is obvious that the court treated the stipulation for $1,500 damages as liquidated damages, and not as penalty. The contract, which is set out above, provides several things for Denton to do, and the agreed damages of $1,500 is provided in case of failure to perform the contract, which means the entire contract, and not any one of the independent conditions contained in it. In the case at bar Denton had transferred his interest in the business, and Kelly received it, and afterwards sold it, but the title to some of the chattels named had failed, and, taking the evidence most favorably for the plaintiff, Denton had broken the contract by entering into the real estate business in Hollis, contrary to its terms. Our statute on this subject provides (Rev. Laws 1910, sec. 974):

"Penalties imposed by contract for any nonperformance thereof are void. But this section does not render void such bonds or obligations, penal in form, as have heretofore been commonly used; it merely * * * avoids the penal clauses."

Section 975 provides:

"Every contract, by which the amount of damages to be paid, or other compensation to be made, for a breach of an obligation, is determined in anticipation thereof, is to that extent void, except as expressly provided by the next section."

Section 976 provides:

The parties to a contract may agree therein upon "an amount which shall be presumed to be the amount of damage sustained by a breach" thereof, "when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage."

In Raymond v. Edelbrock, 15 N.D. 231, 107 N.W. 194, it is held, where the contract stipulates for the performance of several acts, and fixes the same amount of damages for the nonperformance of any single condition as is fixed for a total breach, regardless of the relative detriment apt to result from such partial breach as compared to the loss for the total breach, the very terms of the contract itself demonstrate that compensation for actual detriment was not the thought of the parties. If the agreement is not for compensation it is necessarily one for penalty.

In 1 Pom. Eq. Jur. (3d Ed), sec. 444, it is said:

"When an agreement provides for the performance or nonperformance of one single act, or of several separate and distinct acts, if the stipulation to pay a certain sum of money upon a default is so framed, is of such a nature and effect that it necessarily renders the defaulting party liable in the same amount at all events, both when his failure to perform is complete and when it is only partial, the sum must be regarded as a penalty, and not as liquidated damages."

In our opinion these authorities announce the true rule and are applicable to the facts in the case at bar. There were in the contract under consideration a number of separate and independent things to be done by Denton: First. He was to transfer one-half interest in the real estate business, and the evidence shows that he did this. Second. He was to transfer a one-half interest in an automobile, and the evidence shows that this was done. Third. He was to transfer a one-half interest in all the personal property set out in the contract, and this was done, with the exception of some articles of the value of from $50 to $75. And, fourth. He was not to engage in the real estate business in Hollis for 20 years, and was to work for Kelly, or his firm for a certain time. The contract provides as liquidated damages the sum of $1,500 for nonperformance of the contract. Under the construction which seems to have been placed on the contract by the trial court, had all of it been performed, except transferring the personal property, Kelly would still have been entitled to recover the $1,500. Under the above authorities, and under sound reason, we do not think this is so. We are therefore of the opinion that the instruction complained of was faulty in both aspects above discussed.

We therefore recommend that the judgment be reversed, and the cause remanded.

By the Court: It is so ordered.