First National Bank v. Badham

June 30, 1910. The opinion of the Court was delivered by Acting Associate Justice in place of Mr.Justice Hydrick, disqualified. For the purpose of this opinion it will be necessary only to state that this was a suit commenced 8th August, 1905, based upon two promissory notes set out in the complaint; each being the basis for a separate cause of action, as will appear from the complaint herein.

The main question involved in the Court below, as well as in this Court, is whether said notes are negotiable; it will, therefore be important to have a copy inserted here.

"$785.00. Columbia, S.C. July 12, 1902. On or before the first day of January, 1903, for value received in one machinery as per contract November 23, 1899, I, the undersigned, of Richland county, State of South Carolina, promise to pay to the order of V.C. Badham, of Columbia, S.C. seven hundred and eighty-five dollars, negotiable and payable at the Carolina National Bank, Columbia. Without offset, with interest at the rate of 8 per cent. per annum after maturity until paid, waiving all relief whatever from valuation, appraisement or exemption laws, with all expenses if suit be instituted for collection of this note. And it is expressly understood and agreed that the said V. C. Badham neither parts with the title, nor do the undersigned acquire any title in the property enumerated herein until this note and all other notes given in payment for same, and all extensions and renewals thereof are fully paid. And in case it becomes necessary to employ an attorney to collect this note, a further sum, not exceeding 10 per cent. for fees. Presentment for payment and protest waived. Sam J. Huffman. P.O. Congaree, Richland Co., State of S.C."

The following endorsements are on the back of the said note: "Pay to the order of Richland City Mill Works. V.C. Badham. Richmond City Mill Works. By H.A. Moore, Treasurer. Pay to the order of any Bank, Banker or Trust Co. All previous endorsements guaranteed. First National Bank, Richmond, Indiana. G.R. DuHadway, Cashier."

The other note is identical with the above, except the last endorsement, the amount and date of maturity; and these differences do not affect the question of negotiability; in other words, both notes must bear the same fate so far as that question is concerned.

According to the case, another action previous to this was brought on the notes against the maker, Sam J. Huffman, and V.C. Badham, the defendant herein, jointly, but was discontinued and this one commenced thereafter against V.C. Badham, because S.J. Huffman, in the former, answered and pleaded as a defense breach of warranty, alleging that the machinery was sold to him by Badham as agent for the Richmond City Mill Works, and that he and the Richmond City Mill Works, as an inducement to him, the said Huffman, to buy, had represented and warranted that said machinery would have a certain capacity of production per day, and said notes were given and accepted upon condition that he would not be liable unless the machinery upon trial proved to have such capacity, and same had failed to develop such capacity. The defendant, Badham, answered in that suit and virtually set up same defense. The plaintiff, in order not to become involved in litigation with said Huffman upon that defense, as above stated, discontinued that suit and instituted this one against V.C. Badham alone.

Badham, in substance, sets up same defense here as in the other suit. In this suit he alleges that he, as agent of Richmond City Mill Works, had full power and authority to make, and as such did make, the representations, and that he accepted and took the notes subject thereto and that his endorsement on said notes was conditional, that after a fair trial said machinery did not have the producing capacity of fifty barrels of flour per day, as represented by him to said Huffman.

On the trial in the Court below his Honor Judge R.W. Memminger, presiding, held the notes to be non-negotiable. Said trial resulted in judgment for defendant.

The case was heard in this Court, at November term, 1909, involving twenty-six exceptions, almost all of which will depend upon negotiability or non-negotiability of the notes.

Exceptions 9, 10, 15 and 16 in different forms raise the question of negotiability, and will be considered first and together.

In so far as our own decisions are concerned, beginning with Bank v. Strother, 28 S.C. 504, 6 S.E., 313, and coming on down to Machine Co. v. Badham, 81 S.C. 63,61 S.E., 103, the last utterance of this Court upon the subject, for one reason or another, there is a difference of opinion among the Supreme Court Justices on the question under consideration. The Court does not seem to have ever been a unit in any of the cases except the Strother case. In that case the note contained three provisions: 1st. "All counsel fees and expenses in collecting this note, if it is sued or placed in hands of counsel for collection. 2d. Gives payee ``power to declare this note due at any time they may deem it insecure, even before maturity.' 3d. With exchange on New York."

Mr. Chief Justice McIver, in delivering the opinion of the Court, held the note to be non-negotiable, mainly on the ground that it contained the provision "with exchange on New York," for, with reference to the other two provisions, he uses this language: "If, however, there was any doubt as to the effect of either of these stipulations, there can be none as to the effect of the exchange provision as above." Thus clearly showing that he was not fully satisfied, that the other two provisions affected negotiability.

The next case, Sylvester Beckley Co. v. Alewine, 48 S.C. 308,26 S.E., 609; 37 L.R.A., 86, the note provided for "ten per cent. attorney's fees for collection." Mr. Justice Gary, delivering the opinion of the Court, said that Bank v. Strother, held "that uncertainty in a note prior or subsequent to maturity destroyed its negotiability." Mr. Chief Justice McIver concurred in the opinion. Mr. Justice Pope concurred in the result on another ground. Mr. Justice Jones dissented as to question of negotiability.

The next case, White v. Harris, 69 S.C. 65,48 S.E., 41, the note contained the provision, "we agree in default of payment after maturity to pay ten per cent. for attorney's fees for collection." Mr. Chief Justice Pope, delivering the opinion, held the note to be negotiable, for the reason that the attorney's fees were definite and certain. Mr. Justice Gary dissented for the reason stated in the Sylvester case.

The next case, Green v. Spires, 71 S.C. 107,50 S.E., 554, the note contained a provision "to pay all costs and expenses, including ten per cent. attorney's fees," if "collected through an attorney or by legal proceeding of any kind." Mr. Justice Gary, delivering the opinion, held the note to be non-negotiable upon the authority of the Bank v. Strother. Mr. Chief Justice Pope concurred. Mr. Justice Jones dissented as to question of negotiability. Mr. Justice Woods concurred in the opinion of Justice Jones, saying Bank v. Strother should be overruled in so far as it held non-negotiable a note providing for payment of attorney's fees and costs of collection, which cannot accrue until after maturity.

The next case, Machine Co. v. Badham, 81 S.C. 63,61 S.E., 1031, the note contained the provision, "negotiable and payable at the bank * * * * with all expenses if suit be instituted for collection of this note." Mr. Justice Gary, delivering the opinion, held the note non-negotiable. Mr. Chief Justice Pope concurred in the result. Mr. Justice Jones concurred in the result, but dissented on the question of negotiability. Mr. Justice Woods concurred in the dissenting opinion.

The citation of the foregoing cases will show the views of the Justices of this Court, from which it will be seen this Court has been divided on the question under consideration since the case of Bank v. Strother down to the present time.

It is very important that the law on the question involved should be settled by this Court, and rightly settled, not so much in accordance with the needs and purposes of the times with regard to commercial interest, but in accordance with sound reason as regards the question itself. Our Court being divided in this regard and there being no decision upon which we can rely for precedent, except the case of Bank v. Strother, supra, it will therefore be necessary to look elsewhere for authority.

Mr. Daniel on Negotiable Instruments, 5 ed., sec. 62a, speaking of instruments like those involved here, says: "Such instruments should, we think, be upheld as negotiable," and continues with his reasons therefor, in the text, and besides cites numerous cases to support same, and also cites the cases contra.

I find the text writers on the subject are about equally divided pro and con. The Courts of the several States are about equally divided.

I find that those writers and jurisdictions opposed to holding paper like this under consideration negotiable, do so mainly on the ground of uncertainty as to amount that will be due under the terms of the instrument. In other words, the commercial world can not estimate the value of paper if put on the market for sale, or negotiation, hence would not know what to pay for it.

Those writers and jurisdictions who favor negotiability do so on the ground that no uncertainty as to amount due by terms of such instrument can arise until after maturity.

After a careful consideration of the authorities I am forced to the conclusion that the better reasoning leads to the following as a sound proposition of law. If a note or written instrument, otherwise negotiable, contain a provision or provisions, which do not and can not in any way have any effect on said note or written instrument until after it becomes non-negotiable by operation of law, to wit: after maturity, such provision or provisions do not render the same non-negotiable.

The provisions in the notes, involved here, that is, as to attorney's fees, and as to expense of collection, do not and cannot affect the negotiable character of the notes, because those provisions can not have any active legal operation until after maturity, when the notes by operation of law become non-negotiable.

The notes involved here are, however, non-negotiable, on account of the following provision contained therein, "for value received in one machinery as per contract November 23, 1899, I promise to pay," etc. This provision is notice to the commercial world of a contract made November 23, 1899, in connection with the purchase of the machinery for which these notes were given; the terms of the contract do not appear on the face of the notes, but it is sufficiently referred to and stated to inform those who deal with these notes they must take the contract into consideration in so doing.

The Circuit Judge, in the Court below, held the notes to be non-negotiable, which was correct, and this Court will not reverse a correct ruling, though the reason for it be erroneous or unsound.

The notes being non-negotiable, exceptions 1, 2, 3, 4, 5, 6, 7, 8, 11, 12, 13 and 14, which relate to the admissibility of evidence, can not be sustained, and are therefore overruled.

Exceptions 15, 16, 17 and 18 cannot be sustained, the notes being non-negotiable.

Exception 19 imputes error to the Circuit Judge in charging the following: "And if the jury also believe from the evidence, that before the commencement of this action Sam J. Huffman, or the defendant, offered to return the machinery to the plaintiff and the plaintiff declined or failed to accept a return thereof, then the jury should find for the defendant on this ground." Under the law of this State there can be no rescission of an executed sale for breach of warranty, except: 1st. Where this right is given in the contract of purchase. 2d. Where the seller is guilty of fraud. 3d. Where there has been an entire failure of consideration. The charge, therefore, should have limited the right of rescission to the instances above, and it should have been left to the jury to say whether or not; if the right ever existed to rescind, it had been waived by the defendant or by Huffman, in not undertaking to do so within a reasonable time.

Under the contention of the parties and in view of the testimony submitted in the case, it was error to charge as above.

Exceptions 20, 21, 22, 24 and 25 are disposed of by what has been said as to 19.

Exception 23 is overruled, as the request submitted by plaintiff is not applicable to non-negotiable paper such as is involved here.

Exception 26 is overruled, the question raised there being matter in discretion of the trial Judge.

Exception 10 is sustained in so far as the question raised therein concerns the charge in regard to sec. 255 B of the Code, the same is not applicable here as construed and charged by the Circuit Judge, for the reason that it would have the effect of destroying altogether negotiable paper in so far as this State is concerned.

Let all the exceptions be reported with the case.

It is the judgment of this Court that the judgment of the Court below be, and the same is, hereby reversed, and the case remanded for a new trial.

MR. CHIEF JUSTICE JONES concurs in the result and inthe separate opinion of Mr. Justice Woods.

MR. JUSTICE GARY: I dissent from the conclusion announced herein that the notes were not rendered non-negotiable by the provision as to attorney's fees, but concur in the separate opinion of Mr. Justice Woods to the extent that the words expressing the consideration of the note "for value received in one machinery as per contract November 23, 1899," did not render the note non-negotiable.

MR. JUSTICE WOODS. I concur in the conclusion reached in the opinion of Judge De Vore that the notes in suit were not rendered non-negotiable by reason of the provision therein for attorney's fees. The learned Judge has reached the conclusion, however, that the words in the notes expressing the consideration "for value received in one machinery as per contract November 23, 1899," prevented the notes from being negotiable instruments. I dissent from this conclusion, because it seems to me not only an unsound and unfortunate limitation on the negotiability of promissory notes, but clearly opposed to authority. The notes are identical in form and need not be separately referred to. The first note is in these words:

"$785.00. Columbia, S.C. July 12, 1902. On or before the first day of January, 1903, for value received in one machinery as per contract November 23, 1899, I, the undersigned, of Richland County, State of South Carolina, promise to pay to the order of V.C. Badham, of Columbia, S.C. seven hundred and eighty-five dollars, negotiable and payable at the Carolina National Bank, Columbia, without offset, with interest at the rate of eight per cent. per annum after maturity until paid, waiving all relief whatever from valuation, appraisement or exemption laws, with all expenses if suits be instituted for collection of this note. And it is expressly understood and agreed that the said V.C. Badham neither parts with the title, nor do the undersigned acquire any title in the property enumerated herein until this note and all other notes given in payment for same, and all extensions and renewals thereof are fully paid. And in case it becomes necessary to employ an attorney to collect this note, a further sum, not exceeding ten per cent. for fees. Presentment for payment and protest waived. Congaree, Richland Co., S.C. Sam J. Huffman."

The following endorsements were on the back: "Pay to order of Richmond City Mill Works. V.C. Badham. Richmond City Mill Works. By H.A. Moore, Treasurer."

There is not a word importing that the payment of the amount promised was to be subject to or dependent on any contract of sale or any contingency whatever. Had there been such an expression, without doubt the instrument would not have been negotiable. These cases will serve to illustrate the principle. In Dilley v. Van Wie, 6 Wisconsin, 206, the note was held not negotiable. There, however, the reference to a collateral contract was not, as in the note under discussion, explanatory of the consideration, but the words, "subject to the provisions contained in an agreement this day made between said Carter and myself," were inserted in the body of the instrument, qualifying and rendering conditional the promise to pay. In Cushing v.Field, 70 Maine, 50; 35 Am. Rep., 283, the note was held not negotiable because of the indorsement: "This note is subject of a contract made November 13, 1874." This was manifestly a limitation upon the promise itself and of course destroyed its certainty. In Costello v. Croxwell,127 Mass. 293, the note was not an original promise in writing, but was itself collateral given to secure a contemporary agreement. The words, "given as collateral security with agreement," were written on the margin and it is obvious, as stated by the Court, that the note was conditioned "upon the performance of the undertaking to which this is collateral."

This case is entirely different. The promise to pay is not subject to a separate contract, nor according to a separate contract, nor subject to any contingency, but absolute and unconditional. The words relied on by the learned Judge as making the note not negotiable merely express the consideration, the reference to the contract being manifestly for the purpose of indicating a sale by which the title to the machinery had been reserved as a security for the debt. Such a reference to the consideration and the security does not take away from the paper a single element of a promissory note; it is none the less an unconditional written promise to pay a specified sum of money at a certain time to the order of the payee.

The generally recognized rule that the expression of the consideration does not affect the negotiability is thus stated in Daniel on Negotiable Instruments, vol. I, sec. 51a: "The negotiability of the instrument is not impaired by recitals or statements upon its face, which merely state the consideration upon which it was made, and impose no other liability upon any parties thereto than that for the payment of the sum of money therein expressed. Where there is a memorandum upon the instrument that it is "secured according to the condition of a certain mortgage;" or that it was "given in consideration of a certain patent right;" or "as part pay for a pianoforte," or for any other consideration, or "and the same will be credited on your joint note to me." The statement that collateral security has been deposited for the performance of a promise contained in the bill or note is a recital only, which does not affect its negotiability; and though the recital contain the terms of the deposit, that does not alter the case, for it renders neither the amount, the time of payment, the payee, nor the engagement to pay, uncertain."

Two cases in this State make it clear beyond all doubt that neither statement of the consideration nor provision for securing the promise affect the negotiability of the instrument. And these cases seem conclusive of the question here; for as above indicated, reference to the contract of sale was made in the note merely to indicate that the note was given for the purchase money of machinery, and that by the contract of sale the title to the machinery was reserved as a security for payment of the note. In NationalBank v. Gary, 18 S.C. 282, a note held to be negotiable was in these words, fully setting out the security:

"$886.00. Charleston, S.C. July 31, 1877. On the first of November, 1877, I promise to pay to M.W. Gary or order, without offset, eight hundred and eighty-six dollars, for value received, with interest from date, interest after maturity at the rate of one per cent. per month, having deposited with M.W. Gary, as collateral security, seven hundred and thirty-five dollars Greenville and Columbia Railroad second mortgage coupons, past due. And in case this note shall not be paid when due, I hereby give the said M.W. Gary authority to sell the said security, or any part thereof, for my account, on the maturity of this note, or at any time thereafter, at public or private sale, at his discretion, without advertising the same, and to apply so much of the proceeds of said security to the payment of said note, as may be necessary to pay the same, with all interest due thereon, and also the payment of all expenses attending the sale of said security. If the net proceeds of such security shall not cover the amount due on this note, I hold myself bound to pay the balance forthwith, after such sale, with interest, at the rate of one per cent. per month."

In Dowie Moise v. Joyner, 25 S.C. 123, the note was in these words, expressing the consideration, the security for the debt and a distinct undertaking on the part of the payee:

"Collateral note for fertilizers. $826.50. Eastover, S.C., April 23, 1884. On November 1, next, I promise to pay to the order of Dowie Moise, eight hundred and twenty-six and 50-100 dollars at First National Bank of Charleston, for value received in fertilizers. And to secure the payment of this note, I hereby agree on or before May 15, next, to pay to the said Dowie Moise all moneys collected from the sale of said fertilizers, and to deliver to them all notes given for purchase of same, inclusive of freight on said fertilizers, as said collateral security for the payment of this note. That on or about September 15, next, Dowie Moise agree to return said planter's notes for collection for their account, and that I agree in their behalf to collect the same, and remit to them the proceeds of such notes as may be collected, or transfer the original notes which, as trustees for them, we may be unable to collect in part or in full, and this agreement to remain in force until this obligation is satisfied."

This was held to be a negotiable note, notwithstanding the agreement as to the collateral and the agreement of thepayees to return the collateral notes to the maker for collection.

It is a well settled doctrine in other jurisdictions also that the reservation to the payee of title in the property for which the note is given or the statement of the consideration do not affect negotiability. Chicago Ry. v. Merchants Bank, 136 U.S. 268; Choate v. Stevens (Mich.), 43 L.R.A., 277; Seigel v. Chicago Trust Savings Bank, 7 L.R.A., 537; Windmill Co. v. Honeywell (Kan.),53 Pac., 488; Campbell v. Equitable Securities Co. (Col.),68 Pac., 788; Collins v. Bradbury, 64 Maine, 37; Gilpin v. PeoplesBank (Ind.), 90 N.E., 91.

In Markey v. Corey, 108 Mich., 184, 62 Am. St. Rep., suit was brought on a promissory note on the face of which was written: "This note is given in accordance with the terms of a certain contract under the same date, between the same parties," and the Court held that the negotiability of the note was not affected by these words. In Biegler v.Merchants' Loan Trust Co. (Ill.), 45 N.E., 512, an indorsement on the note was as follows: "This note is secured by a lien upon my interest in certain horses named in the agreement this day made between S.W. Liehy Son and myself." It was held that the notes were negotiable and were not affected by the recital of the security and agreement.

In Bank of Sherman v. Apperson (Tenn.), 4 Federal, 25, the note recited that it was "for value received, being for a part of the payment on the Goree plantation purchased of said Gregg, as per agreement of the fourteenth of February, 1874." The Court held that the note in question was negotiable and "the recital of the consideration in the face of the note did not at all affect its negotiable character." In Taylor v. Curry, 109 Mass. 36, 12 Am.Rep., 661, a promissory note given to an insurance company and otherwise negotiable bore on its face the words: "On policy No. 33,386." The policy referred to contained a provision for a set-off in case of loss. Yet the Court held that this did not make the note contingent upon the happening of no loss and added, "a mere reference to the policy, without more, does not affect the negotiability of the note."

If a written contract had been introduced and had contained a limitation on the liability of the maker of the note, that fact would not affect the liability of the defendant as endorser, for as we have shown, it would not affect the negotiability of the note. But it may seem important to observe that the record shows that defendant failed to offer in evidence any written contract limiting the liability of the maker, and himself testified that there was no written contract containing any limitation of the liability of the maker of the note.

On the trial counsel for defendant did not contend that the reference to the contract of sale in the note affected its negotiability and the Circuit Judge did not so hold. It seems to me clear that the notes are negotiable and that the judgment should be reversed and a new trial ordered for error of the Circuit Judge in holding otherwise.

As this was the main issue in the cause, and the course of the trial and the other rulings of the Court depended very largely on the holding that the notes were not negotiable, the labor of considering the exceptions in detail would be fruitless.