Douglass v. Lockhart

On April 5, 1909, J. W. Douglass, F. R. Grissom, W. L. Owen, T. L. Shahan and B. P. Mills executed three notes due June 1, 1910, 1911, and 1912, respectively, whereby, it is alleged, they jointly and severally promised to pay "to the order of Lew W. Cochran, Crawfordsville, Ind., or bearer," the amount therein specified, with 8 per cent. interest, and providing that unpaid interest should bear the same rate of interest as the principal. The first of these notes was paid and appellee became the purchaser of the last two, and this suit is filed to recover the amount thereof. Plaintiff alleged that he purchased them for a valuable and adequate consideration, without indorsement from the party in possession of the notes, and without notice or actual knowledge of any infirmity therein, and without any knowledge that defendants had any character of defense against the same, and without having reason to believe that there was any illegality in connection with the execution and delivery of the notes, but that he was in all things a bona fide purchaser. The defendants filed a joint answer, in which they admitted the execution and delivery of the notes, but denied that the plaintiff was the owner and holder of the same, or that he purchased them for a valuable consideration before maturity, without notice, and further denied that he purchased the notes in good faith, but that plaintiff took them with full knowledge that they were given as deferred payments for a certain horse, the purchase of which was brought about by certain false and fraudulent representations, which rendered the notes noncollectible; that one R. F. Dygert entered into negotiations with defendants to sell them a certain French coach stallion, named Alfonso No. 3397, representing said stallion to be an imported registered animal; that it belonged to Lew W. Cochran, a large and well-known dealer and importer, of Crawfordsville, Ind., and that he was the agent of said Cochran in making such sale and taking said notes; that he gave them a registration certificate upon the stallion; that Lew W. Cochran was well known as a large and responsible dealer in registered horses, and that upon these representations they made and executed the notes; that the horse was not a registered coach stallion nor Alfonso No. 3397, and was not the property of Lew W. Cochran, who purported to sell and warranted to defendants, and that the said Dygert was not the agent of said Cochran; that the notes as drawn and signed by the defendants were made payable to Lew W. Cochran, of Crawfordsville, Ind.; that Cochran never authorized the taking of said notes; that they were never delivered to Cochran, and that after the notes were signed by defendants the words "or bearer" were falsely and fraudulently entered into the notes after the words, "Lew W. Cochran," in order that the said Dygert might transfer said notes without the signature of said Cochran, and thus cheat and defraud defendants; that they received the guaranty of the said Cochran in consideration of the notes; that the guaranty was forged; that the horse actually sold and delivered to defendants was inferior in breeding to the said Alfonso No. 3397, and was worth at least $1,200 less than the horse they actually thought they were buying, and for which they executed said notes, and that said notes were therefore without consideration and absolutely void. Defendants further alleged that the notes had been materially altered by the addition of the word "bearer" thereto; that appellee was fully advised of these conditions, or had notice of sufficient facts to put him upon inquiry before he purchased the notes, if, in truth and in fact, he ever purchased them; that he purchased the same for far less than the face value thereof; and that in the event defendants were held to pay any sum that they be required to pay only the amount which the plaintiff actually paid for the notes. After the evidence was in, the court instructed a verdict for the plaintiff against the defendants in the sum of $667 principal, and $288.75 interest.

The first error assigned is predicated upon the proposition that the evidence raised the issue of material alteration, and this seems to be the principal question presented by the appeal. It is contended by appellee that on account of article 582, R.S. 1911, and the construction placed upon that article, even though the words "or bearer" were inserted in the note, following the name of Lew W. Cochran, after their execution, still such fact does not constitute a defense to the action. The test as to the materiality of an alteration in a written obligation, as announced in volume 1, Ruling Case Law, p. 967, is as follows:

"That is a material alteration which so changes the term of the instrument as to give it a different legal effect from that which it originally had, and thus works some change in the rights, interest or obligations of the parties. It is the effect of the act upon the instrument, and not the particular manner in which it is done, that is material, whether it be by interlineation, addition, substitution, change of words, detaching material memoranda therefrom, erasure, or by cancellation of some material provision thereof. No distinction can be maintained between the interpolation of a new clause whereby the legal effect of the instrument is materially changed and the striking out of one thing and inserting another, whereby the same result is effected. That the alteration causes actual injury is not the test of materiality, and it is equally unimportant whether the alteration was beneficial or injurious to the party who it is sought to charge on the instrument. The question is not whether such party has been or could be injuriously affected, but whether or not his rights have been materially affected — whether the contract in its altered condition is the contract into which he entered. That is material which might become material in alteration which may, in any event, alter the rights, duties, or obligations of the person sought to be charged, is material in the legal sense. Courts cannot undertake to say that he would have made the contract as altered and thus to make it for him merely because its terms are more favorable to him than those of the original instrument any more than they could be justified in a like conclusion where the alteration imports additional liability. In the one case no less than in the other, the altered paper is not the contract which the party has made, and in neither case can the courts declare it to be his contract or enforce it as such. The law proceeds on the idea that the identity of the contract has been destroyed and that the contract made is not the contract before the court, that the party did not make the contract which is before the court, and so adjudging, it cannot go further than hold him bound by it on speculations, however probable and possible that he would or ought to have entered into the altered agreement because it involved less liability than the original and only paper executed by him. Nor is the intent with which an alteration is made to be considered in determining its materiality and its consequent effect upon the validity of the instrument altered, though it may be of great importance with respect to the right of the party affected by such alteration to recover upon the original contract or consideration. An alteration of an instrument may be considered immaterial if it does not vary the meaning of such instrument in any essential particular, and if the rights or interests, duties or obligations of either of the parties are in any manner changed, or if what is written or erased has no tendency to produce a change in the meaning or language or to mislead any person."

While the general rule is that a transferee without indorsement of a note payable to order takes it as a mere chose in action, and must aver and prove the consideration, and takes it subject to all equities which may be urged against it in the hands of the transferror, yet the rule has been abrogated in this state by the enactment of the above-mentioned statute. This statute provides that any person to whom a negotiable instrument has been assigned may maintain an action thereon in his own name, and, should he obtain such instrument before maturity, by giving for it a valuable consideration without notice of any discount or of any defenses against it, he would be compelled to allow only just discounts against himself. In Word v. Ellwood, 90 Tex. 130, 37 S.W. 414, our Supreme Court held that under this statute the form of assignment, whether written or verbal, was immaterial, as the statute extended its protection to all assignees coming within its terms, though they might not have acquired their instruments in accordance with the technical rules regulating transfers under the law merchant. The Supreme Court also held in Prouty v. Musquiz, 94 Tex. 87, 58 S.W. 721, 996, that the statute placed a transferree without indorsement by the payee upon the same footing as an indorsee, and this holding is followed in Bank v. Kenney,98 Tex. 293, 83 S.W. 368, Elmore v. Rugely, 48 Tex.Civ. 456, 107 S.W. 151, and McFarling v. Carey, 149 S.W. 766. The effect of this statute, in our judgment, is to make the alleged alteration of the instruments in question immaterial.

The further point is urged by the appellants that the evidence is sufficient to raise the issue of bona fides on the part of appellee in making the purchase. It is held in Wilson v. Denton, 82 Tex. 531,18 S.W. 620, 27 Am. St. Rep. 908, Greneaux v. Wheeler, 6 Tex. 515, and First Natl. Bank v. Chapman, 164 S.W. 900, that the validity of the title of the assignee of negotiable paper depends on his good faith in acquiring it. In Masterson v. Mansfield, 25 Tex. Civ. App. 262,61 S.W. 505, and Ft. Dearborn National Bank v. Berrot, 57 S.W. 340, it is held that the question of good faith in the purchase of an instrument is one for the jury. We will not discuss, or in any way set out, the evidence bearing upon this issue, but content ourselves with the statement that there is sufficient evidence in the record upon which the court should have submitted it. Bolt v. State Sav. Bank, 145 S.W. 707; Jones v. Bank, 160 S.W. 126.

We have carefully reviewed the statement of facts, and under the evidence we think the court should have submitted the issues of fraud and failure of consideration.

In view of another trial, we will state that, in the event the plaintiff should be entitled to recover, his judgment should be for the full amount claimed, rather than the amount paid by him for the notes. Locke v. Citizens' National Bank, 165 S.W. 536, decided by this court, but not yet officially published.

Because the court peremptorily instructed the jury, the judgment is reversed, and the cause remanded.

HUFF, C.J., concurs in the disposition made of the appeal, but dissents upon the question of the materiality of the alleged alteration.