Butterworth v. Beach

Kimball, Justice.

This appeal is for review of a judgment for plaintiffs (respondents) in an action on a promissory note. The defendants (appellants) were the makers of the note which was dated May 12, 1915, for $1050, payable one year after date to the order of Thoeming Commercial Company, payee. In the petition the plaintiffs alleged, among other things, that they took the note from the payee for value before ma-urity in) the regular course of business. The answer admitted the making of the note by the defendants, denied generally the other allegations of the petition, and alleged a total failure of the consideration for the note. Trial was had without a jury. The trial court, believing that the plaintiffs had the rights of holders in due course, refused to hear any evidence in support of the defense of failure of consideration, and we must, therefore, view the case as though the defendants have a complete defense to the note in the hands of the payee or any other person not having the rights of a holder in due course.

It was shown by the; plaintiffs’ evidence that they acquired the note, not from the payee before maturity, but from the Weston County Bank long after it was due. Having acquired the paper after its maturity, the plaintiffs were not in a position to claim that they were holders in due course as defined by the Negotiable Instruments Law (Wyo. C. S. 1920, § 3985,) but if the bank, from whom they derived their title, was a holder in due course at the time of the transfer, the plaintiffs were entitled to the same rights. C. S. § 3991. The important question, then, was whether the bank was a holder in due course when it transferred the note to plaintiffs. Upon this point, the plaintiffs introduced evidence tending to prove that the bank became the holder of the note in good faith before maturity as collateral to secure the payment of notes owed the bank by Thoeming Commercial Company, payee in the collateral note, and Thoeming Mercantile Company; that the plaintiffs, on August 16, 1917, bought all the “Thoeming” notes then held by the bank and at the same time took over the note in suit as collateral to the notes so bought.

The witnesses who testified to these facts were not asked by plaintiffs to give details with respect to the pledge contract between .the bank and Thoeming Commercial Company, nor to describe the principal indebtedness for which the note in suit was pledged. The president of the bank, who had testified for plaintiffs, was afterwards called as a witness for defendants, and then testified that the note in suit was pledged originally and before maturity as security for eight notes then held by the bank, sis of which were made by Thoeming Commercial Company for various amounts aggregating about $1700, one by B. H. and L. C. Thoeming for $1100, and one by Thoeming Mercantile Company for $339, and that all of these eight notes had been paid before the trial. There is no direct evidence in the record to show more definitely when or how they were paid. However, as it appears that on August 16, 1917, the plaintiffs bought all Thoeming notes then held by the bank, the inference is that other Thoeming notes had been paid previously; and, as the bank on August 16 claimed to hold the note in suit as collateral only, it is to be inferred that it had not been sold or taken by the bank in payment of any part of the principal indebtedness for which it had been originally pledged, and that it was then held only as security for the notes sold to plaintiffs. The same witness testified that the “Thoeming” notes sold to plaintiffs were eight in number, one made by Thoeming Commercial Company for $476, dated May 10, 1913, and seven by Thoeming Brothers for various amounts, aggregating about $4400, none dated earlier than February, 1917. There was no evidence that the Thoeming Brothers indebtedness, evidenced by the seven notes last mentioned, originated prior to the maturity of the collateral note in question. It was stated rather casually that some of them'were renewals, but there was no evidence to show the date or nature of the debts renewed by them. The same witness testified that any collateral the bank “had from Thoeming was applied to any of the Thoeming indebtedness — Thoeming Mercantile Company, Thoeming Commercial Company and Thoeming Brothers., ’ ’ but there was no evidence that 'this was done pursuant to any pledge agreement with the Thoeming Commercial Company.

The defendants offered to prove that the note in suit was not received by the bank before its maturity as collateral to any of the notes sold by the bank to plaintiffs. Plaintiffs’ objection to this offer was sustained, and this ruling is assigned as error. The theory upon which the objection was sustained, as announced by the trial judge, was, in effect, that the plaintiffs were entitled to the rights of holders in due course unless the defendants could prove that the note in suit was never in fact given to the bank as collateral security before maturity.

We cannot concur in this view, and think it cast too great a burden on defendants.

It may be conceded that the note in suit was pledged before maturity to the bank which then became a holder with a lien, and, therefore, a holder for value to the extent of the lien. C. S. 3960. No other element of a holder in due course being involved, the bank was then also a holder in due course to the same .extent. However, it appears without contradiction from the evidence in the record that the principal indebtedness for which the note in suit was then held as collateral was paid, and if that were the only indebtedness involved, the bank thereafter could not Have collected the collateral note from the defendants having a complete defense against the payee. A pledgee of a negotiable instrument is a holder in due course only to the extent of his lien. C. S. 3960, supra; Jones on Collateral Securities, (3rd Ed.) See. 674, 675; Daniel on Neg. Ins. (6th Ed.) Sec. 832a; Williams vs. Cheney, 3 Gray, (Mass.) 215; Easter v. Minard 26 Ill. 495; Yellowstone National Bank v. Gagnon, 19 Mont. 402; 48 Pac. 762, 44 L. R. A. 243, 16 Am. St. Rep. 520; Canadian etc. Bank v. Sesnon Co., 68 Wash. 434; 123 Pac. 602. When the principal indebtedness is paid the pledgee’s lien is at an end, and thereafter he does not continue as a holder in due course of the pledge unless he has some other interest which gives him that standing.

The only other interest of the bank shown by the evidence was that of a holder of the instrument as a pledge to secure the indebtedness evidenced by the eight notes which the plaintiffs bought on August 16, 1917, and, of course, this was the only interest which the plaintiffs then acquired. In the absence of evidence to connect the notes bought by plaintiffs with the original indebtedness for which defendants’ note was pledged before maturity, or to show the time when defendants’ note was pledged to the bank for the indebtedness evidenced by the notes sold to plaintiffs, there was nothing to exclude the possibility that, as security for the latter indebtedness, defendants’ note was received by the bank after its maturity. If that were established, neither the bank nor its transferee had the rights of a holder in due course, and the pledged note in the hands of either was subject to the same defenses as if it were nonnegotiable. C. S. Sec. 3991.

Evidence material on this issue was excluded when the trial judge sustained the objection to defendants’ offer and. announced that no evidence along that line would be received unless the defendants proved that the note in suit was never given to the bank as collateral before maturity. In other words, it was then held that if the bank, as a pledgee before maturity, was a holder in due course, it continued as such even after the payment of the principal indebtedness. This cannot be true if, as we have said, a pledgee is a holder in due course only to the extent of his lien. On this point plaintiffs’ counsel relies on cases holding that in a suit on a negotiable instrument by the pledgee against the maker the condition of the indebtedness from the pledgor to the pledgee, even its payment in full, is immaterial, and cites, among other cases, Logan v. Cassell, 88 Pa. St. 288; 32 Am. Rep. 453; Sibley v. Robinson, 23 Me. 70; Banister v. Kenton, 46 Mo. App. 462; Peoples Nat’l. Bank v. Rice, 149 App. Div. 18, 133 N. Y. Supp. 622. These eases, and others, tend to establish the principle that a pledgee who continues to hold the pledge after the payment of the pledgor’s debt to him may, as a legal holder, recover the amount due from the maker to the pledgor, but they do not lend any support to the proposition that such a holder is a holder in due course.

We deem it unnecessary to discuss other specifications of error in the exclusion of evidence. Those upon which our ■opinion is not herein indicated raise questions which may be unimportant or presented in a different manner at another trial.

No question in regard to the sufficiency óf the pleadings was raised before or at the trial, and no evidence was objected to on the ground that it constituted a variance or worked a surprise. The court and the parties assumed at the trial that the issues upon which evidence was taken were properly presented by the pleadings which we think were sufficient to support the judgment. Whether any pleading on proper challenge should have been amended in the trial court is a moot question which we need not decide.

For the error mentioned the judgment is. reversed, and the cause remanded for a new trial.

Reversed and Remanded.

Potter, Ch. J., and Bluhe, J., concur.