Alpena National Bank v. Greenbaum

44 N.W. 1123, 80 Mich. 1, 1890 Mich. LEXIS 595

• Court: Michigan Supreme Court
• Decided: April 11, 1890
• Status: Published

Opinions

Champlin, C. J.

This case was before this Court at the January term, 1889, and is reported in 74 Mich. 157.

The Prentiss Lumber Company was a corporation organized under the laws of the State of Michigan, and was doing business at the city of Alpena, where it owned a saw-mill, and was engaged in the manufacture and sale of lumber. On September 7, 1883, it was largely in debt; and on account of losses and financial embarrassments, it was not able to meet its commercial paper at maturity, and, in order to secure the payment of certain classes of its paper and debts, it executed to George L. Maltz, of Alpena, two mortgages, — one upon its saw-mill property and appurtenances, upon condition and in trust to pay the following indebtedness, with interest at 7 per cent, until paid, namely:

George L. Maltz_______________________________ $13,000 00

The Alpena National Bank.................... 77,500 00

Hubbell, Brown & Co., of Cleveland, Ohio____ 2,000 00

Pierce & Coleman, of Dayton, Ohio........... 7,500 00

Mary O. Prentiss, of Alpena................... 2,700 00

Rectina P. Chase, of Syracuse, N. Y........... 186 00

A. R. &. W. F. Linn, of Detroit______________ $3,085 75

The Labor account............................ 10,000 00

Total...................................... $115,921 75

The other mortgage was upon certain personal property, and was also in trust to pay the following indebtedness of the Pientiss Lumber Company, with interest. at 7 per cent, until paid, namely:

George L. Maltz, of Alpena...'________________ $13,000 00

The Labor Account, being the aggregate amount then due certain laborers and employés then in the employ of the company, for labor performed about the mill and mill premises, and the rafting and handling of logs of the company_________________________________________ 10,000 00'

The Alpena National Bank, a sum sufficient to cover the direct loans of the bank made to the Prentiss Lumber Company, and the amount of all paper held by the bank accepted or indorsed by A. R. & W. F. Linn or George Prentiss, and estimated at about_____________ 21,535 75-

Perry Prentiss, of Cleveland, Ohio............. 1,500 00-

Hubbell, Brown & Co., of Cleveland, Ohio____ 2,000 00

Pierce & Coleman, of Dayton, Ohio........... 7,500 00

Mary C. Prentiss, of Alpena________ 2,700 00’

Rectina P. Chase, of Syracuse, N. Y.......... 186 00-

The remainder of the indebtedness to the Alpena National Bank, arising from paper of first party held by said bank, about the sum of.. 59,000 00

Total...................................... $117,421 75

It was expressly agreed in the chattel mortgage that the indebtedness stated above should be paid in the order above set forth, so far as the avails of the chattel mortgage security would pay the same. The .mortgagee was authorized to sell at public or private sale, and apply the proceeds thereof in liquidation of said debts, interest, and reasonable expenses.

Both mortgages bore date September 7, 1883, and were executed at the same time, as parts of one transaction, and, according to familiar rules, must be construed together, as one instrument. Maltz immediately took possession of the personal property, and proceeded to convert it into money. ' A quantity of logs he hired sawed at the mill, and sold the lumber. He has converted all of the property covered by both mortgages into- money, and has received as the avails thereof the following sums:

From the sale of logs......-................. §36,638 55

From the sale of lumber................. 37,998 02

From the sale of other personal property______ 2,683 76

From the sale of saw-mill___________ 35,000 00

Total...................................... §112,320 33

It appears that previous to the failure of the Prentiss. Lumber Company the defendants, Greenbaum and Epsteyn,. being then in partnership, and prior to January 1, 1883,. sold to the Prentiss Lumber Company goods for which' they took the notes of the company. Such notes were by them indorsed and discounted at the Exchange Bank of George L. Maltz. After February 1, 1883, one of such notes was sold and transferred by Maltz to the Alpena National Bank, and another, given April 23, 1883, was, by Greenbaum and Epsteyn indorsed and discounted at the Alpena National Bank; and were held by the bank at. the time the mortgages were executed to Maltz, and formed a portion of the class secured by the last clause of the chattel mortgage. The Alpena National Bank brought this suit against the maker and indorsers of these notes, two in number, which had been given in renewal of such former notes. The indorsers appeared to the action, and set up several defenses in their notice filed under the plea of the general issue, viz.:

1. That Greenbaum and Epsteyn sold goods for which the notes were given to the Prentiss Lumber Company upon credit, by and through the representations of Maltz as to the solvency and standing of the Prentiss Lumber Company, and to the effect that, if they would sell to the Prentiss Lumber Company on credit, and receive its notes, the Alpena National Bank would receive such notes, and discount the same, and look absolutely to said Prentiss Lumber Company for their payment, and that Greenbaum and Epsteyn were not to be liable upon their indorsements at all.

2. That Greenbaum & Epsteyn were induced to sell goods to the Prentiss Lumber Company by the false and fraudulent representations of Maltz, as president and general manager of the Alpena National Bank, that the Prentiss Lumber Company was entirely solvent, and had goods, money, and other property, to the amount of over $100,000, over and above all debts and liabilities, and the defendants would be safe and secure in making such sales upon credit; that at this time the Prentiss Lumber Company was indebted to the Alpena National Bank in the sum of several thousand dollars, and there-was an understanding and agreement between George Prentiss, representing the Prentiss Lumber Company, and George L. Maltz, as president and general manager of the Alpena National Bank, that the said Maltz, as president and general manager, should represent the Prentiss Lumber Company to be entirely solvent, and in good credit, when, as a matter of fact, it was absolutely insolvent, and known to be so by the said George L. Maltz, for the purpose of getting credit, and inducing Greenbaum & Epsteyn to sell on credit said goods, and take therefor the notes of the Prentiss Lumber Company.

After the reversal of the case in this Court, as before stated, the defendants interposed another notice, which is entirely unauthorized in practice, setting forth in such notice the entire opinion of this Court in disposing of the case, and also the memorandum filed in refusing a rehearing.

They also appended thereto a notice of a third defense, .as follows:

-“And- also that at the time the notes in suit were indorsed there was a fraudulent understanding and agreement between the Prentiss Lumber Company, represented by George Prentiss, and the plaintiff that, whenever the plaintiff should ask for it, or demand the same, the Prentiss Lumber Company would turn over to the plaintiff, absolutely, all its property, or give security thereon, to pay or secure a large indebtedness due from the Prentiss Lumber Lumber Company to the plaintiff, which agreement and understanding was fraudulently concealed from all of said defendants by the plaintiff, as well as the existence of any indebtedness from the Prentiss Lumber Company to the plaintiff, when, if either of said facts were made known to any of said defendants, said defendants would not have taken or indorsed the notes of the Prentiss Lumber Company in suit.”

When the case was here before, it satisfactorily appeared to us, from the record then before us, that Mr. Maltz had collected from the assets sufficient money to pay all of the claims secured by the mortgages in full; and it was upon this fact that we held the notes in suit paid. We said:

“It appears that Mr. Maltz collected and holds in deposit, in the bank or in his hands, money enough to pay this paper, and which is, by the terms of the trust, applicable to such payment.”

And we refused to examine the other errors alleged—

“Because, in our opinion, the evidence showed payment of the paper.”

The first question to be disposed of, therefore, is whether the record now before us discloses a different state of facts upon that point. If it does not, the judgment in favor of the defendants must stand affirmed, as the opinion then announced, so far as the facts are the same, is the law of the case.

The testimony presented in this record is not the same upon this point as it was when the case was tried before. The defendants’ counsel did not see fit to rest their defense before the jury upon the question of payment, nor, indeed, were they content to try the case upon the same issues involved in the suit as first tried, but they interposed a notice of a new and different defense, and introduced a mass of testimony which they claimed tended to prove the defenses set up in their notice; and these defenses were submitted by the court to the jury as if they were of the first importance, and the question of payment was laid before the jury in a manner which made it appear to be of only secondary importance. The jury found a general verdict for the defendants. So we are unable to determine whether the jury found that the notes had been fully paid because of enough money having been collected to pay the indebtedness secured by the mortgage in full, or whether they found that there was no cause of action on account of the other defenses set up.

On the trial in this case, Mr. Maltz testified positively and unequivocally, that — ■

“The property did not realize enough to pay all the indebtedness covered by the mortgage."

He also testified that after converting all the property into money, and paying all the indebtedness mentioned in the mortgage prior to that secured by the last clause, the balance on hand to apply upon this indebtedness was the sum of §13,842.65; that the last money realized was the sale of the saw-mill on February 15, 1886; and that, since the last trial, he had apportioned the balance on hand pro rata among the creditors in that class as of that date, and had indorsed " the share applicable to the notes in suit upon such notes. If this testimony be true and there is no positive testimony in contradiction of it, then the notes in suit were not fully paid, as held in our former opinion. Whether the jury found it true or not, we cannot tell, because the other defenses were submitted to them, and the judge instructed them if they found such defenses established by a preponderance of testimony, they should find for the defendants.

I shall not analyze the testimony pro and con to show, or draw inferences, that enough money had in fact been received to pay in full all claims secured by these mortgages out of the $112,320.33 acknowledged to have been received by Mr. Maltz. I will only say that possibly the figures and the testimony may be so handled as to make it appear that enough was received; and the skillful counsel for the defendants in his brief so places them as to make it thus appear. But he has made no allowances for interest, or expenses of the trust. The indebtedness all drew interest, some of which had accrued at the time the mortgages were executed. The property was sold from time to time during the years 1883, 1884, 1885, and 1886; the last sale being the saw-mill, for $35,000, on February 15, 1886. The mortgages were dated September 7, 1883. From this date to the' last sale was two years, five months, and eight days. It would be within bounds to say that at least an average of one year’s interest accrued upon the total indebtedness. We gather from the testimony, that the face indebtedness, without interest, embraced in the last clause of the mortgage, was at its date $50,846.84, to which add one year’s interest at 7 per cent., — $3,559.28,—makes a total of $54,406.12. The prior indebtedness secured by the mortgage, as we gather from the testimony, was $58,441.75; to which add one year’s interest,. — $4,090.92; total, $62,532.67, — making the total indebtedness to be paid, including one year’s interest, $116,938.79, which exceeds the sum realized for the property, to say nothing of the expenses of executing the trust, which must have been considerable. Whatever deficit there may be must fall upon the last class secured by the mortgages.

I do not pretend to accuracy in the above figures. This can only be arrived at by an accounting, if there is any dispute, between Mr. Maltz and the creditors. If, however, as appears to be the case with these defendants, such creditors deny all liability on their contract of indorsement by reason of tbe defenses set up in this case, a suit at law will be necessary to settle that question; and this brings us to a consideration of this branch of the case as presented by this record.

In order to understand the points raised by the assign-¹ ments of error, it is necessary to bear in mind the dates of certain events which have an important bearing upon the rulings of the court in the admission of testimony, as well as upon the defenses set up under the notices given under the plea of general issue.

In 1872, George Prentiss engaged in the business of the manufacture of lumber in Alpena, and took up his residence there in 1878. He continued this business until January or February, 1882, when the Prentiss Lumber Company was organized as a corporation, and this corporation continued the business of manufacturing lumber at Alpena from the date of its organization until on and after September 7, 1883.

In 1880, Greenbaum and Epsteyn, the defendants in this suit, entered into copartnership, and engaged in the business of selling clothing, at Alpena. They continued in such business until April 23, 1883, when they dissolved partnership. They had dealings with George Prentiss down to the time the corporation called “ The Prentiss Lumber Company” was organized, and afterwards with such corporation; the total amount of sales being over $7,200. In such dealing they took the individual notes of George Prentiss while he was in business, as follows:

April 14, 18S1................................... $1,081 89

November 4, 1881..................-............ 801 69

Total......................................... $1,888 58

They took the notes of the Prentiss Lumber Company as follows:

February 15, 1882.............................. § 700 00

April 3, 1882..................-................. 867 85

August 24, 1882................................- 500 00

December 18, 1882............................. 1,014 43

February 15, 1883............-_________________.. 1,000 00

April 23, 1833................................... 1,162 76

Total_____________________-................. §5,245 04

All of the foregoing notes were paid except that of December 18, 1882, for $1,014.43, and that of April 23, 1883, for $1,162.76, both of which' were - afterwards renewed, and are the notes involved in this suit.

From 1872 to February 1, 1883, George L. Maltz was engaged in business at Alpena as a private banker, and conducted it under the name of the "Exchange Bank/'’ On February 1, 1883, the Alpena National Bank was organized under the act of Congress. Maltz owned less than one-half of the stock in this corporation, and was elected a director and president of the bank, and was its financial manager. The note of date December 18, 1882, was discounted by Maltz at his private bank on January 3, 1883, and was sold by him to the Alpena National Bank soon after it organized, and was renewed by a new note of date June 21, 1883, drawn by the Prentiss Lumber Company, payable to the order of John C. Comfort, cashier, and indorsed by Greenbaum and Epsteyn. The note of date April 23, 1883, was discounted by the Alpena National Bank on that day, and was renewed by the parties on August 25, 1883. The original notes were discounted for Greenbaum and Epsteyn, and they received the avails thereof. They were not accommodation indors- • ers or makers, but they received the full consideration expressed in the notes, less the discount. All sales of goods for which the first-mentioned note was given were made before the Alpena National Bank was organized.

This action is upon contract, brought on the promise of defendants, Greenbaum and Epsteyn, to pay these notes. The defendants have, by way of notice, 'set up three defenses, two of them founded upon what they allege as a fraud perpetrated upon them by George L. Maltz, as president and financial manager of the Alpena National Bank. While retaining the consideration for which their promises were made, they ask to be relieved from all liability, under their first defense, because Maltz, while yet a private banker, and before the plaintiff had an existence, made representations to them, as the president of the plaintiff bank, as to the credit and responsibility of the parties to whom they sold goods for which they took the notes discounted by them, and that Maltz, at the time of such sales, asserted that if they would sell to the Prentiss Lumber Company goods, and receive therefor the notes of the Prentiss Lumber Company, the Alpena National Bank would receive said notes, and discount the same, and look absolutely to the said company for their payment. And, in reliance upon such representations, they sold the goods, took the notes, indorsed them to facilitate collection, but with the understanding that such indorsement was without recourse, and without liability. There is no testimony in this record tending, in the remotest degree, to show that, at the time the sales were made by Greenbaum and Epsteyn for which the note of December 18 was given, such a corporation as the Alpena National Bank was ever thought or spoken of.

With these undisputed facts before us of the business in which the several parties were engaged, and with the dates of the several transactions in our mind, it is clear that the first defense set up cannot by any possibility be true. It is impossible that Mr. Maltz should, as the president and financial manager of the Alpena National Bank, have made the representations set up in the first defense. The allegation is that they were made to -induce Greenbaum & Epsteyn to sell goods to the Prentiss Lumber Company, and these sales were all made during •the years 1881-82-83, and prior to the dissolution of the firm of Greenbaum & Epsteyn. Mr. Greenbaum testified that the goods for which the note of December 18, 1882, was given, were all sold prior to November 28 of that year; and the note of April 23, 1883, was given for .sales made between November 28, 1882, and April 20, 1883. It is not claimed that, between the dates last ■given, any representations were made which induced ■defendants to sell goods upon crdit to the Prentiss Lumber Company.

Mr. Greenbaum was permitted, against objection, to testify to representations which Mr. Maltz had made to him of the credit and responsibility of the Prentiss Lumber Company in 1881 and 1882; and, also, that when he ■closed up business with the company, in April, 1883, Prentiss offered him a note to wind up the business, and that he did not care to take the note, and Prentiss told him to find out whether Maltz would discount it, and how the Prentiss Lumber Company stood, and that Maltz told him that he (Greenbaum) could take the note; there was no risk about it; the Prentiss Lumber Company was good, and worth over $100,000;' that Maltz said he would discount it in the bank, and he (Greenbaum) would have to run no risk; that the note was all right; “that the Prentiss Lumber Company note is all right;” that he relied upon Maltz’s statements, and took the note, and a few days after discounted it at the bank. The admission of this testimony was not only a palpable, but it was pernicious, error. The testimony as to the representations made at the time the note was taken, in April, 1883, was Hot admissible under the notice; and that with reference to representations made before the organization of -the bank, and before Maltz could possibly be its president and financial manager, was clearly inadmissible.

In the moral law, we read of visiting the sins of the fathers upon the children unto the third and fourth generations, under certain circumstances. But it is difficult to see how, if private-banker Maltz made any such representations as claimed respecting the credit of the Prentiss Lumber Company, .and that the Alpena National Bank would, if such credit was extended, take the notes without recourse against defendants as indorsers, these could be laid at the door of the Alpena National Bank, organized long afterwards. This notice is not only inconsistent with the facts, but it is unsupported by the. testimony to sustain that branch of the notice which asserts that, if such sales should be made upon credit, the Alpena National Bank would discount the notes, and look only to the Prentiss Lumber Company for its pay.

It is not necessary for us to decide whether an indorser of commercial paper can be permitted to show by parol that at the time his indorsement was made, and the paper transferred, there was an agreement that he should not be held liable upon his indorsement.

In the second defense, which is set forth above, there exists the same inherent difficulty. The gist of the defense is the fraud of Maltz, as president and financial manager of the Alpena National Bank, in entering into an agreement with George Prentiss, representing the Prentiss Lumber Company, that he (Maltz) should represent the company as entirely solvent, and in good.credit, for the -purpose of inducing Greenbaum ■ & Epsteyn to-sell clothing and gents’ furnishing goods, and take therefor the notes of the company, Maltz knowing them to be absolutely insolvent; and, in pursuance of such agreement, representing the Prentiss Lumber Company as solvent, and worth $100,000 over and above all of their liabilities, relying on which, they sold the goods upon credit. The only testimony introduced as to representations of Maltz concerning the credit of the company which induced the sale of goods upon credit was that of Mr. Greenbaum, and, as before stated, he testified that such representations, which induced the sale of goods on credit, were made in 1881 and 1882, as above stated. There is no testimony which tends in the remotest degree to support the claim asserted,—

“That there was an understanding and agreement between George Prentiss, representing the Prentiss Lumber Company, and George L. Maltz, representing the plaintiff in this suit, that Maltz, as president and general manager of the Alpena National Bank, should represent the Prentiss Lumber Company to be entirely solvent, and in good credit, for the purpose of getting credit, and of inducing the defendants to sell the company goods and take their notes therefor.”

The only witnesses who testified upon that point were George Prentiss and George L. Maltz, and both denied that there ever was such understanding or agreement.

It must be further noted that there is no claim set up in this second defense, of fraud in obtaining the indorsements of Greenbaum and Epsteyn, or any inducement held out to them to indorse such notes. The only fraud alleged is—

1. The false representation of Maltz as to the Prentiss Lumber Company’s credit, which induced defendants to sell the goods in the first instance.

2. A fraudulent agreement between Prentiss and Maltz that Maltz should represent the company to be solvent, and in good credit, for the purpose of inducing defendants to sell them goods, and take notes thez’efor.

The court, however, permitted testimony by Mr. Greenbaum, against the objection of plaintiff’s counsel, of what Mr. Maltz said at the time the indorsements were made upon renewing the original notes, and also as to what was said a few days previous to the giving of the original notes. This testimony was, substantially, as follows:

That, in 1881 and 1882, Greenbaum and Epetevn sold goods to George Prentiss, and took his notes, and after the Prentiss Lumber Company was formed they continued to do so; that the notes were payable to the order of Greenbaum So Epsteyn, and, after finding out if the bank would take them, they negotiated them at the bank; that when the firm dissolved, in April, 1883, the company was indebted to them, and they went to get their pay; that Prentiss, the president of the company, told them he could not pay them then, and referred them to Maltz about the solvency of the company before they took the note; that Greenbaum went to Maltz, and told him Prentiss offered him a note to wind up the business with the firm, and that he did' not care to take the note, and that Mr. Prentiss told him to find out whether Maltz would discount it, and how the Prentiss Lumber Company stood; that Maltz told him that he could take the note; there was no risk about it; the Prentiss Lumber Company was good; that it was worth over a hundred thousand dollars; that the bank would discount it, and he would run no risk; that the note was all right, and the Prentiss Lumber Company was all right; that he relied upon what Mr. Maltz told him, and that, had it not been for the representations then made by Mr. Maltz, he would not have taken the Prentiss Lumber Company note.

That, just prior to the notes being renewed, he had a conversation with Maltz as manager of the bank; that he refused to indorse the renewal notes until Maltz told him the same thing, — that the Prentiss Lumber Co. was good, and he ran no risk, and that the renewal was only for the accommodation of Prentiss; that he could not pay it then, and would pay the interest; that the same thing ■occurred with reference to both renewals, and that he would not have renewed the notes, had not Maltz made those representations, upon which he relied; that he had no recollection of any conversation with Maltz at the time the notes were discounted, or when the renewals were made, but that .these conversations were prior to 'those events;.and that he had no conversation with Mr. Maltz at the time the notes in suit were indorsed.

This witness was examined, cross-examined, re-examined by his counsel, and again cross-examined by counsel ■upon the subject of the representations made by Mr. Maltz. The result of the whole is substantially stated ■above, with the exception that he stated upon a cross-examination that he did not apply to Mr. Maltz when Greenbaum & Epsteyn were selling the goods, but he did prior to taking the original note; that several notes, both of George Prentiss and the Prentiss Lumber Company, had been taken for the goods sold to the company, and had all been paid, except the two of which the notes in .suit were renewals.

The court erred in his instructions as follows:

"Now, gentlemen, it cannot be disputed, under the ■evidence, that these representations, to which I have, called your attention as being representations within the proper ■definition of the same, if they were used and made by. Mr. Maltz, were untrue at the time.”

It was not only disputed that Mr. Maltz made the representations, but it was disputed whether, if made, the representations were untrue. We may say that it appears beyond dispute that down to September 7, 1883, the Prentiss Lumber Company was in good credit, and was carrying on an apparently prosperous business. It was largely in debt, but it also had large assets; and, according to a statement made by Prentiss a few days prior to September 7, 1883, and put in evidence by defendants,, its assets amounted on August 24, 1883, to $364,393, and its liabilities to $213,000, showing a balance of assets over liabilities of $151,393. No testimony was introduced to impeach the good faith of Prentiss in making this statement.

The defendants also introduced in evidence the annual report of the Prentiss Lumber Company for the year 1882, which Bhowed assets at $210,172.91, and liabilities, $86,261.10; leaving a surplus of $48,886.81, after repayment of capital stock of $75,000, or a surplus of $123,866.81 as regards creditors of the company. The Alpena National Bank had, during the year 1883, made direct loans to the company of about $11,000; and Maltz, individually, had loaned it about $13,000. Five thousand of this sum Mr. Maltz had loaned on September 4, 1883. Neither the bank nor Maltz held any security for these loans, although Mr. Prentiss had said on two different occasions, when obtaining such loans, that he would give-security if they asked it, or at any time when they would ask it; a statement not unusual between a customer and his hanker.

During the summer of 1883 the Prentiss Lumber Company met with losses that aggregated about $64,000; and in the latter part of August it became aware of the-extent of its losses, and it concluded to give the mortgages in question. It turned out, as is generally the case in winding up under the mortgages, and from a stoppage in business, that there was a great shrinkage between the values of the. assets, as estimated by the company, and the price actually obtained on a sale and • disposition of them by the trustee; but the evidence in the case did not justify the charge of the court in the remarks above quoted. Laying out of view entirely the testimony of Mr. Prentiss and of Mr. Maltz contradicting the statements of the witness Greenbaum, I do not think there is testimony in the whole record that warranted the court in submitting to the jury the question whether Mr. Maltz made to the defendant Greenbaum any false or fraudulent representations whatever. Fraud, in order to be actionable, requires proof. If representations wore made, either falsely or negligently, it is not sufficient to show that the representations were made, but it must be proved that the representations were false.¹ This the •defendants failed to do. I have reference now to the time when the notes of which the notes in suit were renewals were executed, and when defendants’ liability first arose upon their indorsement.

The first error assigned upon the ruling of the court upon the admission of testimony relates to the introduction in evidence of a statement of the assets and liabilities of the Prentiss Lumber Company, dated August 24, 1883, and first shown to Mr. Maltz on the evening of September 7, 1883. This statement showed the assets to be $364,393, and the liabilities, $213,000; leaving a balance of assets over liabilities of $151,393. There could be no prejudicial error in admitting this statement. Its tendency was favorable to plaintiff. It showed that by the estimate and valuation placed upon the property of the company it was solvent, and that its assets largely •exceeded its liabilities; and there is nothing in the testimony to show that Maltz knew, or had any reason to believe that the Prentiss Lumber Company was not solvent and in good credit down to September 7, 1883, when he was told by Prentiss of the embarrassment of the company. It had a tendency to rebut the fraudulent intent which the defendants claim Maltz had in representing the company solvent and in good credit'.

The defendants’ counsel asked the witness Maltz, upon cross-examination, whether he had some stock in the Prentiss Lumber Company, and he answered that he did not. He was then asked if $30,000 worth of stock was not carried along upon the books of the Prentiss Lumber Company for a year or more. He answered that he did not know. He was asked if he did not see it upon the books of the company upon the other trial of the case. He replied that he saw the item, but did not know what it was for. He further testified that the secretary of the company, a Mr. Billings, came to the bank,, and desired to place $30,000 of stock in his hands, which he refused. He was asked why he refused it, and ho-replied that he did not desire it, that was all, from the-fact that at that time he did not. want to be considered a stockholder. Counsel then asked:

“Why didn’t you want to be considered a stockholder?”'

He replied:

“Because I was not going to put any money in thatinstitu tion.”

The following questions and answers were then asked and given:

“ Q. About that time you were representing the Prentiss. Lumber Company to be good and solvent, were you not?

“A. I believed then so, believe so still.

“ Q. And, while you were making these representations,, you did not want to be regarded as a stockholder with them?”

Counsel for plaintiff interposed an objection on the-ground that it was incompetent and irrelevant. Plaintiff’s counsel -stated why he considered the testimony as irrelevant and incompetent; the principal reason being that, if such representations were made, they were not within the scope of the authority of Maltz, as president of the bank, to make. The court, in deciding upon the admissibility of the testimony, stated to counsel as follows:

“So far as this point is concerned, I understand the object of the testimony, generally, to be an offer to show that while the plaintiff held the notes for which the notes in suit were given as renewal, and upon the question being presented of the proposed renewal, and the reindorsement by the defendants, being referred by the Prentiss Lumber Company, the principal maker, to the bank, or to Mr. Maltz, its president, Greenbaum went to Maltz; that Maltz, knowing the situation, and his bank having the notes for which these notes were given in renewal, and knowing that it was proposed to make these renewals in this way, by the indorsement of Greenbaum, made the statements to Greenbaum with reference to the responsibility of the Prentiss Lumber Company which you propose to introduce in evidence. Is that correct?”

Counsel for defendants, Mr. Shields, replied:

“I think that is a fair and accurate statement of it.”

The court then said:

“Now, I am inclined to think that that testimony is admissible, at least within the limits I have stated; and I shall admit it. I think it quite distinguishable from the case of an agreement or statement on the part of a bank officer that an indorsement which it is proposed to make-will not be insisted upon. This goes to the question of fraud in procuring an indorsement; not an agreement that a valid indorsement, upon its face, should not be-enforced. It is not a question of an attempt to vary the conditions of a written agreement; but it is a question of' fraud in the procuring of a written agreement; and it seems to me that the bank, if it procured, by fraud of' its active agents in doing the business, the indorsement of Mr. Greenbaum upon this paper, cannot assert the-legality of Greenbaum’s indorsement upon the paper against its own fraud, or the fraud of its active officers, in procuring the indorsement. At least, within the-limits I have indicated, I will allow the examination.”

Although no answer was given to the question • asked, yet, as the rule laid down by the court was acted upon to a large extent in the subsequent course of the trial, in the admission-of testimony, and in his instructions to the jury, we may determine the correctness of such rulings upon this exception better than to take them up seriatim.. If this testimony was admissible at all, it must have been under the issue raised by the second defense, above set forth. The theory and gist of that defense is that fraudulent representations were made by Maltz respecting the credit and responsibility of the Prentiss Lumber Company to the defendants, whereby they were induced to sell goods to that company, and take the company’s notes therefor. Aside from the conspiracy clause, which is not attempted to be proved, this is the gist of that defense. There is not one word about false representations made by Maltz, subsequently to Greenbaum & Epsteyn’s taking the notes, to induce them to indorse such notes, or a renewal thereof. The point of the judge’s ruling is that the testimony was admissible to show a different fraud from that alleged, — in fact, to show a fraud not alleged, — relating wholly to representations made after the original notes were given, and while they belonged to the bank, which induced Greenbaum to indorse such renewal notes. I think such testimony was not admissible, under the pleadings.

In Bourreseau v. Evening Journal Co., 63 Mich. 437, Chief Justice Campbell, speaking for the Court, said:

“The practice is settled in this State, as at common law, that it is not competent to prove distinct facts in defense that have not been made part of the issue as framed. No one can be prepared in advance to anticipate every fact, true or false, which may be offered in evidence, and of which he has had no notice.”

I am also of the opinion that, if the original notes were free from taint when the bank became the purchaser thereof, they could not be rendered void or worthless by what transpired at the time they were renewed by giving the notes in question. The renewals merely continued the original contracts in force during the period to which •tbe time of payment was extended. Tbe notes, originally, were not sold to the bank or discounted for the benefit of the maker. Greenbaum and Epsteyn were not accommodation indorsers. They sold the notes to the bank, and received the consideration. While this was the situation, the notes, upon their face, disclosed the fact that Greenbaum and- Epsteyn occupied the relation of sureties to the maker; and the bank was therefore bound to respect their rights as sureties. It could make no change ¡n the contract, to the prejudice of the sureties, without their consent. The only change' madp in the contract was an' extension of time of payment, to which the sureties assented. They claim that the. request for extension was made by the maker, and that they gave their assent by reason of the representation of the holder that the maker was good. If the representations were made to induce the indorsement of the renewals, and were false, how are the indorsers damnified? They claim that, if the extension had not been made, they would have been in a position to collect their debt by suit from the maker. To do this, they would have had to pay the notes to the bank, and then brought suit in the circuit court; and how is it made to appear that, before the judgment could have been obtained, the failure would not have occurred¹, and the property sold or mortgaged to other, bona fide creditors? If the renewal notes were .of no validity, the original notes remained in full force, and the indorsers were liable upon them. In other words, the representa- . tions, under the facts of -this case, are not a defense which goes to the validity of the contract of indorsement; but, if it has any merit, it only goes to a recoupment, under proper pleadings, to the extent of the injury actually suffered by reason, or on account, of extending the time for payment.

The court erred in permitting defendant Greenbaum to testify to conversations which he had with Maltz, after the execution of the mortgages, to the effect that sufficient property was covered by the mortgages to pay all of the debts secured thereby, and that he need not have anxiety about his liability upon the notes in suit. Such testimony was irrelevant to any issue made in the case. The court admitted it as tending to show payment. It could have no such tendency, and was extremely prejudicial. No claim was made that Maltz had not sold all of the property covered by the trust mortgages, or that the total amount realized from such sales was not, as he testified, the sum of $112,320.33. This being so, the jury had no right to weigh his opinion of the value of the security against the results reached by a conversion of it into money, as evidence showing payment of the notes.

It was error, also, for the court to permit the witness Greenbaum to testify, against plaintiff's objection, to the effect that, if Mr. Maltz had not told him that'he had sufficient property to cover the notes and pay them, he would have taken steps to collect the debt out of other property of the Prentiss Lumber Company. This testimony had no relevany to the issues being tried. Its only effect could be to prejudice the jury against the plaintiff, by drawing the attention of the jury away from the issues involved, and to lead- them to think that defendants were injured by statements made by Maltz, but for which the plaintiff was in no way responsible. Such testimony was also inconsistent with the defendants' theory of the case. That theory was that defendants were not liable at all upon their indorsements, by reason of the fraud practiced by Maltz in procuring them. This testimony of Greenbaum recognizes their liability, and Seeks to establish a discharge from liability by matters ex post facto.

The testimony of Andrew W. Comstock should have been excluded. He was a banker at Alpena. This leading question was asked him:

"" In that conversation, did you say to him, in substance, that the Prentiss Lumber Company was bad, and soon would fail?” ~ ' ‘

The question refers to a conversation which the witness claims he had with Mr. Maltz in the 'spring of 1883, the date of which he does not fix. He replied that he did. He kept on discounting the notes' of - the Prentiss Lumber Company brought in by his regular customers, whom he knew were good. Whether he apprised his regular customers of the same advice he so kindly tendered to Mr. Maltz he does not state. The testimony was not admissible as evidence of the fact that the Prentiss Lumber Company was bad; for it is his opinion, merely, both of its badness, and that it would soon fail. He disclosed no knowledge of its affairs which would warrant him in expressing such opinion; and, if it was oifered as notice which should have put Maltz upon inquiry, it should have been made to appear that the conversation was prior to April 23, 1883, when the second of the original notes bears date.

I am of opinion that the court erred in submitting the issues raised by the third defense to the jury. Both Mr. Prentiss and Mr. Maltz testified that there was no understanding or agreement between them that the bank should have security for the money loaned to the Prentiss Lumber Company by it whenever it requested such security.

Mr. Prentiss testified that he casually remarked to Mr. Maltz at one or two times, when borrowing money:

"" "Any time you want security on these direct loans, I will give it to you.’- On one of these two occasions, I added: "I will hold the mill property to see that you are taken care of/ That was all the agreement, and all the understanding, in those same two remarks of mine. Mr. Maltz never asked it, nor was there any further conversation about, or reference made to, it.”

The witness was asked:

“ Q. Did George L. Maltz, or the Alpena National Bank have any security on any property of the Prentiss Lumber Company on the 23d day of May, 1883?

“A. I don't remember that they did. Mr. Maltz had my word that I would, for money that he and the bank might advance, hold the mill property for security for it. He had my word for it, and nothing else.”

Mr. Maltz testified upon the subject as follows:

“Q. Had you, or the Alpena National Bank, any security in the summer of 1883?

“ A. No, sir.

“Q. Had . you assurance from the Prentiss Lumber Company that, when asked for, you should have security?

“A. Yes, sir.

“Q. And when were those assurances given you?

“A. Mr. Prentiss said, any time I wanted security, he would give it to me.

“ Q. Give it to you, or to the bank?

“A. I don't know whether it was to the bank or not. It was in a conversation with me.

“Q. Whatever advances you made, of course, would be in behalf of the bank?

“A. Yes, sir.

“Q. So that this security talked about was intended to be given to the bank whenever asked by you?

“A. Yes, if I wanted any additional security.

“Q. In point of time, when was this assurance given you?

“A. I suppose I could have it at any time.

“Q. That was the understanding and agreement with you, all the way from 1883, was it not?

“A. There was no agreement; but, if I should go to him, and want security, he would give it to me.

“Q. You had that understanding and assurance from Mr. Prentiss from the beginning of the Prentiss Lumber Company, had you not?

“A. It may be. I don’t remember distinctly about it.”

The foregoing is, substantially, all of the testimony from which it is claimed the jury would be warranted in finding that there was a secret agreement which had the effect to discharge the indorsers, and forms the basis for the following instructions of the court to the jury:

“ As to the defense based upon alleged secret agreement, the defendants claim as a defense, substantially, that, at and previous to the time these indorsements were made, there was a secret understanding between the plaintiff (made for it by its president, Mr. Maltz) and the Prentiss Lumber Company that, whenever the plaintiff should ask or demand it, the lumber company would give security upon its property, or turn the same over absolutely to the plaintiff or Mr. Maltz, as its general officer, to satisfy any claim the bank might have, and that the transaction of September 7, 1883, was the execution of that agreement; that when the defendants made the indorsements in question the Prentiss Lumber Company was largely indebted to plaintiff; that these facts were concealed from the defendants when the defendant Greenbaum consulted Mr. Maltz as to the prudence of making the renewals in question; and that if they had been disclosed to him at those times, and on those occasions, he would not have made the notes or the renewals.

“ Now, gentlemen, to maintain this defense, the defendants have the burden of showing, by the preponderance of the evidence, every fact essential to constitute it. It must appear from the evidence that such an agreement or understanding existed, as a matter of fact, at the time the indorsements in question were made. If there was no agreement or understanding, the basis of his defense is wanting. It need not have been in writing, or even put into any distinct form as to details, but the substance of it must have been understood between them. The minds of Mr. Prentiss and Mr. Maltz must have met upon it, and they must have made it the basis of their action; and the two mortgages of September 7, 1883, must have been made in pursuance of it. It must also appear that before asking the indorsements, and while the alleged agreement existed, Mr. Greenbaum applied to Mr. Maltz for information upon which to determine whether or not he should indorse these renewal notes.”

There is nothing in the testimony tending to show a secret agreement which was a fraud upon the creditors of the¹ Prentiss Lumber Company. Nor is there any principle of law which made it the duty of the Alpena National Bank to disclose to such creditors the fact that the Prentiss Lumber Company was a debtor to the bank, and that it had offered to give security whenever requested. There are no such overstrained and refined relations between a bank and its ■ customers. Good faith and fair dealing is all that is required of a creditor in his transactions with a debtor who occupies the position of surety to a contract. Good faith and fair dealing do not require the creditor to inform such surety of other and independent transactions with the principal debtor. The notice of the third defense does not set up that any representations were made to induce Greenbaum to take notes, or renew notes already given; but it relies on a fraudulent concealment of the indebtedness, and the agreement to secure it, if requested. To hold that, when an indorser of a note applies to have it discounted for his own accommodation, the silence of the bank or purchaser as to the indebtedness of the maker of the note to him, and of the maker’s assurance that he will give security if required, is a fraud upon the indorser which will enable him to keep the consideration received for the note, and discharge him from all liability, is a doctrine too palpably absurd for serious consideration.

The testimony of Mr. Maltz is to the effect that the bank was not intended, by the transaction in which security was taken, to be a trustee,' and in this he is supported by Mr. Prentiss; and there is nothing in the testimony contradicting their statements. It has never assumed to act as trustee, while Mr. Maltz was named as trustee in the instruments creating the trusts, and has acted as such. He was asked:

“ Since the giving of the mortgage referred to, and the real-estate mortgage, state whether or not the Alpena National Bank, through its officers or directors, as such, have assumed to have anything to do with the controlling of disposal of that property.”

“ The Alpena National Bank has had nothing to do with the disposal of the property, or the control, or anything connected with the trust.”

He further testified that he alone had the exclusive management and control of it; that the bank was in no way connected with, or interested in, the. mortgaged property,' or in the transaction,' save as a creditor; and that the money into which the -property had been converted remained in his hands subject to distribution as a trust fund.

It appeared when the case was here before that all money collected by the trustee had been paid over to the bank, and that there was a sufficient sum paid to satisfy all claims secured by the mortgages. Upon that state of facts, we held the notes in suit satisfied; for, if plaintiff was allowed to recover under such circumstances, defendants would be entitled to the benefit of the money paid into the plaintiff's hands for the purpose of discharging these •claims. It now appears that the trustee paid into the bank, from the money collected, sufficient to pay the claims preferred in the mortgage over the last class, which embraces the claims in suit, and for the money properly applicable to the payment of the last class of claims he held certificates of deposit in his own name. Under these facts, as they now appear, the bank cannot be held as a trustee of these creditors to the amount of money so deposited. To hold the bank as trustee, simply because its president and financial manager was a trustee for the benefit of creditors, would- operate harshly and unjustly upon the rights of a majority of the stockholders of the bank, and make them pecuniarily responsible for acts which neither they nor the board of directors of the bank ever authorized or assented to, and would unjustly condemn them to losses concerning which they have never had a hearing in a court of justice. I cannot reconcile the idea with due process of law.

If it be true that enough money was not realized to pay all classes of creditors mentioned in the mortgage in full, then Mr. Maltz was justified in not making a pro rata distribution until the question of the validity of the defendants’ indorsement should be determined. If these defendants are not entitled to be discharged absolutely from all liability by reason of the fraud and deceit set up in their notices under the general issue, which, by this record, we do not think they have maintained by legal and proper testimony, the proper method for them to pursue would be, if they believed the trustee has not faithfully executed his trust, to file a bill in chancery for an accounting, in which suit the whole matter of the proper execution of the trust can be gone into, and the trustee charged with all proper items. The hank can be made a party defendant; and, if a proper showing can be made, it can be enjoined from the further prosecution of this suit until such accounting is had.

The judgment of the circuit court should be reversed, and a new trial ordered.

Long and Grant, JJ., concurred with Champlin, C. J.

1 See People v. Reynolds, 71 Mich. 343.