Grebe v. Swords

149 N.W. 126, 28 N.D. 330, 1914 N.D. LEXIS 126

• Court: North Dakota Supreme Court
• Decided: October 1, 1914
• Status: Published

Opinion

Fisk, J.

(after stating the facts as above). There are, as the writer views it, three main propositions involved in this litigation: First, Was there a failure of. consideration as to the notes and mortgages sought to be canceled ? If so, then,

Second, Did the First National Bank of Eugby acquire title to such paper in due course ? If not, then

Third, Are the plaintiffs estopped by their dealings with the bank from questioning the bank’s or the receiver’s title thereto ?

These propositions will be considered in the order above mentioned.

Appellant’s counsel strenuously contend that there was no failure of consideration for the notes in question, but, on the contrary, that they were given for a perfectly good and valuable consideration, and consequently enforceable as such, even in the hands of A. H. Jones, the payee. Their argument is based chiefly upon the hypothesis that Jones owned the three quarters of land covered by the mortgages, and sold the same to these plaintiffs, taking the said notes and mortgages in payment of the purchase price. They point to Exhibit 1, the contract, and to Exhibit 2, the warranty deed, both executed by the former owner of the land, Henry Grebe, and which deed purports on its face to be a deed of conveyance of such land to A. H. Jones, and which contract purports to fix the terms and method of payment of the agreed purchase price, as conclusive evidence of Jones’ ownership and right to make sales of this land to these plaintiffs.

Our first inquiry, therefore, will be directed to the true nature and legal effect of the transaction between Henry Grebe and A. H. Jones as disclosed by the record. The testimony of Grebe is positive and wholly undisputed as to the fact that a sale by him to Jones of such land was never contemplated by either Jones or himself, and such testimony is corroborated by that of his brothers, John and Louis, as well as by all the facts and surrounding circumstances disclosed, excepting the two exhibits, to which we have above referred, which, of course, create the presumption that they are what they purport upon their face to be. It is a significant fact, entitled to considerable weight, that appellant failed to call Jones as a witness at the trial. He evidently relied upon these two Exhibits, 1 and 2, as not only the best, but the sole and only competent, testimony as to the nature of the transaction. In this we think he is in error. These actions are not based on those exhibits, nor were these plaintiffs, or either of them, parties thereto. Such exhibits are only incidentally and collaterally involved in this litigation, their only relevancy being to prove a link in appellant’s chain of evidence tending to establish a consideration for the notes and mortgages executed to Jones by these respondents. In other words, they merely tend to show that Jones had title to these lands, and therefore had a right to sell and convey them to Louis and John Grebe; but their evidentiary force stops here, for they in no way tend to prove that Jones in fact did sell and convey such lands to Louis and John. And the undisputed evidence is that no such sale took place. On the contrary, it clearly appears from the testimony that Jones acted merely as a conduit through which the title passed from Henry to his brothers, Louis and John, for a purpose not clearly disclosed by the record, but which Jones induced the Grebes to believe was necessary, or at least advisable. All the Grebe brothers positively testified, however, that there was no intention by such transfers to devest Henry of his interest in this property, and such testimony is undisputed. Whether owing to Henry’s serious trouble involving him in criminal proceedings, the purpose was to put the property beyond the reach of his creditors, which may be easily inferred from some of Henry’s testimony, or whether it was deemed necessary in order to facilitate the giving of security to enable him to procure bail, is not clearly made to appear, nor, as we view it, is it of vital importance. In either event Jones acquired no title which he sold or could sell to Louis and John Grebe. The fact, as testified to by Henry Grebe, to the effect that he was badly scared on account of the criminal charges, and did everything which Jones told him to do, seems to be amply borne out by the record. Indeed, we are forced to the belief, from a perusal of the evidence, that the Grebes, in dealing with Jones, were at a great disadvantage and wholly incapable of protecting their rights. They were simple-minded and inexperienced, and apparently placed implicit confidence in his honesty, blindly following his suggestions. He took advantage of their situation, and wickedly betrayed the trust they so foolishly placed in him. Had Jones retained these notes and mortgages, instead of disposing of them to the bank, and were these actions against him instead of the receiver of such bank, we believe no court would hesitate to award relief to the plaintiffs. In arriving at the foregoing conclusion we have not overlooked, but have duly considered, the elementary and well-settled rules invoked by appellant’s able counsel to the effect that Exhibits 1 and 2, which were made at the same time and relate to the same transaction, must be construed together as one contract; also that all preliminary negotiations leading up to the making of a written contract are merged in such contract, and parol evidence is inadmissible to vary or change the terms thereof; also the rule governing the nature and degree of proof which should be exacted by the courts before canceling solemn written instruments. While these and other rules of a similar nature referred to in appellant’s brief are no doubt correctly stated by counsel, we do not deem them controlling of the rights of the parties in the case at bar. There is an exception to such rules which is equally well recognized, and which counsel have evidently overlooked. Such exception was, no doubt, made for the express purpose of dealing with cases analogous to the case at bar*, and is a very wise and salutary exception, designed to relieve innocent victims of fraud and deceit by permitting them to show that it was never intended that an instrument, which purports to be a contract between them, should ever have effect as a valid and binding agreement. It would, indeed, be strange, as well as a reproach upon the law, if, as appellant’s counsel contend, the instruments, Exhibits 1 and 2, must be accepted as conclusive evidence of the fact that the transaction between Henry Grebe and A. H. Jones on July 19, 1907, was in truth and in fact what these instruments on their face indicate it to have been. The rule to which we refer is very clearly and concisely stated in 17 Oye. 691, as follows: “The objection to parol evidence does not apply where it is offered, not for the purpose of contradicting or varying the effect of a written contract of admitted authority, but to disprove the legal existence or rebut the operation of the instrument, and in order to determine the validity of the writing the true character of the.transaction may always be shown. So, also, evidence which is offered, not for the purpose of varying or contradicting the terms of a written instrument, but to show that it was never intended to be operative between the parties, and never in fact had any legal existence as a contract or grant, is admissible.” Numerous authorities are cited in the notes supporting the text. At page 722 of the same treatise it is further stated: “It is generally considered that parol evidence is admissible where it is offered, not for the purpose of varying the terms of a written contract, but for the purpose of explaining and showing the true nature and character of the transaction evidenced thereby, especially where it is plain that the language used, taken in its literal sense, does not exhibit the real transaction, or where the writing is assailed on the ground of fraud. Applications of this principle are to be found in those eases where evidence has been admitted to show that, although a writing evidences upon its face an absolute transfer of property or an absolute promise to pay money, the real transaction consisted merely in the giving of security or indemnity, or that the grantee in a written instrument, such as a deed, assignment, bill of sale, or the like, which on its face passes the title to property, took the title subject to a trust.” We might cite many adjudicated cases in support of the rule as stated in Oyc., but we deem it wholly unnecessary. Our conclusion on this point is that under the testimony it is entirely clear that Jones did not acquire title to these lands from Henry Grebe, and therefore had no right to sell, and did not sell, the same to Louis and John Grebe, but on the contrary, he received the title merely in trust for the sole purpose of transferring the same to Louis and John, which trust he executed by later executing and delivering deeds to them. Therefore, we must overrule appellant’s contention that the mortgages and notes involved were given as payment for the purchase price on the sale of such land by Jones to the Grebes.

But it is also contended by appellant that the promise by Jones to furnish bail constituted sufficient consideration for the giving of these notes and mortgages by Louis and John. Such contention is, we think, unsound. Plaintiffs did not give the notes as a consideration for the promise of Jones to furnish bail and pay expenses of the defenses, but they gave them merely to secure and indemnify him against any loss which he should suffer in the future by reason of his performing such acts. The notes were not to be paid as a consideration for his promise, but only on the contingency that he advanced moneys and suffered loss on account of furnishing such bail. Under these circumstances no consideration for the notes could arise until such time as Jones was entitled to be reimbursed for advances and loss, and under this record such contingency never arose. At no time, therefore, could Jones have recovered a single dollar on these notes and mortgages. In brief, the payment of anything thereon was conditional, and such condition never arose. The case of Tronson v. Colby University, 9 N. D. 563, 84 N. W. 474, cited by appellant’s counsel, is not in point. It was there merely held that a promise is a good consideration for a promise; but as we have above stated, the Grebes did not give these notes for Jones’s promise to'do certain things, but they were given solely as security, and to indemnify Jones against a future contingent liability or loss. The case at bar is governed, we think, by the well-settled rule stated in 7 Cyc. 706. We quote: “And in general if a note is given merely as indemnity against a loss which may ensue to the payee from a contemplated act of the maker, and the act is not done, and the liability of loss not incurred, there will be no consideration for the note.”

Having reached the conclusion that Jones, the payee, could not have enforced the payment of these notes for failure of consideration, we next come to the question as to whether the bank, through its receiver, stands in a more favorable position. In other words, was the bank a purchaser of this paper in due course ?

The presumption in the first instance, of course, is as appellant’s counsel contend, that the bank was a purchaser of the paper in due course, the notes being negotiable in form and duly indorsed by Jones. But such presumption was rebutted when it was shown that the title of Jones was defective, and thereafter the burden shifted to the holder to prove that he acquired the title as a holder in due course. Bev. Codes 1905, § 6361. That the title of Jones was defective cannot be doubted, for under the express provisions of § 6357, Bev. Codes, the title of one who negotiates an instrument is defective “when ... he negotiates it in breach of faith, or under such circumstances as amount to a fraud.” That it was, under the circumstances, a breach of faith amounting to fraud for Jones to negotiate these notes must, we think, be conceded. On this point, see Citizens’ State Bank v. Garceau, 22 N. D. 576, 134 N. W. 882.

There is not only an entire absence of evidence that the hank in purchasing this paper did not know that the title of Jones was defective, but it affirmatively appears that in the discounting of such paper Jones, as cashier, is the only person who acted for the bank. He turned over the notes, and gave, or caused himself to be given, credit therefor on the books of such bank. He was the bank in the transaction, and whatever was done by his assistant cashier was done purely in a clerical way, under the directions of Jones, and without the exercise of any independent judgment or discretion in the matter. This being true, the knowledge of Jones as to the infirmity in this paper was the knowledge of the bank. Emerado Farmers’ Elevator Co. v. Farmers’ Bank, 20 N. D. 270, 29 L.R.A.(N.S.) 567, 127 N. W. 522. See also cases cited in notes in 2 L.R.A.(N.S.) 993, and 29 L.R.A.(N.S.) 558. While there is a diversity of opinion among the courts as to whether the knowledge of the bank official who deals with himself will be imputed to the bank, the apparent weight of authority appears to support the views of this court in Emerado Farmers’ Elevator Co. v. Farmers’ Bank, supra.

The only remaining point which requires consideration is that of estoppel. It is urged by appellant’s counsel that plaintiffs, by renewing the notes after the bank acquired them, are, by reason of such acts, estopped to urge any infirmity therein. Their reasoning is that such action on their part was an affirmance and ratification of Jones’ act in selling such notes to the, bank. WTe fail to discover any room for the application of the doctrine of estoppel here. It does not appear that, on account of such renewals, the bank parted with anything or in the least changed its position to its detriment. Moreover, it could not have been misled thereby as to the character of the notes, for, as we have seen, knowledge of the true facts was imputed to it through Jones, its cashier, long prior thereto. Jones might, with equal force, have urged an estoppel on such ground had he retained the notes in his possession. Nor are we able to see any merit in the other alleged ground of estoppel; namely, that by permitting the notes to remain in the bank after such renewals and until the receiver was appointed, such conduct “had the effect of deceiving not only the bank and the examiner, but also the stockholders, depositors, and creditors of the bank.” There might possibly be some merit in appellant’s contention if the facts in the case at bar brought it within the rule announced in the cases cited by counsel. Such, however, is not the fact.

The rale invoked by counsel, and which the authorities cited by them tend to support, is to the effect that when a person, for the purpose of giving a bank a false credit, executes to it commercial paper which is placed among its assets for the purpose of deceiving the bank examiner or others, he is estopped from urging any infirmity in such paper after it has passed into the hands of a receiver of such bank. But as very correctly stated in the brief of respondent’s counsel, “The Grebes in giving these notes had no thought of lending any false credit to the bank. The original notes all ran to Jones personally. They signed such papers as Jones asked them to sign, and had no real grasp of the fact that the notes were being carried by the bank as assets of the bank. Indeed, it does not even appear that they knew that the notes appeared on the books of the bank as assets thereof. Whether the renewal notes ran to the bank was a matter that did not attract their attention, and even if they had discovered this fact it would have meant nothing to these simple inexperienced men. To a plain, ignorant farmer, Jones was the bank, and any notice that might come to the Grebe Brothers from the bank relating to these notes would not carry to their minds the thought that they had been a party to a scheme to give the bank a false credit by allowing their notes to appear upon the books as assets of the bank. Even if they had, in a vague way, realized that Jones had sold the notes to the bank, it would not be fraudulent for them to not take any action to have these false appearances altered. In fact they would have been unable to do so even if they had tried. They did not give him the notes for the purpose of having them appear on the hooks of the bank as assets. They were fully justified in believing that Jones, who was the bank, would, as between bim and tbe bank, take care of these notes if ,it ever became his duty to do so. If, under the circumstances of this case, the •doctrine of estoppel applies, then in every instance whenever a bank fails the defense of want of consideration as against the bank can never be urged as against the receiver of the bank.”

Our conclusion, after due consideration of the questions presented, is that the findings and conclusions of the trial court are in all things •correct. The judgment in each case is accordingly affirmed.