Israel v. L. M. Ayer & Co.

2 S.C. 344, 1871 S.C. LEXIS 10

• Court: Supreme Court of South Carolina
• Decided: April 20, 1871
• Status: Published

Opinion

The opinion of the Court was delivered by

Moses, C. J.

The pleadings and evidence are set out at length in the brief, and will only be referred to incidentally and in effect, in the opinion which will express the judgment of the Court.

The first exception submits error, on the part of the Circuit Judge, in not instructing the jury “that the acceptor for the áccom-modation of the plaintiff, as well as for the drawers, is hot liable to a suit by the plaintiff, the contract being nudum pactum.”

“ An accommodation bill is a bill to which the acceptor, drawer, or indorser, as the case may be, has put his name without consideration, for the purpose of benefiting or accommodating some other party, who is to provide for the bill when due. A party who requests and procures another to lend his acceptance, thereby engages to take up the bill at maturity, and $0 indemnify the acceptor against the consequences of non-payment.” — Byles on Bills of Exchange, 95; Story on Bills, Sections 187, 191.

There is a wide and well recognized distinction between bills and promissory notes, and all other parol contracts, as to defenses which may operate to defeat their validitjq because of want of sufficient consideration. Such instruments imply a consideration in themselves,'and a bona fide holder, who takes one in the usual course of trade or commercial dealing, is not required to shew that he paid value for it. One who claims by transfer or endorsement, before maturity, for value from the original holders, is not bound by any legal or equitable defenses which might prevail between them and the immediate parties to the transaction. He derives through a title, unaffected even by a fraud unknown to him, by which the paper may have got access to the commercial market.

The rule, however, for the very reason on which it is founded, cannot prevail between the original parties to the instrument. As between them, its value depends on the consideration for which it is held. If it was executed for the favor or accommodation of one of them, it wants that element so essential to a valid agreement. If no consideration passed, and the use of the name was only given to another as the mode whereby he might obtain value or credit on his own account, and for his own use, what loss has he suffered by the payment which should be compensated by him who thus loaned his credit ?

“ However, in general, between the original parties or a holder who has not given full value, the defendant is at liberty to show that he drew, accepted, endorsed or made the bill or not cfor the accommodation of the plaintiff, or of one of them, or of a person for whom he is trustee, who, either expressly or impliedly, engaged to provide for the bill, or the defendant may show that he received no consideration, or none that was, in point of lavr, adequate, and thus may entirely defeat the action or reduce the claim.”— Chitty on Bills, 703; 3 Kent, 80 ; Story on Bills, Sect. 187 ; Byles, 92; Farrar and Hayes vs. Gregg, 1 Rich., 380.

Although there Avas error in the refusal of the Circuit Judge to charge the jury, as thus claimed by the appellants, still it cannot bo ground for a venire de novo, because the'testimony they submitted does not sustain the allegation involved in their proposition, that the acceptance of the bill, of which the one sued on is a renewal, was for the accommodation of the plaintiff as well as of the drawers; in fact, the plea avers the contrary, to wit: that it was for the accommodation of the said Hoffman, Brabham & Co., the drawers. Ayer, one of the defendants, himself testifies, “ that the first acceptance was without consideration to defendants, from H., B. & Co., and merely for the accommodation of the latter.” Trumbo, another of the defendants, in his evidence, says: “ The draft sued on was accepted for the accommodation of -H., B. & Co., and that fact was known to the plaintiff,” This knowledge, however, cannot change the relation of the plaintiff, unless it could be shown that, as between him and the drawers, there was no consideration ; for the very purpose of the defendants, in the accommodation they afforded the drawers, recognized the consideration moving from the plaintiff to them. From respect to the commercial value of bills of exchange, the authorities go very far to preclude any defense against a bona fide holder, before duo, by reason of knowledge that the bill was founded on an accommodation transaction. “The payee and acceptor; in the relation in which they stand to each other, are not immediate but remote partios, and between them two distinct considerations, at least, must come in question : 1st. That which the defendant received for his liability; and, 2d, that which the plaintiff gave for his title. Between them the action will not fail, unless there be absence or failure of both of these considerations.” — • Byles, 92.

Mr. Parsons, in his second volume on notes and bills, p. 27, says that “ the principle is a general one, that a person making or endorsing a note, or endorsing a bill, or becoming liable in any way on negotiable paper for the benefit of another person, is liable to a third person, even with notice of the want of consideration, but is not to the person for whose benefit the paper was signed.” The authorities to which he refers clearly support his position.

Mr. Chitty, in his work on bills, at page 305, says: “But where the bill is in the hands of a third person, who has given value for it, and who becomes the holder before it was duo, the acceptance will, in general, be obligatory on the acceptor, though he received no consideration, and although the holder knew that circumstance, because the very object of an accommodation acceptance is to enable tho party accommodated to obtain money or credit from a third person, and, therefore, the want of consideration furnishes no defense to one who has advanced money oh the credit of the acceptor, though he may have been defrauded by the drawer.”

The same doctrine is announced in Byles, p. 93.

Where the payee himself is not the party accommodated by the acceptance, he is entitled to the same position ás a holder for value with knowledge of the want of consideration between the drawer and acceptor. If the acceptance was for the benefit of the former, so far as the latter was concerned, it was a valid bill in the hands of the payee.

In Grant vs. Ellicott, 7 Wend., 227, it was held that “it is no • defense in an action on a bill of exchange by the payee against the acceptor, that it was accepted without consideration, or, in other words, was an accommodation acceptance for the drawer, and that fact was known to the payee.” Savage, O. J., delivering the opinion of the Court, refers to Charles vs. Marsden 1 Taunt., 224, and quotes the language of Lawrence, J., there used, as follows : “ In the present case it is to bo supposed that the drawer persuades a friend to accept a bill for him because he cannot lend him money. Would there be any objection if, with the knowledge of the circumstance that this is an accommodation bill, some person should advance money upon it before it was due? Then what is the objection to his furnishing it after it is due? For there is no reason why a bill may not be negotiated after it is due, unless there was an agreement for the purpose of restraining it.”

It is further alleged as error, that the Circuit Judge refused to charge the jury “ that the acceptor for the accommodation of the drawer, with knowledge of the fact of want of consideration, is entitled to all the advantages of a surety, and if the plaintiff shall extend credit to the drawer, or shall have given up securities, the acceptor is discharged.”

This exception raises a question of much interest, and one which, we believe, has never been presented for the judgment of the Courts of the State.

Where one is the holder of an instrument, in which principal and sureties are bound, he is not permitted to deal with the former in any way that would prejudice the sureties, as either by extending, for consideration, the time of payment, or releasing any collateral or counter security which he may have for the debt. The rule is an equitable one, and proceeds upon the ground that the creditor shall not, by a binding contract, change the agreement into which the sureties have entered by extending the period for its per-' formance; or where he has received from the principal debtor securities of any character for the protection of his demand, he is, as to such securities, a trustee for the benefit of the sureties, and holds them devoted to their protection and relief. Occupying that position by reason of the relation in which he stands to the sureties, he cannot vary their rights to their prejudice, or make a new contract with the principal, to their wrong or injury. The surety is entitled, on his payment of the debt, to be subrogated to all the rights of the creditor; and if he has so affected these, as against the principal, in regard to the original contract, as by binding himself to a change of its terms more favorable to the principal, or has made a surrender of collateral security in his possession or control, for the same debt by his own act he has put beyond his command, the power of realizing the means which he should have retained for the benefit of the sureties.

In the Courts of this State this equitable doctrine has been recognized to the full éxtont of holding that whatever would discharge a surety in equity may also be set up as a defense at law.— Wayne vs. Kirby, 2 Bail., 551.

The exception under review seeks to extend this principle in favor of an accommodation acceptor against a holder, knowing, when he took the bill, that it was without consideration as between the drawer and drawee, and accepted, solely fin- the accommodation of the drawer. It follows, as a necessary consequence, that the rule cannot be applied to such acceptor, unless he is to be held a ' mere surety on the bill for the acceptor.

Laxton vs. Peat, 2 Camp., 185, is the case mainly relied on to sustain the proposition submitted by the exception, and that case, decided in the King’s Bench by a no less distinguished jurist than Lord Ellenborough, did hold “that, if the endorser of a bill of exchange, having notice that it was accepted without consideration, receive part payment from the drawer, and give him time to pay the residue, he thereby discharges the acceptor.” The eminent Judge distinctly rested his decision on the ground “that the acceptor of an accommodation bill, within the knowledge of all the parties, can only be considered as a surety for the drawer.’’

The same Judge carried out the same view in Collott et al. vs. Haigh, 3 Camp., 281, holding “ that the drawer of an accommodation bill is not discharged by time being given to the acceptor,” and rested his decision on the ground that “ the drawer of an accommodation bill must be considered as the principal debtor, and the acceptor only in the light of a surety.” The case of Kerrison vs. Cooke, 3 Camp., 361, followed but a few months after, in, the Common Pleas, and Gibbs, J., there said, “ admitting Laxton vs. Peat to be law, of'which grave doubts hwe been entertained, the present case may be distinguished front it.”'

In Raggett vs. Axmorr, 4 Taunt., 730, heard in the same year, Mansfield, C. J., said “ that, except in the case cited from Campbell, it was never known that anything passing between the other parties could discharge an acceptor.”

Fentum vs. Pocock, 5 Taunt., 192, has been recognized as the leadiug case on this question, and it expressly and distinctly affirms that the ruling of Lord Ellenborough, in the cases from Campbell, were not law. It has since been followed by the approbation of many eminent Judges, both in England and America, and has been declared, by such learned jurists as Kent and Parsons, to express the true rule. — 3 Kent, 86 ; 1 Parsons on Notes and Bills, 327.

In Fentum vs. Pocock, Mansfield, C. J., said: “ No doubt, if the defendant can succeed in establishing the principle that we must subvert and pervert the situation of the parties so as to make the acceptor merely a surety, and the drawer the principal, the consequences contended for must follow.” That case differs from Laxton vs. Peat in this particular, that there the holder took the bill knowing that it was an accommodation one, while in Fentum vs. Pocoeh he ascertained the fact after it came into his hands. Mansfield, C. J., said: “ It is better not to rest this ease on that foundation, for, as it appears to me, if the holder had known in the clearest manner, at the time of his taking the bill, that it was merely an accommodation bill, it would make no manner of difference, for he who accepts a bill, whether for value or to serve a friend, makes himself in all events liable as acceptor, and nothing can discharge him but payment or release.”

In Price vs. Edmunds, 10 B. & C., 578, Parke, J., approved of Fentum vs. Pocock “ as good sense and good law.” In Yallop vs. Ebers, 1 B. & Ad., 698, Tenterden, C. J., said, “Laxton vs. Peat has been long overruled.” It is needless to refer to the many English cases which either expressly or by necessary implication repel the conclusion of Lord Ellenborough and follow the rule adopted by Mansfield.

Mr. Story, in his work on Bills, p. 510, note, says: “The question has also come before some of the American Courts, and it has been held that the parties are bound by the character which they assume upon the face of the bill; if by that they are liable as primary debtors, oras principal debtors, then, as to the holder, they are bound as such; and his knowledge, at the time when he takes the bill, that they are, or either of them are, accommodation parties, will not vary the case.” He refers to Bank of Montgomery County vs. Walker, 9 Serg. & R., 229; S. C., 12 Serg. & R., 382. To these may be added Murray vs. Judah, 6 Cowen, 493, and many others. In the case last named, Sutherland, J., delivering the opinion of the Court, says: “ The acceptor of a bill of exchange is undoubtedly the principal debtor, and the drawer the surety, though it be accepted without consideration and for the sole accommodation of the drawer, and nothing will discharge the acceptor 'but payment or a release. Lord Ellenborough certainly fell into an error when he held a contrary doctrine in Laxton vs. Peat and Collott vs. Haigh.”

In the opinion of tho Court in Griffith vs. Reed, 21 Wend., 500, it is said, “The presumption” (that the acceptance,by the drawee is an acknowledgment on his part that he has funds of the drawer in his hands) “may be rebutted. The drawee may show that he accepted and paid the bill for the accommodation of the drawer, and then, in the absence of any express stipulation, the law will imply an undertaking on the part of the drawer to indemnify the acceptor. On this implied obligation the acceptor may have an action against the drawer, but not on the bill itself.”

Aside from the general application of the rule, there is a view of the facts in the case before us which materially strengthen its application against these defendants. Even .where there may be a want of consideration between the immediate parties to a bill, it could only avail as a defense so long as the bill remained in the hands of the payee. When, however, he has been forced to take it up the law raises a promise on the subsequent payment, and gives a new cause of action. — See Wood vs. Repold, 3 Harris and J., 125. It was proved that the bill sued upon was given as a renewal of the one for the same amount paid by the plaintiff Israel, and the acceptor, therefore, stands to him as principal, for a valuable consideration was paid by the said plaintiff.

It is alleged as further error, that the Circuit Judge refused to instruct the jury, on the request of the appellants, “that if they find that the plaintiff discharged the defendants, or used any declaration to them from which a discharge, or the intention to discharge them, will be inferred, they should find for the defendants.”

A discharge of a bill of exchange may be by any agreement between the parties, founded upon a sufficient consideration, and collateral to the payment of the money, or by some renunciation inducing an act on the part of the acceptor which might not otherwise have been done, which affects his interests, and it may be express or implied from circumstances. In the latter case, a cigar intention to discharge, or a clear renunciation of all claims against the acceptor, must be established. Story, 266, and other elementary writers, affirm the same conclusion.

The defendants had a right to the judgment of the jury as to the fact of such discharge. However the judicial eye may fail to perceive any proof on which the claim could be sustained, yet it wras a question for the jury, with proper instructions from the Court, as to what, in law, would constitute a discharge between the holder and acceptor of a bill of exchange.

As to the exception to the instructions which were given, save as hereinafter stated, we do not see that the defendants have any just cause of complaint. The error, so far as it may have been of prejudice to them, consists in the charge to the jury, “ that, in determining whether H., B. & Co. could have secured defendants, aftor the fire, they should determine whether they were in fact insolvent; if so, they could make no assignment by which a creditor could be preferred, and so could not have secured defendants.” This was again repeated to them in a shape somewhat changed, on the en-quiry by the jury, “whether if they find H. B., & Co. were insolvent at the time of the fire, they can find that the said H., B. & Co. could make any assignment of policies to protect the plaintiff or the defendants ?”

His Honor, in answer, instructed them, that if H., B. & Co. “ were insolvent at the time, they would be unable to make any preference to secure any creditor, because such preferences were not allowed by the Bankrupt Act.”

We think there was error in both of the said instructions.

1st. Without regard to the Bankrupt Act, such an assignment would only be voidable, and not absolutely void. A debtor, even when insolvent, may give a preference to one creditor over another, provided he does not secure to himself an advantage by such preference at the expense of creditors, and that it is not given with the fraudulent view to defeat, hinder or delay other creditors.

2d. In regard to the effect of the Bankrupt Law on the assignment, under the circumstances, to the plaintiff, if ever made.

“The two first sub-divisions of the thirty-fifth Section of the Bankrupt Act are intended to apply to and to defeat and invalidate what are deemed to be fraudulent preferences to creditors.”— James’ Bankrupt Law of United States, p. 154.

The fraudulent preferences so referred to must be made within four months of the filing of the petition. (See Bankrupt Act, Section 35.)

The third sub-division of the Section refers to payments, sales, assignments, &c., made within six months before the filing of the petition. In neither case are they absolutely void, because the person to be thereby benefited must have “reasonable cause to believe such person insolvent, and the sale, assignment, &e., made in fraud of the provisions of the Act.” (See said thirty-fifth Section.)

The Act, so far from avoiding all sales, assignments, &c., by a party who may afterwards apply for its benefit, regards them as valid, unless, in a.Court of Bankruptcy, found to be in violation of the provisions of the law which it administers.

All the proof submitted, in the brief before us, of the proceedings in bankruptcy, is “that H., B. & Co. were adjudicated bankrupts, 27th March, 1868.”. If the applicant is adjudged a bankrupt on the filing of the petition, which is an act of bankruptcy— for such is the language of the eleventh Section of the said Act— then more than six months had elapsed from the date of the averred assignment before the said H., B. & Co. were adjudged bankrupts. Connected with this inquiry there is a fact in the case which should not be overlooked. The assignment of the very same parties to Pclzer was on April 10, 1867, and yet, although the assignors were afterwards declared bankrupts, Pelzer’s assignment does not appear to have been affected by any objection in the Court of Bankruptcy. We are forced, therefore, to conclude that His Honor erred in his instruction to the jury as to the validity of the assignment to the plaintiff, assuming it to have been made.

It is with reluctance that we send the case back. We cannot, however, undertake to say what may have been the conclusion of the jury on the question of discharge, if that point had been submitted by the Court, nor can we say what influence the charge did have as to the validity of the alleged assignment to the plaintiff.

The motion is granted, and a new trial ordered.

Willard, A. J., and Wright, A. J., concurred.