Long v. City Nat. Bank of Commerce

256 S.W. 1006

• Court: Court of Appeals of Texas
• Decided: November 7, 1923
• Docket: No. 2179. [fn*]
• Status: Published

Opinions

BOYCE, J.

A majority of the court have concluded that appellee’s motion for rehearing should be granted and that our former judgment, entered on original hearing, should be set aside and the judgment of the trial court affirmed. Accordingly the original opinion, written by Chief Justice HALL, is withdrawn, and the cause will be disposed of in accordance with the opinions this day handed down.

The City National Bank of Commerce of Wichita Falls brought this suit on two notes for $6,250 each, executed by appellant, Long, payable to “McCoy, Bonner & Nixon, trustees,” and by them indorsed and delivered to the plaintiff. These notes were executed by Long in evidence of the balance of his subscription for a $25,000 interest in an association to be organized for the purpose of purchasing a one-half interest in an eleven-story building, known as the Commerce Building, in the city of Wichita Falls. Long defended on the grounds: (1) That the notes were without consideration; (2) that the notes were executed and delivered to be held in escrow pending the consummation of the organization of the association or corporation referred to in the subscription contract, and were wrongfully taken out of escrow and delivered to plaintiff ; (3) that plaintiff was not a bona fide purchaser of said notes for value without notice; (4) that the principal note for which plaintiff held these notes sued on as collateral had been paid, and the bank had no further claim on these collateral notes.

Such details of the facts on which these pleas are based as are necessary to be considered in the discussion of the propositions presented will,appear in the following statement, and in such further statements as 'may be made in a detailed discussion of the various propositions.

The subscription agreement referred to is dated April 26,1920, and is as follows:

“The undersigned, each for himself, hereby subscribes and agrees to pay for the amount of stock or interest set opposite our respective names in a corporation, syndicate, or stock association (as may be hereafter agreed upon) the total capital of which will be $550,000, hereby , organized for the purpose of acquiring and owning a one-half interest in and to lot No. 1, block 175, of the city of Wichita Falls, Texas, with the building thereon situated, now known as Commerce Building. One fourth of said amount is paid herewith in cash, and the remainder will be paid in three equal installments, to bear interest at the rate of 6 per cent, per annum and due 3, 6, and 9 months from this date. R. S. Nixon, president of the American National Bank, is hereby authorized to collect all amounts due and to become due hereunder until a permanent organization or plan of operations can be formed.”

Long signed this subscription contract for $25,000, and paid $12,500 in cash. The project was being promoted principally by the officers and stockholders of the American National Bank, of which Nixon was president —it being contemplated that said bank would use a part of the building as its banking house; and there is testimony to the effect that -it was understood that said bank would take any difference between the amount actually subscribed and the amount necessary to purchase the building. McCoy and Nixon were active in the promotion of the organization. The names of Ray S. Nixon and H. S. Griffin head the subscription list with a subscription of $50,000 each, and their names appear to have been scratched out. Many other names were signed who appear from the list to have paid part cash and given their notes for the balance. It appears that some of the subscribers had not paid anything on their subscription and had not executed any notes. The testimony of the defendant and other subscribers is to the effect that they signed the subscription at the instance of Nixon, relying on the fact of Nixon and Griffin’s subscription, and that it had been made in good faith; also relying on representations that a corporation would be formed and a loan secured on the building for one-half the amount for which they were buying it, that the rentals from the building would take care of any further payments, and that the subscribers would thus only have to pay one-half cash and would not be called on for the remainder.

On May 1, 1920, the National Bank of Commerce, the owner of the half interest in the building which the Syndicate proposed to purchase, conveyed such interest to McCoy, Nixon, and Bonner, for the consideration of about $485,000, who paid about $135,000 cash, being out of the money paid by the subscribers to the contract above set out, and gave their notes for the balance, about $350,000. This deed was recorded on May 8, 1920. No trust is recited in this deed or in these notes, though it was understood that such parties were taking title to the property for the benefit of the syndicate subscribers. These subscribers knew that the property had been bought. Long,testified that he did not know in whose name the title was taken, but supposed he could have found out if he had inquired. It is in evidence that he discussed the matter of his interest in the building at various times, and expressed a desire to get the association incorporated so that his interest would appear in his own name. The American National Bank moved into the building and occupied a part of it as had been contemplated, and it is in evidence that Nixon, Bonner, and McCoy, or some one acting for them and ,fpr the Syndicate; collected the rents and handled the business incident to the ownership' of the building until it was sold at trustee’s sale more than a year later. We are inclined to think that all parties interested in this joint enterprise at the time these notes were' given and negotiated should be held to be partners. The association, or whatever it was (the parties themselves called it “the syndicate”), did business for more than a year. Nixon, Bonner, and McCoy (by reason of the fact that the title to the property purchased for the Syndicate was taken in their names, the execution of notes for deferred payments in their names, and the delivery of ngtes for unpaid subscriptions payable to them as trustees) were put forward by, or assumed to act with the apparent approval of the subscribers to the enterprise as their representatives.

On July 15, 1920, Bong executed the two notes sued on. They were payable to the order of “McCoy, Bonner and Nixon, trustees,” in three and six months after date. He testified that these notes were presented to him for signature by H. M. Frank, cashier of the American National Bank, who represented to him that—

“We are paying some interest on it (evidently on the Nixon, Bonner and McCoy purchase-money notes), and will hold the notes for you in order to put the business in a businesslike shape. These notes will be held in the bank and not transferred to anybody.”

Frank, in securing the notes, was acting for the trustees, Nixon, McCoy, and Bonner, and turned the notes into the files of the Syndicate. Frank testified that the signers of the notes knew that he was acting for the trustees and that he told Long and others who signed similar notes:

“That the notes were to be taken to get all the papers completed and for a stock company which Judge Bonner was supposed! to be drawing the papers on at that time, and told him the notes were going to be held to clear up the whole affair and get the stock company organized; that we did not expect to use the notes inasmuch as we were figuring on a loan at that time and thought we had a loan placed. * * * I told Joe Long that if we got a loan it would take care 'of the deferred payments. I told all of them that; I did not tell him what would happen if we did not get the loan. What I told them I told them as Mr. McCoy had instructed me — that we just wanted to get the notes and get the papers complete and form the company. We got the notes so we could get the contract these parties signed evidenced by the notes. We took the notes for the same purpose we took the money.” .

. He testified in another place that he told Long that —

“The notes were to be given just to complete .the organization of this company and until the papers could be drawn, and the notes themselves were not to be used except for building up the organization of this stock company. We had no intention of putting the notes in the bank; I mean by putting them in the bank, trading them to the bank.”

Another signer of a similar note testified that Frank told him on presentation of the note for signature, that— i

“The notes were going to be held until the loan was negotiated, and the notes were going to be held contingent on the negotiations of the loan. That was the way they told me — if the loan was negotiated they would return the notes to us. I never thought of what would be done if the loan was not negotiated.”

The National Bank of Commerce was consolidated with the City National Bank of Commerce, and the plaintiff thus acquired the notes of McCoy, Bonner, and Nixon. In order to secure “an extension of time and forbearance from suit” on such notes of McCoy, Nixon, and Bonner, Nixon, with the consent of the other two trustees, delivered the notes of Long sued on herein, to the plaintiff bank, to be held as collateral to the said notes of McCoy, Nixon, and Bonner, signing the indorsement of the notes thus: “McCoy, Bonner & Nixon, Trustees, by R. S. Nixon.” It was agreed that the plaintiff so acquired said notes before their maturity and that it —

“had no notice of any infirmity in the instruments or defects of title of the persons negotiating the same, unless the instruments'themselves gave notice of said infirmity.”

Early in 1921, McCoy, Bonner, and Nixon secured a charter for a corporation named the American Investment Company, organized for the purpose of taking title to said building, with a capital stock of $550,000, on affidavit that the entire amount of said stock had been subscribed by such persons and $275,000 paid in. This payment, .according to the affidavit, being the value of the equity of said parties in said property. Certificates of stock were issued to Long and other subscribers, but were not delivered. A meeting of the stockholders was held, at which Long was present, and- he was elected a director. He testified that he was not aware of the financial situation of the Syndicate at this time, and did not know of the fraud which he alleged was practiced upon him in the securing of his signature to the subscription and execution of said notes. McCoy, Bonner, and Nixon conveyed the property to said corporation in consideration of its assumption of the balance due on their said notes. This deed was not filed for record.

“Times were good” in Wichita Falls when this project was started; later in the year they were not so good. A number of the signers of the subscription contract, -including Nixon, became insolvent. The American National Bank “went out of business,” and the negotiations for a loan on the building, to take care of the balance due on the notes executed by Bonner, Nison and McCoy, were fruitless, and the plaintiff filed this suit on Long’s notes in June, 1921.

On October 4, 1921, the plaintiff purchased at trustee’s sale the one-half interest in the building conveyed to McCoy, Nixon, and Bonner ; the sale being made under the terms of deed of trust executed by said parties at the time of the purchase, and the bank bid at this sale the sum of $25,000. In August prior to the sale in October, the plaintiff bank had entered into a bond for the sale of said one-half interest in said building, for the sum of $277,000.

A trial without a jury resulted in judgment for the plaintiff on the notes. The court, in its finding, sets out the execution of the various instruments referred to in the foregoing statement, and finds that Long executed and delivered said notes “to W. M. Frank, for the use and benefit of the said Nixon, Bonner, and McCoy, trustees, as the balance of the amount subscribed by Jos. Long, Jr.and further that the bank had “no notice of any defect or infirrhity of title” to the notes at the time it acquired them. No specific finding is made as to whether any fraud had been practiced in the matter of securing plaintiff’s subscription or as to the condition under which said notes were executed and delivered, except as they are covered by the general findings above quoted, and no specific finding was made as to the authority of the said Bonner, Nixon and McCoy to put the notes up as collateral to their own notes.

[1] The first contention urged by the appellant is that the notes were placed in escrow in the American National Bank, “pending the consummation of the proposed contract, which was never consummated,” and were wrongfully withdrawn from the escrow by the trustees. We do not think the evidence conclusively establishes the facts as thus contended by appellant.' The evidence, a part of which we have set out in the foregoing statement, warranted the trial court, we think, in the finding that, pending the securing of a loan and in the event one was never secured, the trustees, were authorized to use these notes for the purpose of protecting the interest of the subscribers to the enterprise, and that this was the purpose of the pledge of these notes as collateral to the plaintiff bank.

The next proposition presented is that the bank had sold the property, securing the Nixon, Bonner, and McCoy notes for more than sufficient to pay off said notes, and thereby discharged the collateral. Again’ we think the facts do not sustain the contention. If the contract for sale at $277,000 should be executed and should be taken as the measure of the amount realized for said property, instead of the sum for which plaintiff later bought it at trustee’s sale, yet there would still be due a balance on the Nixon, Bonner, and McCoy notes amounting to more than the amount due on the notes executed by appellant in suit.

[2] The next proposition urged as the first proposition under the fourth assignment, is that the word “trustee” following the name of the payees in the notes, is sufficient to put plaintiff bank upon inquiry as to the defenses against them, so as to prevent, the bank from being protected as a bona fide purchaser. This proposition is made a predicate for the further proposition urged as the first proposition under the sixth assignment and as the first proposition under the tenth assignment, that appellant "had a defense to the notes in that they were without consideration.” Appellant’s position under the latter claim is that he was not bound by his subscription contract because of the fact that Nixon, Griffin, and McCoy, who were the largest stockholders in the bank and the principal promoters of the proposed enterprise, and the bank itself, were in a failing condition and insolvent at the time of the circulation of the subscription list and that such persons knew that the proposal for the purchase of the property could not be, consummated; that plaintiff subscribed on the solicitation of Nixon and on representation that he and Griffin had each subscribed $50,000 and would pay their subscriptions ; that said subscriptions were not made in good faith; that Nixon and Griffin’s names were subsequently erased from the subscription list and they paid nothing thereon; that these facts constituted a fraud and rendered the subscription contract void, so that there was no consideration for the notes. It does not appear that Nixon, Griffin, or the American National Bank were insolvent at the time the subscription contract was signed. It does appear that in the fall of the year 1920 Nixon and several of the other subscribers were insolvent and the bank in a failing condition. It does not appear when Griffin’s and Nixon’s names were erased from the subscription list, nor does it appear who made the erasures and by what authority. Nixon denies that he authorized the erasure of his name. The witness Frank testified that he discussed these subscriptions with Nixon at the time of the organization of the National Bank of Commerce, which was some time after the execution of appellant’s notes, and at this time Nixori said “We are not figuring on taking our subscriptions!’ Nixon testified that the American National Bank assumed the obligation of his and Griffin’s subscriptions and paid them. There is testimony that this bank paid about $123,000 into , the enterprise. The court made no finding as to this matter, and no request was made by the appellant for specific findings, so ¡hat he is not in position to complain of the court’s failure to find spe- eifically on the issue of consideration. It appears quite probable that tbe judgment of the court was based on the theory that even if the notes as between the parties were without consideration, because of fraud in connection with the subscription contract as stated, this would constitute no defense to them as against the plaintiff, a bona fide holder thereof ; and we may dispose of the case on the same theory. The question of law thus presented involves an inquiry as to the effect the naming of the payees as trustees would have as constructive notice of defenses to the note, and this presents the principal issue of law in the case.

[3, 4] Some authorities hold that the use of the word “trustee” in connection with the name of the payee of a note is to be regarded as deseriptio personse and may be rejected as surplusage. The weight of authority, however, we (the writer speaking for himself and the Chief Justice in this statement) think is that the use of such word gives notice of the existence of a trust. Shaw v. Spencer, 100 Mass. 382, 97 Am. Dec. 107, 1 Am. Rep. 115; Hazeltine v. Keenan, 54 W. Va. 600, 46 S. E. 609, 102 Am. St. Rep. 954, 955; Bank v. Looney, 99 Tenn. 278, 42 S. W. 149, 38 L. R. A. 837, 63 Am. St. Rep. 830; Hill v. Fleming, 128 Ky. 201, 107 S. W. 764, 16 Ann. Cas. 841; Daniel on Negotiable Instruments (6th Ed.) § 271; 8 C. J. 515. The Supreme Court of this state, we. think, in the case of U. S. Fidelity & Guaranty Co. v. Adoue & Lobit, 104 Tex. 379, 137 S. W. 648, 138 S. W. 383, 37 L. R. A. (N. S.) 409, Ann. Cas. 1914B, 667, gave its adherence to the general rule stated above. This court followed this rule in the case of Fidelity Trust Co. v. Fowler (Tex. Civ. App.) 217 S. W. 953.

We then become concerned with the further question as to the extent of the notice thus given — whether it is notice of any and all defenses that the maker of the note might have to it, thus rendering the note practically nonnegotiable, or merely notice involving an inquiry into the power of the trustee to transfer the note. Mr. Daniel, in his work on Negotiable Instruments (6th Ed.) § 271, announces his conclusion as to the authorities as follows:

“The better opinion seems to be that while the fiduciary indicated as payee may transfer a good title, provided he makes the transfer within the authority of and for the benefit of his trust, yet that such words as ‘trustee,’ etc., suffixed to a payee’s name, put his indorsee upon inquiry as to the title, and if the transfer be in fraud of the trust the indorsee must suffer the consequences.”

The Supreme Court of Tennessee, in the case of Bank v. Looney, 99 Tenn. 278, 42 S. W. 149, 38 L. R. A. 837, 63 Am. St. Rep. 830, where a maker of a note, given in payment of the amount of a subscription made by him to an enterprise organized to purchase certain property, thei note being payable to S. P. Sykes, trustee, was pleading as a defense to the note in the hands of third persons, that his subscription had been procured by fraud, said:

“The rule is that he who takes a security from a trustee, with his fiduciary character displayed upon its. face, is bound to inquire as to his right to dispose of it, but if, on inquiry, it is found that there is no restriction upon the trustee’s power of disposition, or (it may be added) there is nothing in the nature of the transaction to indicate any abuse of his trust then the title of a purchaser in good faith, for value and before maturity, will be protected.”

The Supreme Court of New York, in the case of Weeks v. Fox, 3 Thomp. & C. 356, says:

“The notice arising from the signature, ‘L. Fox, Agent,’ imposed no further obligation on him [the purchaser] than that of inquiring whether Lewis Fox had authority to bind the defendant by signing bills in that way; and. in the absence of evidence, the legal presumption is that he did make the inquiry, and that he ascertained what the actual authority was, namely, a general authority to sign bills. He was under no obligation to make further inquiries and ascertain what .was the consideration of the bill, or for what purpose it was made. When an agent acts, in making negotiable instruments, within the terms of the authority with which he has been clothed, the fact that he has abused or perverted his authority in the particular instance constitutes no defense as against a bona fide holder. The apparent authority is the real authority.”

To the same effect see the following authorities: Fox v. Citizens’ Bank & Trust Co. (Tenn. Ch. App.) 37 S. W. 1102, 35 L. R. A. 678, and note: note, 1 L. R. A. (N. S.) 188; Central State Bank v. Spurlin, 111 Iowa, 187, 82 N. W. 493, 49 L. R. A. 661, 82 Am. St. Rep. 511, and particularly Motes on pages 514 to 516; Perry on Trusts (6th Ed.) par. 225, and note, pp. 377, 378. It is true that in some .of the cases it is said that the use of the word “trustee” and like terms, in connection with the name of the payee, destroys the negotiability of the note. A reference to these cases will be found in the notes above cited. But, as pointed out by the writers of those notes, such expressions are found in cases dealing with controversies between the beneficiaries of the note and the holder rather than in controversies between the maker of the note and the holder. We have found no authority which holds that such fact gives notice of defenses that the maker of the note may have to it, and' we are convinced that the weight of authority is to the effect that tlie negotiability of the note is not destroyed, and that the rule stated by Mr. Daniel and other authorities cited is sound.

This conclusion is reached without reference to the provisions of our Negotiable Instrument Law. Section 60 of that act (Com plete Tex. St. 1920, art. 6001a60) reads as follows:

“Tiie maker of a negotiable instrument by making it engages that be will pay it according to its tenor, and admits the existence of the payee and his then capacity to endorse.”

One definition of capacity as given by the Century Dictionary, is as follows:

“Ability in a moral or legal sense; legal qualifications; legal power or right.”

It may be that the effect of this provision would be to permit the purchaser of the note in due course to assume that the payee who is named in the note as trustee has the authority to negotiate it, unless there be something in the circumstances of the transaction itself to put the purchaser on notice that the payee is violating his trust or acting beyond his authority in negotiating the note. The law certainly does not detract anything from the proposition that the negotiability of the instrument is not destroyed by the use of such terms.

A summary of our conclusion is that the record warranted the trial court in finding that the trustees had the apparent authority to transfer these n'otes; that they were transferred for the benefit of the trust in pursuance to the general purpose of their execution and the holding by the trustees; and the fact that they were made payable to Nixon, Bonner & McCoy, as trustees, did not give the purchaser constructive notice of any defense of want of consideration which the maker might have urged against the original payees.

[5] Another proposition advanced by appellant is that, since the notes were payable to three persons as trustees, one could not' indorse without authority from the others; that as this authority does not appear from the face of the notes themselves, Nixon’s indorsement is irregular, and thus deprived the purchaser of any benefit of the rule in favor of a bona fide purchaser. It was shown that Nixon did have authority from the other trustees to indorse the note in their name. No authority is cited that in our opinion sustains appellant’s proposition, and we do not think it sound. Section 41, art. 6001a41 R. S.; 8 C. J. 337-339. The inquiry suggested by this form of indorsement would be as to the authority of Nixon ta act for the' other trustees in signing. No question is raised as to such authority, and this form of indorsement would not, in our opinion, put the purchaser on inquiry as to any defenses that the maker might have to the note.

Motion for rehearing will be granted, and the judgment of the district court affirmed.

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