Merriman v. Social Manufacturing Co.

12 R.I. 175, 1878 R.I. LEXIS 56

• Court: Supreme Court of Rhode Island
• Decided: July 20, 1878
• Status: Published

Opinions

Dubeee, O. J.

This is a bill for instructions in a case which may be stated as follows:

Prior to October 13, 1875, George C. Ballou and his son David Ballou were, and for many years had been, extensively engaged in manufacturing under the firm of George C. Ballou & Son, the property used in the business being chiefly owned by George C. Ballou. The Ballou Manufacturing Company organized as a corporation September 30, 1875, under a charter granted in 1872. October 13, 1875, George C. Ballou conveyed all the real estate, mills, and machinery used in the manufacturing business of George C. Ballou & Son to the corporation, the consideration named in the premises of the deed being one dollar. The deed contained the fpllowing clause, to wit:

“ And whereas, and in further consideration for the premises hereby conveyed, the said Ballou Manufacturing Company agree and are to pay and discharge all the indebtedness now existing against said George C. Ballou and George C. Ballou & Son, now due or to grow due.”

The corporation voted, November 2, 1875, to accept the deed, subject to all its conditions, and to take it in full payment for 850 shares of the capital stock subscribed for by George C. Ballou and for 150 shares subscribed for by David Ballou, who thereupon became the sole owners of the stock. On the same day George C. Ballou was elected president and David Ballou treasurer, and both were elected directors. The deed to the corporation was recorded November 23, 1875.

April 17, 1876, the Ballou Manufacturing Company, and George C. Ballou & Son, respectively, assigned all their property to the complainants for the equal benefit of all their creditors.

At the time of the assignment the Social Manufacturing Company held the note of George C. Ballou & Son for $5,000, payable in six months, dated November 27,1875, but being a renewal of a note for the same amount bearing date prior to October 13, 1875.

At the time of the assignment George C. Ballou & Son were, and for many years had been, accommodation indorsers for Oren A. Ballou & Co., and as such had indorsed several notes, which did not mature until after October 13, 1875, and which, when they matured, were renewed by notes of the same description for the same or a less amount. Two of these notes, dated February 21, 1876, are held by the Social Manufacturing Company, and the others, five in number, by three different banks, the holders of the renewal having been holders of the original notes. The holders of all these several notes have presented them to the complainants, as assignees of the Ballou Manufacturing Company, as claims on which they are entitled to dividends under the assignment of the Ballou Manufacturing Company. The complainants question their right to dividends, and desire the instruction of the court.

The dividends are claimed under the clause in the deed to the Ballou Manufacturing Company, above recited, which binds the company to pay and discharge all the existing indebtedness of George C. Ballou & Son, whether due or to grow due.

No question is made in regard to the right of the holders of these notes to dividends on the ground that there is no privity between them and the Ballou Manufacturing Company ; but it is assumed on both sides that they cannot be excluded on any such ground. Counsel have, however, at our request, submitted authorities, in accordance with which we find that the holders of the notes are entitled, either directly or by subrogation, to dividends under the assignment of the corporation, unless excluded on other grounds. See Urquhart v. Brayton, ante, p. 169, and cases cited ; Klapworth v. Dressler, 13 N. J. Eq. 62; Crowell v. Currier, 27 N. J. Eq. 152; Curtis v. Tyler, 9 Paige, 432 ; Marsh v. Pike, 10 Paige, 595; Blyer v. Monholland, 2 Sandf. Ch. 478 ; Vrooman v. Turner, 8 Hun, 78 ; Thompson v. Bertram, 14 Iowa, 476 ; Crawford v. Edwards, 33 Mich. 354 ; Miller v. Thompson, 34 Mich. 10.

It is contended that the holders of these notes are not entitled to dividends because the notes are not a part of the indebtedness existing against George C. Ballou & Son on October 13, 1875, but are an indebtedness subsequently contracted. The holders of the notes contend that, though the notes were given after October 13, 1875, they were given for debts previously contracted, and given not in payment, but simply to renew the promise and extend the time of payment.

The doctrine of this court, established by repeated decisions, is that a negotiable promissory note, given by the debtor for a preexisting debt, does not pay the debt unless given and received as payment, the burden of proving that it was so given and received being on the party who maintains it. Under this rule we see no reason why the note first above-mentioned should not be regarded as representing a debt which existed prior to October 13, 1875; for there is not the slightest evidence that the note was either given or received as absolute payment of the debt then existing. It merely extended the time of payment, or, at the utmost, operated only as conditional payment. It does not appear that it was ever negotiated, which, in Sweet Carpenter v. James, 2 R. I. 270, is said to make the new note primé facie payment. We think, therefore, the new note never having been paid, the prior indebtedness must be held to have remained unextinguished.

It is urged that the indebtedness, if not extinguished, was at least extended, and that, for that reason, the Ballou Manufacturing Company cannot be held. The objection might have some force if the indebtedness had been extended without the consent of the corporation; but inasmuch as the copartnership and the corporation are composed of the same persons, it must be presumed that the indebtedness was extended with the consent of the corporation and for its benefit, as well as for the benefit of the copartnership.

What we have said in regard to the first-mentioned note is equally applicable to the two other notes held by the Social Manufacturing Company, unless, upon some other ground, they are not to be regarded as representing an indebtedness existing against George C. Ballou & Son prior to October 13, 1875. The note first above-mentioned was made by George C. Ballou & Son. The other two notes were not made by them. They were simply indorsed by them for the accommodation of Oren A. Ballou & Co., who were the makers. It is contended that an indorsement, before notice of dishonor, is not an “ indebtedness,” but only a contingent liability ; and that it was tbe indebtedness existing against George 0. Ballou & Son prior to October 13, 1875, not their contingent liabilities, that the Ballou Manufacturing Company agreed to pay and discharge. On this ground, therefore, the right to dividends on account of notes so indorsed is denied.

Indebtedness is a word of large meaning. It is used to denote almost every kind of pecuniary obligation originating in contract. We see no reason for limiting its significance in the case at bar, whether we regard the language of the stipulation or the extrinsic circumstances. The language is “ all the indebtedness .... now due or to grow due.” The assumption was obviously meant to be comprehensive. We think it must be held to cover liabilities contracted by indorsement, whether then due or to grow due.

But it is further urged that the liability or indebtedness never did grow due, because there was no notice to the indorsers when the notes matured. It is true there was no notice, but notice was not given because the indorsement was renewed. The in-dorsers thereby waived notice by promising to pay in case they were duly notified when the new notes matured, and it is conceded that they were then duly notified.

These are the only grounds suggested at the hearing for the exclusion of the three notes first mentioned. We do not think that either of them can be sustained.

We next come to consider the renewal notes held by the different banks. It appears that when these notes were given the former notes were surrendered. In Nightingale v. Chafee, 11 R. I. 609, we decided that such surrender or cancellation was not in itself proof of absolute payment, especially when payment in that manner was obviously not for the creditor’s interest. We still adhere to that view. To keep the old note is to keep the evidence of the debt as it were in duplicate. This might not be desired by either party. It appears, however, in the case at bar, that the old notes when surrendered were stamped “ paid ” by the banks. This was certainly significant, but perhaps not decisive ; for it may be said they were paid sub modo, but not absolutely. Maillard v. Argyle, 6 M. & G. 40 ; Berry v. Griffin, 10 Md. 27 ; Wheeler v. Schroeder, 4 R. I. 388; 2 Amer. Lead. Cases, 5th ed. 267. But in the case at bar there was something beyond even this. It is admitted that the new notes were not simply exchanged for the old, but that the new notes being offered to the banks were discounted, and the proceeds placed to the credit of the makers on the books of the bank; that thereupon, the old notes having matured, the makers drew their checks upon the banks for the amount thereof, and that it was not until after these checks were received by the banks that the old notes were stamped “ paid,” and surrendered. And in view of this complex operation were they not paid ? Of course the question is, What did the parties intend ? We have considered this question carefully, and the more carefully because we now learn what it may have been important for us to have known in deciding other cases, that the same practice prevails in all the banks ; and we cannot resist the conclusion that the parties intended to have the new notes represent new debts, the old being regarded as paid and extinguished. The new notes were given to create new credits, or, in- other words, to procure in effect new loans, the proceeds of which were applied, by the checks drawn for that purpose, to the payment of the notes, which were surrendered. This, and nothing short of this, is the real import of the acts which were done, and of the record which was made of them. Letcher v. Bank of the Commonwealth, 1 Dana, 82, 84; Slaymaker v. Gundacker's Executors, 10 S. & R. 75, 82; Sill v. Bostick, 10 Yerg. 410 ; 2 Parsons on Notes & Bills, 208.

Our conclusion is that the paper held by these banks does not represent any part of the indebtedness existing against George C. Ballou & Son prior to October. 13, 1875, but that it represents a new indebtedness subsequently contracted, and consequently that it does not entitle its holders to dividends under the assignment of the Ballou Manufacturing Company.

It is suggested that the notes may be provable, even if paid, because they may be regarded as paid by George C. Ballou & Son. We think, however, that if they can be regarded as paid by George C. Ballou & Son, rather than by Oren A. Ballou & Co., it will not make them provable specially for the benefit of the banks holding the new notes ; but only in favor of George C. Ballou & Son, or their assignees, for the copartnership creditors generally. But whether they are to be regarded as paid by George C. Ballou & Son is not a question presented by this bill.

The bill asks for instructions in regard to two other notes held by the Jackson Bank. But if the notes last above considered are not entitled under the assignment of the corporation, the other notes are still less so. We instruct the assignees accordingly.