Pettyjohn v. National Exchange Bank

43 S.E. 203, 101 Va. 111, 1903 Va. LEXIS 8

• Court: Supreme Court of Virginia
• Decided: January 15, 1903
• Status: Published

Opinion

Whittle, J.,

delivered the opinion of the court.

This is a motion by the National Exchange Bank of Lynch-burg against W. J. Graham, J. W. Holloran, and Walker Pettyjohn, late partners as Graham & Holloran, and the said Pettyjohn individually, t'o recover judgment on certain negotiable notes, signed Graham & Holloran, ‘ payable to the order of Walker Pettyjohn, and purporting to be indorsed by him.

The notes were delivered by Holloran to the bank for discount, and the proceeds were placed to the credit of Graham & Holloran. W. J". Graham and J. W. Holloran made no defence, and judgment by default was rendered against them.

Pettyjohn filed a plea of nil debet, accompanied by an affidavit denying that he had signed or indorsed the notes, or that he had authorized any other person to sign or indorse them for him; or that there was any copartnership between him and any person who signed or indorsed, or authorized the signing or indorsing of the notes.

There was a verdict for the bank, which Pettyjohn moved the court.to set aside as contrary to the law and evidence, but the motion was overruled, and judgment rendered for the pláintiff, and the case is here upon the writ of error to that judgment.

There was evidence tending to prove: That prior to Eebruary 19, 1898, W. J. Graham and J. W. Holloran had conducted the business of building contractors under the firm name of Graham & Holloran; that on that date Pettyjohn entered into a written contract with them for the manufacture- and sale of brick under the same firm name. The new firm was without capital, and it was understood that Pettyjohn would aid it, as he had frequently aided the old firm, by indorsing notes which the firm would make payable to his order. That on May 1, 1899, Graham & Holloran opened an account with the bank, and thereafter notes of the partnership payable to Pettyjohn were indorsed by him, and discounted by the bank. Holloran, as managing partner, negotiated these transactions. On July 30, 1900, the partnership was terminated by a sale of Petty-john’s interest to his associates. The notes which are the subject of this controversy were made after the dissolution of the partnership, and without the knowledge or consent of Petty-john; and, without his knowledge or consent, his name was indorsed upon the notes, and they were taken to the bank and discounted, and the avails passed to the credit of Graham & Holloran. At the time the bank discounted the notes, it had no notice of the dissolution of the firm. At the trial, Petty-john offered the following instructions, which the court refused to give:

I.

“The court instructs the jury that if they believe from the evidence that the defendant, Pettyjohn, was a member of the firm of Graham & Holloran, but that by the terms of the notes in suit, and the course of dealing between said firm and the plaintiff, the execution of said notes was not complete as to said Pettyjohn ruitil they were indorsed by him, the said Pettyjohn cannot be held liable in this suit unless he indorsed said notes, and, if the jury believe from the evidence that said Pettyjohn did not indorse them, .they must find in his favor.”

II.

“The court instructs the jury that if the plaintiff is entitled to recover in this action, such recovery must be by virtue of the notes sued on, and not by virtue of any contract that might be implied from the application of the proceeds of the said notes.”

The bank offered four instructions, -which were given by the court. The correctness of instructions II. and HI. is conceded; the others are as follows:

I.

“The court instructs the jury that when a partner of a trading partnership borrows money professedly for the firm, and executes therefor a negotiable instrument in the partnership name, it binds all the partners, whether the borrowing were really for the firm or not, or whether he diverts or misapplies the funds or not, provided the lender is not a party to the intended fraud; and the burden is not on the lender to prove value, or lack of knowledge of the fraud.”

IY.

“The court instructs the jury that if they believe from the evidence that the notes in suit were discounted by the plaintiff bank for Graham & Holloran; that the defendant, Walker Pettyjohn, was then a member of that firm; that said firm got from the bank the net proceeds of said notes; that the said notes, at the time they were so discounted and delivered to the bank, were indorsed in the name of said W. Pettyjohn, then the said Pettyjohn is liable, notwithstanding the indorsement of his name as aforesaid may be a. forgery.”

The refusal of the court to give the instructions asked for by Pettyjohn, and giving instruction I. and IY. at the instance of the bank, is assigned as error.

The vice in defendant’s instruction No. I. is, that it submits to the jury the question of the legal effect of the notes sued on, and no rule is better established than that it is the province of the court, and not of the jury, to construe and determine the legal effect of written instruments. There was no error, therefore, in refusing that instruction. New River Mineral Co. v. Painter, 100 Va. 507, 42 S. E. 300.

Plaintiffs instruction No. I.. while a correct exposition of the principle enunciated, was, under the pleadings, irrelevant and calculated to mislead the minds of the jury from the issue they were sworn to try, and the rule, in such ease is, that it is error to give an instruction, which, though not erroneous, is inapplicable and misleading. McCoy v. N. & C. R. Co., 99 Va. 132, 37 S. E. 788.

It will be observed, that this motion is founded upon the contract evidenced by the notes and their indorsement, and is not an action upon the implied liability arising from the fact that the money received from the bank was placed to the credit of Graham & Holloran, and applied to the use of that firm.

The bank having sued on the express promise evidenced by the notes and their indorsment, cannot recover upon the implied promise arising from the use of the proceeds of the notes by the firm. Manufacturers’ Bank v. Gore (Mass.). 8 Am. Dec., pp. 84-5.

The object of defendant’s instruction No. II. was to illustrate that distinction. It correctly expounds the law,- and ought to have been given. The principle invoked is not technical but substantial, and involves the familiar rule of pleading and evidence that the allegations and proofs must correspond, and that a plaintiff must recover, if at all, upon the case made by the pleadings. Richmond Rwy. & Elec. Co. v. West, 100 Va. 184, 40 S. E. 643, and authorities cited. Malcomson v. Clayton, 15 English R. 74.

Instruction No. IV. told the jury that if they believed from the evidence that the notes sued on were discounted by the bank for Graham & Holloran, that Pettyjohn was a member of the firm, that the firm got the net proceeds of the notes, and that the notes, at the time they were discounted and delivered to the bank, were indorsed with the name of Pettyjohn, he is liable notwithstanding the indorsment of his name was a forgery.

The notes were drawn by the firm, and made payable to a member of the firm or order They were the same in legal effect, therefore, as a note made by a person payable to himself or order, and snch an instrument is invalid and inoperative until indorsed by the maker. When so indorsed, it becomes payable to bearer, or to the indorsee or order, according to the terms of the indorsement Such a note can take effect only when indorsed and delivered by the maker. 1 Daniel on Neg. Inst., sec. 130; Smalley v. Wright (Me.), 69 Am. Dec. 112; Dubois v. Mason (Mass.), 34 Am. Rep. 335; Pickering v. Cording (Ind.), 47 Am. Rep. 145; Hall v. Burton (Ill.), 81 Am. Dec. 310; Scull v. Edwards (Ark.), 56 Am. Dec. 294; Norfolk Nat. Bank v. Griffin (N. C.), 22 Am. St. Rep. 868, 11 S. E. 1049.

“A note signed by a firm, payable to a member of the firm, is not a good legal contract, for the obvious reason that the payee cannot sue himself (at law); but such a note becomes a good legal contract when indorsed. It is like a note payable to one’s own order, which though till indorsement is not a good legal contract, becomes such by the indorsement.” Pitcher v. Barrows (Mass.), 28 Am. Dec. 306; Cutting v. Daigneaw (Mass.), 23 N. E. 389; 1 Dan. on Neg. Inst., sec. 354.

The notes in question on their face informed the bank that Pettyjohn was a party to them in his individual capacity, and that his indorsement was essential to infuse vitality into the notes and to impose individual liability upon him; and that information was accentuated by the previous dealings of the parties in respect to the same character of paper.

“The fact that a note was presented for discount by the maker has been held notice to the discounter that an indorsement thereon was for accommodation.” 1 Daniel on Neg. Inst., sec. 795 a.

The testimony of the cashier shows that he was familiar ■with that principle, and regarded Pettyjohn as an accommodation indorser for Graham & Holloran. That it was his invariable custom to "require Ms indorsement to the notes of the firm, and that he would not wittingly have discounted the paper without such indorsement. It further appears that it was the habit of the bank to protest the notes at maturity, unless protest was waived by Pettyjohn, or unless a check was deposited by the makers as a guarantee that he would indorse renewals.

So that, it is apparent that the bank understood Pettyjohn’s relations to these notes, and dealt with him “at arms length,” as it would have dealt with any other indorser for the accommodation of the firm.

While each member of a trading partnership has, as a general rule, implied authority to bind his associates by signing the firm name, he has no authority, by virtue of the partnership relation alone, to hind a copartner by signing his individual name to partnership paper. This doctrine is illustrated by the following quotation from a decision of the Supreme Court of Georgia in a ease identical in principle with the one under consideration:

“But the payee did not indorse, and the person who did indorse, though a partner of the payee, did not indorse in the partnership name or in his own name, but in the name of the payee (the payee being his partner); and this he did without any authority further than the general implied authority of the partnership relation. The partnership had an established partnership name which was quite different from the name of the individual partner to whom the note was payable. The agency of a partner to sign for the partnership is generally restricted to signing in the established partnership name, when the partnership has such a name. Let it be conceded that the note was partnership property, and that the partner who transferred it had a right to transfer it, we think that without some special authority from the payee, he could not indorse it in the name of the latter, and put it afloat with all the incidents of negotiable paper transferred before due; and if be could not do this, the words *or bearer/ had they been genuine, would or might have varied the rights of the holder, and made these rights more comprehensive ; and whatever might or would have had that effect cannot be treated as immaterial. There is a public policy to be subserved in guarding the purity and integrity of negotiable paper, and neither surreptitious interpolations in the body of the instrument, nor the indorsement by one man with the name of another ought to be countenanced as a strictly commercial transaction in a doubtful case.” McCauley v. Gordon, 37 Am. Rep. 68.

The statute law of the State, which is merely declaratory of the pre-existing doctrine of the law merchant, defines the liability of a person upon an instrument to which his signature has been forged.

“Where a signature is forged, or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature unless the party against whom it is sought to enforce such right is precluded from setting up the forgery, or want of authority.” Neg. Inst. Law, Art. I., sec. 23. (Acts 1897-’8, p. 896.)

If, therefore, Pettyjohn is to be held liable on these notes it must be on the ground that he has precluded himself from setting up the forgery, or want or authority.

As a general rule, the doctrine of estoppel is not applicable except in cases where the person against whom it is invoked has by his representations or conduct, misled another to his injury, so that it would be a fraud to allow the true state of facts to be proved. Taylor v. Cussen, 90 Va. 40, 17 S. E. 721. Conceding that Pettyjohn’s failure to inform the bank of his withdrawal from the firm of Graham & Holloran, left his responsibility as partner uimpaired, it did not increase his responsibility.

A representation or concealment to operate an estoppel must be made with knowledge of the facts by the party to be estopped, unless his ignorance is the result of negligence..

For an estoppel to arise from silence, the person upon whom the duty to speak rests must have an opportunity to speak, and knowledge of the circumstances requiring him to speak. In other words, hi's silence must amount to bad faith; and that, of course, cannot be predicated of silence in regard to a transaction of which one has no knowledge, or means of knowledge.

Pettyjohn being ignorant of the existence of the notes- and forged indorsement, of course did no act which induced the bank to believe his signature genuine. It cannot be said, therefore, that he has misled the bank, or has been guilty of the omission of any duty in respect to it, that ought to estop him from setting up the forgery under the statute.

In discussing the defences against which a bona fide holder of negotiable- paper is not protected, Mr. Daniel says: “So where the party has never in fact signed the instrument as it then stands, as, for instance, where it was forged in its inception, and is not genuine, or was subsequently materially altered. In such cases the bona fide holder cannot enforce it, for the defendant has only to say: ‘This is not my contract, non hcec in fcodera veni.’ So, if executed by one acting as agent of the principal, but exceeding his authority, the bona fide holder cannot recover unless the principal were in fault in inducing him to believe that the agent had authority.” 1 Daniel on Neg. Inst., sec. 809.

The case does not fall within the principle of what seems to be the established doctrine, that the makers of a negotiable instrument, who negotiate it with the forged name of the payee indorsed upon the note, will be held to warrant the genuineness of the signature (Such instrument has not the inherent infirmity of a note made by a person payable to himself or order, or of a firm payable to one of its members or order, which requires the indorsement of the payee to give it vitality, but is a complete instrument).

Having issued such an instrument as genuine in' all respects, it would be unjust and fraudulent upon others to permit the makers to deny it • and proof of their having so issued it would be sufficient to enable the holder to recover against them. 2 Daniel on Neg. Inst., sec. 1354.

But the liability of a firm on a note which is forged in its inception presents an essentially different question, as does the liability of a payee whose name is forged.

When the instrument is incomplete, and requires the indorsement of the payee to consummate it, and constitute it a good legal contract, and the payee’s signature is forged, it is an infirmity which inheres in the factum of the instrument, and by the terms of the statute renders it inoperative; and this is true, under the authorities, even in the hands of a bona fide holder for value.

And the circumstance that the payee, whose name is forged, is a partner in a firm, another member of which forges his signature and puts the paper afloat, does not cure the defect. Admittedly his associate has no authority, arising out of the partnership relation alone, to bind him individually. So that the essential elements from which individual liability can arise, prior authority to indorse or subsequent ratification of the indorsement, are both lacking.

It would be indeed a curious result, if one whose signature has been forged to the indorsement of a note payable to himself or order, of the existence of which he had no knowledge, could be held bound upon the indorsement when the paper was negotiated by the forger, likewise without his knowledge, albeit they may happen to be members of the same firm.

The rule adverted to, that a partner, by virtue of the partnership relation, has no authority to bind a copartner by signing his individual name, would be of little value, if by taking; one other unauthorized and wrongful step—namely, negotiating the paper—he could estop his partner from setting up the forgery. Indeed, until the paper is negotiated the forgery is harmless; and to deny the party who has been victimized the right to make defence after it has become harmful would practically annul the rule.

Counsel for the bank insist that upon the whole testimony the jury would have been justified in believing that Pettyjohn indorsed the notes. However that may be, the instruction complained of withdrew that question from their consideration.

Authority has been adduced to sustain the contention that Pettyjohn is liable upon an implied assumpsit to refund to the bank the proceeds of the notes of which his firm received the benefit But, as has been remarked, if such liability exists, as to which no opinion is expressed, it cannot be enforced in this form of action. Malcolmson v. Clayton, 15 Eng. R. 74.

It follows from these views, that the trial court erred in giving plaintiff’s instruction Ho. IV.

The remaining assignment of error is to the refusal of the court to set aside the verdict of the jury as contrary to the evidence.

As a new trial will have to be granted on other grounds, it is unnecessary to consider that assignment.

The judgment of the Circuit Court must be reversed and annulled, and the case remanded for a new trial to be had, not in conflict with the views herein expressed.

Reversed.