Vallely v. Devaney

194 N.W. 903, 49 N.D. 1107, 1923 N.D. LEXIS 61

• Court: North Dakota Supreme Court
• Decided: July 23, 1923
• Status: Published

Opinion

BiRdzell, J\

This is an appeal from a judgment for the defendants and from an order denying a motion for judgment notwithstanding the verdict or in the alternative for a new trial in three consolidated actions upon as many promissory notes. By stipulation two additional actions, each on separate notes, abide the result of these cases. The facts are as follows: In 1918, one W. L. Dodson purchased a large herd of cattle at some distant point and took them to.Cavalier county. In connection with the purchase he had given his'note to the St. Paul Cattle Loan Company of South St. Paul.for $28,000. This note was indorsed by B. Prom and was secured by a chattel mortgage on the cattle. From this herd - some cattle were afterwards sold to the defendant Benoit, some to the defendant Beauchamp and some to the defendant Marcotte, all farmers living in the vicinity of Milton. In the summer of 1919, Benoit, Beauchamp, and Marcotte, together with the .other defendants in this action, Devaney and Sullivan, organized a corporation under the laws of this state, which was known as the Northern Live Stock Company. When this company was organized the directors were Sullivan, Devaney, Marcotte, Beauchamp, Sheehan, and Prom. Benoit was made president, Devaney, secretary, and Sbeeban, treasurer. During tbe remainder of tbe year 1919, meetings were beld and negotiations conducted with a. view to tbe acquisition by tbe company of a large herd of live stock and of considerable land for ranch purposes. These negotiations were practically completed in December and soon after tbe first of tbe year, January 12th, a meeting was beld at which they were finally completed. Tbe details of tbe arrangement are not clear in tbe record and are perhaps immaterial. But it does appear that tbe various interested individuals named above turned their herds in to tbe company, each taking what is termed a lien note in settlement. Tbe manner in which tbe corporation stock was distributed does not.appear, except it does appear that Prom obtained $5,000 of stock on account of tbe purchase of tbe Dodson herd. There seems to have been an understanding reached, prior to tbe meeting of January 12, 1920, that no mortgage should appear as being given by tbe live stock company, so that tbe company might obtain tbe advantage of a better credit rating. Hence tbe so-called lien notes. It was apparently recognized at tbe January meeting that cattle were being turned in to tbe company upon which there were mortgages. The testimony is conflicting as to tbe discussion of tbe mortgages at this meeting, but tbe defendants all agree it was understood that tbe individuals, except Dodson, who turned their herds in, were to pay off their mortgages or secure releases. They further claim that at tbe time of this meeting they did not know of tbe South St. Paul Cattle Loan Company mortgage on tbe Dodson herd. They testify also that, while tbe subject of mortgages was under discussion and while each of tbe other owners stated tbe amount of tbe mortgage against bis herd, Dodson and Prom remained silent, thus giving tbe impression that tbe Dodson herd was clear. It appears that tbe defendants in this action, other than Sullivan, did later clear up tbe mortgages on their herds. Early in July, 1920, Prom requested Benoit, tbe president of tbe live stock company, to accompany him to St. Paul. While they were there they went to tbe Stock Yards National Bank for tbe purpose of securing an extension of tbe $28,000 loan. Prom gave bis note for $26,000 and secured Benoit’s indorsement. He returned with this note to Milton and stated to the remaining members of tbe board of directors of tbe live stock company that tbe loan would be extended if they would indorse this note; that otherwise it would be foreclosed and that, inasmuch as the mortgage covered so large a percentage of the cattle taken over, this would practically put the live stock company out of business. Upon these representations the note was indorsed by the remaining directors. They claim, however, to have derived from this transaction an understanding that Prom was to pay this debt personally. Soon after this, Benoit, as president of the company, shipped some three carloads of cattle to St. Paul and applied .the proceeds on the cattle company loan. Up to this time expenses were being incurred in the care of the cattle which had been met by the State Bank of Milton in the following manner: Upon a note of the Northern Live Stock Company, dated December 1, 1919, due April 1, 1920, indorsed by Sullivan, Marcotte, Beauchamp, and Benoit, the bank advanced $1,000; upon a note of the Northern Live Stock Company, dated January 10, 1920 and due the 1st of May, the bank had advanced $693.22; upon a note of Benoit, dated January 12, 1920, and indorsed by Sullivan, Marcotte, and Devaney, and which was payable on or before the 12th of May, the bank advanced the amount of the note, $1,462; and upon the company note, dated January 31st and due the 15th of June, guaranteed by Devaney, Sullivan, Marcotte, Benoit, and Beauchamp, $1,000; total $4,155.22.

There was more than $5,000 paid out for the company on the checks of Benoit, over and above the funds derived from the notes, which was carried as an overdraft, so that by August 1, 1920 there was due the bank on account of notes, overdraft and interest, $10,133.84. Prom was president and managing officer of the bank. On or about August 1st, Prom met with the other directors of the Northern Live Stock Company at the office of Devaney in Langdon and proposed to them that they execute notes representing the amount that had been thus advanced for the benefit of the cattle company. It seems that previous to the meeting he had prepared notes for execution. At that meeting, notes were given by the various makers, dated August 1, 1920, in amounts as follows: Devaney,- $2,000; Beauchamp, $2,000; Benoit, $3,000; Northern Live Stock Company, $2,500; Northern Live Stock Company, $633.84. Each of the individual notes was indorsed by the remaining four members of the board of directors, except Prom, and the company notes were indorsed by all except Prom. The failure of Prom to execute or indorse the notes, according to the explanation given at the time, was due to the fact that they were to be held by the bank and he could not, as an officer of the bank, appear to be liable. These are the notes upon which the present actions were brought.

The testimony is to the effect that at the time the notes were executed, it was stated by Prom, in substance, that he desired the notes so that he might carry the live stock company loan in a manner that would be unobjectionable to the bank examiner and that, if these notes would be executed, the company debt would be in such shape that the bank could carry it; that upon being asked whether or not the individuals were to be liable, he had stated, in substance, that they would not be liable; that the entire obligation would be met from the assets of the live stock company; that he spoke of a prospective sale which a real estate broker was negotiating under a listing contract of some weeks standing and that the proceeds of this sale would more than liquidate the company obligations, and that these obligations would be the first to be satisfied out of the.proceeds. The notes, aggregating $4,155.22, which were past due, were turned over to the secretary of the live stock company, marked “renewed” across the face. The secretary states, however, that the meeting had adjourned before the notes were delivered to him and that they were included among some papers handed him by Prom with an explanation that they were memoranda to show what the new notes were given for; that he did not examine the papers and did not know that the old notes were included until after this suit was brought.

The sale referred to did not materialize, and later that fall the company, lacking both the means and feed to care for the cattle longer, shipped them to South St. Paul where they were sold. The proceeds of the cattle, -with the exception of those derived from the Sullivan herd, amounted to some nine thousand dollars and were applied on the St. Paul Cattle Loan Company mortgage. The proceeds of the Sullivan cattle were apparently applied on a prior mortgage which he had not removed or satisfied according to the agreement. The State Bank of Milton failed on December 3d and is insolvent. This action is brought by the receiver to collect these notes as assets of the bank. If the notes be considered as assets of the bank, it is nevertheless insolvent.

The principal contention upon this appeal is that the trial court erred, in not granting plaintiff’s motion for judgment notwithstanding the verdict. It is contended that the facts, as shown by the record and as stated above, constitute no defense to a liability on the notes. On the other hand, it is contended by the defendant that the facts stated show the notes to have been executed for the accommodation of the bank, and, furthermore, that their. execution was induced by fraud.

The fraud which it is claimed vitiated the original transaction was the concealment of the mortgage on the Dodson herd at the time they were turned in to the company in the meeting when everybody, except Dodson and Prom, disclosed the mortgages on their respective herds. It is urged that this fraud was operative during practically the whole time the expenses for the care of the cattle, which were advanced by the bank, were being incurred. While the notes in suit were given at a time subsequent to the discovery of this fraud, if fraud existed, it is said that they were given in circumstances that justified the defendants in treating the St. Paul Cattle Loan C'ompany obligation as the personal debt of Prom, the maker.of the renewal.note. It is also claimed that their execution was directly induced by the promise of Prom that the defendants would not be held personally liable, a promise which he did not intend should be performed, for, as he testified, his very object in getting the notes was to obtain their personal liability for the advances to the live stock company. Are the rights of the bank, suing through the receiver, affected by the matters of defense which must be taken as established ? We shall consider these defenses under two heads; first, accommodation to the bank, and, second, fraud.

It is elementary that the plaintiff is not entitled to a judgment notwithstanding the verdict is justifiable-on the most favorable construction of the evidence. So, for the purpose of discussing this assignment of error in the light of the defenses- asserted, we shall consider that the evidence establishes the following conclusions of fact: When the Dodson herd was turned in to the company there was fraudulent concealment by Prom and Dodson of the St. Paul Cattle Loan Company mortgage; that the fact remained concealed until about July 1st or some six months later; that substantially all of the advancements that were made by the bank and which are represented by the notes in suit were made during this time (some were made, indisputably, however, before the January meeting) ; that the note given in renewal of the debt to the St. Paul Cattle Loan Company is the personal -note of Prom and was given as such with the understanding that the mortgage security on the Dodson herd, then owned by the live stock company, should continue as a lien; that a month later when the notes in suit were given they were given to enable the bank to carry the live stock company obligations in a form satisfactory to the bank examiner; and that the individuals who gave them were induced to1 do so relying upon the promise made by Prom that they would not be held personally liable but that the notes would be discharged by the assets of the company, which promise was fraudulent in that Prom did not intend it to be performed, but intended to hold the defendants personally liable. Certainly, no view of the facts more favorable to the defendants is warranted by this record. The question, then, is “do these facts constitute a defense to the notes in the hands of the payee bank, at the suit of the receiver, the bank being, insolvent. Whether the notes be considered as given in payment of the live stock company’s obligation to the bank, or whether they be considered as having been given so that the obligation might still be carried by the bank, in which event they must be regarded as collateral security, is immaterial. In either event the bank is a holder for value. Comp. Laws, 1913, §§ 6910 and 6912; N. I. Law, §§ 25 and 27.

The clear and unmistakable meaning of the undisputed evidence descriptive of the transaction at the time the notes in suit were taken is that they were given to be turned over to the bank so that the bank could carry, in satisfactory form, the obligations which had been incurred by the live stock company, amounting to over $10,000, in the brief period of its existence. This is the testimony of the defendants themselves, and they, practically agree as well that the necessity for giving the notes was that the bank .could not carry this obligation in the shape it then stood, represented as it was by overdue notes and an overdraft, and that, unless the obligation were evidenced in some differ-, ent manner, it would not be satisfactory to the bank examiner. As an-obligation of the live stock company it "was likewise in excess of the legal limit. If it be assumed that this understanding, together with the express promise that Prom is said to have given, that they would not he held personally liable, coexisted and further assuming that the effect of the whole transaction was to make the notes an accommodation to the bank instead of the live stock company (and this is the most favorable view for the defendants), the defendants are liable under what we consider to be the sound rule of law adhered to by the overwhelming weight of authority. Where a note or other obligation is given to a bank with the avowed object of its appearing as assets for purposes of public examination, those who purport to be liable upon the obligation are estopped, as against creditors who would be prejudicially affected by the truth, to assert a secret understanding that they were not to be held liable. Where the action is brought by the receiver of an insolvent bank with which such an arrangement is claimed to exist, the other assets not being sufficient to satisfy the claims of creditors, the rule is applicable with all its force. Pauly v. O’Brien (C. C.) 69 Fed. 460; Lyons v. Benney, 230 Pa. 117, 34 L.R.A.(N.S.) 105, 79 Atl. 250; Harrington v. Connor, 51 Neb. 214, 70 N. W. 911; Murphy v. Gumaer, 16 Colo. App. 183, 70 Pac. 800; Arthur v. Brown, 91 S. C. 516, 74 S. E. 652; Neal v. Wilson, 213 Mass. 336, 100 N. E. 544; Skagit State Bank v. Moody, 86 Wash. 286, L.R.A.1916A, 1215, 150 Pac. 425.

Banks are institutions subject to public regulation to the end that they may make proper loans and freely contract debts with depositors and others to achieve the ends of legitimate business. Careful examinations by public authority are required periodically in order that those who deal with banks may not be misled by appearances. To sanction any arrangement, therefore, whereby the real assets and securities of a bank are to be regarded as less than or different from the apparent assets and securities would tend to defeat the entire purpose of the regulatory measures. Those who participate in a transaction the object of which is to give to the assets of a bank a favorable appearance, for purposes of examination, but less favorable for purposes of liability or enforcement, are participating in a transaction which is fraudulent, as to the public and as to the creditors, including depositors, in whose behalf regulation is primarily imposed. First Nat. Bank v. Davidson, 48 N. D. 944, 188 N. W. 194.

On the question of fraud, we think little need be said. It will be observed, from the statement of facts, that the fraud relied upon to defeat liability on the notes in question consists in the statement that the defendants were not to be personally held, a promise which was fraudulent in that it was not intended to be kept. There seems to be some further contention that there was fraud in representing that the obligation of the live stock company to the bank would be met from the assets of the company when, as a matter of fact, Prom intended to apply the assets toward the payment of a mortgage securing the note upon which he was personally liable. This amounts substantially to the same thing and it all resolves to the primary fraud committed on these defendants in taking from them notes under a promise that they were not to be held personally liable, a promise which for one reason or .another was not intended to be kept. Manifestly, if the defendants are estopped, under the rule of law heretofore previously applied, from asserting the accommodation character of the instruments, and, if the prime reason for that estoppel is that to permit them to show the true transaction would be to work a fraud on creditors, it must be obvious that the same reason precludes the assertion by them of the fraud of Prom, which, if allowed to be established, would have exactly the same effect. From the standpoint of creditors the promise upon which the defendants rely is fraudulent. If they cannot show, as against the receiver, that the note was for the accommodation of the bank, they should not be permitted to show that Prom entertained a dishonest intention (dishonest toward them) of holding them to the exact legal consequences of their act while stating to them that he did not do so. In other words, if the legal consequence of their act in giving a note for the accommodation of the bank is liability at the suit of the receiver, no different consequence can be attached by reason of the existence of a secret intention on the part of the officer of the bank that they were to be held to such, a liability. So, we think the defense of fraud fails for the same reason that the defense of accommodation fails. The defendants cannot assert a collateral fraud of the character attributed to Prom when to do so would involve the perpetration of a fraud upon creditors in which they (the defendants) participated. This would permit them to take advantage of their own wrong.

It should be obvious that we decide nothing with respect to the liability of parties upon notes given to a bank for its accommodation where sued by the bank itself. It follows, from what has been said, that the facts, proven by the undisputed evidence in the case and by the testimony of the defendants themselves, do not establish any defense to liability on the notes in suit, and it was error for the trial court to deny the motion for judgment non obstante.

It may not be improper to make a further observation touching’ the original consideration for the notes in suit which further substantiates the estoppel against the defendants. They stood in the bank in lieu of obligations previously incurred on behalf of the live stock company, some prior and some subsequent to the transaction of January 12 th, which is the first transaction claimed to have been tainted by any fraud. The live stock company received benefits coextensive with the advancements made by the bank. There can be ím question on the record before us but what the bank was not chargeable with any fraudulent concealment practiced by Prom in his own interest. Compton v. Bunker Hill Bank, 96 Ill. 301, 36 Am. Rep. 147, nor that Prom, while purporting to act for the bank in connection with his personal interests, could not bind the bank by a verbal promise that those who executed the notes to the bank would not be personally bound thereby. Bank of United States v. Dunn, 6 Pet. 51, 8 L. ed. 316; Neal v. Wilson, 213 Mass. 336, 100 N. E. 544; State Bank v. Forsyth, 41 Mont. 249, 28 L.R.A.(N.S.) 501, 108 Pac. 914; First Nat. Bank v. Lowther-Kaufman Oil & Coal Co. 66 W. Va. 505, 28 L.R.A.(N.S.) 511, 66 S. E. 713. While Prom’s fraud, if it existed, would have warranted the live stock company in rescinding the contract, it would have made the contract only voidable, not void. If, therefore, while the live stock company continued to act under the contract, it incurred obligations to the bank, manifestly it could not defend against such obligations on the ground of another’s fraud. The bank gained no advantage by that fraud. In fact the security it held for the moneys advanced to the company was impaired by the failure of Prom to personally remove the mortgage lien on the cattle. These defendants placed reliance in Prom’s representation that there was no lien, and, after its discovery, that he would remove it, and they knew that he was dealing with them' in the live stock company on his own account. Therefore, as between the bank and the defendants, it is. more equitable to charge the latter than to visit the consequences of such fraud, if any, upon the bank. This consideration is an additional basis for the estoppel in favor of the receiver.

Judgment reversed and cause remanded with directions to enter judgment for the plaintiff.

BkoNSON, Oh. J., and Chbistianson, Nuessle, and JOHNSON, JJ., concur.