Valley Savings Bank v. Mercer

55 A. 435, 97 Md. 458, 1903 Md. LEXIS 162

• Court: Court of Appeals of Maryland
• Decided: June 30, 1903
• Status: Published

Opinion

Fowler, J.,

delivered the opinion of the Court.

This is a suit by the Valley Savings Bank of Middletown on a promissory note for $600. The makers of this note are the thirteen defendants and J. W. Downey. The note is joint and several dated April i ith, 1901, and payable one year after date to order of R. S. Delauder & Co. The following endorsements appear on it: “Received of J. W. Downey thirty-three 33-100 dollars on within note, and he is hereby released from any further payment on the same;” and “Received of E. D. Hobbs thirty-three 33-100 dollars on within note.” Neither of these was signed, but it appears by the evidence that Downey wrote the first, but there is nothing to show who wrote the second. Following these appeared the endorsement written on the note at the time it was delivered to the plaintiff

It appears from the testimony that one Hanan, acting or pretending to act as agent for Delauder & Co., the payee of the note, undertook to sell a Spanish Jack to certain residents of Frederick County for breeding purposes. The 'price of the animal was agreed to be fixed at $1,800. The evidence shows, and indeed it is conceded, the whole transaction was'a fraud on the part of the agent of the vendors, whose plan was to get subscriptions from eighteen persons of $100 each to purchase the animal. He persuaded Dr. Downey to subscribe in order that others might be induced to' follow his example and secretly gave him the money to pay his subscription. It is not necessary however to narrate all the facts relating to this fraudulent transaction. It is sufficient. to say that the defendants with Downey' signed and delivered to Hanan, the agent or alleged agent of the vendors, three notes each for $600 for the purchase-money agreed to be paid for the jack—the note sued on in this case being the first of the series. It also appears that Hobbs never did sign the notes, because he agreed to pay his subscription in cash.

Having thus secured the execution of the three notes, Hanan applied to Mr. Coblentz, one of the directors of the plaintiff bank, to get his assistance in borrowing money on them. After some negotiation and examination into the financial standing of the makers of the note, the plaintiff decided to make a loan of $1,600 to R. S. Delauder & Co. and take the three $600 notes as collateral security. The proceeds of this loan were placed to the credit of Delauder & Co. and were subsequently checked out and used by them.

The defendants have all pleaded the general issue. During the trial the plaintiff took two and the defendants five exceptions—some of them relating to the rulings of the Court upon objection to testimony and some to the granting or refusal of their respective prayers. The precise points of the various exceptions will appear further on when we consider them. The verdict and judgment were in favor of the defendants, and although we have before us in this record only the appeal of the plaintiff we will, in accordance with the provisibns of sec. 76, Art. 11 of the Public Local Laws (Frederick County), pass upon all the exceptions of all the parties inasmuch as our conclusion is that the judgment must be reversed.

1. In the first place we will consider the question presented by the release of Downey, one of the joint makers of the note sued on. The defendants contend that the legal effect of this release was to discharge all the other joint makers. The general rule has often been said to be that where one or two or more joint, or joint and several, makers of an instrument are validly released all are discharged. But this general statement has frequently been somewhat restricted, and it is said, and we think the rule is supported by reason as well as authority, such a result will not necessarily follow, unless the release is a technical one under seal. Thus in the case of State v. Gott, 44 Md. 346, &c., the rule as applicable to contracts is said to be, quoting from Story on Contracts, “A release under seal, if given to one of several debtors jointly liable, enures to the benefit of all. But a release by parol to one debtor will not operate as a discharge to other debtors jointly liable, and can only be pleaded by the debtor to whom it was given.” The reason of this rule is said to be that an agreement not under seal to discharge a particular person or not sue him does not extinguish the debt, and therefore cannot bar the suit to recover it. Line v. Nelson, 38 N. J. L. 358. But whatever the reason may be, the rule itself, as announced in State v. Gott, supra, is firmly established; and as was said in that case in 1875 we can say now, we have not been referred to any satisfactory authority in which this doctrine has been overruled.

Several Maryland cases were relied on by the defendants to support their views as to the effect of the release of Dr. Downey, but we do not think they do so. Thus Claggett v. Salmon, 5 G. & J. 351, was a case of principal and surety and it was in considering the rights of a surety that the Court used the general language relied on by the defendants. There was in .that case no question before the Court requiring any consideration of the effect of a parol release on the liability oí joint debtors when, as here, they are all principals. The same may be said in regard to Oberndof v. Union Bunk, 31 Md. 126, and Blackburn v. Beall, 21 Md. 208. In Yates v. Donaldson, 5 Md. 389, the joint debtors purchased certain property from their creditor for $1,700, which they agreed in writing to pay at a stipulated time. Subsequently the creditor agreed to accept from one -of them notes for two-thirds, and from the other notes for one-third, of the joint indebtedness. One of the 'joint debtors complied with his-part of the agreement and paid his notes at maturity, but the other failed to fully do so. The creditor sued both of them to recover the balance. It was held that while, if the parties had been principal and surety, such a contract would have released the one who was surety, -yet being both principals it did not have that effect. It is .true the Court used the language relied on by the defendants and used it in regard to principals, namely, that “ if one be .released both will be, except in a case where the remedy against the other is expressly reserved.” But the question still remains, how released. Of course if the release is under seal and shows, as in State v. Gott, that the indebtedness is satisfied, all the joint debtors would be released; but if the -release is only by parol such release can be pleaded as a discharge only by the debtor so released. State v. Gott, stipra. And in the very case relied on by the defendants (Yates v. Donaldson, supra), it was held that the matters relied on by one of- the joint debtors was not a good defense, and that in a case like that and the one we are considering, where all are principals, it would be impossible to adjust the equities in a suit at law by the creditor. It would be impossible, said the Court, to render a judgment upon any adjustment of these equities, because the only judgment in such a case must be for the same amount against all the defendants. Another Maryland case cited by the defendants is Booth v. Campbell, 15 Md. 569, in which it was said that a release or discharge of one of several defendants in a judgment, jointly liable thereon, operates as a discharge of all. Undoubtedly an effective and valid release must have that effect, but the question again arises what kind of a release or contract did the Court in that case hold would operate as a discharge. There was a parol agreement on the part of the judgment creditor and one of the judgment debtors that if the latter would pay twenty per cent on the amount of the judgment, and secure a certain contract from another party (which latter condition was held to be a good collateral consideration), the judgment creditor would “ release the judgment.” The sum agreed upon was paid and a receipt of the creditor therefor was filed in the cause with an entry on the record of its being in full of said judgment. This, together with the additional collateral consideration, was held to be a good accord and satisfaction. In other words, the judgment having been satisfied all liability therein was discharged. The very record which showed the existence of the judgment evidenced its satisfaction, and being satisfied the judgment of course cannot be made the basis of a suit against anybody. The case now before us presents a very different state of facts.

We do not think, therefore, that there was error in the various rulings of the Court below refusing to recognize the release of Downey as a discharge of the defendants and a bar to this suit. What we have said above disposes oí the defendants’ first and second bills of exceptions relating to testimony and to their fifth so far as it is based on the rejection of their third, sixth and seventh prayers.

The most important of the remaining questions is presented by the plaintiff’s second bill of exception, which relates to the granting of defendants’ fourth and the rejection of plaintiff’s second, third, fourth, fifth and sixth prayers.

First, then, in regard to the granting of the defendants’ fourth prayer. In order to consider the question presented by this exception, we will have to refer to plaintiff's first prayer which, as we have seen, was granted. By this prayer the jury was instructed that if they find from the evidence that the defendants signed the note sued on and that said note was endorsed by the payee and delivered to the plaintiff for a valuable consideration, before said note became due and payable, and shall find that said plaintiff at the time it acquired said note had no notice of any fraud in the obtention of said note, or of any failure of consideration therein, then the plaintiff is entitled to recover the full amount of said note, less •certain credits. The prayer thus concluded—“and there is no evidence in this case legally sufficient from which they can find that the plaintiff had any knowledge or notice of fraud, or want or failure of consideration in the making of said note.” The fourth prayer of the defendants, which was also granted, ■embodies in it the general and well settled doctrine applicable to negotiable paper, that if there is fraud in the origin of the note the burden of proof is upon the holder to show that it ■qame to him before maturity in good faith for value and without notice of any infirmity or defect in- the title of the persons who transferred it to him. But in addition to the assertion of this general proposition the jury are informed that, “unless they believe from the evidence that said note was thus acquired by the plaintiff their verdict should be for the defendants.” It seems to us, in spite of the ingenious argument of the able ■counsel for the defendants to the contrary, that there is a direct and palpable conflict between these two instructions. By the first the jury are told that they cannot in this case find that the plaintiff had any knowledge 'or notice of fraud or failure of consideration in the making said note, while by the other they are permitted, if they will, to find from the same evidence that the plaintiff did not obtain the note in good faith. In other words while they are told there is no legal evidence of knowl edge or notice of fraud, they may yet find in point of fact that the note was not obtained in good faith. It is difficult indeed to understand how the holder of commercial paper can take it in good faith, without notice of defects in title and without knowledge of fraud, and at the same time be in a position to have his good faith in the transaction questioned. This is what the fourth prayer in our opinion allows the jury to do. It is most desirable, if possible, to free a practical question like this from fine distinctions, and we think the decisions of this Court have shown a strong tendency in that direction. Thus in the leading case of Totten v. Buey, 57 Md. 446, the former learned Chief Justice of this Court said : “The question is not what facts will or will not be sufficient to put the party on inquiry, but the question whether the party had knowledge of the infirmity of the note at the time of the transfer to him; or in other words, whether he procured the note in good faith for valuable consideration.” Maitland v. Bank, 40 Md. 568; Bank v. Hooper, 47 Md. 88; Williams v. Huntington, 68 Md. 590-601. And so in the case last cited the present Chief Justice quotes the language of Judge Alvey with approval and says : “The question is one of fraud or bad faith on the part of the taker of the note.” In Cheever v. Pittsburg R. R. Co., 150 N. Y. 65-67.it is said: “The rights of the holder are to be determined by the simple test of honesty and good faith and not by a speculative issue as to his diligence or negligence. ” Equally clear, simple and broad is the rule expressed in sec. 75, of Art. 1 3 (our Negotiable Instruments Act), by which, of course, we must be governed. The notice, that section provides, which will prevent a holder of a note from recovering is “actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.” But the prayers in question, as we have seen, after telling the jury in the first that there is no legally sufficient evidence of any knowledge or notice of fraud in the making of the note, allowed them by the fourth to find, either that the plaintiff was not a holder in good faith before maturity, or, second, that it had notice of infirmity or defect in the title of its endorser. The jury could under this prayer have found, and perhaps they did find, that in spite of the fact there was no legally sufficient evidence of knowledge or notice of fraud in the making of the note, yet that the evidence before them justified them in finding the plaintiff was not a holder in good faith because it had notice of some defect or infirmity in the title of its endorser growing out of the worthlessness of the animal purchased by the defendants. It is clear, however, that by the first prayer they were in effect told there was no legally sufficient evidence of knowledge or notice of any such failure of consideration, but if under any-theory of the case, such a prayer as the defendant's fourth could have been properly granted, submitting to the jury the question whether the plaintiff acquired the note in good faith for value before maturity and without notice, &c., then it was error to have rejected the plaintiff’s third and fourth prayers based upon the theory that mere suspicion of defect of title or knowledge of circumstances .which would excite such suspicion in the mind-of a prudent man, or gross negligence on-the part of the taker of the note at the time of transfer, will not defeat his title.” Williams v. Huntington, supra.. We think, moreover, that if the Court could be justified by the facts of the case in granting a prayer like the defendants’ fourth, it was error under the facts of this case to refuse the plaintiff’s, sixth, by which the Court was asked to instruct the jury that if they should find that at the time the plaintiff acquired the note it had no notice of any fraud in the obtention of said note, or any failure of consideration, other than the note itself showed, the plaintiff was entitled to- recover. In other words', such an instruction would have been equivalent to a declaration by the-Court that if the endorsements on the paper were the only suspicious circumstance, or the only evidence to show knowledge of fraud, then such circumstance or evidence was not legally sufficient to show bad faith and to prevent a recovery' by the plaintiff. It does appear that even if suspicion had been aroused by seeing the endorsements upon the notes and the plaintiff or its officers had made inquiry that any evidence. of the fraud or failure of consideration or defect in title would or could have been discovered. It does appear however from the evidence that Mr. E. L. Coblentz, one of the officers of the plaintiff, made inquiry from the agent of the payee as to the meaning of the endorsements on the note and he' was informed what the circumstances were. The fraud was not thus disclosed, nor could it have been discovered by inquiry from the makers themselves, who were then ignorant of the trick that had been played upon them by foisting upon them an animal totally unfit for the purpose for which he was purchased. Can we reasonably impute bad faith to the plaintiff merely because its officers saw the endorsements on the paper? If not, then, when the question of good faith or knowledge of fraud is submitted to the jury, the plaintiff was entitled to an instruction like its sixth prayer. Thus in Hamilton v. Vought, 34 N. J. Law, 187, the Court say: “When mala fides is the point of inquiry, suspicious circumstances must be of a substantial character, and if such circumstances do not appear, the Court should arrest the inquiry. Under the former practice, circumstances of slight suspicion would take the case to the jury; under the present rule the circumstances must be strong, so that bad faith may be reasonably inferred.” And again the Court of Appeals of New York in Cheever v. Pittsburg R. R. Co., supra, declares: “The holder’s right cannot be defeated without proof of actual notice of the defect in title or bad faith on his part evidenced by circumstances.” This is but the declaration of the same rule set forth in in the 75th section of Article 13 of our Code, and the same general principle which we have already said has been announced in Totten v. Bucey and Williams v. Huntington, supra.

In conclusion we will indicate specifically the result of the foregoing considerations.

Plaintiff's First Bill of Exceptions.—This exception related to the refusal of the Court to allow the witness Coblentz h> answer the question whether the plaintiff bank at the time it received the note sued on had any knowledge of fraud or failure of consideration in said note ? By the action of the Court in granting plaintiff’s first prayer this exception became unimportant, and it was abandoned at the hearing.

Plaintiff’s second and last bill of exceptions relates to the action of the Court in granting defendants’ fourth prayer and refusing plaintiff’s second, third, fourth, fifth and sixth prayers.

It follows from what we have said there was error in granting defendants’ fourth, and in refusing to grant plaintiff’s third, fourth and sixth, if under the facts of the case the defendants’ fourth could have been properly granted. Plaintiff’s fifth submits to jury the question of the knowledge of fraud and failure of consideration, &c., but this question was withdrawn from the jury and the prayer was properly rejected.

The defendants’ first bill of exception we have already considered. It related to the effect of the release of Dr. Downey. Defendants’ second bill of exception related to the prayer they offered at close of plaintiff’s case. This exception was waived. Defendants’ third bill of exception related to the exclusion of certain testimony which was supplied by other witnesses.

The fourth bill of exception of defendants’ was taken to refusal to allow several witnesses to testify in reference to certain dealings had by them in relation to the note sued on, but counsel refused to offer to show that the plaintiff had notice of these transactions. We think clearly there was no error in this ruling.

Defendants' fifth bill of exceptions. This exception calls in question the rulings upon the prayers, namely the granting of the plaintiff’s first and the rejection of the defendants’ prayers with the exception of the fourth which was granted.

From what we have already said it will be seen that we are of opinion that the first prayer of the plaintiff was as the case is now presented properly granted. It also, of course, follows from what we have said that defendants’ first asking to take the case from the jury and for verdict for the defendants was properly refused. Defendants’ second was necessarily refused, if the plaintiff’s first could have been properly granted, and we have said it should have been granted. Defendants’ third relates to the release and as we have said was properly refused.

(Decided June 30th, 1903.)

Defendants’ fifth was properly refused because it submitted to the jury the question whether the plaintiff took the note with knowledge of fraud and they were instructed properly as we ■ hold by plaintiff’s first that there was no legally sufficient evidence of such knowledge. The defendants’ sixth and seventh presented the question as to the legal effect of the release of Dr. Downey which we have already considered. Defendants’ eighth prayer was, we think, properly rejected, if for no other reason because there was no evidence that the signature of Hobbs to the notes was a condition precedent to the liability of the defendants thereon. Some of the witnesses testified that the understanding was that all who signed the subscription papers were to sign the notes, and others testified their understanding was that they could pay in cash or give notes; but their is nothing either in the testimony or the contract of subscription that there was to be no liability unless all signed the notes.

By reason of the errors indicated the judgment will be reversed and new trial awarded.

Jtidgment reversed with costs and new trial awarded.