Billingsley v. Kelly

Barnes, J., delivered the opinion of the Court. Henry E. Billingsley (Billingsley) joined with Paul J. Kelly and Jack R. Huffner (Appellees or Kelly or Huffner when referred to individually) to form Urban Systems, Inc. (Corporation), a Maryland corporation, in the fall of 1966. The purpose of the Corporation was to procure private and governmental contracts to perform studies of urban problems. Billingsley, Kelly and Huffner each owned a one-third interest in the Corporation and together constituted its board of directors.

The Corporation met with less than immediate financial success and became indebted to each of the three principals for unpaid salary. The Corporation had an additional obligation to Billingsley for personal funds he had expended on behalf of the Corporation. On March 11, 1968, the Corporation executed four promissory notes. Two of these notes were made payable to the order of Billingsley; one in the amount of $6,868.81 for unpaid salary; the other in the amount of $16,083.42 for personal expenditures in be ¹¹⁸ half of the Corporation.

Both of these notes were indorsed by Kelly and Huffner as individual guarantors. A third note made payable to the order of Kelly in the amount of $13,830.98 for unpaid salary was indorsed by Huffner and Billingsley as individual guarantors. A fourth note made payable to the order of Huffner in the amount of $13,-280.98 for unpaid salary was indorsed by Kelly and Billingsley as individual guarantors. Payment on each of thé four notes, dated March 11,1968, was due on demand and each was entitled to 6% interest from July 1, 1967.

Having made a fruitless demand for payment from the Corporation as maker and Kelly and Huffner as indorsers by a letter of October 25, 1968, Billingsley sued Kelly and Huffner for the balance due on March 24, 1969. The Circuit Court for Talbot County (J. DeWeese Carter, C. J.), sitting without a jury, found that Kelly and Huffner were liable to Billingsley in the amount claimed but also that Billingsley was liable to Kelly and Huffner on their notes. The trial court determined that the amount due Kelly and Huffner was more than that due Billingsley and thus entered judgment for the Appelles, Kelly and Huffner, by way of recoupment. At the trial the circumstances surrounding the issuance of the notes were thoroughly explored in the resolution of issues raised as to fraudulent inducement, parol agreements, and the adequacy of the underlying consideration, etc. After weighing all of the evidence, the trial court decided that the notes were valid as written.

Since none of these issues has been raised on appeal, there is no need to recount the conflicting descriptions of the transaction. Billingsley raises four points 1 on appeal. First, he contends that the introduction of Kelly’s note into evidence was limited to the purpose of showing the nature of the March 11, 1968, transaction and not for a claim of recoupment thus prohibiting the trial court’s use of the note for purposes of recoupment in its judgment. Secondly, Billingsley contends that since the Appellee, Huffner, ¹¹⁹ never took possession of the note issued him by the Corporation, such note never became a valid negotiable instrument and thus is not enforceable against him as an indorser.

Thirdly, Billingsley contends that he cannot be held liable on either of the Appellees’ notes as an indorser when there has been no prior demand upon and dishonor by the Corporation, as maker. Fourthly, Billingsley contends that indorsers are liable to one another in the order of indorsement and since he was the last indorser on each of the Appellees’ notes, there is no right of contribution against him to be used for recoupment. These arguments will be considered in the order raised. (1) The following exchange between the Court and both counsel took place when the Appellees had Kelly’s note introduced into evidence. “(Mr. Fitzgerald) I have no objection to the substitution of a photostat but I will object to this.

There is no claim of payment or offset here. They only have a general issue plea and there is no counter claim by these people and I don’t think it is admissible under the state of the evidence at this time. They have said this is a U. S. I. note and no showing on the state of the evidence that it is proper to proceed at this time against endorsers, and they are not holding any offset because the liability of an endorser is, at best, a continuing liability. “ (Mr. Hoffman) In answer to that, we are relying on the doctrine of recoupment. It is a simultaneous transaction, all growing out of one transaction and the general issue plea will support all the notes on that, and I have some authority on that if you want it. “ (The Court) One of the points that Mr. Fitzgerald makes is that you have not set up a factual base on which to make the endorsers liable ¹²⁰ because you haven’t shown any demand on the maker. “ (Mr. Wheeler) I would like to say that the real purpose of introducing the note at this time is to show the nature of the transaction and isn’t to make claim. “(The Court) If that is the basis, we think it is involved very definitely in the total transaction, and for that reason we will admit it. in evidence, but we feel that there is merit to the position of Mr. Fitzgerald.

Obviously this shit is against these people as endorsers. I think there has to be compliance with the requirements of the Uniform Commercial Code. “(Mr. Hoffman) I think it is a suit both as principal and endorser referring specifically to the Commercial Code. “(The Court) He says it is a corporate note and so considered it because the note says on the front U S I and signed by the Vice President . and with the corporate seal. It is a serious question whether they appear here as makers. I know that you allege that in your declaration.

We have admitted it over objection as part of the defendants’ case.” The trial court was hesitant to admit the note for purposes of recoupment before liability of Billingsley on the note as indorser had been demonstrated by a prior demand upon and dishonor by the Corporation as maker. In order to overcome this obstacle, the Appellees changed their proffer. The trial court later determined that Billingsley was liable on the note as an indorser and used it for recoupment against him. Billingsley cites Fidelity Mut.

Life Assoc. v. Ficklin, 74 Md. 172 , 21 A. 680 (1891) ; Mutual Life Ins. Co. of Balto. v. Rain, 108 Md. 353 , 70 A. 87 (1908) ; Travelers Ins. Co. v. Needle, 171 Md. 517 , 189 A. 216 (1937), for the proposition that the trial court was bound by the Appellees’ limited proffer and thus pre ¹²¹ eluded from using the evidence for purposes of recoupment. These cases are distinguishable from the case at bar which falls within the ambit of the early case of Emery v. Owings, 3 Md. 178, 188 (1852) in which it was stated, “When testimony is admitted for a particular purpose, it does not follow that the party introducing it may then use it for any object he thinks proper, and if any such attempt is made the court will prevent it upon the application of the opposite party, where the use attempted is an improper one ” (Emphasis added.) Mutual Life Insurance Co., supra, is distinguishable because in that case it was the defendant who sought to use evidence offered by the plaintiff for another purpose.

The court held that in order for the defendant to use declarations in a proof of loss statement offered by the plaintiff as admissions against the plaintiff, it would be necessary for the defendant to make an independent offer of such admissions into evidence. Fidelity Mut. Life Assoc. and Travelers Ins. Co., supra, are distinguishable because the other purpose for which the offering party intended to use the evidence was an improper one.

In these cases the plaintiff wanted to use the proof of loss statement to show compliance with the insurance policy for the additional purpose of establishing the loss as a fact. Such evidence has been held incompetent for proof of loss. Here, the evidence was used in behalf of the party introducing it and its use for recoupment was a proper onp. Recoupment as opposed to set-off is allowable under the general issue plea when the claim arises from the same contract or same transaction as the plaintiff’s claim and no affirmative relief is sought in excess of plaintiff’s claim.

Maryland Rule 342 ; Holloway v. Chrysler Credit Corp., 251 Md. 65 , 246 A. 2d 265 (1968) ; Eisenberg Admin. v. Air Cond., Inc., 225 Md. 324 , 170 A. 2d 743 (1961) ; District Agency Co. v. Suburban Delivery Service, Inc., 224 Md. 364 , 167 A. 2d 874 (1961) ; 2 Poe, Pleading & Practice (Sachs Ed. 1970), § 616. No excess relief was granted here but each note does constitute a separate and integral contract inasmuch as it is necessary to take each note in ¹²² dividually and balance it against the validity and performance of the underlying consideration by the named payee in order to determine whether the Corporation as maker would have any defense or offsetting claim for damages against each payee. The trial court determined that there was no such failure in the underlying consideration for the notes. That each note constitutes a separate contract does not preclude use of recoupment among the notes if they can be shown to have arisen from the same transaction.

Recoupment was not allowed on independent contracts between the parties in Molesworth v. Schmidt, 196 Md. 15 , 75 A. 2d 100 (1950) because, as the Court specifically stated, the defendant had failed to show a connection between the two contracts made between same parties on different dates. Here we have the same parties on the same date joining together in alternate combinations as indorsers guaranteeing corporate obligations in the form of promissory notes to each other. Since each of the parties owned a one-third interest in the corporation, they were meeting on equal terms. It is undisputed that Billingsley initially requested that the Corporation issue promissory notes to him in the amount of its indebtedness to him and that the Appellees personally guarantee the notes by indorsement.

It was the very concern of the Appellees that in the event of demand on these notes, they would have no means of diminishing the obligation by recourse to the corporate indebtedness to them that they insisted upon the notes issued to them with Billingsley’s guaranteeing indorsement, thus the notes are tied together as an outgrowth of the same transaction. Since there was no dispute in regard to the underlying consideration for these notes, Billingsley was not prejudiced by their use for recoupment purposes and the trial court was properly acting within its discretionary power to so use them. (2) All four of the notes were executed in Billingsley’s office on March 11, 1968. At that time Kelly had the cor ¹²³ porate seal in his office.

It was agreed that Billingsley would hold the notes until he obtained the seal and impressed it upon each note after which each of the parties could take possession of his note. Shortly after this was accomplished, Kelly obtained delivery of his note. Huffner, however, never bothered to pick up his note. It is also undisputed that Billingsley retained the notes for the sole purpose of placing the seal on them and that there was no reason,why Huffner could not have taken physical possession of his note at any time.

Billingsley contends that since Huffner never took actual delivery and possession of the note which the Appellees had admitted into evidence from Billingsley’s possession, such note is a nullity and could not be used by the Court for recoupment. In terms of the Uniform Commercial Code adopted by Maryland in Art. 95B of the Maryland Code, 1964 Replacement Volume, the question comes down to whether or not Huffner can be considered a “holder” of the instrument. Md. Code (1957, 1964 Repl. Vol.), Art. 95B, § 1-201 (20) defines “holder” as “a person who is in possession of a document of title or an instrument or an investment security drawn, issued or indorsed to him or to his order or to bearer or in blank.” Since it is undisputed that Huffner never took actual possession of the note, he could only qualify as a “holder” if construed to be in constructive possession of the note and only if that concept is still viable under the Uniform Commercial Code as adopted in Maryland.

John Hancock Mut. Ins. Co. v. Fidelity Balto. Nat.

Bank & Trust Co., 212 Md. 506 , 129 A. 2d 815 (1957) cited by Billingsley as authority for his position is of no help on this question. In John Hancock, supra, an insurance agent submitted false claims in the name of fictitious persons to his company which then drew checks payable to these fictitious persons and sent them to the agent for distribution. Since this case was prior to the enactment of U.C.C. (Code, Art. 95B), § 3-405 (1) (c) and governed by the Negotiable Instruments Law as then codified in Art. 13 of the 1951 ¹²⁴ Maryland Code, the Court correctly decided that no delivery could have taken place under Maryland law because there existed no payees to take constructively or otherwise.

No question of constructive delivery was involved in the case. This Court recognized and applied the concept of constructive delivery in regard to negotiable