Black v. Bank of Westminster

Pearce, J., delivered the opinion of the Court. This suit was brought by the First National Bank of Westminster to recover from Levi Black the amount due upon two negotiable promissory notes for $100 each, made by him and payable to the order of the United Milk Producers’ Association, now an insolvent corporation, in six and twelve months respectively from date. The declaration, which contains the common counts and a special count upon each of said notes, alleges that they were endorsed to the plaintiff by the payee before its insolvency. The defendant pleaded never indebted as alleged, ánd never promised as alleged, and subsequently filed ten additional pleas.

The third denied that the plaintiff was a corporation as alleged, and this, on motion, was stricken out by the Court, because the defendant, having failed in his previous pleading to deny plaintiff’s incorporation, had thereby admitted it. There was no exception to this ruling, and none could have been sustained. The fourth and fifth pleas denied that the notes were endorsed as alleged. The sixth and seven pleas denied that J. B. Councilman, the Secretary and Treasurer of the United Milk Producers’ Association (which will hereafter for brevity be called the association) and by whom the alleged endorsement was made, was the agent of the association to endorse said notes to the plaintiff, or that he had power and authority so to do.

The eighth plea alleged that the notes were procured and negotiated by the fraud of said association. The ninth plea alleged that the notes were given to the association, and were deposited by it with the Old Town Bank of Baltimore, and by that bank were delivered to the plaintiff in breach of faith. The tenth plea alleged an agreement between the defendant and said association that these notes were to be deposited by ⁴¹⁵ it with the Old Town Bank of Baltimore as collateral security for advances to be made by it to said association, and that the Old Town Bank was to hold, and not to negotiate, the same ; and that the plaintiff well knowing these facts received said notes from said bank. The eleventh plea alleged that said notes were executed and delivered for the accommodation of said association, under the agreement set forth in the tenth plea, and that the plaintiff took said notes, well knowing all these facts.

The twelfth plea alleged that the defendant had subscribed to 400 shares of the capital stock of said association upon condition that said association would take his milk and pay him for it, and out of the amount thus due him at the end of each month, would deduct five per cent of his said subscription, to be credited thereon; and that subsequently said association requested him to give to it three notes covering the amount then unpaid on said subscription, to be deposited with the Old Town Bank under the agreement stated in the tenth plea, and that he gave said notes, two of which are the same here sued on ; that for four months this agreement was carried out, and then said association, without any fault on defendant’s part, refused to receive his milk and pay him for it, or to credit anything upon his said subscription, and that the plaintiff took said notes well knowing all the terms and conditions of said agreement. The plaintiff joined issue on the isf and 2nd pleas traversed the 4th, 5th, 6th and 7th, and demurred to the 8th, 9th, 10th, nth and 12th pleas. This demurrer was sustained, whereupon issue was joined on all the pleas, and the case went to the jury resulting in a verdict for the plaintiff for the amount due on the two notes. During the trial, nine exceptions were taken to rulings on the evidence, and one to the ruling on the prayers.

The first question is presented by the ruling on the demurrer. As to the eighth and ninth pleas, there is no averment in either that the plaintiff took the notes with knowledge of the fraud charged in one, or of the breach of faith charged in the ⁴¹⁶ other, and there was therefore no error in the ruling as to these pleas. Banks v. McCosker, 82 Md. 518; Code, Art. 13, sec. 75, (Supp. to Code). The tenth plea does not aver that the agreement set out therein, was in writing.

In McSherry v. Brooks, 46 Md. 113 , prayers were rejected which sought to defeat recovery by an endorsee upon promissory notes because of an alleged parol promise by the payee to keep the notes in his possession and not to pass them away, the Court saying : “This would seem to be contrary to all principle and authority,” and, that it was not competent “to destroy their legal import and operation by the introduction of parol evidence that the notes were not to be negotiated, notwithstanding the negotiable terms employed on their face.” . But it is not necessary, as was contended by the appellee, to allege in the declaration that the promise is in writing. If it appear in proof at the trial to be in writing, it is sufficient for its admission. Ecker v. Bohn, 45 Md. 285 ; Horner v. Frazier, 65 Md. 1 .

But if in writing that could not avail in this case, since this plea expressly alleges the execution and delivery of the notes by the defendant to the association, and sec. 43 of Art. 13 of the Code, provides that every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon, to have become a party for value ; and sec. 45 provides that where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who became such prior to that time. But apart from these considerations, the plea states a case which does not disentitle the plaintiff to recover, since it alleges that the notes were delivered by the association to the Old Town Bank, “as collateral security for advances to be made by it to the association ; ” and in Maitland v. The Citizens' Bank, 40 Md. 562 , it is said that “every person is within the rule, and entitled to the protection of a bona fide holder for value, who has received the note in payment of a precedent debt, or has taken it as collateral security for a precedent debt, or for ftdure, as well as past advances.” The Old Town ⁴¹⁷ Bank therefore, as well as the .plaintiff, is presumed to be a holder for value; and in Cover v. Myers, 75 Md. 419 , the Court said : “Where a negotiable instrument is originally infected with fraud, invalidity, or illegality, the title of the original holder being destroyed, the title of every subsequent holder which reposes on that foundation, and nó other, falls with it. But if any subsequent holder takes the instrument in good faith, and for value, before maturity, he is entitled to recover on it; and so any person taking title under him may recover, notwithstanding such latter holder may have knowledge of the infirmities of the instrument; and all that is required of the holder in such case, is, that it be proved that he, or some preceding holder, or endorsee, under whom he claims, acquired title to the paper before maturity, bona fide, and for value.” And this view of the law has since been formulated in sec. 77 of Art. 13. We find no error therefore in the ruling as to this plea.

The only difference between the 10th and nth pleas is that the latter alleges these notes were given to the association for its accommodation, and that this fact was known to the plaintiff. But this does not alter the case, nor destroy the negotiability in fact of paper which was made negotiable in form, for the accommodation of the party receiving it; for, as was said in Maitland v. Citizens' Bank, supra: “The result of all the well-considered cases upon the subject is, that it is no defense that the note sued on was known to be an accommodation note between the maker and the payee, provided the plaintiff took the note for value, bona fide before it was due. The reason is, as stated by Mr. Justice Story, that the very object of any accommodation note is to enable the party accommodated, by sale or negotiation, to obtain a free credit and circulation of the note, and this object would be wholly frustrated, unless the purchaser, or other holder for value, could hold such a note by as firm and valid a title, as if it were founded in a real business transaction.” And sec. 48 of Art. 13 of the Code, declares that “An accommodation party is one who has signed the instrument as maker, drawer, acceptor or en ⁴¹⁸ dorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a party is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.” It is obvious from the above language of the Code, and from that of Maitland’s ease, that an accommodation note, taken for value and before maturity, is taken bona fide, and what we have said respecting the tenth plea is equally applicable to the eleventh plea.

The twelfth plea is based upon the alleged executory agreement between the defendant and the association, which is sufficiently stated in the earlier part of this opinion. The plea avers knowledge by the plaintiff of the terms of this agreement when the notes were taken, but contains no averment of breach and notice of breach before the plaintiff took the notes and parted with its money on their faith and credit. Upon principle, it would seem that this must constitute a fatal defect in the plea, and the authorities sustain this view. The rule is stated thus in U. S. Nat.

Bank v. Floss, 38 Ore. 68 ( 62 Pac. 751 ): “The breach of an executory agreement which forms the consideration of a negotiable note, is not a defense in whole or in part against an endorsee who took the note for value before maturity, even if he had notice of the contract, unless he was also informed of the breach before its purchase.” In Davis v. McCready, 17 N. Y. 233 , the reasons upon which this rule rests, are well stated in an opinion by Judge Denio. In that case, the consideration for the acceptance of a bill of exchange was the sale of a brig, accompanied by an executory agreement of the vendor to make such repairs as would render her seaworthy. The defense was that this agreement had not been performed; but the Court said: “ The plaintiffs were not bound to follow up the transactions between the original parties to the bill. To hold otherwise would attach an inconvenient and repugnant condition to such an acceptance.

By accepting simply and unconditionally a negotiable bill, the defendants are to be held as intending to give it all the qualities of commercial paper, one of which is that it shall circulate ⁴¹⁹ freely for the purposes of business, and be available in the hands of any holder for value. To decide that one who proposed to purchase it, and who had a knowledge of the transaction upon which it was given, must await the consummation of that transaction, would essentially impair its character and legal effect.” So in Arthurs v. Hart, 17 Howard, 6 , the Supreme Court of the U. S. said: “It is true the plaintiffs knew, at the time they took the paper, that it was given as part of the price of a sugar mill, and that the mill had been defectively constructed; but they also knew that the defendant, upon the promise of the builders to make the necessary repairs, had agreed to accept the bill unconditionally, and had accepted it accordingly. They knew therefore that he looked to this undertaking for indemnity, and not to any conditional liability upon the acceptance, and the transaction which is brought home to the plaintiff, lays no foundation, in law or equity, to impeach the paper in their hands.” We are of opinion therefore that the demurrer was correctly overruled as to all the pleas to which it was addressed. The demurrer having been overruled, the plaintiff put in evidence the certificate of the incorporation of the association, and of the amendment thereto, showing that it was a trading corporation with large and varied powers, incorporated December 5th, 1899, with a capital stock of only $1,000, but that by amendment certified February 27th, 1900, the capital stock was increased to $250',000.

The plaintiff also proved payment of the proper bonus tax upon the original and amended certificates of incorporation, and then proved by Miles W. Ross that he was a clerk in the employment of the association, at its principal office in Baltimore City, from Febauary 7th, 1900, to September 4th, 1900, when it went into the hands of receivers ; that during the period of his employment, the association received notes, checks and drafts all of which were endorsed by J. B. Councilman, Treas.; that he knew Mr. Councilman’s signature, and that the name of the association was always endorsed with a rubber stamp. The ⁴²⁰ two notes sued on were then shown him, endorsed: ‘ ‘The United Milk Producers’ Association of Baltimore City, Jas. B. Councilman, Secy, and Treas.,” by a rubber stamp, and “J. B. Councilman, Treas.,” and he testified that he recognized, this signature as Mr. Councilman’s, and that the name of the association was endorsed in the usual way with a rubber stamp. These two notes were then offered in evidence by plaintiff and were admitted over defendant’s objection, and to this ruling the first exception was taken.

The defendant contends that a corporation can only make such contracts as are. authorized by its board of directors, and that such contract is then made through an agent, whose authority can only be shown by a vote of the board. But this is too general and broad a statement of the law on the subject. It is true that' in the absence of express authority conferred by charter or by law, there is no power inherent in the office of secretary or treasurer that would enable him to make or endorse promissory notes in the name of the corporation ; but on the other hand, to hold that for every transaction of this charcter, it is necessary to show a vote of the board, no matter what may be the custom of the corporation in this-regard, would be to take an untenable position. Thus in vol. 1,2nd ed., Amer. and Eng.

Ency. of Law, p. 1033, it is said: “The power of an agent to draw and endorse negotiable instruments, must, as a general rule, be expressly conferred, yet in some cases it is necessarily implied from the duties to be performed. * * * * Where the execution or endorsement of negotiable paper is necesssary or customary in the transaction of the business, authority in the agent may be implied.” “Parol evidence is admissible to show the authority of an endorser’s agent to endorse.” Miller v. Moore, 1 Cranch (C. C.) 471. “A corporation may confer authority by parol upon an officer to issue or endorse negotiable paper.” Odd Fellows v. First Nat. Bank of Sturgis, 42 Mich. 461 . “The implication of power arises where the act falls under the customs and usages of business within the officer’s sphere of duty.” 1st Daniel on Neg. Inst., sec. 396; Farmers' and Mechanics' Bank of Kent Co. v. Butchers' and Drovers' Bank, 16 N. Y. 125 . ⁴²¹ Special reliance is placed by defendant on the case of the City Electric Street R. W. Co. v. First Nat. Exchange Bank, 31 L. R. A. 536 ( 62 Ark. 33 ), where it is said: “Unless the authority is expressly conferred by the charter, or given by the board of directors, it may be stated, as a general proposition, that the president and secretary of a corporation are not empowered to bind it by their signatures to commercial paper. * * * Where the authority of the president and secretary is challenged, as it has been by the answer in this case, that authority should be shown by the proof, and not be presumed as matter of law.” And in the Floyd- Acceptances, 74 U. S. 666 (7 Wall.), Justice Miller said: “The person dealing with the agent, knowing that he acts only by a delegated power, must at his peril see that the paper on which he relies comes within the power under which the agent acts, for it is to be kept in mind that the protection which commercial usage throws around negotiable paper, cannot be used to establish the authority by which it was issued or endorsed.” Accepting fully both those authorities, we think they in' no way affect the present -case.

In Credit Co., Limited, v. The Howe Machine Co., 54 Conn. 357 , the strong Court of that State held that drafts accepted by the treasurer of a corporation are presumed to be properly accepted by the corporation, there being no circumstances to indicate fraud or illegality; and in an action by the holder against the corporation as acceptor, the burden of proof is upon the defendant corporation to show that the plaintiff had knowledge that the acceptances were for accommodation, and that he was not a bona fide holder for value. In the course of the opinion in that case, Judge Carpenter said : “A preliminary question of some importance is, on whom was the burden of proof? In the pleadings, the defendant assumes that burden ; and properly so upon principle. The drafts apparently may be for a legitimate purpose.

As there is some presumption that all parties act properly, and within the scope of their powers, the plaintiff establishes a prima facie case when it presents the drafts duly drawn and accepted, there being no circumstances indi ⁴²² eating fraud or illegality. And so are the authorities. Edwards on Bills, 686, 689 ; Daniel on Neg. Inst., secs. 656, 662; 1 Parsons on Notes and Bills, 255. * * * * The course of dealing by the defendant shows clearly the treasurer had power to accept drafts; but it is claimed that under the circumstances he had no power to accept these particular drafts.

Obviously, the authority, or want of authority, in the treasurer to accept these drafts depended, not upon the nature of the