Flood v. Petry

This is an appeal by the defendant from an order granting a motion for a new trial. The action was one for the cancellation of a certain promissory note. There

The plaintiff Philip H. Flood entered into a contract with one Joseph Petry by the terms of which the latter was to erect a building on land belonging to plaintiff for the sum of twenty-two thousand five hundred dollars. There were to be seven progress payments, according to the terms of the contract, six in cash, but the final one partly in cash and partly by a note for the principal sum of three thousand five hundred dollars, payable in eighteen months. The seventh payment was to become due when thirty-five days should have expired after the date of acceptance of the building, provided no liens nor claims against the building, lot or premises should have been filed or recorded. At the time of executing the contract, however, plaintiff signed and delivered to Petry a note which was in the following terms:

“$3500.00.

San Feancisco, Cal., Mch. 15th, 1907.

Eighteen months after Oct. 12, 1907, for value received I promise to pay to the order of Joseph Petry the sum of thirty-five hundred dollars, with interest thereon in like gold coin from date until paid, at the rate of 6 per cent per annum, and if the interest be not paid annually, to become as principal, and bear the same rate of interest. This note is negotiable and payable without defalcation or discount and without any relief or benefit -whatever from stay, valuation, appraisement, or homestead exemption laws.

Due April 12th, 1909.

Philip H. Flood.”

Petry borrowed two thousand dollars from the defendant corporation, gave his own notes for that amount and pledged the note above described as security.

The trial court made findings among which were the following :

“That the said promissory note was the note provided in the said contract to be' made and delivered to the said defendant Joseph Petry as a part of the seventh payment provided in the said contract to be made, and that the sole consideration for the making, signing, and delivery of the said promissory note was the execution of the said contract by the said defendant Joseph Petry.

“That at and prior to the time the said promissory note of the plaintiff was indorsed and delivered by the said defendant Joseph Petry to the said defendant The National Bank of the Pacific the said defendant The National Bank of the Pacific had notice that the sole consideration for the making, signing and delivery of the said promissory note by the plaintiff to the said defendant Joseph Petry was the execution of the said contract by the said defendant Joseph Petry, and had notice of the terms and conditions of the said contract.

‘1 That at the time the said promissory note of the plaintiff was given, made, signed and delivered by the plaintiff to the said defendant Joseph Petry, and at the time the said promissory note of the plaintiff was indorsed and transferred by the said defendant Joseph Petry to the said defendant The National Bank of the Pacific, the said defendant The National Bank of the Pacific had notice that no portion of the work to be done by the said defendant Joseph Petry under and pursuant to the terms of the said contract, between the plaintiff and the said defendant Joseph Petry, had been done by the said defendant Petry and had notice that the said work had not been commenced.”

It was also found that Petry abandoned work on the building on May 22, 1907, after he had received two of the payments for which the contract provided. The court likewise found that the consideration failed as to defendant Petry (who had not answered and against whom a default had been entered).

Respondent insists that the motion for a new trial was properly granted, because the consideration for the note was not the execution of the contract by Petry, but was the completion of the building in accordance with the terms of the contract. Appellant contends, however, that the findings are sustained by evidence in which there is no substantial conflict and that failure of consideration is not a defense open to a maker as against an indorsee for value, even in a case where the indorsee knew that the note was intended to be the evidence of an indebtedness that would become due if an executory promise were performed. In behalf of his contention, respondent, Dr. Flood, contends that since the note and contract were executed at the same time, and since there is

It has long been the law in California that a failure of consideration in whole or in part after a bona fide assignment of a promissory note is no defense to a suit by the assignee against the maker, notwithstanding the farmer’s full knowledge of the original consideration for which the note was given. In the case of Splivallo v. Patten, 38 Cal. 139 , [ 99 Am. Dec. 358 ], the original consideration for the note in suit according to the complaint, was the rent of certain premises for one year. Before the expiration of the term the landlord’s title failed. Defendant alleged that the assignee of the note having full knowledge of the consideration for it, was in the same position as the landlord would have been if he had not indorsed and delivered the note to the plaintiff. This court sustained a judgment entered after a demurrer to the answer had been sustained. The same rule is stated in 7 Cyc. at page 947, and Splivallo v. Patten, 38 Cal. 139 , [ 99 Am. Dec. 358 ], is cited in support thereof.

In Davis v. McCready, 17 N. Y. 232 , [ 72 Am. Dec. 461 ], it is held that the breach of an executory contract which formed the consideration for the acceptance of a bill of exchange is not a defense against indorsees who took the bill for value with notice of the contract but without notice of its breach. In that ease Judge Denio, delivering the opinion of the court, said: “If one will issue his negotiable paper and send it into the world, in consideration of an engagement of the party with whom he deals to do some act for his benefit in future, he declares in effect that he will pay the note or bill according to its terms to any one who shall become the holder for value in the course of business, and rely for his own indemnity upon the promise he has received as the consideration

The rule announced above has been declared to be the true one in cases where the holder of the note knew of the contract but not of the breach thereof, at the time of taking title to the negotiáble paper. It is of course equally applicable where a person has acquired a note in good faith for value before maturity, knowing that the consideration was an executory agreement on the part of the payee which might be broken and which was in fact violated after the transfer of the note. In Kinkel v. Harper, 7 Colo. App. 53 , [ 42 Pac. 176 ], the court said: “Whenever a bill or note is disposed of for a valuable consideration the holder is not bound to inquire whether the indorser has performed or will be able to perform the agreement into which he has entered, so long as there is nothing suspicious or out of the usual course of business in the circumstances attending its issue. (Miller v. Ottaway, 81 Mich. 196 , [ 21 Am. St. Rep. 513 , 8 L. R. A. 428 , 45 N. W. 665 ]; Adams v. Smith, 35 Me. 324 ; Patten v. Gleason, 106 Mass. 439 ; State Nat. Bank v. Cason, 39 La. Ann. 865 , [ 2 South. 881 ] ; Davis v. McCready et at., 17 N. Y. 230 , [ 72 Am. Dec. 461 ]; Craig v. Sibbett et al., 15 Pa. St. 238 ; Bond v. Wiltse et ad., 12 Wis. 682 .)” A very instructive case is Siegel Cooper & Co. v. Savings Bank, 131 Ill. 570 , [ 19 Am. St. Rep. 51 , 7 L. R. A. 537 , 23 N. E. 417 ].) The note which was discussed in that case expressed as the consideration the privilege of placing advertising signs in certain cars for a definite period. The consideration wholly failed after the transfer of the note to defendant. That was held to be no defense against the holder for value. The court uses the following language at pages 572 and 573 of 131 111.: ‘1 There is a distinction, clearly recognized in the authorities, between an instrument payable at a particular day; and one payable upon the happening of some event; and the rule is, that where the parties insert a specific date of payment, the instrument is then payable at all events— and this, although, in the same instrument, an uncertain and different time of payment may be mentioned, as, that it shall be payable unon a particular day, or upon the completion of

In 2 Randolph on Commercial Paper in section 1019, the rule is thus formulated: “Knowledge of an executory consideration is not knowledge of its failure, or of a breach of the agreement which formed the consideration. And a fortiori, notice of the agreement is not notice of equities arising out of it after the transfer of the note. But, if the purchaser knows that the consideration has failed, he is not a bona fide holder.” In support of the last statement the learned author

Respondent contends that the contract in this ease should be regarded in the same light as a mortgage given for future advances and the note as an adjunct thereto, and that the equities must therefore prevail against the bank just as they might prevent the assignee of a non-negotiable note supported by a mortgage upon the security of which nothing had been advanced, from enforcing the payment of such non-negotiable instrument if he had taken it with notice or means of knowing that no advances had been actually made. It is true that, whether negotiable in form or not, a note secured by a contemporary mortgage on land, executed as a part of one transaction is subject to the equities and is not in fact negotiable if taken with notice of the existence of the mortgage. (Meyer v. Weber, 133 Cal. 681 , [ 65 Pac. 1110 ] ; Briggs v. Crawford, 162 Cal. 129 , [ 121 Pac. 381 ] Civ. Code, sec. 1642; National Hardware Co. et al. v. Shenvood et al., ante, p. 1, [ 130 Pac. 881 ].) And if, in the present case, the note had been placed in escrow for delivery after the completion of the building which was to be constructed under the contract, and the defendant corporation knowing that fact had taken it, the rule announced in the cases cited above might be applicable ; but as was held in the case last mentioned, the maker of a note, even if ordinarily it would be subject to the defense of want of consideration, may by his conduct, waive the benefit of such defense. In the present case, the note, although

• It is conceded by the appellant corporation, as of course it must be, that a trial court has the very widest discretion in the matter of granting a motion for a new trial, but it is submitted that n'a other rational conclusions could have been reached by the superior court under the evidence than those indicated by the findings. With this position of the appellant we agree.

The order granting a new trial is reversed.

Sloss, J., Lorigan, J., and Henshaw, J., concurred.

concurring.—I concur in the judgment solely on the ground that the conduct of Flood in executing the note, under the circumstances stated in the opinion of Mr. Justice Melvin, and the terms of the note itself, show that it was his intention that the note was to be negotiated by Petry, if he chose, before its maturity and prior to the completion of the building contracted for, and that these facts create an estoppel against Flood which prevents him from asserting the failure of the consideration of the note against a third person who took it for value with knowledge of the fact that the consideration was the completion of the building free from liens or claims, provided, as was the fact here, the person took the note before the failure of consideration occurred. I

Hearing in Bank denied.