First National Bank of Kansas City v. Pennig

Plaintiff brings the action on a promissory note, dated December 1, 1909, for the sum of one thousand one hundred dollars, due three years after date, payable to the order of McLaughlin Bros, at the Lassen County Bank, Susanville, California, with interest at six per cent, signed by all the defendants. It is alleged in the complaint that, ‘ ‘ on or about February 12, 1912, and long prior to the maturity of said note, in the ordinary course of business, and for a valuable consideration, said McLaughlin Bros, assigned and transferred said note, then held and owned by them, to plaintiff, as collateral security for a certain note on said day given by said McLaughlin. Bros, to plaintiff, and plaintiff thereupon became, ever since has been and now is the lawful owner and holder of said promissory note so assigned and transferred to it by said McLaughlin Bros.” It is further alleged that, upon the maturity of said note, to wit, on the

The answer denies specifically the averments of the complaint, including a denial that plaintiff is a banking corporation organized under the National Bank Act of the United States or otherwise, but admits the execution of the note sued upon.

As a special defense the answer alleges: “1. That the promissory note mentioned in plaintiff’s amended complaint was given by defendants solely for and on account of one Perdieron stallion ‘Etraegent,’ sold and delivered to the said defendants by said McLaughlin Bros., and without any other consideration therefor.

“2. That said stallion was purchased by the defendants, as said McLaughlin Bros, then well knew, for breeding purposes, and the said McLaughlin Bros., as part of the contract of sale and consideration of said note warranted and represented that said stallion was fit and proper and suitable for such purpose, and as a part of such contract and purchase said McLaughlin Bros, guaranteed and represented to defendants that if the said stallion did not get 75 per cent of the mares bred to him with foal they would replace him with another stallion of the same breed and price upon return of said stallion to the seller thereof.”

Facts showing a failure of consideration and a breach of warranty are then set forth quite fully.

The cause was tried by a jury and defendants had the verdict. Judgment passed thereon in favor of the defendants from which plaintiff appeals.

In support of the verdict, defendants make the following points: 1. That plaintiff has failed to prove its alleged corporate existence; 2. That it has failed to prove that it received the note in suit before maturity; and, 3. That the indebtedness for which the note was alleged to have been given

1. It appeared that plaintiff was, on February 26, 1886, duly authorized, under section 5169 of the Revised Statutes of the United States, [5 Fed. Stats. Ann. 116, U. S. Comp. Stats. 1913, sec. 9711], to commence the business of banking. It is claimed by defendants that under the law unless its term of existence was extended it would cease to exist in twenty years, or on February 24, 1906. Plaintiff replies by citing section 7 of the act of Congress of July 12,1882, [5 Fed. Stats. Ann. 92, U. S. Comp. Stats. 1913, sec. 9671], which provides that where national banking associations whose corporate existence has expired and which do not avail themselves of the act “shall be required to comply with the provisions of sections 5221 and 5222 of the Revised Statutes in the same manner as if the shareholders had voted to go into liquidation as provided in section 5220 of the Revised Statutes; and the provisions of sections 5224 and 5225 of the Revised Statutes shall be applicable to such associations, except as modified by this act, and the franchise of such association is hereby extended for the sole purpose of liquidating their affairs until such affairs are finally closed.”

It appeared from the testimony of the president of plaintiff bank and by the testimony of the principal teller that both of them had been serving the bank in their several capacities for over fourteen years, which would reach back several years prior to 1906. There was evidence that plaintiff was carrying on its business as a national bank when the transaction occurred and when the action was commenced and for fourteen years prior thereto. It was a de facto corporation if not a corporation de jure and as such could maintain the action. (Lakeside Ditch Co. v. Crane, 80 Cal. 185 , [ 22 Pac. 76 ] ; Oroville & V. R. R. v. Plumas Co., 37 Cal. 361 ; Miller v. Coal Co., 31 W. Va. 836 , [ 13 Am. St. Rep. 903 , 8 S. E. 600 ].) The rule has been stated that “a debtor of a corporation cannot avoid his liability to the corporation on the ground that the corporation has forfeited its charter, if there has been no adjudication of such forfeiture.” (Jones v. Bank of Tennessee, 8 B. Mon. (Ky.) 122, [ 46 Am. Dec. 542 ].)

2. Did the evidence show that the note in question was assigned to plaintiff before maturity and without notice of the alleged defense?

The demand note of October 17, 1912, referred to by the witness, was received in evidence. Indorsements showed payments at different times on the principal aggregating twenty thousand dollars. Witness continuing: “The note of August Pennig and others has not been paid. . . . There is about $1,209.50 due thereon, figuring interest to date of maturity. At the time we acquired this note neither I nor any other" officer of the First National Bank had any notice of any defenses between the makers of the note and McLaughlin Bros. . . . These credits made on the McLaughlin note were received from collections on collateral notes we held. That is the reduction of the note from $50,000.00 to $30,000.00; that is from collateral which was put up at the time this note was put up.” He testified, on cross-examination: “McLaughlin Bros, failed some years ago, I don’t know the exact date; they were engaged in importing Perdieron horses; our bank had been discounting or eollaterizing notes that had been taken by McLaughlin Bros., for eight or ten years, and all that time I knew for what these notes were taken, that they were taken as part of the purchase price of horses sold by McLaughlin Bros. In some cases I know that defenses made were want of consideration by reason of the failure of the horse to come up to warranty. Q. You knew that when you

Witness Sidney Silverman deposed: “I am discount teller for the First National Bank of Kansas City, Missouri. I have seen the note of August Pennig et ah, offered in evidence in connection with the deposition of Mr. Swinney, and can identify it as the note sued on in this case. Mr. Swinney represented the bank in that transaction when the note was taken. . . . After the arrangements were made, Mr. William McLaughlin was referred to the discount department and I made the loan and took the collateral. I am the chief man in that department. Q. You made a record of that transaction on the books of the bank ? A. The record was made. I caused it to be made under my supervision. The note marked exhibit ‘A’ (the note in snit) which was given as collateral for exhibit ‘B’ (the $50,000.00 note) is still held by the First National Bank and remains unpaid.” On cross-examination he was asked if in his dealing with McLaughlin Bros, it had not frequently come to the knowledge of the officers of the bank that notes were being contested for want of consideration. “A. I should not say that occurred frequently. In fact, I would say to the contrary. I would say it did not occur over once or twice, perhaps three times prior to the taking of this note. ... I should say not over half a dozen of the notes taken by the bank from McLaughlin Bros, have been sued upon. We have no record of the notes sued upon.

Plaintiff introduced the evidence of the protest of the note sued upon, from which it appears that it was protested on December 2, 1912, at the request of the Bank of Lassen County. No point is made as to the sufficiency of this protest. The foregoing is the evidence in support of the complaint.

Defendant’s evidence related exclusively to the special defense that the horse failed to measure up to the warranty and we think was sufficient to justify the verdict on that issue. If, however, the evidence showed without conflict that plaintiff took the note as collateral security, before maturity

In volume 3, Ruling Case Law, page 1049, the rule is stated as follows: “An instrument passing by delivery will be presumed to have come into the possession of the holder before maturity. And if an indorsement bears no date the presumption is that it was made before the maturity of the instrument.” Many eases are cited in support of the rule. In San Antonio v. Mehaffy, 96 U. S. 312 , [ 24 L. Ed. 817 ] it was said: “The holder of commercial paper, in the absence of proof to the contrary, is presumed to have taken it under-due, for a valuable consideration and without notice of any objection to which it was liable.” In Mobley v. Ryan, 14 Ill. 51 , [ 56 Am. Dec. 489 ] it was said: “Where an indorsement is without date, the presumption of law is, that it was made before the note became due. If the time of the indorsement becomes material for the purpose of defense, it is ineum.bent on the maker to show that it was made after maturity of the instrument, and thereby destroy the legal presumption.” Plaintiff could have relied upon this presumption. But it submitted evidence which, fairly interpreted, strengthened the presumption. It certainly did not overcome it or cast doubt upon it. Defendants refer to the fact that the protest was made at the request of the Bank of Lassen County and that no evidence connects plaintiff with that bank or explains how the note happened to be protested at the request of the Bank of Lassen County. Plaintiff was shown to be the owner and holder of the note, before maturity and subsequently; the note was payable at Bank of Lassen County and was, we may presume, sent by the plaintiff to that bank for presentment. Ordinarily, presentment would not be necessary to charge the maker, but where the note by its terms is payable at a specified time and place and the maker is will

The cross-examination of Swinney and Silverton is set forth herein because it was conducted apparently to show that they had sufficient knowledge of the consideration of these collateral notes transferred to plaintiff by McLaughlin Bros., and the defenses set up to them by purchasers of horses from McLaughlin Bros., to justify the inference that they either knew of the infirmity of the note in question or were put upon inquiry as to the defenses that might be made. The good faith of plaintiff in its purchase of this note cannot be impeached by evidence that it had brought suit on other notes in which a defense similar to that here interposed was made. In Citizens’ Trust & Savings Bank v. Stackhouse, 91 S. C. 455 , 40 L. R A. (N. S.) 454 , [ 74 S. E. 977 ], the action was upon a promissory note assigned to plaintiff by the same McLaughlin Bros, and a similar defense to the one here was there made. Among other things, the court said: “Certainly the mere fact that plaintiff had litigation in collecting some twenty, or probably forty, of the many notes which it had discounted in the run of seventeen years’ business with the McLaughlin Bros, as its depositors does not tend to show bad faith in discounting the note here sued on.” The supreme court had occasion, in Sinkler v. Siljan, 136 Cal. 360 , [ 68 Pac. 1024 ], to consider the same principle and it was there said: “The circumstances attending the purchase must be something more than such as to invite inquiry on the part of the purchaser; they must, as was said in Eames v. Crosier, 101 Cal. 260 , [ 35 Pac. 873 ], show that the note was taken by plaintiff under circumstances creating the presumption that he knew the facts impeaching its validity, otherwise the burden is upon the defendant to show that plaintiff took the instrument with notice of the

3. We are. unable to discover any evidence upon which defendants’ claim can rest that the indebtedness for which the note in question was held as collateral had been fully paid before the commencement of the action or at the time of the trial. The testimony of the officers of the bank, we think, made it quite clear that the collateral was given to secure the McLaughlin Bros. ’ note for fifty thousand dollars and had no connection with the other of their indebtedness to plaintiff of thirty thousand dollars which had been paid.

The judgment is reversed.

Ellison, J., pro tem., and Hart, J., concurred.

A petition to have the cause heard in the supreme court, after judgment in the district court of appeal, was denied by the supreme court on October 15, 1915.