Opinion
No. 21880
Decided August 14, 1950.
Negotiable instruments — Past-due hypothecated promissory note — Holder not in due course, when — Parties to action on note — Pledgee may sue in own name — Defenses available where holder not in due course — Defense that holder not real party in interest, available, when — Pledgee bank not owner until conversion — Holds subject to certain contingencies and defenses.
1. Where a payee indorses a past-due promissory note, without recourse, to one of several guarantors of such note, which guarantor in turn indorses the note in blank and delivers it to the payee as additional collateral security for such guarantor's personal note, such payee holds the hypothecated note as pledgee and neither the pledgor nor the pledgee-payee becomes a holder of the hypothecated note in due course.
2. The pledgee of a chose in action, such as a past-due promissory note, may bring an action in his own name for the collection thereof and is bound to account to the pledgor for the proceeds of the collection thereon.
3. A person who becomes the holder of a promissory note after maturity may maintain an action thereon in his own name, but the action is subject to the defense by the maker that the holder thereof is not the real party in interest.
4. In the hands of a holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable.
5. A bank as pledgee of a past-due promissory note assigned to it by one of the guarantors thereof does not become the owner thereof until such time as it may convert the note to its own, pursuant to the terms of the pledge, and until such conversion, holds the note subject to any transactions which may subsequently occur between the pledgor-guarantor of such note and the coguarantors thereon, and, also, subject to any defenses which the coguarantors may have against the pledgor-guarantor.
APPEAL: Court of Appeals for Cuyahoga county.
Mr. William E. Todd, Sr., for appellant.
Messrs. Ewing Hecker and Mr. Charles P. Mayo, for appellees.
This is an appeal on questions of law by plaintiff from a judgment entered by the Common Pleas Court on behalf of defendants.
On May 26, 1931, The Beidler-Curry Coal Company, a corporation, acting through its president and treasurer, made, executed and delivered to the plaintiff, its promissory note in the amount of $2,800, payable 90 days after date. The note bore the endorsement of E. W. Beidler, B. C. Tucker, H. T. Beidler and T. F. Beidler, each of whom were either officers or directors of The Beidler-Curry Coal Company, and each of whom, concurrent with such endorsement, guaranteed payment of the note, waived demand and notice of nonpayment, and authorized any attorney at law to appear in any court of record in any state after such note became due and waive the issuance and service of summons and confess judgment against them in favor of the holder of the note for such amount as might then appear due.
In March of 1931, the assets of The Beidler-Curry Coal Company were sold as an entirety. After applying the proceeds of sale to outstanding obligations, the company was still indebted to various creditors in the amount of approximately $16,000, which amount included the note held by plaintiff.
The four endorsers upon the note, being desirous of accomplishing the liquidation of such indebtedness and conscious that each of the several individuals, because of particular circumstances and past contact with the various creditors, could more successfully initiate and successfully conduct negotiations with particular creditors leading to the accomplishment of the desired result, in August 1931, entered into a detailed agreement among themselves, as to the individual responsibility of the four endorsers in bringing about the payment of such indebtedness.
In this agreement, H. T. Beidler, E. W. Beidler and B. C. Tucker each agreed to pay $5,334 to the creditors of the coal company, and Theodore F. Beidler agreed to pay to each of the other three parties $1,333.51. With respect to The Cleveland Trust Company note, H. T. Beidler agreed to pay $921, E. W. Beidler $1,351.87, and B. C. Tucker $527.15. The agreement recites that the payments by each constitute one-fourth of the total obligations of the parties thereto, and are to be made in installments from time to time as each party is able to do so, and to protect the other three parties to the agreement.
The agreement provided further that a record of payments made by each party should be kept and the totals paid in should be equalized on a prorata basis from time to time, "it being the intention of this agreement that each party shall relieve the other parties to this agreement from the responsibility of payments, the obligations set against each party's name and that no party shall be obliged to pay more than his prorata share." It was provided further that in the event one party should pay more than his share at or before final settlement, the other parties in default would pay such party any money paid in excess of such party's proportionate share.
On September 28, 1931, a note in the amount of $13,800, representing an indebtedness owed by H. T. Beidler for some time prior to that date to the collateral loan department of plaintiff, matured. On October 20, 1931, this latter note was renewed, the principal of same, however, being increased to $16,233.40. This latter note was secured by 193 shares of National Screw Manufacturing Company stock, several insurance policies upon the life of H. T. Beidler, and possibly other collateral. On October 20, 1931, the day the renewed note in an increased amount was delivered by H. T. Beidler to the collateral department of plaintiff, such department transferred to its commercial department $2,826 and on the same day the record of the loan of plaintiff to The Beidler-Curry Coal Company was credited with $2,800, and such record was closed. On the same day, the plaintiff endorsed without recourse the $2,800 note to H. T. Beidler, who thereupon endorsed it to plaintiff, and it was deposited with the collateral loan department of plaintiff and pledged as additional collateral security for the indebtedness of H. T. Beidler, in the sum of $16,233.40.
H. T. Beidler's collateral note in the sum of $2,805.07, dated July 31, 1935, and also his collateral note in the sum of $16,700, dated August 31, 1935, show as collateral the 193 shares of National Screw Manufacturing Company stock, two insurance policies, and the $2,800 note of the coal company. These two collateral notes of H. T. Beidler were reduced to judgment and show a balance of $1,555.50, due on the note of $2,805.07, as of December 22, 1937, and on the $16,700 note, as of June 7, 1939, there was due the sum of $6,486.06.
On April 24, 1946, plaintiff recovered a cognovit judgment based upon the $2,800 note against the defendants, T. F. Beidler, B. C. Tucker and E. W. Beidler, such judgment being in the amount of $5,264. Judgment was not taken against the coal company or H. T. Beidler.
After term, the defendants, B. C. Tucker and E. W. Beidler, filed their separate petitions to vacate such judgment, and on June 28, 1947, by separate entries, the judgment against the defendant, B. C. Tucker, and defendant, E. W. Beidler, was vacated; the vacations being conditioned, however, that the judgments vacating such judgment be suspended pending trial upon the issues joined. And thereafter, by leave of court, such two defendants filed their separate answers and, later, amended answers. The defendant, T. F. Beidler, deceased since the submission of this cause, did not during his lifetime question the judgment.
The amended answers of the defendants, B. C. Tucker and E. W. Beidler, present six separate defenses:
1. General denial.
2. That plaintiff holds the note as pledgee only and is not the real party in interest.
3. That the note was wholly without consideration and for accommodation purposes only; that plaintiff became possessed of the instrument as pledgee after the maturity thereof; that plaintiff is not an innocent holder for value or a holder in due course; and that defendant is not indebted to plaintiff in the sum of $2,800 by virtue of such accommodation endorsements or otherwise.
4. That the note has been paid.
5. Sets forth the agreement between E. W. Beidler, H. T. Beidler, B. C. Tucker and T. F. Beidler, with reference to payment of the obligations of the coal company, including the note in suit, and that H. T. Beidler after maturity of the note paid and became possessed of it and thereafter, on October 20, 1931, redelivered the note to plaintiff as additional security for his personal obligation.
In its reply the plaintiff alleges that the allegations in the second, third and fifth defenses are insufficient in law, and further alleges:
1. That plaintiff is the legal owner and holder of the note and entitled to maintain the action.
2. That plaintiff acquired the note in due course before maturity and is an innocent holder thereof, and has paid full value therefor, and is entitled to recover upon the written guaranty of the defendants thereon.
Such reply then:
1. Denies that the note has been paid.
2. Denies the agreement of August 1931 or that plaintiff ever had any knowledge of said agreement; that plaintiff released any of the endorsers on the note; and that H. T. Beidler paid or has become possessed of such instrument.
Upon the pleadings and the evidence, the Common Pleas Court found that the note in suit had been paid and rendered judgment for the defendants.
A review of the evidence discloses that on October 20, 1931, H. T. Beidler obtained an additional loan from the bank in the sum of $3,433.40, and that $2,826 of the additional loan was applied by the bank in payment of the coal company note of $2,800. Instead of stamping the note "paid" it was endorsed without recourse by the bank to H. T. Beidler, who in turn endorsed it in blank and redelivered it to the bank as additional collateral upon his personal note of $16,233.40. Upon its redelivery to the bank, the $2,800 note was held by the bank as pledgee. Since the note was overdue, neither H. T. Beidler nor the bank became holders in due course.
The first question to be determined is whether the bank, as pledgee of the note, may bring an action thereon without converting it to its own, pursuant to the terms of the collateral note. No authority to bring an action on the pledged note is provided by the collateral note. After default a pledgee may sell the property in accordance with the terms of the pledge, or bring an action to foreclose his lien. However, if the pledge consists of a chose in action, apparently the pledgee may bring an action in his own name for collection thereof, and is bound to account to the pledgor for the proceeds of the collection, and properly credit the same on the pledgor's obligation so secured. Handy v. Sibley, 46 Ohio St. 9, 17 N.E. 329. The pledgee of a promissory note may collect it by suit when it becomes due, whether the pledgor's obligation is then matured or not. 41 American Jurisprudence, 632, Section 71, citing, Central National Bank of Cleveland, Trustee, v. Mills, 62 Ohio App. 413, 24 N.E.2d 607; Hammond Pure Ice Coal Co. v. Heitman, 221 Ind. 352, 47 N.E.2d 309, 145 A.L.R., 997, 1004.
The second question is whether the bank, as a holder other than a holder in due course, may bring the action.
Prior to the enactment of the Uniform Negotiable Instruments Act in 1902, Section 3173, Revised Statutes, provided that if an instrument be indorsed after due date, and the indorsee institute an action thereon against the maker, drawer or acceptor, the defendant shall be allowed to set up any defense he might have made, had the action been instituted in the name and for the use of the person to whom the instrument was originally made payable. This section seems to recognize that a party taking a note after maturity could bring an action thereon, but subject to defenses. However, in Osborn v. McClelland (1885), 43 Ohio St. 284, 1 N.E. 644, the Supreme Court held that a holder in due course of a promissory note could maintain an action thereon in his own name, but that a person who became a holder after maturity and sued to recover thereon was subject to the defense by the maker of the note that the holder was not the real party in interest. See, also, Kernohan v. Durham (1891), 48 Ohio St. 1, 26 N.E. 982, 12 L.R.A., 41.
Section 8156, General Code, provides: "The holder of a negotiable instrument may sue thereon in his own name; and payment to him in due course discharges the instrument."
Section 8295, General Code, defines the term, "holder," as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
The Negotiable Instruments Law makes a distinction between a "holder" and a "holder in due course." The latter holds the instrument free from defenses available to prior parties, but in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. Sections 8162 and 8163, General Code.
Under Section 8156, General Code, the plaintiff can properly bring the action as holder of the note. Wick v. Cleveland Securities Co., 71 Ohio App. 393, 50 N.E.2d 351. But since plaintiff, as pledgee, took the note after it was past due, the note is subject to the same defenses as if it were nonnegotiable. The Supreme Court of Ohio has recently held that the holder of a promissory note who takes it after maturity takes it subject to every objection, including equitable setoff, to which it was subject in the hands of his assignor. Union Properties, Inc., v. Baldwin Bros. Co., 141 Ohio St. 303, 47 N.E.2d 983, 149 A. L. R., 725.
Courts in other jurisdictions have held that the term "defenses" means technical defenses, and does not embrace setoffs arising out of an independent transaction. Stegal v. Union Bank Trust Co. (1934), 163 Va. 417, 176 S.E. 438, 95 A. L. R., 582.
It is interesting to note that the Union Properties case, supra, approved and followed Baker v. Kinsey, 41 Ohio St. 403, which was decided prior to the enactment of the Negotiable Instruments Law.
Since the plaintiff brought its action as pledgee (or assignee) and also as endorsee after maturity, it is subject to the defense that it is not the real party in interest. See Osborn v. McClelland, supra, and Kernohan v. Durham, supra.
At the time H. T. Beidler transferred or assigned the note to the bank, he had paid the maker's obligation on the note, and, having paid the principal obligation, was entitled to contribution from his coguarantors. But prior to his payment, H. T. Beidler had agreed with his coguarantors with respect to their mutual obligations on the indebtedness of the coal company, and could then recover from them only their proportionate share of the obligation to the bank. H. T. Beidler had paid the note. Since the maker of the note was nonexistent, all Beidler assigned to the bank as collateral was his right of contribution from his coguarantors.
The past-due note was held by the bank as pledgee from October 20, 1931, until judgment was taken thereon on April 24, 1946, against E. W. Beidler and Tucker. In the meantime E. W. Beidler and Tucker had paid an amount equal if not in excess of their two-thirds share of the coal company's indebtedness, so that H. T. Beidler could then claim no contribution from them on account of their payment of the $2,800 note in 1931.
In Marling v. Fitzgerald (1909), 138 Wis. 93, 120 N.W. 388, 23 L.R.A. (N.S.), 177, the Supreme Court of Wisconsin held that although the assignment of a note for value and without notice is without due course, the note is subject to only those defenses that exist at the time of the transfer and not those which may possibly exist at some future time.
In Rosecky v. Tomaszewski (1937), 225 Wis. 438, 274 N.W. 259, the court limited the above rule to equitable defenses only, and not to subsequent payments on the note which were legal defenses.
Where an assignee becomes the outright holder of a chose in action he takes it subject to any infirmities existing at the time of the assignment, but he should be free from any transactions between his assignor and the obligor subsequent to the assignment. But in the instant case the bank as pledgee-assignee did not become the owner of the chose in action, and until such time as the bank should convert the note to its own, the note was held subject to any transactions which might subsequently arise between H. T. Beidler, as pledgor, and the other guarantors of the note. At the time it took judgment on the note it stood in the shoes of H. T. Beidler and could have no greater right against the defendants than its pledgor-assignor. Since E. W. Beidler and Tucker were no longer obligated to H. T. Beidler, they were also not obligated to the plaintiff.
In passing it may be noted that when H. T. Beidler reindorsed the note to the bank after maturity, he thereby made the note payable on demand, giving it a second maturity, so far as he was concerned (31 Harvard Law Review, 1139), but his reindorsement could not revive the maturity of the note, so far as his coguarantors were concerned.
The judgment of the Common Pleas Court is affirmed.
Judgment affirmed.
HUNSICKER and DOYLE, JJ., concur.
FESS, J., of the Sixth Appellate District, and DOYLE and HUNSICKER, JJ., of the Ninth Appellate District, sitting by designation in the Eighth Appellate District.