Opinion
No. 20231
Decided June 1, 1927.
Negotiable instruments — Unqualified indorsement by payee with intent to pass title — Contract implied thereby cannot be varied by parol evidence — Indorser may seek reformation by cross-petition, when — Clear and convincing evidence necessary — Insufficient consideration to support new contract — Promise to pay debt peomisor already legally bound to pay — Holder entitled to judgment on pleadings — Indorser's answer pleads promise to do thing already bound to perform.
1. When a promissory note is by the payee thereof transferred with intent to pass title therein, and unqualifiedly indorsed by such payee to evidence the transfer, the contract implied from such indorsement; cannot, in the absence of fraud or mistake, be varied or explained by parol evidence as to prior or contemporaneous agreement.
2. In an action upon such indorsement, the indorser, for the purpose of defense, may seek, by way of cross-petition, the reformation of such indorsement, upon equitable principles; if the averments of such cross-petition are not sustained by clear and convincing proof, such relief is properly denied. ( Farr v. Ricker, 46 Ohio St. 265, approved and followed.)
3. A promise to pay a debt for which the promisor is already legally bound does not constitute a consideration sufficient to support a new contract.
4. In an action where a bona fide holder seeks to recover against an indorser upon a promissory note, and the answer pleads the defense of a promise to do a thing which such indorser is already legally bound to perform, such answer does not state a defense, and a motion for judgment on the pleadings in favor if the holder of such promissory note is properly granted.
ERROR to the Court of Appeals of Muskingum county.
This is a proceeding in error to reverse the court of Appeals of Muskingum county. The original action, brought in the court of common pleas, was one upon two promissory notes, being set out in two separate causes of action. These notes were executed and delivered to the Shannon Motor Company by purchasers of automobiles from said company, and the notes were indorsed by the Shannon Motor Company, by "Le Roy D. Shannon, Official Title"; said Le Roy D. Shannon being the sole owner of the Shannon Motor Company. These notes were each secured by a chattel mortgage upon the respective automobiles. A copy of the note constituting the first cause of action and the indorsements thereon is as follows:
"$229.00. Zanesville, Ohio, October 30, 1924.
"For value received I promise to pay to the order of Shannon Motor Co., two hundred twenty-nine and no/100 dollars in six equal monthly installments of $38.17 each, beginning with the thirtieth day of November, 1924, and continuing said payments monthly until all installments hereof are paid, at the office of the Universal Mortgage and Discount Company, Newark, Ohio, together with interest at 8 per cent. per annum after maturity.
"And the undersigned, and the indorsers, sureties and guarantors of this note, and each of them hereby authorize irrevocably any attorney at law to appear in any court of record in the state of Ohio or in any other state in the United States after any installment of the above obligation becomes due, and waive the issuing and service of process and confess a judgment against us and each of us in favor of the holder hereof for the amount of said note, together with costs of suit and thereupon to release all errors and waive all right of appeal.
"All parties to this note, including sureties, indorsers and guarantors, hereby severally waive presentment for payment, notice of nonpayment, protest, notice of protest, and diligence in bringing suit against any party thereto, and all indorsers and guarantors hereon hereby consent that time of payment may be extended after maturity from time to time without notice thereof. This note is a purchase-money note secured by a chattel mortgage executed this day. If any installment of this note is not paid when due then all installments hereof remaining unpaid shall immediately become due and payable at the option of the legal holder hereof, without notice or demand; said notice and demand being hereby expressly waived.
"Tom McCutcheon.
"P.O. Philo, Ohio.
"Indorsements:
"For value received, pay to the order of the Universal Mortgage and Discount Company, Newark, Ohio.
"We, the undersigned, do hereby consent, to ratify and adopt the provisions contained in the within described note.
"Shannon Motor Company,
"By Le Roy D. Shannon, Official Title."
The note sued upon in the second cause of action is of like import as to execution and indorsement, save and except there are several credits upon said note.
To the petition filed seeking to reduce these cognovit notes to judgment, an answer was filed by the plaintiff in error, defendant below, the substance of which is that the note sued on in the first cause of action had been executed to the Shannon Motor Company by one Tom McCutcheon, in consideration of the sale and delivery of an automobile. As a part of the terms and conditions of the sale and the agreement on the part of the Shannon Motor Company to accept the note, McCutcheon agreed to pay the premium necessary to insure the car from fire, theft, collision, and conversion. A chattel mortgage was executed by McCutcheon to the Shannon Motor Company, which was assigned to the Universal Mortgage Discount Company at the time of the sale of the note; and the insurance premium collected from McCutcheon, amounting to $11, together with the purchase price of the automobile, went to make up the sum of $229, the face of the note.
As a part of the agreement of transfer, the Shannon Motor Company claims that the sum collected for the insurance premiums was transmitted to the mortgage company, who agreed at that time, and as a part of the consideration therefor, to immediately insure the car described in the chattel mortgage and to protect the interests of the Shannon Motor Company from any and all loss resulting from fire, theft, collision, or conversion thereof by the owner of the car. The mortgage company insured the car against loss from fire and theft only, and did not insure it against loss from collision or conversion; and thereafter McCutcheon, the purchaser of the car, and mortgagee, wrongfully converted the car and absconded, taking the car with him, and the Shannon Motor Company did not know for a long time after McCutcheon had converted the car and absconded that the mortgage company had failed and neglected to insure the same against loss therefrom. The answer alleges that, if the mortgage company had insured the car against collision and conversion, the motor company would have been fully protected against loss by reason of the acts and conduct of McCutcheon, and the motor company therefore avers that the mortgage company is barred and estopped from recovery upon the notes described in the petition.
The second cause of action arises upon a promissory note executed and delivered to the motor company by one Andrew J. Shafer, which was sold and transferred by the motor company to the mortgage company, together with a chattel mortgage executed by the purchaser of the car, and afterwards, said Shafer defaulting in his payments upon the note, the mortgage company requested the motor company to pay and satisfy the unpaid balance on said note; whereupon the answering motor company avers that it was agreed between the mortgage company and the motor company that, if the mortgage company would reduce its right of action to possession of said car and return said car and reassign the chattel mortgage and note to the motor company, it (the motor company) would pay the mortgage company the amount then due and unpaid upon said note; that the mortgage company has failed to deliver the property or to reassign, or offer to reassign, the security, and therefore the motor company asks to be discharged from its liability upon said indorsement.
To this answer a reply was filed by the mortgage company, which is in the nature of a general denial as to each defense.
A jury was waived in the trial in the court of common pleas, and motion for judgment upon the pleadings in relation to the second cause of action, to wit, the Shafer note, was sustained by the court. On the first cause of action, the McCutcheon note, a hearing was had upon the evidence, the court admitting what the motor company had to offer in support of its claim, but rendering a judgment in favor of the mortgage company, defendant in error, plaintiff below. Motion for new trial was overruled, and judgment, entered. Error was prosecuted to the Court of Appeals of Muskingum county, which court affirmed the judgment of the common pleas court. Error is now prosecuted to this court to reverse said judgment.
Mr. T.E. McElhiney, for plaintiff in error.
Mr. E.B. Graham, for defendant in error.
As to the first cause of action contained in the petition, it is conceded that the Negotiable Instruments Code does not control the situation shown by the facts in this case, although Section 8300, General Code, may be said to be nearest applicable. The same provides: "In any case not provided for in this division, the rules of the law merchant shall govern." While counsel have presented the question of the right to receive oral testimony to vary the terms of the implied contract arising upon the indorsement of a promissory note, the record discloses that the trial judge in fact did receive such testimony, and upon consideration thereof rendered judgment against the indorser.
The plaintiff in error in his answer asks to be released from liability as an indorser on this note because of the failure of the indorsee to perform its promise to take out conversion insurance upon the automobile covered by the chattel mortgage, and in his brief cites the text of 8 Corpus Juris, 620: "Indorsers are released if the security is impaired by the act or negligence of the holder to the injury of the surety or indorser." Also page 458.
The mortgage company in its reply denied that it ever made such promise.
Does the record show such fraud or mistake as to excuse the indorser from his liability upon this note? The presumption was in favor of the regularity of the indorsement and the burden was on the indorser to substantiate his right to this reformation of the contract of indorsement by clear and convincing evidence.
Apparently the trial court found there was nothing in the record to show that the letter of October 28 from the mortgage company to the Shannon Motor Company on its face referred in any wise to the purchase of the McCutcheon note; that, while said letter contains the following: "If we can be of any further service to you, let us know" — the record is silent as to whether any answer or further dealings were had between the parties relative to the contents of the letter of October 28th; that there was nothing in the record to show that the mortgage company, in purchasing the McCutcheon note, had any knowledge that a portion of the $229, the face of the note, was to be used for the purchase of collision and conversion insurance.
The most that can be claimed by the motor company is that this claimed agreement to take out conversion insurance was to be inferred from the letter of October 28th, and that such inference shows that which is tantamount to fraud upon the part of the mortgage company.
The trial court saw the witnesses, observed their demeanor and manner of testifying, and had all the advantages offered a trial judge in arriving at a conclusion upon the facts, and, regarding the answer as tantamount to a cross-petition for reformation, found that the motor company had failed to produce the requisite degree of proof to sustain its defense; and the conclusion upon this question of fact was sustained by the Court of Appeals. We do not feel authorized to disturb such decision.
The general rule is that parol evidence to vary the contract implied from a regular indorsement of a promissory note is not admissible, in the absence of fraud or mistake. The contract is implied by law as clearly and perfectly from the blank indorsement as if written out in full. In Farr v. Ricker, 46 Ohio St. 265, 21 N.E. 354, this court said:
"1. The indorsement of a negotiable promissory note, made to transfer the title to one who has purchased it for value, is, though in blank, an abbreviated contract in writing, whereby the indorser binds himself to pay the note if, on presentment, the maker does not, and due notice is given him of such nonpayment; and, in the absence of fraud or mistake, the legal effect of such indorsement cannot be varied by parol.
"2. A blank indorsement may, like any other written agreement, be reformed upon equitable principles, in an action on the indorsement, for the purpose of a defense. In such action the cause of reformation should be stated by way of cross-petition, with a prayer for such relief; and the averments should be supported by clear and convincing proof, to warrant the relief.
"3. Where, in an action on an indorsement, evidence is offered by the defendant in support of averments in his answer which, if true, would make the enforcement of the indorsement operate contrary to the contemporaneous agreement of the parties and a fraud on the rights of the indorser, the liberal principle of our Code would, in a trial to the court, authorize it to receive the evidence and permit an amendment of the pleadings; but, where the evidence is contradictory and inconclusive, the refusal of the court to consider the evidence is not error, to the prejudice of the substantial rights of the indorser."
So much is said in the opinion of the above case that is applicable in principle to the instant case that we quote at length from page 266 (21 N.E. 354) et seq.:
"The note had been purchased by the plaintiff of the defendant for value, in the course of business, and the indorsement was made to transfer the title. So that the case presents the question whether parol evidence is admissible for the purpose of varying the legal effect of such an indorsement. There has been some conflict in the decisions as to this, but it now seems that the decided weight of authority is against its admission for such purpose. Its admission has generally been placed on the ground that the contract of indorsement is an implied one, not in writing, and so not within the rule excluding parol evidence offered for the purpose of varying," or contradicting "the terms of a written agreement. But this is not the generally received opinion, and is contrary to the usage and understanding of the commercial world. It is said by Justice Matthews in Martin v. Cole, 104 U.S. 37 [ 26 L.Ed., 647]: 'The contract created by the indorsement and delivery of a negotiable note, even between the immediate parties to it, is a commercial contract, and is not in any proper sense a contract implied by the law, much less an inchoate or imperfect contract. It is an express contract, and is in writing, some of the terms of which, according to the custom of merchants and for the convenience of commerce, are usually omitted, but not the less on that account perfectly understood. All its terms are certain, fixed, and definite, and, when necessary, supplied by that common knowledge, based on universal custom, which has made it both safe and convenient to rest the rights and obligations of parties to such instruments upon an abbreviation. So that the mere name of an indorser, signed upon the back of a negotiable instrument, conveys and expresses his meaning and intention as fully and completely as if he had written out the customary obligation of his contract in full.' And it was there held that parol evidence is not competent to contradict or vary the legal effect of such an indorsement; and it is also stated that the cases in support of the rule 'are too numerous for citation.' Regarding the indorsement, though in blank, as an abbreviated written agreement, all of whose terms are, by usage and custom, made definite and certain, such would seem to be the logical result of the previous decisions of this court. Thus it has been applied in a number of cases to the making of a note ( Titus v. Kyle, 10 Ohio St. 445; Collins v. Insurance Co., 17 Ohio St. 215 [23 Am. Dec., 612]), and to the drawing of a bill ( Cummings v. Kent, 44 Ohio St. 92, 4 N.E. Rep., 710 [58 Am. Rep., 796]), and also to the acceptance of a bill ( Robinson v. Bank, 44 Ohio St. 441, 8 N.E. Rep., 583 [58 Am. Rep., 829]).
"* * * That an indorsement may be reformed in equity on the ground of accident, fraud, or mutual mistake, as any other written agreement, so as to make it conform to the real intention of the parties, will not admit of much doubt. * * * But such remedy must have been obtained, either by a suit for that purpose or by a cross-petition in action on the indorsement, before it can be relied on as a ground of defense. In such case the issue is triable by the court, and must be sustained by clear and convincing proof, as in all similar cases, before the reformation can be had. This remedy affords a sufficient protection against any possible wrong that may result from the rule at law, and adequately protects the holder of negotiable paper."
We regard the rule as announced in the case of Farr v. Ricker, supra, as determining the law in this case. Additional authorities to support the same may be cited and reference is made to the following: First Nat. Bank of Midland v. Powell (Tex.Civ.App.), 149 S.W. 1096; Church v. Nat. Newark Essex Banking Co., 97 N.J. Law, 237, 116 A. 620, 22 A. L. R., 524; Doolittle v. Ferry, 20 Kan. 230, 27 Am. Rep., 166. See, also, 4 A. L. R., 770, 11 A. L. R., 637, 22 A. L. R., 524, and 35 A.L.R., 1120, in which the subject is treated in annotated cases and authorities cited.
As to the first cause of action, we feel that the Court of Appeals did not err in reaching the conclusion shown by the record.
The second cause of action set forth in the petition involves the question as to whether a man may take advantage of that which he is already obligated and bound to do, and offer the same as a consideration for a new contract, to relieve himself from the original obligation.
The plaintiff in error was already bound as an indorser upon the Shafer note, sued upon in the second cause of action, and was liable for its payment; and the claimed agreement set forth in the second cause of action as to the mortgage company repossessing the car and returning the same, and reassigning the mortgage in order to secure payment of the note by the indorser, was not a good consideration for a new contract; for, as above indicated, the indorser was already bound for the payment of the note.
"A promise to do what the promisor is already bound to do cannot be a consideration, for, if a person gets nothing in return for his promise but that to which he is already legally entitled, the consideration is unreal. Therefore, as a general rule, the performance of, or promise to perform, an existing legal obligation is not a valid consideration. This legal obligation may arise from the law independent of contract, or it may arise from a subsisting contract." 13 Corpus Juris, 351, Section 207.
In Sherwin Co. v. Brigham, 39 Ohio St. 137, it was held:
"1. In order to render the writer of a letter of credit liable, either upon an implied acceptance or an agreement to accept drafts taken on the faith of such letter, the drafts must be taken for a valuable consideration.
"2. A promise to have the drafts discounted, and to take up notes on which the persons taking the drafts are liable as indorsers, is not a valuable consideration."
On page 140, in the opinion of the Sherwin case, it is said:
"What they agreed to do in respect to the notes indorsed by them, and what they did, was no more than they were bound, by their contract, to do, before the defendant's letter was written; and when they paid the accommodation notes, they paid only the amounts, and at the times, therein specified."
We find the following in Clark on Contracts (3d Ed.), at page 156: "Doing or promising what one is already legally bound to do is, as a rule, no consideration."
In 6 Ruling Case Law, p. 664, par. 73, it is said:
"The performance of a duty imposed by law or arising from a contract with the other party is not a sufficient consideration, because the performance of such duty involves no detriment to the promisee. Where a legal obligation exists, a cumulative promise to perform it, unless upon a new consideration, is a nullity. A promise cannot be conditioned on a promise to do a thing to which a party is already legally bound."
See, also, 12 L.R.A., 470; 13 L. H. A., 581; 34 L.R.A., 33.
An application of the principle announced by the above-noted authorities brings us to the conclusion that the common pleas court did not err in entering judgment upon the pleadings in the second cause of action, nor did the Court of Appeals err in sustaining said judgment.
Entertaining these views, our conclusion is that the judgment of the Court of Appeals in affirming the judgment of the common pleas court was right, and such judgment is therefore affirmed.
Judgment affirmed.
KIWKADE, ROBINSON, JONES and MATTHIAS, JJ., concur.