Stewart v. Bowman, Jr.

Holt, Justice. Action for declaratory judgment that plaintiffs, as sureties on a loan of $25,000 made by defendant bank to Jenkins, Inc., evidenced by a promissory note in that amount, have equities superior to defendants Bowman, endorsers of the note. The court made findings of fact and conclusions of law that, as between plaintiffs and defendants Bowman, plaintiffs were primarily liable. Plaintiffs’ motion for amended findings or a new trial was denied, and they appeal from the order. For an understanding of the legal questions involved the following statement of the facts may be sufficient: Plaintiffs are Avidows, the one the mother and the other the grandmother of Donald Stewart, who Avas 24 years old Avhen the transaction began from which this action arises. Donald and W. S. Jenkins, Jr. were, in *545 June, 1931, working for a stock and bond brokerage firm, Donald as a salesman on commission and Jenkins as head of the sales department and as an officer of the corporation. The two conceived the plan to go into the same business and incorporate as Jenkins, Inc. Neither had any funds. It was deemed necessary to have $10,000 for working capital and office equipment. Jenkins was to contribute his experience, and Donald was to furnish credit or security for a bank loan of $10,000. Jenkins had learned that plaintiffs owned some stock which they might obtain to be used as pledge for the loan. Plaintiffs desired to establish Donald in business. Jenkins interviewed plaintiffs, laid before them the bright prospects he and Donald had in the venture, and eventually the plaintiffs turned over to them 40 shares of the preferred and 400 shares of the common stock of F. H. Peavey & Company and 2,575 Independence Trust shares, to be used as collateral or pledged for the $10,000 loan. , Jenkins arranged for the loan from the First National Bank of Minneapolis, pledged the stock of plaintiffs, except 300 shares of the F. H. Peavey & Company’s common, as security for his $10,000 note. The 300 shares of F. H. Peavey & Company’s common stock were retained by Jenkins. About the same time Jenkins had an opportunity to obtain the exclusive agency to sell an issue of the stock of the General Manganese Corporation in Minnesota and South Dakota, which would be very profitable if sales could be made. But, in order to obtain such exclusive right for Jenkins, Inc., 5,000 shares of the stock must be bought at five dollars a share. To obtain the funds for this purchase Jenkins negotiated a loan of $25,000 from the First National Bank, giving his note for that amount, secured by the endorsements of the defendants Bowman and by the pledge of the 300 shares of the F. H. Peavey & Company stock he had retained, as stated. Before the Bowmans consented to endorse the note they procured exhibit 5 from plaintiffs and exhibit S from Jenkins, the latter a contract dated August 6, 1931, reciting that Jenkins was about to acquire stock of General Manganese Corporation, that it was necessary to obtain the assistance of the Bowmans to borrow the requisite funds, that Jenkins was expecting to borrow from the First National *546 Bank, or elsewhere, the sum of $25,000 to carry out the purpose of obtaining the stock of General Manganese Corporation, and to that end the Bowmans “promise and agree to arrange for such loan to be made either by endorsement of the notes given therefor * * * and agree” that such a loan shall immediately be made to Jenkins, he to pay interest on the loan and renewals thereof and to be reimbursed therefor out of the profits of the sale of the stock. Coincident with the receipt of the loan the 5,000 shares of the General Manganese Corporation stock acquired were to be delivered to the bank as additional pledge for the loan, and as, from time to time, shares of such stock were sold the bank should apply as payment upon its loan ten dollars out of the purchase price received for each share, no share to be sold for less than $12.50 per share. All the money received by the bank upon the sale and not applied in payment of the loan was to be placed in a special deposit in the bank to the credit of the parties to exhibit S. Jenkins agreed, as a further security for the payment of the loan, to deliver to the bank 300 shares of the common stock of F. H. Peavey & Company fully endorsed in blank. Of the moneys received from the sale of the General Manganese Corporation stock, after payment of the loan and interest, Jenkins was to have one-half and the Bowmans one-fourth each. The contract contained this provision: “This contract is not intended to be and shall not be, in any degree, construed as an agreement of partnership or agency.” It was signed by Jenkins and the Bowmans. It is conceded that it was executed for the benefit of Jenkins, Inc., of whose stock Jenkins and Donald Stewart owned one-half each. Exhibit 5 is in these words: “Minneapolis, Minnesota, “August 6, 1931. “Mr. S. H. Bowman, Jr. and Mr. Frank F. Bowman, “Minneapolis, Minnesota. “Dear Sirs: “This is to say to you that we are aware and hereby consent that three hundred (300) shares of common stock of The Peavey Company now owned by the undersigned may be pledged or hypothe- *547 cated by Mr. William S. Jenkins, Jr. as collateral security for any loan or loans required by him, whether made by either of you directly or with your assistance by others. “Very truly yours, “Orcelia A. Stewart “Lura L. Stewart” When the $25,000 loan was obtained, a document, exhibit 0, signed by Jenkins and one of the Bowmans, was left with the bank, stating that the 5,000 shares of the General Manganese Corporation delivered to the bank could be withdrawn by Jenkins upon payment of ten dollars for each share withdrawn, such payments to be applied on the loan, and upon full payment thereof the remaining shares were to be delivered to Jenkins upon payment of ten dollars for each share, but the moneys so paid to be deposited in a special account to the credit of the parties. Therein Jenkins also agreed immediately to deliver to the bank to be held as further security for the repayment of the $25,000 loan “the following collateral— namely: Three hundred (300) shares of the common capital stock of Peavey Company, * * i:' fully endorsed in blank.” Plaintiffs allege in the complaint and testified at the trial that they never knew of the $25,000 loan; that they gave the Independence Trust shares, the 40 shares preferred, and the 400 shares of the common F. H. Peavey & Company stock to Jenkins, to pledge for 'the $10,000 loan, and did not learn until recently that Jenkins had withheld from that pledge the 300 shares of F. H. Peavey & Company common which were subsequently pledged for the $25,000 loan. Donald, whose role in the transaction of the loans appears to have been merely that of an errand boy for Jenkins, admitted that he knew of the $25,000 loan and got plaintiffs to sign the consent the bank required and also exhibit 5 desired by Bowmans. Plaintiffs appear to have been deceived, but as against the Bowmans they are in no position to complain. The latter had no knowledge of the $10,000 loan or how plaintiffs’ stock got into the hands of Jenkins. The $25,000 is still unpaid, plaintiffs allege that Jenkins, Jenkins, Inc., and Donald Stewart are all insolvent, and that the *548 bank refuses to enforce payment of the Bowmans, who are well able .to pay the loan, evidenced by the renewal note endorsed by them. Plaintiffs’ prayer for relief is that the court as between plaintiffs and the Bowmans adjudge the latter primarily liable for the payment of the loan. The court made findings of fact and conclusions of law in substance that plaintiffs’ 300 shares of F. H. Peavey & Company common stock is the primary security for the payment of the loan of $25,000 and that the Bowmans are entitled to exoneration, to the extent that the collateral securities pledged to the bank will pay its $25,000 loan. As far as the 5,000 shares of the General Manganese Corporation stock pledged by the principal debtor and owner, Jenkins, Inc., being primarily liable, there is no question raised. There are 54 assignments of error. It will be necessary to consider but few of them in order to arrive at a decision. Plaintiffs’ contention that the Bowmans were so interested in the purchase of the General Manganese Corporation stock that they might be considered partners with Jenkins and hence held liable with him as the actual borrowers cannot be sustained. The contract, exhibit S, specifically negatives the existence of partnership or agency relationship. Plaintiffs had no contact with the Bow-mans and do not claim that they signed exhibit 5 in reliance upon any knowledge of exhibit Spor upon any representations of Bow-mans, or their connection with the loan except what might be inferred from exhibit 5. There is no ground upon which plaintiffs may claim the Bowmans liable on the note held by the bank other than as endorsers before delivery, or, in other words, as sureties as. to any other sureties for Jenkins or Jenkins, Inc. It clearly appears from exhibit S that no partnership was intended. T. R. Foley & Co. v. McKinley, 114 Minn. 271, 131 N. W. 316. PlainGffs have no reason to claim a partnership. They took no step in reliance upon the existence of a partnership. The assignments of error which go to a vital point in the case are those relating to findings Nos. 4, 5, and 8. As far as finding 4' is concerned, it is fully sustained, except this of the quoted part placed in italics: *549 “* * * and that they Avould consent to, and would permit or cause the same to be pledged and deposited with said bank to primarily secure the payment of said loan and any extensions or renewals thereof, for the purpose of protecting and to thereby protect, indemnify cmd save harmless the said Samuel U. Boioman, Jr., and Frank W. Bowman from liability or loss by reason of their doing the things aforesaid.” Finding 5 reads: “That in reliance upon and pursuant to the aforesaid proposals, representations and agreements, and upon the condition that they would be primarily secured against liability or loss in the premises by the pledge of said F. H. Peavey & Company common stock for the payment thereof, and furnished with the written consent of the plaintiffs to such use thereof, said defendants Samuel EL Bowman, Jr. and Frank W. BoAvman made and entered” exhibit S. The part of finding 8 to which objection could be made is: “That upon delivery to them of the written consent [exhibit 5] of said plaintiffs to the aforesaid use of said 300 shares of F. H. Peavey & Company stock by them oAvned and upon being informed that said stock had been assigned, pledged and delivered to said bank to primarily secure the payment of said loan,” that the Bow-mans were thereby protected and secured against liability or loss in the premises and they endorsed the $25,000 note to the bank. It is quite clear that the Peavey stock was not pledged to the BoAvmans. It Avas pledged to the bank as collateral to the promissory note signed by Jenkins as maker and the Bowmans as endorsers. A pledge is made by delivery. The stock was delivered to the bank and is still held by the bank, to which pledging plaintiffs consented in writing. There is nothing in that consent nor in exhibits S or 5 purporting to pledge the stock to the Bowmans. Nor can it be spelled out of the testimony of Frank W. Bowman or Jenkins, the only persons Avho testified on that subject. BoAvman testified that he asked Jenkins: “What collateral will you give us for putting our endorsement on the note?” After some further *550 and later talk, he was informed that Jenkins could get 300 shares of Peavey stock to use as collateral in addition to the Manganese stock to be purchased by Jenkins or Jenkins, Inc. The entire testimony of Bowman does not make out even an agreement to pledge the Peavey stock to the Bowmans, or to the bank for their protection. Jenkins’ testimony does not even furnish a suggestion of pledging the Peavey stock to protect the Bowmans. We therefore conclude that the italicized part of finding i, finding 5, and the quoted part of finding 8 are not sustained by the evidence unless that is the legal import to be gathered from exhibits S and 5 and the acts of the parties in executing and delivering the note and pledging the Peavey stock to the bank. The Peavey stock was actually pledged to the bank and not to the Bowmans. They did not, by exhibit S, reserve any control of that stock as they did of the pledged Manganese Corporation stock. In the instructions to the'bank (exhibit 0), signed by Jenkins and one of the Bowmans for both, Jenkins agrees that he will, upon the receipt of the $25,000 to be lent by the bank, “immediately deliver to the said First National Bank, to be held as further security for the repayment” of said loan the 300 shares of Peavey stock. There is no agreement that this pledge was to protect or indemnify the Bow-mans. The Bowmans by endorsing Jenkins’ note became sureties as between themselves and the maker. Plaintiffs’ stock by being pledged Avith the bank became surety for the debt as between the OAvners thereof and the debtor. The relation in which plaintiffs’ stock and the Bowmans stand to one another in regard to this $25,000 note of the bank is that of cosureties. We fail to find in the situation presented by the evidence or the findings any superior equities in the BoAvmans over the owners of the pledged Peavey stock. The former’s purpose in becoming sureties on this large note Avas to realize a large profit from the venture of Jenkins and Jenkins, Inc., the maker of the note. Plaintiffs’ purpose in delivering their Peavey stock to Jenkins to use as a pledge Avas to open an auspicious business career for Donald. The expectations of both ended in bitter disappointment. Exhibit 5 undoubtedly authorized Jenkins *551 to pledge the stock to the Bowmans to secure them against loss on their endorsement. But it was not so pledged. It could have been so pledged subject to the pledge to the bank. Pierce v. National Bank of Commerce, 268 F. 487. But, as already stated, it was not done. There is no pretext that there was an agreement to pledge to the Bowmans subject to the pledge to the bank. Neither exhibit S nor 5 indicates such a purpose or intention. There is no doubt that the Bowmans became endorsers in reliance upon the pledge of plaintiffs’ stock to the bank to secure its note or loan, and that they considered it ample security so that they were absolutely protected against loss on their endorsement. But, since it was not pledged to them but to the bank to 'secure its note, the Bowmans as endorsers of the note must be considered as cosureties with the pledged stock, which did not belong to the borrower or maker of the note. Jones, Collateral Securities (3 ed.) § 517a, states: “A person pledging his property as security for the payment of the debt of another stands in the position of a surety of the debtor.” And so does a mortgage given by one other than the borroAver to secure the latter’s note. We therefore conclude that as a matter of law, upon the undisputed facts in this case, the Bowmans and the 300 shares of F. H. Peavey & Company common stock owned by plaintiffs are cosureties for the loan of the bank, evidenced by the $25,000 renewal note of the original note made by Jenkins; that is, as between the stock and the BoAvmans, if the latter are obliged to pay the note, they can have recourse to this Peavey stock for one-third of the amount so paid by them, and should the stock be applied by the bank in payment of the note, plaintiffs, as the owners thereof, would be entitled to contribution from each of the BoAvmans for one-third of the amount so paid. This conclusion necessitates a modification of the findings. We think no error Avas committed by the court in receiving parol testimony in regard to the pledging of the Peavey stock to the Boavmans. The trouble Avith the testimony and the inferences from Avhat was done is that it shoAArs only a pledging to the bank of that stock and not to the Bowmans. *552 There is nothing in the point urged by plaintiffs that by extending the time of the loan by successive renewal notes the pledged stock was released. Plaintiffs signed and delivered to the bank their express consent to renewals of the note without notice to them, exhibit F, containing this language, “and I hereby consent to their use as collateral security for the indebtedness aforesaid and all renewals or extensions thereof.” The 300 shares of F. H. Peavey & Company common stock and the defendants Bowman are cosureties as between themselves, and neither has primary equities over the other. The pledged General Manganese Corporation stock owned by the borrower is primarily liable as between plaintiffs’ stock and defendants Bowman. The order is reversed and the cause remanded to the trial court with direction to amend the findings of fact and conclusions of law in conformity herewith.