Reconstruction Finance Corp. v. Patterson

Me. Justice DeHayen delivered the opinion of the Conrt. This is a snit on a promissory note for $1,2:60, executed by C. A. Patterson and wife, Mrs. Georgia Patterson, on November 15, 1930, payable to the order of the Home Exchange Bank, and due November 15, 1931. The note was secured by a mortg’ag’e deed of trust on certain land. Oh the back of the note appears the following: “Interest paid to Nov. 15,1932, and note is hereby extended to that date. This 11/15/31.” On February 15, 1932, the note was transferred by the Home Exchange Bank, by in-dorsement in blank, to the Reconstruction Finance Corporation, and it became the owner and holder of the note. Defendants filed a plea of the general issue of nil debet, and several special pleas, the second of which only is it necessary to discuss. This plea was “That there was no consideration for either the indebtedness declared on, or the note evidencing the same, or the execution of said note.” Plaintiff demurred to all of the special pleas, and the demurrer was sustained. The case was tried alone on the first plea. At the conclusion of all the proof, the plaintiff moved the court for a directed verdict in its favor, which motion was granted, and plaintiff given a judgment for the amount of the balance due on the note. On defendants’ appeal to the Court of Appeals, that court reversed the judgment because of the action of the trial judge in sustaining the demurrer to the second plea. .Plaintiff filed its petition for certiorari and assigned *670 errors. This petition has heretofore been granted and argument heard. Plaintiff was the holder of said note in dne course. Section 7376 of the Code is as follows: “What constitutes a holder in due coiorse. — A holder in due course is a holder who has taken the instrument under the following conditions: “ (1) That it is complete and regular upon its face; “(2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; “ (3) That he took it in good faith and for value; “ (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.” Section 7380 of the Code is as follows: “Wihat constitutes notice of defect. — To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of' the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.” It is not averred in the second plea that plaintiff had actual knowledge that there was no consideration for the note. It is only averred that there was no consideration for the debt declared on, or the note. Under Code, section 7352, it is provided: “Absence or failure of consideration is matter of defense as against any person not a holder in due course. ’ ’ In 8 Corpus Juris, 748-750, it is stated: “As against holders in due course, however, want or failure of consideration is not a defense, in the absence *671 of a statute to the contrary, and this is the rule under the Negotiable Instruments Law.” And, again, at page 913: ‘ ‘. . . But a plea of want or failure of consideration is not good against an indorsee without allegations showing that he is not a bona fide holder in due course.” It is averred in the declaration that the note here in question was hypothecated by the Home Exchange Bank as collateral to secure indebtedness owing by it to the Reconstruction Finance Corporation and that it became the owner and holder of the note. The proof shows that plaintiff became the holder of the note prior to its maturity. Under Code, section 7383, “Every holder is deemed prima facie to be a holder in clue’course.” It is insisted that because the note was hypothecated with plaintiff as collateral to secure an indebtedness owing it by the Home Exchange Bank that it is in possession of the note as bailee and not as holder. This contention cannot be sustained. In Crane & Co. v. Hall, 141 Tenn., 556, 213 S. W., 414, it was held that where defendant executed a note and mortgage, and such note was negotiated contrary to agreement and came into the hands of plaintiff prior to maturity, plaintiff was a holder in due course, even thoug’h the note was taken as security for a pre-existing debt owing by the person who negotiated it. The court expressed the view that a pre-existing debt was “value,” even though the instrument was transferred merely as collateral security for such debt. The Court of Appeals held that the note was not indorsed by the Home Exchange Bank. Under the notation showing the payment of interest and extension of the due date of the note appears “Home Exchange Bank, Rutherford, Tennessee, J. W. Dickson, Cashier.” The *672 Court of Appeals related tills indorsement to the notation just mentioned. Defendants filed no plea denying that plaintiff was the owner and*holder of the note. Passing this, however, we think from an inspection of the note that the hank’s indorsement cannot reasonably be considered as merely its signature to the interest payment. The note passed into the possession of plaintiff. Certainly, the signature of the bank appears on the note. It will be observed that the interest notation is written in ink, while the signature is partly with a rubber stamp and the cashier’s name is signed in pencil. This' would indicate that the two entries were not made at the same time. The interest notation is written at the very top of the back of the note, at the very edge; consequently a subsequent indorsement would necessarily fall beneath it. We are constrained to sustain the assignments of error made on the petition for certiorari, and reverse the decree of the Court of Appeals and affirm that of the trial court. Defendants will pay all the appellate costs.