Farley National Bank v. Henderson

BRICKELL, C. J. Appellant brought this action to recover upon a bill of exchange for the sum of $5,000, drawn by J. C. McKenzie upon appellee, dated January 20, 1896, payable to the order'of appellant, December 28, 1896, and accepted by appellee. The defense set up by the various special pleas was, that the bill had been accepted by the defendant solely for the accommodation of the drawer and for a special purpose, and that the drawer, with the knowledge and participation of — 463 — plaintiff, bad diverted the bill and the proceeds thereof ■from the purpose intended. Accommodation paper is a loan of credit by the accommodation party to the party accommodated to the extent of the value of the paper. Prima facie it is without restriction as to the manner of its use, and the accommodated party may use it for any legal purpose, and when thus used, and in the hands of a bona fide holder, in due course, for value, it becomes precisely what on its face it imports, and is no less binding on the accommodation party because of its character as accommodation paper. But one who thus lends his credit may undoubtedly do so upon such terms and conditions as he sees fit, and may impose restrictions upon the use to be made of the paper or its proceeds. When such restrictions are imposed, whoever takes the paper with knowledge that the terms and conditions upon which the accommodation was given are being violated; whoever participates in the diversion of the paper to other objects or uses than such as were intended when the paper was made, unless fraud is imputed, must be understood to relieve the party giving the accommodation from all liability. — Gilman v. N. O. & S. R. R. Co., 72 Ala. 581; First Nat. Bank v. Dawson, 78 Ala. 67; Marks v. First Nat. Bank, 79 Ala. 550; 1 Amer. & Eng. Encyc. of Law, (2d ed.), 383; 3 Rand. Com. Paper, §1803. The mere promise or statement of the accommodated party that he will use the paper for a particular purpose, will not, however, amount to such a restriction as to its use as will render the violation of the promise a legal diversion of the paper, unless it is exacted or made as the condition upon which the accommodation is given, and is relied on by the party giving the accommodation. Nor is there a legal diversion merely because the paper is not used in precise conformity with the agreement. If it effects the substantial purpose for which it is designed, although the result was not produced in the precise manner contemplated, there is ho legal diversion, unless there is fraud, or the interest of the accommodation party is thereby prejudiced. — 1 Dan. Neg. Ins., §792; Duncan v. Gilbert, 29 N. J. L. 521; Jackson v. Bank, 42 N. J. L. 177; 1 Amer. & Eng. Encyc. Law, (2d ed.), 380, and cases cited. And it may be stated gener — 464 — ally that when the restriction is only as to the use to be made of the proceeds of the paper, the misapplication of the proceeds by the accommodated party is no defense to an action on the paper by the holder who gave value for it, since the latter is not obliged to see that the proceeds are applied in the manner and for the purpose contemplated by the accommodation party. — Bunzel v. Maas, 116 Ala. 68; 1 Amer. & Eng. Encyc. of Law, (2d ed.), 382. But it is manifest this rule can not apply where the person who discounts the paper himself receives the proceeds in payment of a debt due by the accommodated party, with knowledge that such application thereof is a diversion from their intended purpose. •The fifth plea avers that defendant accepted the bill sued on for the accommodation of J. C. McKenzie, the drawer, “upon and in consideration of a promise then made by said McKenzie to this defendant, that if defendant would accept said bill, the said McKenzie would use it to obtain money thereon, and buy additional goods and put the same in the business then being carried on by said McKenzie,” that after receiving the acceptance, McKenzie delivered it to plaintiff in payment of a debt due by him to plaintiff, and that in this transaction plaintiff “willfully and knowingly charged and received from McKenzie interest on said acceptance at a greater rate than eight per cent per annum.” The p’> a sufficiently shows that the bill was accepted by defendant upon condition that McKenzie would have it discounted, or otherwise obtain money on it, and Avith the proceeds buy additional goods to use in his business, and the condition was one AAdiich defendant undoubtedly liad the right to exact. It cannot be inferred from the plea that it was an entirely immaterial condition, which defendant had no interest in having performed, or that defendant had no interest in the application of the proceeds of the bill AAdiich could be prejudiced by their application to the payment of McKenzie’s debt; or that the payment of said debt substantially effected the purpose contemplated by defendant Avhen he accepted the paper. He was clearly interested in the future ability of McKenzie to meet the paper when it should mature, and he had a right to impose such restrictions on the use of the proceeds as would, in his opinion, if com — 465 — plied with,-better enable him to meet it; and he may have believed, and had good reason for the belief, that McKenzie would be better able to meet the paper by using the proceeds thereof directly in his business, through the purchase, of much needed goods, than by using it to pay a past debt. — Benjamin v. Rogers, 126 N. Y. 60; U. S. Nat. Bank v. Ewing, 131 N. Y. 506. The plea having averred that the bill was used to pay the debt to plaintiff, showed, prima facie, a diversion, and it was not necessary that it go further and negative all or any facts from which it might be inferred that the purpose of the acceptance had been substantially effected by other means. If by the use of the bill in payment of his debt, McKenzie was enabled to procure from other sources money to the same amount .with which to buy for cash additional goods, and did, in fact, procure such money and purchase such goods, and place them in his business, and if, by so doing, he effected the piirpose contemplated, these were properly matters for replication, not necessary to be negatived in the plea. Nor was it necessary to aver in the plea that defendant was injured by the diversion, or that his interests Avere prejudiced thereby. This, also, was matter for replication, and the burden Avas on plaintiff, and not on defendant, to sIioav that no injury was suffered.- — Rochester v. Taylor, 23 Barb. (N. Y.) 18. The plea differs from that discussed in Bunzel v. Maas, 116 Ala. 68, in this, that in that case the plea failed to show to what use the proceeds of the note were' applied, and hence shoAved no diversion thereof; while in this, the plea clearly aA^ers that the proceeds were used for a particular purpose different from that contemplated, and therefore sIioavs, prima facie, a diArersion. But it was clearly essential to the sufficiency of the plea, thgt it aver that plaintiff acquired the bill AArith knowledge of the terms and conditions upon which it had been accepted, or, in the absence of such averment, that facts be alleged to show that plaintiff was not a hona fide holder thereof. Such knowledge, actual or implied, is essential to such a defense, and the weight of authority uoav is, although there are some decisions to the contrary, that the defendant must not only show that the paper was diverted from its intended purpose, but also — 466 — that such diversion was known to the holder when he received it; the misapplication not being such fraud as shifts the burden of proof. — 1 Dan. Neg. Ins. §790; First Nat. Bank v. Dawson, 78 Ala. 71. The plea contains no averment of such knowledge on the part of the plaintiff, and it is, therefore, defective, unless it is aided by the averment that plaintiff, in the transaction by which it acquired the bill, “knowingly and wilfully charged and received from McKenzie interest on said acceptance at a greater rate than eight per cent per annum.” The paper having been given to plaintiff by the drawer, plaintiff was chargeable with notice, by reason of this fact, that it was accommodation paper, having no vitality in the hands of McKenzie, and was not evidence of an indebtedness against the acceptor until negotiated. — Marks v. First Nat. Bank, 79 Ala. 562. The transaction, as shown by the plea, was essentially a loan of money by plaintiff on the paper, and not a purchase thereof, and plaintiff was, therefore, prohibited from charging McKenzie more than the legal rate of discount. — Capital City Ins. Co. v. Quinn, 73 Ala. 558. And it is well settled by the decisions of this court that the holder of negotiable accommodation paper, who acquires it upon a usurious contract from the person for whose accommodation it was made, indorsed, or accepted, although in the usual course of business and without actual notice, is not a bona ficle holder; and in his hands it is subject to the equities and defenses which the accommodation party could have set up against the accommodated party. — Saltmarsh v. Tuthill, 13 Ala. 390; Carlisle v. Hill, 16 Ala. 398; Capital City Ins. Co. v. Quinn, supra. If, therefore, the averments charging usury are sufficient, plaintiff xvas chargeable with notice of the terms and conditions on which defendant accepted the bill, not being a bona fide holder, and the failxire to directly allege such notice was not a defect. But the allegation of usury xvas insufficient on demurrer. A plea settiixg up the defense of usury mxxst aver with distinctness and particularity all the essential elements of the usxxrioxxs contract, so that an inspection of the plea will reveal the entire transaction and leave nothing to conjecture,, and must state the amount of usurious interest charged.- — Woodall v. Kelly, 85 Ala. — 467 — 368; Kilpatrick v. Henson, 81 Ala. 469; Munter v. Linn, 61 Ala. 492. The plea fails to meet these requirements, and it is, therefore, insufficient to show that plaintiff was not a bona ficle holder of the bill sued on. For the above reasons the court below erred in overruling the demurrer to the fifth plea as amended. Much that has been said above with respect to the fifth plea is equally applicable to the seventh and eighth pleas. They contain substantially the same averments, as the fifth, with the exception of the charge of usury, Avliieh is omitted, besides many additional averments showing the circumstances under which defendant’s acceptance was procured, and each distinctly avers that plaintiff received the bill with full knowledge of the terms and conditions on which it was accepted and of the facts stated in the plea, These pleas were not subject to the infirmity of the fifth, pointed out above, nor were they objectionable on any of the grounds specified in the demurrer thereto, and the demurrers were, therefore, properly overruled. Plaintiff filed seven replications to defendant’s pleas, and demurrers were sustained to the third and fifth, and also to the sixth and seventh in so far as the latter purported to answer the fifth plea. The third and fifth original replications were clearly objectionable, and the demurrers thereto were properly sustained. The third avers that defendant ratified the diversion of the bill after knowledge that it had been diverted, but fails to allege the facts constituting the ratification. The averment was, therefore, the statement of a mere conclusion. The fifth fails to show for what purpose McKenzie gave to defendant his note for $5,000 at the time the latter accepted the bill sued on — whether it was given in exchange for said acceptance, or as security therefor. The fact averred could constitute a defense only in the event the note was given in exchange for the acceptance, so as to create an independent contract and an absolute indebtedness to the defendant thereon. This is not sufficiently shown by the averment that it was given “in consideration of said acceptance.” Each of these replications was subsequently amended, and as amended no demurrer was interposed to them. The sNth and seventh replications set up no matter which — 468 — could not 'have been shown under the first, which joined issue on the pleas, and the sustaining of the demurrer to these constituted no error of which plaintiff can complain. The second replication averred that defendant, with knowledge of the fact that the bill had been diverted to other uses than those intended, had ratified said diversion, and set out the fact relied on constituting the ratification. These facts are, that at the time McKenzie procured defendant’s acceptance of the bill he gave to the latter his promissory note for a like amount, payable December 1, 1896, a date prior to the date of the maturity of the bill, “in consideration of and to secure him for such acceptance,” and that on November 25, 1896, defendant sued out an attachment against said McKenzie for the sum of $17,046.72, which sum included said note, and said attachment was levied on the stock of goods in McKenzie’s possession, which xvere subsequently sold, in advance of judgment, under an order of court obtained on this defendant’s motion, and the proceeds of which were paid to defendant on the 18th, 20th and 22d days of February, 1897; that about February 15, 1897, defendant filed a complaint in said cause claiming said sum of $17,046.72, due by certain promissory notes, among which was the note given to secure defendant on his acceptance, and on February 18, 1897, judgment was rendered thereon in favor of defendant, the plaintiff in said cause, which said judgment includes the amount of said notes. In the fourth replication the same facts are averred by way of estoppel. In the fifth as amended, substantially the same facts are averred, but the note above mentioned is alleged to have been given “in consideration of said acceptance.” To the second, third, fourth and fifth replications defendant rejoined that at the time he sued out said attachment he had no knowledge or information that the bill sued on had been diverted, and that as Soon as he learned of the diversion, on January 4, 1897, he instructed his attorney in the attachment suit “to strike therefrom' the said note for $5,000 mentioned in said second replication, and not to take judgment in said attachment suit for the amount of said note, and that the judgment recovered in said attachment suit included the amount of said note contrary to the in — 469 — structions of this defendant;” that defendant had no knowledge or notice that said note was included in the judgment until after, the distribution of the proceeds of the sale of the attached property and the expiration of the term of the court at which the judgment was rendered, and that the proceeds of the sale of said property Avere insufficient to pay the amount of the indebtedness sued for exclusive of the amount of said note. It is further averred that defendant also instructed his attorney'to return said note to McKenzie, and that he has never asserted any claim against McKenzie by reason of said note since the diversion of the bill sued on became knOAvn to him, and that he noAV remits and discharges said judgment to the extent of the amount of said note Avitlx interest. It seems clear that an accommodation maker, indorser or acceptor of negotiable paper who, Avit’h knoAxdedge that the paper has been diverted from the special uses intended, and before it becomes due, realizes, or attempts to realize, on the securities placed in his hands for indemnity by the accommodated party, must be held to haxre ratified the diversion by such action. For the implied agreement between the parties is that the accommodated party Avill meet the paper Avhen it becomes due, and that, in the event he defaults and the accommodation party has to pay the debt, the latter may then, and not until then, reimburse himself from the securities. If for any reason, knOAvn to him, he has incurred no liability by reason of his signature to the paper, he acquires no right to retain or dispose of the securities. His disposal of the securities, or attempt to dispose of or realize on them, after knoAvledge of the facts Avhich exempt him from liability, is, therefore, a clear acknoAvledgement of his liability and waiver of such facts; and if the cause of the exemption is the diArersion of tlie paper, such action is a clear ratification of such diversion. In so far as the ratification is based on the suing out of the attachment, the rejoinder is a complete ansAver to the replication as a plea of ratification, since it distinctly avers that defendant had no knowledge of the diArersion at the time the attachment was sued out. But the replication further alleges in support of the ratification that the defendant took judg — 470 — ment on said note at a time which, as shown by the rejoinder, was subsequent to his acquisition of knowledge of the diversion, and this allegation the rejoinder attempts to meet and answer by the averment that, after defendant had acquired such knowledge, he instructed his attorney not to take judgment on said note. One of the questions presented by the demurrer to the rejoinder is, therefore, whether the action of defendant’s attorney, in taking such judgment contrary to the instructions of his client, was binding on the latter in such sense as to preclude him from setting up such instructions in avoidance of the alleged ratification. We are unable to perceive any sound reason why a client may not, after suit brought, revoke in part the authority previously given to his attorney to institute suit against the same person on several claims, by instructing him to withdraw one of said claims from suit, and thereby escape the effect of the attorney’s disobedience of the instructions as a ratification of some other act entirely independent of and having no connection with this suit, where he has not received, or, having received, has not retained any benefit from such disobedience of his instructions. The rejoinder distinctly avers that the proceeds of the sale of the attached property received by him were less than the indebtedness for which the attachment Avas sued out exclusive of the note for $5,000, and, therefore, shoAVs that he received no actual benefit from the taking of judgment on said note, except the mere existence of said judgment, Atdiich, in the rejoinder, he remits and discharges to the extent of said $5,000 and interest. We are of the opinion the rejoinder was a complete answer to the second, third and fifth replications, in so far as they set up the facts alleged therein as a ratification by defendant of the uses to Avhich the bill sued on was applied. But this rejoinder Avas no ansAver to the same facts set up in the fourth replication by way of estoppel, and the facts alleged in said replication, if true, effectually preclude defendant from asserting any defense based upon the facts that the bill sued on Avas accepted by him for the accommodation of McKenzie for a special purpose, and that it had been diverted from the uses contemplated with the knowledge of plaintiff. We reach’ — 471 — this conclusion, however, not because the replication shows by direct averment that the transaction between defendant and McKenzie ivas an exchange of the former’s acceptance for the latter’s note, but because they show by legal inference that the very act of defendant in attempting to collect the amount of McKenzie’s note, by suing out the attachment before his acceptance became due, whether or not he had knowledge at the time that the bill had been diverted, ivas a recognition by conduct of the fact that McKenzie was his debtor by reason of said note, absolutely, and independently of the latter’s failure to meet the acceptance when it should become due, and that he isms likewise the plaintiff’s debtor. When parties exchange negotiable notes or bills executed by them, whether by way of accommodation, or for the purchase of such paper, the paper given forms a sufficient consideration for that received, and neither is accommodation paper. Each instrument constitutes an independent contract and creates an absolute debt.- — -2 Band. Com. Paper, §§479, 480; 1 Amer. & Eng. Encyc. of Law, (2d ed.), 338 and notes. But neither the fourth nor the fifth replication shows, with sufficient dearness to meet the requirements of pleading, that the transaction between defendant and McKenzie was an exchange of the negotiable paper of each. The fact that McKenzie’s note was made to mature at an earlier date than the bill accepted by defendant, and that defendant sued on said note before the .maturity of his acceptance, are persuasive of this theory, but they are not conclusive in construing the pleading. In the fourth replication it is alleged that the note was given “in consideration of aad to secure him for said acceptance,” and it is well settled that the giving of security to the accommodation party for the loan of his credit does not prevent the paper from being accommodation paper. — 1 Am. & Eng. Encyc. of Law, (2d ed.), 337. The fifth replication avers that the note was given “in «consideration of said acceptance,” but this was not sufficient to show that the purpose of the parties was to exchange their negotiable paper. The bill sued on, so far as anything appears to the contrary in the pleadings, was accepted by defendant for the accommodation of McKenzie, but for all practical purposes of defense — 472 — its character as accommodation paper ceased the moment that defendant asserted the right to treat McKenzie as his absolute debtor, before the maturity of the acceptance, by suing on the note given to indemnify him against loss he might incur by reason of his acceptance. Such conduct was entirely inconsistent with the theory of the defense set up by the pleas. It was consistent only with the theory that McKenzie was his absolute debtor by reason of the note, at the time of the suit thereon, either because the original transaction was an exchange of their negotiable paper, or because of some subsequent agreement between the parties; and he clearly could not treat McKenzie as his absolute debtor without, at the same time, acknowledging his own indebtedness on the bill either to McKenzie or to the holder through McKenzie. One who has made a choice between two inconsistent steps or courses of action is confined to that chosen, and is estopped to assert any right or claim any benefit growing out of or based upon the other. When Henderson sued McKenzie on the note he' estopped himself from saying, in a suit by McKenzie for the non-payment of the bill, that he accepted the bill for the mere accommodation of McKenzie, because, as we have seen, his action was consistent only with the theory that the note was given in exchange for the acceptance, thereby preventing the'latter from becoming accommodation paper, or that, by a subsequent understanding between the parties, they agreed to stand in a changed relation, different from that originally created by the transaction, and to treat the respective instruments as evidence of the assumption by each party of independent and absolute obligations. Dewey v. Bell, 5 Allen (Mass.) 165; Hooker v. Hubbard, 97 Mass. 175. And whatever benefit the estoppel would work in favor of McKenzie can be claimed also by the plaintiff in this action; for while, generally speaking, a stranger can not take advantage of an estoppel, it binds and runs in favor of parties and privies' alike, and the relation of privity may be said to exist between plaintiff and McKenzie; the former succeeding to the position of the latter with respect to the subject of the estoppel. It is entirely immaterial, in so far as it affects the question of estoppel, that the defendant, at — 473 — the time he sued out the attachment, was ignorant of the fact that the bill 'had been diverted, or that, after having acquired knowledge of the fact, he instructed his attorney not to take judgment on the note. It was the act of suing out the attachment, thereby asserting his right to treat McKenzie as his absolute debtor on said note, that worked the estoppel against the defendant. Having elected to assert this right, the subsequent discovery of a probable defense to this action based only on a theory entirely inconsistent with that upon which the right was asserted, and the instructions to his attorney not to take judgment on the note, can not release him from the effect of his election, so far as to enable him to take advantage of. the defense, when, notwithstanding his instructions, his attorney did take judgment on the note, and he, after knowledge of this fact, allowed it to stand as a binding judgment against McKenzie until the institution of the present suit, and the necessities of the case made by the pleadings forced him to offer to discharge it. The facts averred in the fourth original replication and those averred in the fifth replication as amended show, if not a technical estoppel, yet a quasi-estoppel by election, which effectually precludes the defense set up by the pleas and in the rejoinder. Turning now to the evidence, we find that it fully supports all the material averments of these replications necessary to Avork the estoppel. It is shown by the evidence offered by the defendant that at the time defendant accepted the bill sued on, payable December 28, 1896, McKenzie gave him, as security therefor, his negotiable promissory note for a like amount, payable December 1, 1896, and that on November 25, 1896, defendant, before notice of the diversion, sued out an attachment against McKenzie claiming an indebtedness due by certain promissory notes, among which was that above mentioned, which attachment was levied on McKenzie’s stock of goods,. Avhich were sold under order of court, in advance of judgment, and the proceeds of which, being less than the amount of the indebtedness exclusive of said note, were paid to defendant after he had acquired knowledge of the diversion of the bill. It is further shown that on January 4, 1897, defendant be — 474 — came informed of the use to which said bill and the proceeds thereof had been applied, and on the same day, after having acquired such information, he instructed his attorney not to take judgment on said note, but on February 15, 1897, a complaint was filed in said attachment cause, claiming the amount of said note with others, and on February 18, 1897, judgment was rendered in favor of this defendant for the amount claimed, including said note, which judgment, at the time of the trial-, was still standing as a binding judgment against McKenzie; and that on January 28, 1897, defendant filed a sworn answer to a bill in equity filed by a creditor of McKenzie against this defendant and McKenzie, seeking to assail said attachment proceeding as fraudulent and collusive, in which answer he stated that all the indebtedness for which said attachment was sued out Avas bona ficle and genuine. These facts fully supported the replication, and overcame the defense set up by the pleas, and, being undisputed, entitled plaintiff to the general charge in its favor, which was requested ancl refused. This conclusion renders unnecessary a consideration of the other assignments of error. The judgment is reversed and the cause remanded for further proceedings in conformity to this opinion. ReArersed and remanded.