Long v. Shafer

OPINION. FARRINGTON, J. The issue in this court is made clear by the following language appearing in the brief of learned counsel for appellant: “We concede that, under the law as it existed prior to the adoption of the uniform negotiable instruments act in 1905; it was competent to show by parol evidence that one who signed a negotiable instrument ostensibly as a maker signed as a surety and that the holder had knowledge of' the fact, and that upon proof of these facts and proof that the holder had extended the time of payment for a consideration moving from the principal, without the assent of the surety he was thereby discharged from all liability on the instrument; also that if the holder held any property of the principal to secure the note, or other security for its payment, and without the assent of the surety gave up such property or released the other security, the surety was discharged to the extent of the property surrendered or the security released. “We further concede that if these special defenses are available to a surety under the uniform negotiable instruments act, then the.judgment was for the right party and should be affirmed. “Our contention is that both of these defenses have been abrogated by the uniform negotiable instruments law, and that if one signs a negotiable instrument as an accommodation maker, without consideration, and wishes to be secured, he must take the security to himself, or by express contract with — 647 — the payee agree that the latter shall take and hold the security for his protection.” It is stated in the briefs for both sides that the uniform negotiable instruments act was not intended to make new law, but that, with few exceptions, it is-a codification of the rules of the law merchant as declared by the best and most authoritative decisions. Counsel for appellant also state that they do not contend that extrinsic evidence is not admissible in actions between the parties to a negotiable instrument to show want of consideration, fraud, mistake, illegality, or duress, or to explain an ambiguity, when such explanation is not inconsistent with the written terms. Appellant contends that where the act speaks it controls, and that prior conflicting adjudications must be held for naught, citing Merchants and Farmers Sav. Bank v. Kallerjohn, 137 Ky. 427, 125 S. W. 1071, Ann. Cas. 1912, A, 439; and First Nat. Bank of Shawano v. Miller, 139 Wis. 126, 120 N. W. 820, 131 Am. St. Rep. 1040. Also, that an examination of the act will reveal that the word “surety” is nowhere mentioned in it, and that the liability of makers and indorsers of these instruments is classified as “primary” and “secondary;” and that the obligation of makers and accommodation makers of negotiable notes is primary and absolute, citing sections 10161 and 10030, Revised Statutes 1909. Furthermore, that section 10089, Revised Statutes 1909, prescribes the only methods by which a maker can he discharged, whether he be in fact a principal or an accommodation maker. Appellant contends that sections 10000, 10089 and 10161, Revised Statutes 1909/when read together, leave no opening whereby parol evidence can he admitted as against a holder for value to modify the absolute liability incurred by the signing of the note as makers. Also, that since Long paid full value for the note he is a holder for value. — 648 — Long is not a holder in due course because tbe instrument was not negotiated to Mm. There is no call for a lengthy discussion about this because the statute (Sec. 10022, R. S. 1909) is explicit. Now section 10028 provides that “in the hands of any holder other than the holder in due course, a negotiable, instrument is subject to the same defenses as if it was nonnegotiable. ” Hence this case is lifted bodily out of the governing power of the uniform negotiable instruments act. Section 10001 defines when an instrument is negotiated, and does not include the handing over of a promissory note by the maker to the payee. The act, in sections 10022, 10027 and 10028, makes a distinction between a holder and a holder in due course. To shut off the defense here set up, the holder must bring himself within the terms of sections 10027 and 10028, the note must have been negotiated to him. The maker handing Ms note to the payee is not a negotiation of the instrument, and such payee is a holder other than in due course, and thus falls within the terms of section 10028. This leaves the case to be controlled by the common, law or law merchant (section 10165), and appellant has conceded that if the common law is to govern, the defense set up here is permissible. [See Fullerton Lumber Co. v. Snouffer (Iowa), 117 N. W. 50.] As said in the case just cited: “Negotiability is riot necessary to the validity of a promissory note, and the mere fact that it is negotiable in form does not, as between the maker and payee, deprive the former of any defense thereto that he would otherwise have.” [See, also, Crawford’s Annotated Neg. Instr. Law (2 Ed.), sec. 54, and sec. 97 followed by a footnote in which it is said: “In an act designed to be uniform in the various States, no more can be done than fix the rights of holders in due course.” Also: Ogden Negotiable Instruments, sec. 142, page 132; Daniel on — 649 — Negotiable Instruments (6 Ed.), Vol. 2, sec. 1312, page 1478; Stone v. Goldberg & Lewis, 60 So. 744; Goldberg & Lewis v. Stone, 65 So. 454; Haddock v. Haddock, 85 N. E. 682.] In the case last cited this language appears: “There is no reason that we can conceive why the Legislature should intend to change the rule in regard to the admission of parol evidence as it has existed in this State for many years. All of the quotations show that it had enlarged rather than. restricted the rules allowing parol evidence to show the true liability and relation of the parties whose names appear upon the bill or note in all actions between themselves.” It is therefore clear that defendants had the right to show by parol that they were sureties only on the note. And since the negotiable instruments law does not govern the case and the rules of the common law are to be looked to, there is but one conclusion to be drawn from the Missouri decisions which is that the release of the collateral security on the part of the payee in the note without the consent of^the accommodation makers released the latter pro tanto — to the extent of the value of the lien so discharged. [Ferguson v. Turner, 7 Mo. 497; Lakenan v. Trust Co., 147 Mo. App. 48, 126 S. W. 547; 27 Am. and Eng. Ency. Law, pp. 516, 517.] The following cases hold that parol evidence is admissible to show who is principal and who is surety on a note: Garrett v. Ferguson’s Admrs., 9 Mo. 124; Mechanics’ Bank v. Wright, 53 Mo. 153; Hardester v. Tate, 85 Mo. App. 624; Reynolds v. Schade, 131 Mo. App. 1, 109 S. W. 629. Appellant cites Lane v. Hyder, 163 Mo. App. 688, 147 S. W. 514, and Citizens’ Bank v. Douglass, 178 Mo. App. 664, 161 S. W. 601, as authority for his contention that parol evidence is inadmissible to show that the defendants signed the note as sureties or accommodation makers. These cases discuss the question as to whether under the negotiable instruments — 650 — law a surety Is discharged by an extension of time given the principal debtor, holding that he is not discharged. [See, also, Vanderford v. Farmers’ & Mechanics’ Natl. Bank, 66 Atl. 47, 10 L. R. A. (N. S.) 129, and note; Richards v. Market Exchange Bank Co., 90 N. E. 1000, 26 L. R. A. (N. S.) 99, and note; Cellers v. Lyons, 10 L. R. A. (N. S.) 133, 89 Pac. 426; Bradley Enginering & Manufacturing Co. v. Heyburn, 56 Wash. 628, 106 Pac. 170, 134 Am. St. Rep. 1127; Wolstenholme v. Smith, 34 Utah, 300, 97 Pac. 329; Union Trust Co. v. McGinty, 212 Mass. 205, 98 N. E. 679, 28 Am. and Eng. Ann. Cas. 525.] In the case of Lane v. Hyder, supra, the action was between the payee in the note and a comaker who attempted to defend on the theory that he was only a surety on the note and that plaintiff without his consent or knowledge extended the time of payment. It was held that under the negotiable instruments law the surety was primarily liable on the note, and that under section 10089, Revised Statutes 1900, providing how negotiable instruments may be discharged, an extension of time of payment does not discharge the surety. That case is a direct authority in favor of the contention made by the appellant in our case. The case of Citizens’ Bank v. Douglass only incidentally passes on the question and approvingly cites Lane v. Hyder; but an entirely different question was up for decision in the Douglass, case than that presented in the Hyder case and different from that presented in this case. There may be some nice distinction between the effect, so far as a surety or accommodation maker is concerned, of an extension of time by the holder and a release of collateral security by the holder; but the principle that would hold or release an accommodation maker in the one case ought to hold or release him in the other. [See section 10000, R. S. 1909.] — 651 — The cases last cited and those referred to therein as authorities, holding that under the negotiable instruments law a person primarily liable such as a surety or accommodation maker is not discharged by an extension of time for payment without their knowledge or consent, have not escaped criticism. Witness, 31 L. R. A. (N. S.) 150, note: “So few cases have passed upon the question that this doctrine cannot be said to be firmly established, especially in view of the fact that it is contrary to the previously well-settled doctrine relating to the discharge of a surety. It is doubtful ‘if the intention of the framers of the negotiable instrument act was t thus to change and overturn so well-settled a principle of law, neither inequitable nor unjust in its application.” It should he said of the Hyder and Douglass cases that at no place in the opinions does it appear that the attention of the court was ever called to sections 10001, 10022, 10027 and 10028, Revised Statutes 1909. We believe that liad such sections been noticed by the court in the Hyder case the result would have been different. The following cases, and many others cited, discussing this phase of the negotiable instruments act and holding that an accommodation maker is barred from showing such fact, appear to be suits by indorsees and not the original payees: National Citizens’ Bank of New York v. Toplitz, 81 N. Y. Supp. 422; Wolstenholme v. Smith, 97 Pac. 329; Security Trust & Safe Deposit Co. v. Duross, 86 Atl. 209; Mersick v. Alderman, 60 Atl. 109; Tatum v. Commercial Bank & Trust Co., 64 So. 561; Steinhilper v. Basnight, 69 S. E. 220; Woods v. Finley, 69 S. E. 502. The case of Spencer & Co. v. Brown, 143 N. Y. Supp. 994, clearly holds (citing New York cases) that in support of a defense of “accommodation paper” or “want of consideration,” as between the payee and maker the latter may show by parol evidence the real — 652 — agreement between the parties at tbe time of the execution; and. this is the rule we adhere to. The doctrine we follow does not impair or burden negotiable instruments. It only holds that a note as between the original parties is like any other simple contract. Because on its face it is drawn so that if necessary it will pass as negotiable paper does not require that it take on that character before it is negotiated as “negotiation” is defined in section 10001. There is no reason for the luggage to be dropped on this contract any more than on any other until it has sallied forth on the high seas of negotiation — until it has come into the hands of a holder in due course as provided by section 10022 (particularly the fourth subdivision thereof). In.his hands, section 10027 provides for dropping the luggage, but in the hands of the holder other than in due course commercial paper is subject to the equities existing between the original parties. To hold otherwise is to deny parties, as between themselves, the right to contract concerning matters nowise unlawful, and to accomplish this result will require express and not mere implied enactment. In Missouri, for many years prior to the enactment of the uniform negotiable instruments law, as between the original parties to a note, a surety or accommodation maker could by parol evidence show the contract that was made and that he was a surety or accommodation maker although the face of the note did not disclose such fact. We therefore quote with approval the following language from the case of Sutherland v. Mead, 80 N. Y. Supp. l. c. 508, 509: We are not to impute to the Legislature an intent to change a rule of law which has existed id uniform course of enforcement for over three-quarters of a century, without a. clear and unequivocal expression so to do.” That case was dealing with the negotiable instruments law and it follows the act in defining a holder for value and a holder in due course. It will be observed by reading — 653 — the negotiable instruments act that there is a distinction between a holder or holder for value and a holder in due course. In all the circumstances enumerated imthe act under which equities can be set up against the enforcement of negotiable paper, such as fraud, failure of consideration, etc. — in every instance it uses the term holder in due course. For example, where fraud is charged, the holder in due course must show that he had no knowledge of the fraud when he acquired the instrument. The same is true as to failure of consideration. In other words, the act clearly shows that it is dealing principally with paper that has been negotiated, and the determining element is whether the holder is one in due course. That the act does make a distinction between the liability of a maker and an accommodation, maker is shown by section 10019. To hold the accommodation maker liable under that section the holder must be one in due course. To hold that an accommodation maker is primarily and absolutely liable in all cases and that the equities and facts cannot be set up as between the original parties will lead to absurdity. For instance, if A signs a note payable to himself and gets B to sign .it as an accommodation maker, then A could sue B and B under the primary absolute rule would be prevented from showing that he signed the note with A as an accommodation maker only, and section 10019 requires that such a note must have been negotiated or fallen into the hands of a holder in due course before absolute liability is fastened on him. In the discussions of this question in all the opinions we have seen we find none taking into account the language contained in our section 10028. Such a provision is either not in the acts of other' States where the decisions have been rendered, or, as is true of all the opinions under our act thus far, it has been ignored. If it is to be read out of the negotiable instruments act, then there may be some good reason for a — 654 — different view; bnt so long as that section remains in the act, and so long as a great number of decisions in this State stand as the law that it is not varying’ the terms of a note, such as is presented in this case, to show by parol evidence that a signer was an accommodation» maker or a surety, we can see 'no escape from the conclusion we have reached. Appellant has conceded that if the defense sought to be set up is available to defendants as accommodation makers, the judgment is for the right party and should be affirmed, and we have upheld that defense. The judgment is affirmed. However, as a conflict exists between our decision and that of the Kansas City and St. Louis courts of appeal in the Hyder and Douglass cases, this cause is certified to the Supreme Court for final determination. Robertson, P. J., concurs. Sturgis, J., dissents in a separate opinion.