Commercial State Bank v. Iverson

CAMPBELL, J. Plaintiff brought action in the usual form as indorsee and holder in due course of a promissory note in the principal sum of $100 executed by defendant to^ Young & Engelhard Creamery Company, a corporation.- Defendant ariswered that plaintiff was not a due course holder of the note; that the'note was given for corporate stock of the Young & Engelhard Cream-' ery Company, and was secured by false representations; that said corporate stock was never delivered; that the corporation is now insolvent and bankrupt; and that the consideration for the note had wholly failed. — 468 — The case was tried oil the issues so joined, and the facts were developed substantially as follows: For some time prior to the year 1920 C. W. Young and A. H. Engelhard, as copartners under the firm name of Young & Engelhard, had conducted! a creamery business at Salem, S. D., and about April 15, 1920, said partnership- borrowed $2,000 from plaintiff bank, which indebtedness was evidenced by a promissory note then executed and delivered -by said partnership- to the bank, which promissory note was subsequently, and on August 8, 1920, renewed by a second note in like amount executed by the partnership to plaintiff -bank. In September, 1920, the creamery business which had formerly been conducted by Young and Engelhard as copartners was incorporated under the name of Young & Engelhard Creamery Company, which corporation was duly organized and directors and officers elected, and A. J. Engelhard, one of the former copartners, became and continued the secretary treasurer of the corporation, and acted' as such at all times, and was the person “who did the business of the corporation” and “transacted practically all of the business of the corporation,” and said -corporation, after its organization, appears to have- taken over and -conducted in every respect the creamery business previously carried on by Young and Engelhard as copartners. After the taking o-ver of the business by the corporation, and. about January 5, 1921, the $2,000 renewal note executed by the partnership- representing the $2,000 originally borrowed by the partnership in April, 1920, -came due, whereupon the corporation paid the interest on the same and took it up by executing and delivering to plaintiff bank the promissory note of the corporation executed by the said) A. J. Engelhard as secretary treasurer 'thereof for the principal sum of $2,000. On March 29, 1921, the corporation, by its secretary treasurer, Engelhard, paid the interest on the note of January 5, 1921, and: renewed the same by executing and delivering to- plaintiff -bank another $2,000 note. On May 19, 1921, thei defendant Iverson executed and -delivered to the corporation, Young & Engelhard Creamery Company, the note in suit. Thereafter, and on June 3, 1921, Engelhard, as secretary treasurer of the corporation-, took the note so given by defendant to plaintiff bank and indorsed and! sold the same to the bank, and the bank, in payment therefor, credited the open checking account of Yo-ung — 469 — & Engelhard Creamery Company in said' bank in the sum of $100. At the same time Engelhard, as secretary treasurer of the corporation, indorsed and sold to plaintiff bank certain other notes owned by the corporation executed by other persons, and the checking account of the corporation was likewise credited with the proceeds thereof. Thereafter, and on the same day, Engelhard, as secretary treasurer of the corporation, gave to plaintiff bank the corporation’s check- drawn on its account in said bank for the sum of $1,218 to take up the baalnce due on the corporation note dated M'arch 29, 1921, which check -was so applied, and which check, when paid and charged against the account of the corporation, more than exhausted the credits previously and on the same day placed to the account as proceeds of the notes sold, including the proceeds of defendant’s note. The form of indorsement made on defendant’s note when the same was negotiated to plaintiff bank was as follows: “Y. and E. Creamery Co., by A. J. Engelhard, Secretary and Treasurer.” Plaintiff having rested, defendant moved for a directed verdict, and plaintiff likewise moved, whereupon the court made findings and conclusions, and entered judgment in favor of defendant for dismissal of the complaint upon the .merits, with costs, from, which judgment and from an order denying its motion for a new trial plaintiff appeals. We do not understand upon what theory the judgment appealed from could have been entered. The respondent had been called as an adverse witness by appellant, and his testimony consisted only of admitting his signature to' the note sued upon. The only other witness who testified was one D. Goldsmith, president of appellant bank, who testified as follows regarding the purchase of the note in question by the bank: “I reside in Salem, and am the president of the Commercial State Bank. The Commercial State Bank is the owner and holder of the promissory note Exhibit A, and has been since about June 3, 1921, when it purchased the same from the Young & Engelhard' Creamery Company. They were given credit on the books of the bank on their open account on June 3, 1921, for $100. That $100 was afterwards checked out of their open account in the bank in full on June 4th, leaving a balance to their credit at the close of — 470 — •business on June 4, 1921, of 10 cents. At the time the bank purchased the note it had’ no- notice or knowledge that the note had been previously dishonored by the maker, and had no knowledge or notice of any infirmity or defect of the title of Young & Engelhard Creamery Company, and purchased the note in good faith. The note was purchased from A. J. Engelhard, the secretary and treasurer of the Young & Engelhard Creamery Company. It is past due, and payment has been demanded from- the maker, Mr. Iverson, but he has refused to pay it. I know the signature of A. J. Engelhard, and that is -his signature on the back of the note, which purports to- indorse it by him- as secretary and treasurer, and that is the way they customarily indorse notes.” And on cross-examination, redirect, recross, etc., testified at considerable length with reference to- the payment made on June 3, 1921, by Young & Engelhard Creamery Company upon its note held by appellant bank dated March 29, 1921, and the origin and history of said corporation note as above outlined. There was not a syllable of competent testimony in the record showing, or tending to show, that respondent had any defense whatever to this note in the hands of the payee or any other person. The note was his absolute, negotiable, past due, promise to pay money, and, so far as appeared from the record, there was no reason whatever why he should not pay it to any person payment to- whom would discharge the obligation. Plaintiff appeared in court with the note in question indorsed by the payee in blank. The indorsement was not made by an agent but by the executive officer of the corporation and neither section 1723, Code 1919, nor the decision of this court in State Bank of Alcester v. Weeks, 189 N. W. 941, 45 S. D. 639, have any application whatsoever to the facts of the case at bar, since said section has no application to the executive officers of a corporation. Uline Loan Co. v. Standard Oil Co., 185 N. W. 1012, 45 S. D. 81, 27 A. L. R. 585. Engelhard was the general executive officer of the creamery corporation and the general manager of its business, and the presumption is that he had authority to indorse anddiscount negotiable paper of the corporation. Merril v. Hurley, 62 N. W. 958, 6 S. D. 592, 55 Am. St. Rep. 859; Iowa, etc., Bank v. Sherman et al., 97 N. W. 12, 17 S. D. 396, 106 Am. St. Rep. 778; Weaver v. Henderson, 91 So. 313, 206 Ala. 529; Swedish, etc., Bank v. Koebernick, 117 N. W. — 471 — 1020, 136 Wis. 473, 128 Am. St. Rep. 1090; Merchants’, etc., Bank v. Citizen, etc., Co., 34 N. E. 1083, 159 Mass. 505, 38 Am. St. Rep. 453; Winer v. Bank, 117 S. W. 232, 89 Ark. 435, 131 Am. St. Rep. 102; Union, etc., Bank v. Moomak, 184 N. W. 51, 106 Neb. 388; Citizens’, etc., Bank v. Skeffiington (N. D. 1924) 196 N. W. 953. The note, being indorsed in blank, became bearer paper (sections 1713 and 1738, Code 1919), and appellant was certainly both the 'bearer and holder o-f the note as defined in section 1892, Code 1919. Under the" express provisions of section 1755, Code 1919, appellant as such holder was authorized to sue on .the note in its own name, and payment to appellant in due-course would discharge the instrument. Respondent having shown no defense- whatever to the note, it was entirely immaterial whether appellant was a holder of the instrument in due course or whether appellant had' any beneficial interest in the note or whether as between, itself and the creamery -corporation it had good title to the- note or had the right to retain the note- or the proceeds thereof. It is- very apparent, therefore, that the court erred in granting respondent’s motion for a directed verdict at the close of plaintiff’s case, and this error requires the reversal o-f the-judgment and order appealed from. The situation as to the motions for directed verdict in this case is somewhat peculiar. Usually motions by b-oth parties for directed verdict are not entertained' until the submission of all the testimony, and that is the proper practice, since it will ordinarily make possible- final disposition of the case- on- the appeal without a new trial. In the instant case, however, the plan seems to have been conceived of trying this lawsuit in periods as a football game is played. Both motions for directed verdict were made at the close of plaintiff’s case, and the following stipulation was entered into: “Thereafter it was stipulated by and between counsel that a jury might be waived and, the court might take up and- consider the two motions made for directed verdict, and that, if the court should decide that the defendant’s motion should be denied, then the defendant might introduce evidence in support of the allegations of his answer.” It is apparent, therefore, that the court has permitted re — 472 — spondent to reserve the right to introduce his evidence at a later stage of the case, and however much the procedure thus attempted is to be deplored, yet we do not feel justified in making final disposition of the case on this appeal in view of the fact that respondent might have some evidence not yet produced going to the question of whether appellant is a holder in due course, and, if he can contradict appellant’s showing on this point, might then introduce evidence of a defense good as against the maker of the note, and it will therefore be necessary to remand the case for a new trial. In view, however, of some of -the matters argued in the briefs on this appeal, and for the guidance of court and counsel in the event of a new trial, we deem it proper to consider somewhat the question of whether or not upon the evidence as it has thus far been developed appellant ranks as a holder of the note sued upon in due course. We think that question must be answered in the affirmative. Respondent contends that the transfer of a note belonging to a corporation by an officer thereof for his personal profit does not pass the title to the note to any person taking the same knowing that it belongs to the corporation and that the officer is using it for li-is own gain. This, of course, is sound law. From- it respondent argues that since the money credited by appellant to the checking- account of the creamery corporation in payment for the note sued upon was drawn out and disbursed by the corporation upon the same day in payment of the balance unpaid upon a note of the corporation dated March 29, 1921, which-said note of the corporation was a renewal of a like note of the corporation dated January 5, 1921, which in turn took up a note of like amount originally given by the partnership of Young & Engelhard, the net result of this entire chain of circumstances mus. be that the note sued upon was transferred by Engelhard for his own personal gain, and that plaintiff could not be a holder in due course. Certainly it is true that an officer of a corporation cannot use the corporate assets' to' pay his personal obligation upon which the corporation is not liable, and an attempt so to do is fraudulent as to the corporation, and any one wlm knowingly participates in such attempt is liable to the corporation in such manner as the circumstances may require. The difficulty, however, that arises in connection with respondent’s effort to avail himself in this case of — 473 — these principles of law is that, so far as respondent is concerned, the consideration paid, by appellant for the note in suit was not in fact credited upon a personal liability of Engelhard. Respondent paid consideration by crediting the open checking account of the corporation, which credit was subsequently withdrawn and used by the corporation, and whether the officer of the corporation who withdrew said moneys misappropriated the same or not is not a matter of which respondent can avail himself in this case. Even disregarding the matter of deposit and withdrawal of the money, and assuming that the consideration paid for the note in suit was a direct credit upon the corporation note, yet the note upon which the credit was made was in fact the note of the corporation and not any personal obligation of Engelhard and defenses against it, whether fraud in its inception, payment, failure of consideration, or anything else for the corporation or its successors in interest and not for respondent in this action. The judgment and order appealed from are reversed, and the case is remanded for a new trial.