Burnham Loan & Investment Co. v. Sethman

• Decision Date: 04 February 1918
• Docket Number: 8781.
• Citation: Burnham Loan & Investment Co. v. Sethman, 171 P. 884, 64 Colo. 189 (Colo. 1918)
• Parties: BURNHAM LOAN & INVESTMENT CO. v. SETHMAN et al.
• Court: Colorado Supreme Court

171 P. 884

64 Colo. 189

BURNHAM LOAN & INVESTMENT CO. v. SETHMAN et al.

No. 8781.

Supreme Court of Colorado, En Banc.

February 4, 1918

Rehearing Denied April 1, 1918.

Error to District Court, City and County of Denver; James H Teller, Judge.

Action by the Burnham Loan & Investment Company against George H Sethman and others. Judgment for defendants, and plaintiff brings error. Reversed and remanded, with directions to enter judgment for plaintiff.

Plaintiff below, the Burnham Loan & Investment Company, plaintiff in error, brought this suit as pledgee, against George H Sethman on his promissory note for $10,002, given to the German-American Indemnity Company in payment for stock, and negotiated and delivered to plaintiff by one S. N. Mitchell as collateral security to his note for $3,000. The trial court found that plaintiff was not a holder in due course basing its finding upon a lack of diligent inquiry amounting to bad faith in accepting the note, and rendered judgment in favor of defendant.

Plaintiff's business was loaning money. One R. A. Ramey, who was its secretary, treasurer, and general manager and had entire charge of the business, made the loan to Mitchell which resulted in this litigation. The business of the German-American Indemnity Company, hereinafter called the Indemnity Company, was writing insurance. One E. C. Harrell was its president and general manager, and the by-laws gave him the entire charge and control of all its business. Mitchell was treasurer, but in name only, his duty as such being to pay out money on the order of the president and secretary. He had nothing to do with the books, and had no possession or control of the company's notes and bills receivable. He was under contract as the general stock salesman on commission. The by-laws provide that the notes and bills receivable of the company should be kept by the secretary, which office was held by one Dr. Brown. Defendant Sethman was a civil engineer for companies employing workmen and one Harry Ramey, son of R. A. Ramey, was an insurance solicitor for the Indemnity Company, but was in no way connected with or identified with plaintiff.

March 5, 1912, Sethman went to the Indemnity Company's office in Denver and bought from Harrell, the president, 3,334 shares of the capital stock of the company at $3 per share, of the par value of $1 per share, amounting to $10,002, for which he made, executed, and delivered to the company his promissory note in ordinary form, payable in 60 days. Harry Ramey and one Reid were instrumental in securing Sethman as such purchaser. Harrell as president and general manager promised Sethman, if he would buy the stock and give the company his note for the purchase price, that it would retain possession of the note; that the company would issue him the stock and elect him treasurer at a salary of $2,500 a year; that the duties of the office would not interfere with his usual occupation; that he would not be required to meet the note at maturity, but the company would renew it from time to time until his salary paid the amount due thereon; that the company desired the names of the various corporations with which he was associated as engineer, and wanted his influence with their workmen to induce them to take out policies of insurance. The stock was never issued to him, and he was not elected treasurer. His note was indorsed by the payee in blank and delivered by Harrell to Mitchell, who on the 18th applied to plaintiff for a loan of $3,000, and offered the Sethman note so indorsed and in his possession, together with 3,000 shares of the capital stock of the Indemnity Company, standing in the name of Harrell, also indorsed in blank, as collateral security for the loan. Mitchell told Ramey that the note was assigned to him (Mitchell) on account of commissions the company owed him on stock sales. Ramey went to the company's office and inquired of Harrell regarding his authority as president to make the indorsement, and was shown the following by-law, passed when Harrell was elected president, under which the company had been working some two years:

' Duties of President. It shall be the duty of the president to preside at all meetings of the board of directors, to sign all deeds, bonds, certificates of stock, checks, and documents of any description of the company, and to have general supervision of all meetings, either stockholders' or directors' meetings. It shall be his duty to call all meetings, either regular or special, and the call shall be made in accordance with the by-laws. It shall be his duty to secure the services and fix the remuneration of agents, employés and assistant officers for the general promotion and welfare of the company, and shall have entire charge of the affairs of the company. A suitable compensation, to be determined by the directors, shall be allowed the president for his services. Motion duly seconded by Mr. Probst and unanimously adopted and the by-laws so amended.'

Harrell also told Ramey the note was given for stock sold and delivered to Sethman. After making further inquiry, plaintiff made the loan and paid out the money on Mitchell's order, taking his note therefor payable in 90 days, and Mitchell delivered to plaintiff the Sethman note as collateral. While plaintiff made a personal loan to Mitchell, in fact, the money was borrowed to pay agents' advance commission on the sale of the stock to Sethman for which the note was given, and was used for that purpose. The company agreed to pay its agents 30 per cent. commission on the sale of stock, and required them to give 10 per cent. of this to Mitchell as general agent, and he under some agreement was to divide this with Harrell. The commission on the Sethman sale was $3,000, the amount of the Mitchell loan. Reid and young Ramey were the agents instrumental in producing the purchaser, and on this account each received one-third of the proceeds of the Mitchell loan; the remainder, under their agreement, should have been divided between Harrell and Mitchell, but Harrell overlooked this detail, and Mitchell, as a fact, received nothing out of the loan, though it was made in his individual name. So while ostensibly and in fact, so far as plaintiff knew at the time, it made a personal loan to Mitchell, the company received and used the money to pay these agents.

There is no evidence plaintiff had knowledge of any defense the maker had to the note, and no evidence that it had actual knowledge of any defect in Mitchell's title. After Mitchell failed to pay his note, plaintiff had several interviews with Sethman about the payment of his note, and finally Sethman declared that it had been obtained by fraud, that there was a want of consideration, and that he would pay nothing upon it. Thereupon this action was instituted.

The Pleadings.

The complaint alleges that March 5, 1912, Sethman made and delivered his promissory note for $10,002 to the Indemnity Company, payable 60 days after date; that the Indemnity Company indorsed in blank, negotiated, and delivered it to Mitchell, and on March 18, 1912, for value, he negotiated and delivered it to plaintiff who is the holder in due course. The answer pleads failure and want of consideration of which it is alleged plaintiff had notice, and also alleges a defect in the title of the person negotiating it to plaintiff of which it is alleged it had notice; that plaintiff did not take the note in good faith and is not a holder in due course; that plaintiff in making the loan advanced the money to the Indemnity Company to be used in paying obligations to its agents. The replication denies knowledge of any defense the maker had to the note; denies knowledge of any defect in the title of the person negotiating it; denies that plaintiff advanced the money to the Indemnity Company, and alleges as the transaction: That March 18, 1912, plaintiff loaned Mitchell $3,000; that he made and delivered to it his promissory note therefor payable in 90 days, and as security deposited with plaintiff the Sethman note, and prays that its recovery be limited to the amount due on the Mitchell note. July 20, 1914, after judgment entered and after the term of court had expired, without notice to plaintiff and without leave of court first had and obtained, defendant filed an answer, in which it is alleged that Mitchell had no authority to pledge the note; that he pledged it to plaintiff as collateral security for a loan plaintiff made to him personally, at a time when plaintiff knew he was treasurer of the company, and knew or should have known that he had no authority to pledge company property as security for his personal loan, and that his title was therefore defective.

The Statute.

Our Commercial Code, passed in 1897, provides:

'Sec. 34. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.'

'Sec. 52. A holder in due course is a holder who has taken the instrument under the following conditions * * * 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 * * * defect in the title of the person negotiating it.'

'Sec. 55. The title of a person who negotiates an instrument is defective within the meaning of this act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.

'Sec. 56. To constitute notice of * * * defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of * * * the defect, or knowledge of such

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