Capital National Bank of Tampa v. Hutchinson

• Citation: 435 F.2d 46
• Decision Date: 22 December 1970
• Docket Number: No. 29232.,29232.
• Parties: CAPITAL NATIONAL BANK OF TAMPA, Plaintiff-Appellee, Cross-Appellant, v. J.A. HUTCHINSON, Jr., Defendant-Appellant, Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

435 F.2d 46 (1970)

CAPITAL NATIONAL BANK OF TAMPA, Plaintiff-Appellee, Cross-Appellant, v. J.A. HUTCHINSON, Jr., Defendant-Appellant, Cross-Appellee.

No. 29232.

United States Court of Appeals, Fifth Circuit.

December 1, 1970.

Rehearing Denied December 22, 1970.

Robert E. Knox, Thompson, Ga., A. Rowland Dye, Douglas D. Batchelor, Jr., Augusta, Ga., for appellant; Hull, Towill, Norman, Barrett & Johnson, Augusta, Ga., of counsel.

Gwinn H. Nixon, Augusta, Ga., James B. McDonough, Jr., Tampa, Fla., for appellee.

Before JOHN R. BROWN, Chief Judge, and DYER and INGRAHAM, Circuit Judges.

DYER, Circuit Judge:

In this controversy involving fraud, shoddy business practices and misplaced trust, Hutchinson asks this Court to reverse a judgment notwithstanding the verdict in favor of Capital National Bank of Tampa, Florida. The District Court held Hutchinson liable as the sole remaining solvent endorser on five notes, totalling $40,000. On appeal, Hutchinson contends that the debt for which the notes were collateral had been discharged, thereby releasing him from liability. Capital cross-appeals, claiming that the jury verdict for Hutchinson on a sixth note, in the amount of $10,000, should be reversed; the Bank asks that judgment in its favor be rendered or that its motion for a new trial be granted. We reverse the judgment notwithstanding the verdict and affirm the jury verdict in favor of Hutchinson.

This legal labyrinth is the result of both parties' mental somnolescence. In January, 1964, Hutchinson sold a motel located in Greenville, North Carolina, to Pitt Motel Corporation, a wholly owned subsidiary of Intercontinental Motels, Ltd. As part of the purchase price, he accepted six notes, four in the amount of $10,000 and two in the amount of $5,000. The notes were endorsed by Intercontinental and also by Martin Von Zamft and William Fanning, both principals in the former. Upon receiving the notes, Hutchinson endorsed five, totalling $40,000, and returned them to Fanning. Hutchinson did so with the understanding that the notes would be discounted and the proceeds sent to him according to a payment schedule.

Fanning, however, had other uses for the notes endorsed by Hutchinson. On February 19, 1964, he and Von Zamft took the notes to Capital National Bank, which made a good faith loan to Intercontinental in the amount of $40,000. Capital kept the five notes as collateral to secure the loan and gave the proceeds to Intercontinental.

On March 2, 1964, Hutchinson spoke with Theodore Davis, then president of Capital, by telephone. Hutchinson allegedly did not know, and Davis did not inform him, that Capital held the five notes which he had endorsed as collateral for the $40,000 loan to Intercontinental. After the telephone conversation, Hutchinson endorsed the sixth note for $10,000 and mailed it to Davis with instructions that Capital send him the proceeds resulting from the discount. Instead, on March 13, 1964, Capital lent Intercontinental an additional $10,000; "on advice of counsel," the Bank used the sixth note sent by Hutchinson as collateral for the new loan. In any event, Hutchinson never received the $10,000.

On September 29, 1964, Capital learned that Pitt and Intercontinental were subject to Chapter X bankruptcy proceedings. When it became apparent that the loans to Intercontinental were sour, a vice-president of Capital wrote Davis, who had left Capital to become president of a bank in Miami, Florida, and advised him of the condition of the loans. Davis then contacted Von Zamft and Fanning to complain about the weakness of the loans. Von Zamft offered to strengthen the loans with the name of Gordon S. Miller, if Capital would loan Miller additional money. Upon Davis's recommendation Capital loaned Miller $90,000 on an open, unsecured note dated December 10, 1964. The money was deposited in Miller's account with the Bank. Simultaneously, and as part of the understanding, Capital transferred $50,316.67 from Miller's account and entered a payment of $50,000 plus accrued interest on Intercontinental's liability ledger. The bookkeeping entries show payment in full of the Intercontinental indebtedness.

Although Capital did not stipulate that the notes endorsed by Hutchinson would serve as collateral for the Miller note, it retained physical possession of them. Likewise, it did not physically surrender or cancel the Intercontinental notes. Capital's witnesses testified that the bookkeeping entries were merely pro forma: they denied any intention to cancel the Intercontinental notes or release the collateral.

As the District Court noted, in lending $90,000 to Miller, Capital threw good money after bad. Like Pitt and Intercontinental, Miller pocketed the proceeds of the loan and soon claimed bankruptcy. Apparently Capital and Hutchinson are the only solvent parties remaining after this commercial debacle.

Hutchinson and his attorney during the Pitt Motel sale, testified that between January 1964 and July 1964, when Pitt and Intercontinental became the subjects of bankruptcy proceedings, they made numerous attempts to ascertain why the five notes totalling $40,000 had not been discounted and the proceeds returned to Hutchinson. Although he traveled to Miami for conferences with Fanning and Von Zamft at least twice, Hutchinson allegedly did not realize until September 28, 1964, that Capital held these notes as collateral for the $40,000 Intercontinental note.

Following the trial the District Court submitted written interrogatories to the jury. The questions and answers were:

1. Under all the facts and circumstances, was there any implied agreement by the Capital National Bank of Tampa that the acceptance of the $90,000 note on December 10, 1964 from Gordon S. Miller and the allocations of the credit derived from that note constituted payment and discharge of the notes from Intercontinental Motels, Ltd.? Yes.

2. If the answer to the first question is yes, did the Capital National Bank of Tampa at that time retain the six (6) notes of Pitt Motel Corporation, endorsed by J. A. Hutchinson, Jr., as collateral for the payment of the $90,000 note of Gordon S. Miller to the Bank? No.

3. Did the Capital National Bank of Tampa act in bad faith when it accepted in February 1964 the five (5) notes in the amount of $40,000 endorsed by J. A. Hutchinson, Jr., and gave the money to Intercontinental Motels, Ltd.? No.

4. Did the Capital National Bank of Tampa act in bad faith when it accepted in March 1964 the $10,000.00 note endorsed by J. A. Hutchinson, Jr., and gave the money to Intercontinental Motels, Ltd.? Yes.

5. Did the Capital National Bank of Tampa fail to furnish a valuable consideration (which does not have to be money) to J. A. Hutchinson, Jr., for the $10,000.00 note of Pitt Motel Corporation endorsed by J. A. Hutchinson, Jr., and mailed to the Bank by Hutchinson in March, 1964? Yes.

6. Was the delivery of the $10,000.00 Pitt Motel note to Capital National Bank by Defendant Hutchinson on March 2, 1964 a part of the same transaction under which Capital National Bank earlier received $40,000.00 of Pitt Motel notes? No.

The court then entered a verdict for the defendant J. A. Hutchinson, Jr. Later, however, the District Judge granted a judgment notwithstanding the verdict in the amount of $40,000 in favor of Capital National Bank. He reasoned that the loan to Miller, the accompanying book entries, and the nature and effect of the transaction show nothing more than a substitution of debtors. The trial judge held that, as a matter of law, when a creditor substitutes one debtor for another by accepting the latter's promissory note in satisfaction of the former's, when the creditor retains physical possession of the collateral surrendered by the original debtor who does not object to such retention, and when there is no ostensible consideration running to the new obligor from the creditor or from the original debtor, then the presumption that the collateral was intended by all parties to the substitution to secure the new note becomes conclusive.

As to the sixth note of $10,000, the judge concluded that the jury finding of bad faith on the part of Capital was amply supported by the evidence. Therefore, he affirmed the jury verdict for Hutchinson.

Appealing from the judgment notwithstanding the verdict, Hutchinson argues that the District Court's "conclusive presumption" rests on a chimerical premise. Specifically, he contends that the Capital-Miller loan transaction constituted a novation. According to Hutchinson a substitution of debtors by novation is essentially an agreement. Its terms are governed by the intention of the parties, a factual issue for the jury, not a legal question for the Court. Consequently the conclusive presumption of law as to collateral for the Capital-Miller loan was erroneous. The jury verdict should not have been disturbed, since there was no agreement that the security for the $40,000 Capital-Intercontinental loan should survive payment of that loan.

In this diversity action, Capital and Hutchinson agree that Florida law controls. Under Florida law a novation is a mutual agreement between the parties concerned for the discharge of a valid existing obligation by the substitution of a new valid obligation on the part of the same or another debtor. Novation results not from the mere substitution of one writing for another, but only from the substitution of a new obligation for another — with intent to extinguish the old. Fontainbleau Hotel Corp. v. Crossman, 5 Cir. 1963, 323 F.2d 937, 942; Murphy v. Green, 102 Fla. 102, 135 So. 531, 534 (1931). Necessarily incident to any novation is the extinction of the prior contractual obligation. Fontainbleau Hotel Corp. v. Crossman, supra; Burge v. Maund, 66 Fla. 173, 63 So. 708 (1913).

In Murphy v. Green, supra, the leading Florida case with regard to novation, the Florida Supreme Court commented:

If there is an express agreement by the

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