Continental Nat. Bank of Fort Worth v. Conner

• Decision Date: 10 November 1948
• Docket Number: No. A-1712.,A-1712.
• Citation: 214 S.W.2d 928
• Parties: CONTINENTAL NAT. BANK OF FORT WORTH v. CONNER et ux.
• Court: Texas Supreme Court

214 S.W.2d 928

CONTINENTAL NAT. BANK OF FORT WORTH v. CONNER et ux.

No. A-1712.

Supreme Court of Texas.

November 10, 1948.

Error to the Court of Civil Appeals of Second Supreme Judicial District.

Suit by Continental National Bank of Fort Worth against H. M. Conner and wife to enforce a mechanic's lien note. Judgment for plaintiff was reversed and remanded by Court of Civil Appeals, 209 S.W.2d 639, and plaintiff brings error.

Judgment of Court of Civil Appeals reversed in part and affirmed in part, and judgement of district court reversed.

Thompson, Walker, Smith & Shannon and John A. Kerr, all of Fort Worth, for petitioner.

Richard Owens, of Fort Worth, for respondents.

GARWOOD, Justice.

Continental National Bank of Fort Worth, petitioner here, sued respondents, H. M. Conner and wife, to enforce for the amount of $1400 and interest a mechanic's lien note of $4250, made by the Conners and hypothecated to the bank by the payee of the note, A. D. Womack, who was also the contractor in the mechanic's lien contract; the pledge being security for a loan or loans to Womack by the bank in the principal sum of $1400. The premises in question were not a homestead at the time of the execution or hypothecation of the note and contract. The administrator of Womack's estate and others were parties below, but they have no connection with the controversy at the present stage.

The Conners defended on the ground that the bank stood in the shoes of Womack and that, by reason of Womack's failure to complete the construction work in accordance with the mechanic's lien contract nothing was due him or the bank on the note, although at the time suit was filed, the unincumbered value of the work done was apparently in excess of the bank's advances. The bank in turn, as hereafter more fully explained, asserted itself to be a holder in due course of the Conners' note and as such entitled to enforce it and the lien without regard to their equities against the payee, Womack, under the contract.

The note was payable October 21, 1945 to Womack's order and, together with the contract, was endorsed and delivered by him to the bank on October 15, 1945, or six days before maturity, against an advance to him on that date of $1000. A further advance, amounting to $400, was made on November 10, 1945, or some 21 days after maturity of the pledged note, which meanwhile had evidently remained in the bank's possession as security for the first advance. The record suggests that these advances or loans were payable 30 days from date, respectively, but does not show a rate of interest or whether they were evidenced by notes, although they appear to have been later consolidated and extended by means of a note executed by Womack under date of December 10, 1945, in the principal sum of $1400, with provision for interest only after maturity and at the rate of 10% per annum. This note will be referred to again later in the present opinion, as will also the character of the evidence supporting the above recitals of fact.

The trial court evidently rejected the bank's claim to stand in a better position than its endorser, Womack, and submitted issues to the jury apparently on the theory that its right of recovery, if any, depended on Womack's having substantially performed the mechanic's lien contract. On the verdict judgment was rendered for the bank in the sum of $913, with foreclosure; the amount thus awarded representing the excess of the contract price of $4250 over the total of payments made by the Conners to Womack, Womack's unpaid debts to workmen and materialmen and the jury's estimate of the cost to the Conners of completing the work after Womack's default and death. On appeal by the plaintiff bank the Court of Civil Appeals held — properly, we think — that the case should not have been tried on the substantial performance theory, but it also denied the bank's right to enforce the pledged note as a holder in due course of a negotiable instrument, held that it might recover only what its endorser, Womack, could recover under the lien contract and remanded the case for trial in quantum meruit. 209 S.W.2d 639, 641.

While agreeing that the trial court's judgment should in any event be reversed, we disagree with the decision to the extent that it denies altogether the bank's status as a holder in due course and therefore disagree also with the order for retrial of the whole case on the quantum meruit theory.

If the pledged note in suit was in fact negotiable and plaintiff bank a holder in due course from the payee, Womack, the effect of Womack's default under the lien contract is quite different from what it would be in cases like those cited by the Court of Civil Appeals, in which either there was no claim that the instrument in suit was negotiable or the controversy was between the maker on the one hand and on the other the payee rather than the endorsee. Where the suit is one by a holder in due course of a negotiable document, in connection with which other instruments have also been executed between the original parties, the rule, that all the instruments are to be treated as one, has no application, and the statement of the Court of Civil Appeals that "the mechanic's lien note along with the lien contract referred to in the note obligated the payee to construct the building" would not be apt; nor would such circumstances be a case for the further statement of the court that "the original payee could not have transferred a greater interest in the mechanic's lien note than he held himself." Art. 5932, Sec. 3, R.C.S.; Page v. Ford, 65 Or. 450, 131 P. 1013, 45 L.R.A.,N.S., 247, Ann.Cas.1915 A, 1048, and cases cited therein; also Ferring v. Verwey, 200 Wis. 631, 229 N.W. 46; Mortgage Bond Co. v. Stephens, 181 Okl. 182, 72 P.2d 831; Paepcke v. Paine, 253 Mich. 636, 235 N.W. 871, 75 A.L.R. 1205, and A.L.R. note following the report; Bailey, Negotiable Instruments and Contemporaneously Executed Written Contracts, 13 Texas Law Review 278, and 14 Texas Law Review 307. The fact that the mechanic's lien or other contract securing the note is executory in character and known by the noteholder so to be does not of itself make the note and contract a single non-negotiable instrument, when the note itself is otherwise in negotiable form. Lozano v. Meyers, Tex.Com.App., 18 S.W. 2d 588; West v. First Baptist Church of Taft, 123 Tex. 388, 71 S.W.2d 1090.

Doubtless what the Court of Civil Appeals intended to hold was that the hereinafter quoted language in the note itself conditioned the makers' obligations therein upon performance of the mechanic's lien contract by the payee-contractor, Womack, and so made the note non-negotiable under the applicable portions of Article 5932, R.C.S., which require its essential obligations to be unconditional in terms and certain or determinable as to amount and time of payment. The pertinent provisions of the note in suit read as follows:

"Failure to pay any portion of the principal or interest hereon * * *, or failure to perform any agreement contained in the below mentioned lien instrument shall, at the option of the holder thereof, mature this note.

"This note is secured by mechanic's lien of even date between Maker and Payee relating to: Lot 11 in Block 4, HOMER L. AIKMAN ADDITION to the City of Fort Worth in Tarrant County, Texas, to which said mechanic's lien contract reference is hereby made * * *." (Italics ours.)

Whether the Court of Civil Appeals meant to apply it here or not, the rule in this state undoubtedly is that before a reference in an otherwise negotiable instrument to another agreement will make the former non-negotiable, "it must appear therefrom that the paper is to be burdened with the conditions of the agreement." Arrington v. Mercantile Protective Bureau, Tex.Com.App., 24 S.W.2d 383, 384. The rule is not illogical when we regard on the one hand the basic statutory requirements for negotiability consisting of absoluteness and certainty in terms, Art. 5932, Sec. 1, R.C.S., and on the other hand the explanations in the same article, Sections 3 and 5, that the terms of the instrument are not rendered conditional by inserting therein (a) "a statement of the transaction which gives rise to the instrument"; or (b) a provision which "Authorizes the sale of collateral securities in case the instrument be not paid at maturity." The statutes do not limit the length or particularity of the reference in the instrument to the underlying transaction or the security for the instrument. Conceivably the "statement" might consist of a complete copy of the instrument referred to. Only when it ceases to be a "statement" and becomes something else can it affect the negotiability of the document in question. See Ferring v. Verwe, supra.

The above quoted provisions of the note in suit are the only ones that could conceivably be said to change the clearly unconditional and certain obligations set forth in the first part of the same instrument, which are in the time-honored form of a negotiable promissory note. In our view, they do not purport to do so. With the one possible exception below discussed, the quoted provisions are either a mere "statement" expressly permitted by Article 5932, Section 3, above-mentioned, or a reference to the security given for the note as impliedly authorized, we believe, by Section 5 of the same article. In the quoted language, plainly no particular phrase regarding the relationship between the note and the lien contract contains the words "burdened with," "subject to" or their equivalent. The expression "to which said mechanic's lien contract reference is hereby made" seems either the usual layman's idea of "making it legal" or just another instance of our inherited professional weakness for tautology. It might also be explained as the convenient equivalent of a more elaborate "statement" of the underlying transaction as permitted by Art. 5932, supra. See Paepcke v. Paine, 253...