Farr-Barnes Lumber Co. v. Town of St. George

• Court: South Carolina Supreme Court
• Writing for the Court: MARION, J.
• Citation: Farr-Barnes Lumber Co. v. Town of St. George, 128 S.C. 67, 122 S.E. 24 (S.C. 1924)
• Decision Date: 14 March 1924
• Docket Number: 11451.
• Parties: FARR-BARNES LUMBER CO. v. TOWN OF ST. GEORGE.

122 S.E. 24

128 S.C. 67

FARR-BARNES LUMBER CO. v. TOWN OF ST. GEORGE.

No. 11451.

Supreme Court of South Carolina

March 14, 1924

Appeal from Common Pleas Circuit Court of Dorchester County; R. W Memminger, Judge.

Action by the Farr-Barnes Lumber Company against the Town of St George. Judgment for plaintiff, and defendant appeals. Affirmed.

Fraser J., dissenting.

R. Lon Weeks, of St. George, for appellant.

Legaré Walker, of Summerville, for respondent.

MARION J.

Action by the transferee of a promissory note against the maker. The trial court directed a verdict for the plaintiff. The defendant's appeal turns upon the question of whether there was error in the court's ruling that upon the evidence presented the plaintiff was a holder of the note in due course, against whom the defenses interposed by the defendant were not available.

The note was made by the defendant, the town of St. George, to one L. S. Traxler on August 12, 1920, and in form and tenor is as follows:

"November 15, after date for value received we promise to pay to the order of L. S. Traxler seven hundred and seventy-five and no/100 dollars negotiable and payable at ______ with interest at the rate of 8 per cent. per annum. In case of suit or collection by attorney, I also agree to pay 10 per cent. attorney's commissions."

The note was indorsed in blank by the payee, L. S. Traxler, and delivered to the Bank of St. George, with instructions to collect and apply the proceeds upon two notes of the said Traxler to the plaintiff, Farr-Barnes Lumber Company, in the amount of $1,400, which had been "discounted" by the bank and were then held by the bank in that capacity. These notes so held by the bank had been given by Traxler to the plaintiff lumber company in part payment of the purchase price of a steam engine and boiler, were secured by a chattel mortgage of this machinery attached to the notes, and carried the indorsement of the Farr-Barnes Lumber Company. The notes and mortgage were dated February 12, 1920, and the maturity date was subsequent to November 15, 1920. The note here in suit was given by the defendant town to Traxler, in payment of the purchase price of the boiler, which Traxler had bought from the lumber company six months before and for which he had given the notes and chattel mortgage then held by the bank. Shortly after the town purchased the boiler from Traxler, the lumber company learned of the sale and that the town's note for the purchase price had been placed with the bank. There was no formal release of the chattel mortgage on the boiler, but both the bank and the lumber company appear to have acquiesced in Traxler's action and to have tacitly accepted and treated the town's note as a substitute for the mortgage on the boiler. The town's note to Traxler, indorsed by him in blank, was delivered to the bank before maturity and without notice of any infirmity in the note. It was not credited by the bank upon Traxler's discounted notes to the lumber company, but was held for "collection and as additional security" to those notes. At maturity of the town's note to Traxler, the bank presented the note for payment, and payment was refused. The bank continued to hold the note. Thereafter the Traxler notes to the lumber company, discounted and held by the bank, fell due. They were not paid by Traxler, but were subsequently paid by the lumber company as indorser. The collateral, consisting of the chattel mortgage and the note of the town to Traxler, indorsed in blank by Traxler, was thereupon delivered by the bank to the lumber company. Upon the town's note to Traxler, thus acquired by it, the lumber company brought this action.

The Town, by its answer, alleged: (1) That the plaintiff acquired the note "after its maturity and not in due course"; (2) that the note was made and delivered to the payee, Traxler, in consideration of an express warranty of quality of the boiler, for the purchase price of which the note was given, and upon the condition that, if the boiler was found within a reasonable time not to be as represented, the note would "be canceled and delivered to the defendant," and that both the warranty and the executory agreement had been breached; and (3) that the plaintiff knew "shortly after defendant's examination of said boiler," and long before its acquirement of said note, that said boiler at the time of its purchase by defendant "was worthless and of no value and that defendant received no consideration for said note."

The plaintiff, having introduced in evidence the note in its possession, did not rest its case upon the prima facie showing thus made, but introduced other evidence directed to establishing the manner, time, and good faith of its acquirement of the note. The defendant offered evidence to establish failure of consideration and breach of the payee's agreement to cancel and deliver the note. The presiding judge ruled, in substance, that evidence directed to establishing those defenses would not be received until the defendant had introduced sufficient evidence tending to establish that the plaintiff was not a holder in due course to require submission of that issue to the jury. In so ruling, we think the trial court committed no error. For the purposes of the trial court in passing upon the evidence, the facts the excluded evidence would have tended to establish were in effect assumed as proved. In no view could the defendant have been prejudiced. The ruling is in accord with that made by the trial court in Bank v. Stackhouse, 91 S.C. 455, 74 S.E. 977, 40 L. R. A. (N. S.) 454, and upheld by this court for the reasons therein stated. See Farmers' & Mechanics' Bank v. Whitehead, 105 S.C. 100, 89 S.E. 657, and Bank v. Crawford, 103 S.C. 340, 88 S.E. 13.

The pivotal question is whether, under the facts, the court was correct in holding as a matter of law that the plaintiff was a holder in due course. Section 52 of the Negotiable Instrument Act (section 3703, vol. 3, Code 1922) defines a "holder in due course" as one--

"who has taken the instrument under the following conditions: (1) That it is complete and regular upon its face; (2) that he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (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 infirmity in the instrument or defect in the title of the person negotiating it."

Section 57 of the act (section 3708, vol. 3, Code, 1922) provides that--

"A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves," etc.

Section 58 of the act (section 3709, Code 1922) provides that--

"A holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect to all parties prior to the latter."

Applying the foregoing provisions of the statute to the facts, did the Bank of St.

George become a holder of this note in due course? That the note was (1) "complete and regular upon its face," (2) that the bank came into possession of it "before it was overdue and without notice that it had been previously dishonored," and (3) that at the time it was delivered to the bank it had "no notice of any infirmity in the instrument or defect in the title" of Traxler, the payee, who indorsed and delivered it, is not open to question and seems not to be disputed. The position of appellant is that the note was not negotiated to the bank and that the bank did not become a holder in due course because it did not take the note "in good faith and for value." The test of the validity of that position lies in the answer to the inquiry: What were the bank's legal rights in and to the note upon and after its delivery by Traxler to the bank?

The undisputed facts are that the note was indorsed in blank by the payee, Traxler. The title of the note thereupon passed by delivery to the bank (7 C.J. 599, § 246), subject only to such limitation as may be implied from the instruction to the bank to collect the note and apply upon a specified indebtedness of Traxler. That indebtedness was then owed to and owned by the bank. The undisputed fact is that the bank had "discounted" the Traxler notes to the lumber company upon which the town's note was to be applied. There is no suggestion in the evidence that the term "discounted," as used by witnesses in this connection, was employed in a sense other than that the bank had acquired the notes for value, was a holder thereof in due course, and had a right to hold either Traxler as maker, or the lumber company as indorser, for the payment thereof, at maturity. "Where one who deposits paper with a bank for collection is indebted to the bank, the bank has a lien on the paper and the proceeds thereof for the amount of such indebtedness." 7 C.J. 613; 3 R. C. L. 585, § 215. There was no express or implied agreement here that would prevent the attachment of the bank's lien. On the contrary, the express agreement was that the town's note deposited by Traxler with the bank was for collection and application to Traxler's notes then held by the bank. That the bank in that case by implication of law acquired a lien on the town note for the purpose of protecting the payment of Traxler's notes then held by it would not seem open to question. 3 R. C. L., 584, § 214. That such was the understanding of the bank is indicated by the statement several times repeated, of the defendant's witness, the cashier of the bank, that the town's note was received for collection and "as collateral," as ...