First Nat. Bank of Appleton v. Court

• Decision Date: 11 March 1924
• Citation: 183 Wis. 203,197 N.W. 798
• Parties: FIRST NAT. BANK OF APPLETON v. COURT.
• Court: Wisconsin Supreme Court

183 Wis. 203

197 N.W. 798

FIRST NAT. BANK OF APPLETON

v.COURT.

Supreme Court of Wisconsin.

March 11, 1924.

Appeal from Muncipal Court of Outagamie County; Albert M. Spencer, Judge.

Action by the First National Bank of Appleton against E. H. Court. Judgment for plaintiff, and defendant appeals. Affirmed.

In the year 1921 the N. Simon Cheese Company, a corporation, issued a large amount of common stock, and employed J. F. Havorka & Co., Incorporated, engaged in the stock brokerage business, to sell the same. On the 16th day of August, 1921, Havorka & Co., sold a small block of said stock to the defendant, and took from him his promissory note payable to it, for the sum of $1,000, six months after date, with interest at the rate of 7 per cent. per annum. Havorka & Co. thereupon indorsed this note to the N. Simon Cheese Company, a corporation, without recourse. The cheese company, located in Appleton, Wis., for many years prior to the 16th day of August, 1921, had been a customer of the plaintiff bank, had an open checking account with such bank, and during such period transacted a large amount of business. On August 19, 1921, being three days after the execution of the said note, the cheese company indorsed the note to the plaintiff, and the plaintiff thereupon gave the cheese company credit on its open checking account. On the date of the indorsement of the note to the plaintiff, the cheese company at the opening of business on that day had to its credit in its account with the plaintiff bank a balance of $20,739.23. On the same day the bank honored and paid checks of the cheese company aggregating $90,959.50, leaving a balance at the close of business on that day to the credit of the cheese company of $14,289.20. This would indicate that on said last-named date the cheese company had made sufficient deposits to the credit of its account in the bank to account for such balance at the close of such day.

The evidence also shows that defendant's note was taken by the bank in the usual course of business, and that thereafter it had no further dealing with the cheese company with respect to this note, and that it had no conversation until after the maturity of the note, with any of its officers or agents, on account of such note; that the officers of the bank had knowledge of the sale of stock by the cheese company, and that they presumed such note was given in payment of the purchase price of stock. It also appears that the president of the bank, who represented the same at the time of the discount of the note, had not prior thereto been acquainted with Havorka & Co., and that he had made no investigation to determine what right Havorka & Co. had in and to the note.

In his answer the defendant alleges that the sale of the shares of stock to the defendant by Havorka & Co. was induced by various alleged false and fraudulent representations, and that, relying upon such representations, such note was executed, and that the bank had notice of such fraud, and that it had not become the holder of the note in due course.

At the conclusion of the trial, upon motion of the plaintiff, the court directed a verdict in favor of the plaintiff for the full amount of the principal and interest of the note, together with costs, whereupon judgment was entered in plaintiff's favor accordingly, from which judgment the defendant has taken this appeal. Further facts will appear in the opinion.C. G. Cannon, of Appleton, for appellant.

Julius P. Frank, of Appleton, and James H. McGillan, of Green Bay, of counsel, for respondent.

DOERFLER, J. (after stating the facts as above).

A vital, concrete proposition here presented is whether a bank in discounting a note of one of its depositors, and crediting the amount to the checking account of such depositor, becomes the bona fide owner of such note for value, where it appears from the evidence that on the date of the discount the depositor added largely to his balance by additional deposits, but withdrew from his account by checks actually paid an amount sufficiently large so as to leave to his credit at the close of business on that day a sum considerably less than the amount to his credit at the opening of business on that day, but leaving a balance at the close of business largely in excess of the amount credited by the discount of the note.

[1] It has been firmly established in this state and throughout the country that a bank is not a holder in due course of a negotiable instrument in its possession, unless it has honored and paid checks of the depositor, or has given value for the note, or has assumed an obligation of the depositor on account of the discount of the note. Under such circumstances the mere relationship of debtor and creditor is created between the bank and the depositor, and so long as that relation continues, and the deposit is not drawn out, the bank is held subject to the equities of the prior parties, notwithstanding the note was taken before maturity and without notice of any infirmity therein.

In Mann v. Second Nat. Bank, 30 Kan. 412, 1 Pac. 579, the court said:

“The proposition rests on the plainest principles of justice, and in no manner impairs the desired negotiability and security of commercial paper. Whenever the holder is a bona fide holder, he has the right to claim protection, but protection only to the extent he has lost or been injured by the acquisition of the paper. If he has parted with value, either by a cash payment or the cancellation of a debt, or giving time on the debt, or in any other manner, to that extent he has a right to claim protection; but when he has parted with nothing, there is nothing to protect. A mere promise to pay is no payment. He may rightfully say to the party from whom he purchased: ‘The paper you have given me is valueless, and therefore I am under no obligations to pay;’ and if the paper be in fact valueless, payment cannot be compelled.”

Such, in substance, also is the holding of this court in Manufacturers' Nat. Bank v. Newell, 71 Wis. 309, 315, 37 N. W. 420;Hodge v. Smith, 130 Wis. 326, 334, 110 N. W. 192;Northfield Nat. Bank v. Arndt, 132 Wis. 383, 112 N. W. 451, 12 L. R. A. (N. S.) 82;Curry v. Wis. Nat. Bank, 149 Wis. 413, 136 N. W. 549. This doctrine is generally accepted in the state courts outside of Wisconsin, and in the federal courts.

When the note proves valueless, or the bank receives notice of infirmity of the note, it can return the note to the depositor, and debit his account for the amount thereof.

In the case of Manufacturers' Nat. Bank of Racine v. Newell, supra, the bank discounted the note for a company, and credited it with the amount, and such credit subsequently increased so that at the time of suit on the note the bank had parted with nothing of value for it. It was held that the bank was not a bona fide purchaser for value. In the opinion in that case the following appears:

“But here it conclusively appears that the bank did not pay the company the amount of the note at the time of giving the credit to the latter on its books, nor any part thereof; on the contrary, it was then owing the company over $40,000 on its bank account. The taking of the note and giving the credit simply increased the amount of that indebtedness. * * * Of course, there was an implied obligation on the part of the bank to honor the checks and drafts of the company to the extent of such indebtedness. * * * But there is not a particle of evidence that any such check or draft was ever given.”

It will be noted that in the Newell Case there was no evidence in the record to show that the amount credited had at any time been to any extent depleted. The same doctrine is also held in Hodge v. Smith, supra.

In the case of Northfield Nat. Bank v. Arndt, supra, the following will appear under the second headnote of the case:

“A bank purchased a note from depositors, placing the amount paid therefor to their credit on account subject to check. The balances on such account varied, and at times it was overdrawn, before the maturity of the note. Held, that the fact that at various dates, including the date of purchase and the date of maturity of the note, the amount to the credit of the sellers exceeded the amount due on the note, did not prevent the bank from being a bona fide purchaser for value.”

It will thus appear from the Arndt Case that, notwithstanding the fact that at the time of the purchase of the note, and at the time of the maturity thereof, the depositor had to his credit an amount in excess of the amount of the note, such fact...