First Nat. Bank of Willmar v. Malmquist, 23,622.

• Court: Supreme Court of Minnesota (US)
• Citation: 158 Minn. 140
• Docket Number: No. 23,622.,23,622.
• Parties: FIRST NATIONAL BANK OF WILLMAR v. NELS O. MALMQUIST AND OTHERS.<SMALL><SUP>1</SUP></SMALL>
• Decision Date: 08 February 1924

Page 140

158 Minn. 140

FIRST NATIONAL BANK OF WILLMAR v. NELS O. MALMQUIST AND OTHERS.¹

No. 23,622.

Supreme Court of Minnesota.

February 8, 1924.

Action in the district court for Meeker county to recover upon a promissory note. The case was tried before Qvale, J., who at the close of the testimony denied defendants' motion for a directed verdict and granted plaintiff's motion for a directed verdict in its favor. From an order denying their motion for judgment notwithstanding the verdict or for a new trial, defendants appealed. Affirmed.

L. K. Sexton, E. W. Campbell and Alva R. Hunt, for appellants.

Daly & Barnard, for respondent.

DIBELL, J.

Action on a promissory note of $10,000, dated April 5, 1921, made by the defendants Malmquist to one Orred, by him indorsed to the Green Lake State Bank of Spicer, and by that bank indorsed to the plaintiff, First National Bank of Willmar. The court directed a verdict for the plaintiff. The defendants appeal from the order denying their alternative motion for judgment or a new trial.

The Green Lake bank was a correspondent of the Willmar bank. It indorsed to the Willmar bank negotiable paper and took credit on its drawing account. Shortly before maturity the Willmar bank returned the discounted paper to the Green Lake bank and charged its account. This was their way of doing business. Paper passed back and forth continuously. The amount of the discounts changed as paper came and was credited, or was returned and charged, and the drawing account of the Green Lake bank changed as credits were given and charges made and drafts drawn.

Prior to April 5, when the note was made, Orred, who was the cashier of the Green Lake bank, was an embezzler in excess of $75,000. The Green Lake bank knew of it some time before. The Willmar bank was apprised of it shortly before April 4. On that day the two banks went over the situation together. It was understood by both that Orred had forged notes. It was supposed, and it seems to be the fact, that some of the discounted notes in the Willmar bank were forged. The Willmar bank was willing to continue making discounts, but it insisted upon collateral. On April 9, 1921, the Green Lake bank indorsed to the Willmar bank the note of $10,000, and another note not here involved, as collateral. The Willmar bank receipted as follows:

"This is to acknowledge receipt of notes as follows: [Notes described.]

"These notes are held by this bank as security for any indebtedness owing by the Green Lake State Bank to this bank."

At this time the liability of the Green Lake bank on discounted paper was in excess of $30,000. The $10,000 collateral note was accommodation paper given by the Malmquists to Orred. The answer alleges that Orred procured the paper by fraud under circumstances making his title defective, and that the Green Lake bank and the Willmar bank had notice of the facts. It is to be taken as true, upon the record as it is, that the Green Lake bank held by a defective title, for an offer to prove the fact was rejected. And upon the record we assume that the plaintiff had notice that the note was given by the defendants as an accommodation to Orred.

The points involved may be roughly summarized:

(1) Whether one who takes accommodation paper, with knowledge that it is such, as collateral security for an antecedent debt, is protected as a good faith purchaser.

(2) Where the burden of proof of good faith rests when there is fraud in the inception of paper.

(3) Whether, as a matter of law, the plaintiff was a good faith purchaser of the collateral accommodation note.

(4) Whether the collateral note secured the continuing liability of the Green Lake bank on its indorsements of discounted paper, through the particular paper changed.

(5) Whether the effect of the plaintiff's acquiring notice, after it had taken the accommodation note, of a defense thereto, was to prevent it from holding it for such continuing liability which was always in excess of the note.

(6) Whether, the plaintiff having assumed and sustained the burden of proving that he was a good faith purchaser, notwithstanding the defective title of its indorser, it was error to reject proof of fraud in the inception of the collateral note.

1. It always has been the holding of this court, following the Federal rule, that one who takes by indorsement a promissory note as collateral security is a purchaser for value. Rosemond v. Graham, 54 Minn. 323, 56 N. W. 38, 40 Am. St. 336; Haugan v. Sunwall, 60 Minn. 367, 62 N. W. 398; First Nat. Bank v. Busch, 102 Minn. 365, 113 N. W. 898; German American State Bank v. Lyons, 127 Minn. 390, 149 N. W. 658. The facts in these cases arose prior to the enactment of the Uniform Negotiable Instruments Act. In the last case it was said that the holding was in harmony with section 25 of that act, G. S. 1913, § 5837, which provides that "an antecedent or preexisting debt constitutes value." Section 26 makes a holder under section 25 a holder for value. The doctrine was applied, after the Negotiable Instruments Act, in Snelling State Bank v. Clasen, 132 Minn. 404, 157 N. W. 643, 6 A. L. R. 1663, and Bank of Montreal v. Beecher, 133 Minn. 81, 157 N. W. 1070, without a reference to the act. Apparently it was not in mind. It is the practically universal holding under the act. Brannan, Neg. Inst. Act. p. 98, § 25.

The doctrine of this court, embodied in the uniform act, is that a bank purchasing in good faith without notice, crediting the account of its indorser, and afterwards acquiring notice, is only protected in the amount of the credit then drawn. 1 Dunnell, Minn. Dig. § 952; Neg. Inst. Act. § 54, G. S. 1913, § 5866. This doctrine has no application to the rule embodied in section 25 and is not a limitation upon it.

By section 29 of the uniform act, G. S. 1913, § 5841, an accommodation party "is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party." The proper construction of section 29, applicable to the situation presented by the record before us, having in view section 25, is that one who takes bona fide and in due course accommodation paper, knowing it to be accommodation, as collateral to an antecedent debt is protected just as a bona fide purchaser upon a present consideration, or one who in good faith takes other paper as collateral security for an antecedent debt, is protected. The authorities, so far as we find any directly to the point, so hold. Elgin Nat. Bank v. Goecke, 295 Ill. 403, 129 N. E. 149; Elgin Nat. Bank v. Goecke, 213 Ill. App. 559; Neal v. Wilson, 213 Mass. 336, 100 N. E. 544; Fox v. State, 102 Ark. 451, 145 S. W. 228. The plaintiff was a holder for value under sections 25, 26, and the defendants were liable to it under section 29, though it knew they were accommodation makers.

2. When there is fraud in the inception of the note, and on the record we must...