First Nat. Bank of Willmar v. Malmquist

• Decision Date: 08 February 1924
• Docket Number: No. 23622.,23622.
• Citation: 197 N.W. 271,158 Minn. 140
• Parties: FIRST NAT. BANK OF WILLMAR v. MALMQUIST et al.
• Court: Minnesota Supreme Court

158 Minn. 140

197 N.W. 271

FIRST NAT. BANK OF WILLMAR

v.MALMQUIST et al.

No. 23622.

Supreme Court of Minnesota.

Feb. 8, 1924.

Appeal from District Court, Meeker County; G. E. Qvale, Judge.

Action by the First National Bank of Willmar against Nels O. Malmquist and others. From an order denying their alternative motion for judgment or a new trial, defendants appeal. Affirmed.

Syllabus by the Court

A bank which takes by indorsement an accommodation promissory note, knowing it to be accommodation, as collateral security to an antecedent liability of a bank as an indorser on discounted paper, is protected against defenses of the maker just as a bona fide purchaser of negotiable paper for which a present consideration is given is protected. Under sections 25, 26 of the Negotiable Instruments Act the indorsee taking for a pre-existing debt is a holder for value, and under section 29 it is no defense to the accommodation maker that the indorsee knew that he was an accommodation party.

Where there is fraud in the inception of a note, so that the indorsee takes through a defective title, the burden is upon him to prove that his purchase was in good faith without notice.

The evidence required a holding, as a matter of law, that the plaintiff bank, which took by indorsement from a bank an accommodation note as security for such bank's indorsements of paper discounted, sustained the burden of proof that it was a good-faith purchaser.

Under the evidence the accommodation note was indorsed and delivered to the plaintiff bank as collateral security for the continuing liability of the indorsing bank upon paper then or afterwards discounted.

Though the plaintiff, after taking the collateral note, acquired notice that the defendants had or claimed a defense, it could hold such note as security for the amount of the continuing liability of its indorser, existing at the time the collateral note was taken, though the form of the indorsed obligations changed, different ones taking their place, so long as such liability of its indorser exceeded the collateral note.

The plaintiff having assumed and sustained the burden of proving that it was a purchaser in good faith, though it took through a defective title, it was not error to reject testimony of the defendants, offered in proof of fraud in the inception of the note, for, if proved, the result would not be different. L. K. Sexton, E. W. Campbell, and Alva R. Hunt, all of Litchfield, for appellants.

Daly & Barnard, of Renville, 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] 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. Rep. 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 pre-existing 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. Brannon 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. 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...