First Nat. Bank of Fort Dodge v. McCartan

• Citation: 220 N.W. 364,206 Iowa 1036
• Decision Date: 05 April 1927
• Docket Number: 37985
• Parties: FIRST NATIONAL BANK OF FORT DODGE, Appellant, v. J. H. MCCARTAN et al., Appellees
• Court: United States State Supreme Court of Iowa

220 N.W. 364

206 Iowa 1036

FIRST NATIONAL BANK OF FORT DODGE, Appellant, v. J. H. MCCARTAN et al., Appellees

No. 37985

Supreme Court of Iowa, Des Moines

April 5, 1927

OPINION ON REHEARING JUNE 26, 1928.

REHEARING DENIED OCTOBER 26, 1928.

Appeal from Pocahontas District Court.--F. C. DAVIDSON, Judge.

This was an action on a promissory note. Defense was based upon the proposition that the instrument was for accommodation only, and delivered in blank to one C. B. McCartan, for the benefit of a certain bank, but that said McCartan inserted his own name as payee, and transferred the document in breach of faith. Plaintiff, in reply, pleaded estoppel, based upon defendants' negligence in placing their signature on the blank paper, thus invoking the rule that, where one of two innocent purchasers must suffer, he who made it possible for his agent to cause the loss must bear it.

Reversed.

Kelleher & Mitchell, for appellant.

Heald Cook & Heald and F. P. Hogan, for appellees.

KINDIG J. DE GRAFF, ALBERT, and WAGNER, JJ., concur, EVANS and MORLING, JJ., specially concur, STEVENS, C. J., concurs in result. FAVILLE, J., took no part.

OPINION

KINDIG, J.

A rehearing was granted in this cause. Consequently, this is the second opinion. For the first decision, see 213 N.W. 408.

There is no doubt that J. H. McCartan (now deceased) and R. B. McCartan were accommodation makers of the note. The facts and circumstances are:

Two banks, the First National and the McCartan State, both of Pocahontas, were operated as associate concerns. One C. B. McCartan, his mother, Ella, and brother, Theodore, owned much of the stock of each. C. B. McCartan was cashier of the latter institution. Those makers of the note above named were the uncles of C. B. Perhaps because of that relationship, and the further fact that J. H. and R. B. had previously aided him and his mother financially, C. B. approached them for monetary assistance, under the following conditions: Through the voluntary action of the stockholders, an assessment approximating 100 per cent had been levied against the stock of each bank. Therefore, on Sunday, August 8, 1923, C. B. McCartan journeyed to his uncles' farm, and requested them to sign an accommodation note for $ 7,500, to accomplish which a blank form was left; and on Monday morning, in compliance with the nephew's entreaty, J. H. and R. B. affixed their names thereto, without filling any of the blanks, and placed the same in the mail, addressed to C. B., unaccompanied by any letter of instructions. Upon receipt thereof, the addressee completed the "note" by writing in the proper places the amount and date of maturity, which were "$ 7,500" and "one year," respectively. That was unobjectionable, and about it no complaint is made.

In addition, however, C. B. also, in the appropriate space, inserted his own name as payee. About this the controversy centers, and will be hereafter discussed. Subsequently, and within a brief time, C. B. McCartan sold the "note" to the McCartan State Bank, and placed the proceeds thereof to his own credit in the same institution. Then he immediately proceeded to apply the entire sum in payment of the "assessment" made against the stock which he, his mother, and brother held.

Next in the course of events was the negotiation of this "note" by the McCartan State Bank for full value to the appellant. When suit was brought, appellees defended upon the ground that the "note" was nonnegotiable, and therefore subject to any defense which the "makers" might have against C. B. McCartan,--which plea is that the understanding and agreement between J. H., R. B., and C. B. McCartan were to the effect that the signers of the "note" were to so become for the "accommodation" of the "bank" only, and not for C. B. McCartan, as he himself by unauthorized insertion made it appear. No claim is interposed as to which of the two banks it is, to which reference is there made.

Appellant urges two propositions on this appeal.

I. Does the following acceleration clause destroy the negotiability?

"It is also agreed that should the holders of this note at any time deem themselves insecure, they may demand such additional security as may seem to them necessary, a failure to comply with such demand causing this note to become due and payable at once."

Attempt at reconciliation between conflicting views of the judicial decisions on this point in the various states is not necessary, for the reason that this court has previously taken a definite stand. Iowa Nat. Bank v. Carter, 144 Iowa 715, 123 N.W. 237; Quinn v. Bane, 182 Iowa 843, 164 N.W. 788. Iowa Nat. Bank v. Carter, supra, contains the ensuing appropriate discussion:

"It is fundamental, of course, that to make a note negotiable it must be certain both as to time and amount of payment. * * * 'An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.' Before the adoption of the Negotiable Instruments Law, we had held that these provisions [acceleration clauses] in a note and mortgage rendered it nonnegotiable. * * * Since the general adoption of the Negotiable Instruments Act, the courts have held to the same doctrine. * * *"

State Bank of Halstad v. Bilstad, 162 Iowa 433, does not modify the Carter case, for, as shown by 144 N.W. 363, there was removed from the Bilstad case the following sentence:

"So far as the Carter case holds the notes therein considered nonnegotiable because of uncertainty as to time of payment, it should be modified, because the statute expressly makes notes payable on or before a fixed date negotiable."

Inconsistency does not appear in Des Moines Sav. Bank v. Arthur, 163 Iowa 205, 143 N.W. 556. Involved in that decision was an "acceleration clause" in a mortgage, rather than in the "note," and the argument was that the language of that contract of security modified and influenced the written promise to pay, to the extent that it removed its "negotiability." We there said:

"The note was complete in itself * * *. The purpose of the mortgage was to afford security for the payment of the note * * *. While the note and mortgage are to be construed together whenever the nature of the transaction becomes material, this does not mean that the provisions of the mortgage are thereby incorporated into and become part of the note."

Accordingly, it appears that there had been no modification or abridgment of the doctrine announced by the Carter case. No incompatibility arises between that case and the following decisions: Des Moines Sav. Bank v. Arthur, supra; Commercial Sav. Bank v. Schaffer, 190 Iowa 1088, 181 N.W. 492; Hubbard v. Wallace Co., 201 Iowa 1143, 208 N.W. 730. Of course, the default of the maker in the payment of interest or the performance of some other agreement or covenant may accelerate the "due date," and in this event the instrument will still be negotiable, provided that it is payable upon a fixed or determinable future date; for under those circumstances "it [is] certain that the time [will] arrive when the note would be payable, and the circumstances that it might become payable before that time upon the default of the maker in certain respects at the option of the payee or holder [would] not affect its negotiability." Commercial Sav. Bank v. Schaffer, supra.

The criterion is, Does the election of the payee or holder to declare the paper due and payable independent of any fault and beyond the control of the maker render the contract nonnegotiable? Des Moines Sav. Bank v. Arthur, supra, aptly explains:

"* * * but the chattel mortgage securing the note there [Iowa Nat. Bank v. Carter, supra] held nonnegotiable provided that the note should become due and payable at the election of the payee or holder. This, being independent of any default of the maker, left him without protection, and such a clause is generally held to render the note, when construed in connection with the mortgage, nonnegotiable, as was decided in the above case."

Reference in the Arthur case was made to the following clause contained in the instrument in Iowa Nat. Bank v. Carter, supra:

"'* * * or if at any time the said party of the second part * * * shall deem themselves insecure, then the whole amount of said sum of money in said notes mentioned which shall not have been paid, * * * shall be immediately due and payable.'"

Inspecting now the phraseology of the paragraph involved in the case at bar, it is found that the undertaking was:

"It is also agreed that should the holder of this note at any time deem themselves insecure," etc.

Basis for this attitude is not the default of the maker, for he has no control over the "holder's" feeling in this regard, but rather, the option contemplated may arise at any time the whim or caprice of the "holder" so elects. Then, after the exercise of that option, "they [the holders] may demand such additional security as may seem to them necessary, a failure to comply with such demand causing this note to become due and payable at once." In other words, the "maker" is not in default in the first instance, and only becomes in that predicament through an election by the "holder" over which no one has any control except the elector himself. Presented here is a different situation from that which arises, causing "acceleration" because the "maker" fails to perform some duty, and for that reason is in default. Under the illustration, the "due date" is "advanced" because of the "maker's" failure; while in the actual case before us, the "advancement" was attempted, not because of the "maker's" omission, but due to the mere volition of the "holder." Applying the general principles to the facts here, it is found that the clause contained in the "no...