First Nat. Bank v. Yowell

• Decision Date: 11 June 1927
• Parties: FIRST NAT. BANK OF SPARTA v. YOWELL.
• Court: Tennessee Supreme Court

294 S.W. 1101

155 Tenn. 430

FIRST NAT. BANK OF SPARTA v. YOWELL.

Supreme Court of Tennessee.

June 11, 1927

Appeal from Chancery Court, Davidson County; James B. Newman Chancellor.

Bill by the First National Bank of Sparta against James A. Yowell. From a decree overruling a demurrer to the bill, the defendant appeals. Decree sustained, and cause remanded.

CHAMBLISS J.

This appeal is from a decree overruling a demurrer to a bill filed to recover on a certain promissory note. The demurrer challenged the right to recover on this note on the ground in substance, that it appeared from the bill that this note had been canceled and extinguished by the execution and delivery to the complainant holder of a renewal or extension note of like amount and with the same payor and payee. It further appeared that suit had been brought by complainant on said renewal note and recovery denied because it was shown that said renewal note had been materially altered by the raising of the interest rate thereon without the consent of the maker. Following the dismissal of its former suit on the renewal note, this suit was brought on the theory that the renewal note, being an unenforceable evidence of a valid obligation, did not extinguish the original obligation and restored, or left open, the right of recovery on the original note.

The bill not only fails to show affirmatively that the alteration was fraudulently made, but charges that the change in the interest rate was made at the time the renewal was accepted under circumstances and upon representations of the indorser who arranged for the renewal, which, while not effective to bind the maker, indicated good faith on the part of the complainant holder.

The opinion of this court in Columbia Grocery Co. v. Marshall, 131 Tenn. 270, 278, 174 S.W. 1108, relied on by counsel for appellee, has application here. In that case recovery on the original debt was denied, when notes had been executed and accepted therefor and then materially altered by the holder, but this was put expressly on the ground that the alteration had been fraudulently made, and the opinion clearly recognizes the right of the holder, in the absence of a showing of fraud, to recover on the original obligation, which in the instant case was the note sued on.

While the general rule is that the holder may not fall back on the original contract or consideration where the note taken has been materially altered (3 R. C. L. 1110), yet "the cases seem to be harmonious upon the proposition that where an alteration is made under an honest mistake of right, and not fraudulently and with a view to gain an improper advantage, a recovery made be had upon the original consideration of the instrument" (3 R. C. L. 1112, citing authorities which clearly sustain this text). In a leading case, Vogle v. Ripper, 34 Ill. 100, 85 Am. Dec. 298, the notes were altered so as to call for a higher rate of interest. It was held that while the identity of the instrument was destroyed, and recovery could not be had thereon, finding that it did not appear that the alteration was made fraudulently, recovery was granted on the original consideration. The court said:

"We think the intention with which the alterations were made is a material fact. The character of the act and the effect of it depend upon the intention with which it was done."

And, again:

"Where the alteration was not fraudulent, although the identity of the instrument may be destroyed, we think it should not cancel a debt, of which the instrument was merely evidence. If there was no attempt to defraud, there is no reason why a court should not assist the creditor as far as it can consistently."

In a note in 17 Am. Rep. 105, the same rule is laid down.

In Otto v. Halff, 89 Tex. 384, 34 S.W. 910, 59 Am. St. Rep. 56, the note was altered so as to bear interest from date instead of from maturity. While holding the alteration material, and that the note could not be recovered on, the right of recovery on the original consideration was recognized, the alteration not having been made with fraudulent intent. The cases are reviewed and those in apparent conflict are distinguished. In addition to many cases cited, the court quotes from 2 Daniel on Negotiable Ins. p. 1413, as follows:

"When an instrument has been materially altered it cannot be sued upon in its altered form nor read in evidence to support an action even when brought by a bona fide holder without notice; but when the party making the alteration discharges the burden of proof upon him by showing that the material alteration was made by mistake and without fraudulent intent, the right of action upon the consideration for which it was given remains."

The principle of the general rule appears to be that:

"No one should be permitted to take the chance of committing a fraud without running any risk of losing by the event when it is detected."

But this principle does not apply in the absence of fraudulent intent.

To the same effect is Walton Plow Co. v. Campbell, 35 Neb. 173, 52 N.W. 883, 16 L. R. A. 468, wherein a nonnegotiable note was changed to bearer. The court found the alteration to have been fraudulently made and applied the general rule and held the debt evidenced by the note and secured by a mortgage canceled. However, the intention was declared to be controlling, and it was held that where the alteration was "innocently made under an honest mistake of right, * * * while the alteration vitiates the instrument, it would not defeat a recovery upon the original consideration for which such note was given."

An early Tennessee case, Kennel v. Muncey, Peck, 273, was an action of debt upon a note of hand which the defendant alleged to have been altered from $1,764 to $1,794. While it was held that the alteration vitiated the note so as to cut off recovery thereon, recovery was allowed under a second count on the original consideration, the note not being an extinguishment of the precedent demand on which it was founded. The question of the extinguishment of the debt by the making of the alteration does not appear to have been raised or considered. In Stroud v. Rankin, 2 Baxt. 74, it was said:

"In most of the cases supposed to hold that the giving of a note leaves the original demand in full force, it will be found that the note itself was not an effective and valid security in the hands of the payee, as in the case of Kennel v. Muncey, Peck's R. 273, where the note was claimed to have been rendered invalid, and not enforceable, by reason of an alteration without the consent of the maker," etc.

This language would seem to recognize as established the right of a holder of an instrument which has been rendered invalid by his alteration to fall back on the original consideration; but we think this general statement is subject on principle and authority to the modification that the holder must show that in making the alteration he acted without fraudulent intent, but innocently and under a mistaken apprehension of right. Such, according to the allegations of the bill which the demurrer admits to be true, are the facts in the instant case.

The pertinent language of the opinion in Grocery Co. v. Marshall, supra, was as follows:

"Thus, if a holder of a promissory note makes a material alteration in it after its execution but without any design to defraud, and in the belief that he had a right to alter it in order to make it conform to the original agreement of the parties, such alteration does not deprive the holder of the right to elect to disregard the note and to sue on the original obligation, provided the note was not accepted as payment thereof."

As has been seen, this is undoubtedly the rule and fits the facts of the instant case, unless the concluding qualifying proviso has application here.

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