Hancock Savings Bank v. McMahon

• Decision Date: 16 March 1926
• Docket Number: 37200
• Citation: 208 N.W. 74,201 Iowa 657
• Parties: HANCOCK SAVINGS BANK, Appellant, v. GEORGE MCMAHON et al., Appellees
• Court: Iowa Supreme Court

208 N.W. 74

201 Iowa 657

HANCOCK SAVINGS BANK, Appellant, v. GEORGE MCMAHON et al., Appellees

No. 37200

Supreme Court of Iowa, Des Moines

March 16, 1926

Appeal from Polk District Court.--JOSEPH E. MEYER, Judge.

ACTION at law upon two promissory notes for $ 5,000 and $ 400 respectively, executed by defendant McMahon and guaranteed by his codefendant. The controversy presented is upon the defense of the principal defendant. This was that the $ 5,000 note was a mere renewal of a former note or notes to which the defendant had a valid defense, but had not discovered the same at the time the note in suit was signed. The alleged valid defense was that the original note was obtained by fraud, and that it was delivered conditionally and the condition violated. There was a verdict for this defendant and judgment thereon, and the plaintiff has appealed.

Reversed.

Miller Kelly, Shuttleworth & McManus, for appellant.

Stewart & Hextell, for appellees.

EVANS, J. DE GRAFF, C. J., and ALBERT and MORLING, JJ., concur.

OPINION

EVANS, J.

I.

Each of the notes in suit was given on November 10, 1922. The larger note was given in renewal of a former note, and the smaller note was given for interest accrued on such former note. In our consideration of the case, we shall confine discussion to the $ 5,000 note. Our conclusion on that branch of the case will be decisive of the other.

The note in suit was the second renewal of an original note given by this defendant to the plaintiff on October 28, 1921. In consideration thereof, the plaintiff surrendered a note of like amount which it had held against one Wencks. The defense pleaded is predicated upon certain events which occurred on March 16, 1920. We shall, therefore, take such date as our starting point. On that date a meeting of the board of directors of a certain corporation known as the Consolidated Chemical Products Company was held in the city of Des Moines. The following appears as a part of the minutes of such meeting:

"It was decided by the board to borrow some money for the purpose of paying up the standing current indebtedness and buying materials for operation in the future, whereupon, Mr. Fred J. Boie moved, and Dr. McMahon seconded, the following resolution be adopted:

"Resolved that the officers of the Consolidated Chemical Products Company be and they are hereby authorized to borrow money for the payment of current expenses and for the purpose of buying and having on hand materials for future operation, and that they are hereby authorized to pledge the property of the company, including all property, personal and real, belonging to the Consolidated Chemical Products Company, for the purpose of securing and repaying the loan, and that the same be preferred claim upon the property of the company and be paid before any dividends are paid to stockholders. This resolution was unanimously carried."

The Dr. McMahon named in such minutes is the defendant herein. He had been a director for several years in such company, and so continued, either as director or president, during the entire time covering the transactions involved herein. This corporation had its chemical plant located at Alton, Illinois. The directorate appears to have consisted in the main of physicians and cashiers of small banks. The corporation itself had no line of credit upon which it could draw for the borrowing of money. The purpose of the foregoing resolution was to offer protection to such of the directors as would aid it in borrowing money. The plan orally adopted at that meeting was that each of the directors would loan $ 5,000 to the corporation and take the corporation's promissory note therefor. In order to carry out this plan, it was necessary for a majority of these directors to borrow the money themselves, and this they proceeded to do. Wencks was the cashier of the State Bank of Klemme. Boie was the cashier of the Hancock Savings Bank, plaintiff herein. This defendant borrowed $ 5,000 from the State Bank of Klemme, and gave his note therefor. The corporation guaranteed the note. It also executed its promissory note for a like amount to this defendant. Wencks, the cashier of the State Savings Bank of Klemme, borrowed $ 5,000 from the Hancock Savings Bank. Boie, cashier of the Hancock Savings Bank, borrowed $ 5,000 from some other bank. Such were the events of this date. These various notes were renewed by their makers from time to time until October 28, 1921. On that date, by mutual arrangement of the directors, this defendant executed his note for $ 5,000 to the Hancock Savings Bank, in consideration of which such bank surrendered its Wencks note, and in consideration of which also this defendant received back the $ 5,000 note held against him by the State Bank of Klemme. The defense pleaded is directed against the note executed by this defendant to the State Bank of Klemme on March 16, 1920. The substance of such defense is: (1) That he received no consideration for it; (2) that it was delivered conditionally, and the condition was broken; (3) that he was deceived and defrauded, in that it was agreed that each director would advance to the corporation the sum of $ 5,000, whereas some of the directors did not do so.

The further averment is that this defendant had not discovered the fraud or the breach now complained of, at the time he executed the note in suit to the Hancock Savings Bank. We think the defense pleaded is wholly beside the mark. No fraud is charged as against the Hancock Savings Bank in obtaining the defendant's note on October 28, 1921. It had no claim upon him prior to that time. It did hold the note of Wencks for a like amount. That note was never impeached as a good and valid obligation. Suppose it be true that the defendant had a good and valid defense against the note held by the State Bank of Klemme. This plaintiff had no interest in such note, and could be in no manner affected by a defense thereto, if one had been interposed. Its acceptance of the McMahon note October 28, 1921, in exchange for the Wencks note, was abundant consideration, regardless of whether McMahon himself received any benefit therefrom. His argument is that he had a good defense against the State Bank of Klemme, and that, therefore, the return of such note to him constituted no consideration. The argument is untenable. The case of the defendant is presented upon the theory that his note to the plaintiff on October 28, 1921, was a mere renewal of the note to the State Bank of Klemme. This is a mistaken premise, and has led the defendant quite astray. The plaintiff-bank was not a purchaser of the defendant's note from the State Bank of Klemme. It never had any interest in such note. No question of holder in due course is involved. The original note executed by the defendant, so far as this plaintiff is concerned, was so executed to the plaintiff as payee. No allegation of fraud is directed to that transaction. It is simply alleged that the defendant had not yet discovered the fraud. And thus was the case submitted to the jury on the theory that, if the defendant proved a good defense to his note as against the State Bank of Klemme and that he had not discovered such defense when he executed his note to the...