Hills v. Gardiner Sav. Institution

• Decision Date: 03 October 1973
• Citation: 309 A.2d 877
• Parties: Milton B. HILLS v. GARDINER SAVINGS INSTITUTION.
• Court: Maine Supreme Court

Page 877

309 A.2d 877

Milton B. HILLS v. GARDINER SAVINGS INSTITUTION.

Supreme Judicial Court of Maine.

Oct. 3, 1973.

David A. Nichols, Camden, for plaintiff.

Sanborn, Moreshead & Schade, by Richard B. Sanborn, Augusta, for defendant.

Before DUFRESNE, C. J., and WEATHERBEE, POMEROY, WERNICK and ARCHIBALD, JJ.

WEATHERBEE, Justice.

This case is on appeal from a Superior Court judgment for the Defendant-Appellee in the amount of $38,542.53, plus certain interest. Although the Plaintiff-Appellant had initially sought a declaratory judgment concerning the parties' rights and obligations, trial actually ensued on the Defendant's counterclaim for judgment on a document signed by the Plaintiff. The Defendant's counterclaim characterizes the document as a contractual guarantee by the Plaintiff to pay the amount of a certain promissory note upon default of the makers. The Plaintiff, however, urges that his signature is merely that of an endorser, thus giving him a status which would require presentment and notice of dishonor prior to his liability on the note. The basic issue on appeal is the determination of the extent of Plaintiff's liability resulting from his signature on the document in question.

The germane facts, if not their interpretation, are clear. A certain couple named Roberts were developers of real estate in Liberty and Montville, both developments being financed by mortgages from the Defendant bank beginning in 1957. Difficulties arose, and in 1963 the bank began to foreclose its mortgages on both properties which secured indebtedness totalling $46,500. Meanwhile, the developers were also in debt about $26,000 to the Plaintiff, a supplier of materials to the Montville development. The Plaintiff had recorded a materialman's lien for $21,364.26 in August of 1963.

In an effort to salvage the situation, the Plaintiff, Defendant and developers met. On January 8, 1964 the developers executed a promissory note in the amount of $30,200 in return for some new financing from the bank. The note obligated the developers to repay their debt in equal monthly installments of $254.86. The Plaintiff agreed to drop his lien and received certain first, second and third mortgages on some property of the developers. The bank placed this indebtedness 'on the books' after the Plaintiff signed the separate document, ¹ the effect of which is the crux of this controversy.

The document states that the Plaintiff was 'endorsing' the above note, a note the document seeks to incorporate into this 'endorsement' by reference. His liability is restricted by requiring that any holder of the note first exhaust foreclosure and sale remedies against the principal before asserting a deficiency against the Plaintiff. The Plaintiff also reserved the right to purchase the above note and to demand assignment of any security upon default of the maker. The document contains no acceleration clause and is not dated, though it evidently was signed by the Plaintiff at least by January 24, 1964. Upon signing this document, Plainitff discharged his lien of record.

The testimony shows that no monthly payments whatsoever have been received by the bank from the developers pursuant to the above note. The bank, as well as the Plaintiff, was forced to foreclose again and apply the resulting money to its indebtedness due from the developers.

Whether the Plaintiff was kept informed of the developers' lack of payment is disputed in the record. The Defendant bank claims that it conferred with, sent letters to and called the Plaintiff to tell him of the situation. The bank also claims that despite these efforts, no response was ever received from the Plaintiff. The Plaintiff asserts that he did not receive notice of the financial problems until months later.

When the bank sought full payment of the amount of the note from him, the Plaintiff commenced his aforementioned declaratory judgment petition, which later was dropped in favor of trial on the Defendant's counterclaim. At the time of trial, 57 monthly installments were due and payable.

First, we must determine whether the document signed by the Plaintiff is an endorsement of the developers' note as claimed by the Plaintiff. As this document was executed in January, 1964, prior to Maine's adoption of the Uniform Commercial Code (U.C.C.), it is agreed that the applicable law governing this issue is the Uniform Negotiable Instruments Act (N.I.L.), formerly Chapter 188 of R.S.1954.

The N.I.L. clearly indicates the requirements for creating an effective endorsement of a negotiable instrument such as the note in question. Section 31 of that Act states that '(t)he indorsement must be written on the instrument itself or upon a paper attached thereto.' (Emphasis added.) This is not to say that the endorsement must be signed at the time of the note's execution, but the endorsement must become physically a part of the note by attachment of some type. An instrument's usefulness in negotiation or transfer can only be evidenced by looking at it or any attachments and determining if any endorsements of any kind exist. This N.I.L. requirement of 'attachment' had been the law of Maine since the N.I.L.'s adoption in 1917.

In the instant case, the record discloses that the Plaintiff signed the document within two weeks of the making of the note and sent the document to the Defendant. The Plaintiff's signature appears only on this document, a separate piece of paper which is not and has not been attached to the note. Although the words 'endorse' and 'endorsement' appear on the document, that paper cannot serve as an effective endorsement under the N.I.L. unless the dictates of section 31 are met.

Additionally, Plaintiff argues that the document he signed incorporates the note by reference and is thus an endorsement 'on' the note. Although the doctrine of incorporation by reference is commonly used in wills and contracts, we can find no instance in which it exists in the area of endorsements of negotiable instruments. Although Plaintiff's document attempts expressly to incorporate the note, the Plaintiff cites no authority for this usage of the doctrine and we ourselves can find none. This Court is not persuaded that it should extend the doctrine to endorsements of negotiable instruments. Adoption of the incorporation doctrine could well undermine the precise mandate of N.I.L. section 31 and the smooth functioning of the negotiation process itself. No cogent reasons exist for changing the long-held requirement of attachment of an endorsement to the instrument. In fact, this requirement is continued by the even stricter language of the N.I.L.'s successor, the U.C.C., in 11 M.R.S.A. § 3-202(2). That section demands that an endorsement be 'firmly affixed' to the instrument, as opposed to merely 'attached'.

It is a cardinal rule of construction of contracts that ambiguous language should be construed more strongly against the party who drew up the contract. E. g., Monk v. Morton, 139 Me. 291, 30 A.2d 17 (1943). Plaintiff's attorney's use of 'endorser' in an instrument which is not attached to the note contrary to the express provisions of the N.I.L. certainly creates an ambiguity. Therefore, its use should not be construed as an intention of the parties that the Plaintiff should have the benefits that the N.I.L. would have given him if the requirements of the N.I.L. had been met.

As the endorsement theory can now be dismissed, ² we feel that the document signed by the Plaintiff is, in effect, a unilateral contract to pay fully any deficiency owed by the developers after foreclosure and sale by the bank. We no longer are exploring the field of negotiable instruments, but are focusing instead on basic contract law as evidenced by the signed document. Of course, our desire is to examine the contract and ascertain the parties' intentions therein expressed. In interpreting contracts, the Court is disposed to look to the substance and meaning of a transaction rather than its mere form. Neely v. Havana Electric Ry., 136 Me. 352, 10 A.2d 358 (1940).

Although 'endorse' and 'endorsement' appear several times in the document prepared by the Plaintiff's attorney, we have already stressed that the writing cannot have the legal effect of an endorsement. Not only does the instrument, through its use of the word 'endorser', create uncertainty as to the Defendant bank's responsibility in case of the developers' default-it also fails to state explicitly what...