Howard Nat. Bank & Trust Co. v. Newman., 324.

• Decision Date: 07 January 1947
• Docket Number: No. 324.,324.
• Citation: 50 A.2d 896
• Court: Vermont Supreme Court
• Parties: HOWARD NAT. BANK & TRUST CO. v. NEWMAN.

50 A.2d 896

HOWARD NAT. BANK & TRUST CO.

v.NEWMAN.

No. 324.

Supreme Court of Vermont.

Jan. 7, 1947.

Appeal from Chittenden County Court; Cushing, Presiding Judge.

Action by the Howard National Bank & Trust Company against Abe Newman to recover the balance due on a note. Judgment for defendant, and plaintiff appeals.

Reversed and cause remanded.

Black & Wilson and J. H. Macomber, Jr., both of Burlington, for plaintiff.

Joseph S. Wool, Burlington, and A. Pearley Feen, both of Burlington, for defendant.

Before MOULTON, C. J., and SHERBURNE, BUTTLES, STURTEVANT and JEFFORDS, JJ.

JEFFORDS, Justice.

In July, 1942, the defendant came to the plaintiff, hereinafter called the Bank, to request the Bank to make a loan to Harley Fay of Rochester. It appeared that Fay owed Newman about $1,000 and wished to purchase certain chattels. The purpose of the loan was to take care of Fay's debt to Newman and provide funds for the purchase of the chattels.

After certain steps had been taken the loan was made and a note given the Bank by Fay. The note was secured by a mortgage on certain real estate owned by Fay, by a chattel mortgage on cattle owned by him, by an endorsement of Newman and an assignment of milk checks by Fay.

Shortly after the loan came due Fay became delinquent in his payments on the note and the Bank notified Newman of this default. The Bank suggested to Newman that the chattel mortgage be foreclosed. Newman agreed to this and a foreclosure was had, the net amount realized being credited on the note.

Some time later an official of the Bank called Newman on the telephone and made a demand for the balance due on the note. Newman requested the Bank to foreclose the real estate mortgage so that he could get a deficiency judgment against Fay. The bank official told Newman that a judgment against Fay would be of no value because Fay had stated that he would go through bankruptcy if suit were brought against him. Newman was asked if he would permit the Bank to take a quitclaim deed from Fay by releasing him in order that the real estate might be sold and the amount realized applied on the note. Newman asked for time to think it over.

A short time later the same official again called Newman. At first Newman objected to the taking of the deed. It was again explained to him that a deficiency judgment would be of no value because Fay had nothing and would go through bankruptcy if sued. Newman then consented to the taking of a quitclaim deed ‘with the understanding it would release Fay from liability’. Newman at that time said he could sell the farm for enough to pay the balance on that note.

An agent for the Bank procured the quitclaim deed from Fay with a release to Fay from any further liability on the note. Newman tried himself and through a real estate dealer to sell the farm but without success. The Bank finally sold the real estate and credited the purchase price on the note and then brought this suit for the balance due.

Before suit was brought the Bank made several demands on Newman for payment. One of his answers was that ‘he would pay the note’ but could not do so at that time.

At another time he said ‘it was not convenient for him to pay the balance right then but that he thought he had a prospect for the place and would like a little time.’ He asked for further time.

At the close of all of the evidence the defendant moved for a directed verdict on the grounds, in substance, that the maker of the note having been discharged by the Bank, the defendant being secondarily liable on the note was thereby discharged; that on the undisputed evidence the Bank released the principal debtor on the note without expressly reserving the right of recourse against the defendant thus releasing the latter from any liability on the note and that as to any claim of a new promise after the release, the same is not supported by any legal consideration. The motion was granted with exceptions to the plaintiff.

By P.L. 7260 (§ 120 of the Uniform Negotiable Instruments Act, hereinafter called the Act), it is provided that ‘A person secondarily liable on the instrument is discharged: * * *

‘III. By the discharge of a prior party; * * *

‘V. By a release of the principal debtor, unless the holder's right of recourse against the party secondarily liable is expressly reserved.'

It should be noted at the outset that while the defendant in support of the ruling below relies on both of the above sections, each of the parties in oral argument and in their briefs discuss only subsection V.

The plaintiff advances three reasons for saying that the defendant was not discharged under subsection V in this case; one being that here was an express consent by Newman to the release of the principal debtor and that such consent is equivalent to an express reservation of the right of recourse. In support of this contention it relies on National Bank of La Crosse v. Funke, 215 Wis. 541, 546, 255 N.W. 147, 93 A.L.R. 365 and First National Bank of Hanover v. Delone 254 Pa. 409, 98 A. 1042.

The latter case had to do with subsection VI of P. L. 7260 which sets forth one of the grounds for the discharge of a person secondarily liable as follows: ‘By any agreement binding upon the holder to extend the time of payment, or to postpone the holder's right to enforce the instrument, unless made with the assent of the party secondarily liable, or unless the right of recourse against such party is expressly reserved.'

In the Delone case [254 Pa. 409, 98 A. 1047], it was held that there was evidence to prove an express reservation of a right of recourse from certain uncontradicted testimony. It is stated in the course of the opinion ‘That courts should not be overly particular as to the precise phraseology of such a reservation, so long as it may reasonably be construed as complying with the requirements of the act, which merely announce a well-established rule.'

In the Funke case [215 Wis. 541, 546, 255 N.W. 149] the holder of notes signed an agreement of composition with the creditors of the principal debtor liable on notes which were indorsed by the defendants. It was held that the composition agreement released the debtor and the indorsers who, it might appear, had impliedly consented to the release of the debtor by signing the agreement. The basis for the holding appears in the following paragraph in the opinion: ‘Upon the language of subdivision (5) itself and in view of the insertion of assent as exempting from discharge in subdivision (6), and its noninsertion in subdivision (5), we consider that it must be held that subdivision (5) covers the instant situation and that the defendants are discharged because the bank did not expressly reserve recourse against them when it signed the composition agreement.'

The court in the course of the opinion refers to Phenix Nat. Bank of New York v. Hanlon, 183 Mo.App. 243, 166 S.W. 830, and the characterization of its result as regrettable in Brannon's Negotiable Instrument Law. In the Phenix case it was held that an indorser who had written on the note in question his consent to the release of the maker was discharged from liability on the ground that the consent was not an express reservation of the right of recourse required by subsection V. In discussing the Phenix case and what is said in regard to the result in Brannon the court in the Funke case says: ‘It would seem that a holder of a note might as effectively ‘expressly reserve’ his right of recourse by procuring an indorser expressly to consent to the principal obligor's release as by any other method, and that the ‘regrettable result’ of the decision of the case last cited might have been avoided upon this ground'.

This statement in the opinion is the basis for the present plaintiff's reliance on the case.

Assuming but not deciding that Newman expressly consented to the release of Fay, we do not believe that such consent can reasonably be construed as complying with the requirements of subsection V. At the common law there is a well recognized distinction between a release of a maker by the holder of a note where the holder's rights against an indorser are expressly reserved and a release consented to by the indorser. In the former case the maker is still liable to the indorser for whatever sum the latter may be called upon to pay to make up the amount remaining due. But if the indorser consented to the release he was barred of any right of recourse. Arlington Nat. Bank v. Bennett, 214 Mass. 352, 101 N.E. 982. See also Morse v. Huntington, 40 Vt. 488, 494 et seq. It is to be presumed that the framers of the Act had this distinction in mind when they drafted subsection V. It should reasonably follow, in view of this distinction, that they did not intend that consent to a release whether express or implied should be equivalent to an express reservation of rights.

In the Funke case, supra, it is held that the common law rule that consent by the surety to the release of the principal leaves the surety bound has been modified by the Act. It would seem to be inconsistent to hold that an indorser is not bound under subsection V if he impliedly consents to the release but is bound if he expressly consents thereto.

Moreover, the language of subsection V is entirely inappropriate to describe a consent on the part of the indorser. It is apparent that this section applies only to agreements between the holder of a note and the maker to which the indorser is not a party for his consent is not needed and not to that class of cases, under the common law, in which he must be made a party for his consent. Arlington Nat. Bank v. Bennett, supra.

Finally the statement in the Funke case relied upon by the present plaintiff was dictum. We are in accord with the basis for the holding in that case heretofore quoted in so far as it applies to subsection V and believe that it should apply to express as well as to implied consents to a release of a principal debtor by...