Martin v. Estate of Martin

• Decision Date: 22 April 1992
• Docket Number: No. 89-CA-0668,89-CA-0668
• Citation: 599 So.2d 966
• Parties: L.H. MARTIN v. ESTATE OF W.W. MARTIN, Jr., Deceased.
• Court: Mississippi Supreme Court

Page 966

599 So.2d 966

L.H. MARTIN v. ESTATE OF W.W. MARTIN, Jr., Deceased.

No. 89-CA-0668.

Supreme Court of Mississippi.

April 22, 1992.

Rehearing Denied June 17, 1992.

Guy M. Walker, II, Laurel, for appellant.

Anthony L. Thaxton, Gilchrist Sumrall Thaxton & Yoder, Laurel, for appellee.

Before DAN M. LEE, P.J., and ROBERTSON and McRAE, JJ.

ROBERTSON, Justice, for the Court:

I.

This is a simple suit on a note. It seems the proceeds of a predecessor note were used in the original maker/bank president's efforts to deceive FDIC bank examiners. The maker of today's note assumed the obligations of the original note, and his estate defends on grounds the note was tainted with illegality. The Chancery Court credited the defense.

We reverse, for reasons presently set forth.

II.

A.

This case has its genesis a decade ago amidst the myriad problems of the Merchants and Manufacturers (M & M) Bank of Ellisville, a state-chartered but Federal Deposit Insurance Corporation (FDIC) insured banking association. The play opens in 1982 with a cast of three characters. Garey C. Holifield was chief executive officer (CEO) and chairman of the board of directors of the M & M Bank. W.W. (Woody) Martin, Jr., was president of the bank's holding company and voted a controlling interest in the bank's shares and was also a member of the board of directors. L.H. Martin was a successful businessman, largely in oil and gas ventures, and also served as a member of M & M Bank's board of directors.

L.H. Martin was the Plaintiff below and is the Appellant here. W.W. Martin, Jr., was the original Defendant below. His estate became substituted as Defendant in the Chancery Court and is Appellee here.

B.

State and FDIC bank examiners descended upon the M & M Bank in December of 1982, after learning that the Bank had paid off a number of questionable loans the Bank of Mantee had made to various officers of The Mississippi Bank. It seems the Bank of Mantee and the M & M Bank had common ownership, and apparently loans were being moved between the banks to avoid FDIC scrutiny. The FDIC and state bank examiners pored over the Bank's books and records and found "insider loans," the details of which are unimportant, except that several weeks later FDIC "classified" at least three of these loans and issued a cease and desist order requiring the M & M Bank to end these illegal transactions. The Bank made certain commitments, among which was that the outstanding balance on the classified loans would be promptly reduced.

In point of fact, the debtors on these loans were unable to respond, a fact CEO Holifield well knew. In May of 1983, Holifield approached L.H. Martin and asked if he could personally borrow from Martin $100,000.00 for a short period of time, with the understanding that the money be "used in the bank." Martin agreed. At the time, Martin had approximately $70,000.00 in cash in a safety deposit box. The remainder of the money was provided via a $40,000.00 loan the Bank made to DAPSCO, a closely held corporation controlled by L.H. Martin. Martin would somehow get his hands on $30,000.00 of the DAPSCO money and loan it to Holifield.

The transaction was consummated on May 25, 1983. L.H. Martin delivered to Holifield $100,000.00 in cash. Holifield made and delivered two unsecured promissory notes payable to L.H. Martin, the first in the principal amount of $70,000.00 without interest, and the second for $30,000.00 with interest at 13.5 percent per annum--the rate DAPSCO was paying on its loan from the Bank. Each note was payable six months from date.

Holifield took the $100,000.00 and placed it in a safety deposit box, where it remained for some time. Without question, Holifield intended to use the money to apply to the classified loans so, when FDIC examiners reappeared, he could show progress being made in collecting certain classified loans. And, indeed, about a month later, Holifield used the money to "reduce" the outstanding balances on three such loans.

It is not clear what Holifield did next, but we do know, in the Fall of 1983, FDIC reappeared and in December, 1983, demanded that the Bank remove Holifield as its CEO. Holifield and the Bank acquiesced, and it was arranged that W.W. Martin, Jr., would become the Bank's new CEO. Garey Holifield, on the other hand, resigned as CEO but assumed Martin's prior position of president of the Bank holding company. During this period of time, W.W. Martin, Jr., learned of the loan L.H. Martin had made to Holifield and orally assured L.H. Martin that he, W.W. Martin, Jr., would be responsible for payment of Holifield's notes.

Things went from bad to worse, and, at CEO Martin's insistence, Holifield resigned as president of the holding company on February 2, 1984, and severed all other Bank ties. In exchange for his resignation, Holifield asked that W.W. Martin, Jr., assume the notes he had given L.H. Martin and that the Bank release him, Holifield, from any liabilities thereon. W.W. Martin, Jr., agreed. He and Holifield then met with L.H. Martin, who acquiesced, and on that date W.W. executed the note upon which the present action is based--a new note entirely in W.W.'s handwriting and in the following form:

PROMISSORY NOTE

February 2, 1984.

I, W.W. Martin, Jr., promise to pay L.H. Martin $30,000.00 plus interest at 13.5 percent per annum from 5/25/83 to May 2, 1984.

Also, I, W.W. Martin, Jr., promise to pay L.H. Martin $70,000.00 in cash at zero interest rate due and payable on February 2, 1985.

s/W.W. Martin, Jr.

s/Garey C. Holifield

Witness

W.W. Martin, Jr., then delivered this note to L.H. Martin, who also retained the original Holifield notes. ¹

February 2, 1985, came and passed, and W.W. Martin, Jr., made no payment on the note. L.H. Martin from time to time inquired, and W.W. told him he did not have the money.

C.

On February 28, 1986, L.H. Martin commenced the present proceedings by filing his complaint in the Circuit Court of Jones County, exhibiting the February 2, 1984, note(s) and demanding judgment against W.W. Martin, Jr., in the amount thereof. In March of 1986, W.W. Martin, Jr., made two $5,000.00 payments to L.H. Martin, both of which were applied to the $70,000.00 note. Nothing of consequence occurred until June 29, 1986, when W.W. Martin, Jr., died of a self-inflicted gunshot wound.

In due course, Joan Gatlin Martin approached the Chancery Court of Jones County and was appointed executrix of the last will and testament of W.W. Martin, Jr. L.H. Martin then probated a claim based on the note he held. Soon thereafter, the Circuit Court action was abandoned, and the matter proceeded to trial in the Chancery Court. That Court found that Holifield was engaged in illegal efforts to deceive FDIC examiners regarding the M & M Bank's classified loans, and that Holifield's original note to L.H. Martin, as well as its assumption and renewal by W.W. Martin, Jr., were part and parcel of the illegal scheme, by reason of which "the notes would be void as a matter of public policy." The Court further held that, to permit L.H. Martin

to prevail would lend the aid of the courts of this state in enforcing a scheme to deceive the FDIC in enforcing the banking laws and regulations.

The Court then dismissed L.H. Martin's claim with prejudice.

L.H. Martin now appeals to this Court.

III.

The promissory note L.H. Martin has exhibited is complete and regular on its face. It is enforceable according to its terms, unless the estate has some defense cognizable in law. Payment is a defense to the first $10,000.00 of the note, because we know Woody Martin paid that amount before he took his life. The question is whether there are further defenses.

A note is a contract, and this state has long recognized that contracts against public policy are unenforceable. See, e.g., First National Bank of Vicksburg v. Caruthers, 443 So.2d 861, 864, n. 3. (Miss.1983). Where, as here, the maker of a note takes such a view, he must say so affirmatively by way of defense. Rule 8(c), Miss.R.Civ.P.; Hertz Commercial Leasing v. Morrison, 567 So.2d 832, 834 (Miss.1990) (citing cases). The Martin Estate did so here, and persuaded the Chancery Court, which held Holifield's plan illegal and that L.H. Martin was part and parcel of it from the beginning.

We know of no talismanic test whether a contract offends public policy. See Restatement (Second) of Contracts Secs. 178, et seq. (1981).

Long ago we drew a distinction between contracts integrally a part of illegal conduct and those separate contracts lawful in and of themselves and supported by a distinct and lawful consideration. Holt v. Barton, 42 Miss. 711, 714-15 (1869); Green v. Sizer, 40 Miss. 530, 559 (1866); see also, Armstrong v. Toler, 24 U.S. (11 Wheat.) 258, 6 L.Ed. 468 (1826). Closer to today's setting, we find the line drawn between knowledge of a borrower's (Holifield's) illegal purpose and direct participation in the illegal use of the money loaned. 15 Williston on Contracts Sec. 1755, pp. 179-80 (3d ed. 1972).

In Smith v. Simon, 224 So.2d 565 (Miss.1969), we listed several occasions wherein we have pretermitted enforcement of otherwise valid contracts, viz.

(1) when the principal purpose of the contract directly furnishes aid and protection to an illegal enterprise, Smith v. Maryland Casualty Co., 252 Miss. 81, 172 So.2d 574 (1965), involving fidelity bond covering employees who misappropriated illegal liquor; (2) when in order to enforce the contract a party must base his cause of action on his own illegal act, Capps v. Postal Telegraph-Cable Co., 197 Miss. 118, 19 So.2d 491 (1944), involving failure to deliver a telegram concerning a gambling contract; (3) where the contract itself is unlawful, Powelson v. National Airlines, 220 Miss. 595, 71 So.2d 467 (1954), involving a contract to purchase stock in violation of a federal statute, and Morrissey v. Bologna, 240 Miss. 284, 123 So.2d 537 (1960), involving an indebtedness for illegal liquor.

...