McQueen v. First National Bank of Mesa City

• Decision Date: 16 December 1929
• Docket Number: Civil 2837
• Citation: 283 P. 273,36 Ariz. 74
• Parties: A. C. McQUEEN, Appellant, v. FIRST NATIONAL BANK OF MESA CITY, ARIZONA, a Corporation, Appellee
• Court: Arizona Supreme Court

283 P. 273

36 Ariz. 74

A. C. McQUEEN, Appellant, v. FIRST NATIONAL BANK OF MESA CITY, ARIZONA, a Corporation, Appellee

Civil No. 2837

Supreme Court of Arizona

December 16, 1929

APPEAL from a judgment of the Superior Court of the County of Maricopa, Joseph S. Jenckes, Judge. Affirmed.

Mr. J L. B. Alexander, Mr. William G. Christy and Mr. Harold Baxter, for Appellant.

Messrs Silverthorn & Van Spanckeren, for Appellee.

OPINION

LOCKWOOD, C. J.

A. C McQueen, hereinafter called plaintiff, brought suit in the superior court of Maricopa county against the First National Bank of Mesa City, Arizona, a corporation, hereinafter called defendant. The complaint was for the recovery of a certain sum paid by plaintiff as a result of his signing a note in favor of the Merchants' National Bank of Los Angeles, hereinafter called the bank, and contained two counts, the first alleging that plaintiff signed the note to the bank, relying on an express guaranty from defendant's cashier that defendant would indemnify him for any personal loss in the transaction; and the second setting up in substance that plaintiff was an accommodation maker for the benefit of defendant on the note, and seeking recovery on the implied promise which by law accompanies such a situation. Defendant denied any promises to plaintiff to protect him against any liability on the note, and alleged that, if such promises were made, they were ultra vires, and that defendant had received no benefit therefrom, and further set up that the sum paid by plaintiff was to settle a note given by one McElrath for a loan made him by defendant in excess of the limit allowed by law for defendant to make, and that plaintiff had participated in making such loan as a director of defendant. It further alleged that plaintiff and his co-directors had purchased, outright, from defendant, the McElrath note, as well as certain other notes, and from that time were its owners, and that the note to the bank was given by them to secure the funds to purchase such notes, and defendant had no interest in any of the notes or liability thereon, and also pleaded a general denial. Plaintiff replied, setting up the statute of limitations as against the defense of excess loan, to which reply defendant demurred, and the court sustained such demurrer. The trial court, after the evidence was all in, instructed the jury to return a verdict for defendant, and from the order directing the verdict, and the judgment rendered on such verdict, plaintiff has appealed.

There are some five assignments of error, but we think it advisable to discuss the case rather from the standpoint of the general legal propositions involved than to take up each assignment seriatim. The undisputed facts appear from the record to be as follows: Plaintiff was from the sixteenth day of January, 1918, until June, 1923, a director of defendant, and for many years before that had served on the board of directors of its predecessor in interest, the Mesa City Bank. The capital stock of defendant is and always has been one hundred thousand dollars, and its surplus has at no time exceeded forty thousand dollars. In the fall of 1917, or the spring of 1918, one O. C. McElrath became a patron of defendant, and borrowed large sums of money from it, with the result that on January 30th, 1919, the total loans to him greatly exceeded the amount that defendant was permitted by law to make to any one person. Thereafter, and while McElrath was still an excess borrower, defendant loaned him the further sum of ten thousand dollars, and again on October 10th of the same year another ten thousand dollars. These last two loans were duly approved at directors' meetings of defendant, plaintiff being among the directors present thereat.

During all the period mentioned above the Merchants' National Bank of Los Angeles, California, was defendant's correspondent in that city, and had frequently discounted notes for it, both its own and its customers'. Among the notes so discounted were the two of McElrath for the ten thousand dollars each, above mentioned. The bank also held a third note for the same amount, made by McElrath directly to it, which was guaranteed by the directors of defendant individually. On March 1st, 1921, all of McElrath's indebtedness was consolidated into one note in favor of defendant for $32,785.42, which note included the three ten thousand dollar notes above mentioned, and some small balances still due on other loans.

During the years 1921, 1922 and 1923 defendant was heavily indebted to the bank, and had deposited with it various customers' notes as collateral security for the indebtedness, as well as discounting some of these notes directly. Owing to the collapse of cotton prices and general business conditions in the Salt River Valley, defendant was unable to collect many of these notes when they were due, and on at least two different occasions, in order to satisfy the pressing demands of the bank for a liquidation of the indebtedness due it by defendant, or better security therefor, the directors had given it their individual promissory notes for various large sums. On July 21st, 1922, defendant's cashier wrote the bank regarding its indebtedness as follows:

"We are in a position at the present time to reduce this obligation to an even $180,000, and would like to suggest that it might be much better from your standpoint, as well as our own, to accept from us a directors' note for the full $180,000 amount of customers' notes which have been or may be purchased from this bank by our directors. From your standpoint, it would mean that you would have just the one note to worry about, which, of course, would be always in good shape, with interest paid promptly at maturity, and, when a renewal was necessary, a prompt renewal of the entire obligation. That would be the advantage from your viewpoint. The advantage gained by us in such an arrangement would be that we would be left free to work out the several difficult individual problems of each of the borrowers, without having to sacrifice any of the collateral or the satisfactory relationship that exists at this time by accepting an untimely renewal."

This proposition was accepted by the bank, and a note for $179,715.42, dated August 1st, 1922, was executed by seven of the defendant's directors, including plaintiff, and delivered to the bank, together with various customers' notes as collateral security therefor, among these last notes being the McElrath note for $32,785.42, above mentioned. The transaction was shown on defendant's books as a sale to the directors of the customers' notes, and the money shown by the books to have been received as the proceeds of such sale was used to cancel the indebtedness of defendant to the bank. Thereafter, on the face of defendant's records, it had no personal interest, either in these various customers' notes as an asset, or in the indebtedness to the bank as a liability, but merely handled the customers' notes for its directors, and used the proceeds, when available, to apply on their note at the bank. Subsequently, McElrath became insolvent, and the bank demanded that the directors pay the amount of his note, which had been deposited as collateral with it, or substitute some other security. When this demand was made upon them plaintiff resigned as director, and refused to pay any part of the note, with the result that the other directors, who had also signed the note to the bank, paid the entire amount of the McElrath note, and brought suit against plaintiff for his pro rata share thereof, recovering judgment against him for $5,602.10, not including interest and costs. Plaintiff paid the judgment, and then brought this suit to recover from defendant the amount so paid.

We first discuss the note given by plaintiff and his co-directors to the bank. One of three possible situations must have existed regarding it: (a) The directors may have borrowed the money represented by it for themselves, and used it to purchase customers' notes, including the McElrath note, from defendant, taking title to these customers' notes outright in themselves; (b) the directors may have executed it on the express guaranty on the part of defendant that they would not be obliged to pay it, the proceeds of the note going to the benefit of defendant; (c) the directors may have executed it for the accommodation of defendant, with no express promise from the latter in regard to its payment.

Let us consider the legal effect of each one of these three situations. It is unquestioned that, if the situation is as set forth in (a), plaintiff cannot recover. If he, in common with his co-directors, borrowed money directly from the bank and purchased the McElrath note outright with the proceeds, defendant is under no obligation to him of any nature.

What is the rule if the situation is as set forth in (b), to wit that the directors signed the note for the accommodation of the defendant, with an express guaranty on the part of the latter that it would hold them harmless? It is unquestionably the law that a national bank may negotiate its own paper, and bind itself for the payment thereof by its indorsement, but it cannot guarantee payment of the paper of others or become surety thereon for such others benefit, and any such guaranty is ultra vires, and void, and no recovery may be had thereon. Consolidated Nat. Bank v. Anglo & L.P. Nat. Bank, 34 Ariz. 160, 269 P. 68, and cases cited. It is, however, an apparent, though not a real, exception to the rule that, if a corporation makes an ultra vires contract and receives a benefit therefrom, a liability does under certain circumstances exist. Such liability, however, is not based upon the ultra vires contract. The real ground of...