Scandinavian American Bank v. Johnston

• Decision Date: 18 April 1911
• Citation: 115 P. 102,63 Wash. 187
• Court: Washington Supreme Court
• Parties: SCANDINAVIAN AMERICAN BANK v. JOHNSTON.

115 P. 102

63 Wash. 187

SCANDINAVIAN AMERICAN BANK v. JOHNSTON.

Supreme Court of Washington

April 18, 1911

Department 2. Appeal from Superior Court, King County; C. H. Neal Judge.

Action by the Scandinavian American Bank against E. W. Johnston. Judgment for defendant, and plaintiff appeals. Reversed and remanded, with instructions to enter judgment for plaintiff.

Roberts Battle, Hulbert & Tennant, for appellant.

Hart Prigmore & Evans, for respondent.

CROW J.

The controlling assignment is that the trial judge erred in refusing to withdraw the case from the jury and enter judgment in appellant's favor.

The following facts appear from undisputed evidence: Some time in January, 1909, the respondent, E. W. Johnston, subscribed $5,000 par value of the capital stock of the Electric Transportation Company, a corporation, organized to operate a line of sightseeing automobiles on the streets of Seattle, and motor boats on Lake Union, during the A.-Y.-P. Exposition. In part payment respondent executed his note for $2,000 to the transportation company, which, being sold to a bona fide holder for value, was paid at maturity. On May 7, 1909, certain supplies consigned to the transportation company had reached Seattle, upon which a large amount of freight and other charges were due. The transportation company was a customer of the appellant bank, where it then had on deposit a balance of about $2,000, but it needed $5,000 more to meet the freight and other charges. It then applied for a loan of $5,000; whereupon appellant refused to accept its note without security, but agreed to make the loan on its note indorsed by five or six wealthy business men of Seattle, its stockholders, of whom respondent was one. A $5,000 note of the transportation company, dated May 7, 1909, running to the bank as payee, due in 90 days, indorsed by several of the transportation company stockholders, was executed. Respondent refused to indorse this note, but on the same day did execute his $3,000 note to the transportation company, also due in 90 days, which he then and there delivered to it in payment of the remainder of his stock subscription. He testified that he then told the payee he did not want it to be sold or negotiated. This statement, although denied by other stockholders, we accept as true.

On the same day, May 7, 1909, the transportation company delivered to the bank the principal note for $5,000, indorsed by a portion of its stockholders, and as further and collateral security therefor, at the same time and as a part of the same transaction, also delivered to it respondent's $3,000 note, and two other notes of $1,000 each, previously executed and delivered to the transportation company by one Appleton, in payment of his stock subscription. The bank accepted the principal and collateral notes, made the loan, and immediately placed $5,000 to the credit of the transportation company, which on the same day checked it out in payment of the freight and other charges. The transportation company passed into the hands of a receiver some time in the latter part of June, 1909. None of the notes have been paid, and the appellant bank commenced this action against the respondent, Johnston, on the $3,000 collateral note executed by him, and also another action against Appleton on the two notes executed by him. We on this date file a separate opinion in the Appleton Case (115 P. 109), which is also in this court on appeal.

The respondent, Johnston, in his answer, admitted the execution of his note, but alleged that his subscription to the capital stock had been procured by misrepresentation and fraud; that his $3,000 note thereafter given in payment of such subscription originated in fraud; that it was without consideration; that the appellant bank took it with knowledge of the facts constituting such fraud, and that it was not a bona fide holder. The jury by their verdict in respondent's favor necessarily found that the stock subscription, the consideration for the note, was obtained by fraud, and the only question we will consider is whether the appellant was entitled to a directed verdict upon the theory that it was a bona fide holder for value, having purchased the note before its maturity in due course.

The following facts indisputably appear from the evidence, and, as we understand, are not challenged by respondent: That respondent executed and delivered his note to the transportation company in payment of his stock subscription; that it was on the same day delivered as collateral security to the bank, which then and there made a loan of $5,000 in cash to the transportation company on the principal note; that the bank at that time had no knowledge of any misrepresentations made to Johnston, or that his note had been fraudulently procured without consideration; that Johnston himself did not then know he had been defrauded, and that he did not learn the actual facts until the appointment of the receiver. The jury by its verdict must have found the appellant was not a holder in good faith, and the only possible circumstance upon which it could have predicated such a finding was that, about January 25, 1909, one C. H. Lilly, a prominent and wealthy business man of Seattle, also subscribed for capital stock of the transportation company, and in part payment therefor executed and delivered to it his five promissory notes of $1,000 each; that two of these notes were forthwith sold to the appellant bank at par for value, it then becoming an unquestionable holder of them in due course and good faith; that about February 1, 1909, Lilly, claiming his notes had been procured by the misrepresentations of an employé of the transportation company, engaged to sell its stock, surrendered his stock to the company, and demanded a return of his notes, none of which had yet matured; that three were returned to him, but that he was advised by the company the other two had been sold to the bank. He then called upon the bank, and all notice or knowledge it obtained from him is shown by his testimony, which we accept as true, and which he gave as follows (examination in chief):

'Q. Did you see Mr. Lane, the cashier of the Scandinavian American Bank? A. I did. Q. What did you tell him about those notes? A. I told Mr. Lane I wished to find out if they were holding certain notes of mine, and, if they were holding them, I wanted to arrange to have the Electric Transportation Company take them up; that they had agreed not to cash them, and, inasmuch as they had an account there, as I understood, and plenty of money, I wanted to arrange it so I could get my notes back. Q. What did you tell him, if anything, about the company having secured them from you by misrepresentation? A. I told Mr. Lane they had misrepresented the facts to me to get those notes; and he stated he could not very well arrange to get the notes back, because they did not have a very large balance there; and he stated that they bought this note on the strength of my name being there and being perfectly good, but he did not know the facts about the purchase, and Mr. Woolfolk, I think, he referred me to as knowing the particulars of the purchase; I think, however, that Mr. Lane told me that Mr. Chilberg had passed on them. Some one else; he hadn't passed on it, as I remember--on the purchase of the note. Q. Now, when was it you were in the bank and made the protest about the notes, and had the conversation with Mr. Lane? A. Well, it was somewhere about--well, four or five days after the dates on them. Q. You think it was four or five days after the dates on them? A. Yes, sir. Q. That would be in the vicinity of February 1, 1909? A. February 1st; and I think this note was due February 9th. (Cross-examination.) Q. So you told Mr. Lane they had misrepresented the matter to you by agreeing that they would not negotiate your notes? A. I told them they had misrepresented matters to me, and also had agreed not to negotiate my paper; and he said they had already purchased these two notes; and he sent me back to talk to Mr. Woolfolk, and I actually saw the notes in their possession there in the hands of the man at the note counter; I forget that gentleman's name. A. I went to see Mr. Lane to use a little personal influence, and get him to help me get my notes, and if they had a fat bank account there I thought he could easily arrange it.'

It further appears that, shortly thereafter, Lilly, without participation of the bank, effected some satisfactory arrangement with the transportation company, in pursuance of which it agreed to pay, and did pay, the two notes when they became due, and returned them to him. The only possible notice the bank had that these payments were made by the transportation company must be predicated upon the fact that one of them was paid by the company check drawn upon the appellant bank. It is apparent that appellant has many employés and transacts an extensive banking business. Nothing further occurred between Lilly and the bank. Both of the Lilly notes were paid before the collateral $3,000 note was executed by the respondent, Johnston. The sole question before us is whether any such notice of the Lilly transaction came to the bank as to demand an inquiry in regard to the origin of respondent's note, and whether the bank has been guilty of any such neglect in failing to prosecute an inquiry as will deprive it of the position and rights of a bona fide holder of the collateral note. Although the cashier and other employés of the bank denied Lilly's statements, we, as above stated, accept them as true. Respondent (citing section 3443, Rem. & Bal. Code, defining a holder in due course; section 3446, defining defective title; section 3447, defining notice of defective title; and section...