Security Pacific Nat. Bank v. Chess

• Decision Date: 20 May 1976
• Citation: 58 Cal.App.3d 555,129 Cal.Rptr. 852,19 UCC Rep. 544
• Court: California Court of Appeals Court of Appeals
• Parties: , 19 UCC Rep.Serv. 544 SECURITY PACIFIC NATIONAL BANK et al., Plaintiffs and Respondents, v. J. Thomas CHESS et al., Defendants and Appellants. Civ. 46439.

Page 852

129 Cal.Rptr. 852

58 Cal.App.3d 555, 19 UCC Rep.Serv. 544

SECURITY PACIFIC NATIONAL BANK et al., Plaintiffs and Respondents, v. J. Thomas CHESS et al., Defendants and Appellants.

Civ. 46439.

Court of Appeal, Second District, Division 4, California.

May 20, 1976.

Rehearing Denied June 8, 1976.

Hearing Denied July 15, 1976.

Wainer & Stone, Inc., and Ivan R. Wainer, Los Angeles, for defendants and appellants.

Munger, Tolles & Rickershauser and Harvey I. Saferstein, Los Angeles, for plaintiffs and respondents.

FILES, Presiding Justice.

This is a consolidated action upon 13 installment notes, each executed by one of six defendants. The sole issue tried was whether or not the plaintiff was a holder in due course. The trial court, sitting without a jury, gave judgment for plaintiff, from which defendants appeal.

The notes involved here were executed between August and November 1969 and are a part of a larger number of notes payable to Petroleum Equipment Leasing Company of Tulsa, Oklahoma (hereinafter PELCO) as a part of oil drilling ventures, in which the makers were investors. These notes were transferred by PELCO to Equipment Leasing Company of California (ELC) who pledged them to plaintiff bank as security for loans. The loans to ELC are in default, and payments on the pledged notes stopped after February 1970.

The defendants pleaded a number of defenses, including fraud, failure of consideration, violation of federal and state securities laws, and an oral side agreement that payment was to be made only out of money derived from the production of oil and gas from wells drilled by PELCO. These defenses were based upon the alleged conduct of PELCO. Defendants did not dispute that the notes had been made and not paid. The superior court bifurcated issues and tried first the question whether plaintiff was a holder in due course. After a trial on this single issue, the court made findings of fact and conclusions of law to the effect that plaintiff was a holder in due course, ¹ unaffected by any defenses which the defendants might have against PELCO and ELC. ² Judgment was thereafter entered in favor of plaintiff against the defendant makers for the respective unpaid balances.

The issues argued on this appeal will be discussed in two categories: First, whether the record established that plaintiff became a holder of the note; and second, whether the trial court erred in deciding, upon the evidence, that plaintiff had taken the notes in good faith and without notice of any defense against PELCO or ELC.

I Plaintiff as a holder.

It is defendants' contention that plaintiff cannot be a holder in due course because it never became a holder within the meaning of section 1201, subdivision (20), of the Uniform Commercial Code. ³

They are met with the plaintiff's contention that that issue was removed from the case by a pretrial admission by some of the defendants.

Before trial, plaintiff served upon certain of the defendants a request that they admit, among other things, (a) that plaintiff is a holder of the notes; (b) each note was negotiated to plaintiff by ELC; and (c) each note was endorsed by ELC to plaintiff. Defendants denied the latter two requests, but failed to deny that plaintiff was a holder. During the course of the trial defendants made motions for judgment with respect to four notes which contained no indorsement from ELC to plaintiff. In the oral argument on those motions it became apparent that defendants' attorney thought that the word 'holder' in the request for admissions meant physical possession, and not the definition in the code. ⁴

The trial court made a comment which defendants apparently took to mean that they had been relieved of the effect of the admission; and the minute order denying the motion included this language: 'support for denial of the motions is found without reference to the answers to request for admissions.'

The findings of fact and conclusions of law, as typed upon the stationery of plaintiff's counsel, contained the statement that the motion to dismiss was denied 'not on the grounds that in the Admission Requests the Defendants admitted tht SPNB was a holder, but rather on one or all of . . . five grounds' which were thereafter delineated. Following the word 'not' the word 'only' is inserted in handwriting, and accompanied by the initials of the judge.

Though the record may appear ambiguous as to the trial court's intention, it is perfectly clear that the question whether plaintiff was a 'holder' within the meaning of the Code was tried and was decided in the superior court. Under the circumstances defendants are entitled to a review on that issue in this court.

Each of the 13 notes involved in this appeal bears on the back side an indorsement from Petroleum Equipment Leasing Co. to Equipment Leasing of California. ⁵

Although the language is that of assignment and guarantee, it is nonetheless effective as an indorsement. (See § 3202, subd. (4), and official comments 5 and 6.)

The transfer of the notes by ELC to plaintiff is evidenced by a series of separate written assignments executed by ELC, assigning the described notes to plaintiff as collateral security for any indebtedness of the assignor. These instruments are not attached physically to the notes.

Only one of the 13 notes bears an indorsement using the name of Equipment Leasing Company as indorser. Eight notes show on the back side a handwritten indorsement 'Richard L. Burns' or 'Richard L. Burns, Pres.' Burns was at the time the president of ELC and there is no question of his authority, or any reason to doubt his intention thereby to effect a transfer of the notes to plaintiff. His handwriting therefore constitutes the signature of the corporation, under the principle that a party may adopt any form of symbol as its signature for a particular transaction. (See §§ 3401, subd. (2) and 1201, subd. (39); Hilborn v. Alford, 22 Cal. 482.)

Four of the notes contain no indorsement at all except that by PELCO to ELC. Section 3202 states (in pertinent part):

'(1) Negotiation is the transfer of an instrument in such form that the transferee becomes a holder. If the instrument is payable to order it is negotiated by delivery with any necessary indorsement; if payable to bearer it is negotiated by delivery.

'(2) An indorsement must be written by or on behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to become a part thereof.

'. . ..'

The instruments here in question were not payable to bearer. The notes were payable to the order of PELCO, who indorsed them to 'Equipment Leasing of California, a corporation, its successors or assigns.' This was a special indorsement in that it specified ELC as the person to whom the notes were to be paid. ⁶ The addition of the words 'successors or assigns' did not operate to make the note payable thereafter to bearer. ⁷ The form of indorsement used upon these notes does not come within the statutory definition of 'indorsement in blank.' (See fn. 6, Supra.)

Plaintiff argues that the indorsements to ELC and 'its successors or assigns,' combined with the separate documents by which ELC assigned to plaintiff, should be read together as making plaintiff the holder by indorsement. This argument confuses transfer with negotiation. The separate assignment is, of course, effective as evidence that the notes were transferred to plintiff, and plaintiff became the transferee and owner, at least for security purposes.

But a transferee is not in this situation a holder. Negotiation of an order instrument depends upon indorsement, and indorsement 'must be written by or on behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to become a part thereof.' (§ 3202, subd. (2).) The defect in plaintiff's position is that nothing was written on the four notes by or on behalf of ELC.

Plaintiff also contends that it became a holder under sections 4205 and 4207. ⁸

These sections have no application to the transfer of the 13 notes from ELC to plaintiff. Sections 4205 and 4207 are a part of division 4 entitled 'Bank Deposits and Collections.' Section 4205 applies to an item delivered to the bank for collection or for credit to the deposit account of the transferor. ⁹ Even if the 13 notes were to be collected by the bank so that the proceeds could be credited against the loan, the notes themselves were not 'deposited' by ELC, and the proceeds were not credited to a deposit account. Plaintiff, of course, did not make the 'statement . . . on the item' which section 4205 says is 'effective as the customer's indorsement.'

Plaintiff also contends it acquired the status of a holder under the provision of section 3201 ¹⁰ that 'Transfer of an instrument vests in the transferee such rights as the transfor has therein . . ..' Plaintiff points out that its transferor, ELC, was unquestionably a 'holder.'

Prior to the effective date of the Unform Commercial Code in California, this subject matter was covered by Civil Code section 3130, which was identical with section 49 of the Uniform Negotiable Instruments Law, reading as follows: 'Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires, in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.'

Section 3201 continues the distinction existing under former law between mere transfer of an instrument and negotiation. (See A.B.A. Section of Corporation, Banking and Business Law, Uniform Commercial Code Handbook (1964) 103.)

Section 3201, like its predecessor, assures to the transferee the 'rights' of his transferor--i.e., if ELC is entitled to recover on these...