The Citizens Bank of Lane (J. S. McMahon v. The North End State Bank

• Decision Date: 07 June 1924
• Docket Number: 25,294
• Parties: THE CITIZENS BANK OF LANE (J. S. MCMAHON, Receiver, substituted, Appellant), v. THE NORTH END STATE BANK, Appellee
• Court: Kansas Supreme Court

226 P. 998

116 Kan. 303

THE CITIZENS BANK OF LANE (J. S. MCMAHON, Receiver, substituted, Appellant), v. THE NORTH END STATE BANK, Appellee

No. 25,294

Supreme Court of Kansas

June 7, 1924

Decided January, 1924

Appeal from Sedgwick district court, division No. 2; THORNTON W SARGENT, judge.

Judgment reversed and cause remanded.

SYLLABUS

SYLLABUS BY THE COURT.

1. PROMISSORY NOTE--Indorsed "Without Recourse"--A Written Contract--Cannot Be Varied by Oral Testimony of Prior or Contemporaneous Parol Contract. An indorsement of a negotiable promissory note "without recourse" constitutes a written contract whose legal significance is in no need of testimony to interpret it and which cannot be varied by oral testimony of a prior or contemporaneous parol agreement concerning it.

2. SAME. Where a bank disposed of its excess loans, evidenced by negotiable promissory notes, by selling and delivering them duly indorsed without recourse to another bank in which it maintained a credit account, and its account was credited therewith, parol evidence was inadmissible to prove an agreement between the banks, prior to such disposition of the notes, that if they were not paid at maturity the indorsee would have the right to charge the notes against the indorsing bank's credit account and return the notes to the indorsee.

3. SAME. The case of Bank v. Bank, 98 Kan. 563, 159 P. 403, distinguished.

Chester I. Long, Joseph D. Houston, Austin M. Cowan, Claude I. Depew, James G. Norton, William E. Stanley, all of Wichita, and E. F. Abbott, of Lane, for the appellant; F. M. Sheridan, and B. L. Sheridan, both of Paola, of counsel.

Otto R. Souders, and Clyde E. Souders, both of Wichita, for the appellee.

OPINION

DAWSON, J.:

The Citizens Bank of Lane brought this action to recover a sum of money which it claimed to have on deposit in the North End State Bank of Wichita. It alleged that in the spring of 1921, March 26 and May 14, it sold and delivered to defendant two promissory notes of one William C. White for $ 3,500 each, which it had duly indorsed without recourse, and that immediately on receipt of these notes the defendant bank gave the plaintiff credit for the face value thereof in its reserve account maintained in defendant's bank; but that on September 26, 1921, the defendant, without authority or right, charged the amount of these notes to plaintiff's bank account and attempted to return the notes to plaintiff, and that defendant had at all times thereafter refused plaintiff's demand for the payment of the full amount of its reserve deposit account in defendant's bank.

The defendant bank's answer, among other matters, alleged that for some time prior to March 26, 1921, the plaintiff and defendant had made and entered into an oral agreement, by the terms of which each bank was to carry for the other certain loans in excess of the amounts permitted by the banking laws, and for the purpose of each accommodating the other and to enable them both to better accommodate their customers:

"That by the terms of the said agreement, when a customer of one of the banks had borrowed all the said bank could loan him under the banking laws, and still desired further credits, the bank with which he was doing business was to indorse the notes already held, or new ones obtained, to the other bank under this agreement, and to sign the same 'without recourse.' It being fully understood and agreed that the said signature would not in any measure relieve the liability of the selling bank. As further consideration for the said agreement, money was to be loaned at 8 per cent to the borrower and to be carried by the other bank at the rate of 6 per cent, so that the bank making the indorsement would receive interest at the rate of two per cent and would carry it with the other bank at the rate of 6 per cent. That many notes were carried by each bank in the same manner for the other bank under the terms of the said agreement."

Defendant further answered that the two notes of William C. White for $ 3,500 each were received by it pursuant to such oral agreement and custom, and that at their maturity they were charged back against the plaintiff bank's reserve account and mailed back to the indorsing bank with a statement showing the charge against plaintiff's reserve account:

"That upon the maturity of the said White notes the defendant bank did charge against the account carried in its bank by the plaintiff the amount of the said note with interest at 6 per cent and mailed the said notes to the plaintiff bank with a statement as to what had been done. That the plaintiff bank attempted to collect the said notes and interest at 8 per cent with the intention of retaining the entire amount of principal and interest at 8 per cent, but were unable to collect the said notes and interest. That the said action was in direct compliance with the terms of the said agreement and directly according to the regular custom followed between the two said banks. That thereafter the plaintiff demanded the defendant bank should pay the amount of the said notes, although admitting at the same time that the action of the defendant bank had been in compliance with the said agreement and the said custom between the said banks, but gave as a reason for attempting to set the said agreement aside that the plaintiff bank was in hard financial condition and needed the money more than the defendant bank and that the president of the defendant bank, who was also a stockholder in and vice president of the plaintiff bank, would lose more money by having the loss borne by the plaintiff bank than by the defendant bank. That thereupon the said president of the defendant bank insisted that the plaintiff bank live up to the terms of the agreement irrespective of the loss to him personally, and on behalf of the defendant bank refused to pay the said amounts and demanded the plaintiff live up to the said agreement. That under the terms of the said agreement the defendant bank was not and is not in any measure indebted to the plaintiff."

There was sufficient oral evidence, although of challenged competency, to establish the material allegations of the defense pleaded. The jury returned a verdict for defendant, and answered two special questions, one of which related to an implied contract and was set aside by the court. The other reads:

"1. Did the plaintiff and defendant banks make an express oral agreement about March or April, 1918, by which the bank that indorsed a note to the other bank without recourse promised to take it back in case it should not be paid at maturity, and that the indorsing bank's account should be charged with the amount of said note with interest? Ans. Yes."

Judgment was entered for defendant. Plaintiff appeals, assigning various errors, which all center about the question whether the ordinary legal effect which attaches to the transfer, sale and delivery of a negotiable instrument duly indorsed "without recourse" may be modified or nullified by proof of an oral agreement that if it were not paid at maturity the indorsee had the right to return it to the indorser and charge the latter with its face value. The plaintiff contends that the indorsements of the notes without recourse were complete written contracts which could not be varied by parol evidence of a prior oral agreement that the plaintiff bank should be liable on the notes, if not paid by the maker, regardless of the recitals of the indorsements.

In support of this contention the rule of the negotiable-instrument act, which declares that a qualified indorsement, such as "without recourse," renders the indorser a mere assignor of the title, is cited. (R. S. 52-409.) But long before the adoption of the negotiable-instruments act the legal significance of such an indorsement was understood. In the early case of Doolittle v. Ferry, 20 Kan. 230, where the action was against indorsers of a negotiable promissory note, the defense successfully maintained in the trial court was that there had been a parol agreement between the plaintiff and themselves that their indorsement of the note was not to charge them as indorsers, but was for the sole purpose of transferring the title to the note. But this court declared that the negotiation of commercial paper by indorsement constitutes a contract as full and complete as if all its well-known terms had been written out in full, setting forth exactly the promises and obligations which the law implies. It was said:

" The law gives to an indorsement a twofold force. It operates to transfer title; it is the assumption of a conditional liability. If an absolute liability is desired, apt words are well known, and in common use. A waiver of notice and protest, written above the indorsement, will make the liability certain--the liability of a surety, it may be, but still a fixed and certain liability on the instrument." (p. 232.)

As to indorsements without recourse the court said:

" If a transfer of title without assumption of liability is sought, equally apt and well-known words are at hand. 'Without recourse' relieves the indorser. Where the law furnishes such apt, brief and well-known expressions for making the indorsement accomplish exactly what the parties may desire, wise policy demands that each form of indorsement should conclusively carry with it the liability which it implies. There are no instruments concerning which it is more important that the rules should be clear, settled and conclusive than negotiable paper. Such paper subserves an invaluable purpose in business transactions, and should tell upon its face the whole story of its obligations. Where for convenience, and to facilitate business, certain short forms and expressions are used, to which the law...