West v. First Baptist Church of Taft

• Decision Date: 16 May 1934
• Docket Number: No. 6149.,6149.
• Citation: 71 S.W.2d 1090
• Parties: WEST et al. v. FIRST BAPTIST CHURCH OF TAFT et al.
• Court: Texas Supreme Court

71 S.W.2d 1090

WEST et al. v. FIRST BAPTIST CHURCH OF TAFT et al.

No. 6149.

Supreme Court of Texas.

May 16, 1934.

Error to Court of Civil Appeals of Fourth Supreme Judicial District.

Suit by the First Baptist Church of Taft against Mrs. Ethelyn West, a Mrs. Morris, individuals constituting the Taft Bank, Unincorporated, and others, in which defendants Morris and another filed a cross-complaint. A judgment canceling plaintiff's notes and trust deeds, held by cross-complainants and a codefendant, and a judgment for the bank against plaintiff, were affirmed by the Court of Civil Appeals [42 S.W.(2d) 1078], and defendants West and others bring error.

Reversed and remanded.

Milling, Godchaux, Saal & Milling, of New-Orleans, La., John C. North, of Corpus Christi, and Robert W. Stayton, of Austin, for plaintiffs in error.

Gordon Boone and Felix Raymer, both of Corpus Christi, and Templeton, Brooks, Napier & Brown, of San Antonio, for defendants in error.

SMEDLEY, Commissioner.

The First Baptist Church of Taft, for the purpose of constructing a church building on lots owned by it in Taft, Tex., made application to Southern Mortgage Company, of Abilene, Tex., for a loan of $20,000. Before the building was begun, the church, on the request of the mortgage company, executed and delivered to the mortgage company, for the purpose of "closing the loan," twenty-two promissory negotiable notes aggregating the principal sum of $20,000, payable to Southern Mortgage Company, at the office of Mortgage & Securities Company in New Orleans. At the same time the church executed a deed of trust securing the notes and covering the lots upon which the church was to be built and also other lots owned by the church upon which a parsonage was situated. This deed of trust expressly provided that it covered also all buildings, fixtures, furniture, and equipment then located or thereafter to be located upon the lots upon which the church was to be built. A second and subordinate deed of trust was executed securing the two other promissory negotiable notes payable to Southern Mortgage Company, aggregating the principal sum of $1,000. The notes and deeds of trust, while dated March 9, 1929, were in fact executed May 2, 1929. On the same day, at the request of Southern Mortgage Company, the church caused the two deeds of trust to be filed for record in the office of the county clerk of San Patricio county, and on May 8, 1929, pursuant to the same request, the church mailed the notes to Southern Mortgage Company at Abilene, together with a certificate of the county clerk showing that the two deeds of trust had been filed for record.

It had theretofore been agreed, in the course of the negotiations for the loan, that none of the money should be paid to the church until the building had been entirely completed according to the plans and specifications. It had further been agreed by Southern Mortgage Company that the notes would be held by it in Abilene "until after the money was furnished on the loan."

The church made arrangements with the Taft Bank, Unincorporated, whereby the bank agreed to furnish money to the amount of $20,000 to pay for labor and material in the construction of the building, the money to be advanced as the work progressed and to be repaid the bank when the proceeds of the loan from Southern Mortgage Company were procured. There was an oral agreement between the church and the bank that the bank should have a lien to secure the money so advanced.

Building operations were begun about May 2, 1929, the bank advancing something more than $20,000, which was used in payment for labor and material. The building was completed about October 1, 1929, after the trial of this suit in district court.

A short time after receiving the notes, Southern Mortgage Company forwarded them to Mortgage & Securities Company at New Orleans, advising that the construction of the building had just begun, and that some time would elapse before the loan would be ready for closing. Southern Mortgage Company was a subsidiary of Mortgage & Securities Company, being wholly owned by it and organized by it for the purpose of doing business in Texas, and all the money loaned by Southern Mortgage Company was procured from Mortgage & Securities Company.

On June 25, 1929, the company last named sold and delivered the twenty-two first lien notes to plaintiff in error Mrs. Ethelyn West, who bought them for her sisters, plaintiffs in error Mrs. Morris and Mrs. Barham, paying for the same their full face value, the principal and accrued interest. The notes had been indorsed without recourse by Southern Mortgage Company, and their payment was guaranteed by Mortgage & Securities Company. A short time thereafter Mortgage & Securities Company failed, and its property was placed in the hands of a receiver. The church received nothing for the notes.

This suit was filed by the church against the two mortgage companies, the receiver of Mortgage & Securities Company, the manager of Southern Mortgage Company, Mrs. West and her sisters, Mrs. Morris and Mrs. Barham, and several individuals who constituted the Taft Bank, Unincorporated. The relief sought is cancellation of the notes and the deeds of trust and the removal of clouds from the property of the church. In the alternative, and in the event the notes and deeds of trust are determined to be valid obligations and liens, the church seeks judgment against the two mortgage companies and the manager of Southern Mortgage Company for the amount so determined, with foreclosure of a lien upon any property of the two companies which might be disclosed or discovered.

By cross-action, Mrs. Morris and Mrs. Barham allege their ownership of the twenty-two notes, and of the lien securing them, and that they purchased the notes before maturity for value and with no knowledge or notice of the alleged infirmities, and they pray for judgment for the principal of the notes, interest, attorney's fees, and for foreclosure of lien.

The Taft Bank alleges the advancement of funds by it for labor and material aggregating about $24,000, that it has a lien securing same which is superior to the lien claimed by Mrs. Morris and Mrs. Barham, and prays for judgment against the church for the amount advanced, with interest and attorney's fees, and for foreclosure of lien.

The case was tried without a jury, the trial court making elaborate findings of fact and conclusions of law. Judgment was rendered canceling the twenty-two notes held by Mrs. Morris and Mrs. Barham and the deed of trust executed to secure the notes, and also canceling the two notes aggregating $1,000 held by Southern Mortgage Company and the deed of trust executed to secure them; and judgment was rendered in favor of the Taft Bank against the church for $22,300, with interest, and for foreclosure of lien upon the property of the church. The church dismissed its suit against the manager of Southern Mortgage Company, and it was adjudged that it take nothing by its alternative suit.

The trial court found that the notes were negotiated and sold by the two mortgage companies to Mrs. West in violation of the agreement under which they were executed and delivered, and in fraud of the rights of the church; that the proceeds of the notes were appropriated by Mortgage & Securities Company; and that the church never received any part of the proceeds of the notes, or any consideration for them.

The trial court further found that, at the time she purchased the notes for her sisters, Mrs. West "had actual knowledge of the fact that the notes were for a construction loan, that said loan was not completed, that said notes were not ready for negotiation, and that same were not in fact then negotiable"; and also that "defendants Mrs. West, Mrs. Morris and Mrs. Barham, at the time the notes were purchased by them and delivered to them, as aforesaid, took same with notice of the defects in the title of Mortgage and Securities Company mentioned in preceding paragraphs of these findings, and did not purchase same without notice in good faith and are not purchasers in good faith for value or holders in due course."

The Court of Civil Appeals on first hearing reversed and remanded the cause, holding that there was no evidence charging Mrs. West and her sisters with fraud or bad faith, and that they were innocent purchasers of the notes for value before maturity. On rehearing, the judgment of the trial court was affirmed, the majority of the Court of Civil Appeals holding that there was evidence sufficient to sustain the finding of the trial court upon the issue of bad faith. 42 S.W.(2d) 1078.

Within the terms of the Negotiable Instruments Law there was infirmity in the notes, and the title of Mortgage & Securities Company which negotiated them was defective, because it had been agreed that the notes were to be held and not negotiated until the building was completed and the money represented by the notes paid, and because the notes were negotiated in violation of this agreement, in breach of faith and in fraud of the church. Sections 52-55, art. 5935, R. C. S. 1925.

The important question presented is whether there is any evidence to sustain the findings of the trial court that Mrs. West had actual knowledge of the infirmity or of the defect in the title, and that she did not act in good faith in acquiring the notes.

By the terms of section 52 of article 5935 one is not a holder in due course who, although he purchased a negotiable instrument before maturity and for value, had notice at the time it was negotiated "of any infirmity in the instrument or defect in the title of the person negotiating it."

Section 56 of the said article is as follows: "To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that...