#### PAULY v. O’BRIEN.

(Circuit Court, S. D. California.

August *12,*1895.)

No. 598.

Banks and Banking—Negotiable Instruments.

Where a person, at the solicitation of national hank officers, gave his note to the bank to take up the note of a stranger, for the purpose, as stated by. the officers, of getting the old note “out of the past-due notes,” *held,*that the maker of the new note was liable to the receiver of the bank, on a renewal of the note,_ whether the transaction was a real one, or a mere trick to make it appear to the government and the creditors and stockholders that the bank had a valuable asset which it in fact did not have.

This was an action at law by Frederick N. Pauly, receiver of tbe California National Bank of San Diego, against J. E. O’Brien on a promissory note made by tbe latter to tbe bank.

David L. Witbington, for plaintiff.

E. W. Britt and Works *&*Works, for defendant.

ROSS, Circuit Judge.

Tbis is another of tbe many rascally transactions disclosed in suits brought before tbis court in connection with tbe insolvent California National Bank of San Diego. The action is upon a promissory note executed by tbe defendant to tbe bank, and is submitted to tbe court upon an agreed statement of facts which shows—First, that tbe facts alleged in tbe complaint, which is in tbe ordinary form in such actions, are true; and, second, tbe purpose of tbe note and tbe circumstances under which it was executed, which are, in substance, as follows: On tbe 15th day of November, 1889, one Naylor was indebted to tbe bank in tbe sum of $3,714.40, evidenced by bis promissory note, secured by a deposit with tbe bank of a lot of jewelry as collateral. Naylor was insolvent, and, on tbe day named, tbe bookkeeper of tbe bank, who was a brother of the defendant, at the instance of its vice president, one D. D. Dare, asked tbe defendant to give bis note to tbe bank in place of and to take up that of Naylor, at tbe time stating “that Naylor’s note was past due, and was secured by collaterals which were believed to be ample to pay tbe note, and that tbe bank wanted to get tbe note out of tbe past-due notes, and that tbe Naylor note and collaterals were to be collateral to tbe note to be given by him, and would wipe bis note out when tbe collaterals were disposed of, assuring him that the bank held jewelry as collateral sufficient to pay it.” Tbe defendant consented to tbis request, and, pursuant thereto, executed bis note to tbe bank for tbe sum of $3,-*461714.40, “and the Naylor note was entered as paid on the books of the bank, and the O’Brien note was entered as a discount for its face.” Thereafter,, the bank sold “some or all” of the jewelry for the sum of §4,150, and credited that amount on the note given by the *defendant*Subsequently, and on the 21st of March, 1891, the bank informed the defendant of (he sale, at which time he ex.ecui.ed to the bank a new note, for the amount of the first one, less the amount realized by the sale of the jewelry; and still later, *to wit,*on the 21st of July, 1891, defendant executed to the bank, in renewal of the one last mentioned, the note sued on herein, the amount of which was the amount of the note of March 21, 1891, without interest. Each and all of the notes executed by the defendant, proceeds the *agreed*statement, “were given without any other consideration than here stated, and that the only knowledge said Naylor had of the matter was that Dare told him that the jewelry had been sold, and applied on the note. The Naylor note had been carried, and each of the O’Brien notes were carried, among the assets of the bank upon its books and in its statements to the comptroller, as an asset for iheir face.”

Upon these facts, I think it clear that the plaintiff is entitled to judgment. It is said for the defendant that the note sued on was without consideration. Not so, according to the agreed statement of facts, for it is there stated that it was executed 1 n place of and to take up the note of Naylor, then represented by the bank officers to be past due, and to be secured by collaterals which were believed to be ample to pay it, and which they represented the bank wanted to get “out of the past-due notes,” and which, together with the col-laterals, were to stand as collateral to the note executed by the defendant, upon the execution of which the Naylor note was entered as paid on the books of the bank, and the defendant’s note was entered thereon “as a, discount for its face.” It thus appears that the defendant executed his first note, subsequently renewing it from time to time, and ultimately by the note in suit, for the purpose of having it take the place of the Naylor note, which, together with the collaterals, “were to be collateral to the note” given by him. If, however, this was not really the case, but that, in truth, the transaction was a mere trick to make it appear to the government and to the creditors and stockholders of the bank that it had a valuable note when in fact it did not have one, the result must be the same, for, when parties employ legal instruments of an obligatory character for fraudulent and deceitful purposes, it is sound reason, as well as pure justice, to leave him bound who has bound himself. It will never do for the courts to hold that the officers of a bank, by the connivance of a third party, can give to it the semblance of solidity and security, and, when its insolvency is disclosed, that the third party can escape the consequences of Ms fraudulent act. Undoubtedly, the transaction in question originated with the officers of the bank, but to it the defendant became a willing party. It would require more credulity than I possess to believe that the defendant, when his brother, who was the bookkeeper of the bank, came to Mm with the proposition of its vice president, in its every suggestion and *462essence deceptive and fraudulent, did not know its true character and purpose. So far as appears, Naylor was a total stranger to him. Why should he execute his note to take up the note of Naylor? What moved him to do it, except to enable the officers of the bank to supplant the overdue note of Naylor with a live note, which he now. insists was without consideration and purely voluntary, but which enabled the bank officers to make a deceptive, and therefore fraudulent, showing of assets? Obviously, nothing. There will be judgment for the plaintiff for the amount due upon the note sued upon, according to its terms, with costs.