Case Name: SECOND NAT. BANK OF HOBOKEN, N. J., v. McGEHEE et al.
Court: Texas Courts of Civil Appeals
Jurisdiction: Texas
Decision Date: 1922-02-22
Citations: 241 S.W. 287
Docket Number: No. 6263
Parties: SECOND NAT. BANK OF HOBOKEN, N. J., v. McGEHEE et al.
Judges: 
Reporter: South Western Reporter
Volume: 241
Pages: 287–299

Head Matter:
SECOND NAT. BANK OF HOBOKEN, N. J., v. McGEHEE et al.
(No. 6263.)
(Court of Civil Appeals of Texas. Austin.
Feb. 22, 1922.
Rehearing Denied May 18, 1922.)
1. Appeal and error <©=»I050(2) — Erroneous evidence on issue not necessary, for decision is not prejudicial.
The erroneous admission of evidence on behalf of defendants is not prejudicial to plaintiff where its only tendency was to establish a fact which was not essential to sustain the defense relied on by defendant.
2. Bills and notes <©=>334 — Requirement innocent holder shall set off debt against fraudulent indorser on learning of fraud does not depend upon conspiracy.
The , requirement that the innocent purchaser of a negotiable instrument, who owes a debt to his indorser, who obtained the instrument by fraud, shall, on discovery of the fraud, offset the indorser’s liability against the debt and return the paper to the indorser, rather than use the protection given an innocent purchaser to compel the defrauded party to The instrument to pay it, does not depend upon the existence of a conspiracy between the holder and the indorser to compel the defrauded party to pay the instrument.
3. Damages <©=>46(l)— Lost profits can be recovered where only amount is uncertain.
The rule that damages which are based purely on speculation cannot be recovered does not prevent a recovery of the profits a party would have made except for fraudulent representations by the other party where there was no uncertainty that some damages were suffered; the only uncertainty being as to the amount.
On Rehearing.
4. Courts <©=>107 — Decision of Supreme Court held construction of statute binding on appellate court.
The decision of the Supreme Court that an innocent holder of a note, who had on deposit, after he learned of the fraud whereby his indorser procured the note, funds belonging to the indorser sufficient to meet the note, must apply those funds to the payment of the note, and not rely on the protection given an innocent holder to compel the defrauded maker to pay the note, was a decision that Rev. St. 1911, art. 582, providing that an innocent as-signee for value shall be compelled to allow only just discounts against himself, did not prevent such a requirement of the innocent holder, though that statute was not mentioned in the Supreme Court opinion, where it was cited in the briefs and in the motion for rehearing, and that decision of the Supreme Court will be followed by the Court of Civil Appeals.
5. Bills and notes <©=>365(1) — Statute allowing just discounts against holder allows equitable claims.
The provision of Rev. Civ. St. 1911, art. 582, that an innocent purchaser for value shall be compelled to allow only just discounts against himself, permits charging him with just claims in equity as well as in law against himself.
6. Bills and notes <©=>334 — Equity does not permit innocent holder to disregard set-off against fraudulent indorser.
Equity does not permit the innocent holder of a negotiable instrument to use the shield given for his protection by the law for the protection of his indorser, who procured the note by fraud, and therefore does not permit him, on learning of the claim of fraud, to disregard his right to offset his claim against the indorser against a debt due the indorser for money deposited with the holder, and thereby enable the indorser to reap benefit of his fraud.
7. Bills and notes <©=>334 — Reasonable restrictions on circulation of commercial paper are recognized.
The fact that the rule requiring an innocent holder, after acquiring notice of his indorser’s fraud, to offset against the indorser’s liability his indebtedness to the indorser, rather than to recover from the defrauded maker, restricts to some extent the circulation of commercial paper, does not defeat the rule, since there are other valid rules imposing reasonable restrictions on the circulation of such paper.
8. Bills and notes <©=>334 — Maker cannot compel holder to resort to set-olf against indorser without proving fraud.
The maker of a note cannot compel an innocent purchaser thereof to resort to the in-dorser by offsetting against the indorser’s liability a debt due from the holder to the indorser, unless the maker establishes fraud, want of consideration, or some other valid defense against the indorser.
9. Biiis and notes <©=>334 — Requirement innocent holder shall have recourse against fraudulent indorser does not apply if circumstances mako it inequitable.
The rule that an innocent holder of a note, who thereafter acquires notice that it was obtained by his indorser’s fraud, shall have recourse against his indorser if the latter has on deposit with the holder sufficient money to meet the indorser’s liability, is a rule of equity which will not be applied where the circumstances render its application inequitable.
TO. Bills and notes <§⅜>267 — Rights and obligations of indorser are not identical with those of sureties.
The rights and obligations of indorsers of commercial paper are not identical with the rights and obligations of sureties.
Key, O. J.. dissenting.
Appeal from District Court, McLennan County; Erwin J. Clark, Judge.
Action by the Second National Bank of Hoboken, N. J., against George S. McGehee and others.
Judgment for plaintiff for less than amount claimed and it appeals. Affirmed.
Scott & Ross and John McGlasson, all of Waco, for appellant.
Alva Bryan and Witt, Terrell & Witt, all of Waco, for appellees.

Opinion:
Findings of Fact.
BRADY, J.
Appellant, a banking corporation, domiciled at Hoboken, N. J., sued appel-lees upon a negotiable promissory note executed by them, and acquired by the bank in due course of business before maturity, for a valuable consideration, and without notice of any claims or equities against the same.
Appellees alleged that the note was executed for goods purchased from the Delion Tire & Rubber Company, Inc., of Trenton, N. J. It was also alleged that the contract for the sale of the goods was in writing, and that it contained certain guaranties, but that the goods had proven not to be as represented and as warranted, by reason of which ap-pellees had been damaged in a sum largely in excess of the note sued on; that after the maturity of the note the original payee, Delion Tire & Rubber Company, which had indorsed the note to appellant, had on deposit at such bank at various times sums of money sufficient to pay off and discharge the note, but that the bank, upon notice of ap-pellees' refusal to pay the note at maturity, and that they had defenses to the note, refused to apply the money so deposited to the payment and discharge of the note, which it was their legal and equitable duty to do. It was further alleged that appellant conspired with the indorser to unjustly defraud appel-lees and to compel them to pay the note by pursuing the makers in the state of Texas, instead of discharging the note with the deposits at hand, and returning the paper to the indorser; that such conspiracy was for the purpose of preventing appellees from asserting their just and lawful defenses, which were well known to appellant, and that the suit was brought for the benefit of such in-dorser, which had entered into an agreement with the bank to indemnify it against loss in the bringing of the suit.
At the conclusion of the evidence appellees, by formal admission under the rules, conceded that appellant had a good cause of action as set forth in its petition, except so far as such cause of action might be defeated, in whole or in part, by the defenses pleaded and proven on the trial.
The case was submitted to the jury upon special issues. Upon the undisputed facts of-record and the findings of the trial judge and the jury, we make the following conclusions of fact:
Appellant acquired the note before maturity for value, and without notice of any defenses against it, but shortly after maturity, and before the filing of the suit, it had knowledge or was put upon inquiry of the defenses afterwards aáserted in the suit. The goods which furnished the consideration for the note were not reasonably calculated to answer the purposes for which they were purchased. The guaranty in the contract between the Tire & Rubber Company and ap-pellees was, according to the intention of the parties, to be construed as contended for by appellees; and the condition of the tires was not known to appellees before the execution of the note. The reasonable market value of the tires in the possession of the defendants at the maturity of the note was 50 per cent, of the net invoice price. The expenses incurred by appellees in attempting to market the Delion tires was $6,500. They abandoned any effort to place such tires on the market about May 18, 1918, which was the date the note matured. The • net profits which appellees would have made on the contract in the sale of Delion t'ires for the full period of the contract, provided they had been of good material and workmanship, and up to the guaranties of the contract, was $50,000. The reasonable market value of the tires on hand and in the possession of ap-pellees on June 17, 1918, was $6,650. The amount of the principal, interest, and attorney's fees of the note sued on, at the date of the trial, was $19,593.90. The amount of the deposits to the credit of Delion Tire & Rubber Company in the Second National Bank of Hoboken, appellant, at the date of the trial, was $19,503.88. The note was protested at maturity by appellant, and the liability of the indorser thereby fixed.
The jury also made the express finding that there was an understanding and agreement between the bank and th'é Tire & Rubber Company that the latter was to pay off or indemnify the bank against all loss and expenses that might be suffered by the bank in attempting to collect the note. We do not adopt this finding, because it is apparently dependent entirely upon evidence which may be hearsay, and therefore incompetent— a question which we have preferred not to decide, as will be hereinafter indicated.
The court rendered judgment in favor of the bank against appellees for the sum of $90.02 with interest, such sum being the difference between the full amount due on the note at such date and the amount of the deposits to the credit of the Tire & Rubber Company, and in the hands of the bank. From this judgment the bank has appealed.
Opinion.
The principal question here is whether this case is ruled by Van Winkle Gin Co. v. Citizens' Bank of Buffalo, 89 Tex. 147, 33 S. W. 862, and other cases following that decision, among which are Templeman v. Hutchings et al., 24 Tex. Civ. App. 1, 57 S. W. 868; State Bank v. Blakey & Co., 35 Tex. Civ. App. 87, 79 S. W. 331; Sperlin v. Peninsula Loan & Discount Co. (Tex. Civ. App.) 103 S. W. 232; Union Nat. Bank v. Menefee, 63 Tex. Civ. App. 599, 134 S. W. 822; Commercial Security Co. v. Collins (Tex. Civ. App.) 208 S. W. 728; Simmons v. Hodges, 250 Fed. 424, 162 C. C. A. 494. The doctrine announced and applied in these cases is tersely stated in the syllabus to Bank v. Menefee, supra, as follows:
"Where a nonresident indorsee of a note, after learning of fraud in the acceptance and negotiation of the note, had in its hands funds of the nonresident payee sufficient to pay the note, the maker is not liable to the indorsee."
The principles upon which the doctrine rests, and the reasoning upon which the conclusion is founded, are well indicated by the following excerpts from the opinion of Mr. Justice Denman, speaking for our Supreme Court in the Van Winkle Gin Co. Case:
"In order to determine whether the Van Winkle Gin & Machinery Company have the right in equity to have the amount deposited to the credit of the Forge Company in the plaintiff bank offset against the bill of exchange sued on, it will be necessary to examine and determine the nature of the contract of indorsement and the rights of the bank in reference thereto, as well as its relation to its depositors, as far as they affect the question under discussion.
"By its indorsement the Buffalo Forge Company in effect contracted that if when duly presented said bill was not paid by the acceptor it, the indorser, would, upon due and reasonable notice being given of the dishonor, pay the same to the indorsee bank; and the subsequent presentment and protest fixed its liability upon said contract of indorsement to pay to the bank immediately the amount of said bill and costs of protest. This is an independent and complete contract on the part of the indorser to pay to the indorsee said sums, and the bank was under no obligation whatever to such in-dorser to leave the state of their respective domiciles and pursue the acceptor here. Ross v. Jones, 22 Wall. 576; Sterling v. Trading Co., 11 S. & R. (Pa.) 179; Faulkner v. Faulkner, 73 Mo. 336; Moore v. Britton, 22 La. Ann. 65.
"As soon as the liability of the indorser was fixed by the nonpayment and protest, and at any time thereafter during the continuance of such liability, the indorsee bank had the right to apply any moneys coming into its hands in due course of business belonging to such in-dorser to the payment of the indorser's liability upon such contract, and the indorser had no right in law or equity to compel the bank to proceed against the acceptor, but, upon payment of the bill, he would have had the right to its surrender, whereupon he might have proceeded against the acceptor. 11 Mo. App. 144; 15 East. 428; 1 Esp. 66; 1 Rose, 232; 19 Ves. Jr. 25; 34 Barb. 298.
"The relation of the bank to its depositors is that of debtor and creditor, and its right to offset its indebtedness to the depositor against the indebtedness of the latter to it is of an equitable nature intended for its protection, and does not depend upon any statute in relation to offsets. It is generally said that it is optional with the bank whether it will avail itself of this right. 32 Mo. 191; 6 N. Y. 271; 34 Barb. 298; 2 N. X. 352; 6 Wend. 610; 21 Me. 426; 16 Week. No. Cas. 509.
"The instances in which it has been held that the bank had the absolute right to determine whether it would or would not exercise its privilege were cases in which it was not appealing to the courts to apply any equitable principle in order to allow it to recover, as the Citizens' Bank -of Buffalo is doing here against an innocent party to the paper who, but for the application of such principle, could not be held liable.
"If the Buffalo Forge Company had not transferred the bill before maturity, or if at the time of the indorsement the bank had known of the failure of consideration, it is clear that such failure would have been a complete defense. This is not disputed. , McDonald Mfg. Co. v. Moran, 52 Wis. 203; Mann v. Nat. Bank, 30 Kan. 412.
"But, although in good conscience plaintiff in error ought not, as between it and the Buffalo Forge Company or any one claiming under or through the latter with notice, to be held to pay the bill, nevertheless it will not be allowed to assert its defense to the prejudice qf the indorsee bank, because the latter has invoked the protection thrown round it by the laws as an innocent purchaser. As between the acceptor and the innocent holder, the latter will be absolutely protected because the former has carelessly launched upon the market its unqualified promise to pay, whereby the latter was induced to acquire same.
"But while the law protects the innocent holder at the expense of the negligent but innocent acceptor, it does not permit the former to use his vantage ground for the purpose of going beyond his protection and willfully inflicting on the latter a wrong in order to favor the fraudulent indorser who in justice and good conscience ought to pay the bill.
"In discussing this principle, in the case of Wright v. Hardie, 88 Tex. 657 (32 S. W. Rep. 887), this court, through Chief Justice Gaines, say: 'The doctrine which protects a bona fide purchaser of negotiable paper for value is maintained in part upon principles of commercial policy, but has a deeper foundation in the principle of an equitable estoppel. The maker of a promissory note, by signing and delivering it to the payee, asserts its validity, and by making it payable to the bearer, or to the order of the payee, holds out an invitation to all the world to deal with it, as evidencing a valid debt. Por that reason, and upon the principle that he who trusts most should suffer most, the law shuts off, as against an innocent hoider, any defense the maker may have against the payee, in so far as it may be necessary to protect such holder in the rights acquired by his transfer. A recovery of so much upon the collateral paper as is necessary to discharge the debt secured is requisite for the protection of an innocent holder, although, as between the maker and the payee of the note, the hypothecation may have been fraudulent. More than this the holder cannot claim in his own right, nor can he claim as trustee of the transferor of the instrument, because the maker owes the latter nothing. Accordingly, we find that it is generally held that the pledgee in such a case is limited in his recovery to the amount of his debt.'
"Whether the doctrine upon which the courts allow the innocent holder of commercial paper to recover against the negligent but innocent acceptor maker is based upon broad principles of public policy intended to foster commerce, or upon the principles of an equitable estoppel, or both, it is dear that it extends no further than is necessary to the complete protection of the innocent holder, and cannot be extended so as to allow such holder to pervert the equitable principles upon which it is based for the purpose of aiding one party to a commercial instrument in obtaining an undue advantage over another.
"Glhe bank had the undoubted right to say to the Eorge Company: 'You have indorsed us a paper, which, as between you and the acceptor, the latter ought not tp pay. We have money belonging to you in our hands sufficient to satisfy your contract of indorsement now due, and we elect to avail ourselves of our equitable right to apply the same as an offset and in settlement of your contract and return to you the paper, rather than pursue the innocent acceptor in another jurisdiction, especially since such pursuit cannot possibly be necessary for our protection. We will not use the shield thrown round us by law solely for our protection as innocent purchasers as a subterfuge to aid you in enforcing through us an unjust demand.' Such a position would have been unassailable in morals and in law. The bank, however, elected the contrary.
"The case then comes to this: The indorser in good conscience should pay, the bank has its funds in its hands sufficient to satisfy the demand with a perfect right in equity to offset same in satisfaction of the bill; the pursuit of the acceptor in a foreign jurisdiction is clearly not necessary to the bank's protection, but can only serve to allow the indorser to avail himself of the protection given by law to an innocent purchaser in order to cut the acceptor off from a just defense and compel it to pay a sum of money which in equity it should not pay.
"Under these circumstances, with knowledge of the failure of consideration, probably at the time of the filing of the original answer, but certainly when the depositions of its officers were taken as above stated, it presses the claim to judgment upon its plea of innocent purchaser, in a suit instituted at the instance and expense of the indorser. While expressly waiving its equitable right to offset the deposit, conferred upon it by law for its protection and which appears in this case to have been adequate to its complete protection, it invokes the application by the court of another equitable principle, not for its protection, but for the sole and evident purpose of aiding the indorser to obtain an undue advantage over the acceptor. We are of the opinion that under these circumstances, and for such a purpose, the bank was not entitled to the protection afforded bylaw to an innocent holder, and that, as between it and the acceptor, the deposit should be offset against the bill."
We have been unable to find any satisfactory ground of differentiation between the decision of the Supreme Oourt in the case just quoted from and the instant case. Indeed, able counsel for appellant have not suggested any real basis of distinction, but claim that the decision should not be followed, because a careful reading and analysis of the opinion will disclose that it was-rendered without regard and without reference to the provisions of our statute (article 5S2, Revised Statutes 1911), which were apparently overlooked. This statute reads as follows:
"Any person to whom any of the said negotiable instruments may' have been assigned may maintain any action in his own name which the original obligor or payee might have brought; but he shall not only allow all just discounts against himself, but, if- he obtains the same after it became due, he shall also allow all just discounts against the assignor before notice of the assignment was given to the defendants; but, should he obtain such instrument before its maturity, by giving for it a valuable consideration, and without notice of any discount or defense against it, then he' shall be compelled to allow only the just discounts against himself."
Since the original briefs were filed, however, counsel for appellees have examined the briefs and arguments and the motion for rehearing in the Supreme Oourt, and it is agreed by counsel that in a brief for the Citizens' Bank of Buffalo, filed in the Van Winkle Gin Case, the very article in question (then article 265) was called to the attention of the Supreme Oourt, as a statutory right that the bank should be compelled to allow only the- just discounts against itself, by reason of its position as an- innocent purchaser. Furthermore, on motion for rehearing, counsel for the bank specifically directed the attention of the Supreme Oourt again to this provision of the statute, and insisted that the decision of the court was in conflict with the statute, and also with the rule theretofore prevailing as to negotiable paper. In these circumstances, we must assume that the Supreme Court considered the statute in question, and decided that it was not applicable, or at least not in conflict with the decision of the court. This same rule was applied in later cases, including Bant y. Menefee, supra, in which a writ of error was denied by the Supreme Court.
In addition to wbat has been said above, the writer is of the opinion that, if we should assume the- altogether improbable fact that the Supreme Court and the other courts deciding this question have overlooked the statute referred to, the result would be the same, under the reasoning of those cases. To my*mind the provisions of article 582 embody substantially the rule obtaining at common law or under the law merchant, and nothing more. The holdings referred to are simply to the effect that, notwithstanding this general rule, whether considered as a part of the law of negotiable paper or as statutory law, it could not, in equity, be'applied for the protection of an innocent purchaser when the facts and circumstances of the case disclosed that the holder of the paper had notice of just and lawful defenses, and thereafter refused to avail itself of moneys of the indorser to reimburse itself, and to surrender the paper to the indorser. The principle announced and applied is that no person will be permitted to use the shield-of an innocent purchaser when not necessary for his own benefit, but is for the advantage of an indorser in whose hands the paper would be subject to defenses. To permit this to be done, it is held, in effect would he^to countenance fraud, which equity will not sanction.
Believing that the decision in Van Winkle Gin Co', v. Citizens' Bank and like eases are controlling, we overrule appellant's contention upon this point.
Another point raised by appellant is that the court committed reversible error in admitting the testimony of a witness as to a statement made by Mr. Eberhardt, who was an attorney for the bank, and who was also a director and a member of the loan committee- which passed upon the loan in question. The claim is that this statement as made by Mr. Eberhardt was several- months after the filing of the suit, and that it could not bind the bank, ' because it was not part of the res gestee, was made long subsequent to the transaction, and was - not shown to have been made by Eberhardt in the discharge of his duty as an agent or attorney.
In our view of the matter, it is not necessary to decide this question. As we construe the decision in Van Winkle Gin Co. Case, it is not necessary that there should in fact be any conspiracy between the indorser and the alleged innocent holder. The whole reasoning of the case is to the effect that, if the resort by the holder to suit in a foreign jurisdiction against the maker, who has just defenses against the original payee, is not necessary for the protection of the holder, but is necessarily for the advantage of such payee, the holder will not be permitted to invoke the doctrine of innocent purchaser, under such circumstances as exist here. In at least one of the eases following that decision, namely, Bank v. Menefee, supra, the facts did not show any conspiracy. -
,The statement of Mr. Eberhardt, giving to it its greatest effect, had relation only to the issue which had been pleaded by appellees, that there was a conspiracy between the in-dorser and the bank to deprive them of their just defenses. The jury so found, and it may be assumed that their finding was based upon this testimony. But such finding was not necessary to the support of the judgment, and, as we believe, it may be wholly disregarded. Therefore, if it should be assumed that the evidence of the statement by Mr. Eberhardt was hearsay and incompetent, the result would be the same, because the other essentials necessary to invoke the rule applied in the Van Winkle Gin Case were proven.
Appellant also complains of the submission of the issue and the finding of the jury thereon with relation to the net profits which appellees might reasonably have been expected to make during the life of the contract. The specific claim is that such damages are based purely upon speculation, and cannot form the basis of a valid offset against the note.
We have examined the evidence bearing upon this question, and we do not think the case falls within the rule that damages which are uncertain and speculative cannot be recovered.' There is no uncertainty here as to whether any damages at all were suffered, but simply as to the amount of the damages which were sustained. There is ample testimony in the record to sustain the finding of the jury, that appellees suffered damages legally recoverable far in excess of the amount of the note sued on.
All assignments have been carefully considered, and are overruled. No reversible error has been shown, and the judgment is affirmed.
Affirmed.
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