Case Name: Sebree Deposit Bank v. Clark; Same v. B. Herron; Same v. J. T. Herron; Same v. Todd
Court: Kentucky Court of Appeals
Jurisdiction: Kentucky
Decision Date: 1899-01-07
Citations: 105 Ky. 212
Docket Number: 
Parties: Sebree Deposit Bank v. Clark. Same v. B. Herron. Same v. J. T. Herron. Same v. Todd.
Judges: 
Reporter: Kentucky Reports
Volume: 105
Pages: 212–218

Head Matter:
Case 22 — ACTION ON NOTE
January 7.
Sebree Deposit Bank v. Clark. Same v. B. Herron. Same v. J. T. Herron. Same v. Todd.
APPEAL PROM WEBSTER CIRCUIT COURT.*
1. Promissory Notes — Consideration—Surrender of Old Note.— , The surrender of a past due note* is a sufficient consideration for the execution of new notes renewing same, with, new sureties.
2. Appeals — Finding of tiie Chancellor -on Questions of Fact not Conclusive. — “It is a well settled rule of law that in equity cases this court will consider the evidence introduced, and determine therefrom what judgment should have been rendered.”
3. Fraud — Evidence Insufficient. — The evidence in this case fails to sustain the allegations of such fraudulent misconduct upon the part of the principal as will release the sureties from liability upon the notes sued on.
JOHN W. LOCKETT, for appellant. (F. M. BAKER and YEA-MAN & LOCKETT, of counsel.)
1. The acceptance by the bank *of the notes in controversy as satisfaction of a note then due the bank, is sufficient consideration as to all parties to the renewal notes.
2. Though the principal in the renewal notes may have procured them by fraud’on the sureties and used them otherwise than the sureties understood, they would he used, yet, being delivered by them to their principal, who delivered the notes to the bank, the sureties are bound unless they show that the bank when receiving the notes had actual or constructive notice that they had been procured by fraud or were being misapplied. Brandt on Sur. & Guar., Sec. 406; Daniel on Neg. Instr., vol. 1, Secs. 790-6; Frank v. Quasi, 86 Ky., 649; cited by Daniels; Bank of Commonwealth v. Curry, 2 Dana, 142; Smith v. Moberly, 10 B. M., 266; Millett v. Parker, 2 Met., 608; Burks v. Wonterline and wife, 6 Bush, 21; Magee v. Manhattan Life Ins. Co., 92 II. S., 93-101.
3. The proof shows the bank received the notes without such notice and in good faith and applying them to'the payment of a preexisting deb't does not alter the note. First Daniels, Sec. 793 a; 4th edition.
4. The bank was absent when the notes were signed by the sureties. The notes were sent to the bank by the principal debtor through the mail, the old note canceled and mailed to the principal, without the bank having had any communication with the sureties. It was not obliged to warn the sureties of the risk they were taking and had no- reason to believe they would be or had been deceived into signing the paper when it was received. In this case the sureties are bound. We cite especially on this point, the foregoing cases of Burks V: Wonterline, 6 Bush, 21; and Magee v. Manhattan Life Ins. Co., 92 U. S., 93-101.
5. The casé o-f Ballard v. Russell, 16 B. M-., 201, is not in conflict with the foregoing propositions. The court held in that case that the note not being payable to the party receiving it in discharge of a pre-existing debt, in violation of the purpose for which the surety signed it, but payable to a bank which had never assigned or owned the note, the party receiving it was charged with the duty of inquiring into the purpose of the ■surety. In these cases the notes were payable to- the bank.
6. It was no diversion of these notes to use them in discharge of the old notes, as the effect was to- enable the principal to further his business — the object of the sureties in signing the notes.
YEAMAN & LOCKETT and BAKER & BAKER, fob, appellant.
1. It did not devolve upon the obligee in the promissory notes in contest to inform the sureties of the insolvency of the principal even if it was aware of such insolvency. Ham v. G-reve, 34 Ind., 18; Farmers National Bank v. Branden'(Pa.,) 22 Atl. Rep., 1045.
2. The obligee in the promissory note which surrenders an old note in lieu -of the ones sued on is not bound by any fraudulent misrepresentations by the principal to the sureties in the procurement of their signatures. Whitaker v. Crutcher, 5 Bush, 621; Smith v. Moberly, 10 B. M., 266.
TOWERY & BOURLAND, foe appellees.
1. The signature of the sureties was procured by fraud and the bank was a party to the fraud. Russell v. Ballard, 16 B. M., 201; Rogge v. Cassidy, 12 Ky. Law Rep., 54; Burks v. Wonterline and wife, 6 Bush,'20; Graves v. The Lebanon National Bank, 10 Bush, 28.
S. Y. DIXON, FOB SURETIES.
1. The notes sued on were without consideration.
2. The face of -the notes showed that they were for borrowed money and the evidence shows that the sureties relied on Herron’s ■statements that the notes were executed for that purpose, which was not true in fact. The bank had notice that it was the understanding of the sureties that these notes were executed for borrowed money. Russell v. Ballard, 16 B. M., 201; Ward v. Bank of Kentucky, 14 B. M., 283; Rogge v. Cassidy, 12 Ky. Law Rep., 54.
3. There was sufficient fraud practiced upon the sureties -to justify and demand their release. Burks v. Wonterline and wife, G Bush, 20; Graves v. The Lebanon National Bank, 10 Bush, 28; Aaron v. Mendel, 78 Ky., 427.
Same counsel in a supplemental brief for the appellees, commented upon Bank of the Commonwealth v. Curry, 2 Dana, 142; Smith v. Moberly, 10 B. M., 266; Millett v. Parker, 2 Met., 608; Burks v. Wonterline and wife, 6 Bush, 20; Magee v. Manhattan Life Ins. Co., 92 U. S., 93-101 and cited in addition, Am. & Eng. Ency. of Law, vol. 24, p. 793. •
S. V. DIXON, FOR APPELLEES, IN A PETITION FOB A REHEARING. (D. D. RAYBORN and TOWERY & BOURLAND, of counsel.)
On construction: Russell v. Ballard, 16 B. M., 201; Rogge v. Cassidy, 12 Ky-. Law Rep., 54; Am; & Eng. Ency. of Law, vol. 24, p. 793; Russell v. Ballard (Ky.), 63 Am. Dec., 526.
On fraud: Burks v. Wonterline and wife, 6 Bush, 20; Graves v. The Lebanon National Bank, 10 Bush, 28; Aaron v. Mendel, 78 Ky., 427; Keith v. Goodwin (Vt.), 73 Am. Dec., 345.

Opinion:
JUDGE GUFFY
DELIVERED THE OPINION OF THE COURT.
These four cases practically involve the same questions of law and fact, and were heard together in the court below, and by agreement are heard together in this court. It appears that J. T. Herron was a merchant in Bison, Kv., and some time in the year of 1894 the appellant loaned to him about .$2,500* with G. Mb-Herron. as nominal surety, which note was renewed once, if not of tener,, the last note falling due March 27/ 1895. Shortly: before the note, became due the appellant informed, said Herron that it desired payment of the note.Yhem the'.same.fell'due, which-he promised to pay, but upon maturity failed to pay same; and appellant insisted upon either payment of the note or additional. security, .which Herron agreed to- give, but suggested that it-would be easier for him to give security-if the appellant would divide the debt into smaller notes, which it agreed to do, allowing the debt to be divided into five notes. Yery soon thereafter Herron sent to-appellant the four notes, in controversy herein, together with the fifth one, which is not involved in this controversy; which notes were accepted by the appellant, and the $2,500 note sent to the said Herron. In August thereafter the appellees instituted their several actions, seeking a cancellation of the notes, or at least their release. therefrom, upon the ground of no consideration, and upon the further claim that the execution of the notes was procured by fraud and misrepresentation upon the part of Herron, and also, upon the part of- appellant; alleging, among other things, the representation and agreement that Herron was to get actual cash money to aid him in his business in the purchase of goods, etc. The appellant, by answer, denied all the averments of the petition, in so far as the plea of no consideration was concerned, or any fraud or knowledge of fraud or misrepresentation having been made to the appellees, as well as denying any knowledge of the insolvency of Herron at the time the aforesaid agreement was made and at the time the notes were accepted and the old notes surrendered. After the issues were fully made up and proof taken, the circuit judge rendered a judgment in favor of the appellees, releasing them from any liability on the several notes signed by them, and from that judgment these appeals are prosecuted. It is shown by the testimony that some time in April, after the execution of the notes, Herron made an assignment, and that his indebtedness amounted to between $10,000 and $50,000, and his assets to about $15,000. There is some proof introduced tending to show that, some time before the execution of the notes in contest, he had suffered some loss by fire, but to what extent it does not appear.
It is the contention of appellees that the appellant knew of the insolvency of Herron, and that it conspired and agreed with him to divide the large note into small notes for the purpose of enabling Herron to obtain sureties, which he could not otherwise have obtained, and that it aided Herron in misleading the sureties as to his condition and as to the purpose for which the notes were being executed. It is the contention of appellant that it was not aware of Herron's insolvency, and that it was simply a business transaction; that it desired to collect the $2,500 note, but inasmuch as Herron could not or would not pay it when due, that it desired and demanded better security; and that at the instance of Herron himself, and without any intention of aiding him in defrauding anybody, and without any information or expectation that Herron would do so, it agreed to the division of the debt, as hereinbefore stated.
It is a well-settled rule of law that, if the obligee of a note obtains the signature of a surety for the principal by any fraudulent misrepresentation or concealment of material facts in regard to the condition of the principal, the surety will be released. It is also well, settled that, if the appellant had notice that the sureties had signed the notes in question for a specific purpose, it would have been bound to have applied same to that purpose; otherwise the sureties would not be bound. It nowhere appears that appellant knew to whom Herron would apply to go his security, and it seems certain that appellant had no communication, direct or indirect, with the appellees, in regard to signing or not signing the notes, nor any notice as to any representation made to appellees respecting the purpose for which the notes were executed. The appellant's place of business was several miles distant from Dixon, and also several miles distant from appellees, and it nowhere appears that appellees and the officers of appellant were acquainted with each other.
It is suggested on behalf of appellees that the notes in question indicated that money was to be furnished, and therefore appellant had notice that they were executed for that purpose; but the notes appear to be in the regular form used in executing notes either to obtain money or renewal of an antecedent obligation. It is not an extraordinary proceeding for a creditor who desires to collect a debt, and is unable to do so, to attempt to procure sufficient security, and in this case it seems certain that the surety on the $2,500 note was notoriously insufficient. Nor is it strange that Herron would believe that he could obtain security more readily by dividing the debt into smaller notes, for it is quite reasonable that some friends would be willing to sign a note for $500 or $600 when they would not desire to incur as large an obligation as $2,500, and the fact that the debt in question was so divided certainly does not establish a fraudulent intent upon the part of Herron. Nor was it sufficient notice to appellant that Herron contemplated perpetrating a fraud upon his confidential friends. It is true that Herron was insolvent at the time; and perhaps he ought to have known then that' he could not recover from his financial embarrassment; but it is a well-known fact that many men are hopeful, and are loath to believe that they can not recover or extricate themselves from financial embarrassments. It may be that Herron in fact believed that by obtaining four months' additional time on the debt in question, he could better his financial condition, and escape utter financial ruin. The surrender of the $2,500 note, and the extension of further time, by appellant, constituted a sufficient consideration for the execution of the notes in question; hence appellees are not entitled to exoneration on the plea of no consideration.
It is suggested by appellees that, if there is- any evidence to support the finding of the court below on a question of fact, this court will not reverse, but treat such finding in the same manner as if it was the verdict of a properly instructed jury. Such, however, is not the rule of this court in equity cases. . It is a well-settled rule of law that in equity causes this court will consider the. evidence introduced, and determine therefrom what judgment should have been rendered. We are unable to say that the evidence in this case conduces to show, in a reasonable degree, that appellant was guilty of any unusual, improper, or fraudulent acts in connection with the execution of the notes in question. It therefore results that the court erred in rendering the several judgments. The judgments are therefore reversed, and causes remanded, with directions to set aside the judgments appealed from, and to dismiss the several petitions, and for proceedings consistent herewith.