Case Name: LYON and another against The HUNTINGDON BANK
Court: Supreme Court of Pennsylvania
Jurisdiction: Pennsylvania
Decision Date: 1824-10-18
Citations: 12 Serg. & Rawle 61
Docket Number: 
Parties: LYON and another against The HUNTINGDON BANK.
Judges: 
Reporter: Reports of cases adjudged in the Supreme Court of Pennsylvania (Sergeant & Rawle)
Volume: 12
Pages: 61–69

Head Matter:
[Chambersburg,
October 18, 1824]
LYON and another against The HUNTINGDON BANK.
IN ERROR.
Evidence that the drawer of a note discounted in bank, had without the privity of the bank, informed the endorser, prior to putting his name to the instrument, that the bank had agreed to look to certain other securities for payment, and not to hold the drawer or endorser liable, is not admissible, in an action by the' bank against the endorser.
Where it had been testified by some witnesses, that certain bonds, which had been legally assigned to a bank, with powers of attorney to enter judgment, given at the request of the bank, and of which it retained possession, were assigned as a collateral security, not only for the bank, but also for the endorsers of a note discounted by the bank, held, that it was error to charge the jury, that if they believed the fact to be so, the negligence in not entering up the judgments on the bonds, and issuing executions, was as much the fault of the endorsers, as of the bank.
On a writ of error to the Court of Common Pleas of Hunt~ ingdon county, it appeared that this action was brought by the Huntingdon bank, on a single bill for seven thousand three hundred and ten, dollars, dated 20th of January, 1818, given by the defendants below, John Lyon and Robert T. Stewart, together with Edward B. Patton, who was not taken, and was not a party to the suit. The case was very complicated, and a great mass of .contradictory evidence was returned with the record, a statement of which would unnecessarily swell this report. Some of its leading features will be sufficient.
The debt originated in a loan of ten thousand dollars, made by the bank of Huntingdon to William Patton, about the 24th or 26th of January, 1815. When this loan was made, William Patton gave his note for ten thousand dollars, endorsed by William R. Smith, then cashier of the bank, and at or about the same time, assigned to the bank several bonds of David R. Porter and Edward B. Patton, amounting to upwards of twelve thousand dollars, with warrants of attorney to the said William R. Smith, to enter judgments on them, and with endorsements by the obligors, promising to pay them without defalcation. The bonds were assigned in the form prescribed by the act of assembly, of the 28th of May, 1715, and the accompanying warrants of attorney, were given on the express requisition of the bank. The main point in dispute was, upon what terms the bank received the assignment of these bonds. The defendants contended, that the discount of ten thousand dollars, was made by the bank solely on the credit of the assigned bonds, and that it was agreed, the bank should never look to the drawer or endorser of the ten thousand dollar note for payment; that note having been given merely to comply with the forms of the bank. The plaintiffs, on the other hand, insisted, that the note was considered by them as matter of substance, on which both the drawer and endorser were liable, and that the assigned bonds •were received only as collateral security. The evidence on this point was contradictory; but it was not denied, that the bank refused to make the loan, unless the bonds were accompanied with warrants of attorney, to confess judgment; nor was it denied, that the bonds remained in the possession of the bank from the time of the assignment. I,t was stated by some of the witnesses, that the bonds were received by the bank, as a security, not only for themselves, but also for the endorsers of the note for ten thousand dollars; and a considerable time having been suffered to elapse before the judgments were entered, the defendants, who in consequence of the renewals and changes of parties which took place, became responsible for what remained due, gave evidence from which they inferred, that the bank had beén guilty of gross laches, from which losses ensued for which it was responsible.
In the course of the trial, William Patton was offered as a witness by the defendants, and rejected on the ground of interest, to which an exception was taken. But a release having been executed, be was examined, and the exception afterwards abandoned. The fondants offered to prove, £* that William Patton informed John Lyon, before he entered into any responsibilitjq that the bank had agreed to look to the assigned bonds only, and not to hold the drawer and endorser of the ten thousand dollar note, or of any other note which should afterwards be given in lieu or on account of it, or any part of it, responsible.” The evidence being objected to by the plaintiffs’ counsel, and rejected by the court, a bill of exceptions was tendered and sealed.
At the close of the trial, HustoN, President, delivered to the jury the following charge:
“The facts in this case not disputed, are, that William Patton had large discounts frora the Huntingdon bank, in the fall of 1814, and then applied for an additional loan and obtained it. But on what terms, is the origin of this dispute. It is not disputed that he sold the Sligo works to Edward B. Patton and D. B. Porter, and had their bonds for above eleven thousand dollars. These bonds are made what are called, judgment bonds, and assigned to the bank; but on what terms, and for what special purpose, is disputed.
“ 1. It is not disputed that he gave his own note to the bank, with TV. B. Smith, as endorser; but it is contended, that this was only form.
“ 2. This is denied, and the note is said to have been bona-fide. It is not disputed, that part of this ten thousand dollars was paid by Patton and Porter, and credited o'n Patton and Smith’s note.
“ 3. It is not disputed, that other notes were given to the bank to secure the four thousand dollars then credited, but the reason is disputed.
“ 4. William Patton becomes insolvent, and a proposition is made by Lyon and Stewart; a resolution of the board is passed,a notice from John Lyon is given, a new note is taken, on which Edward B. Patton and John Lyon are drawers, and Bobert T. Stewart endorser, which is regularly renewed, until the note in question is given.
“ The defendants rely on the positive testimony of William Pat~ ion, William B. Smith, and D. B. Porter; the power of attorney to confess judgments; and the assignments and promise endorsed on the bonds; and they rely on the negligence of the bank in not entering the judgments, or in not taking out executions.
“ The plaintiffs rely on the testimony of Vantries; on the note of William Patton, endorsed by William B. Smith; the entry of it in the leger of the 24th of January, and the money being'all draw out by checks before the bonds were assigned; on the order to pay in foui thousand dollars on the 2d of Jhigust, 1815; on the consolidation of the 3d of September, 1816; on the settlement and balance of William Patton’s account, on the 7th of January, 1817, and giving a note with Steioart as endorser for this balance; on the proposition of Lyon and Stewart, on the 10th of January, 1817; the order of the board in consequence of it; on the notice-of Lyon to enter judgment on these bonds on the 18th, and the renewals since. [Here the court read the notes of the testimony.]
“ If it is believed, that the original note was expressly agreed by the board of directors .to be only form, and the maker and endorser not to be liable in any event,, and that this agreement and understanding continued on the introduction of new parties, and new-modelling the notes, — then the defendánts are not liable. But xvhen a man receives ten thousand dollars, and gives his note and security to repay it, it requires some proof to avoid this note, and make it nothing; and if, from the fact of the note given, the evidence at the time and since, you believe the note was a security for the debt, the plaintiffs should recover, unless there is some neglect which would bar them. If the bonds were a collateral security, as well for the bank as the endorser, the negligence is as much the fault of one as the other. If the bank took the bonds in discharge of the ten thousand dollars, — if the amount of the bonds could be recovered, they are bound to recover them, or use proper means to do so. But if the money was lent on the note and endorser, and the bonds were only to be resorted to, on failure of that security, they were not bound to sue them, as long as new endorsers were given, when required, and partial payments made when deman ded. I see no reason why the bonds, especially if equally a pledge for the endorser, as for the bank, should be put in suit; especially, as in July, 181G, there wás a request from William Patton to grant him any indulgence they could, without pressing Edward É. Patton.
. “ If Lyon was originally told these bonds were only a collateral security, it is pretty strong proof they were so, and no more. If they were informed the note was mere form, and afterwards, by any arrangement, it became a real note, and the bonds collateral, this subsequent arrangement with them, became the contract of the parties, and binding on them.
“ If William Patton thought his note at first only form, he must know otherwise when they compel him to pay four thousand dollars. He does pay or secures it, and gives a new note for six thousand dollars. Here, however, was his time to make his stand, and say he was not liable on his notes. If he did not make such stand, is it not an admission that the bank considered the contract differently from what he did; and an acquiescence on his part, and that of his endorser, that they were right? You will consider, then, whether at this time, both he and his endorser, knew that it was substance; and whether from this time, the drawers and endorsers so Considered it. If it was so considered by both parties, when Edward B. Patton endorsed, when Lyon endoi’sed, and when Lyon and Stewart became parties, — then it is substantial, and a paper by which the' defendants are bound. But, again; if the bank agreed to lake the bonds, and were parties to the agreement that only one note was to be taken from Patton^ and Porter, on failing to pay the bond on the day, and they take a note, aftd renew and renew it till this time, is not that a discharge of this suit so far; and this even if they were given as collateral security ? This would be so, perhaps. But let us attend to the facts:
“ William Patton has credit for that sum completely, not taken out of this series of notes, but out of the eighteen thousand dollars which he owed on the 3d of September, 1816; at which time, he gave the note which is the foundation of this suit, and at which time, if not before, this became a real transaction, if the facts are made out,’ that all was thrown together at that time, and all the drawing and endorsing new-modelled.
“ If there was a new-modelling of William Patton’s engagements on the 3d of September, 1816, in consequence of his application in July, and a note was then made, on the face of it, for seven thousand three hundred and ten dollars, and Lyon endorses it, 'he cannot go back and say, that two bonds, amounting to four thousand six hundred and sixty-five dollars, which had been applied in another way, shall be brought back and credited here.
“ A collateral security is not a payment, nor a conditional payment; it cannot be resorted to, unless in the event contemplated by the parties, when it was given. It will be for you then to decide, from ■ the testimony, how these bonds were given at first; whether the bank ivas, in any event, bound to sue them, till the note failed; whether it could sue them, if the note was renewed, and the discount and calls paid; and, lastly, whether after judgment was entered, at the expense and at the request of-Lyon, they were not fairly under his management?”
To this charge, the counsel for the defendant excepted.
It appeared, that in September, 1816, Patton and Porter gave their note for four thousand six hundred and sixty-five dollars, with Thomas H. Stewart as endorser, and in payment of the amount due on their two bonds payable that year; and William Patton had credit for that amount, not on the note of the series in question, but on his other account in bank. The two bonds, in payment of which this note was given, were entered up with the rest; and it was stated by Mr. Orbison, that Thomas 21. Stewart, the endorser on the note of four thousand six hundred and sixty-five dollars, claimed that those bonds, being first payable, were to be a securitj' to indemnify him as endorser on that note.
Anderson, for the defendants,
denied this, and called on the court to decide, whether those two bonds payable in 1816 were not, as respects the present defendants, to be laid entirely out of view.
The court said, “We will not at this time, and in this cause, decide, how the money arising out of the sale of Sligo to Lyon and Stewart, is to be applied, nor whether it, or any part of it, shall go to Thomas II. Stewart; he is not here, and must have notice, and be heard. No execution shall issue, until, in some way, this is decided. At present, we cannot and will not undertake to decide it.”
The counsel for the defendants excepted to the course adopted by the court, in relation to this matter, and prayed them to seal a bill of exceptions, which was accordingly done.
An agreement, however, was afterwards entered into between the counsel, which rendered it unnecessary for this court to give an opinion upon the subject embraced by the last bill of exceptions.
Caruthers and Burnside, for the plaintiffs in error.
The refusal to permit William Patton to prove, that he communicated to John Lyon the ground on which the bonds were received'and discounted by the bank, was error. This was a material part of the case, for it was this communication which induced him to become a party to the note. It was necessary that the jury should hear the evidence, and give to it what weight it deserved. Rutgers v. Lucet, 2 Johns. Cas. 96.
There was error in charging the jury, that if the bonds were given as a collateral security, the neglecf in not putting them in suit was as much the fault of the assignor as the assignee. Even if the security was collateral, it is obvious from the evidence, that it was the duty of the bank to collect the money due upon the bonds. The assignment was a legal assignment, and consequently, the bank alone could bring suit. The bank insisted on warrants of attorney accompanying the bonds, and on their being made payable without defalcation; and retained possession of them from the time the assignment was executed. Under these circumstances, having the absolute control over the bonds, it was the duty of the bank to enter judgments upon them. When these instruments were given, they were considered the principal debt, and if the notes to the bank were any thing more than mere form, they were in the nature of security. A written request was made of the bank on the 18th-of January, 1817, to enter up the judgments, which was not complied with until the 25th of the following April} and, in the mean time, a judgment was obtained by a third person against the obligors. For this negligence, the bank alone ought to suffer. 4 Serg. & Ratole, 175. Chitty on Bills, 373. 2 Wash. Rep. 230, 231. 5 Johns. 68. Patterson v. Bank of Columbia, 7 Crunch, 306.
Tod, for the defendants in error,
after arguing from the facts, that the bonds of Patton and Porter were accepted by the bank, merely as a collateral security, contended, that the testimony of William Patton was rightly rejected, because no pavol evidence was admissible to show what was the understanding of the defendants, at the time they became parties to the instrment in question. By the 8th section the general bank law, all discounts are forbidden except by the consent of the president and four directors of the bank, and therefore the agreement attempted to be set up by the defendants, even if it were proved, would be void. But whatever may have been the original agreement, there was no proof that it extended to the bill on which this suit is brought; and, if it did, it was of no consequence whether it was communicated to the defendants or not. Its binding operation could not be affected by that circumstance.
The presiding judge charged the jury, “that if the bonds were not to be resorted to, except on the failure of the notes, then the depositers of the bonds were as much bound to look to the collec- lion of them as the bank.” This was the fair meaning of the charge, and what the judge meant when he spoke of collateral security. Depositing a bond as collateral security, certainly imposes no obligation to bring suit and issue execution; and on what terms the bonds were deposited, was very properly left to the jury.

Opinion:
Tilghman, C. J.,
(after stating some of the facts,) delivered the opinion of. the court.
Several exceptions were taken by the defendants' counsel, on points of evidence, and to the charge of the court:—
1. The first exception was to the rejection of William Patton, a witness offered on the part of the defendants. He was rejected as incompetent, on account of interest. But this objection having been removed, by a release from the defendants, he was.admitted and examined. The defendants, therefore, having had the benefit of his testimony, this exception was very properly abandoned.
2. The next exception, was to the rejection of evidence offered by the defendants, — " that William Patton informed John Lyon, before he entered into any responsibility, that the bank had agreed to look to the assigned bonds only, and not to hold the drawer or endorser of the ten thousand dollar note, or of any other note which should afterwards be given in lieu, or on account of it, or any part of it, responsible." I cannot perceive error in the rejection of this evidence. If the bank had really made the agreement asserted by the defendants, they ought not to recover in this action, even though that agreement had not been communicated to the defendants. But the great objection to the evidence, is, that it was the bare declaration of William Patton, a person interested, without the privity of the bank. Why should the bank be affected by any thing which passed between him and the defendants? If, indeed, the plaintiffs had given evidence, to prove, that the defendants had been informed, before they made themselves responsible, that the assigned bonds were taken only as collateral security, in that case it might have been rebutted, by the evidence in question. But nothing of that kind appears on the record. I- have said that the plaintiffs ought not to recover, if they agreed to look to the assigned bonds only. My meaning is, that they ought not to recover, unless a subsequent agreement was made, by which the defendants became responsible, without any unfair dealing on the part of the plaintiffs.
3. But the defendants relied chiefly on their exception to the charge of the court. It had been testified by some of the plaintiff's witnesses, that the assigned bonds were received by the directors of the bank as a collateral security, both for themselves and the endorsers of the ten thousand dollar note; whereupon the president charged the jury, that if they believed the fact to be so, the negligence in not entering judgments on the bonds, and suing out executions, toas as much the fault of the endorser as of the bank. From this charge, the jury must have taken the law to be, that in (be case supposed, the bank would not be responsible. Considering the circumstances of this case, I think the law was laid down too. strongly in favour of the plaintiffs. Jt was the bank, who insisted on warrants of attorney to confess judgment, and the assignments were made in strict form, according to the act of assembly; so that the legal property was vested in the bank, which alone could bring suit. The legal inference is (unless there was proof to. the contrary) that the bank took upon itself the care of attending to these bonds, and pursuing all legal means to recover them. The obligors could make no legal payment, after notice of the assignment, to any other than the bank; nor could it possibly have been the intent of the parties, that the endorser of the ten thousand dollar note should have the right of receiving the money, beeause that would have been to deprive the bank of its security in the bonds. If the bank received the money, it operated of course to the discharge of the endorser; and thus, the bonds might justly be said to be for the benefit, as well of the endorsers as of the bank. Or, if the endorser paid, or satisfied the bank, for the note of ten thousand dollars, he would have been entitled to the benefit of the assigned bonds, and might have recovered to the amount of his payment, on judgments entered in the name of the bank, for his use. But the bank remaining unsatisfied, and retaining the possession of the bonds, was bound to take the proper measures for a recovery. I do not mean to say, that although the bonds were legally assigned to the bank, it might not have been provided by express agreement, that no negligence was to be imputed to the bank, unless it delayed the entering judgments, and issuing executions, after request so to do by William, Patton, or his endorser. Neither do I say, that the original agreement, whatever it was, or the assignment of the bonds, might not have been altered by a subsequent agreement. But the jury should have been instructed, that the bank, having taken the assignment to itself, was bound to show, that it was not to use all reasonable diligence in securing the money. This was a very important point in the cause, and a misdirection on it could not fail to be very prejudicial to the defendants. I see no other error in the charge of the president, and indeed, it contains many strong and judicious remarks on the evidence. Another error was assigned, viz. that the court refused to give any opinion, whether the defendants were to have the benefit of the sum of four thousand dollars, which remained, after paying the in-cumbrances oh the Sligo estate, and was to be applied to the payment of the bonds of Patton and Porter, assigned to the plaintiffs. The benefit of these four thousand dollars was claimed by the defendants, and also by other persons not parties to this suit. It is unnecessary for us to give an opinion on this exception, because it was agreed by the counsel on both sides, that the jury should not be embarrassed by the question arising on the application of the four thousand dollars, which was to remain as an object of future discussion. Mr. Tod, the counsel for the plaintiffs, confirmed this agreement in our presence; in consequence of which, Mr. Burnside, who was about to argue the point on behalf of the defendants, refrained from his argument, under an understanding that the matter was to be reserved for future inquiry. I am of opinion, therefore, that for the error which has been mentioned in the charge of the court, the judgment should be reversed, ana a venire de novo awarded.
Judgment reversed, and a venire facias de novo awarded.