Court Opinion

ID: 3424336
Source: CourtListenerOpinion
Date Created: 2016-07-05 19:52:06.857267+00
Date Added: 2024-06-11T14:03:33.512375
License: Public Domain

DISSENTING OPINION.
This action was brought by appellee receiver against the appellants on a promissory note. A copy of the note was made an exhibit to the complaint. Appellants filed affirmative answers in which they admit the signing of the instrument sued upon, but alleged that said note was executed pursuant to a certain agreement which they set out in their second and third paragraphs of answer. This agreement, with its background, as set forth in appellant's answer, was in substance as follows:
Kelley, Glover  Vale Realty Company owned a certain piece of real estate known as 860 Broadway, Gary, *Page 636 
Indiana. This real estate was encumbered with a mortgage of $85,000, executed by a former owner of said real estate. The mortgage was given to secure an $85,000 bond issue, and the Commercial Trust Company of Gary, Indiana, was named the trustee of said bonds. Said bonds were to mature on March 10, 1930. In early February of 1930, J.J. Kelley and W.J. Glover, Jr., two of the appellants herein, went to the First National Bank of Gary, Indiana, and talked to the president of said bank, Richard Schaaf, and Earnest C. Simpson, the cashier of said bank, about refinancing said mortgage. In this conversation, it was agreed that the First National Bank would purchase from the Commercial Trust Company, trustee of said bonds, all of the said bonds and that said bank, the First National Bank of Gary, would then secure a new money lender who would take a new mortgage of said real estate, and by so doing the First National Bank would receive the regular commission from the new lender for placing the loan, and would obtain said business from its competitor, the Commercial Trust Company. In pursuance to this oral agreement, the First National Bank did purchase from the Commercial Trust Company, trustee, said $85,000 in bonds, and placed the same in the cash drawer of said bank, and listed them as a cash item. Said bank made efforts to secure a new money lender who would put up the money and take a new mortgage from Kelley, Glover  Vale Realty Company, the owner of said real estate. Afterwards, the bank encountered difficulty in finding someone who would lend money on this real estate and take a mortgage on said real estate as security. This being the situation, said bank called Mr. Kelley and told him that they were having difficulty in securing a money lender and the bank needed a note for $85,000, executed by him to be used by said bank *Page 637 
as a part of the mechanics in securing the new money lender, and that said note would be used for that purpose and that purpose only; and as soon as they secured a new loan, they would cancel the $85,000 of bonds which they had theretofore purchased, and would cancel the note. Upon this agreement the note was prepared by the bank and signed by Mr. Kelley, individually. The note provided that the $85,000 in bonds should be collateral security for the payment of said note. The original note so signed by Kelley is identical in form to the note sued upon herein, except as to date and amount and the signatures to said note which will be hereinafter explained.
Said note was renewed from time to time, and said bank closed its doors to business without ever having secured a new loan. When the receiver took charge of said bank, the note and bonds were among the assets of said bank. The signatures to the present note were Kelley, Glover  Vale, Inc., J.J. Kelley, W.J. Glover, and Milo F. Vale, who signed said note on the back as endorsers. There was a request for special finding of fact and conclusion of law. The court, in its special findings of fact, found the facts substantially as above set forth. Finding No. 8 is here copied in full:
"The court finds that in February, 1930, Kelley, Glover-Vale Realty Company held title to a piece of real estate commonly known as 860 Broadway, Gary, Indiana, upon which there was a mortgage for $85,000.00, evidenced by bonds signed by the prior owner, Leslie I. Combs, and which bonds and mortgage were to mature March 10, 1930, and that at that time none of the defendants were personally obligated to pay the said bonds or mortgage; that the defendants desired to refinance said mortgage; and that early in February, 1930, the defendants J.J. Kelley and William J. Glover went into the First National Bank of Gary, Indiana, in an endeavor to refinance said mortgage and prevent a *Page 638 
foreclosure thereof. At said time J.J. Kelley and William J. Glover, acting on behalf of Kelley, Glover   Vale, Inc., had a conversation with Richard Schaaf, the President of said Bank, during which conversation an oral understanding was made between Kelley, Glover   Vale, Inc., speaking through said Kelley, and Glover on the one hand, and the said bank on the other hand speaking through said Schaaf, the terms of which were and are as follows:
"The bank was to call in said $85,000.00 of bonds, which had not yet matured, but would mature the next month, from the Trustee, the Commercial Trust Company. Said bank would procure a new money lender, who would make a new mortgage loan upon said real estate. Kelley, Glover-Vale, Inc., would then have said new mortgage executed by the owner of the real estate, Kelley, Glover-Vale Realty Company. The bank would take from the new lender the proceeds of said new mortgage in payment and discharge of the old bonds, which it would take up. The bank would earn a commission for obtaining the new loan and would obtain the advantage of getting this business away from its competitor and business rival, Commercial Trust Company, which held the maturing bonds.
"Pursuant to said understanding the bank called in and paid for said $85,000.00 of bonds with its own money. It failed, however, to procure a new money lender who would make the aforesaid loan. It never procured a new mortgage loan. Kelley, Glover  Vale, Inc., was always ready to carry out its part of said understanding.
"Subsequent to the making of said oral understanding and after the bank had called in said bonds as aforesaid, the bank, having used its own money to call in said bonds, was obliged to and did put said bonds in its cash drawer and carry same on its books as a cash asset in order to make up for the cash which it had paid out.
"In order to obtain some commercial paper to place among its assets to take the place of said $85,000.00 of bonds, the bank obtained $85,000.00 of notes (equal to the amount of the bonds) in the following manner and under the following conditions: On its own initiative, it prepared a $50,000.00 note ready for the signature of Kelley, Glover  *Page 639 
Vale, Inc., payable to the bank and reciting that $50,000.00 of said notes were collateral on the note. The bank induced said J.J. Kelley to sign said note as President of said corporation by the means and under the conditions hereafter stated.
"Shortly after obtaining said $50,000.00 note, the bank likewise prepared and induced J.J. Kelley to sign a series of three notes of himself personally to the bank, totalling $35,000.00, which notes were subsequently consolidated by renewal, into one $35,000.00 note signed by Kelley personally to the bank. This $35,000.00 note of Kelley, which was prepared by the bank for his signature, recited that $35,000.00 of said bonds were collateral to the note."
"The bank obtained the signature of said Kelley as President of Kelley, Glover  Vale, Inc., upon the $50,000.00 note, and also obtained the signature of Kelley individually upon the $35,000.00 of note by the following means:
"T.M. Kitchen, assistant cashier of the bank stated to Kelley: that the bank was in process of obtaining the new mortgage loan under its aforesaid understanding, and stated to him that it desired his signature on said notes merely as part of the mechanics of obtaining said mortgage; that when the proceeds of the new mortgage were obtained, the bank would use same to liquidate said $85,000.00 of bonds, which it held, and at the same time the bank would cancel the notes; and that the notes were to be paid solely out of the proceeds to be derived from the new mortgage and not otherwise. Relying upon said statement of the bank through said assistant cashier, Kelley signed said notes solely with the intent and for the purpose aforesaid."
"After obtaining said notes, the bank continued its efforts to obtain the new mortgage loan, down to the time the bank closed in January, 1932, but the bank never did procure said loan or carry out its part of the aforesaid understanding. Continually, down to the time the bank closed, Kelley, Glover  Vale, Inc., and the other defendants continued to rely upon the bank's said understanding to procure the new mortgage loan and, so relying, they did *Page 640 
from time to time renew said notes at the request of the bank."
"On April 4, 1931, the bank assigned and endorsed the $50,000.00 note to the Gary First National Corporation, which had the same president as the Bank, Richard Schaaf, and which then had its office in the bank's quarters."
"The bank continued to carry the $35,000.00 note of Kelley, and renewals thereof, until July 7, 1931, when the bank made an entry on its books showing that this Kelley note was paid and discharged by renewal. In fact, Kelley paid nothing in discharge of the note. The bank, on its own initiative at that time, prepared a note of like amount to itself to be signed by Kelley, Glover  Vale, Inc., and presented same to Kelley for signature as its president, which he signed solely with the understanding above stated. The bank then placed this note of Kelley, Glover 
Vale, Inc., among its assets in place of the note of Kelley. Kelley, Glover  Vale, Inc., received no money from the bank for the signing of this additional note. None of the defendants received any money for signing any of the notes mentioned in these findings."
"This last mentioned note was renewed from time to time solely for the reasons aforesaid, and the last renewal which was made shortly before the bank closed, is the note sued upon. During the course of said renewals the bank requested, and obtained, the signature of the defendants J.J. Kelley, William J. Glover, Jr., and Milo F. Vale, as purported endorsers on the back of said note. Said endorsements as well as all of said renewals including the last renewal, were solely in reliance upon the aforesaid oral understanding of the bank, and in reliance upon the aforesaid oral understanding of the bank and in reliance upon the aforesaid representations of the bank through said assistant cashier, as to the purposes and manner of payment of the note. All payments of principal and interest mentioned in these findings were likewise made solely upon such reliance. Defendant Kelley, Glover  Vale, Inc., was at all times ready to perform its part of said understanding but said bank failed to perform its part as aforesaid, and it closed in January, *Page 641 
1932 without having performed its part. Neither did its Receiver ever perform subsequent to closing." (Our italics.)
We think this finding very clearly sets forth the substance of this law suit. Before discussing the effect of finding No. 8, we would like to state, that while it is true as set forth in the majority opinion, the pleader does allege in his second and third paragraphs of answer that there was a failure of consideration for said note, it is also to be noted that in said answers the pleader also alleges that there was no consideration for said note, but the fact remains that whatever the pleader chose to call the answer, the facts constituting his defense is set out in full. The facts pleaded determine the character of the pleading and not what the pleader might correctly or erroneously designate the pleading. We think this proposition is so fundamental and so familiar to the profession that we need not take time nor space to cite authority to this proposition.
In appellants' second paragraph of answer it is alleged in substance that after First National Bank, appellee bank, had purchased of the Commercial Trust Company, trustee, the $85,000.00 of bonds, said bank agreed to secure a new money lender and the proceedings of said loan would be turned over to said bank in payment and discharge of the bonds purchased by the bank, and also be used to discharge said note, and that said bank would not require payment of said note until said new loan was consummated. In other words, said second paragraph of answer alleges that by the agreement it was understood between the parties that the signers of said note were not to incur any personal liability, and would not be called upon by the bank to pay said note, but that said note should be paid out of *Page 642 
the new loan that was to be obtained by the bank, and the note thus discharged in that manner. It will be noted also, that by finding No. 8 the court specifically found that the oral contract alleged and set up in said second paragraph of answer was in fact made, and found the terms of said contract to be as alleged in said answer.
Before expressing my views on the law, let us keep in mind all the facts pleaded; and I wish to emphasize the following language found in said finding No. 8:
"That when the proceeds of the new mortgage were obtained, the bank would use same to liquidate said $85,000.00 of bonds, which it held, and at the same time the bank would cancel the notes; and that the notes were to be paid solely out of the proceeds to be derived from the new mortgage and not otherwise."
(Our italics.)
Further on in the finding, the court found the following:
"This last mentioned note was renewed from time to time solely for the reasons aforesaid, and the last renewal which was made shortly before the bank closed, is the note sued upon. During the course of said renewals the bank requested, and obtained, the signature of the defendants J.J. Kelley, William J. Glover, Jr., and Milo F. Vale, as purported endorsers on the back of said note. Said endorsements as well as all of said renewals including the last renewal, were solely in reliance upon the aforesaid oral understanding of the bank, and in reliance upon the aforesaid oral understanding of the bank and in reliance upon the aforesaid representations of the bank through said assistant cashier, as to the purposes and manner of payment of the note. All payments of principal and interest mentioned in these findings were likewise made solely upon such reliance. Defendant Kelley, Glover  Vale, Inc., was at all times ready to perform its part of said understanding but said bank failed to perform its part as aforesaid, and it closed in January, *Page 643 
1932 without having performed its part. Neither did its Receiver ever perform subsequent to closing."
It seems to be clear from the pleadings and by the eighth finding of fact, that at the time the note herein sued upon was originally given, and when the same was renewed from time to time, it was the common understanding that the makers of said note were to pay the same only in accordance with the oral agreement; namely, that said note was to be paid out of the proceeds of the new loan which was to be obtained by the bank. That was their obligation under the contract.
In Flippen v. Abbey (1933), 135 Cal.App. 666,27 P.2d 792, we find facts very similar to the facts here presented and, in my judgment, announces the principle that controls the decision of this case. In the California case, one Primus executed a note to himself and on the said same date endorsed it to one Hilton with an agreement with Hilton that he, Hilton, should purchase from one Mahan 100,000 shares of stock in a mining corporation at twenty-five cents per share, which stock Hilton was to resell and trade at $1.00 per share. Hilton was to sell the note and use the proceeds in furthering a campaign for the sale of the stock so purchased. Hilton, endorsee of the note, agreed to pay said note from the first proceeds received from the sale of this stock and then to return the note to Primus. It was also agreed that all profits arising from the sale of this stock should be divided between the two. The note was to be payable on or before six months with interest at eight per cent per annum. The note was sold by Hilton and various transfers of said note were made, and it finally came into the hands of the plaintiff in the action. It appears that plaintiff purchased said note after maturity and with full notice of the agreement *Page 644 
between Primus and Hilton. There were no profits from the purchase and sale of the stock, and consequently, no fund was accumulated out of which said note was to be paid in accordance with the agreement. Primus died the following year and the holder of the note brought suit against the estate. The court in deciding the question uses the following language:
"While the record shows that the court erroneously struck out this testimony and also erred in shutting out considerable other evidence offered by the respondent, we think it sufficiently discloses a defense to the note as against Hilton. So long as he was the owner of the note he was bound by his agreement that it was not to be paid by the maker but was to be paid by him from the proceeds of certain stock which he was to buy and sell, and was by him to be returned to the maker. It appears that this was not done and that Hilton himself could not recover as against the maker and the appellant is in no better position since he bought the note from him after maturity and in fact with notice."
The same rule of law is again stated in the case of Stern v.Frank (1939), 35 Cal.App.2d 676, 680, 96 P.2d 802, wherein the following language is used:
"The maker of a note is not liable where the note is payable out of a certain fund which fund never comes into existence."
So far as my investigation has revealed, we have found no case that holds to a different rule of law than that above stated. I think the principle sound and good law. Applying this principle of law to the case at bar, I think it furnishes a complete and sufficient answer. The court found specifically and definitely that when the note was executed by the appellants and delivered to the bank, it was clearly and definitely understood that said note was to be paid by the bank out of a *Page 645 
certain fund, namely, the proceeds of the new loan and not otherwise. It was definitely alleged in the pleadings and found by the court, that the bank did not fulfill its agreement and did not secure said fund from a new money lender, that said fund has never come into existence, and also found that the appellants were at all times able, willing and ready to fulfill and carry out all of the terms of the contract by them to be performed.
In my judgment, this contract is binding upon the bank and the receiver is in no better position than the bank itself, and for this reason I think the judgment should be reversed.
NOTE. — Reported in 44 N.E.2d 981.