Court Opinion

ID: 7117590
Source: CourtListenerOpinion
Date Created: 2022-07-24 12:34:22.372596+00
Date Added: 2024-06-11T12:49:15.898813
License: Public Domain

Salinger J.
(dissenting). — The sole question is whether the majority is justified in holding that the facts here create an exception to a confessed rule. Hundreds of cases have built up the rule.
In McNight v. Parsons, 136 Iowa 390, at 392, that rule is stated as follows:
“The courts quite universally hold that knowledge that a note was given in consideration of the executory agreement or contract of the payee, which has not been performed, will not deprive the endorsee of the character of a bona-fide holder, unless he also has notice of the breach of that agreement or contract.”
The collateral agreement in the case was a warranty of the animal for the purchase price of which the note was given, and a further agreement by the seller that he would retain, possession of the animal for several months, and do *297certain tilings to enhance its value. The agreement, the sale, and the giving of the note, were all parts of the same transaction.
In Jennings v. Todd, 118 Mo. 296 (24 S. W. 148), all the papers were made at the same time, and related to the same transaction. The collateral agreement was that the payee was to do certain things, and that the note should not be paid if it failed to fulfill any part of this agreement. Against defense to the note, the court said:
“We think, however, that no well-considered case can be found in which a collateral, contemporaneous agreement, providing that the note should not be paid in event that an executory contract, which was the consideration of the note, should not be performed, has been allowed to defeat the negotiability of the note in the hands of an endorsee, though he have notice of such agreement.”
In view of these, it will suffice to cite but a few of the great number of cases affirming this rule. See Kinkel v. Harper, 7 Colo. App. 45 (42 Pac. 173); Davis v. McCready, 17 N. Y. 230; First Nat. Bank v. Michael, 96 N. C. 53 (1 S. E. 855); Moyses v. Bell, 62 Wash. 534 (114 Pac. 193); Hakes v. Thayer, 165 Mich. 476 (131 N. W. 174); Houston v. Keith, 100 Miss. 83 (56 So. 336); Merchants’ & Planters’ Bank v. Penland, 101 Tenn. 445 (47 S. W. 693).
The contract upon the execution of which the notes in dispute were given, recites that, in consideration of the payment of said notes, the vendor agrees to convey certain lands in fee simple, free and clear of all incumbrances; that, when all the notes have been fully paid, a warranty deed shall be made, and an abstract furnished, showing title free and. clear from all incumbrances in the vendor; and that all money paid under the contract is to be returned if warranty deed and abstract are not furnished, as provided in the contract. As I experience much difficulty in understanding what there is about this transaction *298and collateral agreement to justify the majority in making an exception of this case, I shall attempt to clarify myself by elimination — by pointing out in what respects the situation here does not work an exception. The rule applies to nothing but considerations formed by an executory agreement. Can it be said that the contract here is not an executory agreement? It is so manifest that it is a promise not yet performed as that I shall assume the majority does not ground its opinion upon the claim that the agreement is not executory. Can it be the majority thinks the general rule does not apply because the promise is one to convey land? I can scarcely believe so, because the books are full of cases where the buyer of the note was protected, though the consideration was just such a promise. American Funding Cor. v. Pennington, 107 Miss. 10 (64 So. 845); United States Nat. Bank v. Floss, 38 Ore. 68 (62 Pae. 751); Merchants’ & Planters’ Bank v. Penland, 101 Tenn. 445 (47 S. W. 693). Is its reason that the contract and the notes here were contemporaneously made, and are part of the same transaction? I can hardly think that either, because that was the situation in McNight v. Parsons, 136 Iowa, at 392, and in Jennings v. Todd, 118 Mo. 296 (24 S. W. 148), and, for that matter, in practically all the cases wherein the rule was applied. Is it thought that here is an exception because the payee promised to give perfect title as soon as all the notes were paid, and expressly stated what the law implies; that he would convey when all the notes were paid, or repay all the- buyer had paid if there was a failure to give such title after the notes were paid? Concede, if you please, that this, in a sense, makes an interdependent contract, and involves reciprocal promises, and still the case remains within the rule. Call the transaction what you will: still the voice of authority says such interdependence and such reciprocal promises as are found here do not affect the buyer of the notes. These reciprocal *299promises create an adequate consideration, but have no other effect, except to assure the buyer of the note that he is to be paid by the maker whether the promise to the maker be or be not kept. It absolves him from inquiry whether the payee of the note will perform his contract, and he may assume that he will. Houston v. Keith, 100 Miss. 83 (56 So. 336); Hakes v. Thayer, 165 Mich. 476 (131 N. W. 174); Tiedeman, Commercial Paper, Sec. 300. By selling the-note, the maker declares he will pay it to the endorsee though the consideration should fail as to the payee. Siegel, Cooper & Co. v. Chicago Trust & Sav. Bk., 131 Ill. 569; Jennings v. Todd, (Mo.) 24 S. W. 148. In Whitehead v. Purdy, 172 Mich. 31 (137 N. W. 684), there were reciprocal promises, and there was an express agreement that, if the promise was not kept, the maker of the note should be reimbursed in full. The note was sold to one who had full knowledge of this agreement. At the time of the sale, it was impossible to determine whether the contract of the payee could be performed as was agreed. But a verdict for plaintiff was directed, because the case presented no more than that the makers of the note were willing to give it to secure what the payee promises, in reliance upon his agreement to indemnify and reimburse them for what they had paid on their notes, if the collateral agreement was not kept. And see Kinkel v. Harper, (Colo.) 42 Pac., at 176; Sadler v. White, 14 La. Ann. 177. The rule was applied in Davis v. McCready, 17 N. Y. 230, where-it is expressly found no exception is worked because the consideration is “founded upon reciprocal promises • of the parties.” And in United States Nat. Bank v. Floss, (Ore.) 62 Pac. 751, the payee stipulated just as here, to wit: that, upon payment of the note at maturity, he would convey to the maker by good and sufficient warranty deed. In Jennings v. Todd, (Mo.) 24 S. W. 148, the note collected by the buyer itself recited it should not be paid if the payee did not fulfill *300every requirement of the collateral contract.
To the difference between these notes and what the law terms a conditional note, I shall address myself later. All that it is necessary to say at this point is that the reciprocal nature of the engagements can have no effect here. The maker was bound to pay all the notes before he was entitled to a conveyance. Although upon payment he was thus entitled, he could not defend against either note because no conveyance had been made for the self-evident reason that, no matter how reciprocal the promises were, as payment must precede conveyance, failure to convey was no- reason for not paying.
Such- agreements create a condition subsequent which cannot- affect the buyer of the note. By making a negotiable note, the maker says, in effect, “If anyone shall buy this note, let him be advised that I have confidence the payee will perform the agreement for which I gave the note. If he shall fail, I will obtain redress for the breach of contract.” Siegel’s case, 131 Ill. 569. It is said in Jennings v. Todd, (Mo.) 24 S. W. 148:
“In purchasing such note no inquiry as to the consideration is required. If a failure of consideration occur, the maker must look to the payee for indemnity.”
And in Sadler v. White, 14 La. Ann. 177:
“Anyone having sufficient confidence in another to give his written obligation for something to be given or enjoyed hereafter, is at liberty to do so, and the maker cannot censure airy future holder of the note for having purchased it, and for seeking to hold him liable; for it was the faith of the maker in the payee that-he would execute his promise and allow no obstacles to defeat it that created the note and gave currency to it.”
Can it be . a difference is found because the buyer of the notes here was advised by inspection of the contract itself that it was what it was? Can it make a difference *301how such knowledge is acquired? It seems to me the rule must be the same whether the buyer is advised of the existence of the executory contract by statement on part of those who profess to know the fact, or gets his information by reading the contract itself. In both cases, nothing is accomplished except that the buyer has notice of the agreement. If this self-evident proposition is not to be agreed to unless supported by authority, that is not lacking. The purchaser of the note has been protected where the note itself advised him that its consideration was an executory contract. Houston v. Keith, 100 Miss. 83 (56 So. 336); Moyses v. Bell, (Wash.) 114 Pac. 193; Henneberry v. Morse, 56 Ill. 394. In Jennings v. Todd, (Mo.) 24 S. W. 148, the note itself recited that it should not be paid if the payee did not fulfill every requirement of the collateral contract. The purchaser has had the benefit of the rule where he saw' a recital in the bond itself of what consideration it was given for. First Nat. Bank v. Michael, (N. C.) 1 S. E. 855. And it is said in Siegel’s case, 131 Ill. 569, citing Henneberry v. Morse, 56 Ill. 394:
“The most that can be said of a recital in the instrument itself, of the consideration upon which it rests, is that the endorsee, taking it before maturity, is chargeable with notice of the recital.”
And see cases in note to Kimpton v. Studebaker Bros. Co., 14 Idaho 552 (14 Am. & Eng. Ann. Cas. 1126).
Every factor thus far considered was present in the cases wherein knowledge that the note had for its consideration an executory contract was not allowed to defeat the collection of the note. But in many of these cases, one factor was absent that is present here, and that is that the buyer of the note took an endorsement of the note, and also took an assignment of the contract itself, as further security. Now, in the first place, taking possession of the contract added nothing to notice. So far as the general *302rule is concerned, the buyer of the notes was as much affected by obtaining hearsay knowledge that the executory contract existed as he would by seeing it in the contract of which he took possession. The majority refers to some cases to the effect that, when a note and mortgage are made contemporaneously, the two must be construed together, and that, in jurisdictions where a note secured by mortgage is nonnegotiable, the buyer of the note, is affected by conditions in the mortgage which limit the obligation of the note, and that, even though the note be negotiable, such conditions in the mortgage may be used in defending against the note, if the buyer had knowledge of the provisions of the mortgage. See Briggs v. Crawford, 162 Cal. 124 (121 Pac. 381); National Hardware Co. v. Sherwood, 165 Cal. 1 (130 Pac. 881); Garnett v. Meyers, 65 Neb. 280 (91 N. W. 400); Consterdine v. Moore, 65 Neb. 291 (96 N. W. 1021); Brooke v. Struthers, (Mich.) 68 N. W. 272; Jacobs v. Mitchell, 46 Ohio St. 601 (22 N. E. 768). I concede their holdings, but challenge their applicability here. I am in no doubt that one who buys a contract and assumes to become a party to it is bound to perform it, and, if failure to perform causes a loss to the other party, he may offset that loss when the buyer of the contract sues upon the note which he has bought, though he also bought the contract which is the consideration for such note. The trouble lies with the premise. The buyer of the notes here did not buy the contract. He did not agree to become a party to .it. He did not assume any of its obligations. He took it purely as an additional security. Such taking does not change the rights the rule gives him. See Moyses v. Bell, (Wash.) 114 Pac. 193; Kinkel v. Harper, (Colo.) 42 Pac. 173. As well say that, if a bank takes a bond as collateral to the note of a borrower, and has it endorsed for that purpose, that it becomes obliged to pay the bond if the maker fails to do so. Taking an endorsement of the note gave the buyer *303the right to collect from the maker, and, in certain contingencies, from the endorser. When it took an assignment of the contract, it merely obtained a further security, consisting of a species of lien upon the interest both parties to the contract had in the land covered by the contract. Instead of becoming bound by the agreement to convey good title to land the transfer of the contract worked merely that, if the buyer of the notes had need to resort to the land, he might resort to it; that, in such event, he could make any deficiency out of the land, if the land was worth it and the title of either party to the contract was good; and if there was no deficiency, or if it could not be made out of the land,' the assignment of the contract would prove to be no additional security. It was never before held, and, unless it be done here, in my opinion never will be held, that the general rule which protects the buyer of the note, though he knew its consideration was an executory contract, is abrogated because the buyer takes security additional to what the mere signing and endorsing of the note gave him.
I have no complaint to make of the pronouncement of the majority that, where a note is conditional, whosoever buys it with knowledge of the condition is bound by that knowledge, unless that this is so is to be an argument for holding that the notes in suit here are conditional notes, within the meaning of that rule. There is nothing in Thomas’s Assignee v. Page, 3 McLean (U. S.) 167, and Sutton v. Beckwith, 68 Mich. 303 (36 N. W. 79), the only cases cited in the opinion for this point, which in the least attempts to destroy the general rule by holding that the notes here are conditional ones. They are conditional only in the sense that paying them is not the end, and that if, after payment is made, the contract is breached, the money paid may be recovered back. If that makes the notes conditional in such sense as that knowledge that the consider*304ation is an executory contract affects the buyer, then there never was any substance to the confessed general rule. Every note upheld under that rule was, in that sense, conditional. I have called attention to a number of cases wherein collection was enforced, though the very note stated that payment was to be made if the payee did certain things. See Siegel, Cooper & Co. v. Chicago Trust & Sav. Bk., 131 Ill. 569 (23 N. E. 417); National Bank v. Cason, 39 La. Ann. 865; McCarty v. Howell, 24 Ill. 341; First Nat. Bank v. Michael, (N. C.) 1 S. E. 855; Davis v. McCready, 17 N. Y. 230; Kinkel v. Harper, (Colo.) 42 Pac. 173; Moyses v. Bell, (Wash.) 114 Pac. 193. A conditional note which one having knowledge of the conditions cannot enforce, is one wherein the condition makes it uncertain whether the note can ever be collected, or when the obligation to pay it will mature. Here, there is no uncertainty in either respect. The only uncertainty is Avliether, after they ai’e paid on the day they come due, the original payee Avail mot And that the maker has a right to be reimbursed for Avhat he has paid.
The transaction at bar is not against public policy. Whitehead v. Purdy, supra. The exxforcement of the xmle is a salutax’y help to the transaction of business. Jennings v. Todd, supra. That is why the “Bohemian Oats” cases are not in point. In Merrill v. Hole, 85 Iowa 66, at 71, 72, it was complained that the court should have met a claim that mere notice of what the consideration xvas would not defeat an innocent buyer, and the answer Avas:
“There is no claim that xnere notice that the consideration was the sale of oats and a bond would be notice of want or failure of consideration, but it is that notice of that kind of sale and bond Avould be, because of their being illegal and void.”
In other Avords, Avhen a buyer knoAvs that the note he bixys rests upon an illegal consideration, he is xiot an inno*305cent purchaser. It is all met by the elementary proposition that interchange of agreements is nothing illegal, and, on the contrary, is a valid agreement and consideration. The contract involved in this case is not “this kind of sale and bond.” It is one which the authorities have always held not to affect the buyer. And it is said in Hakes v. Thayer, (Mich.) 131 N. W. 174, distinguishing Bohemian Oats cases, that, as to a contract which is lawful, the buyer of the note need not inquire “whether the seller has performed his agreement or will be able to perform.'”
As to numerous cases cited by the majority in support of the fact that the notes and contract were mutual and dependent agreements; that it was the intent that performance of both should be simultaneous; that, as between buyer- and seller, the two things are interdependent; and that the buyer need not pay unless the seller conveys: I submit that any reliance upon these begs the whole question, by assuming against the conceded general rule that, because these things are so between the original parties, therefore they control the rights of one who buys the notes.
As to the argument that the buyer of the note would have been subject to the conditions of the contract if the note and the contract had been one piece of paper, and that paper had been endorsed, answer is that the papers are not in that condition, and, consequently, were not endorsed while in that form. Another answer is that, in the supposed case, the buyer would not be subjected to defenses because he had knowledge that the obligation rested upon an executory agreement, and such agreement was breached by the payee of the notes, but because what he bought was nonnegotiable, which, as a very necessary consequence, and of itself alone, explains why, in the supposed case, the buyer would not have the status that 1 think he should have in this ease.
It seems to me that here is another instance of assert*306ing a nonexistent distinction for the purpose of abrogating a rule while ostensibly affirming the rule;' that nothing talles this case out of the confessed rule; and I would affirm. If Zebley v. Sears, 38 Iowa 507, is opposed, — and I do not think it is, — it should be overruled; and that the McNight case does, in effect, overrule it.