Court Opinion

ID: 7899430
Source: CourtListenerOpinion
Date Created: 2022-09-08 21:54:31.110008+00
Date Added: 2024-06-11T16:32:12.449767
License: Public Domain

McSherry, J.,
delivered the following dissenting opinion, in which Bryan and Briscoe, JJ., concur:
In March, 1893, Wilcoxon was indebted to the Frederick-Town Savings Institution in the sum of eleven thousand three hundred dollars on four promissory notes, of which two were overdue and two had not yet matured. There were sureties upon each of these notes. . Failing, after considerable pressure brought to bear by the bank, to give additional security, Wilcoxon finally agreed to execute and the bank consented to accept a mortgage upon Wilcoxon’s real estate to secure the entire indebtedness. Accordingly, a new note for eleven thousand three hundred dollars, the total amount he owed the bank, and a mortgage of even date securing that note were executed by Wilcoxon and wife and delivered to the bank; the accrued interest and discount for six months in advance were paid and the bank returned to Wilcoxon the four promissory notes evidencing the original indebtedness. The precise mode pursued in accomplishing this arrangement was as follows : The note for eleven thousand three hundred dollars, signed by Wilcoxon and wife, was apparently discounted, and the proceeds were apparently carried to his credit in his account with the bank. Against this seeming, but not real credit, he drew his check for the face amount of the four notes, with accrued interest and discount in advance on the new note, and that check was then charged up against the fictitious credit simultaneously entered. No *504actual money passed from the bank to Wilcoxon, or from Wilcoxon to the bank, and none could have been drawn on the faith of this alleged credit; but the whole transaction was effected by a system of interledgering entries, intended to create the impression that it was an entirely new discount, disconnected from the antecedent indebtedness, and after all the entries had been made nothing had been substantially accomplished but the substitution of a new note, and a mortgage for the four original notes. Shortly after this transaction had been completed, Wilcoxon, who was a trader, made a voluntary application for the benefit of the insolvent laws, and in due season his creditors elected permanent trustees, in the method prescribed by the Code. The trustees, within four months after the date of the mortgage, filed a bill in equity against the bank, alleging that the mortgage was a prohibited preference, and praying that it be cancelled and annulled. After a hearing the Circuit Court for Frederick County passed a decree vacating and setting aside the mortgage, upon the ground that it was a preference given by a trader and accepted by his creditor, contrary to the provisions of the insolvent law ; and it was further decreed that the four original promissory notes on file in the office of the Clerk as a part of the evidence in the then pending cause, be returned to the bank. Thereafter the bank brought suit against Wilcoxon and Michael upon one of the four promissoiy notes which constituted the evidence of the original indebtedness to the bank. To the narr, which declared on a promissory note for five thousand dollars, Michael in reality a surety, but ostensibly one of the joint makers of the note, pleaded, first, that he never promised as alleged; and secondly, that before suit was brought Wilcoxon satisfied and discharged the note by payment. There are three bills of exception in the record, and from the final' judgment, which was entered pro forma for the defendant, the bank has taken this appeal. The first exception was taken to the ruling refusing to admit in evidence the bill, answer and decree in *505the case instituted by the permanent trustees to annul the mortgage; the second was reserved because of the ruling refusing to allow the plaintiff to show that the note sued on had been delivered back to the bank by the Clerk pursuant to the decree, ánd the third was taken to the ruling of the Court upon the prayers — the prayer of the plaintiff, insisting that under the facts stated, it was entitled to recover, having been rejected and that of the defendant, being the direct converse, having been granted.
The question, then, which, it seems to me, lies at the very root of the controversy is, was there a payment of this note by Wilcoxon under the circumstances stated, and by the method above set forth? If there was not, then clearly, under the issue joined on the second plea, the plaintiff was entitled to recover. If there was a payment, then, of course, the debt was extinguished and the liability of Michael was at an end.
It must be borne in mind that the signatures to the note were not denied by the pleadings, and are, therefore, under Art. 75, sec. 23, sub-sec. 108 of the- Code, admitted; and hence the mere production of the note made out a prima facie case which, unless rebutted, entitled the plaintiff to recover. The defendant having pleaded payment and having thus set up new matter by way of defence had, according to settled rules of pleading and practice, the burden cast upon him to show affirmatively by evidence the truth of the facts asserted in the plea; and this included, as an integral part of the defence relied on, proof as to how and by what means the alleged payment had been made. Payment cannot be proved without at the same time showing how it was made. The method of payment is inseparable from the fact of payment, because the fact as to whether a payment has been made can only appear when the method by which it is alleged to have been made is disclosed. Now, if under the circumstances stated there was a payment, how was it made ? Was the debt evidenced by the five thousand dollar note sued on paid with money, or was it paid by the substitution *506of another and a different obligation; that is to say, was there a novation ? It is not pretended by any one that the note was paid with money — no suggestion of that kind is to be found in the record or was made in the argument at bar— and therefore if there was any payment at all it must have been and could only have been by a novation. If made by the latter means, then what was the obligation or new debt substituted for and accepted in lieu of and as discharging the original indebtedness ? Was it the note of Wilcoxon and wife, with a collateral mortgage as a mere separable and divisible incident, or. was it the note of Wilcoxon and wife and a mortgage of even date securing' it, both forming and intended to form one entire consideration ? There is not the faintest intimation in the record to show that the bank and Wilcoxon agreed to substitute, or ever thought of considering, a new note of the debtor and his wife as a substantive payment of the four promissory notes' upon all of which there were personal securities. There can be no possible pretext that such an understanding or anything resembling it was proposed, much less accepted. There being nothing whatever in the record to show this, it cannot be assumed. The burden of proving such an agreement rests upon the defendant; the presumption of the law being that the note was taken as conditional payment only. Haines & Eppley v. Pearce, 41 Md. 221. There is consequently but one remaining contingency, and it is that the five thousand dollar note was paid, if paid at all, by the new note and the mortgage, both together constituting one entire novation, and not separate novations, of the original debt. To this complexion the contention must inevitably, by the simplest process of exclusion, ultimately come. If, then, the note and the mortgage together constituted the consideration for the surrender of the five thousand dollar note by the bank, and the mortgage has been stricken down because it was an unlawful preference, and therefore because it was such a mortgage as Wilcoxon could not lawfully give, and the bank has lost the benefit of the security the whole transaction *507was intended to provide, has there still been a paymant which extinguished the debt and satisfied the note signed by Michael? If it be conceded, as it must be, that both the note and the mortgage, by the agreement of the bank and Wilcoxon, made up and were to constitute a payment of the note sued on, then when one of these two constituent mediums of payment has proved valueless by reason of matters subsequently intervening but in reality existing at the date of, and inhering in, the mortgage, it is obvious that the other and remaining one cannot alone be treated as payment, unless the Court makes a new contract of novation for the parties that they did not see fit to make for themselves. This, of course, cannot be done. The bank was entitled to get and to retain all that it contracted for, not a mere fraction of it, before it can be held to the terms of its co-relative and dependent agreement to fully and finally surrender and extinguish the antecedent notes. This is so far fundamentally true as to be axiomatic and therefore incapable of demonstration. To constitute a novation which will discharge the original debtor and render a third person liable for the debt, there must be the substitution of a new obligation for the old one, and the new contract must be a valid one upon which the creditor can maintain his remedy. Spycher v. Uerner, 5 L. R. A. 414.
It is by no means an answer to say, that when the mortgage was taken the bank was bound to know that the lien created thereby would not prevail if attacked under the insolvent law, for the provisions of that law were as much an integral part of the mortgage as though they had been written at large therein. With those provisions, therefore, in the minds of the parties, as in contemplation of law they were in the body of the mortgage, it is not to be concluded, for there are no premises to justify it, that either the mortgagor or mortgagee contemplated the contingency would arise which would destroy the mortgage altogether; and hence,, the only tenable inference is that both the bank and Wilcoxon supposed when the negotiations were made and *508closed, that the mortgage was, and would continue to be, perfectly valid and effective, as it would undoubtedly have been had no insolvency proceedings intervened, and had no assault been made on it within the four months prescribed by the statute. “Upon broad principles of justice, it would seem that a man should not be allowed to pay a debt with worthless paper, though both parties supposed it to be good.” Roberts v. Fisher, 43 N. Y. 161. And this doctrine runs through the differing phases of many adjudged cases. Thus, in Bemhisel v. Firman, Assignee, 22 Wall. 170, where a security founded on a prior one was tainted with usury, and the'prior one was free from it, but had been given up and cancelled in exchange for the tainted one, and the latter was thereafter adjudged void because of the usury, it was held that the prior or cancelled one was revived and could be enforced as though the invalid one had never been given. And the Court cites Parker v. Cousins, 2 Gratt. 389; Bank v. Joslyn, 37 N. Y. 353 ; Cook v. Barnes, 38 N. Y. 521 ; Rice v. Welling, 5 Wend. 595. So where payments have been made in counterfeit money the debt has always been treated as still due and subsisting. First Nat. Bk. of Athens v. Buchanan et al., 1 L. R. A. 199, and numerous cases cited in the note. In Petty v. Cook, L. R. 6 Q. B. 790, the payee of a promissory note made by a principal and a surety accepted the amount thereof from the principal, in good faith, and without notice that the payment was a fraudulent preference. The principal afterwards entered into a composition deed for the benefit of his creditors, the trustee under the deed avoided the payment as a fraudulent preference, and the payee returned the amount to the trustee. .Then the payee brought suit against the surety on the note, and the surety pleaded, just as he has done in the case at bar, that the principal had satisfied and discharged the claim by payment. But it was held by Blackburn, Lush and Hannan, JJT., that the payment did not operate as a-satisfaction of the debt, and that the acceptance of the money from the principal by the payee was not an act done against *509the faith of the contract with the surety so as to discharge him. And in Pritchard v. Hitchcock, 6 M. & G. (46 E. C. L. R.) 151, it appeared that A had guaranteed the payment to B of two bills of exchange accepted by C. C afterwards handed over the amount of the bills to B. This was apparently a payment, and was intended to be, but a fiat having issued against C, his assignees in an action for money had and received recovered the money back from B as having been paid by way of fraudulent preference, just as the mortgage in the pending case was stricken down because it was a prohibited preference. Then B, the creditor, brought suit against A, the guarantor, upon the guaranty, and A pleaded that C, the debtor, had paid, and B, the creditor, had received the money in satisfaction of the bills, which allegation was traversed by the replication. It was held that the payment did not amount to a payment in satisfaction. Tindal, C. J., observed: “Of the fact of money being passed as a payment there can be no doubt, but I think that the plaintiff was at liberty to show that what appeared at the time to be a good and satisfactory payment, was perfectly illusory; that the money which he had received from W. Hitchcock could not be appropriated by him to his own use, but that it belonged to the assignees.” The two cases last cited differ from the one at bar only in the single fact that the payment pleaded was made with money, whilst here it was made with a note and mortgage. In both Pretty v. Cook and Pritchard v. Hitchcock, the original evidences of indebtedness had been surrendered up upon the payments being made; the payments would have been good but for the intex-vening insolvency of the debtors, and the sui-eties wei'e sued on the oxiginal contracts, after the money paid by the pi'incipal debtors had been recovered back by the assignees,-because the payments, were, when made, fi'audulent preferences. Notwithstanding all this, the sureties were held not to have been discharged by these illusory payments. Wherein is there the slighest diffei-ence in principle between those cases and the one at bar ?
*510But without searching for merely parallel cases, which are valuable chiefly as illustrations of the application of established legal principles, what is the ultimate principle which underlies, and necessarily underlies, all adjudications of the class alluded to, wherein the surety bases his defence on the plea that the principal paid the debt', and the creditor insists that the payment was wholly illusory ? Obviously it is, that upon the failure of the alleged payment to become an effective and a real satisfaction of the debt, by reason of some supervening legal impediment, the debt remains unextinguished ; and the attempted, but abortive payment, not being an act against the faith of the- contract with the surety, in no way affects his liability, and consequently does not discharge him. The surety, at the time of taking upon himself his liability, contracts that the creditor shall receive valid payment of his claim against the principal debtor. If there is no valid payment the contract of the surety remains unfulfilled, and the surety is not discharged, because what he contracted should be done has not been done. A payment which at the time it is made contains the seeds' of avoidance and is subsequently avoided, is not a valid payment, and hence does not operate to release the surety. And is not that precisely the condition of the case at bar?
Now, all pretence of a payment in money being eliminated, there are two reasons why there was no payment made at all: First, there was no payment, because if the note and the mortgage were both intended by the parties to- the transaction to constitute payment and a part of the agreed medium of payment, the mortgage, has failed to be available by reason of inherent infirmities; then the bank did not get the security it contracted to get, and it obviously cannot be treated as holding towards the surety the relation that it would have been forced to assume had it secured what it contracted for and what Wilcoxon undertook to give it. And secondly, because there is no pretence that the bank agreed to rely solely on the note of Wilcoxon and wife as in itself a payment of the antecedent indebtedness. *511The law is perfectly well settled in this State that the mere receipt of a security of equal or inferior degree to that evidencing the original debt, will never operate as a payment of the latter. There must be, in addition, proof that the new bill or note was accepted by the creditor under an agreement that he would run the risk of its being paid, and would look exclusively to it for satisfaction. Md. & N.Y. Coal Co. v. Wingert, 8 Gill, 171 ; Hoopes v. Strasberger, 37 Md. 390. And the burden of proving such an agreement is on the party asserting it; the presumptions are all against its existence. Haines & Epply v. Pearce, supra. There is not the most indistinct shadow of evidence, nor is it even pretended, that the bank took the note of Wilcoxon and wife under an agreement, either express or implied, to run the risk of its payment, or to look to it alone, apart from the mortgage, in settlement of the promissory notes or either of them. Consequently, there is wanting one of the essential requisites to show a payment by the note alone. Even if the note, separated from the mortgage, continues to have any validity, it could not be treated as a payment, because there is no evidence whatever that it was agreed to be so considered or treated.
But beyond this, when the mortgage fell the note fell with it. The note of Wilcoxon and wife was but a part of the transaction, and a very subordinate and wholly unnecessary part, and was never intended to stand alone or severed from the mortgage. It was the accidental and not the essential feature of the arrangement; and to hold that it survived the wreck of the mortgage and constitutes by itself a payment of the note sued on, is to make the accessory serve the purpose designed originally to be accomplished by the principal — is to convert the subsidiary into the substantial term of the contract of novation or payment. Such a conclusion would hold the wife absolutely bound on the note though she signed it on the condition that it was to be secured by a mortgage on her husband’s property. Being a mere surety herself, as all the facts incontestably show, *512she was entitled to the benefit of all the securities held by the creditor, and it may well be questioned whether she could be held liable at all on the note, even if it did not fall with the mortgage, if she signed it and the bank accepted it upon the express condition that it was to be secured by a mortgage which afterwards turned out to be invalid. The very condition upon which the delivery and acceptance of the note depended failed ; that is to say, the mortgage which was to secure it was inoperative; and the condition failing, the note was no longer enforcible, and not being enforcible it was utterly without value in the hands of the bank and consequently inoperative as a payment at all.
I think there was no error in the first and second exceptions, of which the appellant can complain. The production of the note sued on and the signatures to which were undisputed, made out the plaintiff’s case; there was no evidence adduced tending to show payment, and the plaintiff was not required to prove the negative of the defendant’s plea. Hence the proposed evidence which only tended to prove that negative was immaterial.
There was error, it seems to me, in rejecting the plaintiffs and in granting the defendant’s prayers. The latter, besides being wrong in principle was entirely too general, and if for no other reason ought to have been rejected on that account. In my opinion the pro forma judgment ought to be reversed and judgment ought to be entered for the appellant.
(Filed June 19th, 1895.)