[No. 9228. Department Two. April 18, 1911.]
SCANDINAVIAN AMERICAN BANK, Appellant, v. JOHN F.
APPLETON, Respondent. «1»
BILLS AND NOTES - BONA FIDE PURCHASER - HOLDER IN DUE COURSE -
EVIDENCE - SUFFICIENCY. Where the title to a note was defective
by reason of fraud not discovered until after it was negotiated
to a bank, and the bank established, by the undisputed evidence
of disinterested witnesses, that it took the same before maturity
for full value in good faith, it is entitled to a directed
verdict as a holder in due course; and it is not evidence of bad
faith, or sufficient to put the bank on inquiry, and prevent a
directed verdict, that the maker had previously negotiated to the
same bank the notes of another person the title to which was
claimed to be defective, where the prior transaction was closed
and settled three months before the note in question was
negotiated to the bank, and bore no relation to it, and there was
no occasion to prosecute any inquiry on the prior transaction.
PLEDGES - NOTE AS COLLATERAL - RIGHT OF PLEDGEE - CORPORATIONS
- STOCKHOLDERS - SURETIES ON PRINCIPAL NOTE. Where a
stockholder's notes for his stock subscription were negotiated by
the corporation as collateral security for its own note, which
was indorsed by other stockholders who had paid their stock
subscription, the holder in due course of the principal and
collateral notes may enforce the collateral, although it was
fraudulently obtained, without first proceeding to collect the
principal note, where the corporation
«1» Reported in 115 Pac. 109.
204 SCANDINAVIAN AMERICAN BANK v. APPLETON.
Opinion Per CROW, J. 63 Wash.
had gone into the hands of a receiver and was not shown to be
solvent, and the indorsers financially responsible on the
principal note were only sureties for the corporation.
DUNBAR, C.J., dissents.
Appeal from a judgment of the superior court for King
county, Tallman, J., entered April 13, 1910, upon findings
in favor of the defendant, after a trial on the merits before the
court without a jury, in an action on promissory notes.
Reversed.
Roberts, Battle, Hulbert & Tennant, for appellant.
Douglas, Lane & Douglas, for respondent.
CROW, J. - Action by the Scandinavian American Bank
against John F. Appleton, on two promissory notes. From
a judgment against it, the plaintiff has appealed.
The notes of the respondent, for $1,000 each, dated
January 23, 1909, due in four and five months, were executed and
delivered to the Electric Transportation Company, in
payment of a stock subscription. On May 7, 1909, they were
assigned to appellant as collateral security for the $5,000
note of the transportation company. The transaction in
which these notes were thus assigned is the one mentioned in
our opinion in Scandinavian American Bank v. Johnston,
ante p. 187, 115 Pac. 102. That opinion fully discloses the
facts. About the only difference between respondent's position
and that of Johnston is that respondent's notes, pledged
as collateral, were executed in the preceding January.
This cause having been tried without a jury, is now before
us for trial de novo. Without repeating the facts which
appear in the Johnston case, we will simply state that, upon
the evidence now before us, substantially the same as in the
Johnston case, we cannot approve the finding of the trial
judge that the appellant bank was not a bona fide holder of
respondent's notes for value in due course.
Respondent, in this action, contends, that the principal
$5,000 note was collectible; that his collateral notes were
SCANDINAVIAN AMERICAN BANK v. APPLETON. 205
Apr. 1911 Opinion Per CROW, J.
fraudulently obtained; and that the bank should be compelled
to first proceed against the principal note. In support of
this position, respondent cites, Prentice & Weissinger v. Zane,
2 Gratt. (Va.) 262; Hulett v. Marine Sav. Bank, 143 Mich.
219, 106 N.W. 879, 4 L.R.A. (N.S.) 1042, and Citizens'
Bank v. Bank of Waddy, 126 Ky. 169, 103 S.W. 249, 128
Am. St. 282, 11 L.R.A. (N.S.) 589. The evidence in this
action discloses the fact that the endorsers on the principal
note, shown to be financially responsible, had subscribed and
paid for their stock in the transportation company, and
that the appellant, Appleton, to the extent of $2,000, and
Johnston to the extent of $3,000, had not paid their stock
subscription except by giving their notes. If they could now
be released from liability thereon, they would be relieved from
paying for their stock, and the endorsing stockholders, who
have already paid their subscriptions in full would, in
addition thereto, have to pay the principal note. Whether this
circumstance had any controlling influence over the bank in
making its election to first proceed on the collateral notes
does not appear. The evidence does show that the only
responsible parties on the principal note are the endorsing
stockholders, and not the transportation company, which,
as maker, is primarily liable.
None of the cases cited by respondent sustains his contention
that the bank should be required to first proceed against
the endorsers. Prentice & Weissinger v. Zane, supra, in no
respect touches the question. In Hulett v. Marine Sav. Bank,
supra, there was sufficient evidence to sustain a finding that
the endorsee, who held the defendant's note as collateral, was
not a holder in good faith. The maker of the principal note
was also shown and conceded to be financially responsible and
able to pay. The maker of the principal note in this case
is now in the hands of a receiver and not shown to be solvent.
In Citizens' Bank v. Bank of Waddy, supra, one Paxton
had delivered to the Bank of Waddy his renewal note,
without at the time obtaining a surrender of his original
206 SCANDINAVIAN AMERICAN BANK v. APPLETON.
Opinion Per CROW, J. 63 Wash.
note, which had theretofore been assigned as collateral
security. Instead of procuring and returning
his original note, the cashier of the Bank of Waddy
fraudulently assigned the renewal note to another bank
as collateral. It was held that, if necessary to the
collection of the principal indebtedness, for which his two notes
had been assigned as collateral, the maker, Paxton, would be
obliged to pay his original and also his renewal note,
although given for but one debt. But it was further held that,
for Paxton's protection, the endorsees would first be required
to look to their other collateral, and that, if their principal
notes could be thus satisfied, one of Paxton's notes should be
surrendered to him. There was no question as to the liability
of the makers of any of the other notes which constituted the
remaining collateral. No such circumstances appear in this
action. The only principal obligation, to which the rule for
which appellant contends could be applied, if applied at all, is
the debt of the transportation company. It could not be
applied to the endorsers. Respondent's notes were properly
endorsed by the transportation company, and before their
maturity delivered to appellant, who then became a holder
in good faith for value and in due course.
Reversed and remanded, with instructions to enter
judgment in favor of the appellant.
CHADWICK, and MORRIS, JJ., concur.
DUNBAR, C.J., dissents.