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District Court of Appeal, Third District, California.


Civ. 7029.

Decided: January 10, 1945

B. J. Galbreath, of Marysville, and Muldary & Elkington, of San Francisco, for appellants. Charles A. Bliss and Irvin C. Ford, both of Sacramento, for respondents.

Three defendants only, members of the California Cooperative Producers, and makers of separate promissory notes payable to plaintiffs in specified installments, as pledges to secure a note for $5,000, dated April 17, 1928, for money borrowed from plaintiffs, have appealed from a judgment which was rendered against said defendants for the unpaid amounts of their respective notes together with interest.

The appellants contend that the findings and judgment are not supported by the evidence; that plaintiffs are not holders of the notes in due course; that there was a failure of consideration for the notes; that the notes were delivered to plaintiffs conditionally and not otherwise; that the notes were procured by fraud; that the court erred in refusing to permit the defendant Shidler to prove that he was released from his obligation by full performance of the condition upon which his note became effective; that the court erred in denying the defendants' leave to amend their answer to set up the statute of limitations, and in other rulings upon the introduction of evidence at the trial.

California Cooperative Producers, a cooperative business corporation, was organized prior to April 17, 1928, pursuant to the statutes of California of 1905, p. 594, Division I, Part 4, Title 19, Civil Code, § 653a, to process and can fruits produced by growers who were members of the organization. The appellants were producers of fruit and members of the corporation. As a consideration for processing and marketing their fruit by the corporation the appellants signed written agreements to extend their credit to the corporation by the execution of their promissory notes in amounts to be determined by the tonnage of fruit delivered. April 17, 1928, the corporation borrowed from plaintiffs the sum of $5,000, payable in specified installments on or before April 17, 1931, for which it executed and delivered to plaintiffs its promissory note. That note provided:

‘This note is secured by pledge of the following installment notes, payable to the order of the maker hereof:

The foregoing members, who are the only appellants, executed and delivered to the corporation their said notes, payable in installments, upon the respective dates mentioned. The notes were executed and held as pledges to secure the payment of said $5,000 note. The corporation defaulted in payments of its said $5,000 note, and in 1930 it filed a petition in voluntary bankruptcy. Each of the makers of said security notes was in default of payments as required therein. December 29, 1933, plaintiffs brought this suit upon all of said notes for the unpaid portions thereof. The court adopted findings against the defendants upon all essential issues, and rendered judgment against these appellants for the unpaid principal and interest of their surety notes as follows: Shidler for the sum of $820.57; Winchester for the sum of $6,253.31 and Galbreath for the sum of $1,995.50. From that portion of the judgment said defendants have appealed.

It is harmless that the court, in Finding XVII, inadvertently stated that ‘plaintiffs are not holders in due course of said collateral notes,’ since in the same finding the court determined that plaintiffs purchased and held the notes ‘in good faith and for value and without notice of any equity or defense in favor of defendants,’ and that, at the time plaintiffs acquired the notes, the payee corporation held proceeds from sales of fruit belonging to each defendant, sufficient to pay the installments then due, which proceeds the corporation was required, under its marketing agreement with defendants, to credit to the payment of such installments. Since the judgment and the findings as a whole were favorable to the plaintiffs, the preceding finding should be construed to determine that plaintiffs held the notes in due course free from any defect of title of prior parties, and free from defenses available to prior parties among themselves. In other language, the effect of the preceding finding is that the court determined that the installments which were due before plaintiffs purchased the notes had been fully paid, according to agreement, from the proceeds of fruit delivered by the defendants to the corporation. As so construed, the finding is adequately supported by the evidence.

The plaintiffs were holders of the notes in due course.

Section 3133 of the Civil Code provides in part:

‘A holder in due course is a holder who has taken the instrument under the following conditions:

‘(2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

‘(3) That he took it in good faith and for value;

‘(4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.’

The court specifically found that plaintiffs took the instruments in good faith for valuable consideration, and without notice of any alleged infirmity or defect of title or otherwise. That finding is supported by the evidence.

The notes of appellants were dated in May, 1927, and payable in annual specified installments. No defect or infirmity appeared on the face of any of said notes. They were sold and transferred to plaintiffs for valuable consideration, without notice of alleged infirmity or defect, on April 17, 1928. Every holder of a note is deemed prima facie to be a holder in due course. Sec. 3140, Civ.Code. The evidence shows, as the court found, that plaintiffs owned and held each note ‘before it was overdue’, and before any installment thereof was overdue. In their second amended answer the defendants alleged that ‘the entire amounts, * * * due as principal and interest * * * have been and are fully paid.’ No installment on any note was due until January 2, 1928. No installment on any such note exceeded the sum of $500. Prior to that date, appellants delivered to the corporation, pursuant to their agreements, their crops for 1927, for which each was credited an amount in excess of the installment due in January, 1928. The evidence shows and the court found that said sums were to be applied and credited upon installments which became due, in full satisfaction thereof. In support of that finding, Ralph G. Spencer, employed by the growers as Director of Agricultural Relations, testified:

‘The title to the fruit itself had passed [to the corporation] with the delivery. Their contract.

‘Q. That was my understanding. A. Yes, by contract. * * *

‘The Court: But at the same time he [it] gave them credit for it as though it were cash? A. Yes, we had to.’

We conclude from the record that the corporation credited the makers of the notes with payments in full of the installments which became due January 2, 1928, by application of the funds in its hands according to agreement, and that no installment was overdue on April 17, 1928, when the notes were transferred to plaintiffs. As a maxim it is declared in Section 3529 of the Civil Code, ‘That which ought to have been done is to be regarded as done.’ The plaintiffs therefore purchased and held the notes ‘in due course.’

Assuming, as we have previously determined, that the plaintiffs held the notes in due course, these defenses relied upon by the appellants were ineffectual. Although the court adopted findings against the appellants upon the issue of fraud and several other defenses, it will be unnecessary for us to determine whether such findings are adequately supported by the evidence, although they appear to be so supported.

The defenses of fraud and failure of consideration on the part of the corporation were not available to the defendants since the plaintiffs were holders of the notes in due course. Section 3138 of the Civil Code provides that:

‘A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.’

Against one who holds a negotiable instrument in due course, the burden is on the person who claims a lack of title or other defect to prove that it was acquired with notice of the defect. Allenberg v. Rapken & Co., Ltd., 108 Cal.App. 99, 291 P. 281; Sec. 3140, C.C.; 19 Cal.Jur. 1038, Sec. 176.

Fraud is not a valid defense to a suit on a promissory note by the bona fide holder thereof in due course. American National Bank of San Francisco v. Wheeler, 45 Cal.App. 118, 187 P. 128; 10 C.J.S., Bills and Notes, p. 1097, § 499.

Failure of consideration is no defense against the holder of a promissory note in due course. Robb v. Cardoza, 127 Cal.App. 588, 592, 16 P.2d 325; Sec. 3109, C.C.; 10 C.J.S., Bills and Notes, p. 1146, § 520.

A valid delivery of a note in the hands of holder thereof in due course is conclusively presumed. Sec. 3097, Civ.Code; Baker v. Butcher, 106 Cal.App. 358, 367, 289 P. 236. The alleged conditional delivery of the notes to the effect that they were to be held by the corporation only as security for the faithful performance by defendants of their agreement to deliver the produce of their farms to the corporation for processing and marketing, is not available as a defense in this action in the absence of proof that plaintiffs had knowledge of that fact, even if it be true. Tischhauser v. Prentice, 30 Cal.App. 699, 159 P. 226; 10 C.J.S., Bills and Notes, p. 518, § 79. In the present case the issue regarding a conditional delivery or validity of the notes was determined against the appellants. That finding is adequately supported by the evidence.

The appellants were not prejudiced by striking out the testimony of Alden Anderson, President of the Capital National Bank. Mr. Anderson testified that the bank loaned the corporation $5,000 April 17, 1928, for which its note was given. He said ‘The bank loaned it.’ He said it was loaned on the recommendation of Mr. Peltier, who personally investigated the application for a loan. Anderson said that he did attend one meeting when Mr. Campbell was present. All that Anderson recalled regarding that meeting was that the promoters of the corporation wanted to raise $50,000, ‘to start a new big cannery here’ [in Sacramento]. He said he met Mr. Bliss later and told him the bank had agreed to loan the $5,000. Anderson said he did not recall ‘the gist of any other conversation * * * with Mr. Bliss.’ He testified that ‘I don't remember * * * any of the conversations * * * had with either Mrs. Hawley or Mrs. Hall with regard to this.’ Bliss and Hawley and Hall were among the payees named in the $5,000 note. It does not appear that the growers' notes, which are the subject of this litigation, were mentioned at the meeting attended by Mr. Anderson, or that he knew anything about those security notes.

The appellants contend that the evidence of Mr. Anderson was competent to show that Anderson was the agent of plaintiffs, who are bound by his knowledge of the alleged conditional character of the growers' notes. Anderson's evidence does not tend to show such agency. It shows just the contrary. It appears to be of no value on that issue. In fact, it appears to have little value on any issue involved in this action. If it had any value, it appears to have been favorable to the plaintiffs. The appellants therefore may not complain of striking out Anderson's evidence.

The appellants contend that the court erred in refusing to admit in evidence page 103 of the minutes of the Board of California Cooperative Producers, marked Exhibit ‘N’ for identification, claiming that it tends to show that the defendant Shidler performed his contract and was not required to deliver fruit in 1930. The court did not refuse to admit said record of board minutes. When it was finally offered by appellants, in the absence of the stenographic reporter, the respective parties agreed that it might be received and that the court would enter a minute order to that effect which would appear in the ‘reporter's record.’ The following colloquy occurred in that regard:

‘Mr. St. Clair: A minute order will satisfy me. Is that correct? ‘Mr. Ford: Yes, as long as the minute order will appear in any transcript. * * *

‘Mr. Bliss: It seems to me it would be better to have it go into the reporter's record.

‘The Court: Well, I can call the reporter down and put it in his notes.’

We must assume from the foregoing that the court did not refuse to admit in evidence the minutes of the board referred to. On the contrary, we assume those minutes were admitted in evidence.

The court did not abuse its discretion in refusing to permit defendants to amend their answer, after the trial had been completed, to permit them to set up the statute of limitations with respect to certain installments of the growers' notes. The only reason assigned by appellants in their opening brief for failure to plead the statute of limitations in their second amended answer is that the omission to plead it ‘was overlooked by counsel in preparing an answer for all of the defendants.’ It may not be said as a matter of law that the court abused its discretion in denying defendants' motion to amend their answer in that respect after the evidence had been adduced, merely to enable counsel to correct their oversight or omission to plead the statute. It is not suggested how that amendment would further justice under the circumstances of this case. It has been definitely held that the discretion of the court in refusing to permit an answer to be amended to set up the statute of limitations may not be interfered with on appeal, merely to enable counsel to correct their inadvertence, unless it clearly appears that such amendment is in furtherance of justice. Rudd v. Byrnes, 156 Cal. 636, 105 P. 957, 26 L.R.A.,N.S., 134, 20 Ann.Cas. 124; Overton v. White, 18 Cal.App.2d 567, 574, 64 P.2d 758, 65 P.2d 99.

For the reasons previously assigned, we may not hold that the court abused its discretion in refusing to permit defendants to amend their answer at the close of the trial to set up the statute of limitations provided for in Section 2911 of the Civil Code.

We have critically examined the record with respect to the assignments of alleged errors in rulings of the court with respect to the introduction of evidence at the trial, and find no substantial merit in any of them. Certainly the court committed no reversible error in any of such rulings.

Nor do we believe that the findings of the court are irreconcilably conflicting in any respect. The findings are lengthy and they unnecessarily contain many evidentiary facts which are harmless. They appear to be in accordance with the court's determination that plaintiffs were the owners and holders of the security notes in good faith for a valuable consideration without notice of any defect or equitable defense which the makers may have had as between themselves and the corporation, and that plaintiffs were therefore entitled to recover judgment for the unpaid portions thereof.

The judgment is affirmed.

THOMPSON, Justice.

ADAMS, P. J., and PEEK, J., concur.

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