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District Court of Appeal, Second District, Division 1, California.



Civ. 16917.

Decided: July 21, 1949

William G. Junge, Robert J. McGowan, Los Angeles, for appellant. William K. Lindsay, Los Angeles, for respondents.

All of the parties named in this opinion are corporations.

General American Precooling Corporation was the owner of a large mechanical press used in manufacturing fabricated products. The press was in its possession and on the floor of its place of business. The press was for sale.

Ermac Company arranged for the purchase of the press by Orange County Machine Works. The purchase price was $5,637.50. The purchaser made a down payment of $1,512.50 to Ermac. It was understood that when the sale was completely financed, Ermac would remit the rest of the purchase price to General American Precooling Corporation. Ermac deposited the down payment in its own bank account, awaiting payment of the balance, which, including financing and recording charges, was $4,261.08.

Orange County Machine Works desired to borrow the balance of the purchase price. A representative of Ermac telephoned the Los Angeles representative of Commercial Credit Corporation, plaintiff in this case, and arranged for the loan. The loan was made. It was represented by the following documents: A conditional sales contract, whereby Ermac agreed to sell, and Orange County Machine Works agreed to buy, the press for the price indicated. The purchaser made, executed and delivered its promissory note to Ermac for the balance of $4,261.08. These instruments were prepared by filling in blanks in contract forms. Ermac had on hand a supply of these forms which had been furnished by Commercial Credit Corporation, these two parties having been engaged theretofore for some eight months in similar transactions.

Ermac assigned the contract and endorsed the note to Commercial Credit Corporation, and forwarded the papers to that company. After a few days, Commercial Credit Company sent to Ermac its check for $4,261.08. This check too was deposited to the bank account of Ermac.

During this time the press remained in possession of the owner, General American Precooling Corporation.

Then Ermac mailed its check to General American Precooling Corporation for the entire purchase price of the press. This check was sent to the bank by the payee for collection, but it was dishonored and never paid. The owner retained possession of the press, and the rest of the parties were left to litigate their respective rights.

Action was brought by Commercial Credit Corporation against all of the parties named, and other individuals made parties whose names are not necessary here to repeat. Ermac made no appearance, and its default was entered. Therefore, the contest we are to consider is between Commercial Credit Corporation and Orange County Machine Works. These parties will hereafter be referred to as plaintiff and defendant.

Defendant is out $1,512.50, the down payment on the press, paid to Ermac. Plaintiff, having advanced $4,261.08 to Ermac, is seeking to collect that money, together with interest, attorneys fees and costs, from the defendant, upon defendant's obligation as maker of the promissory note.

The plaintiff asserts that it is a holder in due course of the note, and that equities between Ermac and the defendant have no place in the case.

The defendant denies that plaintiff is a holder in due course, alleges that there was no consideration for the note, and that plaintiff had knowledge at all times of the fact that no delivery of the press had been made, or could have been made to the defendant.

Upon the trial it developed that the note was attached to and made a part of the conditional sales contract. The note and the contract constituted one document, labeled at the top ‘Industrial Conditional Sale Contract.’ The part in the form of a note was not labeled in any way to distinguish it from the rest of the contract. With reference thereto, however, the contract contained the following recital: ‘The balance shown to be due hereunder (evidenced by my note of even date to your order) is payable in 12 equal consecutive installments of $355.09 each the first installment payable one month from date hereof. Said note is a negotiable instrument, separate and apart from this contract, even though at the time of execution it may be temporarily attached hereto by perforation or otherwise.’ After the documents were delivered to the plaintiff and it was discovered that the money was gone and the defendant had no mechanical press, the note was severed from the contract by cutting or tearing along perforations in the paper placed there for that purpose, and the plaintiff brought its action upon the note alone and not the contract.

The trial court found that the plaintiff was not a holder in due course; that the plaintiff at the time it paid $4,261.08 to Ermac knew that the press did not belong to Ermac, was not in possession of, and had not been purchased by Ermac; and had not been delivered to the defendant. Judgment followed in favor of defendant and against plaintiff, and against Ermac in favor of plaintiff and defendant for the sums paid by each of them to Ermac.

Section 3133 of our Civil Code sets forth the essential requisities of a holder in due course of a negotiable instrument. Plaintiff's proof brings the note in suit within each essential element necessary to constitute the plaintiff a holder in due course of the instrument: The note is complete and regular upon its face; plaintiff became the holder of it before it was overdue; it was taken in good faith and for value; plaintiff had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Admitting the truth of all of plaintiff's proof except the two last elements above mentioned, the defendant contends:

(1) That the plaintiff knew that title to the press was not in Ermac; that without title in Ermac the consideration for the note failed, and therefore the element of good faith and value in plaintiff's acquirement of the instrument was lacking; and that the plaintiff had notice of infirmities in the instrument and of defect in the title of Ermac, the negotiating party;

(2) When the note was attached to the conditional sales contract, the note and the contract became one instrument, to wit: a sales contract, assignable but not negotiable, with the holder subject to all equities and defenses which the original parties to the contract may have had.

(3) Negotiability of the note was destroyed when it and the conditional sales contract were conveyed both as one transaction.

Defendant's first contention falls because the consideration for the note was the promise of Ermac to convey title to the press upon payment of the purchase price. Notice of the fact that the contract was executory does not support a finding of failure of consideration or of any infirmity in the instrument. There is no proof in this case of lack of good faith on the part of the payee of the note, or of the holder thereof. Russ Lumber & Mill Co. v. Muscupiabe etc. Co., 120 Cal. 521, 52 P. 995, 65 Am.St.Rep. 186; Pratt v. Dittmer, 51 Cal.App. 512, 197 P. 365; English v. Shipley, 71 Cal.App. 45, 234 P. 334; Drukker v. Howe & Haun Invest. Co., 136 Cal.App. 437, 29 P.2d 289. In such cases as this, it is a legal presumption that a purchaser of a negotiable instrument may rely upon the presumption that the contract will be carried out in good faith and the consideration become executed. 8 Am.Jur., p. 139; Beutel's Brannan Negotiable Instruments Law, 7th Ed. 1948, p. 788; annotation, 100 A.L.R. 1357, ‘Bona Fides of Purchaser of Bill or Note on an Executory Consideration.’

The second contention falls also because in applying the law-merchant, codified in California in our Civil Code, and generally following the Negotiable Instruments Law now adopted by every state in the Union, certain arbitrary rules must be applied. The application of the rules applicable to negotiable instruments in particular cases sometimes causes hardship and loss to individuals, as defendant earnestly argues to be the fact in this case. But the primary purpose of the law-merchant is to make commercial paper serve in lieu of money. This being the case, when one executes and delivers an instrument containing the elements of negotiability as prescribed by the Negotiable Instruments Law, and when that instrument passes into the hands of a holder in due course, it is the making of the instrument and the placing of it in the channels of commerce which set in motion a chain of circumstances peculiar to the law-merchant. In this case the defendant made, executed, and delivered the promissory note—put it into circulation as a substitute for money. The plaintiff had the right to rely upon the ability of Ermac to secure title to the press and to deliver it to the defendant, and the defendant was dealing with the situation upon that basis.

The conditional sales contract and the note, notwithstanding the note was originally attached to the contract, represented two separate and distinct contractual relationships—one was the contract; the other was the promissory note. The fact that the two were together with a perforated line separating them was notice to him who signed that the promissory note was there for the purpose indicated, with all the attributes of negotiable paper. Russ Lumber & Mill C. v. Muscupiabe etc. Co., 120 Cal. 521, 52 P. 995, 65 Am.St.Rep. 186; Williams v. Silverstein, 213 Cal. 269, 2 P.2d 165; Pitman v. Walker, 187 Cal. 667, 203 P. 739; Shawano Finance Corporation v. Julius, 214 Wis. 637, 254 N.W. 355; Shattuck v. Reed, 221 Mich. 155, 190 N.W. 649; First State Bank & Trust Co. v. Crain, 157 La. 427, 102 So. 513, 38 A.L.R. 347; First National Bank v. Newton, 119 Neb. 394, 229 N.W. 334; People's Bank v. Porter, 1922, 58 Cal.App. 41, 208 P. 200; 1 Daniel on Negotiable Instruments (Seventh Ed.), pp. 211–212, and cases cited therein; 7 Am.Jur., p. 849.

This brings us to a consideration of defendant's third proposition, that the negotiability of the note was destroyed when it and the sales contract were conveyed both in one transaction.

Conditional sales contracts, as every one knows, are a very common thing. Articles of personal property too numerous to mention are sold in this manner by thousands every day. The buyer gets possession of the personal property; he usually makes part payment for it at the time of the agreement; the finance company furnishes the rest of the purchase price, the funds advanced are secured by endorsement of the note and assignment of the contract.

If defendant's contention were to be enforced, financing of this type of business transaction would become too hazardous for the risking of capital employed in it. It does not appear that this proposition has been pressed upon the courts of this state for decision since we adopted the Negotiable Instruments Law. Nor have we been able to find any cases in California helpful in determining the problem.

In some states it has been held that in a suit upon the note when a conditional sales contract was entered into at the same time, defenses under the terms of the contract may be interposed. Van Nordheim v. Cornelius, 129 Neb. 719, 262 N.W. 832; Federal Credit Bureau, Inc., v. Zelkor Dining Car Corporation, 238 App.Div. 379, 264 N.Y.S. 723; Todd v. State Bank, 182 Iowa 276, 165 N.W. 593, 3 A.L.R. 971; State National Bank v. Cantrell, 47 N.M. 389, 143 P.2d 592, 152 A.L.R. 1216. Other states take the contrary view. Carpenter v. Longan, 16 Wall. 271, 83 U.S. 271, 21 L.Ed. 313; Thal v. Credit Alliance Corp., 64 App.D.C. 328, 78 F.2d 212, 100 A.L.R. 1354, containing a review of the cases; United States v. Novsam Realty Corporation, 2 Cir., 125 F.2d 456; Commercial Credit Company v. Seale et al., 30 Ala.App. 440, 8 So.2d 199; Cotton v. John Deere Plow Co., 246 Ala. 36, 18 So.2d 727; Robertson v. Northern Motor Securities Co., 105 Fla. 644, 142 So. 226; Peoples Loan & Finance Co. v. Ledbetter, 69 Ga.App. 729, 26 S.E.2d 671; First State Bank etc. v. Crain, 157 La. 427, 102 So. 513, 38 A.L.R. 347; Commercial Credit Company v. McDonough Co., 238 Mass. 73, 130 N.E. 179; Standard Acceptance Corporation v. Chapin, 277 Mass. 278, 178 N.E. 538; Northwestern Finance Co. v. Crouch, 258 Mich. 411, 242 N.W. 771; Commercial Credit Co. v. Summers, 154 Miss. 501, 122 So. 541; Petroleum Acceptance Corporation v. Queen Anne Laundry Service, 265 App.Div. 692, 40 N.Y.S.2d 495; Auto Brokerage v. Ullrich, 134 A. 885, 4 N.J.Misc. 808; B. A. C. Corporation v. Cirucci, 131 N.J.L. 93, 35 A.2d 36; Motor Finance Corporation v. Huntsberger, 116 Ohio St. 317, 156 N.E. 111; Merchants National Bank v. Voudouris, Tex.Civ.App., 248 S.W. 810; Shawano Finance Corporation v. Julius, 214 Wis. 637, 254 N.W. 355.

It is our opinion that the latter is the correct view, and in consonance with the spirit and purpose of the Negotiable Instruments Law and the necessities of business in California.

The judgment is reversed and the cause remanded to the Superior Court, with directions to make and enter judgment in favor of the plaintiff for the amount of the note, together with interest to the date of said judgment, and together with reasonable counsel fees to be fixed by the court, and costs.

DRAPEAU, Justice.

WHITE, P. J., and DORAN, J., concur.