Aiken v. Nance , 28 Haw. 275 ( 1925 )

This case involves the application of the rule of the common law enunciated in the case of Whitcomb v. Whiting, 2 Doug. 652, and adopted in this jurisdiction in the case of Macaulay v. Schurmann, 22 Haw. 140, that the payment made by one obligor on account of interest on a note will start the statute of limitations to run afresh as to the coobligor even though such payment were made by the former without knowledge or authorization, express or implied, of the latter. The note upon which interest was paid in the instant case was a negotiable promissory note executed on June 22, 1910. At the time of the execution of the note there was in full force and effect in Hawaii a negotiable instruments act found in the Revision of 1925 as chapter 212, sections 3695 to 3889, both inclusive. These sections conform to the uniform negotiable instruments act as it appears in the standard textbooks and as it is found in most of the states which have adopted it. "Where the Act speaks it controls." Case v. McKinnis, 213 Pac. (Ore.) 422, 426. The defendant Nance signed the note upon the face thereof as maker. R.L. 1925, s. 3754, provides: "The maker of a negotiable instrument by making it engages that he will pay it according to its tenor." Nance's engagement was to pay the note according to its tenor. He was, therefore, the maker thereof. (Aud v. Magruder, 10 Cal. 282, 289.) The defendant Tavares was a guarantor. Section 3757 provides: "A person placing his signature upon an instrument otherwise than as maker, drawer or acceptor, is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity." Tavares was neither a maker, drawer nor acceptor. He cannot be deemed to be an indorser because he clearly indicated by appropriate words his intention to be bound in another capacity, to wit, that of guarantor. According to the allegations of the complaint and the proof Tavares indorsed the guarantee upon the back of the note for the accommodation of the maker Nance and without any consideration other than the loan by the payee to Nance of the amount of the note. Under the circumstances are Nance and Tavares comakers or coobligors within the meaning of the Whiting case? Whether obligors on a negotiable instrument are comakers or coobligors depends for its determination upon whether they are "primarily" or "secondarily" liable, as those terms are defined in the negotiable instruments act. The act nowhere speaks of or defines who are comakers or coobligors. R.L. 1925, s. 3886, provides: "The person `primarily' liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same. All other parties are `secondarily' liable." Parties to a negotiable instrument in order to be comakers or coobligors must be primarily liable thereunder. A person primarily liable and a person secondarily liable are not comakers or coobligors. Before the passage of the uniform negotiable instruments act there was an irreconcilable conflict in the authorities upon the liability of a stranger to a promissory note, who, prior to its delivery for the accommodation of the maker and for the purpose of giving the note credit and aiding in its negotiability, placed his name in blank upon the back thereof or indorsed upon the back a guarantee of its payment, waiving notice, protest and demand. One line of cases held him to be a comaker. The following authorities, however, indicate that whereas in those states from which they are cited the rule formerly obtained that an accommodation indorser prior to delivery was a comaker, since the adoption of the uniform negotiable instruments act this liability is held to be that of an indorser and secondary: Rockfield v.First Nat. Bank, 77 Ohio St. 311, 83 N.E. 392; Deahy v.Choquet, 28 R.I. 338, 67 A. 421; Gibbs v. Guaraglia,75 N.J.L. 168, 67 A. 81; Baumeister v. Kuntz, 53 Fla. 340, 42 So. 886; Thorpe v. White, 188 Mass. 333, 74 N.E. 592;McLean v. Bryer, 24 R.I. 599, 54 A. 373; Case v.McKinnis, supra. By analogy, whatever may have been the rule formerly as to the liability of a third party, a stranger to a promissory note who prior to delivery guaranteed the payment thereof, waiving notice, protest and demand, under the uniform negotiable instruments act his liability similarly as that of an indorser is secondary. As in the case of an indorser waiving notice, protest and demand his liability becomes absolute only upon default of the person or persons primarily liable, — in this case the maker. There is a paucity of authority on the liability of a guarantor before delivery under the uniform negotiable instruments act but such cases as I have been able to find are uniformly to the effect that a guarantor guaranteeing the payment of a note under circumstances similar to the present case is secondarily liable. In the case of Northern State Bank v.Bellamy, 125 N.W. (N.D.) 888, the defendant Bellamy, a stranger to the note, prior to delivery indorsed the following guaranty on the back: "For value received I hereby guarantee the payment of the within note and hereby waive presentment, demand, protest and notice of protest." Upon suit Bellamy claimed that the time of payment had been extended by the holder without his (Bellamy's) knowledge and consent and that he was thereby released from liability upon his guaranty. The court held: "In 1899 a new law upon the subject of negotiable instruments was enacted by the legislature * * *. Section 6422, Rev. Codes 1905, which is a part of this new enactment, is as follows: `A person secondarily liable upon the instrument is discharged: * * * By any agreement binding upon the holder to extend the time of payment * * * unless made with the assent of the party secondarily liable * * *.' It seems clear that if by the adoption of the new law a guarantor of payment can be said to be included in the class of parties primarily liable on the instrument appellant would not be released from his obligation by the extension of time given * * * as such act now operates to release only those secondarily liable. The question of appellant's liability, therefore, depends wholly upon the construction to be given the section defining the term `person primarily liable.' * * * The nature and character of the contract of guaranty is an important factor in the determination of this point. `Guaranty is an undertaking by one person that another shall perform his contract or fulfill his obligation, and that in case he does not do so the guarantor will do it for him. A guarantor of a bill or note is one who engages that the note shall be paid.' `* * * the contract of a guarantor is his own separate contract; it is in the nature of a warranty by him that the thing guaranteed to be done by the principal shall be done and is not merely an engagement jointly with the principal to do the thing. A guarantor, not being a jointcontractor with his principal, is not bound to do what the principal has contracted to do, like a surety, but only to answer for the consequences of the default of the principal. The guarantor has to answer for the consequences of his principal's default.' * * * With these considerations in mind it is apparent that while in its ultimate results the liability of a guarantor may be as absolute as that of a surety the nature of his contract and the procedure necessary to hold him are very different. Authorities all agree that a contract of guaranty is entirely separate from that contained in the negotiable instrument to which it is appended and that the remedy of the holder of the note against a guarantor must be pursued as a distinct cause of action. * * * The fact that his contract is indorsed upon the negotiable instrument by which he is bound does not in the least alter the character of the obligation. * * * The terms `primary and secondary' when they apply to the parties to an obligation `refer to the remedy provided by law for enforcing the obligation rather than to the character and limits of the obligation itself.' Kilton v. Prov. Tool Co. 22 R.I. 605, 48 A. 1039. Therefore, however closely analogous may be the ultimate liability upon the instrument of surety and guarantor, the clear distinction in the character of their respective contracts and the procedure by which their obligations must be enforced, operates to place these parties in different classes of the persons liable as defined by the new law of negotiable instruments. The purpose in making a classification not provided by the former law would seem to be to strengthen the credit of negotiable paper by protecting the holder against a claim that persons directly and absolutely liable by the terms of the instrument had in fact signed, not as joint makers, but in some other capacity." (Instances of such attempts may be found in the following cases: Graham v. Shephard, 189 S.W. (Tenn.) 867; In re Nashville Laundry Co., 240 Fed. 795; NationalCitizens' Bank v. Toplitz, 81 N.Y.S. 422; Cellers v.Meachem, 89 Pac. (Ore.) 426; Vanderford v. Farmers' Mechanics' Nat. Bank, 66 Atl. (Md.) 47; Lane v. Hyder, 147 S.W. (Mo. Ap.) 514.) Continuing the citation: "As the law now stands, these questions of primary and secondary liability are to be resolved only upon the face of the instrument. All persons by its terms absolutely required to pay the same may be held as primarily liable; all others, secondarily. When a party on signing clearly indicates upon the instrument the capacity in which he is willing to be bound, the holder in accepting it cannot misapprehend its true quality for he then knows that the party may be held in that capacity and no other. Appellant signed as guarantor, and as in that capacity he was secondarily liable upon the instrument he was released, as under the former law, by an extension of time to the principal debtor without his assent." In Farmers' and Drovers' Bank v. Bashor, 160 Pac. (Kans.) 208, the payee of a note before maturity transferred the same under the following guaranty indorsed on the back: "For value received I hereby guarantee the payment of the within note at maturity * * * waiving demand, notice of nonpayment and protest." Thereafter the holder granted the maker an extension of time for payment. The court held: "* * * the defendant was a party secondarily liable.Bank v. Bellamy, 19 N.D. 509, 125 N.W. 888, 31 L.R.A. (N.S.) 149. He was discharged by any agreement binding on the bank to extend the time of payment unless the agreement were made with the defendant's assent * * *. An extension without such assent ipso facto discharges the party secondarily liable * * *." InNoble v. Beeman-Spaulding-Woodward Co., 131 Pac. (Ore.) 1006, Noble, a stranger to the instrument, before delivery indorsed on the back of the note the following: "For value received, I hereby guarantee the payment of the within note at maturity, * * * and hereby waive demand, protest and notice of non-payment * * *." The court in considering Noble's liability held (p. 1010): "Taking Noble's agreement and the note together, nothing else being shown, his liability is not concurrent with that of thosewho signed the note as makers, but successive to theirs, and this would be true in the absence of any other showing, even if Noble had only written his name on the back of the note before it was delivered to the bank and the money advanced thereon. The law of this state says that: `The person `primarily' liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same.' * * * On the face of the note this is the liability of the defendant Smith" (the maker).

Judging Tavares' liability from the terms of the note it is apparent that he was not obligated to pay the amount thereof until default made by the maker Nance. His contract with the payee only came into existence upon such default. His was a "secondary" liability, as that term is employed in the negotiable instruments act, and as a secondary obligor he is not a comaker or coobligor. He was not bound absolutely to pay the note in solido but only in the event of the failure of Nance so to do. Under the circumstances no agency existed as between Tavares and Nance and Nance could not bind Tavares so as to start the statute of limitations running afresh against the latter by the payment of interest on account of the note without Tavares' knowledge and previous authorization, express or implied.

I join in the conclusion of the majority that the judgment as to Tavares should be vacated and set aside.