BORDEN, INCORPORATED v. Brower , 284 N.C. 54 ( 1973 )

MOORE, Justice.

This appeal poses the sole question: Was defendant’s evidence in support of his defenses and counterclaim admissible?

Plaintiff’s evidence establishes a prima facie case for an unpaid balance on a promissory note under seal. Plaintiff contends that the material facts set forth in defendant’s answer, deposition, and affidavits offered by defendant in opposition to plaintiff’s motion for summary judgment were inadmissible in evidence because of the parol evidence rule, and that the trial court properly granted plaintiff’s motion for summary judgment.

Affidavits filed in opposition to a motion for summary judgment “shall set forth such facts as would be admissible in evidence.” G.S. 1A-1, Rule 56(e). If the pleadings, affidavits, and deposition offered by defendant do not set forth facts that would be admissible in evidence because of the parol evidence rule, then such evidence was properly stricken, and since there remained no genuine issue as to any material fact, the court correctly rendered summary judgment for plaintiff. Singleton v. Stewart, 280 N.C. 460, 186 S.E. 2d 400 (1972); Kessing v. Mortgage Corp., 278 N.C. 523, 180 S.E. 2d 823 (1971).

The parol evidence rule in North Carolina was stated by Chief Justice Stacy in Insurance Co. v. Morehead, 209 N.C. 174, 183 S.E. 606 (1936), as follows:

“It is well-nigh axiomatic that no verbal agreement between the parties to a written contract, made before or at the time of the execution of such contract, is admissible to vary its terms or to contradict its provisions. [Citing numerous cases.] ...

“On the other hand, there are a number of seeming exceptions, more apparent than real perhaps, as well established as the rule itself. Roebuck v. Carson, 196 N.C., 672, 146 S.E., 708. ...”

Chief Justice Stacy then sets out eight exceptions to the rule, citing numerous North Carolina cases for each exception. The third exception is that the parol evidence rule is not violated:

“[B]y showing mode of payment and discharge as contemplated by the parties, other than that specified in the instrument. Bank v. Rosenstein, 207 N.C., 529, 177 S.E., 643; Kindler v. Trust Co., 204 N.C., 198, 167 S.E., 811; Wilson v. Allsbrook, 203 N.C., 498, 166 S.E., 313; Stockton v. Lenoir, 198 N.C., 148, 150 S.E., 886; Bank v. Winslow, 193 N.C., 470, 137 S.E., 320.”

The sixth exception is:

“[B]y showing the whole of a contract, only a part of which is in writing, provided the contract is not. one required by law to be in writing and the unwritten part does not conflict with the written. Dawson v. Wright, supra [208 N.C., 418, 181 S.E., 264]; Henderson v. Forrest, 184 N.C., 230, 114 S.E. 391; Evans v. Freeman, 142 N.C., 61, 54 S.E., 847.”

Two excellent law review articles, one by Chadbourn and McCormick entitled “The Parol Evidence Rule in North Carolina,” 9, N.C.L. Rev. 151 (1931), and a sequel by Dalzell, “Twenty-five Years of Parol Evidence in North Carolina,” 33 N.C.L. Rev. 420 (1955), examine in depth this rule as applied in North Carolina. Chadbourn and McCormick offer the following as a concise and accurate statement of the rule: “Any or all parts of. a transaction prior to or contemporaneous with a writing intended to record them finally are superseded and made legally ineffective by the writing.” 9 N.C.L. Rev. at 152. Professor Stansbury, who is in accord with this statement of the rule, also notes:

“. . . The execution of the final writing may be termed the' ‘integration’ of the transaction. By it all prior and contemporaneous negotiations or agreements, whether bral or written, are ‘merged’ into the writing, which thus becomes the exclusive source of the parties, rights and obligations with respect to the particular transaction or the part thereof intended to be covered by it.

“The parol evidence rule applies only to writings which relate to a transaction affecting the legal relations between two or more persons, and which are intended wholly or partly to supersede other negotiations and agreements between them. If such a writing is intended to supersede all other agreements relating to the transaction, it may be termed a total or complete integration; if it supersedes only a part, it is a partial integration. In the latter case, those portions of the transaction which were not intended to be superseded are legally effective and therefore may be shown by parol. ...” 2 Stansbury’s N. C. Evidence, Brandis Rev. §§ 251-52 (1973).

Although Professor Dalzell in his law review article is somewhat critical of the North Carolina rule as being too liberal, he does state that while some courts emphasize the protection of the written instrument from invasion, the emphasis in North Carolina is rather in the direction of giving the proponent of the oral agreement a chance to prove that it was made if he can, and that by so doing the North Carolina decisions may sometimes come closer, to enforcing the contract that should be enforced than do the more conservative authorities.

Promissory notes are not' generally subject to the parol evidence rule to the same extent as other contracts. Parties drawing such instruments tend to follow a rather definitely standardized form. If collateral terms and conditions had been agreed upon, they may be omitted from the note itself to insure its negotiability. Accordingly, it is rather common for a promissory note to be intended as only a partial integration of the agreement in pursuance of which it was given, and parol evidence as between the original parties may well be admissible so far as it is not inconsistent with the express terms of the note. See 3 Corbin on Contracts § 587, at 510 (1960); 2 Stansbury’s N. C. Evidence, Brandis Rev. § 256 (1973) ; Dalzell, Twenty-five Years of Parol Evidence in North Carolina, 33 N.C.L. Rev. at 432-33 (1955).

The North Carolina rule in such cases was stated in Evans v. Freeman, 142 N.C. 61, 54 S.E. 847 (1906)—an often-cited case in which parol evidence was admitted to show that a promissory note was to be paid only to the extent of proceeds received from the sale of patent rights in the maker’s stockfeeder — as follows:

. . [The parole evidence rule] applies only when the entire contract has been reduced to writing, for if merely a part has been written, and the other part has been left in parol, it is competent to establish the latter part by oral evidence, provided it does not conflict with what has been written. ... In such a case there is no violation of the familiar and elementary rule we have before mentioned, because in the sense of that rule the written contract is neither contradicted, added to, nor varied; but leaving it in full force and operation as it has been expressed by the parties in the writing, the other part of the contract is permitted to be shown in order to round it out and present it in its completeness, the same as if all of it had been committed to writing.

“The competency of such evidence for the purpose of establishing the other and unwritten part of the contract, or even of showing a collateral agreement made contemporaneously with the execution of the writing, has been thoroughly settled by the decisions of this Court. . . . Applying the rule we have laid down, it has been adjudged competent to show by oral evidence a collateral agreement as to how an instrument for the payment of money should in fact be paid, though the instrument is necessarily in writing and the promise it contains is to pay so many dollars. . . .”

Other promissory note cases involving the North Carolina method of payment and discharge exception to the parol evidence rule include: Carroll v. Brown, 228 N.C. 636, 46 S.E. 2d 715 (1948) (note to be paid out of profits of a partnership in which maker and payee were engaged); Ripple v. Stevenson, 223 N.C. 284, 25 S.E. 2d 836 (1943) (note to be paid out of rents and profits from an office building); Insurance Co. v. Guin, 215 N.C. 92, 1 S.E. 2d 123 (1939) (note to be paid out of commissions); Bank v. Rosenstein, 207 N.C. 529, 177 S.E. 643 (1935) (co-maker’s liability on a note limited to the value of land covered by a deed of trust); Galloway v. Thrash, 207 N.C. 165, 176 S.E. 303 (1934) (note to be paid by crediting it against payee’s anticipated share of maker’s estate); Trust Co. v. Wilder, 206 N.C. 124, 172 S.E. 884 (1934) (note to be paid out of proceeds of land when land was sold); Kindler v. Trust Co., 204 N.C. 198, 167 S.E. 811 (1933) (note to be paid out of collateral held by payee and such payment to be credited to an endorser); Wilson v. Allsbrook, 203 N.C. 498, 166 S.E. 313 (1932) (note to be paid out of rents collected by maker); Stack v. Stack, 202 N.C. 461, 163 S.E. 589 (1932) (note to be paid out of proceeds of land); Bank v. Winslow, 193 N.C. 470, 137 S.E. 320 (1927) (note to be paid out of proceeds from sale of goods); Quin v. Sexton, 125 N.C. 447, 34 S.E. 542 (1899) (note to be paid out of proceeds of another note); Kerchner v. McRae, 80 N.C. 219 (1877) (bond to be credited with the proceeds from sale of cotton). See 12 Am. Jur. 2d, Bills and Notes § 1264 (1964); 30 Am. Jur. 2d, Evidence § 1061 (1967); Annot. 71 A.L.R. 548, 570-75 (1931); 2 Stansbury’s N. C. Evidence, Brandis Rev. § 256 (1973); 3 Strong, N. C. Index 2d, Evidence §32, at 651 (1967).

In the present case, according to defendant’s evidence, customers Parrish and Scott executed notes to plaintiff for merchandise sold by plaintiff’s agent to them. At the.request of plaintiff’s agent, a note from defendant to plaintiff included, for bookkeeping purposes only, the amount of these two notes. In no event was defendant to be liable for these amounts. The Parrish and Scott notes were made payable to plaintiff and were never assigned by plaintiff to defendant. Hence, defendant had no legal right to collect from Parrish and Scott.

This action is between the original parties to the note. When such an instrument is in the hands of a holder other than a holder in due course, this Court has permitted variance of its express terms by showing that it was to be enforced only on the happening of certain conditions, or only to the extent necessary to accomplish a certain purpose, or that it was payable only out of a certain fund, or that it was given as evidence of an advancement, or that it might be discharged by a method of payment or performance different from that stated in the writing. Insurance Co. v. Morehead, supra, and above cited cases. See also 2 Stansbury’s N. C. Evidence, Brandis Rev. § 256 (1973); 3 Strong, N. C. Index 2d, Evidence § 32, at 651 (1967).

The Court of Appeals, in affirming the trial court’s exclusion of defendant’s evidence, states that although it is making no attempt to reconcile all prior North Carolina decisions, its decision is consistent with the more recent North Carolina cases on this point. In support of this statement the Court of Appeals cites Bank v. Slaughter, 250 N.C. 355, 108 S.E. 2d 594 (1959), and Vending Co. v. Turner, 267 N.C. 576, 148 S.E. 2d 531 (1966). In Bank v. Slaughter plaintiff bank sought to recover the balance due on a note that had been executed by two individual defendants and a corporation. The controlling interest in the corporation had been purchased by the individual defendants with a portion of the proceeds of the loan from plaintiff bank. At the time of the suit the corporation had been adjudged bankrupt and the individual defendants defended on the ground that, pursuant to an oral agreement with plaintiff, the corporation — rather than they themselves — was liable for the balance due on the note. Defendants’ parol evidence concerning this alleged agreement tended to show that prior to the execution of the note, plaintiff agreed that the liability of the two defendants would be limited to that portion of the note that was loaned to defendants individually to purchase the controlling interest of the corporation, and that the corporation alone would be liable for the balance of the loan. This testimony was excluded by the trial court, and this Court affirmed by holding that the promise contained in the note to pay certain amounts “could not be contradicted or destroyed by parol testimony that the makers would not be called upon to pay monies loaned pursuant to the contract.” 250 N.C. at 357, 108 S.E. 2d at 596.

Professor Stansbury, after discussing North Carolina’s various exceptions to the parol evidence rule noted above, cites Bank v. Slaughter for the general proposition that in spite of the liberal approach reflected in many North Carolina parol evidence rule cases, it is not “permissible to show an agreement that the maker should not be liable in any event.” 2 Stansbury’s N. C. Evidence, Brandis Rev. § 256, at 252 (1973). Notwithstanding Professor Stansbury’s suggested distinction between this and prior North Carolina cases, we have some difficulty in distinguishing this case from the long line of North Carolina cases holding that a parol agreement as to mode of payment or discharge is competent as between the parties. At least two writers have observed that although the parol evidence rule in this situation has not always been consistently applied in North Carolina, Bank v. Slaughter seems clearly irreconcilable with the rule laid down by this Court in previous cases. Case Law Survey, Inadmissibility of Contemporaneous Parol Agreement to Vary Terms of Loan, 38 N.C.L. Rev. 543 (1960) Case Law Survey, Parol. Evidence Rule, 38 N.C.L. Rev. 540 (1960). Another writer suggests that the case may possibly indicate a retreat from this Court’s previously well-established position. 2 Stansbury’s N. C. Evidence, Brandis Rev. § 256, at 252, n. 82. Despite any possible conflict, however, we hold that in the instant case North Carolina’s long-established rule admitting parol evidence to show method of payment or discharge is in full force and effect, and Bank v. Slaughter is not controlling.

Neither is the second case relied on by the Court of Appeals, Vending Co. v. Turner, supra, controlling in the instant case. Vending Co. v. Turner primarily involved the principle that payment or the right to a credit upon a note is an affirmative defense that must be pleaded. Although that opinion does contain a general statement to the effect that a promise set forth in the note could not be contradicted or destroyed by parol testimony, the opinion actually affirmed a judgment that embodies the mode of payment or method of discharge exception to the parol evidence rule. In that case plaintiff sued on defendant’s promissory note. Defendant defended on the ground that at the time his note was made he and plaintiff orally agreed that certain payments received by plaintiff from third parties in the form of “promotion money” would be credited upon defendant’s note as if paid by defendant. The jury found that this oral agreement collateral to the note itself was made, and consequently that defendant was entitled to credits on the principal amount of the note for the amount of “promotion money” received by plaintiff. This Court, in an opinion by Justice Lake, affirmed the jury’s findings.

The original note in this case given by defendant to plaintiff was renewed from time to time. Defendant offered evidence, which was stricken, that each renewal contained the amounts of the Parrish and Scott notes. If this is true, the renewals did not operate as a discharge of the original note. Plaintiff would be bound by the parol contemporaneous agreement made with defendant through plaintiff’s agent at the time of the original note as to the mode of payment of the liability of defendant. Bank v. Rosenstein, 207 N.C. 529, 177 S.E. 643 (1935); 1 Strong, N. C. Index 2d, Bills and Notes § 14 (1967).

Applying the more liberal rule generally followed in cases involving promissory notes and the two well-established North Carolina exceptions to the parol evidence rule as set out by Chief Justice Stacy in Insurance Co. v. Morehead, supra, we hold that as between the original parties to the note in question the evidence offered by defendant was admissible to prove that he and plaintiff through plaintiff’s agent, contemporaneously with the signing of the original note, agreed that defendant was entitled to credit on his own note for the amounts of the Parrish and Scott notes, that in no event would defendant be liable for the payment of the amounts of these notes, that these notes had not been paid, and that the amounts of these notes were included in each renewal note given by defendant to plaintiff, including the note involved in this action. Such evidence is sufficient to raise a genuine issue as to a material fact to be determined at trial. Schoolfield v. Collins, 281 N.C. 604, 189 S.E. 2d 208 (1972).

For the reasons stated, the decision of the Court of Appeals is reversed. The cause is remanded to that court with direction to vacate the summary judgment and to remand the cause to the Superior Court for trial in accordance with this opinion.

Reversed and remanded.