Peoples State Bank v. Trombly , 241 Mich. 199 ( 1928 )

Columbus Trombly was indebted to the defendant Munz for lumber. He executed and delivered to Munz a promissory note payable to the Adams Lumber Company, a fictitious and nonexisting company. Before maturity, for value and without notice of the fictitious character of the payee, the plaintiff bank purchased the note from Munz who indorsed it personally and in the name of the Adams Lumber Company, by G. Munz, Pres. In an action by the bank, the defendant resisted payment on the theory that the note was nonnegotiable because it was made payable to a fictitious person of which fact he had no knowledge. The trial court held that the plaintiff was a holder in due course and entered a judgment in its favor. The defendant reviews the case here on error.

The questions involved are troublesome, due to the apparent inconsistency of two provisions of the negotiable instruments law (2 Comp. Laws 1915, § 6040 et seq.). A negotiable note must be payable to order or to bearer. The note in question was payable to the order of the Adams Lumber Company. It had all of the other elements of negotiability. On its face it purported to be a negotiable instrument. But it was not payable to order if the payee named therein was fictitious or nonexisting. The evidence shows that the payee was fictitious and nonexisting. Therefore, though on its face it appears to be payable to order, it was not so payable. Was it payable to bearer? Section 11, paragraph 3, of the negotiable instruments law, says that a note is payable to bearer:

"When it is payable to a fictitious or nonexisting person, and such fact was known to the person making it so payable." 2 Comp. Laws 1915, § 6050.

The record shows that when the defendant signed the note in suit, it was not known to him that the payee was fictitious or nonexisting. Therefore the note was not payable to bearer. The British exchange act makes knowledge on the part of the maker immaterial, and, notwithstanding our statutes, a few of the courts in this country have attempted to follow that rule. But the great weight of authority interprets paragraph 3 of section 11 to mean just what it says. In Harmon v. National Bank, 153 Mich. 73,79 (17 L.R.A. [N. S.] 514, 126 Am. St. Rep. 467), the court quotes with approval the following from Shipman v. Bankof New York, 126 N.Y. 318 (27 N.E. 371, 12 L.R.A. 791, 22 Am. St. Rep. 821):

"We are of the opinion, upon examination of the authorities cited by counsel on both sides, that this rule applies only to paper put into circulation by the maker with knowledge that the name of the payee does not represent a real person. The maker's intention is the controlling consideration which determines the character of such paper. It cannot be treated as payable to bearer unless the maker knows the payee to be fictitious and actually intends to make the paper payable to a fictitious person."

As the note in the suit was neither payable to order nor to bearer, it was nonnegotiable.

The question arises as to what title, if any, the plaintiff got by the attempted indorsement of the fictitious payee. In taking the instrument, it was the duty of the plaintiff to procure a genuine indorsement. A valid indorsement is necessary to pass a negotiable instrument. There can be no genuine or valid indorsement where the payee is fictitious. There was none in this case. The indorsement of Adams Lumber Company by Munz was in effect a forgery. Harmon v. National Bank, supra; People v. Warner, 104 Mich. 337. Being a forgery, the indorsement was wholly inoperative and the plaintiff acquired no title to the instrument.

But counsel for the plaintiff contend that having signed the note and put it into circulation, the defendant is precluded from raising the question as to the fictitious character of the payee. They base their contention on the following provision of the law:

"The maker of a negotiable instrument by making it engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse." 2 Comp. Laws 1915, § 6101.

This section is evidently for the protection of a transferee who obtains a note by indorsement. It seems to be out of harmony with paragraph 3 of section 11, which section is for the protection of the maker. It is difficult to satisfactorily harmonize these provisions of the law. If a maker be conclusively bound by the admissions in section 62, there would be no circumstances in which he could raise any question as to the fictitious character of the payee. Every note payable to the order of a fictitious payee would be payable to bearer, and the fact that the maker was ignorant of the fiction would have no effect upon its negotiability. If such were the rule, paragraph 3 of section 11 might as well be eliminated from the statute, for it would be wholly inoperative. These seemingly conflicting provisions of the law ought to be so interpreted as to give effect to both of them if possible. We think it is possible to do this by adopting the view that section 62 was intended to apply to all negotiable instruments payable to order and to those instruments payable to the order of a fictitious payee where the maker had knowledge of the fiction. The latter instruments are treated as payable to bearer. They are the only instruments that are payable to bearer where the payee is fictitious. They are negotiable and are intended by the maker to circulate. Now, if a maker signs and puts into circulation a note which he knows is payable to a fictitious person, he is required by section 62 to admit that there is an existing payee with capacity to indorse. Having made these admissions to the world, he ought to be forever estopped from thereafter controverting them. But section 62 could have no application to such paper if the maker did not know that the payee was fictitious. If he did not know of the fiction, it would not be payable to bearer. It would not be negotiable. And if he did not know of the fictitious character of the payee when he signed the note, he would not be precluded by the doctrine of estoppel from thereafter asserting the truth. Our examination of this question leads us to the conclusion that section 62 has no application to notes payable to bearer except to those notes which are payable to the order of a fictitious payee of which fact the maker has knowledge at the time he signs the instrument. In any event, it is not of great benefit to a transferee, because such notes do not require indorsement. They pass by delivery. In reference to these two sections of the negotiable instruments act, it was said in Robertson Banking Co. v. Brasfield, 202 Ala. 167 (79 So. 651):

"How this section harmonizes with subdivision 3 of section 4966, unless it applies to all instruments other than those payable to bearer, we are not called upon to decide; for, as above stated, the check in question was not payable to bearer, and if section 5016 makes Brasfield admit the existence of the payee, Johnson, and his capacity to indorse the check, this would but strengthen the reason and necessity of obtaining a genuine indorsement before paying the check. The section does not make Brasfield admit that any other than his named payee could properly and legally indorse the check."

It is further urged by counsel for the plaintiff that the defendant is estopped from denying the existence of the payee because of the general rule that, where the name of a party with which a person contracts is one importing a corporation, the person so dealing with it is estopped from denying its corporate existence. There is no question as to the general rule. See Estey Manfg. Co. v. Runnels, 55 Mich. 130; Doyle v. Mizner, 42 Mich. 332; 5 A.L.R. 1580, and annotations. However, it has no application to the case under consideration. It is true that the name of the payee as it appears in this note is one that imports a corporation, but the defendant had not been dealing with the Adams Lumber Company. He had been dealing with Mr. Munz and was indebted to him for lumber. When he settled his account by giving this note, Munz named the payee as the Adams Lumber Company. If Munz had used this name in other transactions outside of and in addition to the one in suit, it would not have been a fictitious name within the meaning of the statute; and it would make no difference that it had no legal existence as a corporation. The defendant is not here denying the legal existence of a corporation. He is denying that there was a corporation in fact, that there was any person or concern going by that name or using that name. In other words, he is contending that the name was entirely fictitious.

There was competent evidence sufficient to establish the fact that the payee in this note was fictitious or nonexisting. The trial court did not find to the contrary. In giving his reasons for permitting the plaintiff to recover, he seems to have labored under the erroneous impression that, if he held otherwise, the plaintiff would suffer a loss caused by some fault of the defendant. The proximate cause of the plaintiff's loss is not that the defendant signed a note payable to a fictitious person, but because it purchased the note without ascertaining the identity of the payee named.

For the reasons stated, the plaintiff should not recover in this action. The judgment of the circuit court should be reversed without a new trial. The defendant should have costs.