Waters v. Byers Bros. Co. , 233 S.W. 572 ( 1921 )

I agree to a reversal of the case on the ground that the allegations of the fourth subdivision of the answer set up a good defense to the foreclosure of the deed of trust referred to therein, but I cannot agree that the allegations of the first, second and third subdivisions of the answer are sufficient. A preliminary statement of my understanding of the effect of the statements made in the defendant's pleading will be useful in the discussion of the legal principles applicable to the case, as I view it.

It will be noted that it is not expressly stated in the answer that the agreement between the parties other than that evidenced by the notes and mortgage were in parol. However, appellant's counsel, in oral presentation of the case, admitted that the notes and mortgage were the only writings evidencing their agreement, and requested that the case be decided on this theory. So that our opinions are written on this assumption as to the facts. Under the allegations of the answer the notes and chattel mortgage were delivered as a part of the agreement between the plaintiff and defendant, or rather in partial consummation of that agreement. It was their understanding that these very notes, or renewals thereof, were to be paid, and they were thus delivered obligations. The only other part of the agreement that was not consummated by the delivery of the cattle to the defendant and the notes and mortgage to the plaintiff was in reference to the manner and time of the discharge of the obligation, evidenced by the notes, it being the understanding that the defendant was to pay the notes out of the proceeds of the sale of the cattle from time to time, and that the plaintiff, in order to enable the defendant to do this, was to renew the notes every six months until they were so paid. It is not stated that any agreement was made as to the defendant's liability in the event the cattle never paid out the notes, though it may possibly be inferred that the effect of the agreement was that the notes were to be paid only out of proceeds from the sale of the cattle, and that there was otherwise no personal liability on the part of the defendant. I refer to a few of the allegations of the answer. It is stated that it was agreed:

"That the defendant should take the cattle at the price then agreed upon for which notes were then given, secured by a chattel mortgage upon said cattle, the same being signed by the defendant; that the defendant, for his profit in the care and keep of the cattle, was to have the profit to be derived from the cattle after paying off, out of the sales of the cattle to be made from time to time, * * * the said indebtedness and interest thereon."

The pleader, in the second subdivision of the answer, states his own conclusion as to the effect of the agreement.

"Thus, by the terms of said agreement the enterprise was entered into, whereby the defendant was to take the cattle as hereinbefore stated, and the notes so given and the mortgage securing the same were to be discharged out of the profits of the business."

It was further stated that it was understood that the plaintiff would have to "float" (which I understand to mean negotiate) the notes. This latter agreement itself implies an understanding that the notes represented an agreement or obligation. The whole effect of the allegations as I construe them is to show that it was understood that the notes were delivered obligations, evidencing a part of the agreement between the plaintiff and the defendant; that the other part of the agreement was to the effect that these notes were to be extended from time to time and paid out of the proceeds of the sale of the cattle.

If such be the effect of the allegations of the answer, I cannot escape the conclusion that the oral agreement, with respect to the manner of the payment of the notes, is a contradiction and variance of the terms of the written part of the agreement, as evidenced by the notes and the chattel mortgage given to secure their payment, and does not come within any of the recognized exceptions to the parol evidence rule discussed by Judge HALL. The exceptions to the rule so discussed relate to (1) want or failure of consideration: (2) contemporaneous parol agreements; (3) conditional delivery. I will take up the discussion of the case in its relation to the stated exceptions in the above order.

Of course, it has always been competent to defend the enforcement of a note or any other written contract on the ground that it was given without consideration, or that there has been a failure, in whole or in part, of the consideration. If my conclusion as to the effect of the allegations is correct, it follows necessarily that there was an original consideration for the execution of the notes. Do the allegations as to the refusal of the plaintiff to keep his oral agreements as to the payment of the notes state such a failure of consideration as will avail the defendant in this suit? If it were true that a failure to perform a verbal promise that varied or contradicted the terms of the written contract could be proven as a failure of consideration, then the parol evidence rule would amount to nothing. In the case of Hendrick v. Chase Furniture Co., 186 S.W. 278, where the defendant sought to prove a parol agreement for the renewal of notes, made at the time of their execution, it was said:

"It cannot be said * * * that a contemporaneous oral agreement to extend payment at maturity is a failure of consideration, within the common meaning of that term so as to bring the parol agreement to postpone payment within the statute, and thereby avoid the general rule with reference to contradicting the provisions of written contracts by parol evidence."

To the same effect, see Crooker v. National Phonograph Co., 135 S.W. 647,650 (writ of error denied); Nixon v. First State Bank, 127 S.W. 882; Reid v. Ragland, 156 S.W. 921; Kahn v. Kahn, 94 Tex. 114, 58 S.W. 825; Jones on Evidence, § 468.

For the same reasons, a breach of such an oral agreement will not support an action for damages or afford ground for any character of equitable relief. Commonwealth Trust Co. v. Coveney, 200 Mass. 379,86 N.E. 895; Hall v. First National Bank, 173 Mass. 16, 53 N.E. 154,44 L.R.A. 319, 73 Am. St. Rep. 255. In the case first cited it was held that an oral agreement to renew notes from time to time and to require payment only "of such sums as the maker will realize as profits from the sales of his real estate" was inadmissible, either as a defense to a suit on the notes or in support of an action for damages for breach of the oral agreement. I am of the opinion, therefore, that there is no such want or failure of consideration alleged as will avail the defendant in this case.

It is the law that in some cases where the writing is only a part of the agreement, and there was no intention to reduce the entire agreement to writing, then parol evidence to show the entire agreement or collateral contemporaneous agreements made in connection with the writing may be introduced; but the statement of the rule itself is usually coupled with the express qualification that the parol agreements thus sought to be shown must be consistent with, and not contradict, the terms of the written part of the agreement, and where such qualification is not expressly stated it is impliedly recognized. Hendrick v. Chase Furniture Co., 186 S.W. 277, and authorities; Crooker v. National Phonograph Co.,135 S.W. 647; Belcher v. Mulhall, 57 Tex. 21; note 43 L.R.A. 456; 10 R.C.L. p. 1038, § 230. This statement of the rule, found in the reference to R.C.L., is well sustained by the authorities:

"The rule that, where a written contract is made as only a part execution of an entire verbal contract, that portion not embodied in the paper may be shown by parol applies only where such portion is in itself a distinct, complete contract, not to mere stipulations in regard to and varying the terms of the written contract. What is sought to be shown as a collateral agreement must not in any way conflict with or contradict what is contained in the written contract. Extrinsic evidence is not admissible to show that a contract was partly written and partly oral, if the matter proposed to be made part of the contract by such evidence is inconsistent with the terms of the writing."

A number of decisions cited by Judge HALL expressly state this qualification (Reid v. Ragland, 156 S.W. 920; Henry v. McCardell,15 Tex. Civ. App. 497, 40 S.W. 172; Stuart v. Meyer, 196 S.W. 618), and the other cases referred to in this connection permitted the showing of the contemporaneous parol agreements, on the ground that such agreements, which were held to be admissible did not vary or contradict the terms of the writing in the case. Since all the authorities admit the principle, it would not be profitable to enter into a discussion of the facts of the many cases that apply it. Now it seems to be well settled that an agreement to renew a note, or that it shall be paid only out of a particular fund, or that the maker thereof is not to be bound thereby, is in contradiction of the terms of a note payable absolutely at a stated time. Hendrick v. Chase Furniture Co., 186 S.W. 277; Crooker v. National Phonograph Co., 135 S.W. 647; Dolson v. De Ganahl,70 Tex. 620, 8 S.W. 321; Long v. Riley, 139 S.W. 79; Nixon v. First State Bank, 60 Tex. Civ. App. 7, 127 S.W. 882; Daniel on Neg. Inst. §§ SO, 81a; note 43 L.R.A. 449 et seq. No contemporaneous parol agreement is set up in the answer that is not in contradiction of the terms of the note, and the allegations do not, in my opinion, bring the case within this exception to the parol evidence rule.

The question as to conditional delivery of the notes is discussed in two aspects: First, as to the law prior to the adoption of the Negotiable Instruments Act; and, second, in relation to such act. Before the adoption of the act referred to it was the recognized law in this state that parol evidence was admissible to show that manual delivery of a note to the payee was made subject to conditions precedent to the taking effect of the instrument as an, obligation, and upon such showing the note in the hands of the original payee was inoperative until the happening of the contingency. This was the rule of the common law and was followed by the Supreme Court of the United States and the courts of most of the states of the Union. According to the reasoning of the authorities, evidence as to such conditions did not vary or contradict the terms of the note itself, but such evidence simply showed that the instrument never became operative as an obligation at all. The following language, used in the opinion, in an English case (Pym v. Campbell, 6 El. Bl. 370, 373), has been quoted many times with approval by the courts of this country:

"The distinction in point of law is that evidence to vary the terms of an agreement in writing is not admissible, but evidence to show that there is not an agreement at all is admissible."

The question was exhaustively considered by the Supreme Court of the United States in the case of Burk v. Dulaney, 153 U.S. 228,14 S. Ct. 816, 38 L. Ed. 698, from which decision extensive quotations are made by Judge Key, in his opinion in the case of Hawkins v. Johnson,181 S.W. 563. An elaborate note on the subject will be found in L.R.A. 1917C, 306-321. The writer of the note states this conclusion on the subject:

"To restate the governing principles: Evidence which shows that the writing was never delivered with the intention that it was to become a binding contract is admissible. But if the writing has been finally delivered as a contract, evidence which contradicts or varies its terms is not admissible."

So, if the allegations of the answer show a delivery of the defendant's note as a part of the contract made between the plaintiff and the defendant, parol evidence that its payment was to be extended or the note renewed from time to time, and paid in a particular way, would be inadmissible; such evidence would vary the obligation evidenced by the writing rather than show that no obligation at all existed by virtue of the note and mortgage. What is the effect of section 16 of the Negotiable Instruments Act as to the admissibility of such evidence? This section and the preceding one deal with the subject of "delivery." Section 16 reads:

"Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be; and in such case the delivery may be shown to have been conditional, or for a special purpose only and not for the purpose of transferring the property in the instrument."

I do not think that it was intended by the Legislature to make any material change in the law as it already existed in this state in the matter of a conditional delivery of notes, as declared by such decisions as Burk v. Dulaney and Hawkins v. Johnson, supra. The term "conditional delivery," as applied to the delivery of negotiable instruments, had an established meaning — that is, a delivery on condition precedent to the taking effect of the instrument as an obligation in any sense — and there is nothing to show that this was not the meaning in which the term was used in this act.

What is meant by delivery for "a special purpose only," which might be shown in denial of liability on a regularly executed note, is made clear by the addition to the clause "and not for the purpose of transferring the property in the instrument"; an instance of this would be a delivery for the purpose of examination and the like. In my opinion, it was not the purpose of the act to let down the bars to the introduction of parol evidence to vary the terms of the note after it was once delivered as an obligation. I know of no authority that maintains that the adoption of section 16 of this act made any change in the law on this particular subject, except in the cases referred to by Mr. Daniel in section 68a of his work, quoted by Judge HALL, as follows:

"The conflict of authority on the question whether a bill or note can be shown to have been delivered upon a condition precedent is settled in those states which have adopted the statute [the Negotiable Instruments statute] where the rule is recognized that a person may manually deliver an instrument though it be in the form of commercial paper, to another, on its face containing a binding obligation in præsenti of such person to such other, with a contemporaneous verbal agreement that it shall not take effect until the happening of some specified event, and that the paper as between the parties will have no validity as a binding contract until the condition shall have been satisfied."

A consideration of what precedes this statement will make clear what the author meant by the above language. It was shown in section 68 and the first paragraph of section 68a that some authorities had held that a manual delivery of a note to the payee could not be shown by parol to be on condition precedent to its taking effect; and it was stated in such connection that such holding was against the weight of authority, and it was concluded that "it is now generally held that a note may be delivered to the payee to take effect only upon a condition precedent." This discussion is followed by the second paragraph of section 68a, which constitutes the language first above quoted So, it seems clear that the author did not intend to say that the Negotiable Instruments Law made any change as to the law in those states which had already held that parol evidence might be offered to show delivery of a negotiable instrument upon a condition precedent. Mr. Brannan, on page 62 of his work on the Negotiable Instruments Law, has this to say in reference to said section 16:

"The language of the section that the delivery may be shown to have been conditional or for a special purpose, and not for the purpose of transferring the property in the instrument, is somewhat ambiguous. If the last clause qualifies both a conditional delivery and a delivery for a special purpose, it would seem that where the delivery is conditional, and no property in the instrument passes, we have a case of the first kind and not of the second. Moreover, in any case, the statute not speaking on the question as to the kind of evidence by which delivery may be shown to be conditional, recourse must be had to the common law, where the distinction is made between the two classes of cases, which may be generally described as those in which the condition is a condition precedent to the existence of the contract and those in which it is a condition to liability as an existing obligation."

Most of the authorities cited by Judge HALL are typical cases of true conditional deliveries; that is, the instruments by reason of the nonfulfillment of the condition under which they were manually delivered, never took effect at all, and the decisions were placed on such grounds, though in some cases it might be questioned whether the particular facts brought the case within the rule. The case of Paulson v. Boyd, 137 Wis. 241, 118 N.W. 841, is perhaps more nearly in point in its facts than any of the cases cited. Three of the judges dissented from the holding in that case. The conclusion as to the facts is questioned by Brannan (page 61), and is criticized by the author of the note in L.R.A. 1917C, 312, 313. The question of the decision is not as to the statement of the law, but as to its application to the facts of the case. The court states the law of the case, quoting from Hodge v. Smith, 130 Wis. 326,110 N.W. 192, as follows:

"It is familiar law, notwithstanding some conflicting authorities, that a person may manually deliver an instrument, though it be in the form of commercial paper, to another, on its face containing a binding obligation in præsenti of such person to such other, with a contemporaneous verbal agreement that it shall not take effect until the happening of some specified event, and that the paper, as between the parties, will have no validity as a binding contract till the condition shall have been satisfied, and that proof of such condition does not violate the rule that a written instrument cannot be varied by a contemporaneous agreement; that such evidence only goes to show that the instrument never had vitality as a contract" —

and immediately states that —

"It is there also held that this principle is recognized in the Negotiable Instruments Law, * * * by providing that [quoting section 16 of such law]."

The case of Burk v. Dulaney, supra, is also quoted as authority for the conclusion of the court. So that it is apparent that, notwithstanding the Negotiable Instruments Law was then in force in Wisconsin, it was not considered by the court that such law made any change in the law of conditional delivery as it had been announced by the Supreme Court of the United States in Burk v. Dulaney and other authorities following the common law.

So I conclude that these notes were delivered and the condition was only as to the time and manner of their payment, and that parol evidence as to such conditions would not be admissible, and allegations setting up such facts would be subject to demurrer.

It was suggested on oral argument that the effect of the allegations is to allege a partnership or joint undertaking between the plaintiff and defendant, the plaintiff furnishing the cattle, and the defendant their pasturage, care, and keep; that the note was delivered as the liability of the joint undertaking to the plaintiff, and not as an obligation of the defendant, and was executed for plaintiff's accommodation, so that he might secure money for his own purposes while the partnership, or whatever it might be called, was paying out the debt, and that under this view of the allegations the notes delivered were not a contract between the plaintiff and the defendant at all, and as between them is to be regarded as accommodation paper, so that there was no consideration for the execution of the note as an individual liability of the defendant; and also that the partnership arrangements is such an independent agreement ag might be shown and its breach constitute either a failure of consideration or warrant a suit for damages. As I understand it, Chief Justice HUFF is inclined to take this view of the transaction, and places his concurrence in the holding that the allegations of the first three subdivisions of the answer are sufficient on this ground. But, for the reasons already stated, I do not think that the facts alleged in the answer will bear the construction that the notes were not delivered as an obligation. If they were delivered as a part of the contract, then all the other allegations merely go to vary their terms and are conditions of payment and not conditions of effective delivery.

I have not attempted a discussion of the facts of the many cases cited, or that might be cited, on this subject, my purpose being to determine the controlling principles of law from recognized authorities. In addition to the authorities cited, the following may be referred to as being more or less similar in the particular facts on which the decisions were based: Gwinn v. Ford, 85 Wash. 571, 148 P. 891; Stevens v. Inch,98 Kan. 306, 158 P. 43; Smith v. McLaughlin, 120 Ark. 366, 179 S.W. 496.