Lentz v. K. B. Johnson & Sons, Inc., 207 N.C. 614 (1935)

Jan. 28, 1935 · Supreme Court of North Carolina

207 N.C. 614

L. A. LENTZ, Receiver of the COMMERCIAL NATIONAL BANK OF RALEIGH, v. K. B. JOHNSON & SONS, INC.

(Filed 28 January, 1935.)

1. Bills and Notes A a—

While the execution and delivery of a note under seal raises the presumption of consideration, such presumption is rebuttable as against any person not a holder in due course. C. S., 3008.

2. Same: Bills and Notes H b — Evidence of failure of consideration held for jury in this case.

The receiver of the payee of a promissory note under seal brought action thereon against the corporate maker. Defendant introduced evidence that its president signed the note for the accommodation of the payee bank, the note being used to cover an indebtedness due the bank by the brother of the president of defendant corporation in order that the bank’s records should not show the total amount loaned to the president’s brother, and that defendant corporation received no benefit from the transaction, and that the payee bank paid nothing for the note: Held,, the evidence of failure of consideration was competent and should have been submitted to the jury, and a directed verdict in plaintiff’s favor was error.

3. Corporations G c — Corporation held entitled to show that its president was without authority to execute! corporate note under facts of this case.

The corporate maker of a note may escape liability thereon on the plea of ultra vires upon a showing that the execution of the note by its president was not in pursuance of its corporate business, or incident thereto, and was wholly without consideration or benefit to the corporation to the knowledge of the payee. White v. Johnson & Sons, Inc., 205 N. C., 773, distinguished in that the evidence in that case showed consideration to the corporation.

4. Appeal and Error B b—

Where a theory of the case argued on appeal is not supported by allegations in the pleadings, it will not be considered on appeal.

Civil actioN, before GracLy, J., at Second June Term, 1934, of Wake.

Tbe plaintiff is the receiver of the Commercial National Bank of Baleigh. Among the assets of the bank were found two notes, payable to the bank and executed by the defendant corporation. One note for $3,000 was dated 15 November, 1931, payable to the Commercial National Bank, and the other was a note executed by the defendant on 13 July, 1931, for $7,581.69, payable to said bank. The defendant alleged and offered evidence tending to show that the Coastal Land and Timber Company, a corporation, owed the bank a large amount of money, evidenced by various notes, including a $3,000 note and a note for $7,412.50. It was admitted that Mr. E. B. Crow was vice-president and active manager of the Commercial National Bank.

K. B. Johnson, president of defendant corporation, testified: “The Hanover Land and Timber Company and the Coastal Land and Timber Company were two corporations. My brother, J. Beal Johnson, owed the bank considerable money — several notes — and on account of the several notes in the bank with their names on them, Mr. Crow asked me to sign this as K. B. Johnson & Sons, Inc., in order to relieve the bank of so many signatures on notes bearing the same signatures. I told Mr. Crow that we did not owe the bank anything, of course, and had never borrowed a dollar from them; that K. B. Johnson & Sons, Inc., had not. He insisted that it be done as a matter of form to keep the bank’s notes in better shape with the bank examiners. He said there were too many notes with the same signatures. I reluctantly signed this way just to suit them. K. B. Johnson & Sons, Inc., had no liability or obligation with respect to either of those two corporations. . . . That note there represented the interest upon past-due notes at the Commercial National Bank by the Hanover Land and Timber Company and the Coastal Land and Timber Company. I had no authority from the corporation, K. B. Johnson & Sons, Inc., to execute the notes which you hold in your hands. . . . Mr. Crow, the active manager of the bank, bad knowledge of tbe fact tbat K. B. Johnson & Sons, Inc., bad no obligation with respect to tbe notes of Hanover Land and Timber Company and Coastal Land and Timber Company. He knew all about tbat. ... It was understood tbat we could not pay tbe notes. "We did not owe them and could not pay them, but be (Mr. Crow) said: ‘We want it this way to make it look better in tbe bank.’ . . . Mr. Crow asked me to sign a note by K. B. Johnson & Sons, Inc., to cover tbe past-due interest on those notes. He said tbe bank examiners were fussing about it and it gave them a bad standing to have notes past due. I told him, as I did before, tbat K. B. Johnson & Sons, Inc., owed no notes and could not pay any. He said: ‘Well, just sign them this way anyhow to take care of tbe bank situation.’ I signed them reluctantly tbat way. . . . K. B. Johnson & Sons, Inc., did not derive any benefit from this note.”

There was evidence tending to show tbat K. B. Johnson, president of defendant corporation, paid to tbe bank, on 15 December, 1931, tbe sum of $15.00 interest on tbe $3,000 note. This payment was enclosed in a letter to tbe bank, reading as follows: “I herewith enclose check for $15.00 to cover interest on our note for $3,000 for thirty days. Very respectfully, K. B. Johnson & Sons, Inc.” There was evidence tbat, while this cheek was issued by tbe corporation, it was charged to tbe personal account of K. B. Johnson, president thereof.

Tbe following issues were submitted to tbe jury:

1. “What amount, if anything, is due plaintiff on account of tbe note for $3,000, dated 15 November, 1931?” •

2. “What amount, if anything, is due plaintiff on account of tbe note for $7,581.69, dated 13 July, 1931?”

3. “Is tbe defendant entitled to be relieved and discharged from liability on said two notes, or either one of them, because of tbe matters and things alleged in tbe answer?”

Tbe trial judge directed tbe jury to answer tbe first issue, “$3,000, with interest from 15 November, 1931,” etc.; tbe second issue, “$7,581.69, with interest,” etc.; and tbe third issue “No.”

From judgment upon tbe verdict tbe defendant appealed.

Briggs & West for plaintiff.

A. J. Fletcher, Douglass & Douglass, and Clyde A. Douglass for defendant.

Beogden, J.

Tbe two decisive questions of law presented are:

1. If tbe president of a corporation executes a promissory note in tbe name of tbe corporation, payable to a bank, and delivers same to said payee at tbe request and for tbe accommodation of said payee, without tbe knowledge or authority of tbe officers or directors of tbe maker, can such maker in. a suit by tbe receiver of tbe payee assert failure of consideration as a valid defense to tbe action ?

2. Was sucb execution and delivery of tbe instrument an ultra, vires act?

Tbe statute, C. S., 3008, provides that failure of consideration is a valid defense to a negotiable instrument “against any person not a bolder in due course,” etc. "While, of course, there is a presumption of consideration arising from tbe execution and delivery of a sealed instrument, sucb presumption is rebuttable. Farrington v. McNeill, 174 N. C., 420, 93 S. E., 957; Patterson v. Fuller, 203 N. C., 788, 167 S. E., 74.

Tbe defendant offered evidence tending to show that tbe notes in controversy were executed and delivered by him as president of tbe defendant corporation and in tbe name of tbe corporation, at tbe request of tbe Commercial National Bank, tbe payee named in tbe notes. Tbe evidence further tended to show that tbe bank paid nothing for tbe note, and that tbe maker received no valuable consideration as contemplated by law. Consequently, if the jury should find tbe facts to be as contended by tbe defendant, tbe defense of failure of consideration would be available. Manifestly, there was competent evidence of failure of consideration to be submitted to a jury. Therefore, tbe first question of law must be answered in tbe affirmative.

Tbe second question of law depends upon pertinent facts and circumstances. If it' shall be found that tbe notes executed by tbe president of defendant corporation, not in pursuance of or as an incident of tbe corporate business, wholly without consideration, or benefit of any kind to tbe corporation, then sucb execution and delivery of tbe notes would be an ultra vires act. See Bank v. Odom, 188 N. C., 672, 125 S. E., 394; Commissioners of Brunswick v. Bank, 196 N. C., 198, 145 S. E., 227; Indemnity Co. v. Perry, 198 N. C., 286, 157 S. E., 629.

There is no allegation in tbe pleadings that tbe payment of $15.00 interest on tbe $3,000 note constituted ratification, and therefore sucb question is not pertinent to tbe case as now constituted.

Apparently tbe plaintiff relied upon tbe case of White v. Johnson, 205 N. C., 773, 172 S. E., 370. In that case, however, tbe evidence tended to show that tbe plaintiff loaned tbe defendant tbe sum of $2,000 in cash. Obviously, nothing else appearing, tbe defendant received tbe benefit of tbe contract, and tbe plea of ultra vires was, therefore, not available.

The Court concludes that there was competent evidence of a valid defense to the instruments to be considered by tbe jury; and hence tbe peremptory instructions were erroneously given.

Eeversed.