Mills v. Bonin, 239 N.C. 498 (1954)

Feb. 24, 1954 · Supreme Court of North Carolina

239 N.C. 498

R. P. MILLS v. W. L. BONIN.

(Filed 24 February, 1954.)

1. Evidence § 39: Bills and Notes §§ 3, 29—

In an action on notes between tbe original parties thereto, tbe payee is entitled -to set up tbe defense of total failure of consideration, and evidence in support of sucb defense does not violate tbe parol evidence rule.

2. Bills and Notes § 3—

Tbe presumption of consideration arising from tbe fact that notes are under seal is rebuttable.

3. Same—

A total failure of consideration for a note under seal renders it unenforceable in the hands of any person other than a holder in due course, G-.S. 25-33, and in an action on notes given for the purchase price of property defendant maker may set up this defense.

4. Contracts § 5—

As a general rule, the term “consideration,” as affecting the enforceability of contracts, consists of some benefit or advantage to the promissor, or some loss or detriment to the promissee.

5. Bills and Notes § 29: Partnership § 9b — Evidence of total failure of consideration for notes given for net worth of partner’s interest held for jury.

Plaintiff payee instituted this action on notes executed by defendant. Defendant’s evidence tended to show that he executed the notes under an agreement to buy plaintiff’s interest in the partnership of -the parties, the notes to equal the net worth of the plaintiff’s interest therein, that plaintiff managed the business entirely, that defendant had no knowledge and relied completely upon plaintiff’s representation of the condition of the partnership, that through error an audit showed the value of plaintiff’s interest in a certain sum which was reduced by negotiation to a stipulated amount, which plaintiff paid partly in cash and partly in promissory notes, one of which notes he had paid prior to the institution of plaintiff’s action on the balance, and that shortly after the execution of the notes and bill of sale another audit was made disclosing that plaintiff had no net worth in the business, so that the consideration for 'the payment of the cash and the execution of the notes did not in fact exist. Sold: Defendant’s defense of total failure of consideration should have been submitted to the jury, and peremptory instruction for plaintiff for the amount of the notes was error.

6. Money Received § 1—

Where a party pays in good faith, in ignorance of the facts, a sum of money to another for certain property, rights or interest, which in fact is worthless, so that there is a total failure of consideration, the money may be recovered under principles of justice, and where the purchaser sets up the defense of total failure of consideration in the seller’s action for the balance of the purchase price represented by notes, it is error to nonsuit .the purchaser’s counterclaim to recover the cash paid.

Bobbitt, J., took no part in the consideration or decision of this case.

Appeal by defendant from Armstrong, J., April Term 1953 of Fob-syth.

Civil action by plaintiff to recover $5,000.00 with interest, represented by five one thousand dollar promissory notes under seal.

The plaintiff’s evidence tended to show these material facts. For some time prior to 1 May 1952 the plaintiff and the defendant operated as partners a business known as Bonin-Mills, dealing in building materials. The defendant started the business, and sold 49% of it to the plaintiff, who gave his promissory notes in payment of the purchase price — the purchase price was $'7,000.00 — which has been paid. When the partnership was formed the defendant was building houses, and it was agreed that the defendant was to take no part in the business, and to draw no salary. That about 1 May 1952 the plaintiff and the defendant agreed to dissolve the partnership. On 3 .May 1952 the plaintiff and the defendant executed and delivered a Pill of Sale, which is summarized: The plaintiff has this 3rd day of May 1952, in consideration of $6,800.00 paid to him — $800.00 in cash and 6 notes of $1,000.00 each under seal bearing interest, and due and payable on dates specified in the Bill of Sale— bargained, sold and delivered to the defendant all his right, title and interest in and to the assets of the partnership known as Bonin-Mills: it is understood and agreed that as part of the consideration the defendant assumes all liabilities of the partnership. The defendant paid the $800.00 in cash and the first one thousand dollar note due 1 July 1952. The defendant admitted in his answer the execution and delivery of the notes sued upon. That the notes sued upon are all past due, and the defendant refuses to pay them.

A summary of what the defendant’s evidence tends to show, which evidence is supported by the allegations of the answer, is as follows: After the plaintiff became a partner, the plaintiff managed and operated the partnership business entirely. The defendant was not familiar with the condition of the business, but relied completely upon the reports of the business the plaintiff gave him. That he believes the plaintiff reported the net income to him for 1951 to be $26,000.00; that this was after a correction was made, the net income originally reported was $53,000.00. On cross-examination the plaintiff testified he reported to defendant that the partnership had earned $41,000.00'in 1951- — that October and November 1951 showed $11,934.62 profits. The defendant’s evidence further tended to show that the agreement was that the defendant would buy the plaintiff’s interest in the business, and would pay therefor a sum equal to the value of the net worth of the plaintiff’s interest in the partnership. That it was mutually agreed that an auditor should be employed to show what this net worth was. That in February 1952 the defendant learned the business had not made the big profits the plaintiff had reported to him. Among the assets of the partnership was a construction contract in Salisbury, which the plaintiff and defendant agreed had a net worth of $21,000.00. In preparing the audit prior to the purported sale, the auditor carried the net worth of the Salisbury contract into accounts receivable twice, once in the amount of $19,000.00 and again in the agreed amount of $21,000.00, thus showing the assets of the partnership to be some $19,000.00, or more, than they were. About 15 days after the purported sale was made the defendant’s attention was called to this mistake. He had made another audit, which tended to show this mistake, but be bad paid $800.00 in casb and tbe first one thousand dollar note, before be received tbe last audit. Tbat tbe last audit tended to sbow tbat tbe plaintiff bad no interest in tbe business, and bad withdrawn from tbe business some $645.00 or more in excess of bis interest therein. Tbat tbe partnership business owed more than $95,000.00 of debts, which defendant has to pay. Tbat plaintiff bad nothing to sell; be bad a liability instead of an asset. Tbe item of good will was not used as an asset in tbe audit. Tbe first audit tended to sbow tbat plaintiff’s interest in tbe partnership was $7,000.00 or $9,000.00. Tbat in negotiations between plaintiff and defendant, plaintiff’s interest was reduced to $6,800.00 — this was before tbe last audit. Tbat defendant was willing to pay $6,800.00 for plaintiff’s interest until be found out there was nothing for plaintiff to convey. Tbe last audit tended to sbow .that plaintiff withdrew $21,000.00 from the business, and tbat plaintiff bad overdrawn bis capital account in tbe business, and owed it $645.00: tbat on 29 February 1952 tbe liabilities of tbe partnership exceeded tbe assets $1,005.28. Tbe defendant contends there was a total failure of consideration, and tbat tbe plaintiff should recover nothing; and tbat be should recover from tbe plaintiff tbe $1,800.00 be has paid him.

At tbe close of all tbe evidence upon motion of tbe plaintiff tbe court dismissed tbe counter-claim of tbe defendant for $1,800.00, and tbe defendant excepted.

Tbe court submitted one issue to tbe jury: “In what amount, if anything, is the defendant W. L. Bonin indebted to tbe plaintiff R. P. Mills on tbe five notes sued on?”; and directed tbe jury to answer it $5,000.00 with interest from 1 May 1952, which tbe jury did.

Tbe court entered judgment upon tbe verdict, and tbe defendant excepted and appealed.

Eugene H. Phillips for plaintiff, appellee.

Dallace McLennan and John R. Surratt for defendant, appellant.

Parker, J.

This is an action between the payee and the maker of the five notes. No rights of third parties are involved. Tbe defendant has pleaded total failure of consideration as a defense. The rulé prohibiting the introduction of parol evidence to vary, modify or contradict the terms of a written instrument was not violated by the introduction of evidence by the defendant tending to show a total failure of consideration. Swift & Co. v. Aydlett, 192 N.C. 330, 135 S.E. 141; Chemical Co. v. Griffin, 202 N.C. 812, 164 S.E. 577; Galloway v. Thrash, 207 N.C. 165, 176 S.E. 303; Royster v. Hancock, 235 N.C. 110, 69 S.E. 2d 29.

Tbe notes sued upon are under seal, which purports a consideration, but such presumption is rebuttable. Patterson v. Fuller, 203 N.C. 788, 167 S.E. 74; Lentz v. Johnson & Sons, Inc., 207 N.C. 614, 178 S.E. 226; Royster v. Hancock, supra.

G-.S. 25-33 provides that absence or failure of consideration is matter of defense to a negotiable instrument as “against any person not a holder in due course . . .”

It is the general rule in this jurisdiction, and elsewhere, that a total failure of the consideration for a note under seal renders it unenforceable in the hands of any person other than a holder in due course. Jewelry Co. v. Stanfield, 183 N.C. 10, 110 S.E. 585; Swift v. Etheridge, 190 N.C. 162, 129 S.E. 453; Patterson v. Fuller, supra; Perry v. Trust Co., 226 N.C. 667, 40 S.E. 2d 116; Royster v. Hancock, supra; 10 C.J.S., Bills and Notes, p. 626.

As a general rule the term consideration, as affecting the enforceability of contracts, consists of some benefit or advantage to the promissor, or of some loss or detriment to the promisee. Cherokee County v. Meroney, 173 N.C. 653, 92 S.E. 616; Exum v. Lynch, 188 N.C. 392, 125 S.E. 15; Stonestreet v. Oil Co., 226 N.C. 261, 37 S.E. 2d 676.

The defense of absence or failure of consideration may be made to an action on notes given for the purchase price of property. 7 Am. Jur., Bills and Notes, p. 950, where numerous cases are cited.

We said in Fair v. Shelton, 128 N.C. 105, 38 S.E. 290: “To render a promise void upon an entire failure of consideration, it must appear that the consideration upon which it was supposed to be based, did not in fact exist, and its nonexistence was unknown to the parties. For instance, where the grantor sells and conveys land to which he has no title (both parties assuming that he has) the grantee gets nothing — there is a failure of consideration, but otherwise should the grantee purchase such right, title and interest as grantor might have, for here the maxim of caveat emptor applies. Foy v. Haughton, 85 N.C. 168.” . (This is a case of quitclaim deed — parenthesis ours.) “Likewise if a vendee gets that which he buys, though worthless (in the absence of deceit), for he buys upon his own judgment and at his own risk, in not requiring a warranty. So also in the absence of fraud, the buyer is liable for the price agreed to be paid for worthless stock in a corporation, where he receives that for which he contracted, though it was known by the seller to be worthless.” See also Johnston v. Smith, 86 N.C. 498.

“While some decisions appear to have reached a contrary conclusion, it is often held that a sale or transfer of property does not constitute consideration for an undertaking on a bill or note if the seller or transferor completely lacks title to the thing sold or transferred, except where the sale is intended to be merely of such title as the seller has, if any.” (For instance a quitclaim deed, 8 C.J., p. 227 — parenthesis ours.) 10 C.J.S., Bills and Notes, p. 614. See also Williston on Contracts Eev. Ed. Secs. 1570 et seq.; Anno. 1 A.L.E. 2d, p. 37, Sec. 16, p. 52, Sec. 19.

In tbe case under consideration tbe defendant’s evidence tended to show tbat tbe defendant agreed to buy tbe plaintiff’s interest in tbe partnership for a sum equal to tbe value of tbe net worth of tbe plaintiff’s interest ; tbat tbe plaintiff managed tbe business entirely; tbat tbe defendant was not familiar witb tbe condition of tbe business, relying completely upon wbat tbe plaintiff told bim of its condition; tbat it was mutually agreed between tbe parties tbat an auditor should be employed to show wbat tbe net worth of tbe plaintiff’s interest was; tbat this audit by mistake showed tbe net worth of plaintiff’s interest was $7,000.00 or $9,000.00 and tbat the parties by negotiation reduced tbe amount to $6,800.00. Tbat tbe defendant then paid to plaintiff $800.00 in cash, and executed and delivered to bim $6,000.00 in promissory notes, and tbe plaintiff executed to tbe defendant a bill of sale for bis interest in tbe business. Tbe defendant’s evidence further tended to show tbat about 15 days after tbe execution of tbe notes and bill of sale tbe defendant’s attention was called to tbe mistake in tbe first audit, and tbat be bad another audit made which disclosed tbat tbe liabilities of tbe business exceeded its assets, and tbat the plaintiff bad no net worth in tbe business, tbat be bad nothing to convey; tbat tbe supposed consideration for tbe $800.00 in cash and tbe six promissory notes did not in fact exist. Tbat before tbe defendant learned this be bad paid the plaintiff one promissory note for $1,000.00.

Tbe plaintiff contends tbat tbe evidence tends to show there was no total failure of consideration.

We are of tbe opinion tbat tbe defendant’s defense of a total failure of consideration should have been submitted to tbe jury upon proper instructions, and tbat tbe peremptory charge of tbe court was error. Jewelry Co. v. Stanfield, supra; Perry v. Trust Co., supra; Finance Co. v. O’Daniel, 237 N.C. 286, 74 S.E. 2d 717.

If, upon a new trial, tbe jury should find there was a total failure of consideration, tbe defendant will be entitled to recover from tbe plaintiff tbe $1,800.00 be paid bim upon tbe plain principle of justice tbat tbe defendant through ignorance of tbe facts paid tbe plaintiff $1,800.00 for nothing. Anderson v. Hawkins, 10 N.C. 568; Page v. Einstein, 52 N.C. 147; 48 C.J., Payment, p. 768 (where numerous cases are cited) ; 70 O.J.S., Payment, Sec. 158; 40 Am. Jur., Payment, Sec. 214. In stating this conclusion we must not be understood as expressing any opinion as to tbe weight or conclusiveness of the evidence for tbat is the province of tbe jury. G.S. 1-180.

Tbe defendant’s assignment of error to tbe lower court’s dismissing bis claim for tbe recovery of tbe $1,800.00 be paid tbe plaintiff is sustained.

The defendant is entitled to a New Trial, and it is so ordered.

New Trial.

Bobbitt, J., took no part in the consideration or decision of this case.