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Rabon v. Putnam

: October 13, 1947.



Before PHILLIPS, BRATTON, and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

Appellees sued one Curd, as maker, and appellants, Rabon and Simon, as guarantors, of a promissory note in the amount of $37,000, payable to one Rambo and endorsed by him without recourse to appellees. Appellants pleaded the unlawful filling up of the blanks in the note, total failure of consideration, partial failure of consideration, fraudulent procurement, and alteration of the original obligation. The trial court gave judgment for appellees and on appeal, appellants reassert the defenses tendered in the trial court.

Appellees were the owners of preferred stock in the Producers Lumber Company, having a face value of $110,000. Curd, as President and owner of 90 per cent of the common stock, desired to purchase the preferred stock, and the appellees offered to sell the same for $37,000. When Curd was unable to raise the money, he was informed that a note for the agreed amount, due in five years would be acceptable, provided he secured a satisfactory guarantor or guarantors. A promissory note was accordingly prepared in the office of Hal F. Rambo, an attorney who apparently was representing both parties. The note was dated July 1, 1940, due in five years from date, payable to Rambo at his office in Tulsa, Oklahoma, with interest at 6% payable semi-annually, and attorney fee of 10% if collected by an attorney. Immediately below the signature of the maker and on the face of the note appeared the following: "For value received we, the undersigned, guarantee the payment of this note to the extent set forth opposite our respective names, and if at the maturity of this note the maker does not pay the full principal and interest then due thereon, the undersigned will, on demand of the holder hereof, pay the said holder the sum set opposite our signatures; provided, that in no event shall any guarantor be liable to the holder for more than his pro rata share of the unpaid principal and interest due on this note at the maturity thereof." Then followed seven blank lines for the signatures of the guarantors and the amount of their liability to be set out or filled in opposite their signatures.

Curd induced Rabon and Simon to sign the guaranty, and later submitted the note, with the sum of $18,500.00 set opposite the guarantors' respective names, to the appellees in the office of Rambo. The note was payable to Rambo, as nominal payee and by him endorsed without recourse to the order of the appellees, who accepted it as executed in payment of the stock.

In answer to interrogatories, the jury found from controverted evidence that Curd orally agreed with Rabon and Simon at the time the guaranty contract was signed that he would procure additional guarantors, and that the amount he would insert for which each would be separately liable would be $4,500 or less; that after the signatures of other guarantors had been obtained, and the note completed, it would be exhibited to them before delivery to the payee; that the figures of $18,500, appearing opposite each name on the note were not filled in at the time the note was signed; that the note was payable to Hal F. Rambo at his office at Tulsa, Oklahoma, at the time it was signed by Rabon and Simon.

Section 34, Title 48 O.S.A., Section 14, N.I.L., provides: "Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time."

In accordance with the prevailing rule in Oklahoma the trial court held that the appellees, as actual payees of the note, were not holders in due course. See Edwards v. J. I. Case Co., 187 Okl. 244, 102 P.2d 120; First National Bank of Alex v. Godwin, 173 Okl. 169, 47 P.2d 116; First National Bank of Cushing v. Woods, 172 Okl. 645, 46 P.2d 565. And, if therefore the appellants be considered as co-makers or endorsers of the note they were not liable thereunder, because under the established facts the blank spaces in the note were not filled up strictly in accordance with the understanding between the maker and appellants, as required by Section 34, supra. The court was of the opinion, however, that the obligation signed by the appellants, was separate and distinct from the note itself, and constituted an independent contract. Treating the action as one on a contract of guaranty, not upon the note, the trial court held the defenses under Section 34 unavailable, because as guarantors they did not become parties to the instrument. It further held that the appellees being bona fide purchasers of the note without notice of the agreement between the maker and the guarantors, such agreement was not a defense to the guaranty.

Manifestly, to be entitled to the defenses under Section 34, supra, Rabon and Simon must have become parties to the note prior to its completion. They were not makers, co-makers, drawers, or acceptors and we need only consider whether by affixing their signatures to the instrument in the manner shown they became endorsers thereof, hence parties thereto.

"A person placing his signature upon an instrument otherwise than as maker, drawer or acceptor is deemed to be an endorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity." Section 144, Title 48 O.S.A., Section 63 N.I.L.

Thus, it has been held that a guaranty when accompanied by words usually related to the rights of an endorser, such as waiver of presentment, notice of protest and dishonor, the contract will be construed as an endorsement with the enlarged liability of a guarantor. Mangold & Glandt Bank v. Utterback, 54 Okl. 655, 160 P. 713, L.R.A.1917B, 364; First National Bank v. Cummings, 69 Okl. 216, 171 P. 862, L.R.A.1918D, 1099; Delk v. City National Bank of Duncan, 85 Okl. 238, 205 P. 753; Sec Annotations 21 A.L.R. p. 1375, 33 A.L.R. p. 97 and 46 A.L.R. p. 1516, and cases cited therein. Other courts hold that the use of the word "guarantee" clearly indicates the nature of the obligation and a contract using words of guaranty will be so treated, although it may also contain words usually related to the obligations of an endorser. First National Bank, Shenandoah v. Drake, 185 Iowa 879, 171 N.W. 115; Bank of Italy National Trust & Savings Ass'n v. Symmes, 118 Cal.App. 716, 5 P.2d 956; Northern State Bank v. Bellamy, 19 N.D. 509, 125 N.W. 888, 31 L.R.A.,N.S., 149; Noble v. Beeman-Spaulding-Woodward Co., 65 Or. 93, 131 P. 1006, 46 L.R.A.,N.S., 162. But see also Douglas v. Rumelin, 125 Or. 261, 264 P. 852, 266 P. 624; Id., 130 Or. 375, 280 P. 329. When, as here, no words peculiar to the liability of an endorser are used in the guaranty and the obligation is to answer for the default of another, the courts recognize the separateness of the note and guaranty. Square Butte State Bank v. Ballard, 64 Mont. 554, 210 P. 889; Walker v. Griffin, 107 Okl. 107, 232 P. 65; Vol. 8, Amer.Juris. Bills and Notes, Sec. 452, p. 204, Britton on Bills and Notes, pp. 236 and 238, Bigelow, the Law of Bills, Notes and Checks, 3rd Ed., 1928, p. 348.

In our case, Rabon and Simon, guaranteed the payment of the note only to the extent set opposite their respective names and promised to pay their pro rata share at maturity only if the maker did not pay the full principal and interest. In these circumstances, the word "guarantee" clearly denoted the nature of the obligation, and the capacity in which the obligors intended to be bound. The obligation was separate and distinct from the note. Pavlantos v. Garoufalis, 10 Cir., 89 F.2d 203; Howell v. Commissioner of Internal Revenue, 8 Cir., 69 F.2d 447; Peterson v. Miller Rubber Co. of N.Y., 8 Cir., 24 F.2d 59; Northern State Bank v. Bellamy, supra; National Security & Trust Co. v. Niles Invisible Door Check Co., 222 Mich. 510, 193 N.W. 199; Swenson v. Stoltz, 36 Wash. 318, 78 P. 999, 2 Ann.Cas. 504; Holm v. Jamieson, 173 Ill. 295, 50 N.E. 702, 45 L.R.A. 846; Nolan v. Sloan, 305 Ill.App. 71, 26 N.E.2d 990; Daniels Negotiable instruments, 7th Ed. Vol. 3, 1618. Camp v. Dallas National Bank, Tex.Civ.App., 21 S.W.2d 104, Id., Tex.Com.App., 36 S.W.2d 994, and Id., Tex.Com.App., 39 S.W.2d 1111, cited and relied upon by appellants, appears to be contra, but see 13 Texas Law Review, pp. 278 and 284; 30 Columbia Law Review, p. 411.

Although the appellees were not holders in due course, there is no evidence tending to show that they had anything to do with the execution of the note and guaranty, or that they had any knowledge or notice of the circumstances under which it is shown to have been executed. When the note was delivered it was a completed negotiable instrument. It follows, therefore, as the trial court held, that the fraud of the maker whereby the guarantors were induced to sign will not relieve the guarantors of liability to the payee who had no notice of the fraud at the time they accepted the note for a valuable consideration. See Farmers' State Bank of Afton v. Mowry, 107 Okl. 275, 232 P. 26; Potts v. First State National Bank of Talihina, 51 Okl. 162, 151 P. 859; J. R. Watkins Medical Co. of Winona, Minn., v. Coombes, 66 Okl. 126, 166 P. 1072. This rule is based upon the maxim that where one of two innocent persons must suffer because of the acts of a third person, the one who enabled the third person to occasion the loss, must sustain it. See Morris v. Packard Dallas Co., 184 Okl. 277, 86 P.2d 779. Moreover, Section 7, Title 48 O.S.A., Section 196, N.I.L. provides that the rules of law merchant shall govern in cases not specifically provided for in the N.I.L., and under the law merchant, an innocent person may recover against one who signed a contract in blank and delivered it to a third party who filled up the blanks in a manner different from or in excess of his authority. Vol. 8 Amer.Juris. Bills and Notes, Sec. 418, note 14, and the cases cited there.

With respect to the plea of total or partial consideration, it need only be said that the note was given by Curd in consideration of the agreed purchase price of the preferred stock in the sum of $37,000. The stock had a face value of $110,000 and Curd testified that at the time he purchased the stock and executed the note therefor, he believed that it was worth what he paid for it. The stock was delivered as agreed and it constituted a valid consideration for the note. Since the guaranty was entered into contemporaneously with the original obligation and formed with that obligation a part of the consideration to the guarantee, no other consideration need exist for ...

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