Opinion
October 8, 1954 —
November 9, 1954.
APPEAL from a judgment of the county court of Columbia county: ELTON J. MORRISON, Judge. Affirmed.
For the appellant there was a brief and oral argument by J. M. Peters of Hartford.
For the respondent there was a brief by Callahan Arnold of Columbus, and oral argument by Carroll B. Callahan and E. Clarke Arnold.
Action by the plaintiff Implement Credit Corporation (hereinafter referred to as the "finance company") against the defendant Robert Elsinger for balance due upon defendant's negotiable cognovit note.
The plaintiff finance company was incorporated in 1949 by a group of five or six implement dealers residing in different parts of the state for the purpose of providing a finance service to members of the Wisconsin Implement Dealers Association by purchase or discount of their paper. The latter association was formed by the farm-implement dealers of the state to promote their mutual interests and has no direct connection with the finance company, although some of the incorporators of the latter were also members of the association. The finance company limits its purchases to dealers who are members of the association.
Before the finance company will purchase customer notes and conditional sales contracts from a dealer who is a member of the association it requires each dealer to sign an agreement printed in booklet form, which contract refers to the finance company as the "corporation." The pertinent provisions of such contract are as follows:
"1. The contracts and customers' notes and chattel mortgages submitted to the corporation under this agreement will be upon the form or forms approved by the corporation.
"2. All contracts offered by the dealer to the corporation will be valid deferred-payment obligations for the amount stated therein covering only farm and dairy-machinery equipment and implements, and home appliances free and clear from all liens and incumbrances and which the dealer has the legal right to well, and that the merchandise and equipment described in said contract was sold and delivered by the dealer and the description of such merchandise or equipment is in all respects true, correct, and complete. The purchaser named in each contract is bona fide and has legal capacity to enter into such contract and that the down payment mentioned in such contract was in cash or trade-in value.
"3. Corporation shall have thirty days after acceptance to investigate every contract and may reject any contract within that time, and upon rejection, the dealer agrees to promptly remit to corporation all sums received for said contract.
"4. Upon the acceptance by the corporation of the contract or contracts presented by the dealer the corporation will remit to the dealer the face amount of said contract, less report and recording fees, less the finance charges which have been included in the face amount of the note and less the amount payable therefrom, into the dealer's contingent reserve account, as hereinafter provided.
"5. No contract shall be accepted by the corporation unless the implement dealer is a member of the Wisconsin Implement Dealers Association. Five per cent (5%) shall be withheld and deducted from the net amount of every contract presented by the dealer and accepted by the corporation until a $1,500 reserve account has been established. This reserve account shall be deposited with the corporation in the name of the dealer and shall be a contingent reserve account, subject to the following conditions:
"(5a) All notes and contracts for new equipment sold by the dealer, assigned to the Implement Credit Corporation by the dealer shall be without recourse, except that the above reserve account shall be available to reimburse the corporation for any loss sustained.
"(5b) All notes and contracts for used equipment and major repair accounts sold by the dealer, assigned to the Implement Credit Corporation shall be with recourse.
"6. The dealer's contingent reserve account shall at all times be subject to charge for any customers' notes taken from the dealer upon which default occurs.
"7. Upon termination of this agreement as hereinafter provided, and upon the full collection of all of the notes taken by the corporation from the dealer, the entire remaining balance of the dealer's contingent reserve account shall be released to the dealer.
"8. In the event that it shall hereafter appear that any contract and the accompanying notes so assigned to the corporation shall have the option to require the dealer to repurchase said contract and the liability of the dealer to repurchase said contract shall not be satisfied by charging the said note to the dealer's contingent reserve account but shall be by payment by the dealer to the corporation. . . .
"11. Either party hereto may terminate this agreement by ten days' written notice to the other of such termination but such termination shall not relieve either party from its obligations hereunder with respect to any contract offered and accepted prior to the receipt of the notice of such termination."
Such an agreement had been executed between Bierman-Turnacliff, Inc., a farm-implement dealer of Hartland, Wisconsin, and the plaintiff finance company prior to the transaction involving the defendant Elsinger hereinafter set forth.
Under date of June 5, 1952, Elsinger executed a negotiable promissory note in the sum of $3,984, payable to the order of Bierman-Turnacliff, Inc., in twenty-four monthly instalments of $166 each. Attached to such note was a conditional sales contract bearing the same date, executed by Elsinger, as purchaser, to Bierman-Turnacliff, Inc., as seller, purporting to cover the purchase of a certain described tractor, harvester, and husker for a purchase price of $5,299.25. A down payment of $1,801.75 was recited and deducted but there was added to the balance $2.50 to cover "report and recording," and $484 to cover the finance charges and life insurance premium, making the total amount payable $3,984, this being the amount of the face of the note. On the back of the note there was printed the following:
"Regular assignment
"For value received, the undersigned does hereby sell, assign, and transfer to Implement Credit Corporation all of their title and interest to the within note, and authorizes the assignee to do every act and thing necessary to collect and discharge the same.
"In witness whereof the undersigned has set his hand and seal this _____ day of _____, 19__.
"___________________________ Seal Dealer "___________________________ Dealer P. O. Address" The blank forms on which such conditional sales contract and note were executed were supplied to Bierman-Turnacliff, Inc., by the finance company. On the same date that said instruments were executed by Elsinger, the finance company purchased the same from Bierman-Turnacliff, Inc., and the assignment on the back of the note was completed by filling in the blank as to the date so as to show that the assignment had been completed on June 5, 1952, and the assignment was signed "Bierman-Turnacliff, Inc.," and the address of the latter was filled in as "Hartland, Wis." The purchase price advanced by the finance company for the note and contract was $3,322.62, being $661.38 less than the face amount of the note which was $3,984. Such $661.38 so deducted by the finance company covered the following items: $ 57.28 — Life insurance premium 426.72 — Finance charges $174.88 — 5% deducted for dealer's reserve account 2.50 — Recording charge ------- $661.38 — Total deducted The $57.28 deducted for life insurance covered the premium which the finance company paid to Old Republic Credit Life Insurance Company for a twenty-four months' term policy in the amount of $2,500 upon the life of Elsinger, such policy being dated June 5, 1952.At the time Bierman-Turnacliff, Inc., sold the note and contract to the finance company it furnished the finance company with a financial statement on a form previously supplied by the finance company which was signed by Elsinger and purported to list his assets and liabilities, and which stated, among other things, that Elsinger was a farmer owning 120 acres of land. Such statement also gave the names and addresses of two individuals as references to Elsinger's credit standing.
On June 6, 1952, the finance company, pursuant to its usual practice, mailed a letter to Elsinger notifying him to make all payments directly to the finance company as it would not be responsible for payments made to the dealer. Inclosed in such letter was a coupon book for Elsinger's convenience in making the monthly payments, and the $2,500 life insurance policy. At the time of trial the balance due on the note had been reduced through payments from $3,984 to $2,324. Elsinger denied having made any of the payments and the records of the finance company did not indicate whether the payments were made by Elsinger or by the dealer, Bierman-Turnacliff, Inc. Kovacs, general manager of the finance company, testified that frequently payments were received on notes of this kind purchased from implement dealers through the dealers from whom the makers of the notes had purchased farm machinery.
The finance company had purchased a considerable number of notes and conditional sales contracts from Bierman-Turnacliff, Inc., during the period of 1949 through 1952, and had no knowledge of any improper conduct on the part of Bierman-Turnacliff, Inc., until November 24, 1952, when it learned for the first time that on one of the notes that it had purchased from Bierman-Turnacliff, Inc., no machinery had been delivered to the maker of the note, although the conditional sales contract recited such delivery. Kovacs testified that the finance company then proceeded to personally contact all of the makers of notes from whom it had purchased from Bierman-Turnacliff, Inc. In the course of so doing, on December 5, 1952, Kovacs stated that he talked to Elsinger on the telephone, at which time payment on Elsinger's note was delinquent, and Elsinger advised Kovacs that Elsinger had received the machinery listed on the conditional sales contract. Form notices of delinquent payments were sent by the finance company to Elsinger on January 7, 1953, February 11, 1953, March 10, 1953, and April 10, 1953; and on May 20, 1953, the final notice was sent demanding payment in full.
Elsinger testified that he was engaged in the used-automobile and scrap-iron business at Hartland, Wisconsin, at the time he executed the note and contract; that he was not a farmer and that he did not own 120 acres of land; and that none of the three items of machinery listed in the conditional sales contract had been supplied to him by Bierman-Turnacliff, Inc. His explanation of the transaction was that Mr. Bierman, of Bierman-Turnacliff, Inc., came to Elsinger and wanted to borrow some money, and Elsinger informed him that he had none to lend but could use $1,000 himself. The next day, which was June 5, 1952, Elsinger stated that Bierman returned with some papers and informed Elsinger that if the latter would sign such papers Bierman would see that he got $1,000. Elsinger then signed the note and conditional sales contract and the financial statement later turned over by Bierman-Turnacliff, Inc., to the plaintiff finance company. Elsinger testified, however, that both the note and the financial statement were in blank and that Bierman only exposed one corner of the conditional sales contract to view at the time Elsinger signed the same. With respect to the assets and liabilities listed in the financial statement as it was turned over to the finance company, Elsinger stated that the assets were grossly overstated, but that the amount of liabilities was approximately correct. Elsinger denied having had the telephone conversation with Kovacs on December 5, 1952, testified to by the latter; and also testified that he never received the $1,000 that Bierman had promised him.
Under date of June 30, 1953, plaintiff finance company entered a cognovit judgment in the county court of Columbia county against the defendant Elsinger for the $2,324 principal balance, attorney fees in the sum of $232.40, and costs in the sum of $10.75, aggregating in all $2,567.15. Such judgment was entered pursuant to a confession of judgment signed by an attorney as authorized by the warrant of attorney contained in the note. Upon the subsequent application of Elsinger such judgment was opened up and a trial was held on the merits before the court without a jury. After trial, the trial court filed a memorandum decision in which it found that the plaintiff was a holder in due course of the note and, therefore, the plaintiff was entitled to an order for judgment in its behalf.
Findings of fact, conclusions of law, and judgment were accordingly entered under date of January 30, 1954. Such judgment provided for recovery by the plaintiff from the defendant of the sum of $2,729.05, which amount included the 10 per cent attorney fees authorized by the note and the costs of the action. From such judgment the defendant has appealed.
The issue presented on this appeal is whether the plaintiff finance company is a holder in due course of the note executed by the defendant Elsinger so as to be free from any defense that Elsinger might have against the payee Bierman-Turnacliff, Inc. Counsel for the defendant advances the following reasons as to why he contends plaintiff is not such a holder in due course:
(1) That proof of ownership of the note in plaintiff is not established;
(2) That the note was transferred by the payee by means of an assignment which purported to transfer only the "title and interest" of the payee, and, therefore, such assignment did not constitute an endorsement within the provisions of the Uniform Negotiable Instruments Act as embodied in our Wisconsin statutes; and
(3) The plaintiff finance company was so closely associated with the Wisconsin Implement Dealers Association and its members, such as the payee Bierman-Turnacliff, Inc., as to make the plaintiff a party to the original transaction between Bierman-Turnacliff, Inc., and Elsinger.
As to the first point raised, the answer of the defendant denied that the plaintiff finance company was the lawful holder and owner of the note. At the trial the note was in the possession of the plaintiff and bore the assignment on the back to plaintiff, dated June 5, 1952, set forth in the statement of facts preceding this opinion, such assignment purporting to have been executed by Bierman-Turnacliff, Inc. Furthermore, Kovacs, the general manager of plaintiff finance company, testified that the plaintiff had purchased such note from Bierman-Turnacliff, Inc., on June 5, 1952, and had advanced as consideration therefor the sum of $3,322.62.
Sec. 116.54, Stats., which is sec. 49 of the Uniform Negotiable Instruments Law (hereinafter referred to as the "N. I. L."), provides that, where a payee of a note payable to his order transfers it for value without indorsing it, such transfer vests in the transferee such title as the transferor had therein. Therefore, the foregoing evidence clearly proved the plaintiff to be the owner of the note.
Counsel for the defendant maker, however, maintains that there has been a failure of proof on the part of the plaintiff to establish it as a "holder" of the note because it offered no testimony that the signature "Bierman-Turnacliff, Inc.," to the assignment on the back of the note was actually subscribed by an authorized officer or agent of such corporation. Under the provisions of sec. 328.26, Stats., plaintiff was not required to establish the authenticity of such signature because of the statutory presumption that such signature was genuine. Such statute provides as follows:
"In all actions brought on promissory notes or bills of exchange by the indorsee the possession of the note shall be presumptive evidence that the same was indorsed by the persons by whom it purports to be indorsed."
In the case of, a corporation indorser such presumption would necessarily embrace the element that whoever had signed the corporation's name as indorser had authority so to do. A "holder" of a negotiable instrument is defined by sec. 116.01(7), Stats. (sec. 191 of the N. I. L.), to be "the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof." Thus, the possession in plaintiff, plus the presumption of the genuineness of the indorsement, established the plaintiff as the holder of the instrument.
The second point raised by defendant is that the assignment to plaintiff appearing on the back of the note did not constitute an "indorsement" within the provisions of the N. I. L. In order for the plaintiff to be a holder in due course of the instrument within the provisions of sec. 116.57, Stats., (sec. 52 of the N. I. L.), it must have been "negotiated" to plaintiff. Sec. 116.35, Stats. (sec. 30 of the N. I. L.), provides:
"An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order it is negotiated by the indorsement of the holder completed by delivery." (Italics supplied.)
An "indorsement" is defined in the succeeding sec. 116.36, Stats. (sec. 31 of the N. I. L.), as follows:
"The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement."
Therefore, the signature "Bierman-Turnacliff, Inc.," on the back of the note without any words of assignment would have constituted an indorsement. Does the addition of the words of assignment printed above such signature prevent it from being an indorsement? The general rule applicable is stated in 8 Am. Jur., Bills and Notes, p. 55, sec. 320, as follows:
"The rule supported by the weight of authority and reason is that an assignment written on a negotiable instrument constitutes an indorsement of it, but there is authority that it does not have such an effect, at least where it is an assignment of the assignor's interest in the instrument rather than of the instrument itself."
The same rule is set forth in 10 C.J.S., Bills and Notes, p. 695, sec. 208 b, as follows:
"The general rule is that a writing on the back of a bill or note with the intention of transferring title is an indorsement, although it is in terms an assignment, but in some jurisdictions, however, such a transfer has been held not an indorsement."
In Thorp v. Mindeman (1904), 123 Wis. 149, 152, 101 N.W. 417, 68 L.R.A. 146, 107 Am. St. Rep. 1003, a mortgage note was transferred by the payee thereof to the plaintiff by means of the following assignment written upon the note:
"`For value received, I hereby sell, transfer, and assign the within note and the interest coupons thereto attached and numbered four to six inclusive (previous interest coupons having been paid and surrendered), to Josephine Thorp, without recourse.'"
The court held that such assignment constituted an indorsement within the law merchant. Such reference to the law merchant must be deemed to mean the law merchant as embodied in the N. I. L. adopted by our legislature when it enacted ch. 356, Laws of 1899, which enactment was effective prior to the date of the assignment to plaintiff. The N. I. L. in most respects is but a codification of the law merchant. 10 C. J. S., Bills and Notes, p. 419, sec. 11 b. In arriving at its conclusion that the assignment constituted indorsement, the court stated (p. 162):
"While there is doubtless some authority tending to support appellants' claim [that the assignment did not constitute a commercial indorsement], we think that there can be no doubt that the transfer in the present case must be held to be a commercial indorsement under the decisions of this court in the cases of Crosby v. Roub, 16 Wis. 616; Bange v. Flint, 25 Wis. 544; Murphy v. Dunning, 30 Wis. 296. In all of these cases a negotiable note was transferred by attaching it to a negotiable bond which recited that the note was thereby `assigned and transferred' to the holder of the bond as security for the payment of the bond, there being no indorsement on the note itself; and this was held an indorsement within the law merchant. Here there is an agreement on the back of the note itself, signed by the payee, by which he sells, assigns, and transfers the note to the plaintiff. The intent to pass title and make the note transferable by indorsement and delivery afterwards seems very plain. Such, also, seems to be the current of authority. 1 Daniel, Neg. Inst. (5th ed.) sec. 688c."
Counsel for defendant point out that in the instant case the material words of the assignment are "assign and transfer . . . all their title and interest to the within note," while in the assignment before the court in Thorp v. Mindeman, supra, they were "assign the within note." We can perceive no good reason why, if the latter constitutes an indorsement under the N. I. L., the former does not also.
Counsel cites on this point the case of Gale v. Mayhew (1910), 161 Mich. 96, 125 N.W. 781, 29 L.R.A. (N.S.) 648. This case is also cited in footnote 8 of 8 Am. Jur., Bills and Notes, p. 56, sec. 320, as an authority for the statement in the text hereinbefore quoted for the minority rule that an assignment does not constitute an indorsement when the assignor only assigns his interest in the instrument. In this case the defendant Mayhew's negotiable note executed to one Pelton, as payee, was purchased by the plaintiff Gale, and there was written upon the note the following assignment (p. 98): "I hereby assign my interest in this note to William H. Gale. [signed] W. R. Pelton." Plaintiff brought suit on the note against the maker Mayhew. At the close of the trial the defendant moved for a directed verdict on the ground that the note had simply been assigned to plaintiff and, therefore, under sec. 10054, 2 Compiled Laws of Michigan, 1897, plaintiff had no right to bring suit in his own name, which motion was denied. Such statute had been in effect for fifty years and provided that an assignee of a nonnegotiable instrument could bring suit in his own name, but the Michigan courts had construed such statute as also providing for the converse, i. e., that the assignee of a negotiable instrument could not sue in his own name but must bring suit in the name of his assignor. The Michigan supreme court, however, recognized that by reason of the adoption of the N. I. L. in Michigan a transferee of a negotiable note by indorsement could sue in his own name. The judgment of the trial court in favor of the plaintiff was reversed on the basis of that section of the Michigan statutes corresponding to sec. 116.43, Wis. Stats. (sec. 38 of the N. I. L.), which provides: "A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words `without recourse' or any other words of similar import. . . ." The court construed the assignment by Pelton to be such a qualified indorsement, and, therefore, held that he was a mere assignor so that sec. 10054, 2 Michigan Compiled Laws, 1897, was applicable, and plaintiff was barred from suing in his own name.
It seems to us that the Michigan court in Gale v. Mayhew, supra, missed the point that a qualified or restrictive indorsement is nevertheless an indorsement under sec. 33, of the N. I. L. (sec. 116.38, Stats.), the same as is an unqualified or unrestrictive indorsement, and whether a holder takes by way of a qualified indorsement, or an unrestrictive one, does not affect his status as a holder in due course. Whether the assignor Pelton could be held liable as an ordinary indorser was beside the point, as would be the question in the instant case of whether Bierman-Turnacliff, Inc., could be held liable on such ground. This is an entirely extraneous issue upon which there is a considerable division of authority. A summary of the authorities thereon is to be found in Fecko v. Tarczynski (1937), 281 Mich. 590, 275 N.W. 502, and Copeland v. Burk (1916), 59 Okla. 219, 158 P. 1162, L.R.A. 1917A, 1165.
It is our conclusion that the assignment by Bierman-Turnacliff, Inc., to the plaintiff finance company constituted an indorsement under the provisions of secs. 116.36 and 116.38, Stats., so that the note was negotiated to plaintiff by indorsement within the meaning of sec. 116.35.
This brings us to the third and last contention made in behalf of the defendant, viz., that there was such a close association between the plaintiff and Bierman-Turnacliff, Inc., as to make the plaintiff a party to the original transaction between Bierman-Turnacliff, Inc., and the defendant Elsinger thereby preventing the plaintiff from being a holder in due course. The grounds advanced in support of such contention are: (1) The plaintiff finance company was incorporated by members of the Wisconsin Implement Dealers Association to provide a finance service to the members of the association, and the plaintiff limited its purchase of commercial paper to members of the association; (2) the plaintiff supplied the blank forms for the note, conditional sales contract, and financial statement which were executed by Elsinger; and (3) the existence of the signed dealer's agreement between plaintiff and Bierman-Turnacliff, Inc., providing for the deduction of five per cent of the net amount of the contract for which the note was executed, and retention of same by plaintiff in the dealer's reserve account of Bierman-Turnacliff, Inc.
There is no evidence in the record that plaintiff did not act in perfect good faith when it purchased the Elsinger note and contract, as it was some five months later when it learned for the first time of any fraudulent practices on the part of Bierman-Turnacliff, Inc.
Counsel for defendant cites no authorities in support of his position that, because certain members of the Wisconsin Implement Dealers Association incorporated the plaintiff finance company for the purpose of financing members of the association, and the plaintiff limited its purchases of commercial paper to members of the association (Bierman-Turnacliff, Inc., being such a member), such facts prevent plaintiff from being a holder in due course of the note which is the subject of the within action. This falls far short of establishing any relationship of principal and agent between plaintiff and Bierman-Turnacliff, Inc. We deem such evidence to be immaterial on the issue of whether plaintiff is a holder in due course unless coupled up with other facts showing actual direct participation by plaintiff in the original transaction between Elsinger and Bierman-Turnacliff, Inc.
There is a division of authority on the question of whether the supplying of blank forms of notes, conditional sales contracts, chattel mortgages, etc., by a finance company, which customarily purchases customer paper from the dealer, is evidence from which it can be found that the finance company is not a holder in due course of notes so purchased.
Mayer v. American Finance Corp. (1935), 172 Okla. 419, 45 P.2d 497, held that the fact that a finance company furnishes an automobile dealer with blank notes having a form of assignment to the finance company printed on the back thereof is not evidence tending to show that the dealer is the finance company's agent, in taking a note from a purchaser of the vehicle from the dealer, so as to render the finance company chargeable with notice of the dealer's act in taking a usurious note.
In Allied Building Credits, Inc., v. Mathewson (1952), 335 Mich. 270, 55 N.W.2d 826, the finance company supplied all customers, from whom it purchased customer notes, blank forms of notes having printed on the back "without recourse, pay to the order of Allied Building Credits, Inc.;" and the Michigan court refused to find from such fact that there was such an intimate connection between the dealer and the finance company as to prevent the finance company from being a holder in due course.
While it is not directly stated in International Finance Co. v. Magilansky (1932), 105 Pa. Super. 309, 161 A. 613, that the plaintiff finance company supplied the form of note to the dealer upon which suit was brought, the name of the finance company was printed in the indorsement on the back of the note so it is a reasonable inference that the blank form of note had been supplied to the dealer by the finance company. The note had been -given to the dealer in purchase of a furnace and it was brought out that all customer notes of such particular dealer were customarily transferred to the plaintiff finance company. The Pennsylvania court held that these facts, together with others, were not sufficient to establish that the plaintiff finance company was not a holder in due course.
On the other hand, the cases of Commercial Credit Co. v. Childs (1940), 199 Ark. 1073, 137 S.W.2d 260, 128 A.L.R. 726, and Mutual Finance Co. v. Martin (Fla. 1953), 63 So.2d 649, both stress the fact that the plaintiff finance companies in those two cases had supplied blank printed forms of instruments to the dealers. It was held that this tended to establish direct participation on the part of the finance company in the transaction between the purchaser and the dealer so as to prevent the finance company from being a holder in due course.
We must take cognizance of the fact that a very large percentage of the sales of motor vehicles, farm machinery, electrical appliances furnaces, and similar articles are made by dealers to their customers on credit, whereby the purchaser makes a down payment in cash or trade-in and gives his negotiable note for the balance secured by a conditional sales contract or chattel mortgage. These notes usually provide for monthly instalment payments extending over fairly long periods of time. Most dealers have not the capital to carry such notes and at the same time replenish their inventory stock so it is customary for them to discount such notes with a finance company or bank. A very considerable segment of our economy is dependent for its continued prosperity upon such free flow of credit, and anything which delays or impedes such process may well be regarded as against the public interest. Finance companies and banks hesitate to purchase such notes, contracts, and chattel mortgages, if executed on printed forms with which they are not familiar, without first submitting them to the scrutiny and opinion of their attorneys. To obviate such delays and expense, these financial institutions have widely adopted the practice of having their own attorneys draft forms of notes, including the indorsements or assignments on the back, chattel mortgages, and conditional sales contracts, and then have had the same printed and supplied to the dealers from whom they customarily purchase customer paper. By so doing such banks and finance companies are better enabled to render prompt service to dealers when they present customer paper for discount because there is no delay occasioned by passing on the forms of the instruments when their own forms have been used by the dealers.
We can perceive of no reason based upon either logic or public policy why a finance company or bank which supplies such blank printed forms should be held thereby, to have constituted the dealers their agents, or should be deemed to have participated in the sale by the dealer to the customer, including the execution of any contract, mortgage, or note which the customer may have executed to the dealer. For these reasons, this court does not consider the cases of Commercial Credit Co. v. Childs, supra, and Mutual Finance Co. v. Martin, supra, holding to the contrary on this point should be followed as precedents in this state for we believe them to be based upon an unsound premise.
We recognize that Commercial Credit Co. v. Childs, supra, has been quite widely cited with approval by other courts, but the only instance we have been able to discover in which the act of the finance company in furnishing blank forms seems to have been the material factor that may have governed the result is that of Mutual Finance Co. v. Martin, supra. For example, Commercial Credit Co. v. Childs was cited in Commercial Credit Corp. v. Orange County Machine Works (1950), 34 Cal.2d 766, 214 P.2d 819, and Davis v. Commercial Credit Corp. (1950), 87 Ohio App. 311, 94 N.E.2d 710, but in the California case there was evidence of direct participation by the finance company in the transaction between the dealer and the customer prior to the signing of the instrument by the customer, while in the Ohio case there was evidence tending to establish notice to the finance company of past fraudulent practices on the part of the dealer. Such facts readily distinguish these two cases from the case at bar.
In the instant case when the plaintiff finance company purchased the note and contract from the dealer, Bierman-Turnacliff, Inc., it deducted from the proceeds due the dealer the sum of $174.88 and credited the same to the dealer's reserve account. Such sum represented five per cent of the face of the note less the amount of the finance charges, life insurance premium, and recording charges. In other words, the five per cent was based on the net balance purported to be owed by Elsinger for the machinery before the addition of any finance charges, insurance premium, and recording charge. The deduction of such $174.88 was a matter which solely concerned the plaintiff and the dealer in which the customer Elsinger had no interest. The dealer's agreement entered into between the plaintiff and Bierman-Turnacliff, Inc. (the material terms of which are set forth in the statement of facts preceding this opinion), provided for such deduction and the disposition to be made of the amount credited to the reserve account of this dealer.
In Mutual Finance Co. v. Martin, supra, the plaintiff finance company had established a dealer's reserve account for the dealer, from whom it had purchased the note on which suit was brought, and had deducted $125 from the purchase price of the note and placed it in such reserve account. The Florida court in its decision holding that the finance company was not a holder in due course did not cite this deduction as a fact which was material on such issue, but after reaching its conclusion commented that such $125 was obviously retained to protect the finance company against loss. Such comment is a non sequitur in so far as the issue of good faith is concerned.
If a customer defaults on a note given to a dealer in purchase of a motor vehicle, piece of farm machinery, or electric refrigerator, and the finance company or bank has to repossess and resell under the conditional sales contract or chattel mortgage, a loss often occurs due to excessive depreciation of the value of the repossessed article as a result of hard usage, or other causes. By making a comparatively moderate deduction from the purchase price of each note discounted for a dealer until the required reserve has been established the finance company or bank discounting dealers' paper protects itself against such a possibility of loss. If such a practice were held to prevent the finance company or bank from being a holder in due course of notes purchased from dealers, such holding would undoubtedly lead to the abolition of such dealers' reserve accounts by finance companies and banks with the probable result that higher finance charges would be insisted upon as an alternative method of protection against loss. For this reason such practice of establishing dealer reserve accounts may well be regarded to be in the interest of the consuming public who purchase automobiles, farm machinery, refrigerators, etc., on the time-payment plan. Certainly such practice does not operate to the disadvantage of such purchasers.
We deem the fact, that the amount in question was deducted by plaintiff from the proceeds due from it to Bierman-Turnacliff, Inc., and the crediting of the same to the latter's reserve account, to be entirely immaterial on the issue of whether plaintiff is a holder in due course of such note. It in nowise established any direct participation by plaintiff in the original transaction between Elsinger and Bierman-Turnacliff, Inc., or tended to show lack of good faith on plaintiff's part.
Lastly, is the dealer's agreement which was entered into between plaintiff and Bierman-Turnacliff, Inc., evidence which mitigates against plaintiff being a holder in due course of the Elsinger note? We think not. One purpose of such agreement was to spell out the rights of the respective parties with respect to the reserve account of the dealer held by the plaintiff finance company. Such agreement, if anything, tended to discourage the dealer from obtaining any customer note through fraudulent practices, because paragraph 8 provided that, in the event plaintiff purchased such a note, it could require the dealer to repurchase the same rather than charge it against the dealer's reserve account.
It is our considered judgment that the learned trial court properly held that plaintiff was a holder in due course of defendant's note. In fact, we can discover no evidence in the record which would support a contrary finding.
By the Court. — Judgment affirmed.
The following opinion was filed January 11, 1955:
Defendant's counsel in his brief on rehearing states that in our former opinion we neglected to pass on his contention that the plaintiff finance company had failed to meet the burden of proof imposed on it by sec. 116.64, Stats. (sec. 59 of the N. I. L.), to establish that it was a holder in due course. The reason we did not discuss such issue is because we had assumed that defendant was only challenging plaintiff's title because of lack of proof of an authorized genuine signature to the assignment on the back of the instrument. Sec. 116.64 provides, in part as follows:
". . . when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. . . ." (Italics supplied.)
Fraud practiced by a party to a negotiable instrument to secure the execution of the same by another person makes the title of the former defective within the meaning of sec. 116.64, Stats. Wakem v. Schneider (1927), 192 Wis. 528, 213 N.W. 328; and Jones v. Brandt (1921), 173 Wis. 539, 181 N.W. 813. Therefore, in the instant case, because of the fraud practiced by Bierman-Turnacliff, Inc., upon the defendant Elsinger, the burden of proof was upon plaintiff to establish that it was a holder in due course.
Under sec. 116.57, Stats. (sec. 52 of the N. I. L.), which defines the prerequisite elements of the status of a holder in due course, the burden was upon plaintiff to prove that at the time it purchased the note:
(1) That the note was complete and regular upon its face;
(2) That plaintiff became the holder of it before it was overdue;
(3) That plaintiff took it in good faith and for value;
(4) That, at the time it was negotiated to plaintiff, plaintiff had no notice of any infirmity in the instrument or defect in the title of Bierman-Turnacliff, Inc.;
(5) That plaintiff took it in the usual course of business.
The note was offered in evidence as an exhibit and we find it complete and regular upon its face. The testimony of Kovacs, general manager of the plaintiff, adequately proved all of the other elements set forth in sec. 116.57, Stats., to establish that plaintiff was a holder in due course. We deem it unnecessary to summarize such testimony, except as to that relating to whether plaintiff, at the time it purchased the note, had notice of any infirmity in the instrument. As to this, Kovacs was asked the following question and gave the following answer thereto:
" Q. Did you have any knowledge of any infirmity existing in these notes at that time? A. No."
The word "you" appearing in the foregoing question is ambiguous in that it could refer to either Kovacs or the plaintiff finance company, and defendant's counsel failed to cross-examine on this point. However, the trial court could rightly assume that the knowledge of Kovacs, as plaintiff's general manager, and that of the plaintiff company were one and the same in the absence of any evidence to the contrary.
The actual purchase of defendant's note by plaintiff was handled by a Miss Hansen, an employee in plaintiff's office, during the temporary absence of Kovacs from the office. Because Miss Hansen was not called as a witness by plaintiff to testify, defendant's counsel contends this in itself constituted a failure of proof by plaintiff on the issue of whether it was a holder in due course. We deem this argument to be fallacious as plaintiff had met its burden of proof through the testimony of Kovacs. If counsel for the defendant had any reason to believe that Miss Hansen, at the time she handled the purchase of the note, had obtained any knowledge of Bierman-Turnacliff, Inc.'s fraud which she had not communicated to Kovacs, counsel had the privilege of calling her as an adverse witness and examining her on such point. This counsel did not attempt to do.
By the Court. — The motion for rehearing is denied with $25 costs.