This suit is upon a note negotiable in form, in the sum of $3151.20, dated January 30, 1889, payable three years after date, to the order of R.F. Roberts, and indorsed in blank by him.
We approve, with the modifications stated below, the conclusions of fact found in the record, reading:
"1. On January 30, 1889, the defendants purchased from R.F. Roberts four tracts of land, one for 1322 acres, one for 640 acres, and one other for 640, and one for 220 acres, agreeing to give therefor the sum of, to wit, $9650.20, of which $500 was paid in cash, $3480 was evidenced by note for thirty days, and $2500 was settled by assuming to pay an incumbrance for that amount which was at that time on two of the 640 acres tracts, and the remaining part of the purchase money was evidenced by the note sued on.
"2. The note due in thirty days was paid at maturity, and so was the $2500 incumbrance, which, however, did not mature until the 1st day of May, 1893. *Page 362
"3. In January, 1890, and about one year after the note sued on was given by agreement between the defendants and said Roberts, there was an indorsement made on the note sued on, to the effect `that it should be subject to any defense in the hands of any purchaser that existed against it in the hands of said Roberts.'
"4. That the title to the 1322 acres tract failed, as set forth in the defendants' answer, and the same was wholly lost to them. At the time that information as to the failure of title was first given defendants, they had already paid off the $3400, and after its failure they were compelled to pay off the $2500, it being on two of the tracts to which the title did not fail.
"5. Said Roberts made to the defendants, on said January 30, 1889, a warranty deed to all the land, and the fact that such deed was made was recited in the face of the note sued on, but said note does not show whether it was the representative of the entire purchase price of all the lands, or only a part of it.
"6. On, to wit, January, 1891, J.A. Lee, of Fort Worth, made a loan of $1000 to said Roberts, taking said Roberts' note for same, specifying therein that it was to become due January 30, 1892, and to draw interest at 12 per cent per annum, and provided for 10 per cent attorney's fees in case of collection by law, and took from said Roberts the note sued on as collateral to secure the payment of said note, $1000, it being specified in the $1000 note that the note sued on had been given as collateral, and providing in said $1000, that if same should not be paid at maturity, that J.A. Lee might sell the note sued on at private sale, and apply the proceeds to the payment of said $1000, and to pay over the overplus, if any, arising from said sale, to the said Roberts.
"7. That before the note sued on was offered to said Lee as collateral, said Roberts caused the indorsement made on the note in 1890 to be marked out by pen and ink, in such a manner as to make it impossible to read what had been thereon.
"8. That said Lee was informed at the time he took the note sued on as collateral, that the title to a part of the land for which the note was given had failed, but was also at the same time informed and given to understand that a part of it had not failed, and that the note was good to an amount sufficient to secure the said $1000 note, and he took the same believing it was so. That said Lee's informant was a lawyer in Fort Worth who assumed to be acquainted with the land mentioned in the note, and his statement was relied upon by said Lee in making the loan and taking the collateral.
"9. That nothing was said at the time of the loan as to just what land the title to had failed, and nothing was said as to there having been any other sums paid before then on the land, or any other amounts owing on the land besides that represented by the notes sued on.
"10. That said Lee did not keep said note till its maturity, but about January 30, 1892, sold the $1000 note to plaintiff, and also delivered to *Page 363 him the note sued on, the same being sold and the collateral delivered with it to plaintiff for a sum of money equal to the principal and interest then accrued on the $1000 note.
"11. The plaintiff not having collected his $1000 at maturity, sued on the collateral, claiming that he was the owner of same by purchase from Lee.
"12. That the land to which title failed was worth 50 cents per acre, on an average, less than the other lands mentioned in the note sued on."
In lieu of the last clause of the fifth finding, beginning "but," etc., we substitute the conclusion, that said note showed on its face that it represented only a part of the aggregate purchase money of the four several tracts of land therein described. This recital appears not only in the printed part of the note, but also in the written portion.
In lieu of the tenth finding, we substitute the conclusion that said Lee, on January 30, 1892, the day upon which both notes would have been due but for the three days of grace, sold the $1000 note payable to the order of J.A. Lee, and delivered the same to plaintiff, but without any indorsement, in the face of which was the stipulation, under the signature of R.F. Roberts, that to better secure its payment there was deposited with J.A. Lee the note dated January 30, 1889, and due January 30, 1892, for $3151.20, and signed by D.T. Bomar and G.P. Meade, and payable to Roberts, to be by him held as collateral security for the payment of said note; and providing further, in case of its not being paid at maturity, that J.A. Lee would then, or at any time thereafter, be fully authorized and empowered to sell the note so deposited with him as collateral security, at private sale, without notice, etc., as set out in the sixth finding. At the same time, and as a part of the same transaction, and for the same consideration, to wit, the amount of the $1000 note, principal, and interest, said Lee sold the note sued on to plaintiff, which was likewise delivered to him.
Plaintiff testified in reference to the large note: "I knew when I bought it that it had not been paid at maturity. I considered the note due the day it showed to be due on its face, not the ten days afterwards, that the makers would be liable for attorney's fees. * * * I bought the note for speculation, and wanted to collect it all."
The testimony of Lee was all to the effect that he sold both notes together, and there was no evidence on the part of either Lee or Sandidge that the $1000 note only was sold, accompanied by the other note as collateral to better secure its payment.
In addition to the above findings, we deduce from the statement of facts the further conclusion, that the indorsement which had been made upon the note in suit in January, 1890, by the consent of all parties, as set forth in the third finding, was by said Roberts thereafter, and before its negotiation to Lee, without the knowledge or consent of appellants, and with intent to defraud them, erased, as set forth in the seventh finding. This indorsement had been placed opposite the body of the note, *Page 364 so that it could not be separated therefrom except by an erasure. The erasure in question — the note having been sent up for our inspection — is a very emphatic and conspicuous one, in very black ink, and evinces clearly a design to obliterate every vestige of the pre-existing indorsement.
Conclusions of Law — 1. Deducting the relative value of the 1322 acres tract of land, to which the title failed, from the contract price of the whole, there was an entire failure in the consideration of the note sued on.
2. The negotiable form of the note having been changed by the indorsement placed thereon in January, 1890, for that purpose, and that indorsement having been fraudulently erased by the holder of the note, the defense of failure of consideration was available to appellants in this suit.
The law upon this subject is thus stated by Mr. Tiedeman, in his work on Commercial Paper: "Although there are some early cases in New York to the contrary, the weight of authority in this country, as well as in England, is in favor of recognizing as part of the instrument, and as controlling its operation, every memorandum which can affect its character, whether it is written on the face or on the back of the paper. No difference is recognized in their legal effect. It has been very generally held, that memoranda on the back of the instrument constitute a part of it; that the purport of the instrument is not only to be collected from the four corners, but from the eight corners." Sec. 41 and numerous cases there cited. "But if the memorandum is added to the paper after it has been negotiated, the effect of it will depend upon the circumstances. If it is made with the consent of all parties, it controls the operation of the instrument in the same manner as if it had been added before delivery; if it was added by a stranger, it will be treated as surplusage, and have no effect upon the character of the instrument. But if the memorandum is made by the holder, and without the consent of the other parties, it is an alteration which, if material, will avoid the instrument." Sec. 41a; Woodworth v. Bank of America, 10 Am. Dec., 239, and note.
See also the elaborate note of Mr. Freeman to Tuckerman v. Hartwell, 14 American Decisions, 232, where the authorities are collected and ably reviewed, and this terse statement is made: "The alteration of a memorandum constituting a part of a note or bill is governed by the same rules as the alteration of the body of the instrument, except in some instances where the memorandum has been so made as to permit of an alteration, or cutting off from the note or bill, without affecting the apparent regularity of the instrument." These excepted instances are placed upon the ground that the maker of negotiable paper is liable to the bona fide holder "on account of his own negligence in executing and issuing a note that invited tampering with." *Page 365
In further support of the above propositions, see 2 Daniel on Negotiable Instruments, sections 1407, 1407a; Bowser v. Cole,74 Tex. 222, and cases there cited.
3. J.A. Lee having actual notice before the negotiation of the note to him that there had been at least a partial failure of the consideration, it was incumbent on him to have prosecuted that reasonable inquiry which would have led to a knowledge of all the facts; and therefore, without reference to the question of the fraudulent alteration of the note, he was not a bona fide holder thereof, so as to shut out the defense of failure of consideration between the original parties. Appellee having undertaken for purposes of speculation to purchase this note, with notice of the conditions under which it was held by Lee, and of his want of power at that time to sell it, and not even having acquired the $1000 note in due course of trade, for want of an indorsement thereon, it being payable to the order of James Lee, would seem not to occupy any better position than that of Lee. Bank v. Bingham, 118 N.Y. 349.
However, in view of the second conclusion of law stated above, which requires the judgment to be reversed, we do not feel it incumbent upon us to determine definitely his legal status.
We conclude that the judgment should be reversed, and here rendered in favor of appellants.
Reversed and rendered.
ON MOTION FOR REHEARING.