This Court accepts the rulings of the territorial courts on
local questions of pleading and practice.
Santa Fe Ry. Co. v.
Friday, 232 U. S. 694.
Where some of the signatures of defendant makers had been obtained
by means of fraudulent representations by the plaintiff holder of
the paper, the whole transaction is vitiated even as to those
makers
Page 234 U. S. 65
who were liable on former existing paper of which that in suit
was a renewal.
Where a renewal note constitute a new promise with distinct
legal consequences, it cannot be enforced if fraudulently induced,
even if there were no defense to the older note in renewal of which
it is given.
Under the Negotiable Instrument Act of 1907 of New Mexico, the
title of a person negotiating commercial paper is defective if any
signature thereto has been obtained by fraud, and if any one person
is relieved from liability by proof of fraudulent inducement, all
other persons who signed the paper are likewise relieved, although
they did not participate in and were ignorant of such fraud.
Where the court, on plaintiffs' motion, has denied the right of
defendants to show that the note sued on was void as to them
because of subsequent alteration by addition of signatures of other
co-makers, the plaintiff cannot defeat defendants' defense of fraud
in obtaining the later signature on the ground that the notes were
completed instrument and binding upon the makers before the others
had signed.
16 N.M. 414 reversed.
The facts, which involve the effect of fraudulent inducement to
make commercial paper and the rights of co-makers to be relieved of
liability in such case, are stated in the opinion.
MR. JUSTICE HUGHES delivered the opinion of the Court.
This suit was brought by the Bank of Commerce in the District
Court for Socorro County in the Territory of New Mexico to recover
upon two promissory notes. The plaintiff bank was the payee and the
defendants Broyles, Schmidt & Story, Crossman, Brown, Pratt
(alias Anderson), Lewis, and Evans, were the makers. Broyles
defaulted;
Page 234 U. S. 66
the other defendants answered, alleging in substance that they
had signed the notes for Broyles' accommodation, and had been
induced to sign by the fraudulent representations of the bank. Upon
the trial, the motion of the plaintiff for a direction of a verdict
was granted as against all the defendants except Lewis, and as to
him the plaintiff was permitted to take a nonsuit. The judgment on
the verdict was affirmed by the Supreme Court of the territory. 16
N.M. 414.
Several questions of pleading and practice are presented, but,
in view of their local character, we accept, as to these, the
rulings of the territorial court.
Phoenix R. Co. v.
Landis, 231 U. S. 578;
Work v. United Globe Mines, 231 U.
S. 595;
Santa Fe Ry. v. Friday, 232 U.
S. 694. We shall therefore assume that the complaint was
sufficient, and that the defenses of alteration, the unauthorized
filling of blanks, and the failure to credit certain payments were
not available because not suitably pleaded. The Supreme Court of
the territory also held that, although both parties had requested
peremptory instructions, the defendants were entitled, upon the
denial of their motion, to ask that the case be submitted to the
jury, and that this request was properly made.
See Empire State
Co. v. Atchison Company, 210 U. S. 1.
The question before us, then, is whether, in view of the state
of the evidence upon the defense that the notes were procured by
fraud, the trial court erred in directing a verdict for the
plaintiff. It is apparent that there was evidence sufficient to go
to the jury that the signatures of some of the defendants had been
obtained by means of fraudulent representations. Upon this point,
the supreme court of the territory said:
"The defense, as we have seen, was principally that the signing
of the notes was procured by fraud. There was undoubtedly evidence
that the defendants Anderson [impleaded as Pratt], Evans, Brown,
and Lewis were told by plaintiff's representative
Page 234 U. S. 67
prior to signing the notes that Broyles was solvent, and were
further told that plaintiff had ample collateral for the notes, and
there was also evidence from which the jury might have concluded
that the defendants signed the notes in reliance upon these
representations. We find also upon the record room for a conclusion
by the jury that these statements were untrue, and that they were
known when made to be untrue. Indeed, the trial court recognized
this, for, as to Lewis, in whose favor the testimony on this point
was no stronger than on behalf of Anderson, Evans, and Brown, the
court held that the matter was one for the jury."
Notwithstanding this estimate of the evidence, the court
sustained the recovery against the last-named defendants, holding
that, as they were liable upon former notes for the same amount,
which were renewed by the notes in suit, the defense was not
available. It was said that, even assuming the notes in suit to
have been given "as the result of a willful misrepresentation," the
defendants, being bound by the former notes, were "held to no
greater duty than previously rested upon them," and hence could not
defend upon the ground that they were induced to sign the notes by
fraudulent representations.
We are unable to agree with this conclusion. The question was
not one of a recovery of damages in deceit.
Ming v.
Woolfolk, 116 U. S. 599,
116 U. S.
602-603. If there was fraud, it vitiated the
transaction, and the plaintiff could not avail itself of its own
wrong by enforcing the notes. The fact that the three defendants,
Anderson, Evans, and Brown, were liable on the former notes did not
place them under any legal obligation whatever to make the notes in
suit. It appeared that the former notes were signed by Broyles,
Anderson, Evans, and Brown; the last three being in effect sureties
for Broyles, and as the court states, "upon the giving of the
present notes, these former notes were surrendered by plaintiff
bank and destroyed." On the new notes Lewis, Schmidt & Story,
and Crossman were additional
Page 234 U. S. 68
makers and in effect new co-sureties. Not only was there new
paper, but the legal position of Anderson, Evans, and Brown was
materially changed. Broyles was discharged from liability on the
old notes, and, with respect to the new, there were six (treating
the firm of Schmidt & Story as one) in the position of
co-sureties instead of three. No one of the three defendants in
question who were parties to the original paper could pay it and
hold the other two to their original measure of contribution. The
new notes constituted new promises with distinct legal
consequences. It is clear that the plaintiff could not enforce them
if they were fraudulently induced.
There was no evidence of fraudulent representations to the
defendants Schmidt & Story and Crossman, but they contend that
they are not bound if their co-makers were relieved from liability
by reason of the plaintiff's fraud. Reference is made to § 55 of
the Negotiable Instruments Act, Laws of 1907 (N.M.), c. 83, which
provides:
"The title of a person who negotiates an instrument is defective
within the meaning of this act when he obtained the instrument or
any signature thereto by fraud, duress, or force and fear, or other
unlawful means, for an illegal consideration, or when he negotiates
it in breach of faith, or under such circumstances as amount to a
fraud."
It has been held by the Supreme Court of Wisconsin, in
construing the same language in the Wisconsin act, that if one of
the signatures of several co-makers is obtained by fraud, the
defense is also available to the other makers, since the equality
of burden is disturbed.
Hodge v. Smith, 130 Wis. 326;
Aukland v. Arnold, 131 Wis. 64, 66-67. In the case last
cited, the court said, referring to
Hodge v. Smith,
supra:
"It was there held that the title of a person who negotiates
commercial paper is defective when he has obtained any signature
thereto by fraud, and that, if the party so defrauded be relieved
from liability thereon, then such fraud makes such paper
voidable
Page 234 U. S. 69
by all the other persons who signed it, though they did not
participate in and were ignorant of such fraudulent conduct at the
time they signed it. This conclusion was reached upon the ground
that, when several persons assume such an obligation, it is
material and important that all who join as makers should share
equally in bearing the burden of its payment, and if, through the
fraud of the person holding it, such equality of burden is
disturbed and the burden increased as to some of the persons
signing it, such fraud renders the title defective as to all of the
persons who signed it."
While this construction of the statute was apparently accepted,
it was held that the defense was not open to Schmidt & Story
and Crossman for the reason that they signed the notes several days
before the signatures of the other defendants upon whom the fraud
was practiced were obtained, and that there was no evidence in the
record
"as to whether the defendants Schmidt, Story, and Crossman, or
any of them had any knowledge that there were to be any other
signers than themselves."
Accordingly, it was said that, so far as the record showed, the
notes were "complete and binding obligations" upon these defendants
at the time they executed the same, and that fraud in obtaining the
signatures of the subsequent cosigners would not affect the
equality of the burden they had assumed.
This, as it seems to us, is not an adequate answer to the
defendants' contention. It is true that these defendants have
endeavored to maintain that the notes were altered by the addition
of the other signatures, relying upon Negotiable Instruments Law, §
125.
See Daniel, Negot. Inst. § 1387. But the Supreme
Court of the territory ruled that, under the pleadings, this
defense was not available and could not be considered. The
plaintiff could not maintain this position and at the same time
defeat the defense of fraud upon the ground that the notes were
complete instruments, and as such had become the binding
Page 234 U. S. 70
obligations of these defendants before the others signed. Taking
the notes as they stood upon the pleadings and proof, we think that
these defendants (Schmidt & Story and Crossman) must be
regarded as co-makers with the other defendants, to whom the
representations are said to have been made, and it follows that, if
any of the signatures of these co-makers were obtained by fraud,
the equality of burden was altered. The plaintiff's fraud, assuming
it to have been committed, changed the legal effect of the promise
of these defendants. For these reasons, we think that they were
entitled to have the evidence as to fraudulent representation
submitted to the jury, and that the direction of the verdict in
favor of the plaintiff was error.
The judgment is reversed, and the case is remanded to the
Supreme Court of the New Mexico for further proceedings not
inconsistent with this opinion. It is so ordered.