UTAH STATE NAT. BANK v. SMITH

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Docket Number

L. A. No. 5791.

Attorney(S)

Ford Hammon, Percy V. Hammon and Joseph L. Lewinsohn for Appellant. R.Y. Williams and A.W. Rutan for Respondents.

Judges

Curtis D. Wilbur

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Smart Summary

Factual and Procedural Background

Appellant, Utah State National Bank, claiming to be a bona fide purchaser for value of a negotiable promissory note, initiated an action against the makers of the note to enforce its payment. The defendants contended that the note was non-negotiable and thus asserted a defense valid against the payee. The trial court instructed the jury that the note was non-negotiable and that if the defense was established, it would defeat recovery. The jury returned a verdict in favor of the defendants, and judgment was entered accordingly. The appellant appealed from this judgment.

Legal Issues Presented

Whether the promissory note, containing a provision accelerating the due date upon default in payment of interest, is negotiable under the law of the place of payment (Utah).
How the uniform negotiable instrument law, as enacted in Utah and substantially similar to California's, applies to the negotiability of a note with an acceleration clause.
Whether the trial court erred in instructing the jury that the note was non-negotiable.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
State Bank v. Bilstad, 162 Iowa 433, 136 N.W. 204, 144 N.W. 363	Interpretation of uniform negotiable instrument law to promote uniformity and uphold negotiability of notes with acceleration clauses.	Used to support the principle that the uniform law aims to harmonize conflicting decisions and uphold negotiability.
Felt v. Bush, 41 Utah 462, 126 P. 688	Interpretation of uniform negotiable instrument law and legislative intent to harmonize decisions.	Quoted extensively to illustrate the legislative purpose behind the uniform law and the duty of courts to follow majority rule.
Chicago Railway Equipment Co. v. Merchants' Nat. Bank, 136 U.S. 268, 34 L.Ed. 349, 10 Sup. Ct. Rep. 999	Under law-merchant, acceleration clause does not destroy negotiability.	Referenced to show that prior to the uniform law, courts widely held that acceleration clauses did not negate negotiability.
First Nat. Bank v. Barrett, 52 Mont. 359, 157 P. 951	Application of uniform negotiable instrument law to uphold negotiability despite acceleration clause.	Supports the uniform law interpretation that such notes remain negotiable.
Bright v. Offield, 81 Wn. 442, 143 P. 159	Same as above.	Supports the uniform law interpretation that such notes remain negotiable.
Mackintosh v. Gibbs, 79 N.J.L. 40, 74 A. 708	Same as above.	Supports the uniform law interpretation that such notes remain negotiable.
Des Moines etc. Bank v. Arthur, 163 Iowa 205, 143 N.W. 556	Same as above.	Supports the uniform law interpretation that such notes remain negotiable.
Chicago Railway Equipment Co. v. Merchants' Nat. Bank, 136 U.S. 268	Law-merchant principle on negotiability despite acceleration clauses.	Referenced as part of the majority rule supporting negotiability.
National Hardware Co. v. Sherwood, 165 Cal. 1, 130 P. 881	California decisions on negotiability of promissory notes under state law.	Discussed but distinguished as not controlling for Utah law interpretation.
Meyer v. Weber, 133 Cal. 681, 65 P. 1110	Same as above.	Discussed but distinguished as not controlling for Utah law interpretation.
Smiley v. Watson, 23 Cal.App. 409, 138 P. 367	Same as above.	Discussed but distinguished as not controlling for Utah law interpretation.

Court's Reasoning and Analysis

The court began by noting that the negotiability of the note must be determined by the law of the place where it was payable, Utah. It identified that Utah had adopted the uniform negotiable instrument law, substantially identical to California's 1917 enactment. The court examined the statutory requirements for negotiability, emphasizing the requirement that a note be payable at a fixed or determinable future time.

The note contained a clause accelerating the due date upon default in interest payment: "If the interest is not paid when due, then both principal and interest shall become due at the option of the holder." The court analyzed whether this clause destroyed negotiability.

Relying on the uniform law's definitions and the purpose of securing uniformity in commercial paper law, the court concluded that the note was payable at a determinable future time. The payee's option to accelerate the due date upon default did not render the time of payment uncertain; rather, it remained determinable because the payee could fix the maturity at a reasonable time after default.

The court further reasoned that the statute does not require explicit wording such as "on or before" a fixed date to be negotiable but rather that the instrument be in fact payable on or before a certain date. The acceleration clause fits within this framework.

The court acknowledged differences between Utah and California statutes but found those differences irrelevant to the central question, which was governed by the Utah statute as stipulated below. It declined to rely on California decisions interpreting different statutes and noted the absence of Utah case law contrary to its interpretation.

Accordingly, the court held that the trial court erred in instructing the jury that the note was non-negotiable.

Holding and Implications

The judgment of the Superior Court of Orange County is reversed.

The direct effect of this decision is that the promissory note in question is legally recognized as negotiable under Utah law, and the appellant, as a bona fide purchaser, is entitled to enforce its payment. No new precedent beyond the application of the uniform negotiable instrument law to acceleration clauses is established, and the ruling clarifies the proper interpretation of negotiability under the Utah statute in this context.

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UTAH STATE NATIONAL BANK (a Corporation), Appellant, v. F. OWEN SMITH etal., Respondents.

WILBUR, J.

Appellant, claiming to be a bona fide purchaser for value of a negotiable promissory note, brought this action against the makers thereof to enforce its payment. The defendants, asserting that the note was non-negotiable, interposed a defense valid against the payee therein. The court instructed the jury that the note was non-negotiable and that the defense, if established, would defeat recovery on the note. A verdict was rendered favorable to the defendants and judgment thereon entered. This is an appeal from the judgment. [1] The note in question was dated and payable in Utah, and its negotiability must be determined by the law of the place of payment. (1 Daniel on Negotiable Instruments, 6th ed., secs. 865, 879; Wharton on Conflict of Laws, 3d ed., 451d; notes, 61 L.R.A. 209; 19 L.R.A. (N.S.) 670, 671.) The provision relied upon to establish non-negotiability is the usual provision for accelerating the due date for default in the payment of interest, as follows: "If the interest is not paid when due, then both principal and interest shall become due at the option of the holder of this note." At the time of the execution of the note and when it was payable the uniform negotiable instrument law was in effect in Utah, although not then adopted in California. The terms of the Utah statute are shown in evidence, and, so far as the question here involved is concerned, are substantially the same as the uniform negotiable instrument law enacted in California in 1917. The two sections of the Utah law involved are 1553 and 1556 of the Compiled Laws of Utah, which are identical in language with our Civil Code, sections 3082 and 3085, as enacted in 1917, (Stats. 1917, pp. 1532, 1533), and to sections I and 4 of the uniform negotiable instrument law (Crawford's Annotated Negotiable Instrument Law, pp. 11 and 19), and read as follows, viz.:

"1553. Negotiable instruments. Requirements of. An instrument to be negotiable must conform to the following requirements:

"1. It must be in writing and signed by the maker or drawer;

"2. Must contain an unconditional promise or order to pay a sum certain in money;

"3. Must be payable on demand, or at a fixed or determinable future time;

"4. Must be payable to the order of specified person or to bearer; and,

"5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty."

"1556. Time payable. An instrument is payable at a determinable future time, within the meaning of this title, which is expressed to be payable:

"1. At a fixed period after date or sight; or

"2. On or before a fixed or determinable future time specified therein; or

"3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect."

This uniform law has now been adopted by all but two states of the Union (Georgia and Texas). The history of its drafting and enactment in the various states makes it clear that the purpose was to secure uniformity of legislation and decision throughout the United States, and the purpose is further manifest by a general proviso with reference to the applicability of the general law-merchant to supplement the legislation, and no doubt to aid in its interpretation, as follows, viz.: "In any case not provided for in this act the rules of the law-merchant shall govern." (Utah Negotiable Instrument Law, sec. 196; Crawford's Annotated Negotiable Instrument Law, sec. 196, p. 8.)

It is generally held that it is the duty of the courts in construing this law to have in mind the purpose of securing uniformity in the law of commercial paper. ( State Bank etc. v. Bilstad, 162 Iowa, 433, [49 L.R.A. (N.S.) 132, 136 N.W. 204, 144 N.W. 363]; Felt v. Bush, 41 Utah, 462, [126 P. 688]; Union Trust Co. v. McGinty, 212 Mass. 205, [Ann. Cas. 1913C, 525, 98 N.E. 679]; Broderick v. McGrath, 81. Misc. Rep. 199, [ 142 N.Y. Supp. 497]; Rockfield v. First Nat. Bank, 77 Ohio St. 311, [14 L.R.A. (N.S.) 842, 83 N.E. 392].) As the view of the supreme court of Utah on this rule of interpretation is of special interest, we quote from the case of Felt v. Bush, supra, as follows: "The question, therefore, it seems to us, has passed beyond the domain of judicial discussion. As we understand it, the negotiable instruments law was intended to give legislative sanction to the majority rule, to which reference has been made, and was conceived by its authors and adopted by the different state legislatures for the express purpose of harmonizing the conflicting decisions which had been rendered on the subject of negotiable instruments and the rights of those interested therein whose rights were acquired before maturity. As we view it, therefore, it is our plain duty to follow the numerous decisions that have directly passed upon the negotiable instruments law, and have construed it in accordance with the majority rule. The question is one of business expediency, and not of logic or equity as applied to an individual case." [3] Before the enactment of this law the great weight of authority was that under the law-merchant the clause accelerating the due date did not destroy its negotiability. ( Chicago Railway Equipment Co. v. Merchants' Nat. Bank, 136 U.S. 268, [ 34 L.Ed. 349, 10 Sup. Ct. Rep. 999, see, also, Rose's U.S. Notes]; Phelps v. Sargent, 69 Minn. 118, [71 N.W. 927]; Wilson v. Campbell, 110 Mich. 580, [35 L.R.A. 544, 68 N.W. 278]; Clark v. Skeen, 61 Kan. 526, [78 Am. St. Rep. 337, 49 L.R.A. 190, 60 P. 327]; Harrison v. Hunter et al. (Tex.Civ.App.), 168 S.W. 1036; First Nat. Bank etc. v. Garland, 160 Ill. App. 407; Hunter v. Clarke, 184 Ill. 158, [75 Am. St. Rep. 160, 56 N.E. 297]; Merrill v. Hurley, 6 S.D. 592, [55 Am. St. Rep. 859, 62 N.W. 958]; Stark v. Olsen, 44 Neb. 646, [63 N.W. 37]; Daniel on Negotiable Instruments, 6th ed., sec. 48; Smith v. Williamson, 8 Utah, 219, [30 P. 753].) All the decisions based upon the uniform negotiable instrument law, so far as we are advised, hold that the clause in question does not destroy the negotiability of a promissory note. ( First Nat. Bank v. Barrett, 52 Mont. 359, [157 P. 951]; Bright v. Offield, 81 Wn. 442, [143 P. 159]; Mackintosh v. Gibbs, 79 N.J.L. 40, [74 A. 708]; Des Moines etc. Bank v. Arthur, 163 Iowa, 205, [Ann. Cas. 1916C, 498, 143 N.W. 556]; State Bank v. Bilstad, 162 Iowa, 433, [49 L.R.A. (N.S.) 132, 136 N.W. 204, 144 N.W. 363].) The reasoning by which the courts have reached the conclusion that such a note is negotiable is not in each case the same. By section 1553, supra (3082 of our code), a note is negotiable if payable at a "determinable future time." A matter is determinable "that may be accurately found out, settled or decided" (Standard Dictionary); that is "capable of being determined, definitely ascertained, decided upon, or ended." (Webster's New International Dictionary.) A future determinable time could be one determinable at some time in the future as well as one determinable at present, or in advance. By section 1556 (3085 of our code) it is sought to make clearer what is meant by a "determinable future time." An instrument payable at a fixed period after sight is payable at a "determinable future time," the exact date of payment being ascertainable at the date of presentation, but not before. A note payable "on or before a fixed date" is payable at a "determinable future time." If the instrument expressly states that it is payable "on or before" a fixed date, it is payable at the date in question or, at the option of the payer, at any earlier date selected by him for payment. The exact due date is thus left to be determined at a future date by the option of the payer, if exercised before the fixed due date. Under the law-merchant the option in such a case lies altogether with the payer, but the due date is no less "determinable" when the option lies with the payee instead of the payer, and if the option of the payee is limited to the case of a default in the payment of an installment of interest, the date of maturity is not less determinable in the future, for it may be fixed by the payee at any reasonable time after such default. It should be observed that the statute does not say that only an instrument which uses the words "on or before" a fixed date is negotiable. It declares that an instrument which is in fact payable on or before a certain date is negotiable. For the reasons stated the note in question is payable at a determinable future time, to wit, at a fixed date or before that date at the payee's option in case of a default in the payment of interest. There seems no reason for supposing that in this attempt to secure uniform legislation and decision it was intended to change a well-settled rule of the law-merchant, by which in nearly every state such a note was negotiable. Construed in the light of such rule, and under the plain language of the statute, the note is clearly negotiable.

Respondents call attention to the fact that the Utah negotiable instrument law differs from that of California and some other states, in that the words "or of interest" contained in section 3083, subdivision 3, of our amended Civil Code, and section 2 of the uniform law (Crawford's Annotated Negotiable Instrument Law, p. 13), are not included in the corresponding section (1554) of the Utah law. This section, however, defines when "the sum payable is a sum certain within the meaning of the act." The provision of the California law states that the sum is certain "although it is to be paid . . . by stated installments, with a provision that upon default in payment of any installment or of interest, the whole, shall become due." But the question here involved is with reference to certainty in the time of payment, and turns upon the construction of subdivision 2 of section 3085, supra. Our attention is called to certain decisions by the courts of California upon the subject of the negotiability of promissory notes: National Hardware Co. v. Sherwood, 165 Cal. 1, [ 130 P. 881]; Meyer v. Weber, 133 Cal. 681, [ 65 P. 1110]; Smiley v. Watson, 23 Cal.App. 409, [ 138 P. 367]. It is suggested that in the interpretation of the uniform negotiable instrument law of Utah we should consider the same in the light of these decisions, on the theory that the Utah law is presumed to be the same as our own except where shown to be to the contrary. That rule has no applicability here, for the reason that it was stipulated in the court below that the statute in question constituted the law in Utah. The decisions of the courts of this state, based upon its various code provisions concerning negotiable instruments, and particularly upon sections 3088 and 3093 of the Civil Code, since repealed and replaced by the uniform negotiable instrument act, obviously can be of no assistance in ascertaining the law of Utah under the uniform act. Nor are we called upon to prophesy what the courts of Utah may do when the same question comes before them under the uniform negotiable instrument law. The question simply is: What interpretation do we place upon the language of the Utah statute in proof in this case? If there is any decision of the supreme court of Utah bearing upon the construction of the statute, such decision was not proved in the case, and, it may be added, is not now called to our attention. The note was negotiable under the law of Utah. The instruction to the contrary was erroneous.

Judgment reversed.

Sloss, J., Lennon, J., Shaw, J., Melvin, J., Lawlor, J., and Angellotti, C. J., concurred.