Pribus v.

Bush
Court of Appeal of California, Fourth Appellate District, Division Two May 12, 1981 Civ. No. 23473 Reporter: 118 Cal. App. 3d 1003; 173 Cal. Rptr. 747; 1981 Cal. App. LEXIS 1724; 31 U.C.C. Rep. Serv. (Callaghan) 599 cellation of the promissory note signed by plaintiff. The court affirmed, holding that the assignHELEN A. PRIBUS, Plaintiff and Respondent, ment by allonge of plaintiffs promissory note by third party to defendant was ineffecv. PHILIP L. BUSH, Defendant and Appellant tive as an indorsement, since there was suffiPrior History: [***1] Superior Court of Or- cient space on the note itself for the indorsement. There having been no indorsement of ange County, No. 314923, Philip Edgar the note, defendant was not a holder in due Schwab, Jr., Judge. course and, therefore, took the note subject to the defenses that plaintiff had against third Disposition: AFFIRMED. party.
Core Terms

indorsement, allonge, promissory note, negotiable instrument, holder in due course, space, law merchant, trust deed, holder
Case Summary

Procedural Posture Defendant appealed a judgment of the Superior Court of Orange County (California) enjoining the foreclosure of a trust deed on plaintiffs house and ordering the cancellation of a promissory note signed by plaintiff. Overview Defendant, after an unsuccessful effort to collect on a promissory note, filed a Notice of Breach and Default and of Election to Cause Sale of Real Property Under Deed of Trust. Plaintiff responded by seeking a cancellation of instrument, declaratory relief, and injunction. The trial court enjoined the foreclosure of a trust deed on plaintiffs house and ordered the can-

Outcome The court affirmed, holding that the assignment by allonge of plaintiffs promissory note by third party to defendant was ineffective as an indorsement, and therefore, defendant was not a holder in due course and took the note subject to the defenses that plaintiff had against third party.
LexisNexis Headnotes Commercial Law (UCC) > Negotiable Instruments (Article 3) > Dishonor & Presentment > General Overview Commercial Law (UCC) > ... > Enforcement > Holders in Due Course > General Overview Commercial Law (UCC) > ... > Enforcement > Holders in Due Course > Requirements Commercial Law (UCC) > ... > Definitions & General Provisions > Definitions > Holders in Due Course

HN1 See Cal. Uniform Commercial Code 3302(1).

Commercial Law (UCC) > General Provisions (Ar-

Charles Cox

Page 2 of 7 118 Cal. App. 3d 1003, *1003; 173 Cal. Rptr. ticle 1) > General Provisions Commercial Law (UCC) > ... > Enforcement > Holders in Due Course > General Overview Contracts Law > ... > Types of Parties > Holders in Due Course > General Overview Contracts Law > ... > Types of Parties > Holders in Due Course > Requirements Contracts Law > ... > Negotiable Instruments > Indorsements > General Overview Contracts Law > ... > Negotiable Instruments > Indorsements > Qualified Indorsements 747, **747; 1981 Cal. App. LEXIS 1724, ***1

ment itself, but that an exception to the rule allows the use of an attached paper when the back of the instrument is so covered as to make it necessary.
Headnotes/Syllabus

HN2 A holder is a person who is in possession of an instrument issued or indorsed to him. The maker of a promissory note that had been Cal. Uniform Commercial Code 1201(20). assigned by the payees to an assignee by a paper stapled to the note as an allonge brought an Commercial Law (UCC) > Negotiable Instruments (Araction for cancellation of the note and an inticle 3) > Indorsements, Negotiations & Transjunction against foreclosure under the deed of fers > Indorsements trust on her house securing the note. The maker HN3 See Cal. Uniform Commercial Code commenced the action after the assignee had 3202(2). filed aNotice of Breach and Default and of Election to Cause Sale of Real Property Under Commercial Law (UCC) > General Provisions (ArDeed of Trust, following the assignees unticle 1) successful effort to collect on the note. The note Commercial Law (UCC) > General Provisions (Arwas a replacement for another that had been exticle 1) > General Provisions ecuted by the maker at the request of her Commercial Law (UCC) > ... > General Provison who owed the payees a large sum of money. sions > Policies & Purposes > General Overview Commercial Law (UCC) > ... > General Provi- The original note was never delivered, but the sions > Policies & Purposes > Supplemental Prin- payees induced the maker to execute the replaceciples of Law ment note for the same amount as the first note on the payees false representation they HN4 See Cal. Uniform Commercial Code would hold the note and make no use of it. There 1103. was parol evidence that the payees were to be Commercial Law (UCC) > Negotiable Instruments (Ar- paid any excess collected on the note over and above a specified amount. Judgment was enticle 3) > Indorsements, Negotiations & Transfers > Indorsements tered ordering cancellation of the note and enContracts Law > Types of Commercial Transacjoining the assignee from foreclosing on the tions > Negotiable Instruments > General Overview deed of trust. The judgment followed the courts Contracts Law > ... > Negotiable Instruments > Indorsedetermination that the allonge was not effecments > General Overview tive as an indorsement, that due to the lack of an effective indorsement and the fact the payHN5 The law merchant permits the use of an alees retained an interest in the note there had longe only when there is no longer room on been no negotiation of the note, and that thus the the negotiable instrument itself to write an inassignee was not a holder in due course and dorsement. took the note subject to the makers defenses Commercial Law (UCC) > Negotiable Instruments (Ar- against the payees of fraudulent inducement and ticle 3) > Indorsements, Negotiations & Translack of consideration. (Superior Court of Orfers > Indorsements ange County, No. 314923, Philip Edgar Schwab, Contracts Law > ... > Negotiable InstruJr., Judge.) ments > Indorsements > General Overview HN6 The general rule is that an instrument could be indorsed only by writing on the instruHeadnotes CALIFORNIA OFFICIAL REPORTS

Summary CALIFORNIA OFFICIAL REPORTS SUMMARY

Charles Cox

Page 3 of 7 118 Cal. App. 3d 1003, *1003; 173 Cal. Rptr. 747, **747; 1981 Cal. App. LEXIS 1724, ***1

HEADNOTES Charles Pribus, the son of Helen Pribus (plainClassified to California Digest of Official Re- tiff), owed $ 126,500 to Ford and Mary Williams. At Charles request, plaintiff executed a ports, 3d Series promissory note for $ 126,500 and a trust deed on plaintiffs house to secure the note, CA(1) (1) Commercial Paper 9 > Transfer and Negotiaboth in favor of the Williams. Charles delivtion > Indorsement > Affixation of Payees Signature on ered the trust deed to Ford Williams, who caused it Allonge. to be recorded. The note was never delivered. Ford Williams then induced the plaintiff --In an action by the maker of a promissory to execute a second promissory note for $ note secured by a deed of trust on real prop126,500, the subject of this appeal. [***2] erty for cancellation of the note that had been as- The trial court made the finding, which is not signed by allonge and an injunction against now challenged, that this note was executed on the assignees foreclosure under the deed of the false representation by Williams that he trust, the trial court properly found in support of would hold the note and would make no use of its judgment granting the requested relief that it. The court also made the uncontroverted findthe payees assignment of the note by allonge ing that plaintiff received no consideration for was ineffective as an indorsement, and that the note. the assignee thus was not a holder in due course Within a few months, Williams bought from and took the note subject to the makers dePhilip Bush (defendant) an option to purchase fenses against the payees of fraudulent induceBushs contractual rights to buy [**748] an ment and lack of consideration. The assignapartment complex in Texas. As part of Wilment by allonge was ineffective as an liams written agreement with defendant Bush, indorsement, where there was sufficient space Williams assigned the trust deed on plainon the note itself for the payees indorsement. tiffs house to defendant and transferred to deCounsel: Howser, Gertner & Brown and Da- fendant the promissory note which Williams had induced plaintiff to execute. Stapled to the vid L. Sanner for Defendant and Appellant. note was a paper, signed by Ford and Mary Stephen D. Johnson for Plaintiff and Respon- Williams, which stated:For a valuable consideration, the receipt and sufficiency of which is dent. hereby acknowledged, the undersigned do Judges: Opinion by Morris, J., with Kaufman, hereby assign the attached Note to Phillip L. Bush. There was sufficient space on the Acting P. J., and Garst, J., * concurring. note itself to write an indorsement in the words that were written on the paper stapled to the Opinion by: MORRIS note.
Opinion

[*1005] [**747] Defendant appeals from a judgment enjoining the foreclosure of a trust deed on plaintiffs house, and ordering the cancellation of a promissory note signed by plaintiff. Judgment was entered against defendant after the trial court concluded that he was not a holder in due course. Facts
*

After an unsuccessful effort to collect on the promissory note, defendant filed aNotice of Breach and Default and of Election to Cause [***3] Sale of Real Property Under Deed of Trust. Plaintiff responded by initiating the present action, seekingcancellation of instrument, declaratory relief, and injunction. [*1006] Following a trial on the merits, the court found for the plaintiff. Although the promissory note was a negotiable instrument pay-

Assigned by the Chairperson of the Judicial Council.

Charles Cox

Page 4 of 7 118 Cal. App. 3d 1003, *1006; 173 Cal. Rptr. 747, **748; 1981 Cal. App. LEXIS 1724, ***3

able to order, the court held that the plaintiff could assert the defenses of fraudulent inducement and lack of consideration against the defendant because he was not a holder in due course. 1 The court concluded that the Williams indorsement of the promissory note was not sufficient for effective negotiation, because 1) the paper attached to the note was ineffective as an indorsement because there was sufficient space to write the indorsement on the note itself, and 2) the Williams retained an interest in the note. Judgment was entered ordering the cancellation of the promissory note and enjoining the defendant from foreclosing on the trust deed. This appeal followed.

cause of any failure to satisfy the value, good faith, or no notice requirements. Rather, the court concluded that defendant is not a holder in due course because he is not a holder at all, an essential prerequisite to qualifying as a holder in due course. HN2 A holder isa person who is in possession of . . . an instrument . . ., issued or indorsed to him ... ( 1201, subd. (20).) The trial court ruled that the Williams signature on the paper attached to the promissory note did not qualify as an indorsement because [*1007] there was adequate space for the indorsement on the note itself. 3 We affirm the judgment.

[**749] HN3 Section 3202, subdivision (2) states, An indorsement must be written by or [***4] Discussion on behalf of the holder and on the instrument or HN1 California Uniform Commercial Code sec- on a paper so firmly affixed thereto as to betion 3302, subdivision (1) provides, 2A come a part thereof. Thus, the code does not say holder in due course is a holder who takes the inwhether or not such a paper, called an strument a) For value; and (b) In good faith; allonge, [***6] may be used when there is and (c) Without notice that it is overdue or has still room for an indorsement on the instrubeen dishonored or of any defense against or ment itself. Nor has any reported California case claim to it on the part of any person. In the presdealt with this issue under the code. 4 The ent case, the trial court did not question defencode does, however, instruct us as to where to dants status as a holder in due course belook for the law with which to resolve the isCalifornia Uniform Commercial Code section 3305 provides, in part:To the extent that a holder is a holder in due course he takes the instrument free from
1

(2) All defenses of any party to the instrument with whom the holder has not dealt except [certain defenses that are not applicable in this case]. Section 3306 provides, in part:Unless he has the rights of a holder in due course any person takes the instrument subject to (b) All defenses of any party which would be available in an action on a simple contract; and (c) The defenses of want or failure of consideration (Section 3408), . . .
2 3

All references are to the California Uniform Commercial Code, unless otherwise stated.

The court held the signature ineffective as an indorsement on the alternative ground that the Williams did not transfer their entire interest in the note to defendant. Section 3202, subdivision (3) provides,An indorsement is effective for negotiation only when it conveys the entire instrument or any unpaid residue. If it purports to be of less it operates only as a partial assignment. The Williams assignment did notpurport to be of less. However, there was parol evidence that the Williams were to be paid any excess collected on the note over and above $ 105,000. Since we uphold the trial courts determination that the attached signature did not qualify as an indorsement, it is unnecess ary for us to consider the competency or sufficiency of the evidence to support the finding that there was a partial assignment.
4

The few California cases which have cited section 3202, subdivision (2) have involved negotiable instruments which were not indorsed on the instruments or on an attached paper, but were transferred by a separate document. The transferees in those cases were, therefore, not holders. ( Security Pacific Nat. Bank v. Chess (1976) 58 Cal.App.3d 555, 562 [129 Cal.Rptr. 852]; Wright v. Bank of California (1969) 276 Cal.App.2d 485, 490 [81 Cal.Rptr. 11]; Lopez v. Puzina (1966) 239 Cal.App.2d 708 [49 Cal.Rptr. 122, 19 A.L.R.3d 1291].)

Charles Cox

Page 5 of 7 118 Cal. App. 3d 1003, *1007; 173 Cal. Rptr. 747, **749; 1981 Cal. App. LEXIS 1724, ***9

sue. HN4 Section 1103 states that[unless] displaced by the particular provisions of this code, the principles of law and equity, including the law merchant . . . shall supplement its provisions, and that sections Uniform Commercial Code comment notesthe continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by this Act. Therefore, since the Commercial Code has not addressed the issue, we decide the present case according to the rules on allonges of the law merchant. 5

doing so was that it was more convenient to assign it on a separate paper. ( Id ., 56 S.W. at p. 1084.) 6

[***9] As the Bishop case indicates, the law merchant rule on allonges was developed as a refinement of the basic rule that an indorsement must be on the instrument itself. This basic rule must have become impractical when strictly applied in certain multiple indorsement situations, due to the finite amount of space on any given instrument. The allonge, then, was apparently created to remedy the inconveniences of the basic rule, not as an alternative method of indorsement. Support for this analysis is [*1008] Although the cases are not unanimous, the majority view is HN5 that the law found in Folger v. Chase (1836) 35 Mass. merchant permits the use of an allonge only (18 Pick.) 63. [**750] There, the Massachuwhen there is no longer room on the nego- setts Supreme Court dealt with an allonge intiable instrument itself to write an indorsedorsement as a case of first impression. The inment. (See generally Annot., Indorsement of Ne- dorsement had been made ona paper attached to the back of the note by a wafer begotiable Instrument By Writing Not On cause the back of the note was covered with Instrument Itself (1968) 19 A.L.R.3d 1297, previous endorsements. The defendants, citing 1301-1304; [***8] Annot., Indorsement of Bill the basic rule, contended that no indorsement or Note by Writing Not On Instrument Itself had been made. The court disagreed.The ob(1928) 56 A.L.R. 921, 924-926.) Typical of the jection is, that such an indorsement is not sancmajority position is Bishop v. Chase (1900) 156 Mo. 158 [56 S.W. 1080]. There it was held tioned by custom; but we think it is supported that HN6 the general rule is that an instruby the reasons on which the custom was originally founded. Bills of exchange and promisment could be indorsed only by writing on the sory notes were indorsed on the back of the bills instrument itself, but that an exception to the [***10] and notes, because it was a converule allows the use of an attached paperwhen nient [*1009] mode of making the transfer, and the back of the instrument is so covered as to make it necessary. ( Id ., 56 S.W. at p. 1083.) in order that the evidence thereof might accompany the note. Such an indorsement as this Thus, the court invalidated an attempted inwill rarely happen, and no authority to support it dorsement by allonge whenthere was plenty could reasonably be expected; but there is no of room upon the back of the note to have made authority against it. ( Id ., at p. 67.) 7 the indorsement, and the only excuse for not
An excellent discussion of the history and development of the law merchant appears in Bank of Conway v. Stary (1924) 51 N.D. 399 [200 N.W. 505, 508-509, 37 A.L.R. 1186]. The law merchant is there defined asa system of law that does not rest exclusively on the institutions and local customs of any particular country, but consists of certain principles of equity and usages of trade which general convenience and a common sense of justice have established to regulate the dealings of merchants and mariners in all the commercial countries of the civilized world. [Citations.] . . . This lex mercatoria or common law of merchants is of more universal authority than the common law of England. [Citation.] ( Id ., 200 N.W. at p. 508.)
5

While not determinative of this case, it is interesting to note that the dictionaries support the majority position. Blacks Law Dictionary (4th ed. 1951) page 100, definesallonge as[a] piece of paper annexed to a bill of exchange or promissory note, on which to write endorsements for which there is no room on the instrument itself. Websters Third New International Dictionary (1964) page 57, gives a similar definition:a slip of paper attached to a bill of exchange or similar document to provide space for additional endorsements.
6 7

We believe that inherent in the rationale underlying the majority rule is the concern for preventing fraud. An allonge, even thoughso firmly affixed . . . as to become a part of the instrument, may be detached more easily than an indorsement on the instrument itself may be removed. Additionally, a persons signature, innocently made upon an innocuous piece of paper, could b e

Charles Cox

118 Cal. App. 3d 1003, *1009; 173 Cal. Rptr.

Page 6 of 7 747, **750; 1981 Cal. App. LEXIS 1724, ***10

The minority position is best expressed in Crosby v. Roub (1863) 16 Wis. 616, 626-628.
8

There [***11] it was said thatthe usual reason stated for using [an allonge] is, that there is no longer room on the note to make the indorsement. But this does not mean that there must be an actual physical impossibility to write the indorsers name on the original paper. On the contrary, the usage of the mercantile law is, as Chief Justice Marshall says, founded in convenience. And all that its spirit or its letter requires is, that when it is inconvenient to write on the back of the note the real contract between the vendor and the vendee, which, if so written, would pass the title, it may be written on another paper and attached to it with like effect. ( Id ., at p. 626.) 9 The Crosby case was considered, but rejected, in a number of majority jurisdictions. (See, e.g., Bishop v. Chase, supra , 56 S.W. at pp. 1083-1084; Doll v. Hollenback (1886) 19 Neb. 639 [28 N.W. 286, 288].)

the back of a negotiable instrument, a signature [***13] equivalent to an indorsement thereof may be made upon a paper annexed thereto. 10

[**751] These Civil Code sections were in force for 45 years until California adopted the Uniform Negotiable Instruments Act. The act, like its successor, the Uniform Commercial Code, did not state whether or not an allonge could be used when there was still room for an indorsement on the instrument itself. Section 31 of the act (former Civ. Code, 3112) stated in part,The indorsement must be [***14] written on the instrument itself or upon a paper attached thereto. (Stats. 1917, ch. 751, 1, p. 1538.) However, also like the Uniform Commercial Code, the Uniform Negotiable Instruments Act intended prior law not in conflict with the act to supplement the act. Former Civil Code section 3266d stated in part,In any case not provided for in this title the rules of the law merchant shall govern. (Stats. 1921, ch. 194, 12, p. 215.) Thus, it has been held that the [*1010] The majority view interpretation of the act wasbut a statutory affirmation of the law merchant rule of allonges was adopted rule of the old law merchant that an allonge statutorily in California. When the Civil was allowable only when the back of the instruCode was enacted in 1872, it contained these ment itself was so covered with previous entwo provisions: 1) section 3109 --One who dorsements that convenience or necessity reagrees to indorse a negotiable instrument is quired additional space for further endorsements bound to write his signature upon the back of ( Clark v. Thompson (1915) 194 Ala. 504 [69 the instrument, if there is sufficient space So. 925, 926]; see also Plattsmouth State Bank v. Redding (1935) 128 Neb. 268 [258 N.W. thereon for that purpose, and 2) section 3110 --When there is not room for a signature upon
fraudulently attached to a negotiable instrument as a purported indorsement. The majority rule, while not eliminating these methods of fraud, certainly reduces the opportunities for their use. Crosby and Heister v. Gilmore (Pa. 1862) 5 Phila. 62 are the leading minority cases. However, the current validity of both, even in their own states, is questionable. In Bergmann v. Puhl (1928) 195 Wis. 120 [217 N.W. 746, 747-748, 56 A.L.R. 915], even though citing Crosby, the Wisconsin Supreme Court stated the majority rule that [the] only exception to the rule that an in dorser becomes such only by placing his signature upon the instrument is that where the back of the instrument has been covered by endorsements or other writing, leaving no room for further endorsements a strip of paper called an allonge may be at tached to the instrument and subsequent endorsements may be written thereon. And, in James Talcott, Inc. v. Fred Ratowsky Associates, Inc. (1965) 84 Dauph. 258 [ 38 Pa. D. & C.2d 624, 2 U.C.C. R.S. 1134, 1137], a Pennsylvania Court of Common Pleas expressed doubt about the continued vitality of Heister and refused to follow it.
8

It is debatable whether even the Crosby court would have approved the use of an allonge in the present case. Crosby does not state that an allonge can be used unconditionally. Instead, the wording on the allonge had to be such that it would be a contract which, if on the note would pass the title, and that for some reason it is inconvenient to write it on the note . ( 16 Wis. at p. 627, italics added.) In the present case, no showing of inconvenience was made. Indeed, the trial court found that all that was written on the allonge would have fit on the promissory note.
9

Hays v. Plummer (1899) 126 Cal. 107, 110 [58 P. 447] is cited by plaintiff as supporting the majority position. This is misleading. Hays was merely reiterating the California law on allonges as expressed in the Civil Code at that time. The issue at bar in the present case was not before the court in Hays. In that case, a promissory note was assigned by means of a separate written instrument. The court held that the transferee of the note was not a holder in due course, but only an assignee.
10

Charles Cox

Page 7 of 7 118 Cal. App. 3d 1003, *1010; 173 Cal. Rptr. 747, **751; 1981 Cal. App. LEXIS 1724, ***14

661, 663].) CA(1) (1) We conclude that the majority view of the law merchant relating to allonges is the better reasoned one, and is the view adopted by the Legislature. 11 It follows, then, that the assignment by allonge of plaintiffs [*1011] promissory note by the [***15] Williams to the defendant was ineffective as an indorse-

ment, since there was sufficient space on the note itself for the indorsement. There having been no indorsement of the note, the defendant is not a holder in due course and, therefore, takes the note subject to the defenses that plaintiff has against the Williams. ( 3306.) The judgment is affirmed.

11

We have found four Uniform Commercial Code cases that discuss the allonge issue which is presented here. Three of the cases state the majority position. ( Shepherd Mall St. Bank v. Johnson (Okla. 1979) 603 P.2d 1115, 1118; Tallahassee Bank & Trust Company v. Raines (1972) 125 Ga.App. 263 [187 S.E.2d 320, 321]; James Talcott, Inc. v. Fred Ratowsky Associates, Inc., supra, 2 U.C.C. R.S. at p. 1137.) The fourth case did not decide the issue. ( Estrada v. River Oaks Bank & Trust Co . (Tex.Civ.App. 1977) 550 S.W.2d 719, 725.)

Charles Cox