dred and ninety-one, with interest thereon at the rate of seven per cent. per annum, from date, payable semiannually on the first days of February and August in each year until said principal sum shall be fully paid according to the tenor and effect of ten interest notes of seventeen and 50/100 dollars each, bearing even date herewith, hereto annexed, payable at said Third National Bank in the city of New York, provided said principal sum and the interest thereon be paid at maturity; but, in case of default and election as hereinafter provided, then it is expressly agreed that this bond shall draw interest at the rate of twelve per cent. per annum from date, and, if suit be instituted for the collection hereof, a reasonable sum shall be added as attorney's fees. It is agreed that every installment of interest evidenced by coupon hereto annexed, not paid at maturity, shall draw interest at the rate of twelve per cent. per annum until paid. It is further expressly agreed that in case of default in the payment of any installment of interest, or any portion thereof, for the space of ten days after it becomes due and payable, or in case of the breach of any of the covenants or conditions in the mortgage deed securing this bond contained, to which said deed reference is hereby made, and which is made a part of this contract, in either such case the said principal sum, with all accrued interest, shall, at the election of the legal holder or holders hereof, at once become due and payable without further notice, and may be demanded and collected, anything herein contained to the contrary notwithstanding. All appraisement, homestead, exemption, and stay laws are hereby expressly waived. It is further expressly agreed and declared that this bond and the interest notes hereto annexed are made and executed under, and are in all respects to be governed and construed by, the laws of the state of Kansas, and are given for an actual loan of five hundred dollars; said loan being secured by a mortgage deed on real estate, duly recorded. In witness whereof we have hereto affixed our hands and seals and made delivery hereof, at Lawrence, Kansas, this second day of August, A. D. 1886." On the same day the defendants in error executed and delivered to said W. J. Neill their mortgage deed, by which they conveyed to the said W. J. Neill certain real estate located in Ellsworth county, Kan., to secure said note, together with the interest thereon. About January 29, 1887, W. J. Neill assigned and delivered said bond to the plaintiff in error. Steiner paid the several installments of interest, and finally, on about the 1st day of August, 1892, he remitted by bank draft the entire amount then due on the bond and mortgage, being the principal sum and interest thereon, amounting in the aggregate to $522.50. All of these payments and remittances were made by Steiner to the mortgage company, which made the loan originally, although the name of the company had been

changed to the Western Farm-Mortgage Trust Company of Denver.

After the maturity of said note, and on the 13th day of February, 1893, the plaintiff in error brought this action in the district court below to recover from the defendants in error upon said promissory note, and to foreclose the mortgage securing the same. To the petition filed in said action below, the defendants in error filed an answer in due time, alleging as defenses substantially as follows, to wit: First. That the loan evidenced by said note was negotiated by the Western Farm-Mortgage Company, a corporation at Lawrence, Kan.; that, while the note was executed to W. J. Neill as payee, the Western FarmMortgage Company was the real party in interest, and that the said W. J. Neill had no interest therein except as the agent and representative of the Western Farm-Mortgage Company; that the Western Farm-Mortgage Trust Company of Lawrence was, after the negotiation of said loan, organized for the purpose of succeeding to the business of the Western Farm-Mortgage Company; that the defendants in error had no notice, actual or constructive, of the transfer and sale of said note by said W. J. Neill, of the Western Farm-Mortgage Company, to the plaintiff in error. Second. That after the execution of said note and mortgage defendants in error paid the interest as the same became due, either to the Western Farm-Mortgage Company or to the Western Farm-Mortgage Trust Company, its successor, and at the maturity of said note paid the principal to the Western Farm-Mortgage Trust Company at its office in Denver, Colo. Third. That at the time said note was paid to the Western Farm-Mortgage Trust Company at Denver, Colo., the said company was acting as the duly-authorized agent of the plaintiff in error for the collection of the same.

To this answer the plaintiff in error filed a reply, admitting the negotiation of the loan by the Western Farm-Mortgage Company, and the organization and succession in business of the Western Farm-Mortgage Trust Company; and also admitting the payment of the several interest coupons to the Western Farm-Mortgage Company and the Western Farm-Mortgage Trust Company by the defendants in error, but denying the agency or authority of either of said companies to collect the interest or the principal for the plaintiff in error; and alleged that the plaintiff in error had not knowledge of the fact that W. J. Neill was not the real payee in the said note, or of the relation existing between the Western Farm-Mortgage Company and the Western Farm-Mortgage Trust Company, or of the fact that the defendants in error had paid either interest or principal, as alleged in their answer, to the Western Farm-Mortgage Company or the Western Farm-Mortgage Trust Company; that the interest coupons and the principal note were made payable by their express

terms at the Third National Bank of New York City; and that the interest coupons were paid in due course of business through the said Third National Bank of New York City, where they were made payable; and that the plaintiff in error had nothing to do with W. J. Neill, the Western Farm-Mortgage Company, or the Western Farm-Mortgage Trust Company, in the way of receiving interest or principal upon said note after it was delivered to him.

Upon the issues as thus formed the case was tried, and the facts disclosed upon the trial are as follows, to wit: First. That the mortgage and note were executed as alleged in the plaintiff's petition. Second. That the note was assigned as follows, to wit: "For value received, I hereby assign and transfer the within bond, together with all my rights, title, and interest in the mortgage deed securing the same, to ;" and was then delivered to the plaintiff in error on or about January 29, 1887. Third. That the loan evidenced by said note was negotiated by the Western Farm-Mortgage Company, and that W. J. Neill was simply a nominal party as payee therein, and acted simply as the agent or representative of the Western Farm-Mortgage Company. Fourth. That the Western Farm-Mortgage Trust Company was organized for the purpose of succeeding to the business of the Western Farm-Mortgage Company. Fifth. That the defendants in error paid the several interest installments as they became due to the Western Farm-Mortgage Company and its successor, the Western Farm-Mortgage Trust Company. Sixth. That there was no assignment of the mortgage sued on in this action recorded in the office of the register of deeds of Ellsworth county, Kan., and that on July 20, 1891, and before the defendants in error had notice that the note and mortgage had been transferred to the plaintiff in error, said defendants Steiner paid the amount due thereon in full, $522.50, to the Western Farm-Mortgage Trust Company of Denver, and that said company retained the principal amount of said note, the $500 remitted to it by Steiner, -and failed and neglected to forward the same to the then owner and holder of the bond and mortgage, C. C. Chapman. The case was submitted to the jury upon the admissions of the parties and the evidence under the instructions of the court, and the jury returned a general verdict in favor of the defendants in error, and certain special findings of fact. The plaintiff in error duly filed his motion for judgment upon the special findings of fact, and also his motion for a new trial, both of which were overruled by the court, excepted to by the plaintiff in error, and the case is here for review. The questions to be considered here are:

1. Is the note sued on a negotiable instrument? "It is further expressly agreed that in case of default in the payment of any installment of interest, or any portion there48 P.-39

of, for the space of ten days after it becomes due and payable, or in case of the breach of any of the covenants or conditions in the mortgage deed securing this bond contained, to which said deed reference is hereby made, and which is made a part of this contract, in either such case the said principal sum, with accrued interest, shall, at the election of the legal holder or holders hereof, at once become due and payable without further notice, and may be demanded and collected, anything herein contained to the contrary notwithstanding." By this clause the mortgage is made a part of the bond or note. By this reference each and every condition, provision, and stipulation in the mortgage deed becomes as much a part of the bond as if the same was written therein, and it is necessary to examine the mortgage in order to ascertain what are really the provisions and conditions of the bond or note, for the reason that such mortgage is made a part of, and incorporated into, the bond or note by its terms. In this mortgage the Steiners agreed to pay all the taxes and assessments levied upon said premises when the same are due, and insurance premiums for the amount of insurance therein specified; and, if not so paid, the legal holder of the mortgage may, without notice, declare the whole sum of money therein secured at once payable, or may elect to pay such taxes, assessments, and insurance premiums. The amount so paid shall be a lien on the premises, and be secured by the mortgage, and collected in the same manner as the principal debt, together with interest at the rate of 12 per cent. per annum. But whether the legal holder of this mortgage elects to pay such taxes, assessments, or insurance premiums or not, it is distinctly understood that the legal holder thereof may immediately cause this mortgage to be foreclosed, and shall be entitled to the immediate possession of the premises, and the rents, issues, and profits thereof. It also contains an agreement that the mortgagors will keep the buildings, fences, and other improvements upon said premises in as good repair and condition as the same now are, and that said mortgagors will abstain from the commission of strip or waste on said premises until the whole sum of money thereby secured is fully paid. It also contains an agreement that, in case of the breach by the said mortgagors of any of the covenants or agreements contained in said mortgage, then the bond secured thereby shall bear interest at the rate of 12 per cent. from that date, and that the conveyance shall become absolute, and that the mortgagee shall be entitled to the possession of the mortgaged premises, and to have and receive the rents and profits thereof. It also contains covenants that at the delivery thereof the mortgagors were the lawful owners of the premises, and that they were seised of a good and indefeasible estate of inheritance therein, free and clear of all in

cumbrance, and that they would warrant and defend the same in the quiet and peaceable possession of the mortgagee, his heirs and assigns forever, against the lawful claims of all persons whomsoever. In Killam v. Schoeps, 26 Kan. 310, the supreme court held that an instrument which contained a contract in respect to the title to personal property, and for the possession thereof, was not a negotiable promissory note; and Brewer, J., said in the opinion: "You may not incorporate with such a promise stipulations and agreements as to other matters, and then say that the absolute promise to pay money lifts the contract into the region of negotiable paper. This is the general rule, and, whatever exceptions there may be, this is not one. In 1 Daniel on Negotiable Instruments (paragraph 59), the rule is thus stated: 'In the sixth place, it is essential to the negotiability of the bill or note that it purport to be only for the payment of money. Such, at least, may be stated to be the general rule, for, if any other agreement of a different character be ingrafted upon it, it becomes a special contract, clogged and involved with other matters, and has been deemed to lose thereby its character as a commercial instrument.' * ** We conclude, then, that whenever any stipulation concerning other matters than the payment of money is incorporated in one instrument with a promise to pay money, such double contract will not be adjudged a negotiable paper." In Iron Works v. Paddock, 37 Kan. 510, 15 Pac. 574, it was held "that, where a note contains other provisions than the unconditional payment of money, it is nonnegotiable." We hold that the bond in controversy is a nonnegotiable instrument. It therefore follows that the court did not err in instructing the jury "that the note sued on in this action was a nonnegotiable instrument.".

2. Did the payment to the Western FarmMortgage Trust Company operate to discharge the defendants in error from liability to the plaintiffs in error? The payee, W. J. Neill, at the time of the execution of the mortgage, was a clerk in the office of the Western Farm-Mortgage Company, and afterwards held the same position with the trust company. He had no interest whatever in this bond, or the mortgage given to secure its payment. The Western FarmMortgage Trust Company was organized for the purpose of succeeding to the business of the former company, and each of said companies directed Steiner to make his payment to the Denver company. The trust company, of Denver, regularly sent notices to Steiner of the date when his interest and principal would mature, and requested payment to be made to it. Steiner had no notice that the plaintiff in error owned, or claimed to own, any interest in the note and mortgage, until long after he made the final payment. The assignment of the mortgage

was not recorded, and Steiner had no notice of such assignment. He paid the money to the Farm-Mortgage Trust Company, believing that such company was the owner of the note and mortgage. He had no notice that the bond and mortgage belonged to any one other than the mortgage company. Steiner had made all his interest payments to this company, and in due time thereafter the interest coupons were returned to him marked "Paid" by such company. Ping. Mortg. § 1151, "Assignment of Mortgage and Debt": "The payment of the bond by the mortgagor to the mortgagee without notice of an unrecorded assignment defeats the claim of the assignee, and entitles the mortgagor to its cancellation. * * * The mortgagor may pay or settle with a person having the apparent authority to receive satisfaction of the mortgage, and a payment thus made will prevail against one having a secret, concealed, and reserved interest in the mortgage. After the mortgagor has notice of the assignment, he cannot then deal lawfully with the mortgagee in making payment of the debt." In Lockrow v. Cline, 4 Kan. App. 716, 46 Pac. 720, this court held that a note, the same in form as the one under consideration, was a non-negotiable note, and that payment of the same made to the Western Farm-Mortgage Trust Company by Cline, without notice of the assignment, was an extinguishment of the indebtedness. Section 3, c. 68, Gen. St., being paragraph 3887, Gen. St. 1889, reads: "The recording of the assignment of the mortgage, shall not be deemed of itself, notice to a mortgagor, his heirs or personal representatives so as to invalidate any payment made by them, or either of them to the mortgagee." We think this section has reference to mortgages standing alone, or to a mortgage securing debts and notes of a nonnegotiable character. In Burhans v. Hutcheson, 25 Kan. 625, the supreme court says, with reference to this section of the statute: "A better interpretation, and one clearly more in accord with the law of mortgages of this state, is that such section has reference only to a mortgage standing alone, or one securing debts and notes of a nonnegotiable character. Under this interpretation section 3 of the statute is not nugatory, but has ample room for operation." We think the jury were warranted in finding that Steiner acted in perfect good faith in the payment of this note, and that, in consequence, he was entitled to the verdict, and that the findings and the verdict of the jury were in accordance with the evidence and law.

There was one instruction given by the court in this case, which, if examined alone, would seem to be misleading; but this instruction, when examined in connection with the admissions of the parties at the trial, and in connection with the undisputed evidence in this case, could not prejudice the rights of plaintiff in error. There was no

pretense on the part of the plaintiff below that the defendants in error had notice of the assignment of the note in question to the plaintiff in error, and therefore the instruction could not prejudice the rights of plaintiff in error. As we discover in the record no error prejudicial to the rights of the plaintiff in error, the judgment of the trial court will be affirmed. All the judges concurring

(116 Cal. 553)

HERMAN v. HECHT et al. (S. F. 293.) (Supreme Court of California. April 23, 1897.) CORPORATIONS-STOCKHOLDERS' LIABILITY--PLEAD

ING

VARIANCE-ASSIGNMENTS EVIDENCE.

1. The requirement that an action to enforce the liability of stockholders for the corporation's debt must be on the original debt is substantially complied with by a complaint setting out a note of the corporation, and alleging that on the date of the note the corporation borrowed the amount thereof from the payee "on the terms and conditions, and according to the tenor and effect," of said note, since the inception of the debt and the execution of the note are coincident.

2. A finding that a corporation did not "borrow" a certain sum from a bank on its note, in an action against the stockholders on the note, is not justified where the undisputed evidence is that the note was given to the bank in exchange for a partnership note held by the bank, which the corporation had assumed, since the transaction was, in substance, a loan, and a payment of the partnership note with its proceeds.

3. The variance, if any, between a complaint alleging a loan, and proof of such exchange of notes, is immaterial, under Code Civ. Proc. § 469, providing that no variance is material which has not actually misled a party to his prejudice, where the facts as to the consideration of the note were alleged in the answer.

4. The indorsers of the note of a corporation for $40,000 paid it, and subsequently assigned it. in writing, for an expressed consideration of $5. They testified that they hoped to get something out of the collection of the note from the stockholders, but had no arrangement with the assignee therefor. Held, that the assignee was the "real party in interest," and could sue to enforce the liability of the stockholders.

5. Evidence that plaintiff's assignors were also stockholders of the corporation is immaterial in such an action.

6. The pendency of a suit and attachment proceeding on the note by the assignee against the corporation is no defense to the stockhold

ers.

7. If a defense, it is not available unless pleaded.

Commissioners' decision. Department 2. Appeal from superior court, city and county of San Francisco; William T. Wallace, Judge. Action by Alexander Herman against Abraham E. Hecht and others. Judgment for defendants on facts found by the court. A new trial was denied, and plaintiff appeals. Reversed.

Wm. B. Sharp, for appellant. Wilson & Wilson, for respondents.

HAYNES, C. This action is brought by plaintiff against Abraham E. Hecht and 14 other defendants to recover from them, as stockholders in the Pacific Jute-Manufactur

ing Company, a California corporation, their proportion of a promissory note made by said corporation to the Farmers' & Merchants' Bank of Los Angeles, dated April 20, 1881, for the sum of $40,000, payable 15 days after demand, with interest at a specified rate. Said note was indorsed by William Scholle, J. Brandenstein, and I. Cahn. The defendants' answer, in addition to denials which put in issue the averments of the complaint, alleged, in substance, that in 1879 the said corporation borrowed from said Farmers' & Merchants' Bank of Los Angeles the sum of $40,000, and gave its note for said sum; that upon the maturity of that note a new note was given by said corporation for the same sum; that on or about March 10, 1880, said corporation sold and conveyed all its property and assets to the Oakland Bag Company, a co-partnership composed of William Scholle, Israel Cahn, and Jos. Brandenstein; that said co-partnership assumed all the liabilities of the corporation existing at the date of sale, and shortly thereafter said co-partnership gave its own note to said bank, and took up the note made by the said corporation; that on or about March 25, 1881, said corporation, the Pacific Jute-Manufacturing Company, purchased from said co-partnership all the real and personal property, effects, and assets then owned, used, and employed by them under said co-partnership name, and immediately thereafter said corporation commenced and carried on the business for which it was incorporated; that on April 20, 1881, said corporation executed to said bank the note here in suit, and took up the note made by said co-partnership to said bank; and that said note was so executed and delivered by said corporation in substitution of the said note of equal amount then held by said bank, and without any consideration being then, or at all, paid to said corporation. And as a further defense it was alleged that the plaintiff was not the real party in interest, but that said note sued on by him was at the time of the commencement of the action held and owned by said Brandenstein, Scholle, and Cahn, the said indorsers thereof. The action was tried by the court, and the following findings of fact were made: "(1) The plaintiff, Alexander Herman, is not the real party in interest in this action. (2) The Pacific Jute-Manufacturing Company did not on the 20th day of April, 1881, or at any time, for the uses and purposes of its business, or otherwise, borrow from the Farmers' & Merchants' Bank of the City of Los Angeles the sum of $40,000, or any part thereof, or any sum of money." Upon these findings, judg ment was entered for the defendants. The plaintiff moved for a new trial, and this appeal is from an order denying said motion.

Appellant specifies, in proper and sufficient form, that said findings are not justified by the evidence, and also that the court erred in certain rulings upon the admission of evidence.

The exception to the second finding will be first considered. The complaint set out a copy of a promissory note dated April 20, 1881, made by the Pacific Jute-Manufacturing Company to the Farmers' & Merchants' Bank of Los Angeles, for the sum of $40,000, payable at 15 days after demand, and alleged that said corporation, in its corporate name, and for the uses and purposes of its business, on said date "borrowed the sum of $40,000" from said bank, "upon the terms and conditions, and according to the tenor and effect," of said note. These allegations show that the inception of the debt, obligation, or liability, and the execution of the note, were coincident; and therefore, so far as the question of pleading is concerned, respondents' contention that the action must be upon the "original indebtedness" is without merit. Knowles v. Sandercock, 107 Cal. 629, 40 Pac. 1047. And as to the evidence it was shown that on April 20, 1881, the day upon which the note was executed, the board of directors of said corporation by resolution authorized the president and secretary to borrow money in such sum as might be necessary, not exceeding $500,000, and to execute the note or notes of the corporation therefor, and that the note set out in the complaint was executed in pursuance of said resolution. At the time of the sale by the corporation to the co-partnership,-the name and style of which was the Oakland Bag Manufacturing Company,-said co-partnership assumed all the debts and liabilities of the corporation, and when the co-partnership afterwards sold to the corporation all its property and assets the corporation assumed all the debts and liabilities of the co-partnership. At the time last mentioned the Farmers' & Merchants' Bank held the note of the Oakland Bag Company, indorsed by Brandenstein, Scholle, and Cahn, for $40,000, dated January 31, 1881, at 15 days, and at the time the note of the corporation set out in the complaint was executed the note of the bag company was taken up; or, as claimed by appellant, no money passed from the bank to the corporation, but the note of the corporation, indorsed by Brandenstein, Scholle, and Cahn, was substituted for it. It is not questioned that this transaction was the origin of the liability of the corporation to the bank, which is here in question, nor that the note of the bag company was thereby paid, and the liability of the copartnership extinguished. The former liability of the corporation to the bank which existed at the time of the sale to the Oakland Bag Company was paid by the bag company, whether in money or by its note is immaterial; so that from that time until the transaction of April 20, 1881, the corporation was not indebted to the bank. So far as the actual liability of the corporation and its stockholders to the bank is concerned, it is immaterial whether the bank actually paid to the corporation $40,000, and took its note for that sum, or surrendered the note of the bag company for the same sum; for in either case there

was a valuable consideration for the note. The question, therefore, is whether these facts, about which there is no conflict in the evidence, justify the finding that the corporation did not "borrow" from the bank $40,000, or any sum of money. There is no question that the note was executed by the corporation, nor is it questioned that the bank parted with value to the amount stated in the note. The transaction was, in effect, a loan of that sum to the corporation. If the cashier had counted out the money to the agent of the corporation, and he had taken it to the collection clerk, and there paid the same money and taken up the note of the bag company, there could be no question that it was a "borrowing" by the corporation. The law looks at the substance of the transaction, in determining its character, and does not require the doing of vain things. In Hamilton v. Starkweather, 28 Conn. 138, it was held that money paid to B. at the request of A., and upon A.'s promise to repay it, is money lent to A., and can be recovered under a count in general assumpsit for money lent. The court said: "The plaintiff having paid the money as requested, we think it was, in substance, a loan. And whether it might also have been treated as money paid is of no importance. There is no principle that requires a manual transfer of money into the borrower's hands in order to constitute a loan. The question is not so much what was the form of the transaction, as what was the substance of it. * The transaction has

every characteristic of a loan, except that it was not paid over into defendant's hands. And this, in Wade v. Wilson, 1 East, 195, was held to be unnecessary." But, whether this be so or not, the finding should have been in favor of the plaintiff upon the issue of the defendants' liability for their proportion of the money represented by the note of the corporation; for, if it could not be considered as a loan of money by the bank, the facts show a liability of the corporation for the amount named in the note, and for which a stockholder's liability exists, and in that case it is a mere question of variance between the allegation of the complaint and the proof, and "no variance between the allegation in a pleading and the proof is to be deemed material, unless it has actually misled the adverse party to his prejudice in maintaining his action or defense upon the merits. Wherever it appears that a party has been so misled the court may order the pleading to be amended upon such terms as may be just." Code Civ. Proc. § 469.

It cannot be said that the defendants were misled to their prejudice, since the fact that the money was not actually paid into the hands of the corporation, but was applied to the satisfaction of the bag company's note, or was given in lieu of it or in substitution for it, was distinctly alleged in the answer; and if no other issue had been raised, or defense pleaded by the defendants, the plaintiff would have been entitled to judgment