Supreme Court of Canada
Allen v. Hay, 64 S.C.R. 76
Date: 1922-05-31
N. Allen (Defendant) Appellant;
and
C. P. Hay (Plaintiff) Respondent.
1922: May 8, 9; 1922: May 31.
Present: Idington, Duff, Anglin, Brodeur and Mignault JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR BRITISH COLUMBIA.
Bills and notes—Bank and Banking—Estoppel—Note given to bank without consideration—Intention to deceive bank examiner—Liability of maker—Foreign law—Evidence by experts.
The appellant gave his promissory note, in renewal of a previous note given without consideration, to a bank in the state of Washington so as to create a false appearance of assets and deceive the bank examiner, the appellant receiving contemporaneously from the bank a written acknowledgment that there would be no liability. Upon the insolvency of the bank the respondent, the Bank Commissioners of the State, sued the appellant upon the renewal note for the benefit of the bank's creditors.
Held, Idington J. dissenting, that under the law in force in the State of Washington, as proved by experts who referred to American statutes and precedents in support of their evidence, the appellant was estopped from raising a plea of want of consideration.
Per Duff J.—If such evidence is conflicting or obscure the court may examine and construe for itself the passages cited by the experts.
Judgment of the Court of Appeal ([1922] 1 W.W.R. 646) affirmed, Idington J. dissenting.
APPEAL from the judgment of the Court of Appeal for British Columbia, affirming the judgment of Macdonald J. at the trial, and maintaining the respondent's action on a promissory note.
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The material facts of the case and the questions in issue are fully stated in the above head—note and in the judgments now reported.
Craig K.C. for the appellant.—The appellant is not estopped from alleging want of consideration.
The fact that the appellant did not pay the note sued on is not a sufficient prejudice to create an estoppel.
The question of estoppel is to be decided by the law of British Columbia and not by the law of the State of Washington.
The trial judge did not accept the evidence of experts as it was, but made his own investigation of the American authorities and misconstrued the effect of some of them.
D. L. McCarthy K.C.—The appellant is estopped from denying liability according to the law of the State of Washington, as put in evidence by the experts.
IDINGTON J. (dissenting).—Respondent sued in his capacity of Bank Commissioner of the State of Washington upon a promissory note for $10,521.00 given by the appellant to the Northern Bank & Trust Company of which and by virtue of statutory enactments of said state the said respondent has become by reason of its insolvency the administrator and as such entitled, instead of said bank, to sue upon said promissory note.
There never was any consideration for said promissory note. It therefore never was a valid security. This is established by the evidence of appellant and a memorandum of agreement given by the president of the bank cotemporaneously with the giving of the said note.
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It is sought, and so far successfully, before the learned trial judge and in the Court of Appeal, to overcome that difficulty be virtue of the law, it is said, estopping the appellant from setting up any such defence under the circumstances in question which are alleged to have constituted fraud on the part of the appellant.
To render such an estoppel in pais an effective answer to the defence of no valuable consideration, there must be shown on the part of the party setting up such an estoppel, not only the existence of actual misrepresentation or fraud, but also that the party contracted with was ignorant thereof and was thereby induced to change his position on the faith of it.
Such, as I understand the evidence of the expert giving the law of the State of Washington, is the law of that state on the issue thus raised herein, as it is our law on the subject.
The only doubt created as to such statement of the law was the hesitation of the witness as to the effect of the decision by the Supreme Court of that state in the case of Moore v. Kildall, to which he referred the learned trial judge for his consideration.
I find, on reading it for myself therefore, that the court found and, as I agree, correctly so, if I may be permitted to say so, that there was in fact valuable consideration for the note in question therein.
I am unable, therefore, to attach much importance to that case for what we are concerned with herein.
The estoppel, as pleaded in some of the pleas, sets up the misleading of the state examiner as something the respondent can rely upon.
There seem to be several answers thereto.
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It is the claim of the bank that is here in question. And there is no evidence that the bank was either misled or that it was induced in any way to change its position by reason of the alleged fraud.
The evidence in support of the claim of the respondent so far as the evidence before us goes, proves that he, by virtue of his taking over the administration of the assets, stands on no higher ground than that of the bank itself.
And if the evidence of such officers as had the duty at various times of examining the bank's assets is to be considered at all, it falls very far short of maintaining any such pretension as set up. Indeed on the contrary, it shews for the most part that the result would have been the same.
And if the suggestion in respondent's factum that Moore was only the examiner and not the commissioner is worth considering, we have no evidence of that officer who was then the superior of Moore.
In short, despite what counsel sets up that the burden of proof is on the appellant, I submit it clearly is upon him pleading any defence to prove it, and this has not been done, or pretended to have been done, by anything presented in this case.
To render the contention, if possible, more absurd this note was given before the statute law was changed, as it was in 1917, to render it more drastic, and there is no pretence that it was retroactive so far as the evidence goes. The references in same and in respondent's factum to Remington's Code are not very helpful as these books are not available.
Indeed we have cases cited to us from American authorities, in other jurisdiction than Washington State, which are of no more binding force on the Washington courts than they would be on us.
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We are asked to extend the law of estoppel in pais beyond anything sworn to be the law of Washington, and far beyond anything in our own law, in a way that we should not for a moment countenance.
The conduct of the appellant may have been the result of crass stupidity, or of deliberate fraud, but that is, I most respectfully submit, no reason for our departing from the principle of the law, which is to take the law of a foreign state from the sworn evidence of expert witnesses testifying thereto, and so far as that is not established thereby relying upon our own law.
To confuse the duty towards the party to the contract with that due to someone else is as yet no part of our law and is not proven to be the law of Washington.
The case cited by counsel for respondent of Smith v. Kay, is in no way applicable to what is in question herein. That was indeed the converse of this case. Indeed it suggests rather the thought that the fraud in question herein was one joined in by the bank, if not wholly the product of the bank, and hence suggests another remedy for the kind of fraud involved herein than can be afforded in such cases as this.
The joint effort of the bank and the appellant to deceive may have laid a foundation for an action of deceit, but that would not help here where only the neat question of the proper application of the doctrine of estoppel in pais is all that should concern us.
The appeal should be allowed with costs throughout.
DUFF J.—It is not disputed that the plaintiff must fail if the right of recovery depends upon the rules of the law of British Columbia. It is therefore incumbent upon him to prove the law of the State of Washington. This he must prove as matter of fact by the evidence
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of persons who are experts in that law. These experts may, however, refer to codes and precedents in support of their evidence and the passages and references cited by them will be treated as part of their testimony; and it is settled law that if the evidence of such witnesses is conflicting or obscure the Court may go a step further and examine and construe the passages cited for itself in order to arrive at a satisfactory conclusion. Nelson v. Bridporl; Bremer v. Freeman; Di Sora v. Phillipps; Concha v. Murietta; Rice v. Gunn.
In Bremner v. Freeman, Lord Wensleydale's judgment delivered on behalf of the Privy Council included a most searching examination of the French authorities bearing upon the point of French law in dispute.
I think, applying these principles, the learned trial judge, Mr. Justice Macdonald, was entitled to examine the authorities upon.which he relied. The decision in Moore v. Kildall was based upon more than one ground; but the substantive ground upon which the court proceeded in pronouncing the judgment was that the note sued upon, having been given for the express purpose of enabling the officials of the bank to present a false appearance of assets, the plaintiff was, representing as he did the interests of the creditors, entitled to insist as against the defendant that the instrument sued upon was an enforceable obligation. The court cited with approval and relied on a passage quoted from a decision of the Supreme Court of Illinois in the case of Golden v. Cervenka. That passage in full is in the following words:—
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Where notes or other securities have been executed to a bank for the purpose of making an appearance of assets, so as to deceive the examiner and enable the bank to continue business, although the circumstances may have been such that the bank itself could not have collected the securities, it has been held that the receiver, representing the creditors, could maintain the action and the makers were estopped upon the insolvency of the bank, to allege want of consideration. Hurd v. Kelly; Best v. Thiel; Sickles v. Herold; State Bank of Pillsburg v. Kirk; Peoples' Bank v. Stroud; Dominion Trust Co. v. Ridall; Lyons v. Benney. In one such case (Lyons v. Benney, supra) the defence was set up by an affidavit which the court held insufficient, saying:"—
"The substance of this affidavit of defence is that the appellant made and delivered his note to the bank in furtherance of a scheme to deceive the bank examiner, under a promise made to him by the bank that he would not be held liable upon the obligation. He agreed that it should appear as one of the assets of the institution for the purpose of deceiving those whose duty it was to examine them, and he now sets up the defense that, as it was to serve no other purpose, it is to be regarded as a worthless piece of paper under this agreement with the bank * * * . So this appellant was a party to a scheme of the officers of the bank to enable them to make a deceptive and fraudulent showing of assets, and as the fraud was perpetrated upon the creditors now represented by the bank's receiver, he can maintain an action on the note for their benefit * * * . Neither the law nor good conscience can sanction the contention of the defendant that he ought to be permitted to take advantage of the fraudulent agreement between him and the bank to which its creditors were not parties and for whom the receiver sues."
One of the decisions mentioned in this passage, Lyons v. Benney a decision of the Supreme Court of Pennsylvania is referred to by the learned trial judge; and the court in that case cited and relied upon the following passage from the judgment of Ross J. delivered in Pauly v. O'Brien, in the Circuit Court of California. In his judgment Ross J. says at pp. 461-2:—
If, however, this was not really the case, but that, in truth, the transaction was a mere trick to make it appear to the government and to the creditors and stockholders of the bank that it had a valuable note when in fact it did not have one, the result must be the same, for, when parties employ legal instruments of an obligatory character for fraudulent and deceitful purposes, it is sound reason, as well as pure justice, to leave him bound who has bound himself. It will never do for the courts to hold that the officers of a bank, by the connivance of a third party, can give to it the semblance of solidity and security, and when its insolvency is disclosed, that the third party can escape the consequences of his fraudulent act. Undoubtedly, the transaction in question originated with the officers of the bank, but to it the defendant became a willing party. It would require more credulity than I possess to believe that the defendant, when his brother, who was the book-keeper of the bank, came to him with the proposition of its vicepresident, in its every suggestion and essence deceptive and fraudulent, did not know its true character and purpose. So far as appears, Naylor was a total stranger to him. Why should he execute his note to take up the note of Naylor? What moved him to do it, except to enable the officers of the bank to supplant the overdue note of Naylor with a live note, which he now insists was without consideration and purely voluntary, but which enabled the bank officers to make a deceptive and therefore fraudulent, showing of assets? Obviously nothing. There will be judgment for the plaintiff for the amount due upon the note sued upon, according to its terms, with costs.
The law as laid down in this passage cited from the judgment of Ross J. delivered in 1895 and in that cited from the judgment of Dunn J. speaking on behalf of the Supreme Court of Illinois, in 1917, appears from the evidence given in this case to be the law of the State of Washington.
Mr. Craig in a very able argument contended that the oral witnesses who spoke as to the law of the State of Washington deposed in effect that the liability of the defendant, if it existed at all, arose from the application of the general principle of estoppel in pais, being conditioned consequently by the existence of the constituents of estoppel including a change of position on part of the party relying upon the estoppel brought about in consequence of the conduct
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of the other party. I think if Mr. Craig's minor premise is sound, namely, that the rule invoked by the plaintiff does rest upon a strict application of the doctrine of estoppel as recognized in the law of the State of Washington as well as in English law his conclusions necessarily follow. But in truth this premise is much more than doubtful; the cause of action and the only cause of action vested in the plaintiff is the bank's cause of action; to that he succeeds by force of the statute and if the principles of the common law were to be applied it is quite plain that nothing done by the defendant with the concurrence of the bank could, consistently with such principles, preclude the defendant from resisting the bank's claim.
The rule expounded in the authorities already referred to is a rule resting on broader and deeper principles. The statutory custodian of the property of the insolvent corporation while he succeeds to the assets of the corporation does so primarily in the interest of the creditors and (although in the first instance his right to the assets is not the right of the creditors but the right of the corporation in liquidation), the legal relations of the corporation undergo some alteration by reason of the change of status involved in its statutory dissolution and the rule above mentioned has been established as a rule of policy, a rule required in such circumstances by justice and convenience. A person who has participated in an attempt on the part of officials of the corporation to present a false appearance of prosperity and for that purpose has been content to represent himself as a debtor of the company is not permitted to deny the existence in law of this liability; but this rule is a substantive rule of law, it is not a
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mere rule of evidence. It is analogous to the rule by which a person improperly placed on the list of shareholders of a joint stock company and entitled therefore to have his name removed must act promptly. If he fail to act promptly he will be denied relief and in winding up proceedings will be compelled to pay for the shares, because it is conclusively presumed against him that the presence of his name has added to the credit of the company.
The appeal should be dismissed with costs.
ANGLIN J.—If the plaintiff, in order to succeed, were obliged to establish the facts necessary to make a case of estoppel against the defendant, including proof of prejudice ascribable to the defendant's conduct, I should be of the opinion that such a case was not made out. But the evidence in the record establishes to my satisfaction that it is a rule of substantive law in the State of Washington that
one giving a note as "live paper" to make an appearance of assets so as to deceive the bank examiner is estopped, on the insolvency of the bank, to allege want of consideration.
Moore v. Kildall; Barto v. Nix; Skagit State Bank v. Moody. That is undoubtedly what the defendant did in the present case.
Other cases cited at bar and in the judgments delivered in the Court of Appeal indicate that a similar rule obtains in other American jurisdictions. Lyons v. Benney (Penn.),; Pauly v. O'Brien (Cal.); Golden v. Cervenka (III.).
The judgment holding the defendant liable was in my opinion right and should be upheld.
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BRODEUR J.—The action is on a promissory note, and is instituted by the Bank Commissioner of the State of Washington. In 1914, the defendant Allen, who was then living in the United States, gave an accommodation note to The Northern Bank & Trust Company for the purpose of making an appearance of assets so as to deceive the Bank examiner. The Northern Bank & Trust Company, in spite of these misrepresentations as to its assets, had, a few years later, to be put in the hands of the Bank Commissioner of the State who, according to the laws of the State of Washington, proceeded to the liquidation of the affairs of the bank. He found among the assets Allen's promissory note; and as Mr. Allen is now living in British Columbia he is sued before the courts of this province by the bank examiner for the payment of this note.
His defence is that there was a total failure of consideration.
This case has to be decided by the laws of the State of Washington where the note was signed and the liability was incurred.
There is no doubt that no consideration was given. But it is contended by the Bank Commissioner Hay that, according to the laws of the State of Washington a note given in similar circumstances can be sued upon by the official liquidator of the bank.
This note was evidently given for a fraudulent purpose viz., for the purpose of showing in the bank returns assets which did not in reality exist, and also for the purpose of inducing the public to deposit their moneys in the bank. Very severe laws have been passed in that state in order to put an end to such
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fraudulent transactions; and the jurisprudence is to the effect that the Bank Commissioner could sue on these notes though they were originally given without consideration.
In a case of Golden v. Cervenka, the Supreme Court of Illinois, where similar legislation exists, decided that
where notes or other securities have been executed to a bank for the purpose of making an appearance of assets, so as to deceive the Examiner and enable the bank to continue business although the circumstances may have been that the bank could not have collected the securities, it has been held that the receiver representing the creditors could maintain the action and the makers were estopped upon the insolvency of the bank to allege want of consideration.
In two cases of Lyons v. Benny, and Pauly v. O'Brien, the principle of law which was enunciated is that the giving of such notes is a fraud upon the creditors of the bank.
A decision of the Appellate Division of the Supreme Court of Washington rendered in 1920 is to the same effect. It was held in the case of Moore v. Kildall, that "one giving a note as live paper" to make an appearance of assets so as to deceive the bank examiners is estopped on the insolvency of the bank from alleging want of consideration.
It is contended by the defendant that the prejudice which is essential to constitute in a case of estoppel has not been proven in this case.
We have in this case facts which are absolutely similar to those that were in issue in Moore v. Kildall(4) and there is no doubt, according to my opinion, that if Allen was still living in the State of Washington and had been sued there he would have been condemned to pay the note. We have then here to apply the same principles of law and to render the same
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decision as should have been rendered there, and even if our general notions as to the application of the rule of estoppel are violated in some respects we have to disregard these notions and apply the law as it is enunciated in the Washington decisions.
I consider that the appellant has been legally condemned to pay his note and that his appeal should be dismissed with costs.
MIGNAULT J.—There is no difficulty here as to the facts. The defendant appellant, without consideration, signed at the request of one Phillips, then President of the Northern Bank and Trust Company of Seattle, State of Washington, a note for $10,000.00 in favour of the said bank, and a year later, at the request of one Collier, who had replaced Phillips as president of the bank, he signed a renewal note for a like amount, receiving from Phillips and subsequently from Collier a written acknowledgement that there was to be no liability under the note and its renewal. This note was given to the bank to create a false appearance of assets and so deceive the State bank examiner and prevent the closing up of the bank.
The law to be applied is that of the State of Washington, proved by expert witnesses. The respondent, the Bank Commissioner of that State, is entitled to sue on this note. He represents the bank and its creditors. The vital question is whether in a suit by the Bank Commissioner, acting on behalf of the creditors of the insolvent bank as well as of the bank itself, the appellant is estopped from setting up the collateral agreement with the bank that he should not be liable on this note?
I think, according to the evidence made of the law of estoppel in force in the State of Washington, and under the decisions cited by the learned trial judge,
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who was referred to them by the expert witness called by the appellant for a statement of the law governing estoppel in the State of Washington, that the appellant is estopped from raising the defence of non-liability or want of consideration against the respondent.
My only doubt, at the hearing, was whether prejudice to the creditors, necessary for estoppel, had been shewn. But I think on consideration that prejudice must be assumed, for to allow an insolvent bank to continue in business by a show of fictitious assets is certainly prejudicial to all who deal with the bank and acquire rights against it. It may well be that had the appellant not given his note, the bank might have been allowed by the bank examiner to remain open for a further period, but that is merely a surmise, and too much reliance must not be placed on the statement of Moore, one of the bank examiners, that he thinks he would not have done more than he did had the appellant's note not been exhibited to him. But the intention, to which the appellant weakly allowed himself to become a party, was unquestionably to deceive the State bank examiner, and under these circumstances the decisions which, in the State of Washington, are accepted as the law and which apply to such a case the doctrine of estoppel, are consonant with the true principles of justice and fair dealing, and I think they fully support the judgment appealed from.
The appeal should be dismissed with costs.
Appeal dismissed with costs.
Solicitors for the appellant: Craig & Parkes.
Solicitors for the respondent: Tiffin & Alexander.
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