
    COMMERCIAL STATE BANK OF SAN AUGUSTINE v. ELLINGTON.
    (No. 1328—5436.)
    Commission of Appeals of Texas, Section A.
    Feb. 12, 1930.
    
      W. T. Davis, of San Augustine, and A. D. Dipscomb, of Beaumont, for plaintiff in error.
    J. R. Bogard, of San Augustine, and Davis & Davis, of Center, for defendant in error.
   HARVEY, P. J.

Tbis suit was brought by tbe plaintiff in error, tbe Commercial State Bank of San Augustine, against tbe defendant in error, J. H. Ellington, on a promissory note executed by Ellington, as maker, and payable to tbe order of tbe Commercial State Guaranty Bank of San Augustine. Tbe note bears date March 10, 1925, is for tbe principal sum of $1,800; and, according to its terms, became payable September 1, 1025. No indorsement appears on the note. Tbe note recites that it “is secured by a pledge of securities mentioned on tbe reverse hereof.” No securities are noted on tbe back of tbe note. Tbe plaintiff in error acquired tbe note in tbe manner and under tbe circumstances hereinafter shown, and claims to be bolder thereof in due course.

For some years prior to June 25, 1925, tbe Commercial Guaranty State Bank, wbicb we shall designate as tbe old bank, was operating as a state bank in San Augustine. On the date mentioned, said bank was duly declared insolvent by tbe state banking commissioner, who took charge of its assets for tbe. purpose of liquidation. Subsequently, on tbe same day, the banking commissioner, under proper court orders authorizing such sale, sold and delivered to the plaintiff in error (a newly organized state bank) all tbe assets of tbe old bank, except the stockholders’ statutory liability. Tbis sale was duly confirmed by the court. In tbe sale, as part of the consideration therefor, tbe plaintiff in error expressly assumed, all liability to tbe creditors of tbe old bank, and expressly agreed to carry out all contracts of tbe old bank.

In tbis suit on tbe note, substantially tbe following facts were specially pleaded in defense by Ellington:

In February, 1923, and for some time prior thereto, one R. N. Stripling was indebted to tbe old bank, wbicb indebtedness exceeded tbe limits prescribed by law. Tbe bank held various notes and other securities, of tbe face value of $30,000, wbicb Stripling bad pledged to tbe bank as collateral security for tbis indebtedness. Stripling was unable to reduce tbe indebtedness to legal limits by payment. At tbe instance of Stripling, and tbe active vice president of tbe bank, tbe latter being in charge of tbe bank’s affairs, Ellington executed bis note to tbe bank for tbe sum of $3,000 for tbe purpose of covering up and concealing from tbe state banking examiner the portion of tbe Stripling indebtedness wbicb exceeded tbe prescribed limit. There was no consideration for tbis note, and same was executed by Ellington, for the purpose stated, as an accommodation to tbe bank and Stripling. It was agreed by all parties to tbe transaction that tbe note was not to have effect to create any liability on tbe part of Ellington. At the time this note was executed by Ellington, various notes and other securities held by Stripling, of tbe face value of $9,000, were pledged to tbe bank as additional security for tbe Stripling indebtedness to tbe bank. Tbe vice president and Stripling made tbe further agreement with Ellington to the effect that said Ellington note would constitute a first lien on all tbe Stripling collateral which tbe bank held; and, further, that all collections on said collateral, to tbe extent required to satisfy said note, would be applied as credits on the note. Prior to March 10, 1925, tbe bank bad collected on said collateral more than tbe amount called for by tbe Ellington note, but bad failed to apply all said collections as credits on said note. Tbe vice president of tbe bank, on or about the last-named date, represented to Ellington that all collections made on said collater- ' al prior to that date bad been applied as credits on said $3,000 note, leaving a balance due of $1,800. For tbis balance due, Ellington, at the instance of tbe vice president of tbe bank, executed the note here sued on. At the time tbis latter note was executed, Stripling still was indebted to the bank in excess of tbe prescribed limit, to tbe extent represented by the balance due on tbis note. And tbis note was executed by Ellington, for tbe same purpose and under similar agreement with Stripling and tbe vice president of the bank as in the first instance. Tbe bank, prior to its closing, and its successor, tbe plaintiff in error, have collected on tbe said Stripling collateral more than a sufficient sum to satisfy and pay off tbe note sued on.

At tbe trial of the case in tbe court below, Ellington offered testimony to prove the foregoing facts pleaded by him, but, on objection from the plaintiff in error, all said testimony was excluded from evidence. Tbe trial court rendered judgment in favor of tbe plaintiff in error for the amount of tbe note. On appeal, tbe Court of Civil Appeals reversed tbe •judgment of the trial court, on account of error in excluding the above testimony, and remanded tbe cause. 15 S.’W.(2d) 59.

By the testimony wbicb was excluded, Ellington would have shown a valid defense against tbe note. According to such testimony, tbe note was executed in furtherance of a fraudulent scheme to conceal tbe excessiveness of tbe Stripling indebtedness. Tbe old bank, through its agent, was a participant in tbe fraud. For tbis reason, neither tbe old bank nor its stockholders were entitled to enforce payment of tlie note. The plaintiff in error claims to have acquired the note in due course, and insists that, because of this, the plaintiff in error took same freed of vice. The contention is overruled. The sale, under which the plaintiff in error acquired«the note, was a judicial sale. For this reason, thei plaintiff in error did not acquire the note in due course, as contemplated by the Negotiable Instruments Act (Rev. St. 1925, arts. 5934, 5935).

It is further contended that, because the plaintiff in error acquired the note for value and without notice of the fraudulent conspiracy out of which the note arose, the note is enforceable in its hands. This contention also is ill-founded. The stockholders in the old bank were chargeable with the effects of the fraudulent conspiracy, and were not entitled to claim an estoppel against Ellington. Under a valid contract with the banking commissioner, who in part represented the stockholders in the old bank, the plaintiff in error acquired all the assets of the bank, except the stockholders’ liability, and assumed all the liabilities. In this transaction, the plaintiff in error virtually relieved the old bank’s stockholders of their individual liability to creditors of the bank, and stepped into their shoes. In respect to the assets of the bank which were taken over, the position of the plaintiff in error is essentially the same as that previously occupied by said stockholders. The plaintiff in error took the note subject to all defenses which could have been urged against them.

The rejected evidence presented still another self-sufficient defense against recovery on the note: that of payment. By this evidence, Ellington proposed to prove a valid agreement, under which all the Stripling collateral should stand pledged to secure this note; and that all collections on said collateral, to the extent necessary to satisfy this note, should be applied as credits on the note. The recitals of the note were such as to put a reasonably prudent pei'son on inquiry as to the “securities” pledged to secure payment of the note. This inquiry, if followed up, would have led to full knowledge of this agreement. The plaintiff in error was affected with notice of the agreement when it acquired the note. W-e know of no rule of law or of public policy which, would render such an agreement invalid. Goldstein v. Bank, 109 Tex. 555, 213 S. W. 584.

We recommend that the judgment of the Court of Civil Appeals, reversing the judgment of the trial court and remanding the cause, be affirmed.

OURETON, C. J. The judgment of the Court of Civil Appeals is affirmed, as recommended by the Commission of Appeals.  