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Bank of America, National Trust and Sav. Ass'n v. Barnett

Supreme Court of Arizona

January 13, 1960

Edna B. BARNETT; Glenn Draper et ux.; L. B. Hunter et ux.; Manuel L. Marinez, et ux.; John A. Taylor et ux.; Young Davis et ux.; Fred Hill et ux.; Joe G. Larra et ux.; Benny Mendoza et ux.; Clayton I. Roberts et ux.; Carlos De LaOssa et ux.; Thomas Hopkins et ux.; LeRoy Hunter et ux.; Jesus M. Pesquiera et ux.; Joe M. Pineda et ux.; Robert O. Robles et ux., Appellees.

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[87 Ariz. 98] Hirsch & Van Slyke, and S. Rita Goldstein, Tucson, for appellant.

Perry A. Devere, Fickett & Dunipace, Toby La Vetter, Lee H. Brown, and McKay & McKay, Tucson, for appellees.


This is a consolidated appeal by the Bank of America, National Trust and Savings Association (hereinafter called 'the Bank') from judgments dismissing its several actions

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to recover on sixteen negotiable promissory notes executed by the individual appellees. Each of the appellees, and his spouse, executed a separate note and all of them maintain the same position on this appeal. The Superior Court of Pima County, after a consolidated trial before the court without a jury, held that the Bank was not a holder in due course of any of the notes which it accepted after it had learned that the consideration for the notes had failed, and held, further, that as the Bank acquired the notes through endorsement by a foreign corporation which had not qualified to do business in Arizona, the notes were void and recovery could not be had thereon.

The notes in issue were made by the several appellees between January 1952 and January 1953, and payable to the order of Colonial Construction Company (hereinafter called 'Colonial'), in consideration of certain construction work to be performed by Colonial. Each of the notes was thereupon endorsed without recourse by Colonial to the order of United Credits Corporation (hereinafter called 'United'), a California corporation not qualified to do business in Arizona. Within a few days thereafter, United endorsed each note in blank and delivered it to the Bank in California.

[87 Ariz. 99] There is no question but that the Bank is entitled to judgment on the notes as holder thereof in due course unless it had notice of any infirmities in the notes, within the meaning of A.C.A.1939, §§ 52-139, 52-142 (now A.R.S. §§ 44-452, 44-456), or unless the notes were void in accordance with A.C.A.1939, § 53-802 (now A.R.S. § 10-482).

On the first point the trial court found that the construction work performed by Colonial 'was unsatisfactory and practically worthless; that therefore, there was a total failure of consideration for the notes,' and that as the Bank had knowledge of these facts on July 1, 1952, it was not a holder in due course as to any notes negotiated in its favor after that date. We have reviewed the record in this case with great care and can find no evidence to support the conclusion that the Bank, at any time prior to its acceptance of the last note in issue, had such actual or constructive notice of the asserted failure of consideration so as to deprive the Bank of the status of holder in due course (see A.C.A.1939, §§ 52-139, 52-142; now A.R.S. §§ 44-452, 44-456).

There is no evidence that the transactions were not bona fide on the part of the Bank, and the fact that the Bank retained United as its collection agent in Arizona, does not, per se, bind the Bank with any conduct or knowledge on the part of United respecting the original consideration for the notes. Appellees contend that because United and Colonial at one time had adjoining offices and were 'close,' United is presumed to have known that the construction work was worthless, and that the Bank is presumed to have the knowledge attributed to United, as its collection agent. Even assuming that United and Colonial, as claimed, were merely two aspects of the same operation in Arizona, it does not follow in the circumstances of this case that such knowledge may thus be imputed, in two stages, to the Bank. First, there is no evidence that the Bank knew or should have known that United was an 'alter ego' of Colonial. Second, United acted only as the Bank's collection agent, and--because United was a prior holder of the notes and liable thereon in case of default and had, in fact, made warranties to the Bank at the time it endorsed the notes in blank, which warranties are in conflict with the knowledge which it is presumed to have had (see A.C.A.1939, § 52-148; now A.R.S. § 44-446)--the position of United was, in all other respects, adverse to that of the Bank. See Hays v. Bank of America, 57 Ariz. 8, 110 P.2d 235; Restatement, Agency § 279.

Nor does a complaint about the work performed by Colonial, made over the telephone to an official of Colonial who was then at the Bank or to an unidentified person who answered a call directed to the [87 Ariz. 100]

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Bank, constitute sufficient evidence of knowledge on the part of the Bank of an infirmity in the notes (see Lois Grunow Memorial Clinic v. Davis, 49 Ariz. 277, 66 P.2d 238).

Appellees rely, in the main, on testimony to the effect that in July 1952 three men, holding themselves out as representatives of Colonial, United and the Bank, respectively, were told by some of the appellees and others that the construction work, which was the consideration for the notes, was being performed improperly and inadequately. Whether or not such information, if given to the Bank, would constitute notice of an infirmity in the notes (A.C.A.1939, § 52-142; now A.R.S. § 44-456), there was no competent evidence to prove that the self-styled Bank representative was in fact an agent of the Bank. Testimony by third parties of statements of a purported agent constitutes hearsay and is, without more, insufficient to prove the alleged agency in issue.

In the early case of Brutinel v. Nygren, 17 Ariz. 491, 154 P. 1042, L.R.A.1918F, 713, this Court recognized the rule, applicable herein,

"* * * that an agent cannot create in himself an authority to do a particular act by its performance; and that the authority of an agent cannot be proved by ...

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