8/4/2019 OneNote

6 PUGET SOUND STATE BANK v WASHINGTON PAVNG CO.

(1917)
Tuesday, 30 July 2019 4:34 PM

DOCTRINE: It is essential to a PN that it be payable at a time that must certainly arrive in the future, upon the
happening of some event , or the completion of some period, not depending upon the volition of any one
FACTS:
• Washington Paving Co. (WP) had a contract for the paving of certain streets in the city of Olympia
• George Milton Savage was its president and amanager
• W.D. Hayes, the cashier and manager of Olympia Bank (OB) solicited Savage to open an account and do its banking
business with the OB
• It was agreed between OB and WP that:
• The PNs should be held by OB and not sold, hypothecated, or otherwise disposed of without first
notifying WP
• WP should be given the opportunity to pay said notes, the one proposed to be sold, disposed,
hypothecated
• Sept. 5, 1914: Pursuant to the above agreement, WP executed four PNs for $5K each, made payable to its own
order
• Transferred the PNs to the OB by indorsement, making them payable to the order of OB
• WP was given credit as a general depositor of the OB for the sum of $20K
• Each note contains the ff provision: The note shall become due and payable on demand at the option of the
payee, when it deems itself insecure
• Sept. 19, 1914: OB became indebted by overdraft to Puget Sound State Bank (PSB) in the sum of $3600
• It was agreed that the PSB would purchase one of WP's notes from OB
• OB sent by mail not only the note that the PSB purchased, but also the 3 other notes
• None of these notes were indorsed by OB, so they were acquired by PSB by delivery only
• Sept. 22, 1914: WP had drawn checks upon its deposit credit in the OB, reducing its credit with the bank to $9650
• One of these checks (almost the whole reduction from the deposit credit; $10,350) was given to the OB for
the surrender of two of the PNs (@$5K each; $10,000)
• Mr. Tinker of PSB called Mr. Savage of WP and asked if WP had executed notes and deposited them with OB
• Mr. Savage replied that WP had executed four $5000 notes, and that it had checked out less than $200 of
the $20K credit it received in the bank
• SC: Mr. Savage did not make any statement that would lead Mr. Tinker to believe that WP had no
defense or set off against the notes as against OB, nor any statement of consent of the WP that PSB
might acquire the notes
• 2 of the 4 PNs were sent back to OB by PSB
• One being retained as purchased by PSB, and the other retained by PSB to secure the overdraft, which
would be caused by sending the $2000
• Mr. Savage went to PSB and protested to Mr. Tinker against the PSB thus acquiring the notes
• Informed him that payment would be resisted as if they were held by OB (implying that PSB subrogated into
the rights of OB; subject to the defenses it could interpose against OB)
• Took up the 2 notes that had been returned to OB, by giving WP's check against its deposit in OB ($10,350),
which resulted in the reduction of its deposit credit to $9650
• Sept. 2, 1914: The OB was insolvent upon the closing of business and went into the hands of the state bank
examiner
• Dec. 5, 1914: The 2PNs in the hands of PSB matured, and PSB instituted the current suit, seeking recovery upon 2
PNs executed by WP
• Claimed that WP owes PSB $5700
• The whole of 1 PN @ $5000, and
• Overdraft secured by the other PN @ $700
• Trial in the superior court resulted in judgement in favor of WP
• PSB appealed to the SC
ISSUES/HELD/RATIO:
1. W/N the notes are negotiable in the sense that their transfer to the PSB destroyed the defense of set-off invoked
by the company - NO, the right of the payee to declare the note due before maturity upon deeming himself
insecure renders the notes nonnegotiable

https://onedrive.live.com/redir?resid=7054F842543FE949%21204&page=View&wd=target%28Nego.one%7C5371c2e5-1793-b140-86d1-f9d027545833%2F6 PUG… 1/2

8/4/2019 OneNote
• An instrument to be negotiable must conform to the ff requirements: (3) Must be payable on demand, or at a fixed
or determinable future time
• An instrument is payable at a determinable future time when it is expressed to be payable on or at a fixed
period after the occurrence of a specified event, which is certain to happen, though the time of happening
be uncertain
• An instrument payable upon a contingency is NOT negotiable
• Contingency as to time
• The provision that "The note shall become due and payable on demand at the option of the payee, when it deems
itself insecure" gives OB, the payee, the unrestricted power to declare the notes due at any time before maturity
i. This right to exercise such power to declare the notes due, which is possessed by the payee, is NOT
dependent upon any act, promise or agreement of WP, the maker
• Thus, the exercise of such power to declare the notes due is a contingency over which the maker has
no control
• It is divested of the quality of certainty in the time of payment, which is one of the essential elements
of negotiability
• It is essential to a PN that it be payable at a time that must certainly arrive in the future, upon the
happening of some event , or the completion of some period, not depending upon the volition of any
one (Brooks v Hargreaves)
ii. The other stipulation, whereby the payee is invested with such authority to declare the PN due when it is
deemed insecure is sufficient to deprive the paper of its negotiability, as well as of its character as a note
• Renders the time of payment altogether uncertain, dependent upon the option of the payee
iii. This provision is DIFFERENT from the provision that default in the payment of any installment shall
accelerate the maturity of the note
• The negotiable instruments law itself expressly declares that a negotiable instrument may contain
provisions of this kind
• In the installments case, the maturity is accelerated by the failure of the maker to pay the installment
alone --> default consists of his failure to pay money
• In this case, the maturity of the note is to be accelerated by the failure to the make to do something
IN ADDITION to the payment of money --> made to depend upon something over which the maker
has no control (e.g. W/N holder is satisfied with additional security)
• In effect = leaves the time when payable uncertain and indefinite and dependent upon the will
and election of the payee of the note (on the volition of one other than the maker)
• DOES NOT MAKE THEM DEMAND NOTES because it made the PNs payable when payee deems
himself insecure
• CONCLUSION: Since the notes are non negotiable, PSB is subject to any defense the paving company may have
against them, which existed at the time of their transfer to PSB
2. W/N the PSB is wholly in the shoes of the OB such that can off set its debt to PSB from the 2 PNs with the debt of
the OB to WP from the deposit credit - YES
• The notes' transfer to PSB thru delivery by OB without indorsement rendered them subject to the defenses that
WP might have against OB
• The holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests
in the transferee such title as the transferrer had therein
• The transferee acquires, in addition, the right to have the indorsement of the transferrer
• However, for the purpose of determining W/N the transferee is a holder in due course, the
negotiation takes effect as of the time the indorsement is actually made
• PSB never acquired the notes in due course
• The notes were transferred to OB by WP thru indorsement
• Indorsement made them payable to the order of OB, since that made them, upon their face, payable to the
order of WP
• They never became payable to bearer so as to be capable of passing their title by delivery only
3. W/N WP's deposit credit in the OB was an existing demand or CoA at the time of the transfer of the notes from OB
to PSB, such that it can be set off against the amount due upon them in the hands of PSB - YES
• The mere demanding that the deposit credit be set off made it a matured cause of action against OB
• When OB breached its agreement with WP by transfer of the notes, this fact matured the deposit credit of WP as a
CoA without demand
• Deposit credit became immediately available to WP as an offset to the notes, as against any holder (since
they're nonnegotiable and transferred by delivery only; if negotiable hindi sana pwede)
• Set-off is available as a complete defense (Claim of PSB: $5700; Deposit credit of WP: $9650)
DISPOSITIVE

https://onedrive.live.com/redir?resid=7054F842543FE949%21204&page=View&wd=target%28Nego.one%7C5371c2e5-1793-b140-86d1-f9d027545833%2F6 PUG… 2/2