69 A.D.2d 494 (1st Dep’t 1979)
Parol evidence is admissible to show that delivery of a promissory note was conditional on the payee procuring other signatures, provided the condition does not contradict the express terms of the guarantee.
Summary
This case addresses whether individual guarantors of a corporate promissory note can assert an oral agreement as a defense, claiming the guarantee was conditional upon the payee obtaining guarantees from specific other individuals. The plaintiff bank sought summary judgment, arguing that the guarantors’ evidence was insufficient to establish conditional delivery and that such a defense is legally unavailable. The court reversed the lower court’s grant of summary judgment, holding that parol evidence is admissible to prove the condition precedent of obtaining other endorsements, as long as the alleged condition does not contradict the express terms of the guarantee.
Facts
International Institute for Packaging Education, Ltd. obtained a $25,000 loan from United States Trust Co., evidenced by a promissory note. The note was endorsed by five individuals, including Rochman and Horowitz. Rochman claimed an agreement with a bank officer that his and Horowitz’s endorsements were conditional upon all five individuals endorsing the note and any renewals. When the loan was renewed for $35,000 ($10,000 increase), Rochman delivered a new note endorsed by himself and Horowitz, instructing a bank officer to ensure all endorsements were present. D’Onofrio, one of the original five, did not endorse the renewal note. The bank extended the loan anyway. Upon default, the bank sued the Institute and the guarantors.
Procedural History
The Special Term granted summary judgment to the bank, reasoning that public policy prevents a party from showing that a note delivered to a bank was not to be enforced unless certain oral conditions were met. The Appellate Division affirmed, with two justices dissenting. The guarantors, Rochman and Horowitz, appealed to the Court of Appeals.
Issue(s)
Whether Rochman and Horowitz may introduce parol evidence to prove that their delivery of the promissory note was conditional upon obtaining the endorsement of all five original guarantors, and if so, whether such an agreement would bar enforcement of the note against them.
Holding
Yes, because a person not a holder in due course takes an instrument subject to the defense of nonperformance of a condition precedent, and conditional delivery can be proven by parol evidence if the condition does not contradict the express terms of the written agreement.
Court’s Reasoning
The court reasoned that under UCC § 3-306(c), a person not a holder in due course takes an instrument subject to the defense of nonperformance of a condition precedent, such as conditional delivery. The court cited precedent establishing that parol evidence is admissible to show that delivery was conditional. The court distinguished Mount Vernon Trust Co. v. Bergoff, noting that case involved a wholly fictitious note, whereas this case involves a real transaction where the condition precedent (obtaining all endorsements) did not contradict the guarantee’s terms. The court distinguished Meadow Brook Nat. Bank v Bzura, because in that case the guarantee was “unconditional”, and therefore the condition precedent contradicted the terms of the written agreement. Here, the guarantee was not unconditional, so the condition precedent did not contradict the written agreement. The court emphasized that it was not rewriting the bank’s agreement but rather enforcing the existing law regarding conditional delivery and parol evidence. The court noted that the bank could have avoided this issue by simply insisting on an unconditional guarantee.