Dean P. Taylor, Respondent Vs. Arnold P. Mikulay, Appelant

Check this case, I was looking for extra-information about chapter 18, and I found this case where the negotiable documents were involved. The terminology is a little hard to follow, but the case is really interesting.

Minn. Stat. § 480A.08, subd. 3 (1994).
STATE OF MINNESOTA
IN COURT OF APPEALS
C7-96-1094

Filed January 7, 1997
U N P U B L I S H E D O P I N I O N

Randall, Judge

We review a district court decision granting a directed verdict in favor of the holder of a promissory note in the holder's suit for enforcement against the note's maker. The district court erred as a matter of law in finding that the maker could not assert fraud as a defense to the enforcement of the note. Because the jury found that the holder of the note fraudulently concealed a material fact from the maker and the holder did not seek review of the jury's decision, we reverse and direct entry of judgment for appellant.

FACTS

Respondent Dean Taylor first heard about Hector Guimard's Metropolitan entry gates in 1968. At that time, his acquaintance Nico Borsje, a Parisian art dealer, told him that the gates were being stored in a barn in northern California. The gates were one of the original 141 sets of bronze gates designed in the art nouveau style by French architect Hector Guimard between 1900 and 1923 to mark the entrances to the Metropolitan, Paris's underground rail system. Of the 141 sets of gates designed by Guimard, 50 to 60 remain, in various states of repair.
In 1985 Borsje contacted Taylor, who was then doing some accounting work for Borsje, and asked him to accompany him to the barn in California to see the gates. Upon discovering that the gates had been stolen from the barn, Borsje and Taylor traced them to a foundry in Redding, California. At the foundry, Borsje and Taylor found the bronze gates disassembled and with parts missing. Borsje needed to return to Paris, so he promised Taylor a "nice commission" if he could locate the missing pieces and reassemble the gates. Between 1985 and 1987 Taylor recovered the missing sections. Taylor, who testified that he learned how to weld when he was eight years old, repaired the gates using a quantity of "bondo" plastic auto body filler, plow bolts, and green paint. In 1988, after the death of one potential purchaser, Taylor assembled an album of photos of the gate and brought the album to an auction in California to see if he could find an interested purchaser. At the auction, Taylor sat next to appellant Arnold Mikulay, an avid collector of art nouveau and art deco art and architectural artifacts who already owned some of Guimard's work. At trial Taylor testified that the album contained photos of the damaged and repaired gates and that Mikulay saw all of the photos. Mikulay vigorously denied ever having seen photos of damaged gates. He testified that no serious collector who had seen the photos Taylor produced at trial would have purchased the gates.

Mikulay entered into a contract with Borsje for the purchase of the gates in May 1990. The contract required Mikulay to (1) pay $25,000 in cash deliver and some other valuable art nouveau objects to Borsje; (2) pay Taylor $23,920; and (3) execute a promissory note to Taylor for $195,680. Payments on the note were due in four semi-annual installments. Taylor delivered the gates to Mikulay's home in Minneapolis.

Mikulay testified that it was only when he ran into Borsje in New York City in 1993 that he heard the full story of the theft, "chop up," and repair of the gates. There only remained, at this time, one unpaid installment on the promissory note in the amount of $36,760. Mikulay had previously paid three of the four installments. Mikulay stopped making payment because be believed the gates were worth at least $100,000 less than what he paid for them because of the damage and repair. Taylor sued to recover the outstanding balance. Mikulay answered and counterclaimed, seeking damages and dismissal of Taylor's complaint.

A jury trial was held in Hennepin County District court in January 1996. At the close of evidence, the district court granted a directed verdict in Taylor's favor on the theory that the promissory note was an "unconditional promise to pay" and that Taylor's fraudulent misrepresentations or failure to disclose material facts did not justify Mikulay's suspension of performance. The court also found that Mikulay's action for fraud in the inducement of the contract had to be brought against Borsje, because Taylor was not a party to the contract. The court allowed the issue of damages to go to the jury.

The jury returned a special verdict, finding that Taylor fraudulently concealed a material fact of which Taylor had special knowledge and to which Mikulay had no access, but that Mikulay was "not damaged" by Taylor's concealment.

In February 1996, Mikulay brought a post-trial motion, seeking dismissal of Taylor's claim or in the alternative, a new trial. Mikulay's motions were denied, and this appeal followed. Taylor did not file a notice of review.


D E C I S I O N
I.
The district court based its decision to direct a verdict for Taylor on two theories. First, the court interpreted the promissory note as an "unconditional promise" by Mikulay to pay Taylor. While the court did not state that it was treating the promissory note as a negotiable instrument, such an interpretation of the court's language is reasonable given the language of Minn. Stat. § 336.3-104 (1996) (A "negotiable instrument means an unconditional promise * * * to pay a fixed amount of money * * *."). Second, the court found that any cause of action for fraud in the inducement of the contract had to be brought by Mikulay against Borsje, not against Taylor because Taylor was not a party to the contract. We conclude the district court erred on both theories.

Mikulay could be barred from asserting the common law defense of fraud if Taylor was a "holder in due course" of a "negotiable instrument." See Minn. Stat. § § 336.3-305(a)(2) (listing defenses), 336.3-305 (b) (excepting defenses listed in subsection (a)(2) from a holder in due course) (1996); see also Minn. Stat. Ann. § 336.3-305 cmt.2 ("Subsection (a)(2) states other defenses that pursuant to subsection (b) are cut off by a holder in due course."). But a promise to pay money must be made "payable to bearer or to order" before it will be treated as a "negotiable instrument" under Minnesota's Uniform Commercial Code. Minn. Stat. Ann. § 336.3-104, cmt. 1 (1996). Minn. Stat. § 336.3-103(a)(3)(c) (1996) provides an exception to this requirement, but the exception is not relevant in this case.

Because the promissory note at issue contains no words of negotiability, such as "or order" or "or bearer," it cannot be a negotiable instrument within the meaning of Article 3. See Minn. Stat. § 336.3-109 (1996) (A note is "payable to order or bearer" if it states that it is payable to bearer; does not state a payee or "states that it is payable to or to the order of cash, or otherwise indicates that it is not payable to an identified person."); Penn. Mut. Life Ins. Co. v. Utne , 207 F. Supp. 521, 523 (D. Minn. 1962) (promissory note must contain words of negotiability to be considered a negotiable instrument). As the original payee, and the party whose fraudulent actions are at the heart of the lawsuit, Taylor took the note with notice of defenses to its payment. He was not a holder in due course. See Minn. Stat. § 336.3-302(a)(2) (1996) (holder in due course takes without notice of any defenses held by another); Thomton , Sperry & Jensen, Ltd. v. Anderson , 352 N.W.2d 467, 468 (Minn. App. 1984).

An obligor with respect to a promise that falls outside of Minn. Stat. § 336.3-104 (a) (negotiable instruments) can still be precluded from asserting a defense based on ordinary principles of common law contract law. Minn. Stat. Ann. § 336.3-104, cmt. 2. Thus, the court's theory that Mikulay could not suspend his performance because of Taylor's fraud must also be analyzed according to common law contract principles.

II.
Ruling on Taylor's motion for a directed verdict, the district court stated that as a matter of law, no fraudulent misrepresentation or failure to disclose material facts on Taylor's part justifies Mikulay's suspension of performance on the promissory note. We disagree. The contractual relationship between Mikulay and Taylor may be characterized in two ways, and neither characterization precludes Mikulay from raising the defense of fraud.

First, if the promissory note is viewed as a simple contract between Taylor and Mikulay, then Mikulay may assert fraud as a defense based on common law contract principles. See Northwestern State Bank of Luverne v. Gangestad , 289 N.W.2d 449, 453 (Minn. 1979) (counterclaim of fraudulent inducement to sign promissory notes allowable if evidence is sufficient to support such a claim); Vandeputte v. Soderholm , 298 Minn. 505, 507-08, 216 N.W.2d 144, 146-7 (1974) (permitting fraud defense and counterclaim to plaintiff's action to recover money owing on promissory notes, although summary judgment appropriate because defendants could not support their claim that plaintiff made a material misrepresentation of fact); King v. International Lumber Co. , 156 Minn. 494, 497, 195 N.W. 450, 451-52 (1923) (citation omitted) (stating that a contract based on fraudulent concealment can be avoided); Stubblefield v. Gruenberg , 426 N.W.2d 912, 914 (Minn. App. 1988) (stating that fraud in the inducement is an affirmative defense to payment on a promissory note, although summary judgment is appropriate when fraud is not plead with particularity).

Arguing before the district court on the directed verdict, Taylor stated that he considered himself a third-party beneficiary under the Borsje-Mikulay contract and we agree that this accurately describes an alternative view of the parties' contractual relationship. The contract between Borsje and Mikulay obligates Mikulay, among other things, to deliver a promissory note to Taylor for $195,680. Taylor, from the start, was an integral party to this three-way business deal involving hundreds of thousands of dollars. It cannot be argued that he was not an intended third party beneficiary under the Mikulay-Borsje contract. See Cretex Cos. v. Construction Leaders, Inc. , 342 N.W.2d 135, 138 (Minn. 1984) (holding a party is a third-party beneficiary if the contract expresses "some intent by the parties to benefit the third party through contracted performance") (citing Buchman Plumbing Co. v. Regents of the Univ. of Minn. , 298 Minn. 328, 215 N.W.2d 479 (1974).

"[A] third party may sue on a contract made for his direct benefit." Buchman , 298 Minn. at 333, 215 N.W.2d at 483 (citations omitted). But the third-party beneficiary's right to enforce the contract is subject to several defenses, including the contract's unenforceability due to fraud or mistake. See Restatement (Second) of Contracts § 309, cmt. a (absence of mutual assent or consideration, lack of capacity, fraud, or mistake may be asserted by the promisor against the beneficiary); Hansen v. Proctor , 246 Minn. 67, 71-2, 74 N.W.2d 281, 284 (1955) (stating that it is settled that "a third-party creditor-beneficiary in a suit against the promisor is subject to the same equities and defenses that would be available to the promisor if a suit were brought against him by the promisee"). Under either characterization of the relationship between Mikulay and Taylor, Mikulay can raise the defense of fraud.

III.
As a matter of law, Mikulay could assert fraud as a defense to Taylor's suit for the outstanding balance on the promissory note. The jury's finding of fraud, which Taylor has not appealed, disposes of the only factual issue in the case. Thus, we reverse the decision of the district court and institute judgment for Mikulay, allowing him to suspend performance of the remaining balance due under the contract. Put another way, Mikulay keeps the gates, Taylor keeps what he has already received, but is not entitled to the last payment of $36,760.