Opinion
No. 220.
Argued October 8, 1970. —
Decided November 3, 1970.
APPEAL from a judgment of the circuit court for Waukesha county: CLAIR VOSS, Circuit Judge. Affirmed.
For the appellants there was a brief by Becker Stein and Martin R. Stein, all of Milwaukee, and oral argument by Martin R. Stein.
For the respondents there was a brief by Herro, Snyder Chapman and Charles J. Herro, all of Oconomowoc, and oral argument by Charles J. Herro.
The action is on a promissory note. The defense is a claimed novation.
On May 26, 1965, the defendants-appellants, Thomas H. Peltier and Jeanette Peltier, his wife, together with John F. Halloran and Doris T. Halloran, his wife, executed a promissory note in the amount of $6,000 to the plaintiffs-respondents, Richard C. Navine, Jr., and Virginia M. Navine, his wife, as partial payment for a parcel of real estate sold by the respondents to the appellants and the Hallorans. The balance of the purchase price was financed by a note for $24,000 and a first mortgage given by the Peltiers and Hallorans to the Northern Bank of Milwaukee. The $6,000 note given to the Navines was secured by a second mortgage on the same property, was payable six months from the date of execution, and contained a clause providing that the holder could sue directly on the note without first resorting to foreclosure.
The plaintiff-respondent Richard Navine was a real estate appraiser and a former real estate broker; the defendant-appellant Thomas H. Peltier was a builder of residential and commercial buildings; and John F. Halloran "appeared to be a packager or negotiator of both housing and commercial construction projects." Mr. Navine had his office in Oconomowoc and both Mr. Peltier and Mr. Halloran had their offices in Milwaukee. The land in question was located in or near Oconomowoc and was to be used for an apartment construction site.
Between the date of execution and prior to the due date Navine visited the home of Peltier, the person with whom he had negotiated the sale, to assist him in preparing exhibits to be used in negotiations to obtain financing for construction of an apartment building on the property. After the due date Navine made several demands for payment upon Peltier at his home and, subsequently, at Peltier's request, attended several meetings with Peltier and Halloran at Halloran's office, where he again demanded payment.
At one of these meetings, sometime during March or April of 1966, there was a discussion concerning a termination of the association of Peltier with Halloran in this venture. There is some dispute as to the actual discussion. Peltier contends that it was specifically discussed that he was to deed his interest in the real estate to Halloran who was to be solely and exclusively responsible for all financial obligations in connection with the property, including the note to the Navines. Navine admits that there was a discussion concerning relieving Peltier of his obligation but claims that it was to be by virtue of the co-obligor, Halloran, executing a hold-harmless agreement in favor of Peltier.
On April 26, 1966, the Hallorans gave the Peltiers a hold-harmless agreement by which they agreed to save the Peltiers harmless from any and all claims resulting from the purchase of the real estate. Navine was in no manner a party to this agreement. The Peltiers gave the Hallorans a quitclaim deed to their interest in the real estate dated May 25, 1966.
On September 16, 1966, the Navines executed an agreement subordinating their second mortgage to a new first mortgage from the Hallorans to the Bank of Oconomowoc. Navine acknowledges knowing that the Peltiers had nothing to do with this mortgage but testified that he signed it on the promise by Halloran that it would make it possible to complete the transaction and pay off his second mortgage almost immediately.
Subsequent to the meeting in March or April of 1966, Navine made no further demands upon Peltier for the payment of the note until August 25, 1967, when his attorney made demand upon the Peltiers by letter. During this period he continued going to Halloran's office and making demand for payment there as he had previously been requested to do. Between March and July of 1967 he received a total of $400 in payments from Halloran.
On August 1, 1967, Halloran filed a petition for bankruptcy and Navine received notice to that effect on, or shortly after, August 4, 1967. It was then on August 25th that he renewed his demand upon Peltier personally for payment of the note.
When no payment was received the Navines commenced this action on December 1, 1967. The matter was tried on September 16, 1969, and the trial court granted judgment in favor of the Navines and against the Peltiers in the amount of $7,143 principal and interest, plus $120.20 costs.
The defendants, the Peltiers, appeal from the judgment.
The issue presented on this appeal is whether the actions of the parties constituted a novation whereby Thomas Peltier and his wife were relieved of liability on the promissory note dated May 26, 1965.
It is clearly established that the Peltiers and the Hallorans were joint obligors on a promissory note to the respondents and that the note had not been paid. However, appellants-Peltiers contend that they were relieved of their obligation to the Navines by virtue of a novation by which the Hallorans became solely liable on the note.
In T. W. Stevenson Co. v. Peterson (1916), 163 Wis. 258, 261, 157 N.W. 750, this court discussed the requirements for a novation and said:
"The essentials of a novation are a mutual agreement between a debtor, his creditor, and a third person by which such third person agrees to be substituted for such debtor and the creditor assents thereto, extinguishing the obligation of such debtor to such creditor and creating one in place thereof of such third person to such creditor. Hemenway v. Beecher, 139 Wis. 399, 121 N.W. 150."
It is respondents' contention that a novation here is impossible by definition since it requires that a third person be substituted for the original debtor. They argue that since the Hallorans were co-obligors on the note there was no substitution of debtors and therefore no novation.
This argument is supported by Restatement, 2 Contracts, p. 798, sec. 424, which reads in part:
"A novation within the meaning of the Restatement of this Subject is a contract that
". . .
"(c) includes as a party one who neither owed the previous duty nor was entitled to its performance."
The Restatement definition is in accord with the common-law definition which required the substitution of one debtor for another. But as generally applied in modern practice, a new obligation of the original debtor may be accepted in discharge of the original obligation, and in this case there would not be any substitution of parties.
39 Am. Jur., Novation, p. 255, sec. 2, states:
". . . A novation, then, as understood in modern law, generally defined as a mutual agreement among all parties concerned for the discharge of a valid existing obligation by the substitution of a new valid obligation on the part of the debtor or another, or a like agreement for the discharge of a debtor to his creditor by the substitution of a new creditor."
Also, 66 C.J.S., Novation, p. 689, sec. 9, states:
"A novation by substitution of an obligation occurs where a creditor accepts from his debtor any form of new agreement in place of a prior contract or obligation between them, with the intent to cancel the former and to substitute the new one therefor." Also, see sec. 8b, p. 689.
The early Wisconsin cases cited by both parties are in accord with the common-law definition in stressing the element of a substitution of parties. See T. W. Stevenson Co. v. Peterson, supra; Bohn Mfg. Co. v. Reif (1903), 116 Wis. 471, 93 N.W. 466. But the more recent cases which have made reference to novation have stressed not so much the need for a substitution of parties, but rather the substitution of a new debt.
". . . Under the law of this state there is no novation unless the original indebtedness is extinguished by the substitution of a new debt. In this state that does not take place unless there is an express agreement to that effect." In re Beaver Drainage District (1944), 244 Wis. 603, 614, 13 N.W.2d 76, 14 N.W.2d 181.
Also:
". . . A novation contemplates a substitution of a new contract for a previous one, and this is simply not consistent with the facts of the instant case. . . ." State Medical Society v. Associated Hospital Service (1964), 23 Wis.2d 482, 490, 128 N.W.2d 43.
Although both of these quotations are taken from context in cases where the court rejected the contention that a novation had occurred between parties to an agreement, they do indicate that this state is in accord with the modern position and recognizes a novation by substitution of obligations between the same parties as well as by substitution of parties.
With this established, two questions are presented. First, did the evidence clearly show consent by the respondents, Navines, to a substitution of obligations between the parties and, secondly, was there sufficient consideration to support a new obligation.
It is conceded that the Navines never expressly agreed to the substitution of the Hallorans alone as obligors on the debt. However, an express agreement is not necessary. In Bishop-Babcock-Becker Co. v. Keeley (1915), 160 Wis. 546, 548, 152 N.W. 189, the court said:
". . . It is not required that acceptance. of the terms of novation be shown by express words, but it may be implied from the facts and circumstances of the transaction and the conduct of the parties in relation thereto. . . ." Also see: T. W. Stevenson Co. v. Peterson, supra; Raissl v. Loskot (1926), 190 Wis. 507, 209 N.W. 689.
If the express agreement requirement of In re Beaver Drainage District, supra, is contrary to the rule just quoted, it is overruled and withdrawn.
Appellants-Peltiers argue that prior to the meeting at Halloran's office in March or April of 1966, respondents had made repeated demands on them for payment of the note, but that subsequent to that meeting, at which assumption of the debt by the Hallorans was discussed, no further demands were made on them. The next contact between appellants and respondents was in August, 1967, when payment was demanded of appellants after Halloran had filed for bankruptcy. Further, when Navine executed the subordination agreement in September, 1966, he knew that the Peltiers were not parties to the new mortgage and that they no longer had any interest in the real estate. Appellants-Peltiers maintain that these factors point conclusively to the fact that Navine knew of and consented to the assumption of the entire obligation by the Hallorans.
Respondent-Navine testified that all of his initial demands for payment were made upon appellant at his home because appellant was the person with whom he had had contact during the negotiations and that subsequent demands were made at Halloran's office because of Peltier's request. He further testified that it was his understanding that appellant would not be at some of the meetings because of his business. He also admits knowing that appellants were not parties to the new mortgage when he executed the subordination agreement, but states that he signed it so that the note he held could be paid in full as a result of this refinancing. He testified that there was no significant difference in the discussions at Halloran's office when appellant was there and when he was not there, and that he never relieved the appellants of their obligation on the note.
What took place at that meeting sometime during March or April of 1966, at which the termination of the appellants' and the Hallorans' relationship was discussed, and whether respondents' subsequent actions indicated consent to a novation, were both questions of fact for the trial court. The standard of review of its findings where trial was not before a jury was set forth in Mitchell v. Western Casualty Surety Co. (1966), 30 Wis.2d 419, 421, 141 N.W.2d 212, as follows:
"Since the trial court tried the case without a jury, its findings will not be upset on appeal unless they are contrary to the great weight and clear preponderance of the evidence and it is not necessary the evidence in support of the findings constitutes the great weight or clear preponderance of the evidence. Nor is it sufficient that there is evidence to support a contrary finding. To command a reversal, such evidence although sufficient to support a verdict must constitute the great weight and clear preponderance of the evidence. [Citations omitted.]"
The trial court found:
"5. That in no way did that certain transaction between the Hallorans and the Peltiers eliminate the basic obligation of the Peltiers under the provisions of said note."
The Peltiers argue that Navine's failure to make demands for payment on them personally indicates their assent to a new obligation on which only the Hallorans were liable. Respondent-Navine says that he continued to make his demands at Halloran's office pursuant to appellants' request prior to the transaction between appellants and the Hallorans. Appellants-Peltiers argue that there was a specific discussion concerning relieving them of liability on the note and accepting the Hallorans alone as obligors. Respondent-Navine testified that he did not remember any such conversation and that he never agreed to relieve them. Appellants stress the significance of the subordination agreement as an indication that respondents were looking only to the Hallorans as their obligors. Respondents say that they signed it only to facilitate refinancing and payment of the note.
While the trial court might have found that these actions indicated consent on the Navines' part, with sufficient supporting evidence, the findings that it did make were clearly not against the great weight and clear preponderance of the evidence presented.
We further conclude that there was no consideration sufficient to support a substitution of obligations and a release of the Peltiers. While an agreement to take a substituted note as absolute payment of an original note may operate as an extinguishment of the earlier indebtedness and effect a novation, there was nothing of the kind here. Respondents continued to hold the same note upon which appellants and the Hallorans were joint obligors, and the assumption of that joint debt by one of them, with an agreement to hold the other harmless, does not change the relationship between the latter and the creditor without his consent and sufficient consideration to support that consent. First National Bank of Milwaukee v. Finck (1898), 100 Wis. 446, 76 N.W. 608. Also see: Marshall Field Co. v. Fishkin (1923), 180 Wis. 149, 192 N.W. 463.
By the Court. — Judgment affirmed.