Schmidt v. Bank of Commerce

Background

A local bank sued a group of people who signed two promissory notes to collect money. The signers included Broyles, a firm called Schmidt & Story, Crossman, Brown, Pratt (also called Anderson), Lewis, and Evans. Broyles defaulted; the others said they had signed only to help Broyles and that the bank had falsely told some of them Broyles was solvent and that the bank had ample collateral. At trial the judge directed a verdict for the bank against all but Lewis, who was allowed a non-suit, and the territorial supreme court affirmed that result.

Reasoning

The Court examined whether the defendants could use fraud as a defense to stop enforcement of the new notes. It explained that if any signatures were obtained by fraud, the new notes were vitiated and the bank could not enforce them. The Court stressed that the new notes replaced and led to the destruction of earlier notes, changed the legal positions of the signers by adding new co-makers, and disturbed the equality of contribution among them. For these reasons the Court held the evidence of fraudulent representations should have gone to the jury rather than being cut off by a directed verdict.

Real world impact

The decision means people who co-sign commercial paper and claim they were tricked can have their fraud claims decided by a jury. It stops a bank from enforcing newly created notes obtained by alleged misrepresentation without allowing the disputed facts to be tried. The case was sent back to the New Mexico supreme court for further proceedings consistent with this opinion.