[01] LADY v THOMAS contract.
However, the court exempted Wilson from liability under Section 3099
38 Cal. App. 2d 689 | May 1, 1940
Thompson, J.
Del Rosario
PETITONER: William Ellis Lady
RESPONDENTS: James H. Thomas et al.
TOPIC: (as stated in the syllabus)
 Consent of parties; General Rule
CASE SUMMARY: Spouses Thomas executed a promissory note which was secured
by a trust deed. Wilson was the undisclosed principal in the execution of said note, but
his name did not appear on the note or the trust deed. Said note was transferred to
Lady. The trial court rendered a judgment in favor of Lady for the payment of the
principal and interest due on the promissory note, and also directed the foreclosure of
the trust deed and sale of the property. Because Wilson was not made liable, Lady
appealed. The Court ruled that since Wilson’s name did not appear in the note or on
the trust deed, he cannot be made liable on an action based on said negotiable
instrument.
DOCTRINE: In a suit based on a negotiable instrument, one may not recover judgment
against a principal whose name does not appear thereon. As an exception, one may
recover if the action is based, not on the note, but on quasi-contract.
FACTS:
 On Sept. 14, 1932, Mr. and Mrs. James H. Thomas executed a promissory note for
the sum of $3,200 payable to Francis E. Dalin, one year from the date thereof at 7%
interest per annum payable quarterly. The note was secured by a trust deed on
certain described lots in Los Angeles, also executed by spouses Thomas.
 As a part of the same transaction, the note and trust deed were immediately
transferred to William Lady.
 Philip L. Wilson, codefendant, was the undisclosed principal in the execution of
the promissory note, but his name did not appear on the note or the trust deed,
and no reference to him was made in connection with the transaction.
 The court rendered judgment against spouses Thomas for the aggregate sum of
the principal and interest due on the promissory note. The court also directed
foreclosure of the trust deed and sale of the property pursuant to the terms of the
of the Civil Code because his name does not appear on the note or trust deed, and
no reference to him is made in those instruments.
 Plaintiff appealed the portion of the judgment of foreclosure that denied him relief
against said undisclosed principal.
ISSUES and RULING: (Doctrine in bold letters)
 WON the undisclosed principal should also be held liable for the execution of
the promissory note which was secured by a trust deed – NO
o Under the Uniform Negotiable Instruments Act adopted by California and
other states of the Union, a suit may not be maintained on a promissory note
against an undisclosed principal whose signature does not appear thereon,
unless the note is signed by use of his trade or other assumed name.
o Reason for the rule (as expressed by Mechem): “Persons dealing with
negotiable instruments are presumed to take them on the credit of the parties
whose names appear upon them; and a person not a party cannot be charged
upon proof that the ostensible party signed or endorsed as his agent.” And
also, citing Sec. 3099 of the Civil Code (same as Sec. 18 of NIL).
o The case of Craig v. Buckley does not apply. Although the facts of the Craig case
were similar to those of the present case, the liability of an undisclosed
principal whose name does not appear on the promissory note upon which
suit was brought was not mentioned or involved. Sec. 3099 of the Civil Code
was not even cited or discussed.
o The case of Bank of America etc. Assn. v. Cryer does not also apply. Unlike in
the present case, the Cryer case was not a suit on a negotiable instrument, but
was merely an action on stockholder’s liability under former Sec. 322 of the
Civil Code, which was repealed in 1930.
o In the Cryer case, the Court distinguished a suit for the liability of an
undisclosed principal based on a negotiable instrument and an action (like the
one for stockholder’s liability) based on a quasi-contract.
o Under the law merchant, one whose name is not attached to such
instruments may not ordinarily be held liable in a suit based upon those
documents. However, in a suit based, not on the note, but independently
thereof, and founded on quasi-contract, there may be a remedy against a
disclosed or partially disclosed principal who receives the benefits thereof.
o A disclosed or partially disclosed principal is not a covenantor or grantor in a
sealed contract or conveyance unless he appears upon the instrument to be
such (1 Restatment of the Law of Agency).
 o Thus, the proper remedy, as an exception to the general rule that one may not
be held liable upon an instrument which does not contain his name, is to
disregard the liability on the instrument and to maintain a separate suit to
recover the original consideration received by him.
o Since the present suit is founded on a negotiable instrument, the trial court
therefore properly held that the undisclosed principal on the note is not liable
in this action.

DISPOSITIVE: The judgment is affirmed.

PROVISIONS:
 NIL: Sec. 17: Construction where instrument is ambiguous. – Where the language of
the instrument is ambiguous or there are omissions therein, the following rules
of construction apply: (f) “Where a signature is so placed upon the instrument
that it is not clear in what capacity the person making the same intended to sign,
he is to be deemed an indorser;”
 NIL: Sec. 18: Liability of person signing in trade or assumed name. – No person is
liable on the instrument whose signature does not appear thereon, except as
herein otherwise expressly provided. But one who signs in a trade or assumed
name will be liable to the same extent as if he had signed in his own name.