SECTION 3.-DISCHARGE BY NOVATION

In a sense, discharges of contracts by mutual rescision, by accord and satisfaction, and by account stated, are forms of novation, but it is more common to employ the term novation to describe a transaction whereby a new party is, by agreement, substituted as an obligor in the place of the one upon whom the duty rested by the terms of the original contract. This aspect of a novation is presented in the following cases:

MARTIN V. LEEPER BROS. LUMBER CO.

(Supreme Court of Oklahoma, 1915. 48 Okl. 219, 149 Pac. 1140.) Action by the Leeper Bros. Lumber Company, a corporation, against Swan Martin. Judgment for plaintiff, and defendant brings error. DUDLEY, C. In May, 1912, Leeper Bros. Lumber Company, a corporation, defendant in error, hereinafter referred to as the lumber company, commenced this action in the county court of Oklahoma county against Swan Martin, plaintiff in error, hereinafter referred to as owner, to recover judgment for the balance due on account for lumber and building material used in making certain repairs upon his property. The lumber company recovered judgment for the amount sued for, and from this the owner has appealed, and the only question presented is whether or not the petition states a cause of action. The petition, omitting the caption and the prayer, is as follows: "* * * That on or about the 1910, the above-named defendant entered into a contract with one Oscar White, in and by the terms of which contract said Oscar White agreed to furnish material and do certain repair and construction work upon a building owned by defendant on East Eighth street, Oklahoma City, Okl., for which repair and construction work defendant agreed to pay said Oscar White the sum of $

day of

* * *

"That on or about the day of May, 1910, plaintiff entered into an oral contract with said Oscar White in and by the terms of which contract plaintiff promised and agreed to furnish the material to be used by said Oscar White in making the repairs and construction work above mentioned; that in pursuance of said contract with said Oscar White plaintiff furnished and delivered to said Oscar White upon the premises where the above-mentioned repair and construction was being done material as shown by Exhibit A hereto attached and made a part hereof, for which said material said Oscar White agreed and promised to pay plaintiff $750.62.

"That after plaintiff had completed the delivery of the material as shown by Exhibit A upon the premises where the repair work and construction was being done, it was orally agreed by and between defendant and said Oscar White that defendant should take over the repair and construction work on the building, which said Oscar White had agreed and contracted to do for said defendant, as above set forth, and it was then expressly agreed and understood by and between said Oscar White and defendant herein that this defendant should assume and pay all bills for material on said job, including the amount due plaintiff for material furnished as hereinbefore set forth; that said Oscar White advised defendant the amount which was then due and owing

this plaintiff, and defendant fully understood the amount of indebtedness to this plaintiff which he, the defendant herein, was assuming. "That the agreement and arrangement by and between said Oscar White and this defendant whereby defendant assumed and agreed to pay this plaintiff for the material furnished as above set forth was communicated to this plaintiff, and that this plaintiff accepted the offer and promise made by defendant to make payment of the said indebtedness for material, and then and there released said Oscar White from all further liability to make payment of said indebtedness.

"The defendant, on or about the 1st day of August, 1910, paid this plaintiff $450 on said indebtedness, and plaintiff allowed defendant a credit for material returned of $55.74, but that defendant always has neglected and now refuses to make payments of the balance of said indebtedness, the balance being $244.88." * *

In 29 Cyc. 1134, in discussing the manner in which a novation may be effected it is said: "Novation may be effected in three ways: (1) By the substitution of a new obligation between the same parties, with intent to extinguish the old obligations; (2) by the substitution of a new debtor in the place of the old one, with intent to release the latter; (3) by the substitution of a new creditor in the place of the old one, with intent to transfer the rights of the latter to the former." The foregoing rule seems to be the general one.

* * *

Measured by these rules, we think the petition sufficient on the theory of a novation. It pleads: (1) A contract between the owner and the contractor; and (2) a contract between the lumber company and the contractor. Under the contract between the lumber company and the contractor, the contractor is its debtor. The petition then pleads a release and extinction of the contract between the owner and the contractor, and the creation of a new contract by which the owner is to make the repairs, and pay for the labor and material, including the debt of the lumber company. The terms of this contract were made known to and accepted by the lumber company, and its debt against the contractor was released, and the owner accepted as its new debtor in discharge of the original debtor.

The petition fairly pleads a novation by the substitution of a new debtor, and comes squarely within the rule announced in 29 Cyc. 1136, which is as follows: "The most frequent novation is the substitution of a new debtor. To constitute this kind of a novation, there must be a mutual agreement among three parties, the creditor, his immediate debtor, and the intended new debtor, by which the liability of the last named is accepted in the place of the original debtor in discharge of the original debt."

* * *

The petition sufficiently pleads a consideration under section 926, R. L. 1910, and is sufficient upon the theory of a novation. The judgment of the trial court should be affirmed.

KLINKOOSTEN v. MUNDT.

(Supreme Court of South Dakota. 1916. 36 S. D. 595, 156 N. W. 85, L. R. A. 1918B, 111.)

McCoy, J. Plaintiff, as assignee of the original payee, brought this suit against defendant to recover upon a negotiable promissory note for $25 executed and delivered by defendant to the Unitype Company. * * In circuit court there was a verdict and judg

*

ment in favor of defendant. At the close of all the evidence plaintiff moved the court for a directed verdict in favor of plaintiff. The motion was denied, to which ruling plaintiff excepted.

* * *

Defendant admitted the execution of the note. The defendant pleaded as a defense that prior to the transfer of said note to plaintiff the Unitype Company released defendant from the payment of said note and agreed in writing to accept as payor in lieu of defendant the Messenger Publishing Company. It appears from the evidence that at the time of the execution of said note defendant was the proprietor of a printing and publishing business, and purchased certain printing machinery from the Unitype Company, and gave 46 notes, amounting to $1,450 in consideration of the purchase price of said machinery, the note in question being one of such notes. Under the contract for the purchase of said machinery it was provided that the title to such machinery should remain in the Unitype Company until the full payment of said notes. After the making of this contract, and before the maturity of said note, defendant sold and transferred his printing and publishing business and said machinery to the Messenger Publishing Company. About the time this sale and transfer were made to the Messenger Company, defendant wrote the Unitype Company that he had made such sale; that the Messenger Company had agreed to make new notes for those remaining unpaid for such machinery, and would assume the entire obligation of defendant, provided the Unitype Company would consent to take their notes. The Messenger Company also wrote the Unitype Company in substance as follows: We have purchased the interest of Mundt in his contract under which the Unitype typesetting machine was installed. We, therefore, assume the rights and obligations of Mundt in the contract, and agree to pay the unpaid notes given by him, and carry out all his obligations under the terms of the agreement. It is agreed between Mundt and the Messenger Company that on completion of the payment of the balance of these notes and the carrying out in full of the terms of the agreement, you are to issue a bill of sale for said machinery to the Messenger Publishing Company. This letter was signed by the Messenger Publishing Company by its president, and at the bottom thereof, over the signature of defendant, appeared the following:

"The Unitype Company is hereby authorized to issue a bill of sale to the Messenger Publishing Co. for the above-described machine when all the terms of the contract have been fully met and all the notes given under the same duly paid."

Also on the bottom of this letter appears the following: "Accepted. The Unitype Co., by E. J. Andrews, Treas."

The note in question was never paid. The Messenger Publishing Company never executed and delivered to the Unitype Company its notes in place of the notes given by defendant. In order to constitute novation, there must be either an express or implied agreement on the part of the creditor to substitute the new debtor in place of the original debtor, and also an express or implied agreement to release and discharge the original debtor. * All that the Unitype Company ever assented to as shown by the correspondence, was that the Messenger Publishing Company might assume the rights and obligations of defendant under the contract and make payment of the notes given by defendant, and when said notes had all been fully paid and satisfied, it would transfer title to the machinery to the Messenger Publishing

* *

Company. There was no assent or agreement, either express or implied, to discharge or release defendant. In most of the adjudicated cases where it has been held that implied novation had occurred there were circumstances such as the delivery to the original debtor of his notes and new notes taken in place thereof, or other circumstances, indicating an intention on the part of the creditor to accept the new debtor in place of the old, and to release and discharge the obligation as against the original debtor. No circumstances of that character appear in this case. We are of the view that the court erred in overruling the motion to direct a verdict for plaintiff; no defense of release by novation having been shown.

The judgment and order appealed from are reversed, and the cause remanded.

SECTION 4.-DISCHARGE BY RELEASE, CANCEL

LATION, AND ALTERATION

A release is a declaration in writing by the releasor which manifests his intention to regard as extinguished an existing right which he had against the releasee. To constitute a release, the instrument must be under seal. In states where the common-law rules relat ing to sealed instruments obtain, such an instrument is effective without consideration; but, in many states, these rules have been. altered by statute. Statutory changes must therefore be taken into consideration in determining, in a particular state, the requisites and legal effect of such instruments. In the absence of such changes, the legal effect of a release is to discharge the duty of the releasee referred to in the instrument. In one respect, the effect of a release may be regarded as somewhat extraordinary. Where A. and B. have assumed a joint duty, or a joint and several duty to C., a release of either A. or B. will have the effect of discharging the other, although there be in the instrument no language that manifests A.'s intention to release the other party. The theory. apparently is that there is but one set of legal relations between the two or more parties on one side of the contract and that party or parties on the other, and, that, in order to release one of the parties, it is necessary to destroy these relations. Figures of speech in the law are dangerous, but perhaps the situation bears. some figurative resemblance to a case where A. is raising B. and C. up a steep cliff by the aid of a single rope. A. decides to "release" C. and let him drop, but he wants to save B. A. cuts the rope and C. plunges to the bottom, and, despite A.'s prayers, B. does likewise. If the situation were regarded as a double set of relations, a release of one obligor would not have this effect; but the law does not so regard it. But parties to a contract, no matter how numerous on each side, are regarded as tied together by one rope, and not several. But, as usual, a harsh result is mitigated by the introduction of a fiction. A legal fiction, and fictions are legion, is much like a crutch; it assists one in reaching one's destination, but it is a poor method of transportation, when it is not needed. By a legal fiction there has been formulated the rule that, where a

party to a contract enters into a covenant not to sue one of several obligors, or where one of such obligors is released, the releasor reserving his rights against the other obligors, such other obligors will not be discharged.

Since, at common law, an instrument under seal gave rise to an obligation without consideration, one method of discharging a sealed instrument was to cancel it. An act of cancellation is accomplished by surrendering the instrument to the obligor thereon or by mutilating it, marking upon it, or destroying it, with the intent to put an end to the legal obligations which it has evidenced. Negotiable instruments, and perhaps some other types of written contracts may be discharged by cancellation.

Material alteration of the written evidence of a contract also has the effect of avoiding the contract. Where such alterations are innocently made, there may still be a recovery upon the original claim; but, where they are fraudulently made, the entire right of action is destroyed. Material alteration by a stranger does not avoid the instrument, though the contrary is the law in England, and, it seems that, in this country, under the Negotiable Instruments Law, a material alteration by a stranger will avoid the instrument, though there may be a recovery upon the original contract, if the holder was not a party to the alteration. The nature and effect of material alteration of negotiable instruments will be treated in more detail in Part III.

SECTION 5.-DISCHARGE IN BANKRUPTCY

PROCEEDINGS

While it would be decidedly detrimental to the best interests of society and to the individuals directly concerned for the law to provide that insolvency should, of itself, under the doctrine of impossibility of performance, operate as a discharge of contractual obligations, nevertheless, experience shows, that within relatively narrow limits and under certain restrictions, the policy of granting a discharge of debts on account of insolvency may with propriety be adopted. This is one of the features of the Bankruptcy Act (U. S. Comp. St. §§ 9585-9656), but it is not its primary purpose. The principal aspect of a bankruptcy law is to provide the judicial and administrative machinery requisite for an economical and expeditious collection of the assets of a failing debtor and the equitable distribution thereof among his creditors. This feature of the bankruptcy act will be taken up in a later chapter. We are here interested only in those provisions of the act which authorize the court to grant a discharge of the debts of the bankrupt.

The present National Bankruptcy Act does not authorize the granting of a discharge from all kinds of obligations, nor does it provide that, under all circumstances, a bankrupt will be entitled to