#### THE CITIZENS BANK AND TRUST COMPANY v. J. J. KNOX, E. C. WOODBURY and W. E. MAULTSBY, Parties Trading as EL PASO LUMBER COMPANY.

(Filed 9 April, 1924.)

1. Actions — Bills and Notes — Payment—Burden of Proof.

Where the plaintiff produces in evidence the defendant’s note, uncan-eeled, upon which suit was brought, the burden is on the defendant to show that he had paid it, in order to establish this as a defense.

2. Banks and Banicing — Drafts—Collection—Actions—Notes—Discharge of Debt Pro Tanto — Rule of Prudent Man.

Where a bank accepts for collection a bill of lading attached to a draft, upon agreement that the money would be applied to a note the drawer owed it, the bank is under legal obligation to exercise the care of an ordinarily prudent man to collect the draft and apply its proceeds in accordance with its agreement; and an instruction upon a trial on the note that if the jury found that the draft had not been paid to answer the issue in favor of the plaintiff bank is reversible error, for whatever moneys the plaintiff should have received under the rule stated would be a discharge pro tanto of the note it sued on.

Stacy, J., took no part in the consideration or decision of this case.

Civil ACTION tried before Grady, J., and a jury, at September Term, 1923, of Nnw HaNOvbe. Appeal by defendants.

Tbe plaintiff bank instituted tbis suit against tbe defendants to recover tbe sum of $500 and interest, balance due on a note made 21 March, 1921, by Widemer Lumber Company and signed by A. N. Harper, president, at 10 days, for $800. Tbe note was endorsed by J. J. Knox for bimself and on behalf of tbe other defendants, partners. They obtained from tbe plaintiff $800, less tbe usual discount. On 13 April, 1921, $300 was paid on tbe note.

Tbe Widemer Lumber Company is insolvent. Tbe defendants, as a defense to tbe action, say: “Tbat they placed in tbe bands of tbe plaintiff a draft upon tbe Widemer Lumber Company for tbe sum of $500 with bill of lading attached, said bill of lading showing a shipment of *566lumber to tbe said "Widemer Lumber Company of tbe value of $500, wbicb draft was collected by tbe plaintiffs and applied to tbe note tbat tbe plaintiff is now suing upon, as these defendants allege, and as tbe same was not applied, tbat tbe sum of $500 is now in tbe bands of tbe plaintiff, belonging to these defendants, wbicb should have been credited to said note.”

J. J. Knox, a witness for defendants, testified in part, tbat tbe El Paso Lumber Company bad dealings with' the Widémer Lumber Company, and it owed bis company about $2,000.' Tbe note was endorsed by him on 21 March, 1921. When this draft of $500 was sent in be first went out to see Mr. Harper, president of tbe Widemer Lumber Company. “In consequence of what Mr. Harper told me I went to tbe bank and asked Mr. LeGrand, tbe cashier, if be bad a draft in there with a bill of lading attached for a carload of lumber to be applied to tbe El Paso Lumber Company note, and he said ‘Yes.’ Mr. LeGrand said there was a bill of lading there with tbe draft attached, with tbe understanding tbat it should be applied to this $500 note, as $300 bad already been paid on tbe note. Tbe $500 was never applied to tbe note. I do not know whether tbe bill of lading was ever surrendered by tbe bank. I went to see Mr. LeGrand again after tbat, and be told me tbat a part of tbe draft was taken out for indebtedness tbat was owing on tbe shipment. ... I went back to see Mr. Harper about tbat, and Mr. Harper said tbat be did not owe anything.”

“Q. Was any portion of tbat money, of tbe $500 of tbat draft with tbe bill of lading attached for the lumber tbat was shipped, ever applied to this note by tbe Citizens Bank? A. Not to my knowledge.”

A. N. Harper testified in part: “I recall this note of $800 tbat was signed by tbe Widemer Lumber Company, and tbat is my signature. The money was borrowed for tbe purpose of applying to an indebtedness tbat I was due to tbe El Paso Lumber Company.- To tbe best of my recollection tbe credit of $300 was paid by tbe Widemer Lumber Company. Well, we owed tbe El Paso Lumber Company some money, and Mr. Knox bad been out there once or twice about tbe balance, and I told him — I taken tbe bill of lading into tbe bank, signed tbe bill of lading by tbe Coast Line, and told them I wanted tbe draft on tbe party I was shipping tbe lumber to, and attached a draft on tbe bill of lading, and the proceeds were to go to tbe credit of this note. I gave those instructions to one of tbe bank officials. I am not sure if it was Mr. LeGrand or Mr. James.”

Tbe other testimony is not necessary to be set forth for tbe decision of tbe case, and tbe only assignment of error material to be considered is tbe following to tbe charge of tbe court below: “Tbe records of tbe bank have been introduced in evidence here showing tbat tbe draft was *567not paid and that it was returned to the bank unpaid. Now if, in the face of that record, you find that that draft has been paid you will answer the issue Nothing; if you find it has not been paid you will answer it $500 with interest. Go back and see how you find it. The bill of lading hasn’t got anything to do with it.” The jury returned a verdict for plaintiff for $500 and interest.

The court- gave judgment for the plaintiff and the defendants assigned error, and appealed to this Court.

Wright & Stevens for plaintiff.

Herbert McClammy for defendants.

Clarkson, J.

The Widemer Lumber Company owed the plaintiff bank a balance of $500 on a note endorsed by J. J. Knox for his firm,, El Paso Lumber Company; A. N. Harper was president of the Widemer Lumber Company. Harper testified: “I taken the bill of lading into the bank, signed the bill of lading by the Coast Line, and told them I wanted the draft on the party I was shipping the lumber to, and attached a draft on the bill of lading, and the proceeds were to go to the credit of this note. I gave these instructions to one of the bank officials.”

It is well settled that where one signs a note and the plea of payment if set up as a defense, the burden is on the defendant to show payment. Ellison v. Rix, 85 N. C., 80.

The defendant’s testimony, if believed, tended to show in the instant case that to pay the note a draft of $500 with bill of lading attached was turned over to the officials of plaintiff bank. The'bill of lading showing a shipment of lumber hy the Coast Line Railroad, and a draft with the bill of lading attached, were left with plaintiff bank, and the proceeds were to go to the credit of the $500 note. The court below in the charge told the jury “The bill of lading hasn’t got anything to do with it.” In this we think there was error. We think the court should have instructed the jury that if from the evidence they found the facts to be that A. N. Harper, president of the Widemer Lumber Company, turned over to an official or officials of plaintiff bank a draft of $500 with bill of lading attached showing a shipment of lumber by the Coast Line Railroad, with the understanding and agreement that the proceeds were to go to the credit of the $500 note on which J. J. Knox and others were endorsers, the burden was on the hank to show due diligence and care, that is, such diligence and care as a man of ordinary prudence would exercise under the same or similar circumstances in collecting or enforcing the draft with' the bill of lading attached. If the plaintiff did not exercise this care and diligence, and by reason thereof the value of the lumber at the time the bill of lading *568attached to the draft was lost, the defendant J. J. Knox and other defendants would be entitled to credit for the market value of the lumber, at the time it was lost, on the note sued on.

“An order drawn by the debtor upon a third person in favor of the creditor, for the payment of money or goods, is not a payment of the debt unless such order has been actually paid or accepted by the creditor as a discharge of the debt fro tanto. It is not enough that the creditor accepts the order unless he accepts it as a payment. On the other hand, if the order is accepted by the creditor as payment, or is actually paid to the creditor, or if the creditor agreed to accept such an order when the debt was created, the debt is extinguished fro tanto. At any event, where due diligence is not used in collecting or enforcing the accefted order, whereby the claim is lost, the order is deemed a fayment.” 30 Cyc., p. 1191. (Italics ours.)

Page on the Law of Contracts (2 ed.), vol. 5, sec. 2814 (in part), lays down the just rule: “Omission of the creditor to use proper diligence in collecting the draft will make the draft operate as a payment to the extent.of the injury caused.”

Nash, J., in Ligon v. Dunn, 28 N. C., 137, says: “Payment may be made also in a bill of exchange or a promissory note though the receipt of neither is in itself a payment, for neither is money. But if received, and the creditor do not use the necessary diligence to get it faid, the defendant will be discharged.” (Itálics ours.) Terry v. Robbins, 128 N. C., 142.

“When this case was before us upon the defendant’s former appeal (Mauney v. Coit, 80 N. C., 300) we stated the rule, applicable to the facts then appearing to be, that If the drafts were given and received, for and in closing up the account, and were afterwards accepted by the company, it was the duty of the plaintiffs to present them at maturity for payment, and if not paid in a reasonable time, to take proper steps for their collection, and if they failed to do this and the drafts became worthless, it would in law be a discharge of the original debt, that is, of course, if they were lost by reason of the neglect of the holders to proceed to collect and could have been collected by the use of reasonable diligence on their part.’ It is now, however, shown that any effort to enforce payment by action would have been fruitless in consequence of the insolvency of the acceptor, and the law does not require the holder to do a Vain thing.’ ” Mauney v. Coit, 86 N. C., 471.

From the view we take of this case there must be a new trial, so that the jury can pass on the facts under the law as we interpret it to be. For the reasons given there must be a

New trial.

Stacy, J., took no part in the consideration or decision of this case.