74 P. 1100 | Kan. | 1904
The opinion of the court was delivered by
John H. Elward and William A. R. Elward, on September 25,1894, executed to George T. Gilliam a negotiable note due in five years, and William A. R. Elward executed as security for the note a mortgage on real estate in Reno county. On June 24, 1901, John Charles Birket sued the Elwards on the note and mortgage, claiming to have acquired them by indorsement and under such circumstances as to make him an innocent purchaser. The defendants answered with a general denial which put in issue the question whether plaintiff was a bona fide holder, and an allegation that the note had been fully paid to Gilliam by the makers without knowledge or notice of any transfer to plaintiff. A reply was filed, consisting of a general denial.
Upon the trial plaintiff testified that he acquired the note April 28, 1896, as collateral security for a loan of $2000 made to Gilliam at that time. The evidence of defendants showed that on May 25, 1896, the Elwards executed a new note and mortgage to Gilliam in consideration of the satisfaction of the old debt and an additional loan of $500 ; that the old papers were surrendered to John H. Elward, who placed them in a box, which he left in the custody of Gilliam ; that on June 25, 1896, a release of the first mortgage, executed and acknowledged by Gilliam, was filed for record with the register of deeds. The amount due plaintiff from Gilliam was shown to be $814. The court instructed the jury that the only question for their determination was the date at which plaintiff acquired the note; that if he acquired it before June
The theory upon which the trial court held the date of the recording of the mortgage release to be important is not discussed in the briefs, and is not material, since the instruction and judgment are now defended on the ground that if plaintiff took the note as collateral security for Grilliam’s debt at any time after such debt was created (namely, April 28, 1896), he took it subject to any defense that could be made against the original payee. It is obvious that plaintiff could only recover on the theory that he was an innocent purchaser, and the sole question here involved, therefore, is whether one who takes-com'mercial paper as collateral security for an existing debt, without an agreement for an extension of time or other new consideration, is ever entitled to protection as a bona fide holder. If so, the judgment must be reversed ; otherwise it must be affirmed.
The rule in the federal courts as well as in those of England and Canada is that the holder of a negotiable note taken as collateral security for a preexisting debt is a holder for value in due course of business, and as such is protected against all latent equities of third parties. The state courts that have passed upon the question are in irreconcilable conflict. The cases are collected in volume 4 of the American and English Encyclopedia of Law, second edition, pages 290 to 293, and in volume 7 of the Cyclopedia of Law and Procedure, pages 932 to 935. The lists there given indicate with substantial, but not absolute, correctness
A careful examination of the cases cited in the lists referred to discloses that in the following states the rule of the federal courts has been adopted, although in California and Nevada the matter is affected by statutory provisions that the acceptance of the security forfeits a right to attach : California. Colorado, Connecticut, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, Rhode Island, South Carolina, Texas, Vermont, and West Virginia. Nebraska also is now committed to this doctrine. (Lashmett v. Prall, 2 Neb. [unofficial] 284, 96 N. W. 152.) Such citations further show that in the following states the rule has been denied : Alabama,
What may fairly be called the minority doctrine originated in New York in Bay v. Coddington, 5 Johns. Ch. 54, 9 Am. Dec. 268, the opinion being written by Chancellor Kent. The leading case in this country on the majority side is Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865, the opinion being.written by Justice Story. It was there declared that one who took negotiable paper in payment of, or as security for, a preexisting debt, was a holder for value and in due course of busi
The cases of Bay v. Coddington and Swift v. Tyson are cited in almost every opinion in which the merits of the question under consideration are discussed, and the state courts have ordinarily taken sides upon the matter as the arguments of the one decision or the other have appealed to them with the greater force. In the former case it was said :
“It is the credit given to the paper, and the consideration bona fide paid on receiving it, that entitles the holder, on grounds of commercial policy, to such extraordinary protection, even in cases of the most palpable fraud. It is an exception to the general rule of law, and ought not to be carried beyond the necessity that created it.”
In the latter case it was said :
“Receiving it (a negotiable instrument) in payment of, or as security for a preexisting debt, is
Among other arguments advanced in behalf of the majority view are these, that the question is really one of the law merchant- — the custom of merchants, and that a ‘ ‘ transfer by a debtor to his creditor of a negotiable instrument, to payoronlyto secureaprior debt, makes the creditor a holder for value by the custom” (Big. Bills, N. & C., 2d ed., 247) ; that the creditor in accepting a negotiable note, whether or not there are parties to be charged by notice, does undertake to exercise some degree of diligence (2 Rand. Com. Paper, 2d ed., § 804), thereby affording a new consideration ; or at all events that he “is naturally lulled into security and inactivity by crediting the face of the note ; and he should not be made to suffer by the maker for confi
If the question were a new one, to be determined, upon the consideration of equitable principles, there-would be strong reasons for holding that he who takes-a note merely as security for an existing debt acquires no greater right than his debtor had. The-reasons given in Mann v. National Bank, 30 Kan. 412, 1 Pac. 579, for applying this rule to a bank that receives a note from a depositor and adds the amount to-
But the question before us is peculiarly one in which great weight should be given to the authorities, and especially to the decision of the courts of the national government, which do not recognize any local law in such matters. (Oates v. National Bank, 100 U. S. 239, 25 L. Ed. 580.) The question is one likely to arise frequently in transactions between inhabitants of different states. It is important that the law be uniform in the different jurisdictions. The recognition of this consideration prompted the effort at codification of the law of negotiable instruments which resulted, as already noted, in a reversal of policy in North Carolina, Tennessee, and Virginia, and perhaps in New York. Of this effort it is said, in a book review in 38 American Law Review, pages 150,151:
“In December, 1895, a draft of an act was prepared
We prefer to hold in accordance with the weight of authority that an indorsee of negotiable paper taken as security for a preexisting debt is a holder for value- and in due course of business, and therefore, in the absence of any circumstances charging him with notice, is protected against a claim of payment made to the original payee.
It is to be noted that the petition in this case alleges that the note in question was indorsed by Gilliam to plaintiff. This statement was not denied under oath and was therefore not put in issue. The record shows that the note with all indorsements was offered in evidence as a part of plaintiff’s deposition, but the purported copy does not show any indorsement. In the state of the pleadings this is not material, but of course, if the note was not' actually indorsed by Gilliam, plaintiff was not in fact a bona fide holder.
The judgment is reversed and the cause remanded for a new trial.