Covell v. President, Directors & Co. of the Tradesman's Bank

| New York Court of Chancery | Jul 7, 1828

The Chancellor :—In this case a gross fraud has been practiced by the defendant Mullins, and the question is, upon which of' the two innocent, parties to this suit must the loss fall ? Although it is not distinctly stated in the pleadings and proofs, it seems to be understood by the parties that Mullins is insolvent. As to the $1,000 which was due from Mullins at the time he transferred the sealed note, there can be no hardship in the case, as respects the bank. They are, as to that sum, no worse off than they were before the note was received in security. The complainant is clearly entitled to that part of the proceeds of the sealed note. In relation to the sum of $1,425, which Mullins actually obtained in ¿money from the bank by falsely and fraudulently pretending that he was the owner of the note, there is great hardship on both sides. As to the first sum, the complainant has not only the prior but the greater equity. The questions which arise in relation to the last sum, are: 1. Has either party the greater equity? 2. If the- equities are equal, has either party the legal right ? 3. If neither has the greater equity, or the legal-right, which party has the prior equity ?

The greater equity must prevail not only against a lesser equity which is prior in point of time, but is sometimes permitted to prevail even as against the legal right. If the note in question had been negotiable, and had been taken by the bank in due course of business, the equity of the bank to retain it in security for the money advanced, would be equal to the equity of the complainant to receive back his note from Mullins; and the legal right of the assignees to collect the money in their own name would prevail over the prior equity of the complainant. But according to the decision of this court, and of the Court of Errors, in Coddington v. Bay, (5 John. Ch. R. 54, 20 John. R. 647, S. C.,) the bank would not *be entitled to retain the proceeds even of a negotiable note thus transferred to them, merely as a security for an antecedent debt. In this case, I cannot find any principle to support the position that the bank has any greater equity to have the money which was advanced on the security of this instrument repaid, than the complainant has to have his note returned to him, agreeably to the terms of his agreement with Mullins. Where the equities of the parties are equal, if either has the legal right, that must prevail ; but if neither has a legal right to the subject or thing in controversy, the maxim, qui prior est in tempore, portior est injure, applies.^[1] (Tourville v. Naish, 3 P. Wms. 308.) It was on these principles, that, in England, if there were two Iona fide mortgagees having equal equities, and the junior incumbrancer could obtain the legal estate by getting the assignment of an older mortgage, he could tack his junior mortgage thereto, and thus get a preference over the intermediate mortgage; but if there was still a fourth mortgage, older than either, outstanding in the hands of a third person, or if the legal estate was in the hands of trustees, all the subsequent mortgages must be satisfied according to their priority in point of time. (Brace v. The Duchess of Marlborough, 2 P. Wms. 491.) On the same principal, a negotiable note payable to bearer or indorsed in blank, which, by commercial usage, may be prosecuted in the name of the holder, if it is in the hands of an agent, or is stolen, or is lost by the owner, and by the improper act of the agent, thief or finder is put in circulation, and thus comes into the hands of a bona fide holder in the due course of business, the equal equity of such holder will enable him to retain it against the former owner; while, on the other hand, the assignee of a chose in action, who only obtains an equitable interest therein, and must sue in the name of the original owner, is not protected against a prior equity. (Coles v. Jones, 2 Vern. 692. Norton v. Rose, 2 Wash. R. 233. Turton v. Benson, 2 Vern. 764. Livingston v. Hubbs, 2 John. Ch. R. 512.) It will also be found on examination, that the case of Redfearn v. Ferrier & Somervail, (1 Dow. Parl. Rep. 50,) cited by Chancellor Kent, in Murray v. Lylburn, (2 John. Ch. R. 443,) was decided upon the principles above stated. In that case, a share in the Edinburgh Glass House *Company, which by the rules of the company could only be holden by a single individual, stood in the name of Stuart, but in fact it belonged to the firm of Stuart & Somervail. Their partnership was dissolved by the bankruptcy of Stuart; and after the dissolution, Stuart assigned the share on the books of the company to Redfearn, who had no notice of the equitable claim of Somervail. A question having arisen between Somervail and Redfearn, as to the right to the share, the agent of the company raised an action of multiple poinding, (a proceeding somewhat similar to our bill of inter-pleader,) to settle the rights of the parties. The Court of Sessions in Scotland decided against the rights of the assignee, but on appeal to the House of Lords, that decision was reversed. Not on the ground that the assignee of a chose in action was protected against a latent equity in a third person, because a share in a joint stock company is not a chose in action. It was evidently decided on the ground, that by the law of Scotland the assignment, intimated on the books of the company, vested the legal interest and right to the stock in the assignee; and the equities of the parties being equal, the court would not divest him of his legal right.

In Willis v. Twambly, (13 Mass. 204" court="Mass." date_filed="1816-05-15" href="https://app.midpage.ai/document/willis-v-twambly-6404448?utm_source=webapp" opinion_id="6404448">13 Mass. Rep. 204,) a note had been given to a minor, payable in sheep. He sold the note to a third person, and received a watch in payment. The infant afterwards elected to rescind the bargain, and tendered the watch to the assignee, who refused to receive it; and afterwards assigned the note to a bona fide assignee without notice. The court held, that the first assignee could transfer to the second no greater right or interest in the note than he had himself; and that the second assignee took it subject to all the equity which existed between the infant and the first assignee. In the same case, Parker, Ch. J., says, “the assignee of a chose in action must take it principally upon the credit of the party from whom he receives it; for it is always liable to be defeated by equitable circumstances subsisting between the original contracting parties, the assignee being subject to the same equity as the assignor.

In the case before me, the sealed note was merely pledged to Mullins to secure the payment of the $100; to that *extent alone he had an equitable claim upon the money due thereon. The complainant still retained the legal interest in the debt from the Hunts; and an action to recover the amount must be brought in his name. After repayment of the $100, his release to the Hunts would have been a legal and valid discharge of the debt. It was impossible for Mullins to transfer any greater right to the bank than he himself possessed. That was not a legal right, but a mere equitable lien upon the chose in action, which has since been divested, and that before Covell had any notice of the transfer. The maxim, caveat emptor, is properly applicable to this purchase of a chose in action. If the agent of the bank had used the same diligence in ascertaining the right of Mullins to the note, as he did in ascertaining the liability of the obligors, he never would have advanced the money on the credit of this instrument. The bare signature of Covell on the instrument was certainly no better evidence of the right of Mullins than the signature of the Hunts was of their indebtedness. There was as much occasion for inquiry in the one case as in the other.

Again, the equity of Covell to have his note returned arises out of a transaction prior in point of time to the advance of the money by the bank. The prior equity and the legal right are both united in the complainant; he is, therefore, entitled to the whole of the proceeds of the sealed note. And the defendants having refused to deliver up the note after they were informed of his rights, must pay the costs to which he has been subjected in consequence of that refusal.

[1] On this maxim, depends the rights of property in treasure-trove, wrecks, Legge v. Boyd, 1 C. B. 92; E. C. L. R. 60, and dereleets, id. Waifs and estrays, 1 Black. Com. 291; Armory v. Delamere, 1 Stra. 504; Mortimer v. Cradock, 7 Jur. 45. The law of primogeniture, 2 Black. Com. 83, 84. It is acted on in case of conflicting titles; see argument of Sir E. Sugden in Cholmondeley v. Clinton, 2 Meriv. 239; Broom’s Maxims, 263 n. In assignments, and between incumbrancers and purchasers; Foster v. Blackstone, 1 Mylne & K. 297, 2 P. Wms. 491. In regard to the doctrine of tacking of mortgages, 3 Prest. Abs. tit. 274, 215; Willoughby v. Willoughby, 1 T. R. 773, 4. M'Niel v. Cahil, 2 Bligh. 228. See 4 Kent, 178, n. The law relative to patents and copyrights is altogether referable to this maxim. Broom’s Maxims, 260, 272, and cases there cited.