| Tenn. | Dec 15, 1923
Lead Opinion
delivered the opinion of the Court.
The bill seeks to recover from defendants three real estate notes of $1,000 each, which complainant owned and transferred by delivery to a corporation known in the record as the Bynn Yanns Company for shares of its stock, on the ground of fraudulent misrepresentation, and she alleges and particularly relies on the fact that this corporation was subject to. the Blue Sky Law of 1913 (Laws, Ex. Sess. 1913, chapter 31), and had failed to comply therewith. It is insisted for defendants that they are holders in due course of this negotiable paper and had paid value therefor, without notice of complainant’s claims or rights, or of the fact that the transaction involved a sale of stock of the corporation, or that the corporation had failed to comply.
Two of the notes are held by defendant hanks, and the proof sustains their contention that they bought for value without notice and are holders in due course. The pertinent question as to them, conceding the transfer to these hanks of the notes by the complainant to the corporate vendor and indorser thereof to he subject to attack as between said parties because in' violation of the Blue Sky Law, is whether or not this attack is available as against these innocent transferees and present holders for value.
We find that the court of civil appeals is correct in its holding and is sustained by the authorities cited in its opinion, that the illegality attaching to the transaction as between the noncomplying corporation and the pur
This is not a case of an obligation issued or transferred in violation of- a statute expressly declaring it void as in Snoddy v. Bank, 88 Tenn., 573" court="Tenn." date_filed="1890-02-25" href="https://app.midpage.ai/document/snoddy-v-bank-8298333?utm_source=webapp" opinion_id="8298333">88 Tenn., 573, 13 S. W., 127, 7 L. R. A., 705, 17 Am. St. Rep., 918. This distinction has been clearly recognized by this court. Bank v. Chapman, 122 Tenn., 415" court="Tenn." date_filed="1909-09-15" href="https://app.midpage.ai/document/jefferson-bank-of-st-louis-v-chapman-white-lyons-co-8300664?utm_source=webapp" opinion_id="8300664">122 Tenn., 415, 424, 123 S. W., 641; Cohn v. Lunn, 133 Tenn., 547" court="Tenn." date_filed="1915-12-15" href="https://app.midpage.ai/document/cohn-v-lunn-8301324?utm_source=webapp" opinion_id="8301324">133 Tenn., 547, 550, 182 S. W., 584.
The rule is that a bona-fide holder of negotiable paper, executed as part of a transaction prohibited by statute, may enforce its collection, except where the.statute has expressly or by necessary implication declared it void. This principle is applied in Edwards v. Fruit Products Co., 133 Tenn., 142" court="Tenn." date_filed="1915-09-15" href="https://app.midpage.ai/document/edwards-v-hambly-fruit-products-co-8301286?utm_source=webapp" opinion_id="8301286">133 Tenn., 142, 180 S. W., 163, and is in accord with our Negotiable Instruments Act of 1899.
In Joyce’s Defenses to Commercial Paper (2d Ed.) vol. 1, section 163, it is said:
“Except where it is provided by statute that a bill or note issued by a corporation shall be. void, such an instrument, which does not appear upon its face to be illegal or unauthorized, will not, in the hands of a bona-fide holder without notice who has paid a valuable consideration therefor, be subject to the defense that'it is illegal or issued without authority. ’ ’
To the same effect see 8 C. J. sections 1032,1033, 1038; also Pontiac Savings Bank v. Reinforced Concrete Pipe Co., 178 Mich., 261" court="Mich." date_filed="1913-12-20" href="https://app.midpage.ai/document/pontiac-savings-bank-v-reinforced-concrete-pipe-co-7947747?utm_source=webapp" opinion_id="7947747">178 Mich., 261, 144 N. W., 486.
It satisfactorily appears that the defendant banks have carried the burden lawfully thrown upon them on the facts of this case of showing that they purchased these notes without knowledge of the alleged infirmity in the original transaction.
With respect to the third note held by defendant Laf-ferty, the facts as to notice and knowledge on his part acquired before, or at the time of, his acquisition of his note are more involved in doubt. While he insists that he did not understand that stock in this corporation was the consideration passing between the complainant and her vendees of the note, there are circumstances which would seem to have put him on notice of the truth of the situation. However, we find it unnecessary to determine this exact issue of fact, since, further agreeing with the holding of the learned court of civil appeals, we find that the complainant has estopped herself from extending to defendant Lafferty her right of rescission and recovery of this part of the consideration.
It appears that, before finally parting with all control of the consideration paid-by him to those delivering the note to him, he took the precaution to interview the complainant and secure from her, in the nature of a guarantee of the legitimacy of the transaction by which he was acquiring the note, and particularly her acquiescence, her personal indorsement, under circumstances which put her on notice of his pending investment in the note
Moreover, our Negotiable Instruments Law again has application. Therein it is expressly provided that ‘ ‘ every indorser who indorses without qualification warrants to all subsequent holders in due course,” among other things, “that the instrument is genuine and in all respects what it purports to be; that all prior parties had capacity to contract; that the instrument is at the time of his indorsement valid and subsisting.” Shannon’s Code, sections 3516a73, 3516a74.
It follows that the decree of the court of civil appeals must be affirmed.
Rehearing
ON Petition to Reheae.
A petition to rehear is presented which challenges the
Counsel are in error in assuming that prompt disposition of a case, or failure to treat specifically in our written memorandum the assignments as stated and grouped by counsel, properly understood, indicates lack of attention by the court to the briefs and arguments of counsel, or to the record as a whole. Varying circumstances control the order and time of disposition, unnecessary to detail; and it is the constant effort of the court to find and focus the determinative issues and to condense our discussion into the briefest space consistent with reasonable clearness. However, it is apparent that in the instant case further comment is necessary in order to convey to counsel the views of the court, and particularly to make clear, if possible, the scope and applicability of chapter 31, Acts of 1913, known as the Blue Sky Law.
It is insisted for petitioner: First, that the defendant banks and Lafferty bought these notes from a noncomplying corporation; and this proposition of fact is conceded. Second, that these defendants bought with knowledge that these notes had been acquired by the corporation in exchange for its stock while noncomplying (with
The latter two legal propositions are esteemed by us to be determinative of the case for petitioner, and were so treated and were attempted to be clearly disposed of heretofore. They appear to be so recognized in the petition to rehear.
Neither Goodyear v. Meux nor Dixie Rubber Co. v. McBee, which it is insisted were disregarded in our opinion, are in conflict with the conclusions heretofore announced in this case. Both were suits between the original parties to stock purchases from noncomplying corporations, which were doing the business defined by the act as constituting them investment companies, and no question of bona-fide holding of negotiable paper was involved. Holding that the stock sale in Dixie Rubber Company, supra, was in violation of this law,'Mr. Justice Smith said, “And no action could be predicated by the investment company on the note executed for stock thus sold;” that “the complainant cannot recover on the note.” Italics are used by us to emphasize the distinction. It is true that in the course of this opinion it is
So, in Goodyear v. Meux, supra, it was found that the transaction was a sale of stock by a. corporation engaged in this business, prohibited unless compliance had been had with this statute, and therein properly held that no recovery could be had by the corporation on obligations growing out of a transaction under these conditions. While in the course of the opinion by Mr. Justice G-keen it is said that “it is provided that this statute shall be complied with before any attempt to sell stock, or do any other business in the State is made,” this expression must be construed in its connection and limited in its application to the nature of business under discussion. This is made clear by a following express declaration, evidently intended to avoid the very misapprehension into which counsel for petitioner have fallen, when the court says, “It was not intended to regulate the ordinary business of corporations,’domestic or foreign, within the State.” This distinction has been since emphasized in our unpublished opinion in S. S. McConnell, Receiver v. Cy H. Lyle et al., 263 S. W., —, decided at the present term, to which counsel for petitioner refer. Therein it was said that a failure to comply with this statute did not make
In our original opinion reference was made to section 6 of. the act, which is the section declaring a violation of the act unlawful, wherein it appears that this provision is expressly limited to transactions in form or character similar to those set forth in section 1 of the act; and by reference to this section it is to be seen that these transactions are of certain classes only. Omitting nonpertinent recitals, and bracketing exceptions made, section 1 reads as follows:
“That every corporation . . . which shall sell or negotiate for the sale of any stocks, bonds, or other securities of any kind or character or any lands or town lots in any quantity situated outside of this State [other than bonds of the United States, the State of Tennessee, or of some municipality of the State of Tennessee, and notes secured by mortgages on real estate located in the State of Tennessee] to any person,” etc.
It may be observed parenthetically that the particular form of notes which are the subject of the instant litigation, being real estate vendor lien notes, are perhaps embraced within the exception described above as “notes secured by mortgage on real estate located in the State of Tennessee,” looking to the evident intent of this exception rather than the technical language employed. Anderson’s Law Dictionary defines “Equitable Mortgage” as “the lien of a vendor of realty for unpaid purchase money.” But the disposition of the instant case does not require a decision of this question.
It follows that petitioner is in error in his insistence, very earnestly made, that these defendants “dealt directly with a corporation that under the laws of the State of Tennessee had no right to transact any character of business in the State of Tennessee, except that of filing their charter and other papers required to be filed under the Blue Sky Law.
So it is that, in the instant case, while its stock-selling transactions were unlawful, the corporate existence, general powers, and ordinary business of the company were not affected by the failure to comply. Now the particular pertinency of this distinction in the instant casé consists in this: A buyer of paper, executed or indorsed by the corporation, without notice on its face or otherwise that it grew out of the character of business defined in the act, is not legally charged with notice of this illegality in its inception. The corporation being authorized, generally to do business, no presumption arises that the transaction is one growing out of unlawful business, or that the corporation is engaged in that business defined and prohibited if done without having complied with the act. The buyer may therefore became a holder in due
Petitioner further insists that the rule announced in Snoddy v. Bank, 88 Tenn., 573, 13 S. W., 127, 7 L. R. A., 705, 17 Am. St. Rep., 918, should apply. We have distinguished this case, decided before the passage of our Negotiable Instruments Act of 1899, in our original opinion, and have cited and quoted from authorities which we approve and apply. As said therein, the principle approved in Edwards v. Fruit Products Co., 133 Tenn,, 142, 180 S. W., 163, governs here. While that was a case of a noncomplying foreign corporation, in the matter of filing its charter in Tennessee, the reason of the rule adopted applies with at least equal force to a case of a corporation not complying' with the Blue Sky Law. In neither case does the statute expressly, or by necessary implication, declare the obligation of the corporation void, as was true of the statute passed upon in Snoddy v. Bank, supra. This is the essential distinction.
It results that the petition must be dismissed.