97 Tenn. 19 | Tenn. | 1896
Complainants filed this bill to enjoin the defendant bank from prosecuting three several suits before a Justice of the Peace, for the collection of certain promissory notes. It is charged in the bill that said notes were procured by fraud and are without consideration, and that the bank received the notes from the payees with actual or constructive notice of the fraud. It is further charged said notes were not negotiable, for the reason that each contained a stipulation for the payment of reasonable attorney’s fees, and that said bank is not protected in its title to said notes as an innocent holder for value in due course of trade. The Chancellor, upon final hearing, was of opinion that the defendant bank purchased said notes without actual
The facts out of which the present controversy has arisen may be briefly stated. The record discloses that Curtis Bros, were the proprietors of a patent churn, which they were engaged in selling in Gibson County. Complainants purchased of Curtis Bros, the exclusive right to sell this churn in the State of Louisiana and certain counties of Mississippi, for which they agreed to pay the sum of $2,000, evidenced by four notes, each for the sum of $500, and payable, respectively, in seven, eight, nine, and ten months from date. The following is a specimen of the notes in controversy, viz.:
‘ ‘ TREnton, Tenn. , June 3, 1889.
“Nine months after date we promise to pay to the order of Curtis Bros., or bearer, the sum of five hundred dollars, negotiable and payable at the Exchange Bank of Trenton, Tenn., for value received. The drawers and indorsers severally waive present*22 ment for payment, protest, and notice of protest and nonpayment of this note, and, in case of suit, agree to pay all reasonable attorney’s fees for collecting the same.
“$500 due February 3, 1890.
“L. Oppeni-ieimer,
“ C. T. Love,
“R. F. Ross,
“H. R. Camp.”
On the twenty-seventh and twenty-eighth of June,. 1889, three of these notes were purchased by the defendant bank at a discount of twenty per cent.— that is to say, the bank paid twelve hundred dollars-for the three notes of the aggregate face value of fifteen hundred dollars. H. R. Camp, one of the signers of the notes, was in the employment of Curtis Bros, in the capacity of salesman, and negotiated the. sale to Oppenheimer of the exclusive right to sell this churn in Louisiana and • Mississippi. It was agreed between the original parties, ■ at the time the notes were executed, they were not to be transferred, and were alone payable out of the profits of the new business. Curtis Bros., Camp, and Ames, soon after the execution of the notes, left the State clandestinely, and their whereabouts is unknown. The proof abundantly shows that Curtis Bros, were in collusion with Camp, and that said notes were procured to be executed upon false and fraudulent representations, and as between the original parties there was a total failure of consideration. The defendant
The contention of learned counsel for complainant is that the purchase of the notes in suit from strangers at a discount of twenty per cent., when the bank knew that Oppenheimer, one of the makers, was perfectly solvent, indicates knowledge of the fraud, or that the bank had such constructive notice as to put it upon inquiry. As said by this Court: “When the indorsee takes negotiable paper before maturity under circumstances which might reasonably create a suspicion that it was not good — as, where he buys a note on a solvent man, having less than one year to run, for $333.33 at $126, with an agreement to pay $25 more if collected without suit, he takes it at his peril and subject to the equities between the original parties.” Hunt v. Sanford, 6 Yer., 387; 7 Heis., 163.
We think the rule laid down by Mr. Tiedeman is sound, and furnishes an intelligible basis for the determination of what constitutes inadequacy of price in the purchase, of commercial paper. We cannot say, however, in view of this rule and the proof in the record, that there was any such gross disparity between the commercial value of the notes and the price actually paid, as to awaken suspicion in the minds of the officers of the bank of any infirmity in the paper. The proof shows that this bank was accustomed, during this time, to discount paper at rates varying from twelve to twenty-five per cent, per annum, and that it had, prior to this time, discounted paper held by these payees on other solvent parties at such rates. It was also insisted in argument that H. R. Camp, one of the makers of the notes, negotiated the sale of this paper to the bank, and that this fact was sufficient to put the purchaser upon inquiry. Nothing can be predicated upon this position, for the reason that it does not distinctly appear from the record whether it was Ames or Camp who sold the notes to the bank. The officers
The next question presented is whether the stipulation in respect of payment of attorney’s fees, written in the face of the note, destroys its negotiability and thus dismantles the note, allowing proof of fraud in its execution. The question presented has given rise to much judicial controversy, and the decisions announced in different States and jurisdictions are by- no means reconcilable, and, since the question is one of first impression in this State, we shall, after a review of the authorities, adopt that view which most commends itself to our reason and judgment.
Mr. Tiedeman, in the work already cited, Commercial Paper, Sec. 28 (5), says: “Bills and notes, particularly the latter, sometimes contain stipulations that, if not paid voluntarily, the drawer or maker will pay the attorney and collection fee. It has been much discussed what is the effect of such a stipulation upon the legal character of the instruments to which they are added.
‘ ‘A few decisions maintain that the stipulation is in the nature of a usurious charge and avoids the
It may be remarked under this head that, in the case of Parham v. J. J. Pulliam, Ex'r etc., 5 Cold., 497, this Court held that a stipulation in a note to pay attorney’s commission for collecting is not usurious. Other decisions hold the stipulation to be void because it is in the nature of a penalty and tends to the oppression of impecunious debtors. But the avoidance of the stipulation on such grounds enables the Courts to treat the stipulation as mere surplusage and hold the instrument to be negotiable notwithstanding.” Citing 77 Pa. St., 131; 84 Pa. St., 410; 92 Pa. St., 227; 84 N. C., 24; 63 Mo., 23; 64 Mo., 477; 71 Mo., 618, 622, 627; 53 Wis., 599; 27 Minn., 240; 14 Bush, 814; Meyer v. Hart, 40 Mich., 517; Bulloch v. Taylor, 39 Mich., 138; Garr v. Louisville Banking Co., 11 Bush, 182.
“In a large number of cases the stipulation is held to be valid, but because it renders the gross sum to be recovered on the instrument uncertain, its insertion in a bill or note is declared to destroy its negotiability.” Citing Sweeney v. Thickstrew, 77 Pa. St., 131; Woods v. North, 84 Pa. St., 410; Johnston v. Spear, 92 Pa. St., 227; First National Bank v. Bynum, 84 N. C., 24; First National Bank v. Gay, 63 Mo., 33; Samstag v. Conley, 64 Mo., 477; First National Bank v. Marlow, 71 Mo., 618; Storr v. Wakefield, 71 Mo., 622; First National Bank v.
1‘ There are also other cases which not only recognize the validity of the stipulation, but also' the negotiability of the paper in which it appears.” Citing Dietrich v. Baylie, 23 La. Ann., 767; Overton v. Matthews, 35 Ark., 147; Smith v. Muncie National Bank, 29 Ind., 159; First Nat. Bank v. Canatsey, 34 Ind., 149; Johnston v. Crossland, 34 Ind., 344; Smith v. St. Silvers, 32 Ind., 321; Wyant v. Parttorff, 37 Ind., 512; Hubbard v. Harrison, 38 Ind., 325; Wilkes v. Woollen, 54 Ind., 164; Sperry v. Harr, 32 Iowa, 184; Seatin v. Scoville, 18 Kan., 435; Howestien v. Barnes, U. S. C. C., Kansas, 28 Am. Rep., 406 (S. C., 5 Dillon, 482);; Heard v. Dubuque Bank, 8 Neb., 10; Farmers' National Bank v. Rasmusson, 1 Dakota, 60; Wilson Sweny Machine Co. v. Moreno, U. S. C. C., Oregon, 29 Am. Rep., 406 (S. C., 7 Red. Rep., 806); Storieman v. Pyle, 35 Ind., 103. Indiana now prohibits by statute such stipulations in notes unless unconditional. Rev. Stat. (1876), 149.
Mr. Tiedeman remarks that where the amount to be recovered as attorney’s fees is explicitly stated in the instrument, it would seem that the sum of money to be recovered on the paper, with the attorney’s fees added to the principal and interest, would be as certain as the principal and interest would be alone, for the interest continues to accumulate if the paper is not honored at maturity. When the exact
Mr. Randolph, in his work on Commercial Paper, Yol. 1., Sec. 205, in treating this subject, says: “The effect of a stipulation for attorney’s fees or costs of suit contained in a note has been the subject of. much consideration, more especially in our Western States. As an agreement and irrespective of usury laws and other statutory prohibitions, such a stipulation is in itself valid.” Citing Meacham v. Penrose, 60 Miss., 217; Brown v. Barber, 59 Ind., 533; First Nat. Bank v. Breese, 39 Iowa, 640; Garver v. Pontorris, 66 Ind., 191; 42 Ind., 176; 61 Ind., 276; 47 Ind., 559; 85 Ind., 317; Miner v. Paris Exchange Bank, 53 Texas, 559. “And the fees so stipulated for may be recovered by the holder of the notes, although not the original payee.” Citing Johnson v. Crossland, 34 Ind., 334. “And whei'e a stipulation of this sort is contained in a bill of exchange, it has been held to be embraced in the liability assumed by the acceptor.” Bank of British North America v. Ellis, 2 Fed. Rep., 44; 29 Ind., 158.
Says Mr. Daniel, in his work on Negotiable Instruments, Sec. 62(a): “Such instruments should, we think, be upheld as negotiable. They are not like contracts to pay money and do some other thing. They are simply for the payment of a certain sum of money at a certain time, and the additional stipulation as to attorneys’ fees can never go into effect if the terms of the note or bill are complied with. They are, therefore, incidental and ancillary to the main engagement, intended to assure its performance or to compensate for trouble and expense entailed by its breach. At maturity negotiable paper ceases to be negotiable in the full commercial sense of the term, as heretofore explained, though it still passes
This doctrine has received the indorsement of such eminent jurists as Mr. Justice Brewer, now an Associate Justice of the United States Supreme Court, who said, in the case of Seaton v. Scoville, 18 Kan., 781, viz.: “It seems to us, therefore, a just conclusion that paper otherwise negotiable is not rendered non-negotiable by a stipulation for the payment of costs of collection, including attorneys’ fees, in case suit is brought thereon.” Justice Brewer cited with approval the case of Gaar v. Louisville Banking Co., 11 Bush (Ky.), 180 (S. C., 21 Am. Rep., 709), in which it was said, viz.: “The reason for the rule, that the amount to be paid must be fixed and certain, is that the paper is to become a substitute for money, and this it cannot be unless it can be ascertained from it exactly how much money it represents. As long, therefore, as it remains a substitute for money, the amount which it entitles the holder to demand must be fixed and certain; but when it is past due, it ceases to have that peculiar quality denominated negotiability, or to perform the office of money; and hence, anything which only renders its amount uncertain after it has ceased to be a substitute for money, but which in nowise affected it until it had performed its office, cannot prevent its becoming negotiable paper.”
We are, therefore, of opinion the decree of the Chancellor adjudging said notes non-negotionable was erroneous. We hold, however, that, these notes being fraudulent in their inception and without consideration between the original parties, the bank will only be entitled to recover to the extent of the sum
The reason of this rule is thus stated by Mr. Daniel, viz.: ‘£ When the execution of a bill or note has been induced by fraud, a different rule applies. The bona fide holder of it, for value and without notice, is undoubtedly entitled to be protected against a loss which would befall him if the party defrauded were permitted to set up the defense of fraud on the part of the payee against him. But it does not, therefore, follow that he may recover of such party the whole amount, when he has paid a less sum. For his protection and security against loss, it is only necessary that he should be paid back the amount which he was induced to give for the instrument by its appearance of validity, and, therefore, such amount is the limit of his recovery against the drawer or maker who was defrauded into the execution of the instrument. . . . The paper derives its vitality wholly from the circumstance that it has been obtained for value without notice by an innocent purchaser. For his protection, it is maintained in his hands as a legal obligation. The object of the law is to save him from loss, and, to do that, a recovery of the amount he may advance is all that