Matthews v. Rutherford

By the court:

Slidell, J.

This suit is brought upon a note dated in April, 1851, at eight months, for $1980, made by the defendant, to the order of S. B. Conrey, and by him endorsed in blank. The answer contains a general denial, and also pleads that the plaintiffs are not the owners of the note, but merely hold it as collateral security .for debts due them by the payee; that Conrey gave the defendant no value for it; that ho legal transfer was ever made to plaintiffs ; that they gave no value for it, &c.

There was judgment for the defendant, and the plaintiffs have appealed.

From the testimony of Conrey, a witness offered by the defendant, it appears that the defendant gave Conrey this, with other accommodation notes, amounting to between nine and ten thousand dollars. “The arrangement between witness and Rutherford was, that he, the witness, could raise money on those accommodation Dotes. The agreement between witness and Rutherford was, that witness should take the notes.” In May or June, 1851, Conrey applied to the plaintiffs for a loan of $4500, which they made upon his giving them the defendant’s notes,- as collateral security, for the payment of the money at the time stipulated, which was about twenty days. No act of pledge was made. It does not appear that the plaintiffs knew the notes were accommodation notes; and Conrey says he thinks they were not aware of it. He has repaid them $1500, and a balance of $3000 is still due.

In support of the judgment of the court below, the appellee relies on the following cases: Coddington v. Bay, 20 Johnson, 637. Rosa v. Brotherson, 10 Wendell, 86. Smith v. Van Loan, 16 Wendell, 662. Thompson v. Hule, 6 Pick. 260.

*226Every one of those cases will, upon examination, be found to differ from the present in the attendant circumstances, and to involve arguendo doctrines, which support, instead of invalidating, the claim of the plaintiffs.

In Coddington v. Bay, the case was this: Randolph and Savage were employed by Bay to sell a ship for him, on credit, and transmit him the purchaser’s notes. Instead of doing so they, becoming insolvent, gave the notes to Messrs. Coddington, as security against responsibilities they were already under, as endorsers of notes of Randolph and Savage, and makers of notes lent to R. and S. for their accommodation. The rights of Bay, the true owner, were considered superior to those of the Messrs. Coddington, mainly upon the ground that they gave no new consideration for them, nor parted with any security as an inducement for their being delivered. But the doctrine was distinctly recognized by all the judges, that a holder who has in the usual course of business and in good faith parted with his money, or his property, at the time of receiving the note and upon its credit, is entitled to protection, and the real owner must bear the loss.

In Rosa v. Brotherson the case was this: Brotherson was sued upon a note of $100, at nine months, payable to the order of McClelland, and endorsed by him, before maturity, to Rosa, with the understanding that he should apply $55 of its amount to pay himself a debt already due to him by McClelland, and the balance to pay another creditor of McC. But, before the note was given to Rosa, an arrangement had been made between Brotherson and McClelland, by which the note was satisfied, and was to be given up. It was, therefore, fraudlently put into circulation against the express agreement of the parties. It was held, that as the plaintiff had not paid value, nor parted with any thing at the time of the transfer of the note, thus fraudulently put into circulation, he had no equity superior to that of the makers. He loses nothing, said the court, “if the defendant succeeds in his defence. He gave nothing for the note, advanced nothing, nor incurred any responsibility upon its credit.” But the court, at the same time, distinctly recognized the doctrine, that where negotiable paper is transferred in the usual course of business, for a valuable consideration and without notice of fraud, the right of the holder must prevail.

The case of Smith v. Van Loan, establishes nothing which favors the defence in this cause; and contains, on the contrary, dicta which, by implication, are adverse to the defendant.

In Thompson v. Hall, the plaintiff took the note, which was payable on demand in six months after it was due, and under circumstances which might reasonably excite suspicion that it was affected by equities. The fact that it was taken as collateral security, was not the controlling ground of the nonsuit.

None of these cases cover the one before us. They and others, which the defendants have referred to or which may be found in the reports, at most, go to this extent, that a note, taken as collateral security for a preexisting debt, without any new consideration whatever, will be ' held subject to equities between the contending parties ; a doctrine which, even thus restricted, has not commanded universal concurrence. See 16 Peters, 1, Swift v. Tyson. But, on he other hand, the reports and commentators abound in authorities to the effect that the bond fide holder will be protected against such equities, when he has taken the note as security for advances made upon its credit. Such a case falls within the scope of the general principle of commercial law, which protects the bond fide holders, for a valuable consideration, of negotiable paper; for the term *227value has a very large and liberal import. The principle is jealously guarded in England and in the United States, from considerations of public policy in furtherance of the convenience and security of commercial dealings. And this policy is consonant with justice. It rests upon the same basis as the doctrine of courts of equity in other cases, where the purchaser has obtained the legal title without notice of the equitable right of a third person to the property. The only difference in the commercial law, between the absolute holder for value, and the party who takes the note as collateral security for money advanced, so far as the right of recourse against the maker is concerned, seems to be this: that the former may recover in full, and the latter, if there be equities, is restricted to the extent of his advances. In other words, he is considered as a bond jide purchaser pro tanto. See Stulker v. McDonald, 6 Hill, 95, and cases there cited.

But, if, under such circumstances, the equity of the maker must yield to the equity of the holder, although the consideration of the note may have failed, or the maker may have a just setoff against the payee, or the note may have been paid, &c., is the case of an accommodation maker to be viewed more favorably? Such is the case here, and when the true nature of the contract, in its origin, is properly appreciated, all pretence of a defence, under the commercial law, disappears.

The very object of an accommodation note is to enable the payee, by a sale or other negotiation of it, to obtain a credit with third persons for its amount. The parfy, says a learned author, hold himself out to the public, by his signature, as absolutely bound to every person who shall take the same for value, to the same extent as if that value were personally advanced to.himself or at his request. Story on Notes, § 194. See also Smith v. Knox, 3 Est. 46. Chitty, 91.

Hence, it is no defence that the note was known to the holder to be an accommodation note, if he takes it for value, bond fide, before it becomes due. If, however, an accommodation note had been given for a special object, which was abandoned, and afterwards, in fraud of the maker to whom it should have been given up, it is negotiated, and the endorsee knows or has reason to believe such fraud, his dishonest participation in its commission would bar his recovery; and this only is the extent of the suggestion in Smith v. Van Loan.

The defendant has surely subjected himself to the fullest scope of the doctrine above enunciated by Mr. Justice Story. For his witness, the payee, says unqualifiedly, “the arrangement between witness and Rutherford was, that he, the witness, could raise money on these accommodation notes.” In the face of this agreement, to say that although Rutherford would have been bound if the payee had sold the notes outright, he is not bound when the payee raises money by pledging them, is a refinement which we cannot understand ; and which is certainly in direct conflict with authority. He who has the property has a disposing power. See Collins v. Martin, 1 Bos. and P. 650. Bosanquet v. Dudman, 1 Stark, 1. Atwood v. Crowdie, 1 Stark, 483. Brywood v. Watson, 4 Bing. 496, cited Chitty note p. 85. Williams v. Smith, 2 Hill, 301. Bacruter v. Priest, 12 Pick. 406. Story on Notes, § 195. Chitty, 85. Byles, 62.

The only other question presented by the defendant is, whether the pledge to the plaintiffs is unavailing against the defendant, because it was made without the form prescribed in the 3125th article of the Civil Code,

We are of opinion that a notarial act'of pledge, or a written act registered in a notary’s office, is a formality which is necessary to protect the pledgee against third persons. But its omission is unimportant as between the pledgor and pledgee, and is not available to the defendant, who stands in the attitude of a *228person who has voluntarily clothed the pledgor with the ostensible ownership of &6 thing pledged, and this for the very purpose of enabling him to raise money upon it.

The purpose of the law in requiring an act of pledge before a notary, describing the thing pledged, its amount, number, weight, measure, &e., was to prevent frauds upon creditors. The date of the contract was thus made certain, and a change of valuable goods for others of inferior value prevented. Without such precautions an unfaithful debtor, on the eve of proceedings which would put his property in the custody of the law, might collude with others or withdraw it from their pursuit, or give unjust preferences by instruments ante-dated. Experience, however, has shown that the expensive and troublesome formality of a notarial act was a clog upon commerce, the movement of which should be rapid and free, and our Legislature has lately abrogated it.* But, between the contracting parties, a notarial act never was necessary. This contract is open to proof by ordinary evidence. See Pothier, Nantissement, No. 17. Troplong 108, et seq.

It is therefore decreed, that the judgment of the district court be reversed and that the plaintiffs recover of the defendant the sum of $1980, with interest from 15th December, 1851, until paid, and costs in both courts, together with $2 50 costs of protest.

Aots of 1852, p. 15. R.