Lacy v. Globe Indemnity Co.

Hoke, C. J.

Chapter 137, Laws 1921, 3 C. S., secs. 4925 (a), etc., entitled “An act to provide improved marketing facilities for cotton,” contains preamble as follows:

“That in order to protect the financial interests of North Carolina by stimulating the development of an adequate warehouse system for our great staple crop, cotton; in order to enable growers of cotton more successfully to withstand and remedy periods of depressed prices; in order to provide a modern system whereby cotton may be more profitably and more scientifically marketed; and in order to give this important crop the standing to which it is justly entitled as collateral in the commercial world, a cotton warehouse system for the State of North Carolina is hereby established, as hereinafter provided.”

After conferring power to administer the law on the State Board of Agriculture, the statute directs that they shall, in furtherance of this power and purposes, appoint a State Warehouse Superintendent who shall enter into a bond of fifty thousand dollars ($50,000), 3 C. S., sec. 4925 (d), to guarantee the faithful performance of his duties under, the law, and also assistant local managers, etc., who shall also give bond ample to safeguard the interest of the State as suggested by ordinary business experience in such cases. The act then in section 5, 3 C. S., sec. 4925 (e), in order to provide an additional guarantee fund, levies a tax of twenty-five (25) cents per bale on each bale of cotton ginned in the State until 30 June, 1922, with privilege of continual till June, 1923, and in reference to same, provides in part, as follows:

“In order to provide a sufficient indemnifying or guarantee fund to cover any. loss not covered by bonds hereinbefore mentioned, in order to provide tbe financial backing wbicb is essential to make the warehouse receipts universally acceptable as collateral, and in order to provide that a State warehouse system intended to benefit all cotton growers in North Carolina shall be supported by the class it is designed to benefit, it is hereby declared: that on each bale of cotton ginned in North Carolina during the period from the ratification of this bill until June thirty, one thousand nine hundred and twenty-two, twenty-five (25) cents shall be collected through the ginner of the bale and paid into the State Treasury, to be held there as a special guarantee or indemify-ing fund to safeguard the State warehouse system against any loss not otherwise covered.”

Becurring to the facts, it appears that in accordance with the provisions of said act, a storage warehouse was established at LaGrange, N. C., in 1921, with M. L. Valters as local manager, who gave bond in defendant company, for 1921-1922, those here sued on, for the faithful' performance of his duties. The bond, after reciting that the principal would comply with and abide by the terms- of the act, closes with the stipulation that the said principal shall faithfully perform all of his obligations as a warehouseman under said act, and such additional obligation as a warehouseman during the continuance of said license, or any renewal of same, as may be assumed by him under contracts with depositors, etc., and in 1922, renewed his said bond of like tenor, both of said bonds being given to the State. That in the spring of 1921, certain owners stored at said warehouse 68 bales of cotton and' were given negotiable receipts therefor, containing among other things, and as provided by other features of the law, “That the State of North Carolina guarantees the integrity of this receipt until the expiration of the licenses, as above indicated, and upon request of the lawful holder, this receipt will be extended, provided the license are renewed, etc.” That this cotton was duly delivered to the owners who surrendered their receipts to the local manager, endorsing their names thereon, and thereupon it became, and was the duty of said manager, under the act, as per agreed statement, to cancel the receipts and return same to the general superintendent at Ealeigh, N. C. That instead of canceling said receipts and complying with said act, the local manager negotiated the same with the Murchison National Bank of Wilmington, to secure his individual note for $6,500.00, and delivered them to said bank as collateral for said loan, adding to the endorsement of the owners appearing thereon, the further endorsement “LaGrange Storage Warehouse by M. L. Walters, Manager.” On the maturity of the note and demand made for the cotton, it was ascertained that the cotton had been delivered to the owners, and that Walters had fraudulently used same as collateral-on his own note. Thereupon the bank made demand on the State treasury to pay the amount of the note out of the guarantee fund, and after investigation .of the facts, the demand was complied with, the money represented by the receipts was paid and present suit entered on the manager’s bond as stated. It is further stated in the case agreed that the bank loaned the money to M. L. Walters in the due course of business and accepted said receipts as collateral without actual knowledge that the cotton represented by same had been delivered to the parties depositing the same for storage. This, to our minds, presents a clear breach of a specified duty on the part of the local manager, coming directly within the provisions of the bond given by defendant company as his surety, and bringing about the very results that the requirement is intended to guard against, and, in'our opinion, defendant has been properly held liable for this misconduct and default of their principal. When these receipts were taken to the bank by Walters, they had on their face a guarantee of the State as to their integrity until the expiration date of the same, and providing for a renewal of such license and, as we understand the facts, the same-was renewed covering the period in controversy. They were endorsed in blank by the owners and also by the warehouse through Walters, manager, no doubt required to relieve from any unpaid charges for storage. Being endorsed in blank they were negotiable by delivery, C. S., sec. 3010, and taken as collateral, they conferred upon the bank the position of holder for value to the extent of the bank’s lien, C. S., 3005-3007; Smathers v. Hotel Co., 162 N. C., p. 346. The facts agreed upon showing that they were taken in due course of business for full value and without actual notice of any fraud on the part of Walters, there is nothing, in our opinion, to deprive the bank of the position of a holder in due course of the receipts. While there may have been observable irregularities on the face of the instrument, and on conditions presented, sufficient to put one on inquiry under our general statute on negotiable instruments, ch. 58, C. S., this will no longer suffice to effect the rights of a holder in due course, but there must have been either actual knowledge of the infirmity, or knowledge of such facts as to constitute bad faith on the part of the taker, C. S., 3037; Holleman v. Trust Co., 185 N. C., p. 49; Critcher v. Ballard, 180 N. C., p. 112; Smathers v. Hotel Co., 162 N. C., p. 346. Not only is this true under the general law, as stated, but under the legislation more directly applicable, in section 4087, it is provided as follows:

“The validity of the negotiation of a receipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the receipt was induced by fraud, mistake, or duress to entrust the possession or custody of tbe receipt to sucb person, if tbe person to wbom tbe receipt was negotiated, or a person to wbom tbe receipt was subsequently negotiated, paid value tberefor, without notice of tbe breach of duty, or fraud, mistake or duress.”

Tbe receipts in question here come directly within tbe force and effect of this legislation and under its provisions, tbe bank is clearly entitled to claim as bolder in due course, (1) tbe facts showing that at tbe time same were negotiated to tbe bank, they were endorsed by tbe owners and by tbe warehouse and delivered. (2) That tbe bank paid full value and without notice of tbe fraud and breach of duty on tbe part of Walters.

This being true, tbe State authorities having control of tbe matter were fully justified in paying off tbe claim out of tbe funds on band. They were raised and put into tbe bands of tbe State Treasurer for tbe express purpose of making these receipts “universally acceptable as collateral,” and to “safeguard tbe State Warehouse System.” Moreover tbe tax is to provide an indemnifying fund to “cover any loss not covered by tbe bonds heretofore provided for,” thus constituting tbe bonds, including that of defendant’s, tbe primary fund from which to make good tbe default of their respective principals, and tbe State Treasurer, therefore, as custodian of these funds, in tbe exercise of a sound discretion, and in tbe line of bis official duty, and for tbe purposes contemplated by tbe law, having made good tbe loss caused by default of defendant’s principal, is entitled to be reimbursed according to stipulations of defendant’s bond.

There are various irregularities suggested in tbe learned brief of tbe defendant’s counsel, which might have sufficed to put a business man .on inquiry, but none of them go to tbe integrity of tbe receipts as a conclusion of law, nor do they suffice to.establish bad faith on tbe part of tbe bank, and under tbe statute applicable, they are not, in our opinion, available as a-defense.

It is argued for appellant that tbe bank should have refused tbe receipts as collateral because they were placed there by Walters, and this because tbe law provides, that where a receipt is given for cotton belonging to tbe local manager, it shall specify that fact on its face. But it was not Walter’s cotton originally, they were duly and regularly issued to third parties who, as stated, bad endorsed and delivered them, and there is nothing in tbe statute which prohibits Walters from acquiring these receipts.

Again appellant’s counsel insist that tbe facts present a case of double agency, and where tbe bank should have paused or declined to act because Walters was placing them as collateral for bis own personal obligation, citing Grady v. Bank, 184 N. C., p. 158, but in this and all other cases o£ like kind, so far examined, where a claimant was barred of recovery under the doctrine stated, it appeared that he took with knowledge of the fact that the principal's property was being perverted by the agent to his own use. Here, as stated, "Walters offered warehouse receipts endorsed by the original owners, and the case states that the bank had no actual knowledge of Walter’s default. It is further argued that before payment made the State Treasurer was warned not to pay and fully informed of the fact that the receipts were reissued by Walters in flagrant breach of his duties, and furthermore, that the defendant denied liability on the bond. But the receipts had already been negotiated for full value, and this legislation having for one of its chiefest purposes to maintain their negotiability, would indeed fall short of both its purpose and meaning if the authorities having control of the indemnity fund were compelled to stay their hand whenever they were notified not to pay and abide the results of a jury trial, whenever the question was so raised. Considering the terms and purposes of the law unless the facts would disclose a case where a claimant bank or other being an endorsee or holder for value acted it becomes the duty of the Treasurer, as heretofore stated, to make good the loss and, this loss being due to their principal’s default, defendant, in collusion with the defaulting officer, or had knowledge of the fraud, as stated, is legally and primarily liable therefor.

There is no error and the judgment below is

Affirmed.

ClakksoN, J., not sitting.