Mack v. Dailey, 75.

• Decision Date: 17 November 1924
• Docket Number: No. 75.,75.
• Citation: 3 F.2d 534
• Parties: MACK v. DAILEY.
• Court: U.S. Court of Appeals — Second Circuit

3 F.2d 534 (1924)

MACK v. DAILEY.

No. 75.

Circuit Court of Appeals, Second Circuit.

November 17, 1924.

Max Kahn, of Detroit, Mich. (Raymond C. Vaughan, of Buffalo, N. Y., of counsel), for plaintiff in error.

Fluhrer & Reed, of Albion, N. Y., for defendant in error.

Before ROGERS and MANTON, Circuit Judges, and LEARNED HAND, District Judge.

ROGERS, Circuit Judge.

The plaintiff, a resident of the state of Michigan, brought this action against the defendant, a resident of the state of New York, to recover the sum of $20,001.56, with interest thereon from September 18, 1920. The case was submitted to a jury, and a verdict was rendered for the defendant of no cause of action.

The action was brought to recover upon a negotiable promissory note made on September 18, 1920, and delivered to the payee A. W. Wallace & Co. The complaint alleged that this note was indorsed over to the plaintiff before its maturity, and for a good and valuable consideration, and that he is a holder in good faith.

The defendant in his answer admitted that he made the note and delivered it for value to A. W. Wallace & Co.; but he denied that the note was regularly transferred to the plaintiff for value, and alleged that it was transferred to him after maturity, without value, and fraudulently. It also alleged that the note was originally procured by A. W. Wallace & Co. fraudulently and without value. It further alleged that A. W. Wallace & Co. obtained the note under the following circumstances:

The company agreed to sell to defendant shares of stock in the American Silver Corporation to the value of $25,000. That for the purpose of inducing the defendant to purchase the stock it was represented and warranted to defendant that the stock would be listed and placed for sale on the New York Curb Market by November 1, 1920, which event would greatly enhance its value. That they further represented and warranted that within two months thereafter the American Silver Corporation would be shipping silver to the United States mint. That defendant, in reliance on these representations, purchased the stock, and in part payment therefor gave to A. W. Wallace & Co. the note in question and $5,000 in cash. That the stock, however, was never listed on the New York Curb Market, and that the American Silver Corporation has at no time shipped any silver to the United States mint. That the shares of stock were never delivered to defendant.

The defendant in its answer also alleged that the original note, which was payable in 30 days from its date, was renewed from time to time; the note sued upon being the third renewal note; that each of the renewal notes were delivered to A. W. Wallace & Co. with the express agreement and understanding that it was to hold them in their possession and custody, and that the same were not to have any validity, or become binding obligations, unless the stock was listed on the New York Curb Market, the Boston Stock Exchange, and silver was shipped to the United States mint as above stated.

It is clearly established that the understanding between A. W. Wallace & Co. and the defendant was that, if the defendant would give his check for $5,000 and his note for $20,000, the brokers would see that he received 20,000 shares of the stock of the American Silver Corporation at $1.25 a share, and that the note would not be binding unless within a very short time the stock was listed on the New York Curb Market and on the Boston Stock Exchange, and silver was shipped to the United States mint. It was also understood that the note would be held in the office of A. W. Wallace & Co., and would not be sold or used as security, or in any way, until the conditions above stated were fulfilled. The undisputed evidence shows that the stock was never listed, either on the New York Curb Market or on the Boston Stock Exchange, and also that no silver was at any time shipped by the corporation to the United States mint.

The original note, which the defendant gave, was renewed from time to time; the same representations being made that the listing of the stock on the New York Curb and on the Boston Stock Exchange were about to be consummated, and that silver was about to be shipped to the United States mint; that until those conditions were met the note would be kept at the office of the brokerage house of A. W. Wallace & Co., and would not be sold or used in any way, and would not become a binding obligation.

It appears that at the close of the case the plaintiff's counsel moved for the direction of a verdict for the plaintiff, on the ground that it had not been shown that the plaintiff was not a bona fide holder for value and before maturity. Then occurred this colloquy:

"The Court: The defendant has not shown it?

"Mr. Kahn: No; the defendant has not shown that fact, and the plaintiff has shown that he paid a fair valuation for this note without notice before maturity, and he is the holder in due course. Under the federal rule the burden is on the defendant to show that he had notice.

"The Court: Don't you think the question of notice is out of the case?

"Mr. Kahn: No, your honor. I should say the question of notice was a very vital issue in this case. The defendant must show as he alleges in his answer.

"The Court: That is one of the defenses, but they also defend on the ground there was no value given for this note.

"Mr. Kahn: You mean in the beginning?

"The Court: Yes.

"Mr. Kahn: Here is a bona fide holder in possession of it. While that defense would be good against A. W. Wallace & Co., if they proved fraud —

"The Court: The plaintiff must prove that he paid value for the note.

"Mr. Kahn: Yes; and the plaintiff has proved that he paid value for this $20,000 note. In other words, when we start our case and offer the note in evidence, that makes a prima facie case. Then, if the defendant offers any evidence of fraud — we don't claim that he has proven any fraud — then the burden is on the plaintiff to show that he paid valuable consideration for the note. We started out and proved a prima facie case first. Now the burden is on the defendant under the federal rule to prove all of his defenses. He introduced testimony here that might be urged to constitute fraud. In order to save any argument at that time, we elected to put Mr. Mack on the stand and prove that he paid valuable consideration for that note. Having done that, we have met the burden of proof. Then the defendant must go on and prove their defense. We are not obliged to prove anything, except our prima facie case, unless fraud is proven in the case, and I take the position that no fraud has been proven under the federal rule which requires us to prove value. But we have gone ahead and proven value, and I claim that now the burden shifts to them, and that they have not met it.

"The Court: What is the use of their proving that he had notice of defect of title, when you say there is no evidence of fraud, as testified to by the defendant, in the case?

"Mr. Kahn: There is no proof of any notice here.

"The Court: I will admit that, but don't understand they are resting on that defense.

"Mr. Kahn: Then certainly there is no issue of fact. It is purely a question of law, if they can't show that Mr. Mack had notice, and they can't show that he didn't pay value. If they can't show all of these defenses, then Mr. Mack is entitled to a recovery.

"The Court: Yes; if he shows that he paid value.

"Mr. Kahn: Yes; and he has shown that.

"The Court: What do you want to say to that? They ask me to direct a verdict in favor of the plaintiff. I will hear what you have to say on the question.

"Mr. Reed: We say it is a question of fact for the jury.

"The Court: I think so, too. Motion denied.

"Mr. Kahn: I take an exception, if the court please. Before you rule on the question finally, I would like to submit you some authorities.

"The Court: I have looked up the authorities.

* * * * *

"The Court: I think the issue should be submitted to the jury as to false representations, as to whether or not those were fraud, and whether or not there was breach of faith; also as to whether the note was obtained by the plaintiff under payment by him of good and valuable consideration.

"Mr. Kahn: Without notice.

"The Court: I don't think the question of notice is here. There has not been any evidence given as to that.

"Mr. Kahn: As I take it —

"The Court: I think the only question of fact here is whether the holder of this note paid value for it.

"Mr. Kahn: That is the only question of fact?

"The Court: That is the only question of fact.

* * * * *

"Mr. Kahn: Then the only question for the jury is whether or not the plaintiff paid value for the note.

"The Court: Yes; I think so.

* * * * *

"The Court: I will allow the case to go to the jury on three questions, namely: Was the defendant induced to make the note by misrepresentations and in violation of one of the provisions set forth in section 94 of the state statute? second, did the plaintiff have notice or knowledge of the defect in the title of the note or was knowledge imputed to him by the facts and circumstances? and, third, was the plaintiff a bona fide holder for value?

"Mr. Kahn: I take an exception to your honor submitting the questions to the jury on each and every one of the three grounds. I again ask the court to confine it to one question that your honor said you would submit to the jury in the beginning; that is, whether the plaintiff paid value for the note.

"The Court: No; I think I will submit the three questions to the jury that I have stated.

"Mr. Kahn: I take an exception to the ruling of the court. You claimed the affirmative at the beginning of the case."

The undisputed testimony shows that the plaintiff acquired the note sued upon before its maturity, and without notice of any infirmity in the note, or of any defect in the title of the one who negotiated it. The plaintiff testified that in 1919 he bought...