Adair v. Bank of Hickory Flat

• Citation: 115 Miss. 29,75 So. 758
• Decision Date: 25 June 1917
• Docket Number: 19047
• Court: United States State Supreme Court of Mississippi
• Parties: ADAIR v. BANK OF HICKORY FLAT

75 So. 758

115 Miss. 29

ADAIR v. BANK OF HICKORY FLAT

No. 19047

Supreme Court of Mississippi

June 25, 1917

Division B

APPEAL from the circuit court of Sunflower county, HON. E. F EVERETT, Judge.

Suit by the Bank of Hickory Flat against W. T. Adair. From a judgment for plaintiff, defendant appeals.

The facts are fully state in the opinion of the court.

Cause reversed and remanded.

Herring & Wiley and J. L. Williams, for appellant.

In addition to the brief filed herein by our associate, we desire to urge upon the court that the case should be reversed because of two palpable errors on the part of the court, to wit: First, In sustaining plaintiffs demurrer to special plea No. 3; Second, In giving the peremptory instruction to find for plaintiff.

Special plea No. 3 sets up a perfect defense. It is the law that one who takes a note merely as collateral security for a pre-existing debt is not an innocent purchaser for value. In the case of Bank of Meridian v. Strauss, 66 Miss 479, this court said: "In this state it is well settled that receiving property merely as security for a pre-existing debt does not constitute the holder a purchaser for value. Pack v. Harney, 4 S. & M. 255; Pope v Pope, 40 Miss. 517; Perkins v. Swank, 43 Miss 349; Hinds v. Pugh, 48 Miss. 268; Brooks v. Whitson, 7 S. & M. 513."

This seems to be the holding of the court of last resort in the states of Alabama, Iowa, Kentucky, Maine, Missouri, New Hampshire, New York, Ohio, Pennsylvania and Tennessee. See 3 Ruling Case Law, page 1059, and cases there cited. The Strauss case, supra, was decided in 1889, and is still the law of Mississippi, the doctrines therein announced having been re-announced in 1914 in the case of Merchants & Farmers Bank v. Bank of Winona, 64 So. 210. In that case this court said:

"When circumstances in evidence show that the payee, from whom the holder claims, came into possession of the note by fraud upon the maker, then the holder must show his good faith."

There can be no doubt that the execution of the note sued on in this case was fraudulently procured. It is shown unquestionably that the officer of the mining company who took the note, gave appellant a solemn promise in writing to the effect that if at the maturity of the note he did not care to pay for same, for any reason, the note will be cancelled and returned to him.

The Court said, in the case last cited: "We think the evidence offered by appellant might be so construed as to raise an inference that Blackston delivered these notes to the bank of Winona as a security for pre-existing indebtedness."

In the case at bar the defendant did not rely on inference, but it is proven as an absolute and uncontradicted fact that when the bank of Hickory Flat took the note sued on it was put up as collateral security for a preexisting debt of six thousand dollars.

The court below seemed to be under the impression that because it could not be shown that the Bank of Hickory Flat took the note with knowledge of the maker's defenses, then Baird and Warmack could rely on the good faith of the bank, but, under the testimony of Marion Allen, the Treasurer of the Memphis Mining & Manufacturing Company, Transcript page 66, which testimony is not contradicted, it would have been impossible for Baird and Warmack to have acquired the note from the Bank of Hickory Flat, because his testimony shows that the said note was turned back to the said Memphis Mining & Manufacturing Company by the Bank of Hickory Flat after this suit was filed.

Having come back into the hands of the payee the bona fides of the Bank of Hickory Flat has nothing to do with the case. Andrews v. Robinson, 101 Wisconsin 334, 87 N.W. 190, 87 A. S. R. 87.

"The general rule that if a person, with knowledge of facts, which will defeat a promissory note in the hands of the payee, purchases it from a bona-fide holder thereof, he may recover thereon upon the strength of such bona fides, does not apply to a purchaser who is the payee of the note. If he sells such paper to an innocent third person, and repurchases it for value, he does not thereby become possessed of any better right as against the maker than he is possessed in the first instance. Otherwise a person might become possessed of the promissory note of another by the grossest of fraud and by selling it to an innocent third person for value and subsequently repurchasing it, enforce the same against the maker. The law contains no such open door as that for the successful perpetration of fraud." 3 Ruling Case Law, page 1037, and cases there cited.

H. C. Mounger, for appellant.

The rule is uncontroverted that the payee of a note which has been procured by fraud or to which there in a defense as between the original parties, either based upon fraud or illegality of consideration, cannot after transfer of the note to an innocent purchaser, for value, repurchase the note and enforce it, against the maker, stripped of the defenses originally existing as between the maker and the payee. It is held that the defense of the maker cannot be cut off by passing the note through the hands of an innocent third person, although in a suit by the latter, upon the note the defense would not be available. 3 Am. and Eng. Ann. Cases, p. 626, note. We call the courts attention to the principal case of Aragon Coffee Co. v. Rogers, 8 Miss. 823, where the principal is laid down and the court said the case should have gone to the jury. See this note in full, with authorities. See note to 54 L. R. A., p. 673, where it is said: "The exception mentioned is that if the note was invalid as between the maker and payee, the payee could not himself, by purchase from a bona-fide holder, become a successor to his rights, it not being essential to such bona-fide holders protection to extend the principal so far. "See also the principal case, Andrews v. Robertson, ibid; 4 Am. and Eng. Ency. of Law (2 Ed.), 309, 87 Am. St. Rep. 870.

The fourth assignment of error is, "because the court erred in sustaining the objection to the questions of the defendant. At that time, at the time this note was taken, by the Bank of Hickory Flat, was the Memphis Mining and Manufacturing Company indebted to the Bank of Hickory Flat, and if so to what extent? and of what did said indebtedness consist?

This was in the deposition of Marion Allen, the treasurer of said company, the one who sold the stock to Adair, and who negotiated his note to the Bank of Hickory Flat. He was also secretary of the Mining Company. The objection was that the books were the best evidence. There was nothing in the objection. It was as to the existence of a fact, and if the witness knew it, he did not have to have the books before him, or introduce the books. He of all men should have known and it appears that he did know. It was important as to the transfer of the note. If the note was taken as collateral security for a preexistent debt, the bank was not an innocent purchaser.

Receiving property merely as security for a pre-existing debt does not constitute the holder a purchaser for value and by reason of our non-commercial statute, value applies to bills of exchange and notes taken as security for a debt." Merchants and Farmers Bank v. Bank of Winona, 64 So. 210, 212, at bottom, Opinion by COOK, J.; First Nat. Bank v. Strauss, 66 Miss. 479, 6 So. 232, 14 Am. St. Rep. 579; Allen v. Bratton, 47 Miss. 119; B. & A. Dig., p. 94.

The sixth assignment and the most important and the one which covers a multitude of sins, is "Because the court erred in ruling out all the evidence of the defendant, and in giving a peremptory instruction to the jury to find for the plaintiff."

The case should have gone to the jury. The evidence clearly shows that the whole thing was a fraud. The very fact that the treasurer in taking the note, gave Adair an agreement giving him the option to decline to pay it, shows that it was a fraudulent transaction. He was right then and there laying a trap for Adair. His idea was to induce him to sign the note by this trick, and then put it into the hands of an innocent purchaser and collect. The treasurer never intended to keep this agreement from the first. The evidence also shows that Adair gave the sixty days' notice; that he never got any stock or bonds or anything else for the note. There was evidence to go to the jury to show that the bank had had notice. Merchants and Farmers Bank of Winona, 64 So. 211-21; McCarty v. Kapreta, Ann. Cases, 1915A. 834; Morris v. Ga. Loan Savings and Banking Company, 54 L. R. A. 507.

"Notice to an officer or agent of a corporation is, generally speaking, notice to the corporation. This is in accordance with the general doctrine of the law of agency, the rules applicable to the case of individuals and to that of corporations being the same. Am. & Eng. Ency. of Law.

There was evidence enough to go to the jury on the question of notice. 3 Ruling Case Law, Bills and Notes, sec. 244; Canajoharie Nat. Bank v. Diefendors, 10 L. R. A. 676. It is the same with any other defense, illegality of consideration or want of consideration.

"Prima facie the holder is an innocent purchaser for value, but when the circumstances in evidence show that the payee from whom the holder claims, came into possession of the note by fraud upon the maker, then the holder must show his good faith. Merchants and Farmers Bank v. Bank of Winona, 64 So 212. The case of Emanual v. White, 34 Miss. 56, 63, recognizes the doctrine that when the defendant has shown the want, or failure or illegality of consideration, or that it was lost or stolen from the rightful owner, or that the holder came to the possession of it fraudulently, that the burden of proof then shifts to the plaintiff. 4 Am. & Eng. Ency. of Law,...