American Surety Co. of New York v. Fenner

• Decision Date: 01 March 1939
• Docket Number: No. 7206.,7206.
• Citation: 125 S.W.2d 258
• Parties: AMERICAN SURETY CO. OF NEW YORK v. FENNER et al.
• Court: Texas Supreme Court

Page 258

125 S.W.2d 258

AMERICAN SURETY CO. OF NEW YORK v. FENNER et al.

No. 7206.

Supreme Court of Texas.

March 1, 1939.

Error to Court of Civil Appeals of Fifth Supreme Judicial District.

Suit by the American Surety Company of New York under its subrogation rights as surety, against Charles E. Fenner and others. Judgment for plaintiff was reversed and remanded by the Court of Civil Appeals, 97 S.W.2d 741, and both parties bring error.

Judgment of Court of Civil Appeals affirmed.

Malone, Lipscomb, White & Seay, F. W. Bartlett, and Thornton & Montgomery, all of Dallas, for plaintiff in error.

Smithdeal, Shook, Bowyer & Lefkowitz, of Dallas, for defendants in error.

TAYLOR, Commissioner.

This is a suit filed by American Surety Company of New York under its subrogation rights as surety against Fenner & Beane, a stock brokerage firm. The trial court upon findings made by the jury rendered judgment in favor of the surety against Charles E. Fenner and A. C. Beane, and eight others as members of the firm. The Court of Civil Appeals reversed and remanded the cause. 97 S.W.2d 741, 743. Both plaintiff and defendants applied for writs of error. The application of plaintiff was granted on the alleged conflicts, and defendants' was granted because of granting plaintiff's.

The surety prior to instituting the suit paid the claim of the American National Bank of Austin for losses sustained by it on account of the wrongful abstraction of funds by Carl A. Lundelius, one of its employees. It is alleged that the funds abstracted by Lundelius were used by him in trading on the stock market through the local office of Fenner & Beane. The office was in the charge of Leigh Ellis, formerly a director of the bank, and R. W. Nixon, the brokerage firm's "customer's man."

Lundelius began trading on the market on November 4, 1929. The drafts, cashier's checks and other items used by him in his transactions were regular on their faces. The opinion of the Court of Civil Appeals states the manner and result of his operations as follows: "Items of exchange. would come in from other banks to the American National Bank to be collected, Lundelius would collect these items but would withhold remittances and issue the drafts and cashier checks either to himself or to Fenner & Beane. These items of exchange would be presented to Pfaefflin [an official whose duty it was to sign same] and were by him signed. When other items came in for collection Lundelius would collect them and remit for the items that had already come in. The total amount of the items abstracted in this manner by Lundelius was $168,237.50. When available deposits had been credited, Lundelius was short in his account the sum of $77,135.94. When other funds available for this purpose had been credited, there was left a shortage of $45,081.28. Appellee, after some available credits were made, paid to the American National Bank the sum of $31,241.77, and instituted this suit against appellee to recover the amount paid."

The trial court submitted fifty-two special issues to the jury on the negligence theory, that is, that there was evidence to support the view that the firm's agents in charge of its Austin branch were in possession of such facts as would put a person of reasonable prudence upon inquiry as to whether Lundelius abstracted from the bank wrongfully the funds with which he operated, and that such inquiry diligently pursued would have disclosed that he had done so.

The opinion of the Court of Civil Appeals correctly points out in the language of section 56 of article 5935 of the Negotiable Instruments Act, that "to constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith." The opinion also correctly states, quoting from the opinion of this Court in Quanah, A. & P. Ry. Co. v. Wichita State Bank & Trust Co., 127 Tex. 407, 93 S.W.2d 701, 106 A.L.R. 821, that it is "the settled law of this state that the ordinary rule of notice does not apply to the purchaser of a negotiable instrument for a valuable consideration before maturity. The test in negotiable instrument cases is good faith, and not diligence or negligence. Unless the purchaser has actual knowledge of facts and circumstances that would render the paper noncollectible or has knowledge of such facts as that a purchase of the instrument would amount to bad faith, it is immaterial that he has notice of such facts as would put a reasonably prudent person on inquiry, and that such inquiry would lead to discovery."

The Court of Civil Appeals reversed the judgment of the trial court because of its erroneous theory in submitting the case but refused to render judgment in favor of defendants, holding that the evidence raised an issue of bad faith of defendants in their dealings with Lundelius, and that such issue upon another trial should be submitted to the jury.

We sustain this holding, and overrule the first four assignments of plaintiff. These assignments invoke sections 55, 58 and 59 of article 5935, alleging substantially that since the undisputed evidence disclosed that "title to each of the items of paper acquired by defendants was defective" and that "defendants participated in the proceeds to the extent of $7363.00 as commission," the judgment of the trial court should be affirmed.

It is pointed out in the Wichita State Bank case, supra [127 Tex. 407, 93 S.W.2d 704], that it is the rule in this state "that in the purchase of a negotiable instrument the title is derived from the instrument itself, and not from the title of the party who transfers it." (Italics ours.) It follows that unless defendants can be connected with the original wrong doing of Lundelius by actual knowledge of it, or a finding of bad faith in acquiring the paper, they are protected as holders in due course. Quanah, A. & P. Ry. Co. v. Bank, supra; Walker v. Commercial Credit Co., Inc., Tex.Civ.App., 107 S.W.2d 688.

We overrule also the contention of defendants that this case is ruled by American Surety Company v. Bache, Tex. Civ.App., 82 S.W.2d 181, 183, writ refused. In that case the court was careful to...