Cherry v. Frost

• Decision Date: 30 April 1881
• Citation: 75 Tenn. 1
• Parties: W. H. CHERRY v. JOHN T. FROST et al.
• Court: Tennessee Supreme Court

75 Tenn. 1

W. H. CHERRY

v.JOHN T. FROST et al.

Supreme Court of Tennessee.

April Term, 1881.

FROM SHELBY.

Appeal from the Chancery Court at Memphis. R. J. MORGAN, Ch.

GANTT & PATTERSON for complainant.

HARRIS & TURLY for defendants.

COOPER, J., delivered the opinion of the court.

On the 28th of June, 1871, the complainant, W. H. Cherry, borrowed from the City Bank of Memphis, $1,000, for which he executed and delivered to the bank his note, due on demand, and, at the same time, deposited with said bank as collateral security, a certificate of forty shares, of $100 each, of the capital stock of the Mississippi Valley Insurance Company. The certificate was in the following form: “This is to certify that W. H. Cherry is entitled to forty shares in the capital stock of the Mississippi Valley Insurance Company, transferable in person or by attorney on surrender of this certificate.” On the back of the certificate was an assignment for value and the printed form of a power of attorney to make the transfer on the books of the company, left blank as to the name of the attorney, and signed by complainant.

On the 19th of June, 1872, complainant executed to the City Bank of Memphis his note at ninety days for $1,000, another sum of money that day borrowed by him, and to secure its payment delivered to the bank, as collateral security, with a similar endorsement and blank power of attorney as above, a certificate of thirty shares of $100 each in the capital stock of the Merchants National Bank. The certificate was in the form of the certificate as above.

On the 31st of July, 1872, the City Bank suspended payments, and proved to be utterly insolvent. Upon inquiry, complainant learned that the certificates of stock, deposited as collateral security for the payment of his notes, were claimed by the defendant, John T. Frost, as having been pledged to him to secure money borrowed from him by the City Bank. Complainant offered to pay the amount of his two notes upon surrender of his certificates, which offer was refused by the defendant Frost. Complainant then, on the 1st of August, 1872, notified the Mississippi Valley Insurance Company and the Merchants National Bank not to assign the stock on their books, no assignment having yet been made under the power, and on the 9th of August, 1872, he commenced this suit to enjoin the transfer, and to assert his rights. The chancellor, on final hearing, dismissed his bill, and he appealed.

The claim of the defendant Frost is, that on the 10th of May, 1872, he loaned to the City Bank of Memphis $12,000, for which the bank executed to him two notes of that date, one for $4,000 at sixty days, and the other for $8,000 at ninety days, and, at the same time, delivered to him various collaterals, and among others the two certificates of stock deposited by the complainant with the City Bank to secure his notes as above. The defendant further claims that he received these collaterals, under these circumstances, without any notice of the complainant's equity, and under the full belief that they were the property of the bank. It does sufficiently appear that defendant Frost was ignorant of the complainant's rights, or of the nature of the bank's title to the stock, until shortly before or at the time of the filing of the bill. It further appears that the collaterals received from the bank were insufficient to pay the debt of the bank to Frost, and that if he is entitled to the collaterals in controversy, under his claim, they will not satisfy his debt.

The complainant insists that the defendant is not a bona fide purchaser for value and without notice within the rule of law relied on by the defendant. He bases his contention, first, on the character of the transaction between the defendant and the bank, and, secondly, on the character of the certificate.

It does satisfactorily appear that no money was actually loaned by the defendant to the bank on the 10th of May, 1872. About $3,000 of the consideration of the notes of the bank executed on that day had been loaned by the defendant to the bank May 17, 1871. On January 10. 1872, a new note was given by the bank for the amount at four months. On the same day, the bank borrowed from Frost the additional sum of $5,000, giving its note therefor at four months. On the 20th of February, 1872, the bank borrowed from Frost the additional sum of $4,000, and gave its notes therefor. On the 10th of May, 1872, these notes were renewed by the two notes for $8,000 and $4,000, for the security of which the defendant claims that the collaterals in controversy were given. The interest, or discount on the notes executed January 10, 1872, and subsequently, at the rate agreed upon, was paid by the bank in advance when the notes were given.

It is first insisted by the complainant, upon this state of facts, that, even if it be conceded that certificates of stock are of that character of securities which pass to a bona fide purchaser for value free from the equities of third persons, the defendant only received these certificates as security for a pre-existing debt, and not for a consideration passing at the time. The defendant undertakes to meet this argument by saying in his answer and deposition that each of these transactions was a new one, the previous notes paid, and the new note or notes thereupon executed for the new consideration passing. The deposition of the president of the bank, with whom the transactions were made, is not taken, and, perhaps, in the absence of any positive testimony to the contrary, the defendant's evidence must be allowed to prevail. The substance of what was done, however, whether the form of passing and repassing checks was actually adopted or not, was a new transaction. A note taken up by a note given to renew it is, in general, extinguished: Hill v. Bosstick, 10 Yer., 410. A person who gives his money, goods or credit for a note at the time of receiving it, or who then on account of it sustained loss or incurred liability, is a holder in the due course of commercial transactions: Kimbro v. Lytle, 10 Yer., 417. And the fact that a security has been transferred, under such circumstances, in fraud of a third person, will not affect the holder's right if entitled to the character of a bona fide holder in due course of trade: Nichol v. Bate,...