Denniston's Adm'r v. Jackson

• Court: Kentucky Court of Appeals
• Writing for the Court: STANLEY, Commissioner.
• Citation: Denniston's Adm'r v. Jackson, 304 Ky. 261, 200 S. W. 2d 477 (Ky. Ct. App. 1947)
• Decision Date: 14 March 1947
• Parties: DENNISTON'S ADM'R et al. v. JACKSON et al.

200 S.W.2d 477

304 Ky. 261

DENNISTON'S ADM'R et al. v. JACKSON et al.

Court of Appeals of Kentucky

March 14, 1947

Appeal from Circuit Court, Fayette County; Chester D. Adams, Judge.

Action on note by Hughes Jackson and J. T. Jackson, Jr., against Kendall K. Denniston and J. D. Purcell. Kendall K. Denniston and J. D. Purcell died and the case was revived in the names of their respective personal representatives. From the judgment, the defendants appeal.

Partly affirmed and partly reversed.

J Nathan Elliott and Elliott & Elliott, all of Lexington, for appellants.

Troy D Savage, J. Owen Reynolds, E. L. Hutchinson and James Park all of Lexington, for appellees.

STANLEY Commissioner.

Kendall K. Denniston, payee in a note for $3,276.90, transferred it for value before maturity to the J. T. Jackson Lumber Company, a partnership, in satisfaction of an obligation he owed them. The note then bore the following endorsements:

'Pay to the order of J. D. Purcell,

Kendall K. Denniston.'

'Pay to the order of Kendall K. Denniston,

J. D. Purcell.'

'Pay to the order of J. T. Jackson Lumber Company,

Kendall R. Denniston.'

The Lumber Company recovered judgment against the endorsers, Denniston and Purcell. The makers of the note were not sued. Several defenses were made.

The question we now consider is whether the Jackson Company, holders of the instrument, may recover of Purcell, the intermediate endorser. It is of interest, but not of importance here, that Denniston had endorsed the note to Purcell as a pledge to secure him as surety on Denniston's note to a bank, and when it had been satisfied Purcell endorsed this note back to Denniston; but the Jackson Company had no notice of this. They only saw that Purcell was an endorser.

The obscurity of the Negotiable Instruments Law, KRS 356.001 et seq., as to the liability of an intermediate endorser where the payee or other prior party has re-acquired a note has provoked discussion among scholars in the law and given rise to diversity of opinions of the courts, although the cases are few.

Section 50, Ky.Rev.Stats. 356.050, reads: 'Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this chapter, reissue and further negotiate the same; but he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.'

Section 58, KRS 356.058, provides that in the hands of a holder not in due course a negotiable instrument is subject to the same defenses as if it were non-negotiable, and adds: 'But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.'

The diversity of interpretation rests on different theories. One is that when a prior party who endorsed the instrument re-acquires it, he should be regarded as but getting his former title back, or, using a simile, as standing in his old shoes, so that he cannot hold a subsequent endorser liable. The other theory is that he should be regarded as a new purchaser or as acquiring a new title derived from him from whom he obtains it, or as taking a fresh start in new shoes. Under the first theory an intermediate endorser drops out of the line even though he does not strike out his endorsement (Sec. 121, N.I.L., KRS 356.121). Under the other, he is a prior endorser of the one who re-acquires the instrument. Chaffee, The Re-Acquisition of Negotiable Instruments by a Prior Party. 21 Columbia Law Review, 538; Brannan, Some Necessary Amendments of the Negotiable Instruments Law, 26 Harvard Law Review, 493, 502. These academic discussions seem to deal with a course of negotiation touched by fraud somewhere along the line. Illustrative cases are given in which injustice to an innocent endorser might result under either theory.

We examine the cases, in all of which the facts are similar to those we have before us.

In a case decided under the law merchant, West Boston Savings Bank v. Thompson, 124 Mass. 506, Jones, the payee, endorsed a note and assigned a mortgage securing it to Thompson as security for a loan. When it was paid, on Jones' request, Thompson endorsed the note and assigned the mortgage to Pickering and Moseley. When Jones paid Pickering and Moseley they re-assigned the note and mortgage to him by a separate instrument. Then Jones endorsed the papers and assigned them to the Bank, which such Thompson, the intermediate endorser. It was held that by the familiar processes governing the circulation of negotiable paper, the Bank was entitled to recover against all the parties to the note at the time it was negotiated, which included Thompson. Said the court: 'It was not necessary for the defendant to endorse the note; but, as he saw fit to put it in circulation with his endorsement, he became liable on it to any one who took it in good faith and for value before its maturity. It will hardly be seriously contended that his testimony that he 'did not intend to endorse it' would affect the rights of a holder for value.'

The case was followed in State Finance Corporation v. Pistorino, 245 Mass. 402, 139 N.E. 653, decided under the Negotiable Instruments Law.

Under a similar state of facts, and citing the Massachusetts cases as authority, it was held in Persky v. Bank of America National Association, 235 A.D. 146, 256 N.Y.S. 572, that an intermediate endorser was liable to a subsequent bona fide purchaser. But on appeal that judgment was reversed on the ground that the instrument was not negotiable at all, so that the assignee took title subject to a certain available defense against the assignor. The Court of Appeals, therefore, deemed the question of liability of an intervening endorser under the Neogtiable Instruments Law to be 'irrelevant and academic,' hence expressly withheld an opinion on it. Persky v. Bank of America, 261 N.Y. 212, 185 N.E. 77, 79. Therefore, the force of the decision of the Appellate Division of the New York court (an intermediate one) was considerably weakened, if not wholly destroyed.

On the other side, supporting the 'old shoes' theory or of restoration to his original position, it is said in 8 Am.Jur., Bills and Notes, Section 451, that a prior party to whom an instrument has been negotiated back may re-issue or re-negotiate it, but he is not entitled to enforce payment thereof against any intervening party to whom he is personally liable (which is according to Section 50, N.I.L.), and upon authority of Adrian v. McCaskill, 103 N.C. 182, 9 S.E. 284, 3 L.R.A. 759, 14 Am.St.Rep. 788, it is added: 'Furthermore, one who derives possession from such a prior party, with notice of this fact, cannot hold intermediate endorsers liable.' The facts in the Adrian case are like those in the instant case in their essential particulars, except that the payee only endorsed the note in the beginning and above the defendant's endorsement and did not again sign below them when he delivered the note to the plaintiffs. The difference does not seem material for the delivery of the note was the adoption of the former endorsement and the equivalent to a new endorsement. Brannan, Neg.Instr.Law, Sec. 58, p. 716; KRS 356.049; Lawyers' Realty Co. v. Bank of Ludlow, 256 Ky. 675, 76 S.W.2d 920; Hawkins v. Shields, 100 Miss. 739, 57 So. 4, 4 A.L.R. 760. Also, the endorsements were in blank and not special as here, but neither does that seem to be material. 8 Am.Jur., Bills and Notes, Sec. 322. The court reasoned [103 N.C. 182, 9 S.E. 285]: 'When the note was returned to Patterson, [payee,] he became again the owner, and, as between him and any subsequent endorsers, the relation of endorser and endorsee ceased. The plaintiffs were not the endorsers of the defendants. [It is clear that] Patterson could not, by reason of the blank endorsement of McCaskill & McLean, [intermediate endorsers], hold them liable for the note, for he stood in the relation to them of a prior endorser. The plaintiffs derive their title directly from Patterson, the original payee, who had reacquired the title, and not as successive endorsers deriving title through the endorsement of the defendants * * *. The plaintiffs were affected with and bound by notice of what appeared upon the note itself, and they took the note from the original payee, bearing upon its face the fact that he was the first endorser, and that the defendants were his endorsers.'

The case was decided under the law merchant, but that does not seem to be materially different from the Negotiable Instruments Law in this respect. As in Massachusetts, the North Carolina court later recognized the Adrian case as authority for the same conclusion under the Negotiable Instruments Law. Ray v. Livingston, 204 N.C. 1, 167 S.E 496, 498. There every signature on a note was...