Ex parte Goldberg & Lewis

Decision Date17 December 1914
Docket Number667
Citation191 Ala. 356,67 So. 839
CourtAlabama Supreme Court
PartiesEx parte GOLDBERG & LEWIS.

Certiorari to Court of Appeals.

Petition for certiorari by Goldberg & Lewis to the Court of Appeals to review a judgment (10 Ala.App. 485, 65 So. 454) affirming a judgment in an action by them against J.H. Stone and another. Judgment of Court of Appeals reversed and remanded.

Browne Leeper & Koenig, of Columbiana, and Knox, Acker, Dixon &amp Sims, of Talladega, for appellant.

Riddle Ellis & Riddle, of Columbiana, for appellee.

SOMERVILLE J.

The only question presented by the record is whether the payee of a negotiable note can recover thereon against a surety, who signed the note in reliance upon the false statement of the principal signer that the signature of another ostensible surety upon the note was genuine, and upon the violated condition that other named persons were to sign the note as cosureties before its delivery to the payee; the payee having taken the note for value in good faith in the regular course of business, without notice of the fraud or breach of agreement.

In its original opinion the Court of Appeals held that, on common-law principles, either of the matters stated was available to the defendant to defeat a recovery. On the application for rehearing, however, it was held, without receding from the former opinion, that these defenses were available to this defendant under the provisions of the Negotiable Instruments Act (Code,§§ 4958-5149), regardless of the previous state of the law as shown by our decisions ( Stone v. Goldberg & Lewis, 6 Ala.App. 249, 60 So. 744).

In the leading English ease of Watson v. Russell, 3 B. & S. (Q.B.), it was said by Lord Cockburn, C.J.:

"I consider the law to be now quite settled that if a person puts his name to a paper, which either is, or by being filled up or indorsed may be converted into, a negotiable security, and allows such paper to get into the hands of another person, who transfers the same to a holder, for consideration and without notice, such party is liable to such bona fide holder, however fraudulent, or even felonious, as against him, the transfer of the security may have been."

The "transfer" in that case was simply the delivery of the note to the payee, and the principle of protection was applied to the payee as a bona fide holder for value.

This principle is equally well settled in the United States, and has been most frequently applied by the courts in the enforcement of the liability of a surety to the payee of commercial paper, whether his relation to the paper was prima facie that of surety, co-maker, or irregular indorser before delivery. The American cases are collected in notes to Benton, etc., Bank v. Boddicker, 105 Iowa, 548, 75 N.W. 632, 45 L.R.A. 321, 67 Am.St.Rep. 310; Vander Ploeg v. Van Zuuk, 135 Iowa, 350, 112 N.W. 807, 13 L.R.A. (N.S.) 490, 124 Am.St.Rep. 275; and in the opinions of the court in Boston, etc., Co. v. Steuer, 183 Mass. 140, 66 N.E. 646, 97 Am.St.Rep. 426, and Mechanics' Bank v. Chardavoyne, 69 N.J.Law, 256, 55 A. 1080, 101 Am.St.Rep. 701. In his note to Bedell v. Herring, 77 Cal. 572, 20 P. 129, 11 Am.St.Rep. 307, 310, Mr. Freeman says:

"It is not necessary, in order to entitle a holder to the protection of the rule, that he be a subsequent transferee from or through an original party to the instrument. The payee himself may be protected. Thus, if a person is induced to sign a note as surety by the fraudulent representations of the principal maker, he will, notwithstanding, be liable to the payee, if it does not appear that the payee knew of the fraud. (Citing the authorities.)"

To this effect the authorities are uniform, and the rule seems to be grounded equally upon the maxims of the common law and of the lex mercatoria.

This court is fully committed to the rule that protects an innocent payee for value against any defense by an accommodation indorser, based upon transactions between such indorser and his principal.

In Marks v. First Nat. Bank, 79 Ala. 550, 58 Am.Rep. 620, it was said, per Somerville, J.:

"The main question in this case, reduced to its last analysis, is simply whether, in the case of accommodation negotiable paper, the fraud of the maker, in procuring the signature of an accommodation indorser, is a good defense to a suit brought against such indorser by the payee, who knows the nature of the paper, but is ignorant of the fraud. We are of opinion, upon fundamental principles of law governing the subject of commercial paper, that the defense cannot be sustained."

In First Nat. Bank v. Dawson, 78 Ala. 67, the defendant had indorsed a note for the maker's accommodation, upon the violated condition that the maker "was not to negotiate or use it until he procured two other solvent cosureties, or indorsers, to be jointly bound with him (Dawson) as common sureties for Fellows (the maker)." The plaintiff bank was the payee of the note. Stone, C.J., said:

"It is not, and cannot be, controverted that if the bank acquired this commercial paper in due course of trade, for a valuable consideration, and without notice of the limitation put upon Fellows' use of it, this defense would be unavailing."

The case was tried and determined upon the issue of due notice to the bank of the limitation.

For the purposes of this case, and with respect to the application of the principle under consideration, it could make no possible difference whether the technical relation of the defendant to the principal debtor and to the paper was that of indorser and guarantor, or comaker and surety.

From these cases it clearly appears that this court regards a payee, under the conditions stated, as a bona fide purchaser in due course of trade, as to the ostensible obligations of all other parties who have lent their credit to the paper by signing it in any recognized mode before its delivery to the payee. And, further, that the protection of such a payee against such a plea by a surety is based upon "fundamental principles of law, governing the subject of commercial paper." From the foregoing it will be readily seen that the cases of Guild v. Thomas, 54 Ala. 414, 25 Am.Rep. 703, White, etc., Co. v. Saxon, 121 Ala. 399, 25 So. 784, and others, which relate to bond contracts, and Sharp v. Allgood, 100 Ala. 183, 14 So. 16, which relates to a nonnegotiable note, usurious on its face, are not here in point. Smith v. Kirkland, 81 Ala. 345, 1 So. 276.

The decisive inquiry is, therefore, whether the provisions of the Negotiable Instruments Act have expressly or impliedly abrogated the principle in question.

Looking to the opinions emanating from other jurisdictions where a code of commercial law uniform with our own has been adopted, we note a striking absence of harmony. The provisions of the Code which are supposedly pertinent are as follows:

Sec. 5138. Holder means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
Sec. 5007. A holder in due course is a holder who has taken the instrument under the following conditions: (1) That the instrument is complete and regular upon its face. (2) That he became the holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact. (3) That he took it in good faith and for value. (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.
Sec. 4985. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof; if payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder, completed by delivery.
Sec. 5013. In the hands of any holder who is not a holder in due course a negotiable instrument is subject to the same defenses as it were non-negotiable. ***

In Lewis v. Clay (1897) 67 L.J. (Q.B.) 224, 227, there is a dictum by Lord Russell, C.J., that under the English Bill of Exchange Act "a 'holder in due course' is a person to whom, after its completion by and as between the immediate parties, the bill or note has been negotiated"; and to the effect, also, that the delivery between the original parties is not a negotiation. The inference, of course, is that under the act a payee could not be a holder in due course.

In Herdman v. Wheeler (1902) 1 K.B. 361, the defendant signed a blank promissory note and delivered it to A. to be filled in with a certain sum, and to be payable to A.A. fraudulently inserted a larger amount and made the plaintiff the payee. Held, that the delivery of the note by A. to the plaintiff was not a negotiation of the note within the meaning of the proviso to section 20, subd. 2, of the B. of E. Act, 1882, so as to entitle the plaintiff to recover. The proviso referred to is that such an instrument (i.e., one signed in blank and delivered to another for completion) becomes enforceable if negotiated after completion to a holder in due course. Channell, J., speaking for the court, said (after referring to Lewis v. Clay):

"It is quite clear therefore that the expression of opinion of the Lord Chief Justice that a payee was never a holder in due course was a dictum only, and, moreover, as his remarks on the other part of the case appear quite unanswerable, the case could not well have been appealed, and in fact was not appealed; so that his dictum could not well be questioned in that case. It appears to us that the late Lord Chief Justice overlooked the definition of holder in section 2, which is, 'Holder means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.' Therefore, in section 29 [Ala.Code, §
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