First Nat. Bank of Morristown v. C. W. Leeton & Bro.

• Decision Date: 19 February 1923
• Docket Number: 22222
• Citation: 131 Miss. 324,95 So. 445
• Parties: FIRST NAT. BANK OF MORRISTOWN, TENN., v. C. W. LEETON & BRO
• Court: Mississippi Supreme Court

95 So. 445

131 Miss. 324

FIRST NAT. BANK OF MORRISTOWN, TENN., v. C. W. LEETON & BRO

No. 22222

Supreme Court of Mississippi

February 19, 1923

1. BANKS AND BANKING. Purchase of note from copartner with known defenses by officer of bank held notice to bank.

Where the president of a bank is a part owner in a promissory note to which he knows there are defenses, and purchases this note for the bank from his copartner, with the intent and purpose of either defrauding the maker of the note or the bank, for the individual gain of himself and his copartners, his knowledge of the defenses to the note is either notice or knowledge of the bank.

2. CORPORATIONS Knowledge of highest executive officer acting for corporation, notice or knowledge of corporation itself.

A corporation only acts through its officers and agents, and the knowledge possessed by the highest executive officer of the corporation, who acts for the corporation in the transaction, is either the notice or the knowledge of the corporation itself.

3 LICENSES. Blue Sky Laws held not violated in negotiation of note.

The facts in this case do not show that there was any violation of the so-called Blue Sky Laws, section 4127 et seq. Hemingway's Code, of the state.

4. BILLS AND NOTES. Note secured from sale of stock in violation of Blue Sky Law not defense in hands of innocent purchaser.

Even if stock in a mining corporation was sold in this state in violation of this law and a negotiable note given therefor this violation of the law would not be a defense to the note in the hands of an innocent purchaser for value without notice.

HON. W A. ALCORN, Judge.

APPEAL from circuit court of Coahoma county, HON. W. A. ALCORN Judge.

Action by the First National Bank of Morristown, Tennessee, against C. W. Leeton & Bro. From a judgment for defendant, plaintiff appeals. Reversed and remanded.

Reversed and remanded.

Maynard, Fitzgerald & Venable, for appellant.

Appellees take the position that the note was void and therefore not good even in the hands of an innocent purchaser for value. They say it is void: First; because, the corporation for whose stock the note was given had never complied with the requirements of the Mississippi Stock Sale Law Statutes. We have sufficiently answered this contention pointing out there is no proof in the record to show that the corporation came within the class of corporations covered by the statute and in the second place there is no proof that the seller of the stock was acting as the agent for the corporation.

They next contend that the note is void because they say, according to the terms of the contract treasury stock was to be tendered in performance of it and this was not done. It needs no citation of authorities to show that this contention does not affect the validity of a contract but only its performance. Counsel for appellees say page 2 of their brief) that the law is settled in Mississippi that a contract in violation of the statute is absolutely void no matter whether fully executed or executory; and they cite the case of Bellew v. Williams, 109 Miss. 74. This case simply decides that where the parties are in pari delicto the courts will not aid either one of them. The direct implication is, and the authorities in Mississippi so show, that if the parties in many instances are not in pari delicto, that the innocent party is permitted to recover and will receive the aid of courts.

It is stated by counsel for appellees (page 2 of his brief): "Our contention is that the section referred to (a section of negotiable instrument law declaring that a holder in due course shall take free from defective title of prior parties) is not applicable where the paper was void between the parties to it and that a holder in due course cannot recover where the note is void because given for an unlawful consideration as clearly expressed by the statute."

The statutes are analogous to statutes on gaming and usury. In support of their contention, they cite the case of Twentieth Street Banks v. Jacobs, 74 W.Va. 528. A gambling statute was here involved. This case belongs to the minority view and turns upon the construction given the gaming statute of that state and the view held that it rendered the contract absolutely void.

Mr. Williston, in his work on Contracts, in speaking of enforcibility of negotiable instrument given for a gambling debt and the right of a holder in due course, particularly as section 1776, has this to say: "The only conflict concerning the enforcibility of a negotiable instrument given for a gambling debt arises when it has come into the hands of a holder in due course. In regard to illegality generally the rule is clear that unless a statute clearly declares void a negotiable instrument in the hands of all parties, a holder in due course can recover."

We call the court's attention to the case of Citizens National Bank v. Bucheit, Alabama case reported in 71 So. 82, (72 So. 1019), which was a case of a note of a foreign corporation doing business illegally and where this was set up as a defense. The court held the note was good in the hands of an innocent purchaser, for value notwithstanding the foreign corporation had not complied with the statutes authorizing it to do business in the state. See also Bluthenthall v. Columbia, 175 Ala. 398; Commercial National Bank v. Jordon, 71. Fla. 566; and Hunt v. Davenport, 138 Ga. 622.

We do not think, however, it is necessary to go into the question of the effect of illegality on a negotiable instrument in the hands of a purchaser for value in due course since the record in this case does not, as we have shown, bring the case at bar within the principle. It is next urged that the bank had notice because Mr. Forgey, the president, according to defendant's theory, was acting for the bank at the time of his effort to collect the note, regardless of whether notice to him was notice to the bank, at the time of the discounting of the note. We need no citation of authority to show that the notice to be effective must be notice received at the time of the transaction itself. At the time of the president's effort to collect the note, the rights of the parties had long been fixed.

It is next submitted that whatever error or errors there were in the instructions for appellees were cured by the instructions for appellant. We do not understand this contention since the record shows that all the instructions asked by appellant were refused except one which was not modified and this was not used before the jury, so that the appellant used no instructions for the jury and hence there could not be any such thing as curing the instructions for appellee.

We respectfully submit that the judgment of the court below should be reversed and judgment entered in favor of the bank which is, according to appellee's own theory of the proof, an innocent purchaser for value of the note in due course of trade.

J. W. & J. C. Cutrer, for appellees.

Suffice it to say that the note given in payment of the stock in the Southern Exploration Company, was void as between the parties, for two reasons: First, because there was a violation of the law of the state of Mississippi, dealing with the sale of stock in foreign corporations which have not complied with the laws of the state respecting certain conditions precedent.

Section 4141 of Hemingway's Code, provides that if any person shall sell or contract to sell, directly or indirectly, any stock of any corporation, subject to the act, which has not complied with the terms of the act, that person shall be guilty of misdemeanor and punished by a fine and imprisonment.

Sections 4127 and 4128 of Hemingway's Code, forbid any mining corporation, attempting to increase its capital stock, to sell its stock unless the conditions of the act are complied with. The Southern Exploration Company, is a corporation supposed to be engaged in the mining of zinc. The action of the corporation in selling its stock may be regarded as an attempt to increase its capital stock. The statute should be construed very broadly. It was clearly the intention of the legislature in passing these laws to protect the citizens of the state from fraudulent practices by corporations or their agents.

In connection with these sections of the code aforesaid, we might say at this time, that the corporation for whose stock the note was given, had never complied with the requirements of law, or made any pretense of doing so, to authorize it to do business in Mississippi, or to sell its stock here directly or indirectly. The note was void as between the maker and the payee for the reason that the appellees had given same for the consideration that the stock should be issued directly from the corporation, and not from an individual. Appellees never accepted the stock, but returned same immediately upon receipt thereof.

Appellant claims that it is a bona-fide purchaser for value without notice, of the note in controversy, and relies upon section 57 of the Negotiable Instrument Law. That section is in the following words: "A holder in due course holds the instrument free from any defective title of prior parties, and free from defenses available to prior parties, among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon."

The contract entered into between appellees and Thompson, the agent of the corporation, was void because it was in violation of the statutes of the state of Mississippi above referred to, and for the further reason, that Thompson did not comply with the terms of appellees in having the stock issued directly by the corporation. The law is well settled in this state that a contract in violation of the...