Freeman v. Citizens' Nat. Bank

• Decision Date: 31 March 1934
• Parties: FREEMAN et al. v. CITIZENS' NAT. BANK et al.
• Court: Tennessee Supreme Court

70 S.W.2d 25

167 Tenn. 399

FREEMAN et al. v. CITIZENS' NAT. BANK et al.

Supreme Court of Tennessee.

March 31, 1934

Appeal from Chancery Court, Giles County; Thos. B. Lytle Chancellor.

Consolidated suits, by Mrs. E. C. Freeman and others against the Citizens' Bank and others. From a decree of dismissal as to defendant bank, plaintiffs appeal.

Reversed in part and remanded.

J. L Jones and D. R. Wade, Jr., both of Pulaski, for appellants.

R. E Lee, of Pulaski, for appellees.

GREEN Chief Justice.

The above styled proceeding is in reality a consolidation of three suits, heard together by agreement and approval of the chancellor. The suits are by the holders of certain notes against the makers and a guarantor of those instruments and against the bank which transferred the instruments by delivery to the present holders. The chancellor rendered a decree against the makers and the guarantor, but dismissed the suits as to the bank, and the holders have appealed. The cases were tried upon a stipulation of facts.

The Citizens' Bank (hereafter called the bank) was a state institution conducting a banking business in Pulaski. It has been adjudged insolvent and its affairs are now being wound up by the superintendent of banks as receiver.

The Citizens' Bond & Investment Company (hereafter called the bond company) was an affiliate of the bank, the directors of the bond company being composed of the directors and finance committee of the bank. The principal business of the bond company was that of lending money on real estate and, from this record, it seems to have acted in fiduciary capacities, appearing before us as guardian of a minor in one branch of this litigation. The bond company has also been adjudged insolvent and its affairs are being wound up by a receiver.

W. L. Abernathy, Jr., was president of both institutions and we gather that he was the dominant figure in both institutions. He died by his own hand, testate, and his executor is a defendant hereto.

Abernathy and one L. L. Williams appear to have been associated in some sort of trading partnership under the name of Abernathy & Williams.

Mrs. Mary N. Hargrove is a widowed lady residing in Giles county. She was a customer of the bank. She and the bond company were the guardians of her minor son, John Nolan Hargrove.

Mrs. E. C. Freeman was a former resident of Giles county but had removed to the state of Oklahoma. She kept an account at the bank and also rented a safety deposit box there. Abernathy was her business agent.

It is stipulated that Abernathy's estate is insolvent and will pay little or nothing, and it is likewise stipulated that Williams is insolvent and little or nothing can be made out of him.

Prior to September 1, 1928, Abernathy & Williams owned a tract of land in Giles county upon which they wished to borrow $3,000. Application was made to the bond company for this loan, to be secured by a mortgage, and the application was approved by the directors of the bond company. Four notes were thereupon executed by Abernathy & Williams, in the form of bonds, payable to the bond company, two for $500 each and two for $1,000 each.

It was recited on the face of each note or bond that it was "one of a series of four bonds of even date herewith mentioned in a mortgage deed of this date from L. L. Williams and W. L. Abernathy, Jr., to said company and duly recorded in the Register's Office of Giles County, Tennessee."

As a matter of fact, no mortgage to secure these notes was ever executed by Abernathy & Williams and, of course, no such mortgage was ever put to record. Later Abernathy & Williams sold this tract of land to an innocent purchaser named Davis, he making a cash payment therefor and executing lien notes for the balance. These lien notes of Davis were subsequently acquired by the bank, and at the time of the receivership, the bank had hypothecated the Davis notes to secure a loan from its Nashville correspondent.

Under the arrangements between the bank and the bond company, the former institution would purchase the notes belonging to the latter, and the bank would keep some of these notes by way of investment and would frequently sell such notes to its customers. No one connected with the bond company or with the bank, except Abernathy, knew of the failure of Abernathy & Williams to execute and record a mortgage securing the four notes heretofore mentioned. The bond company took these notes from Abernathy & Williams and the bank took the notes from the bond company, without knowledge on the part of either institution that the notes were not secured by registered mortgage.

It is proper to observe here that the loan to Abernathy & Williams by the bond company and the taking over by the bank of the notes representing that loan were transactions in which other officials of the bond company and the bank figured. Abernathy was not at the same time the representative of the separate contracting parties. It follows therefore that Abernathy's knowledge that no mortgage existed was not imputable to the bond company nor to the bank, although he was president of both institutions. His interest was adverse to the interest of each of his principals in this matter and, under a familiar rule, his principals were not chargeable with his knowledge. People's Bank of Springfield v. True, 144 Tenn. 171, 231 S.W. 541; Smith v. Bank, 132 Tenn. 147, 177 S.W. 72; Wood v. Green, 131 Tenn. 583, 175 S.W. 1139.

Some time after the acquisition of the Abernathy & Williams notes aforesaid, but before maturity, the bank sold one of the $1,000 notes to Mrs. Hargrove. Mrs. Hargrove supposed that the note was secured by a mortgage as stated on its face. This sale to Mrs. Hargrove was made by Abernathy and there is no question but that the transaction was well within his authority as president of the bank. The answer of the bank's receiver filed herein discloses that it was the custom of the bank to dispose of such notes in such manner. The stipulation furthermore recites:

"It is further stipulated and agreed that one note or bond of $1,000.00 was by the Citizens Bank sold to Mrs. Mary Nolan Hargrove and the Citizens Bond & Investment Company, joint guardians of John Nolan Hargrove, a minor, on the 4th day of April, 1930, and sold to Mrs. Mary Nolan Hargrove, individually, a $1,000.00 bond of this issue on the 4th day of April, 1930."

It is idle, in view of this stipulation, to say that the bank did not make these transfers and that Abernathy was acting for himself in making the two transfers. Moreover the bank received and retained the proceeds of the sale of each of these notes.

Primarily the bill of Mrs. Hargrove seeks a recovery against the bank, under the implied warranty by a person negotiating an instrument by delivery. Section 7389 of the Code, section 65, Negotiable Instruments Law, is as follows:

"Every person negotiating an instrument by delivery or by a qualified indorsement, warrants:

(1) That the instrument is genuine and in all respects what it purports to be;

(2) That he has a good title to it;

(3) That all prior parties had capacity to contract; (4) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee.

The provisions of subdivision three of this section do not apply to persons negotiating public or corporation securities, other than bills and notes."

The statutory rule is about the same that previously obtained in this jurisdiction. Ruohs v. Third Nat. Bank, 94 Tenn. 57, 28 S.W. 303; Richardson v. Marshall County, 100 Tenn. 346, 45 S.W. 440, 443.

The instrument sold by the bank to Mrs. Hargrove purported on its face to be secured by a registered mortgage. Under the statute the bank, when it negotiated the note to Mrs. Hargrove, warranted that the instrument was "in all respects what it purports to be." There was an obvious breach of this warranty. The warranty was broken the moment it was made and the bank became liable to the purchaser for the loss occasioned by the breach. Richardson v. Marshall County, supra.

Conceding that the bank was not charged with Abernathy's knowledge nevertheless "the bank's good faith in the sale cannot affect the question of its legal responsibility. Its fair intention does not render...