In re Hopper-Morgan Co.

• Decision Date: 26 October 1907
• Citation: 156 F. 525
• Parties: In re HOPPER-MORGAN CO.
• Court: U.S. District Court — Northern District of New York

156 F. 525

In re HOPPER-MORGAN CO.

United States District Court, N.D. New York.

October 26, 1907

Fish Richardson, Herrick & Neave, for claimant.

Brown Carlisle & McCartin, for trustee.

RAY District Judge.

The bankrupt, the Hopper-Morgan Company, is a manufacturing corporation organized and existing under the laws of the state of New York. The claimant, Robertson Paper Company, is a corporation organized and existing under the laws of the state of Vermont.

Prior to July 25, 1905, the treasurer of the bankrupt company, one Roger Morgan, without authority from the company, issued and delivered to one Trautwine a number of notes purporting to be the notes of the company, upon the agreement that they were to be used as collateral only and for the accommodation of the Emerson Manufacturing Company, a corporation, and would be taken up and returned before due so as not to become a charge upon the Hopper-Morgan Company. Trautwine was to pay 3 per cent. for this use of such notes. After these notes had passed into the hands of Trautwine, and at about the time same were to become due, Morgan, without authority of the company, made the note in question, and delivered the same to one Morton, upon the agreement that it should be used for the same purpose only for which one of the original notes, and which it was to replace, had been issued. Morton paid nothing for this renewal note. It does not appear who held the note of which the note in question was a renewal, but it is conceded in the agreed state of facts that the note in question 'with others, had been fraudulently diverted from the purpose for which it was issued by Trautwine, Morton, and their agents. ' In short, Trautwine and Morton and their agents did not use the note in question in place of the original note, but disposed of it in some way in violation of the agreement made when it was issued. The note in question, with its indorsements reads as follows:

'$2,500.

Watertown, N.Y., July 25, 1905.

'Four months after date we promise to pay to the order of ourselves twenty-five hundred dollars at 395 Broadway, New York City.

Seal.

'Value received.

'Due . . .

Hopper-Morgan Company, 'Roger Morgan, Treasurer.'

Indorsements.

'Hopper-Morgan Co., by Roger Morgan, Treasurer.'

'Frederick M. Prescott.'

One Frederick H. Babbitt was the treasurer of the claimant, Robertson Paper Company, and had general charge of its business. Some four or five years prior to the taking of this note in question by the Robertson Paper Company, that company had sold paper to the Hopper-Morgan Company in car load lots, but had not sold it any paper during the year preceding the purchase of same. In July, 1905, when Babbitt was purchasing an automobile from one F. M. Prescott in the city of Boston, Prescott inquired of Babbitt whether the paper of the Hopper-Morgan Company was good, and stated to Babbitt that he could sell an automobile to a man named Mugler if he (Prescott) would take a note of the Hopper-Morgan Company of Watertown, N.Y., in part payment. Babbitt told Prescott that he knew the Hopper-Morgan Company and considered its paper good. Subsequently, Harry Prescott, a brother and associate in business of F. M. Prescott, telephoned Babbitt inquiring if the Robertson Paper Company would be willing to take a note of the Hopper-Morgan Company signed by Roger Morgan as treasurer at the regular discount of 6 per cent. Babbitt telephoned the secretary of the Hopper-Morgan Company in relation to the matter, and was informed that Roger Morgan, the treasurer, had charge of all the financial affairs of the Hopper-Morgan Company, and suggested that Babbitt communicate with Morgan. Thereupon, on July 27, 1905, Babbitt, as general manager of the Robertson Paper Company, wrote Morgan, as treasurer of the Hopper-Morgan Company, as follows:

'We are offered in the way of trade notes to the value of $2,500, which we understand were given by the Hopper-Morgan Company, signed by Roger Morgan as treasurer, to H. H. Mugler of Boston, or if we are correctly informed in regard to this, said H. H. Mugler is now owner of said notes. Inasmuch as we have had very pleasant relations with your company in the past, we venture to ask you if these notes are all right. If the transaction is all straight so far as Mr. Mugler is concerned, and if you will kindly advise me as to when these notes reach maturity. I feel that knowing us as you do in a business way, I am not asking for any information that it will not be perfectly acceptable for you to give. My only idea in this matter is that I am perfectly willing to take this commercial paper in the way of trade if there is nothing wrong about the transaction. Thanking you in advance for the courtesy of a reply, for which we inclose stamped envelope herewith, we remain.'

In reply, Morgan wrote Babbitt, as treasurer, as follows:

'Received your letter just as I was starting to take train for Springfield. In regard to notes which are in possession of H. H. Mugler, would say that I sent them to a man in whom I have every confidence for another purpose. He called me on telephone stating that he had this opportunity to make arrangement with Mr. Mugler, whom he states is a reliable person, for the use of notes. Mr. Mugler does not own them, but is free to use them as collateral, and I don't think you are running any risk in dealing with Mr. Mugler.'

A day or two after the receipt of this letter, Babbitt notified F. M. Prescott that, if he still wished to negotiate the note, the Robertson Paper Company would take it. Shortly thereafter Prescott went to Mr. Babbitt at Plymouth, Mass., and there indorsed the note in question, and delivered it to Babbitt, and received therefor the check of Robertson Paper Company for $2,450, and which check was signed by Babbitt, as treasurer, and was duly paid on presentation at the Robertson Paper Company's bank.

It is conceded in the statement of facts, and agreed therein, that Babbitt never saw the note until Prescott delivered it to him, as above stated, and that Babbitt 'had no notice of any defect or irregularity in the issue of title of the note, unless the letter from Mr. Morgan of July 28th, and above quoted from, constituted notice. ' Babbitt testified that the letter from Morgan, above quoted, aroused no suspicion in his mind of anything wrong; also, that he showed this letter to Prescott at the time he received the note from him; also, that when he delivered the check to Prescott in exchange for the note he had no knowledge of a defect of any kind in the title of the note or of any irregularity in its issue; and that he first learned of the irregular issue of the note about 60 days after the Robertson Paper Company became the owner of it. It does not expressly appear how, when, from whom, or upon what consideration Prescott received the note. It does not expressly appear that Prescott took same in good faith and for value.

It may be inferred that Prescott received the note from Mugler, above mentioned, in exchange and in part payment for an automobile. It is not stated as a fact that Prescott did sell an automobile to Mugler, or that Mugler delivered the note to Prescott, but I think this was the fair inference for Babbitt to draw, for Prescott had told Babbitt that he could sell Mugler an automobile if he would take a note of the Hopper-Morgan Company in part payment. It follows that when Babbitt took the note from Prescott he had some reason to believe that it was the same note which Prescott had suggested he could obtain in exchange for an automobile from Mugler. When Harry Prescott inquired of Babbitt if his company would be willing to take a Hopper-Morgan note, Babbitt wrote Morgan for information, and was informed by him that the note had been issued and delivered to some person for a different purpose, and that Mugler did not own the note and could only use it as collateral. It may be that Babbitt was justified in believing that Mugler had transferred the note to Prescott as collateral. If so, Babbitt knew that Prescott held the note as collateral merely, and that it was issued for a special purpose, and that its use was limited to that of collateral only. He therefore knew that he was purchasing a note issued to be used as collateral of a person who held it for use as collateral merely. When he purchased the note, he therefore purchased the collateral without purchasing the debt it was held to secure.

When Babbitt purchased the note, he showed Morgan's letter to Prescott, of whom he purchased the note, but it does not appear that he inquired of Prescott, or received any information, as to how Prescott came by the note, other than it may be inferred that he assumed Prescott had received it from Mugler in exchange for an automobile. If so, then Babbitt had knowledge, when he took the note, that Prescott had received it in payment for an automobile from a person who did not own it and whose right to use it was limited to its use as collateral. It follows that Babbitt took the note from a purchaser from Mugler with full knowledge that Mugler had no title and could confer none, and with full knowledge that the note was to be used as collateral merely.

Under the agreed state of facts, I do not see how it is possible to hold that the claimant, Robertson Paper Company, is a holder of this note in good faith and for value. The claimant did not take this paper in the regular course of business. It was a seller of paper, and not engaged in the banking business. The note was not presented for discount in the regular course of business. It was purchased in a peculiar way, under peculiar circumstances, and with knowledge that the note had been issued for some particular purpose, not disclosed, but that Mugler,...