Kentucky Rock Asphalt Co. v. Mazza's Adm'r

• Decision Date: 17 March 1936
• Parties: KENTUCKY ROCK ASPHALT CO. v. MAZZA'S ADM'R.
• Court: Kentucky Court of Appeals

94 S.W.2d 316

264 Ky. 158

KENTUCKY ROCK ASPHALT CO. v. MAZZA'S ADM'R.

Court of Appeals of Kentucky

March 17, 1936

Rehearing Denied June 9, 1936.

Appeal from Circuit Court, Jefferson County, Common Pleas Branch Second Division.

Suit by the administrator of the estate of J. N. Mazza, deceased against the Kentucky Rock Asphalt Company. Judgment for plaintiff, and defendant appeals.

Affirmed.

Gordon Laurent, Ogden & Galphin, of Louisville, for appellant.

Thomas C. Mapother, of Louisville, for appellee.

STANLEY Commissioner.

The case determines who shall lose the value of stolen bonds.

In the latter part of November, 1933, five unregistered bonds payable to bearer, issued by the appellant, Kentucky Rock Asphalt Company (to be referred to as the Company), were stolen from the administrator of the estate of J. N. Mazza, deceased, at Huntsville, Ala. The Company was promptly advised of the theft and its aid solicited to locate the bonds. To this end the numbers of the bonds, M22 to M26, inclusive, were furnished the Company on November 26, and it wrote a New York bank, trustee of the bonds, in an effort to trace them through the presentation of the coupons. There was considerable correspondence about the matter conducted by A. A. Hermes, secretary and treasurer of the Company. He advised W. H. Tarvin, its president, about the bonds having been stolen, but it does not appear that he gave him the numbers. The Company had arrangements with certain brokers in Louisville, where it had its principal office, to buy its bonds on the market for its sinking fund at 60 cents on the dollar or less. None of these brokers or any others or any banking institution was given notice of the bonds having been stolen.

On December 4 one John Doyle appeared at the office of Smart & Wagner, brokers in Louisville, with one of the stolen bonds, and left it with them for sale. A member of the firm advised Mr. Tarvin by telephone that they had one of his Company's bonds for sale and asked what he would pay for it. Upon being advised "60 plus half commission," the brokers gave their check to Doyle, delivered the bond to the appellant, which paid them on December 6. Commissions were collected by the brokers from both the seller and the purchaser. The number of this bond, M26, does not appear to have been mentioned during these negotiations. Doyle was not known to the brokers.

A week or ten days later Doyle called on R. M. Morton, manager of the Empire Loan Company and a lawyer, who had known him several years as the owner or representative of a circus or carnival. Doyle advised Mr. Morton that he would like to sell some bonds and asked Morton to identify him at one of the Louisville banks. The next day he took Doyle to the office of Judge L. D. Greene. Judge Greene called Mr. Hermes and told him he had a client with some of his Company's bonds, and asked if they were all right, what their market price was, and if he would take them. Morton, Greene, and his secretary testify that the numbers of the four bonds were read over to Hermes, but Hermes testified he was positive the numbers were not given him, and that Judge Greene did not ask if they were all right. He advised that he would pay "56 or 57 for the bonds." Judge Greene also called Almstedt Bros., brokers, and the price offered by them was a little more. Thereupon the bonds were delivered to Almstedt Bros., who sold them for his account for $2,400 to Stein Bros. & Boyce, other brokers, who were authorized by the Kentucky Rock Asphalt Company to buy its bonds as stated above. They remitted their check to him for the proceeds, and he in turn delivered the check to Morton, and he to Doyle. A fee of $100 was paid Greene and Morton for their services. During the negotiations, a representative of Stein Bros. & Boyce called Mr. Tarvin, president of the Company, and told him they had $4,000 of the bonds, and he confirmed the transaction. On December 20 these four bonds were delivered to the Company, and its check, plus commissions, was remitted to the brokers. It does not appear that the numbers of these four bonds were communicated to the Company by the brokers, and Mr. Tarvin testified that he never looked at the numbers when they were delivered.

A day or so after this, a letter was received from Mazza's administrator, suggesting that the Louisville Stock Exchange might be notified that the bonds had been stolen. Then it was that Hermes discovered the five bonds had been recently purchased by his Company, and he so advised the administrator.

Doyle died a year later, which was after the institution of this suit, but before trial. The record does not indicate how Doyle acquired the bonds or disclose any fact regarding his title to them.

The suit was brought by the administrator against the Company to recover $3,000, the value of the bonds. At the close of the evidence, the court peremptorily instructed the jury to return a verdict for the plaintiff, and judgment was entered accordingly.

The rule that a person can transfer to another no greater right in personal property than he has himself has no application in the case of negotiable bonds. Under the rules of the law merchant, carried forward into the Uniform Negotiable Instruments Act, an innocent purchaser for value of such bonds is protected, even though they have been stolen. As further stated in the recent work on Bonds and Bondholders, by Quindry, § 167: "Any relaxation in the rules would impede commercial intercourse, interrupt credit and place burdens upon commercial and banking interests, out of proportion to any benefits that might accrue to unfortunate individual bondholders. Relaxations in the rules of evidence may be justified in particular cases, but the rules governing the title acquired by purchasers of lost or stolen bonds remain the same as they have been from time immemorial. *** Regardless of the harshness of the rule, it is uniformly applied and the owner is denied title against a bona fide purchaser from a thief." See, also, Defenses to Commercial Paper, Joyce, § 588; Caruth v. Thompson, 16 B. Mon. 572, 63 Am.Dec. 559; Greenwell v. Haydon, 78 Ky. 332, 39 Am.Rep. 234.

Among the conditions on which one is to be regarded as a holder in due course of a negotiable instrument are that he took it in good faith and for value, and at the time it was negotiated to him he had no notice of any defect in the title of the person negotiating it. Section 3720b-52, Kentucky Statutes. The presumption in the first instance is that the holder is of that class, or, as stated in the statute, "Every holder is deemed prima facie to be a holder in due course." Section 3720b-59, Kentucky Statutes. That section continues: "But when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course." So it is that, when it is shown in a given case that bonds were stolen, the burden shifts to the holder to show the circumstances under which he obtained the bonds, and that such circumstances constitute him a bona fide holder. Daniel on Negotiable Instruments, § 1732; Bonds and Bondholders, Quindry, § 167; Defenses to Commercial Paper, Joyce, § 707; Pratt v. Higginsson, 230 Mass. 256, 119 N.E. 661, 1 A.L.R. 714; Merchants' National Bank v. Detroit Trust Co., 258 Mich. 526, 242 N.W. 739, 85 A.L.R. 350. Compare Gibbs v. Metcalf, 201 Ky. 504, 256 S.W. 1109; Bedinger v. Citizens' National Bank of Covington, 212 Ky. 486, 279 S.W. 622.

Obviously, whoever stole the bonds from the owner had no title (section 3720b-55, Kentucky Statutes), and it may justly be presumed they continued in the hands of a holder of that class until the contrary was proven. Parsons v. Utica Cement Co., 82 Conn. 333, 73 A. 785, 135 Am.St.Rep. 278. Appellant conceded knowledge that these bonds had been stolen, but continues to claim that under the circumstances it was a holder without notice, since it did not know it was buying the stolen bonds.

To constitute notice of a defect in title of the person negotiating the instruments, it was not necessary that the Company should have had actual notice. It is sufficient if it had knowledge of such facts that its action in taking the bonds amounted to bad...