King Cattle Co. v. Joseph, 23831.

CourtSupreme Court of Minnesota (US)
Citation198 N.W. 798,158 Minn. 481
Docket NumberNo. 23831.,23831.
Decision Date28 March 1924


Appeal from District Court, Hennepin County; J. W. Molyneaux, Judge.

Action by the King Cattle Company against I. S. Joseph. From an order denying its alternative motion for judgment or a new trial, plaintiff appeals. Order reversed, and new trial granted.

Syllabus by the Court

Bonds which, by reference to the trust deed securing them, expressly made the deed part of the bonds, became subject to its terms. Their negotiability was destroyed by such reference.

The trust deed provided that the trustee and the mortgagor might alter the terms of the deed if it was deemed consistent with the best interests of the bondholders. The promise to pay, contained in the bonds, was subject to this provision and ceased to be unconditional, an essential of negotiability under section 1, Uniform Negotiable Instruments Act (section 5813, Gen. St. 1913).

A broker, who had the bonds for sale to investors, held some of them as collateral to a note he had paid for the issuer of the bonds and separated them from the note and repledged them to secure another debt. This amounted to a conversion of the bonds repledged and the subpledgee got no better title than the broker.

The circumstances under which the bonds were taken by the subpledgee were such as to permit the jury to find that suspicion was cast upon the title of the broker, and that a prudent business man would have made inquiry, which, if pursued with reasonable diligence, would have disclosed the infirmity in the broker's title. The jury might also find that defendant was not an innocent purchaser, and that plaintiff was not estopped from recovering the bonds from him.

A pledgee cannot separate the collateral from the debt, because his interest is not a distinct property right capable of being transferred independently.

An ‘innocent purchaser’ of property in general is one who acquires it by an honest agreement without knowledge or means of knowledge sufficient to charge him with notice of an infirmity or flaw in the title of the seller (citing Words and Phrases, First and Second Series, Innocent Purchaser).

Whether a party has taken property in good faith, and is an innocent purchaser thereof, is usually a question for the jury. Edward Nelson and Einar Hoidale, both of Minneapolis, for appellant.

Cobb, Wheelwright, Hoke & Benson, of Minneapolis, for respondent.


Action to recover possession of 20 bonds issued by plaintiff and held by defendant. The court directed the jury to return a verdict in defendant's favor. Plaintiff has appealed from an order denying its alternative motion for judgment or a new trial.

On January 29, 1921, plaintiff's president, R. S. Nutt, gave his note for $12,000 to Slimmer & Thomas for money borrowed for plaintiff, depositing 40 bonds and a certificate for 750 shares of stock in the plaintiff company as collateral security. The note was payable 30 days after date. At some time not shown by the evidence, the words ‘Due Feb. 28, 1921. Extended one year to Feb. 27, 1922,’ were written upon the face of the note. It was indorsed and payment guaranteed by Stevens & Co., a corporation to whom plaintiff had delivered a large number of its bonds for sale to investors. Nutt failed to pay the note. It was paid by the company, and subsequently the collateral was delivered to one of its officers. He pledged 20 of the bonds to the Union State Bank of Minneapolis to secure his personal note. Later Stevens & Co. pledged Nutt's note to the same bank, and still later it pledged the remaining bonds to the Northern State Bank of Minneapolis.

Defendant was a small stockholder in Stevens & Co. He testified that on a Sunday in March, 1922, he was called to the company's office and informed that the Northern State Bank held the company's note for $11,200, with collateral amounting to $13,000; that unless the note was paid in the morning of the following day the bank would be closed, and that the company could not pay it; that he was asked to advance the money, with the assurance that he would be repaid within two or three days; that he did advance it in the morning of the following day, receiving from the company its demand note and the 20 bonds involved in this action. The note was not paid, the company going into the hands of a receiver in April, 1922. Defendant's claim to the bonds is based on this transaction.

The points discussed in the briefs and oral argument are: (1) Were the bonds negotiable? (2) If so, did the defendant take them under such circumstances as to become a holder in due course? (3) Is the plaintiff estopped from claiming them?

The bonds contain a clause which, in our opinion, destroys their negotiability. It reads thus:

‘All of which bonds have been issued, or are to be issued, under and in pursuance of, and are all equally secured by, and are subject to an indenture of mortgage or deed of trust, dated September fifteenth (15th), 1920, duly executed by the company to said Yellowstone Bank & Trust Company, of Sidney, Montana, as trustee, under which indenture all of the property of the company, real, personal and mixed, now owned or hereafter acquired, has been transferred and mortgaged to said trustee and hereby reference is made to said indenture and the same made a part hereof, with the same effect as if herein fully set forth.’

[1] The mere fact that the bonds were secured by the deed did not change their character or affect their negotiability. Blumenthal v. Jassoy, 29 Minn. 177, 12 N. W. 517; 2Fletcher, Cyc. Corp. § 1011. They are deprived of negotiability because the deed is expressly made part of them. It is as though its contents were repeated in them. Short v. Van Dyke, 50 Minn. 286, 289, 52 N. W. 643. Negotiable paper enters the channels of commerce. It is a medium of exchange in the business world. To circulate freely, it must be ‘a courier without luggage.’ Here, there was ‘luggage,’ a trust deed of 89 typewritten pages incorporated in the bonds.

In Hastings v. Thompson, 54 Minn. 184, 55 N. W. 968,21 L. R. A. 178, 40 Am. St. Rep. 315, it was said that commercial usages have played a large part in shaping the law of negotiable instruments, and in Cudahy Packing Co. v. State Nat. Bank, 134 Fed. 538, 67 C. C. A. 662, that whenever a new instrument, varying in some feature from the ordinary bill or note, is presented for admission to the class of negotiable paper, the courts should inquire whether it has been the general practice of the business world to treat the instrument as negotiable, and, if it has, it should be admitted. We do not know how the business world regards bonds like these, but it would seem that under the most liberal application of the rules for determining the negotiability of an instrument, it cannot be held that they are negotiable.

In Klots, etc., Co. v. Mfrs. Com. Co., 179 Fed. 813, 103 C. C. A. 305,30 L. R. A. (N. S.) 40,Brooke v. Struthers, 110 Mich. 562, 68 N. W. 272,35 L. R. A. 536, and the cases cited in the notes to Continental Bank v. Times Co., L. R. A. 1918B, 632, and to Strand Co. v. Fox, 14 A. L. R. 1121, it was held that the negotiability of an instrument is destroyed where, as here, there is a reference to some extrinsic contract in such a way as to make the instrument subject to the terms of that contract.

Defendant relies on Guilford v. M. S. Ste. M. & A. Ry. Co., 48 Minn. 560, 51 N. W. 658,31 Am. St. Rep. 694, explained in Grant v. W. & S. W. Ry. Co., 85 Minn. 422, 89 N. W. 60, where the court said that the mere recital that bonds were secured by a trust deed did not affect their negotiability. But plaintiff's bonds do not stop with a reference to the deed; they incorporate the deed bodily and, as remarked in the Guilford Case, purchasers of such bonds take them subject to the provisions of the deed.

[2] A clause in the trust deed reads thus:

‘The trustee is hereby empowered to join the mortgagor in modifying, amending, altering or supplementing this indenture, in its absolute discretion, if it shall deem that the same is consistent with the best interests of the bondholders.’

This put it within the power of the trustee and the plaintiff to change the terms of the bonds by altering those of the deed. The promise to pay at a fixed time is not unconditional as required by section 5813, G. S. 1913 (section 1, Uniform Neg. Inst. Act).

It is unnecessary to consider whether defendant took the bonds under such circumstances as to give him the rights of a holder in due course. Lacking negotiability, they were mere choses in action, and he took only such title as Stevens & Co. and give.

Stevens & Co. stood in the shoes of Slimmer & Thomas. It had the right to hold the bonds until the Nutt note was paid. If it transferred the note, the bonds would follow it. A...

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