King Cattle Co. v. Joseph

Citation158 Minn. 481
Decision Date28 March 1924
Docket NumberNo. 23,831.,23,831.
CourtSupreme Court of Minnesota (US)

Edward Nelson and Einar Hoidale, for appellant.

Cobb, Wheelwright, Hoke & Benson, 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 & Company, 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 & Company 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 & Company. 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, 1920, duly executed by the company to said Yellowstone Bank and 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."

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. 2 Fletcher, 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. 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 Throwing Co. v. Mnfrs. 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 Amusement 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. Minneapolis, S. S. M. & A. Ry. Co. 48 Minn. 560, 51 N. W. 658, 31 Am. St. 694, explained in Grant v. Winona & 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.

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 & Company could give.

Stevens & Company 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 pledgee cannot separate the collateral from the debt, because his interest is not a distinct property right capable of being transferred independently. He has a special property in the collateral only by reason of his ownership of the debt; the general property remains in the pledgor. Van Eman v. Stanchfield, 13 Minn. 70 (75); White v. Phelps, 14 Minn. 21 (27), 100 Am. Dec. 190; Norton v. Baxter, 41 Minn. 146, 42 N. W. 865, 4 L. R. A. 305, 16 Am. St. 679; Hershey v. Welch, 96 Minn. 145, 104 N. W. 821; Jones, Col. §§ 418, 419; 21 R. C. L. 649. He holds the collateral in trust, first to apply the proceeds thereof to the payment of the debt, and second, when the debt is satisfied, to restore it or what remains to the debtor or his assigns. Jones, Col. § 393. It is his duty to keep control of the collateral so as to be ready to return it whenever he receives payment of the debt. If he puts it beyond his control, he is guilty of conversion. Upham v. Barbour, 65 Minn. 364, 68 N. W. 42. The case of a broker purchasing stocks or bonds for his client and holding them as security for advances made may be an exception to the rule. Jones, Col. §§ 495, 507; Turner v. Schwartz, 140 Md. 465, 117 Atl. 904, 24 A. L. R. 444. The conclusion follows that when Stevens & Company pledged the Nutt note and half of the bonds to one bank and the other half of the bonds to another bank as security for a total indebtedness in excess of $12,000, it was guilty of a conversion of the bonds claimed by the defendant, whose case is no better than the company's would be.

There is a well-known exception to the rule that the vendor of property other than negotiable securities can give no greater right or title than he has. If the true owner clothes another with the appearance of ownership, or as having full power of disposition over the property, an innocent third party who is thus led into dealing with such apparent owner will be protected. Armstrong v. Freimuth, 78 Minn. 94, 80 N. W. 862; Schumacher v. Greene C. C. Co. 117 Minn. 124, 134 N. W. 510, 38 L. R. A. (N. S.) 180, Ann. Cas. 1913C, 1115; Olsen v. Great North. Ry. Co. 139 Minn. 316, 166 N W. 331; Cardozo v. Fawcett, supra page 60, 196 N. W. 809; Cowdrey v. Vandenburgh, 101 U. S. 572, 25 L. ed. 923; National Safe Deposit, S. & F. Co. v. Hibbs, 229 U. S. 391, 33 Sup. Ct. 818, 57 L. ed. 1241.

Is plaintiff estopped from questioning defendant's title? Defendant got the bonds and Stevens & Company's note from the state bank examiner at 8:30 o'clock in the morning after the Sunday meeting at the company's office. He gave his check to the bank examiner. He counted the bonds but did not examine them. If he had, he would have discovered that three interest coupons were overdue, a circumstance of some, although perhaps not of controlling, importance. Lumpkin v. Lutgens, 143 Minn. 139, 172 N. W. 893. 2 Fletcher, Cyc. Corp. § 1021. He knew that the company had plaintiff's bonds for...

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