Kost v. Bender

• Decision Date: 15 October 1872
• Citation: 25 Mich. 515
• Court: Michigan Supreme Court
• Parties: John Kost v. David Bender

25 Mich. 515

John Kost v. David Bender

Supreme Court of Michigan

October 15, 1872

Heard October 11, 1872

Error to Lenawee Circuit.

Judgment reversed, with costs, and a new trial ordered.

A. L Millard, for plaintiff in error.

Howell & Watts, and C. A. Stacy, for defendant in error.

OPINION

Cooley J.

The declaration in this case is upon a promissory note which was given to the plaintiff by the defendant as part payment on a purchase of land supposed to be valuable for the production of mineral oil. The defense is, that the defendant was defrauded in the sale, and has sustained damages in consequence, which he is entitled to recoup.

The note is negotiable, and was transferred by the plaintiff, before it fell due, to a party who, he claims, was a bona fide purchaser, without notice of any infirmity, and who afterward, for a new consideration, sold it back to him. And the plaintiff further claims, that the note having once passed to a bona fide holder, in whose hands it was subject to no defense of fraud in inception, or defect in consideration, is forever thereafter discharged of such defense, into whose hands soever it may afterward come.

It is perfectly true as a general rule, that the bona fide holder of negotiable paper has a right to sell the same, with all the rights and equities attaching to it in his own hands, to whoever may see fit to buy of him, whether such purchaser was aware of the original infirmity or not. Without this right he would not have the full protection which the law merchant designs to afford him, and negotiable paper would cease to be a safe and reliable medium for the exchanges of commerce. For if one can stop the negotiability of paper against which there is no defense, by giving notice that a defense once existed while it was held by another, it is obvious that an important element in its value is at once taken away.

But I am not aware that this rule has ever been applied to a purchase by the original payee, nor can I perceive that it is essential to the protection of the innocent indorsee, that it should be. It can not be very important to him, that there is one person incapable of succeeding to his equities, and who consequently would not be likely to become a purchaser. If he may sell to all the rest of the community, the market value of his security is not likely to be affected by the circumstance that a single individual can not compete for its purchase, especially when we consider that the nature of negotiable securities is such that their market value is very little influenced by competition. Nor do I perceive that any rule or principle of law would be violated by permitting the maker to set up this defense against the payee, when he becomes indorsee, with the same effect as he might have done before it had been sold at all, or that there is any valid reason against it.

The ground of defense is, the claim for damages which the maker has, by reason of the fraud alleged to have been practiced upon him. It is not pretended that this claim is extinguished by the sale of the note, but only that it is thereby separated from the note and incapable of again becoming annexed to it. After the payee had sold the note, he might have been sued upon this claim, and when he again becomes the holder, he is indisputably liable in some form. The question, then, seems to be, whether the maker shall be compelled to submit to judgment on his note, and then resort to a separate action for damages, or whether all disputes growing out of the one transaction shall be submitted to one jury.

In general, the policy of the law is to avoid circuity of action, wherever it can be done without confusion; and cases of a counter claim like this, are always held to be proper cases for the application of this rule of policy. And if we do not apply it in this case, it must be because of a purely technical reason, and not because the interests of justice would be prejudiced.

The technical reason is, that by the sale of the note to a bona fide holder the claim for damages has been severed from it, and the payee when he again becomes holder will sue upon it in his character of indorsee, and can not have his demand reduced by a claim which could only be offset because of its being an incident to the debt, and which ceased to be an incident when the first transfer took place. But there are many cases in which the law, to avoid circuity of action, disregards such intermediate transactions, and remits the parties to their original rights and equities, with a view to the most speedy and effectual remedy. When this defense was severed from the note by the first transfer, it was done by means of the plaintiff's own wrong. If the defendant had a legal and just defense to the note, either in whole or in part, arising from the conduct of the plaintiff, it was the duty of the latter to recognize and allow it, and he had no moral right to cut it off, or to attempt so to do, by any transfer. But, having done so, and afterward acquired the note a second time, the law, we think, will not permit him to take advantage of this wrong, but will remit the defendant to his original rights. Such, we think, should be the rule; because it avoids circuity of action, expense to the parties, and inconvenience to the courts, without, at the same time, endangering any substantial rights. We had occasion to recognize an application of the same principle, Dubois v. Campau, 24 Mich. 360, in which a party, whose duty it has been to pay certain taxes, sought afterward to claim the benefit of a tax title, which was based upon his default to pay them, and which a third party had bought in, and then sold to...