Lincoln Alliance Bank v. Landers Co., Inc., 527.

• Decision Date: 12 May 1923
• Docket Number: 527.
• Citation: 297 F. 225
• Parties: LINCOLN ALLIANCE BANK v. LANDERS CO., Inc., et al.
• Court: U.S. District Court — Southern District of Texas

297 F. 225

LINCOLN ALLIANCE BANK v. LANDERS CO., Inc., et al.

No. 527.

United States District Court, S.D. Texas, Houston Division.

May 12, 1923

Baker Botts, Parker & Garwood, of Houston, Tex., for plaintiff.

W. J Howard, of Houston, Tex., for defendants.

HUTCHESON District Judge.

This is a suit by the Lincoln Alliance Bank on a negotiable promissory note, executed by Landers Company, Inc., in favor of Rosenberg Bros. & Co., clothiers, of Rochester, N.Y., and indorsed by the payee to the Lincoln Alliance Bank for value received on August 7, 1922.

The only defense asserted in the answer of the defendants is that the consideration of the note has failed by reason of the breach on the part of Rosenberg Bros. & Co. of their agreement to advertise the brand of clothes sold to Landers &amp Co. and to assist them in finding a retail market, and that this defense was available against the Lincoln Alliance Bank because that bank has since the maturity of the note on September 3, 1922, and since said note was transferred to it by said Rosenburg Bros. & Co., 'had on deposit moneys and property of the said Rosenberg of more than the amount of said note sued on herein, and the said plaintiff, Lincoln Alliance Bank, was on or about the 16th day of September, 1922, notified by the defendants of their defenses to the said note, and alleged failure of consideration, and was requested and directed by these defendants to take the necessary steps to protect itself against loss.'

It is further alleged that the note was obtained by causing Landers Company to put in that form a pre-existing open indebtedness of $13,000 incurred in reliance upon the performance of the advertising contract, and without advising Landers Company that Rosenberg Bros. intended to cancel said advertising contract, though the said Rosenberg Company, at the time of securing the note, had that intention in mind; that therefore, not only has the consideration of the note failed, but the note itself was procured by fraud, the $13,000 of open account not being due, under the understanding of the parties, unless and until the contract was performed.

To this answer plaintiff has demurred, and the hearing is upon that demurrer. The issue sharply presented, then, is that, though a bank may be an innocent purchaser for value, by its purchase of a note from one of its customers, and the crediting of his account with the amount, yet, since the doctrine of innocent purchase is for the protection of persons who would otherwise lose, is intended as a shield to one who on the faith of its regularity has taken negotiable paper, and not as a sword to enable a creditor to enforce the payment of an unjust debt, when it is made to appear that the bank had been notified of the unjust character of the paper before maturity, and at the time of maturity and dishonor it had funds on hand with which it could have protected itself by sequestrating the 'indorser's deposit, it ought not to be permitted to pursue the maker, but should be required to protect itself, and leave the maker and the fraudulent indorser to litigate between themselves.

Counsel for plaintiff concedes that the Supreme Court of Texas is committed to the doctrine which defendant invokes, and in support of which he cites the late opinion of Second National Bank v. McGehee, 241 S.W. 287, OPINION of Civil Appeals, with writ of error denied by the Supreme Court. Counsel for plaintiff asserts, however, that this holding is paralleled in no other jurisdiction; that, this being a case of law merchant, the federal courts are not bound by such decision; and that it constitutes a character of exception to the body of the law which does not commend itself for adoption.

Counsel for defendant asserts that, not only is this the rule in Texas, but that the Circuit Court of Appeals for this Circuit, in Simmons v. Hodges, 250 F. 424, 162 C.C.A. 494, has held the same thing on the authority of the Van Winkle Gin Co. Case, 89 Tex. 147, 33 S.W. 862, which is the basis of the McGehee Case, and of Dresser v. M. & I. Co., 93 U.S. 92, 23 L.Ed. 815. To this counsel for plaintiff rejoins that defendant's construction of the Simmons Case is not correct, but, if so, it constitutes an aberrance from the general body of the law, which ought to be followed only in so far as it is compulsory and only in the very track which it has hewn out.

My conclusions on the matter may be briefly stated thus:

(1) I am of the opinion that, before the adoption of the Negotiable Instruments Law, uniformity of decision throughout the United States in the matter of commercial paper was not only desirable, but essential, to freedom of commerce, and that that adoption was brought about for that purpose. That amendment to the Constitution of the United States which next to the Fourteenth, has given rise to more litigation over the validity of state statutes than any other, that no state shall pass a law impairing the obligation of a contract, had its inspiration in the troubles arising out of commercial paper, and especially notes of issue. And not only is it true that there should be uniformity of decision in the United States, but the law of negotiable...