Merchants' Nat. Bank v. Detroit Trust Co.

• Decision Date: 06 June 1932
• Docket Number: No. 144,Jan. Term.,144
• Citation: 258 Mich. 526,242 N.W. 739
• Parties: MERCHANTS' NAT. BANK v. DETROIT TRUST CO.
• Court: Michigan Supreme Court

258 Mich. 526

242 N.W. 739

MERCHANTS' NAT. BANK

v.DETROIT TRUST CO.

No. 144, Jan. Term.

Supreme Court of Michigan.

June 6, 1932.

Appeal from Circuit Court, Wayne County; Fred S. Lamb, Judge.

Action by the Merchants' National Bank against the Detroit Trust Company. From a judgment in favor of plaintiff, defendant appeals.

Reversed and remanded, with direction.

Argued before the Entire Bench, except FEAD, J.Miller, Canfield, Paddock & Stone, of Detroit, for appellant.

Lightner, Oxtoby, Hanley, Crawford & Dodd, of Detroit, for appellee.

McDONALD, J.

The defendant has appealed from a judgment in an action of replevin for the recovery of certain corporate bonds which were stolen from its bank at Defiance, Ohio, and for certain other bonds stolen from the First National Bank of Columbus, Wis., the right to which the plaintiff has acquired by assignment. All of these bonds subsequently came into the possession of the defendant as collateral to a loan made to one of the bandits who stole them. The Ohio bank bonds involved are Butte, Anaconda & Pacific Railway Company, $1,000; Kingdom of Belgium, $2,000; Oriental Development Company, Limited, $2,000; Missouri Pacific Railroad Company, $1,000; Erie Railroad Company, series A, $1,000; Sinclair Pipe Line Company, $5,000; City of Marseilles, $1,000; Government of French Republic, $1,000.

The bond acquired by assignment from the Wisconsin Bank is Ogden Gas Company, $3,000.

The issue involves two questions: (1) Are these bonds negotiable? (2) If so, was defendant a holder in due course?

It is conceded by the plaintiff that all of the bonds are negotiable except the Butte, Anaconda & Pacific Railway Company the Sinclair Pipe Line Company the Ogden Gas Company and the Erie Railroad bonds.

Counsel have stipulated that decision on the question of negotiability is controlled by the law of New York where the bonds were issued and made payable. This is in line with the holding of our court in Paepcke v. Paine, 253 Mich. 636, 235 N. W. 871, 872, 75 A. L. R. 1205.

As to the disputed bonds, the question is, Do they contain an unconditional promise or order to pay at a certain time and, at all events, a certain sum in money? If negotiable, the unconditional promise must appear on the face of the bond. In Paepcke v. Paine, supra, it is said: ‘The instrument itself determines its character. It must, of course, conform to the requirements of the Negotiable Instrument Law. But the statute deals with its form-with what an inspection of its face discloses.’

And in Enoch v. Brandon, 249 N. Y. 263, 164 N. E. 45, 47, quoted with approval in Paepcke v. Paine, supra, it was said: ‘If in the bond * * * anything appears requiring reference to another document to determine whether in fact the unconditional promise to pay a fixed sum at a future date is modified or subject to some contingency, then the promise is no longer unconditional.’

‘It may be stated as the general rule that wherever a bill of exchange or promissory note contains a reference to some extrinsic contract in such a way as to make it subject to the terms of that contract, as distinguished from a reference importing merely that the extrinsic agreement was the origin of the transaction, or constitutes the consideration of the bill or note, the negotiability of the paper is destroyed.’ 3 R. C. L. pp. 883, 884.

In the Negotiable Instruments Law it is said: ‘An unqualified order or promise to pay is unconditional within the meaning of this act, though coupled with * * * a statement of the transaction which gives rise to the instrument.’ Negotiable Instruments Law N. Y. § 22, subd. 2; 2 Comp. Laws, Mich. 1929, § 9252.

In applying these tests to the bonds in question, we will first consider the Butte, Anaconda & Pacific Railway bond.

This bond is negotiable unless the promise to pay is modified and rendered uncertain by the following provision: ‘This bond is entitled to the benefits and subject to the provisions of an indenture of mortgage dated February 1, 1914, made by the company to Guaranty Trust Company of New York as trustee, to which mortgage reference is hereby made for a description of the property and franchises mortgaged, the nature and extent of the security, the rights of the holders of the said bonds under the same, and the terms and conditions upon which said bonds are issued, received and held.’

If the words ‘subject to the provisions of an indenture of mortgage’ and the words ‘received and held’ were eliminated from the above reference, the bond would be negotiable under the holding in Paepcke v. Paine, supra. If the words ‘received and held’ were eliminated, it would be negotiable under the holding in Enoch v. Brandon, 249 N. Y. 263, 164 N. E. 45, 47. In the latter case, the court held that the words ‘subject to the provisions of an indenture of mortgage’ did not impair the negotiability of the bonds. It was said that a purchaser scanning the bonds ‘would interpret the statement that the bonds were secured by, and entitled to the benefits and subject to the provisions of, the mortgage, as meaning that a foreclosure or other relief might be had thereunder only subject to its provisions. He would see that reference to it is also made to determine the terms and conditions under which the bonds are issued and secured. Again, it would mean to him, as it means to us, that only by turning to the mortgage might he discover the precise nature of the lien he is to obtain. He would see that the bonds were to be issued, not only upon the general credit of the corporation, but upon the faith of some collateral mortgage. To it he must go, if further knowledge as to this security is desired.’

In regard to this bond, its negotiability depends on the effect of the words ‘received and held.’ A reference in the bond to a mortgage to determine upon what conditions it was issued does not impair its negotiability. Enoch v. Brandon, supra. The words ‘received and held’ add nothing to ‘issued’ because the terms and conditions on which the bond is issued show how it was received and held. There is nothing in the words themselves indicating that there may be some condition in the mortgage qualifying the unconditional promise of the bond. They refer to the security.

It is our conclusion that the Butte, Anaconda & Pacific Railway Company bond is negotiable under authority of Enoch v. Brandon, supra.

The reference in the Sinclair Pipe Line Company bond reads as follows: ‘To which trust agreement reference is hereby made for a statement of terms under which said bonds are issued, and of the rights and obligations of the company, the trustee and the respective holders of said bonds thereunder, to all of which terms the holder of this bond assents by the acceptance hereof.’

With the exception of ‘to all of which terms the holder of this bond assents by the acceptance hereof,’ the language of this reference is substantially the same as that in Paepcke v. Paine, supra, where this court held the bond negotiable.

The language providing that the acceptance of the bond is an assent to the terms and conditions upon which it was issued is of no consequence. Without any declaration of that kind, the law would imply from the fact of acceptance an assent to the terms and conditions referred to in the bond. The language is so much surplusage. Under the holding of this court in Paepcke v. Paine, supra, the Sinclair Pipe Line Company bond is negotiable.

The reference in the Erie Railroad Company bond reads as follows: ‘To which reference is hereby made for a description of the property and franchises mortgaged and pledged, the nature and extent of the security, the rights of the holders of said bonds under the same, and the terms and conditions upon which said bonds are secured and are to be used.’

From the language used, we do not understand that this reference is to the terms and conditions upon which these bonds are to be used by a purchaser. Bonds are issued to sell. They may be a more attractive investment if the investor knows how the proceeds from the sale are to be used. There would be no advantage in restricting their use in the hands of a purchaser. There would be a decided advantage in the sale of the bonds if the investor knew the...