O'Neal v. Stuart

• Decision Date: 06 June 1922
• Docket Number: 3623.
• Citation: 281 F. 715
• Parties: O'NEAL v. STUART.
• Court: U.S. Court of Appeals — Sixth Circuit

281 F. 715

O'NEAL v. STUART.

No. 3623.

United States Court of Appeals, Sixth Circuit.

June 6, 1922

J. B Sizer, of Chattanooga, Tenn. (Arthur Traynor, of Cleveland Tenn., and Sizer, Chambliss & Sizer, of Chattanooga, Tenn on the brief), for petitioner and appellant. D. Sullins Stuart, of Cleveland, Tenn., for respondent and appellee.

Before KNAPPEN, DENISON, and DONAHUE, Circuit Judges.

DENISON Circuit Judge.

This record presents a case which is near the line between review by petition to revise, under section 24b of the Bankruptcy Act (Comp. St. Sec. 9608), and review by appeal, under section 24a of the same act. We conclude that the former method is the more appropriate one. Accordingly we dismiss the appeal and entertain the petition to revise.

The case involved the rights of O'Neal with reference to a note given by Dooley to evidence part of the purchase price of an interest in land that day bought from Campbell by Dooley, and secured by vendor's lien reserved on the face of Campbell's deed. O'Neal signed this note with Dooley, and appeared to be a joint maker; in fact, he signed solely for Dooley's accommodation, and, as between himself and Dooley, he was surety and Dooley was principal. When later Dooley became bankrupt, the note had become due and remained unpaid by Dooley, and O'Neal had purchased the note from Campbell and had it transferred to him by Campbell's indorsement without recourse, O'Neal sought to prove against Dooley in bankruptcy his claim for the amount paid Campbell and to establish it as a claim secured by the reserved vendor's lien. The District Judge denied his right to have the security, and the rightfulness of that denial is the only question here.

The conclusion of the trial court was based upon its construction of the Uniform Negotiable Instruments Act, as adopted in Tennessee, being chapter 94 of the Tennessee Acts of 1899. The material parts are as follows:

From the preliminary definitions, section 3516a4, Shannon's 1917 Tenn. Code: The person 'primarily' liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same. All other parties are 'secondarily' liable.

From section 119 (Shannon, Sec. 3516a127): A negotiable instrument is discharged: (1) By payment in due course by or on behalf of the principal debtor; * * * (5) when the principal debtor becomes the holder of the instrument at or after maturity in his own right.

From section 120 (Shannon, Sec. 3516a128): A person secondarily liable on the instrument is discharged: (By discharge of the instrument, discharge of a prior party, release of principal debtor, extension of time to principal debtor, etc.)

From section 121 (Shannon, Sec. 3516a129): Where the instrument is paid by the party secondarily liable thereon it is not discharged; but the party so paying it is remitted to his former rights as against all prior parties, etc.

The matter is, of course, one in which the federal courts are bound by any construction of the state statutes, which has been definitely given by the state courts. In Graham v. Shephard, 136 Tenn. 418, 189 S.W. 867, Ann. Cas. 1918E, 804, it is held that one in O'Neal's position was a person 'primarily liable' rather than 'secondarily liable,' under the stated definition, and therefore was not discharged by that extension of time granted by the holder to the maker, which, under the provisions of section 120, would discharge a person secondarily liable. Based upon this decision it was thought that O'Neal was a 'principal debtor' under section 119, and that, as he had become the holder of the instrument after maturity in his own right, the instrument was thereby discharged, and the security fell with it.

It goes without saying that under the familiar rules, expressly recognized in Tennessee (Byrns v. Woodward, 10 Lea (Tenn.) 444; Fidelity Co. v. Bank, 127 Tenn. 720, 157 S.W. 414), and prior to the passage of the Negotiable Instruments Act, O'Neal, upon paying the note in pursuance of his obligation, would have become by subrogation entitled to any security which Campbell held, and by the purchase of the note from Campbell would have become Campbell's assignee of that security. The question, therefore, is whether this statute and its construction by the Supreme Court of Tennessee have changed the law of negotiable instruments in this very important particular.

In Graham v. Shephard the question arose as between the payee and the accommodation maker, and the inquiry was whether the payee, who had full knowledge of the facts, was bound to regard the accommodation maker as a party secondarily liable, for the purposes of applying section 120. The holding is that, as between these parties and for that purpose, such accommodation maker is one 'primarily liable'-- and perhaps 'principal debtor' as well. It does not necessarily follow that this definition must be accepted as between the joint makers themselves, and for the purpose of determining their respective rights among themselves.

In Merchants' Co. v. Bushnell, 142 Tenn. 275, 218 S.W. 709, the question was likewise wholly between the payee and the joint maker, who was in fact a surety. The payee held security covering this and another note, and had applied the security upon the other note while insisting that the surety pay this one. The suit was an effort by the surety to compel the payee to apply the security first...