Nickey Bros. v. Lonsdale Mfg. Co.

• Citation: 257 S.W. 403,149 Tenn. 1
• Parties: NICKEY BROS., INC., v. LONSDALE MFG. CO.
• Decision Date: 17 January 1924
• Court: Supreme Court of Tennessee

257 S.W. 403

149 Tenn. 1

NICKEY BROS., INC., v. LONSDALE MFG. CO.

Supreme Court of Tennessee.

January 17, 1924

Appeal from Chancery Court, Knox County; Chas. Hays Brown Chancellor.

Bill by Nickey Bros., Inc., against the Lonsdale Manufacturing Company. From order directing payment of bonds held by the Union National Bank of Knoxville, out of proceeds of property conveyed in trust, receiver for defendant appeals. Affirmed.

McKINNEY J.

The original bill in this cause was filed, and sustained, as a general creditors' bill for the purpose of administering the affairs of the defendant, Lonsdale Manufacturing Company as an insolvent corporation.

Pending the suit the Union National Bank of Knoxville filed its petition in the cause alleging that it held four bonds of the Lonsdale Manufacturing Company for $500 each, and sought a decree for the face value of said bonds with interest and attorney's fees, as provided for in said bonds, and to have said decree satisfied out of the proceeds derived from the sale of the property, conveyed in trust, to secure same.

The relief prayed for was granted by the chancellor, and the receiver of the defendant company has appealed to this court and has assigned errors.

The pertinent facts as to the transaction are substantially as follows:

On January 31, 1922, the defendant company issued $75,000 of bonds, secured by a deed of trust, to the Fidelity Trust Company, trustee, on certain property owned by it. Said bonds bore interest at the rate of 8 per cent. per annum, and provided for 10 per cent. attorney's fees if placed in the hands of an attorney for collection.

The trust deed securing said bonds contained the following provision:

"It is hereby agreed that the said issue of $75,000 of bonds hereby provided for shall upon the signing and execution thereof or as soon thereafter as practicable be duly certified by said Fidelity Trust Company, trustee, and delivered by it to the president of this company. * * * And such certificate of said trustee shall be conclusive evidence that the bonds so certified have been duly issued hereunder and are entitled to the benefit of the trust hereby created."

In authorizing the issuance of said bonds the stockholders passed the following resolution:

"Be it further resolved that the board of directors be and it is hereby authorized to sell and dispose of said bonds upon such terms and conditions as may seem to it advisable and for the best interests of the company."

The board of directors thereupon conferred the following authority upon the president:

"Upon motion duly seconded and unanimously passed it was ordered that the president be authorized to dispose of said bonds at not less than par through such trust company or their agents and upon such terms as the president might deem advisable and for the best interests of the corporation, the proceeds of said bonds to be used for corporate purposes only."

Said bonds were duly certified by the trustee and delivered into the hands of L. H. Stone, the president of the defendant corporation. Mr. Stone was unable to sell the bonds, but from time to time hypothecated portions of said bonds for the purpose of securing funds with which to meet the obligations of the company.

At the time of the filing of the bill in this cause in May, 1922, $42,000 of the bonds had been disposed of in the manner indicated.

It may be stated at this point that the property securing said bonds was sold for $24,000, so that after adding interest and attorney's fees the holders of same will probably receive about 50 cents on the dollar from the trust fund. These bonds were payable to bearer and passed by mere delivery.

Four of these bonds of $500 each were turned over to the petitioner, Union National Bank, as collateral security to a loan made by petitioner bank to Mr. Stone on April 17, 1922.

The defendant company, being in financial straits and not having sufficient funds to meet its pay roll, on April 15, 1922, through its president, Mr. Stone, applied to petitioner bank for a loan to meet its pay roll and other pressing obligations, which was declined.

The officers of the bank considered Mr. Stone a responsible man of wealth and agreed to make the loan to him individually. Mr. Stone thereupon executed his 30-day note to the bank for $1,000, with C. B. Johnson as indorser thereon.

On the same day Mr. Stone used a part of said fund in paying for some glass, which had been shipped to the company C. O. D., and which it needed badly to use in the manufacture of some of its products, and the balance he loaned to the company, taking its demand note for same payable to himself. This was on Saturday. On Monday following (April 17th) Stone made another individual loan from the bank evidenced by the following note, to wit:

"Sixty days after date we or either of us promise to pay to the order of the Union National Bank of Knoxville $1,000 at the banking house of said bank in Knoxville, Tenn., for value received, having deposited with said bank as collateral security for the payment of this note, and of any other note, claim or indebtedness now or hereafter held against me by said bank, $2,000.00 first mortgage bonds Lonsdale Manufacturing Company (bonds No. 128, 129, 130, 131, $500.00 each), which I hereby authorize said bank to sell, without notice, either at public or private sale, on the nonperformance of this promise applying the net proceeds thereof to the payment of this note, with interest and any excess after the payment hereof to the payment of any other note, claim or indebtedness then held against me by said bank, whether due or not due, as said bank may elect; and accounting to me for the surplus, if any."

Stone also loaned the proceeds derived from the last-named loan to the defendant company, for which it executed its demand note on April 18th.

On June 16, 1922, the note of April 17, 1922, carrying as collateral security the $2,000 of bonds in question, having matured, the Union National Bank elected, as it had the right to do under the written agreement contained in the note of April 17th, to pledge the surplus collateral to the payment of the note of April 16th. This was accomplished by consolidating the two notes and taking a new note, which contained exactly the same provision with respect to the collateral and the application of the surplus to any other indebtedness as has been set out above.

Subsequent to their execution Mr. Stone negotiated the two notes, which the company executed to him, to the City National Bank, and a decree has been entered in this cause in favor of said bank and against the company for the face value of said notes, with interest and attorney's fees.

It will thus be seen that by virtue of the decree on the note just referred to, and the decree on the bonds in favor of petitioner bank, the company will have to pay the same debt twice.

The first error assigned by the defendant is as follows:

"The chancellor erred in holding and decreeing that the petitioner, Union National Bank, was the legal holder of said bonds for value and entitled to realize thereon in this case, and in rendering a decree against the defendant, Lonsdale Manufacturing Company, for the principal, interest, and attorney's fees thereon in the sum of $2,448.00, together with the costs of the cause, or for any amount whatsoever. The chancellor should have held and decreed that the petitioner, Union National Bank, was not the holder of said bonds in due course and for value, and was not entitled to realize thereon in this case, and should have decreed a dismissal of the petition filed therein by the Union National Bank."

By this assignment of error the question is raised as to whether the bank is a holder in due course.

The Uniform Negotiable Instruments Act (Laws 1899, c. 94) applies to public and corporate bonds as well as to bills, notes, and checks.

Mr. Dolle, in his work on the Law of Business Paper and Securities (in reference to the Uniform Negotiable Instruments Law) on page 10, says:

"Although it is applicable to all forms of negotiable instruments, the act has particular reference to promissory notes, bills of exchange and checks, these being the principal form of commercial paper and the three with which business men most frequently meet in their daily transactions."

By section 1957 of the Code of Tennessee 1858 corporate bonds were made negotiable by statute.

It was held by this court in Gilley v. Harrell, 118 Tenn. 122, 101 S.W. 424, that the foregoing section of the Code was repealed, by implication, by the Negotiable Instruments Act, and thus it was inferentially held that the Negotiable Instruments Act applied to public and corporate bonds.

The bonds in question were, therefore, negotiable, and fall within the provisions of our Negotiable Instruments Act. Counsel for the defendant, however, insist that the status of the bank was not that of a holder in due course for the reason that it knew that Stone was the president of the defendant corporation and that he was hypothecating the securities of the corporation as collateral security to his individual notes, and that this was sufficient knowledge to put the bank upon notice.

Prior to the adoption of the Negotiable Instruments Act it was held in this, and other states, that one who receives from an officer of a corporation the notes or securities of such corporation, in payment of or as security for a personal debt of such officer, did so at his own peril. But this rule was changed by the Negotiable Instruments Act.

This court, in Bank v. Butler, 113 Tenn. 580, 83 S.W. 656, said:

"2. The contention of the defendant in error that Ward & Fryberg are not bona fide purchasers, because while they had no...