Oates v. National Bank

Decision Date01 October 1879
Citation25 L.Ed. 580,100 U.S. 239
CourtU.S. Supreme Court

ERROR to the Circuit Court of the United States for the Middle District of Alabama.

The facts are stated in the opinion of the court.

Mr. W. Hallett Phillips and Mr. William C. Oates for the plaintiff in error.

Mr. H. C. Semple for the defendant in error.

MR. JUSTICE HARLAN delivered the opinion of the court.

This is a writ of error to a judgment in favor of the First National Bank of Montgomery, against Oates, the plaintiff in error, upon a promissory note for $5,200, executed by him at Eufala, Ala., on the twenty-fifth day of July, 1873, and made payable on the 1st of December thereafter, to the order of B. H. Micow, president, at the office of the Tallassee Manufacturing Company, No. 1, in the city of Montgomery. The consideration of the note was fifty shares of the capital stock of that company purchased by Oates, for which, at the time, he received a certificate in the customary form. As part of the contract of purchase, he took from the company a separate written obligation, reserving to him the option, on the 1st of December, 1873, at the maturity of the note, of surrendering the certificate of stock and receiving his note duly cancelled. It appears that he was induced to buy the stock upon certain representations of the special agent of the company as to its financial condition. These representations were subsequently ascertained by him to have been false and fraudulent.

On or about Nov. 4, 1873, Micow applied to the bank for an extension of time upon certain indebtedness then held by it against the company, amounting to about $40,000, and all of which matured thereafter and in that month. That indebtedness had been previously extended, on several occasions, at usurious rates of interest, paid invariably in advance. The bank signified its willingness to give an extension for thirty, sixty, ninety, and one hundred and twenty days, upon collateral security being furnished, and upon the payment in advance for such extension of interest at the rate of one and one-quarter per cent per month, upon the different classes of the company's paper by it held. These conditions were complied with, and the extension was accordingly made for the periods stated. The required interest was not carried into the extension bills, but was paid in advance. Among the collaterals placed with the bank, under this arrangement, was the note for $5,200 already described, indorsed in blank, 'B. H. Micow, Prest.'

The evidence was somewhat conflicting as to whether the officers of the bank, at the time of receiving the note in question, had actual notice from Oates as to its consideration. It was, however, conceded that its president had reason to believe the note was given for stock of the company. Oates, although residing at Eufala, was a stockholder and director of the bank. No inquiry was made of him by the officers of the bank, before receiving the note as collateral security, as to any defence which he might have against its payment. But it was proven by them that, when the extension was given to the company, they had no notice of any defect in or defence to the note, or of any equities, except such notice as might be implied from the foregoing facts and the relations of the parties. It is not claimed that the bank had, at that time, any notice of the separate written obligation of the manufacturing company to which we have already referred.

On the 24th of November, 1873, the bank gave written notice to Oates that it held his note as collateral security for the indebtedness of the company. A few days thereafter he transmitted to the bank the company's agreement or obligation, under which he had purchased the stock and given his note, informing its officers that he had, by the same mail, returned his stock-certificate to the company, and demanded the surrender and cancellation of his note. The bank, replying to this notification, stated that it had purchased the note as negotiable paper, in good faith, for a valuable consideration, and without notice of any private understanding between Oates and the company, its officers or agents.

These are the essential facts developed in the record. We are to inquire whether the court below committed any error of law to the prejudice of the plaintiff in error.

The first contention of the plaintiff in error is, that, by the terms of the contract under which he purchased the stock and gave his note, and in view of the false and fraudulent representations of the company's agent as to its financial condition, he was entitled, as of absolute right, to surrender the certificate of stock and have his note returned or cancelled; and, further, that his defence, upon that ground, was secured to him by the statutes of the State of Alabama, in force when the contract was made.

It is clear that, as between the Tallassee Manufacturing Company and Oates, the defence of the latter is perfect. And it would undoubtedly be sustained, even against the defendant in error, were it true, as claimed, that, by the statutes of Alabama, the transfer of the note was without prejudice to any defence which the maker might assert against the payee. This renders it necessary that we should ascertain to what extent, if at all, the rights of parties are affected or controlled by the statutes of Alabama.

By sect. 1833 of the Revised Code of that State it is declared that 'bills of exchange and promissory notes payable in money, at a bank or private banking-house, are governed by the commercial law, except so far as the same is changed by this code.' Sect. 1839 declares that 'all contracts or writings, except bills of exchange, promissory notes payable in money at a bank or private banking-house, and paper issued to circulate as money, are subject to all payments, set-offs, and discounts had or possessed against the same, previous to notice of the assignment or transfer.'

Thus stood the law of Alabama until April 8, 1873, when, by statute of that date, entitled 'An Act to amend sect. 1833 of the Revised Code of Alabama,' it was enacted that sect. 1833 (copied in full in the act) 'be so amended as to read as follows: 'Bills and notes payable at a banker's or a designated place of payment, are negotiable instruments; bills of exchange and promissory notes payable in money at a bank or a certain place of payment therein designated, are governed by the commercial law." Acts 1872-73, p. 111. By the same statute, sect. 1833, as it then stood in the Revised Code, was expressly repealed. It should be observed that the words 'except so far as the same is changed by this code,' in sect. 1833 as it originally stood, are omitted from that section as remodelled by the act of 1873.

The argument of the plaintiff in error is, that although, by the explicit declaration in the act of 1873, 'bills and notes payable in money at a certain place of payment, therein designated,' are negotiable instruments, to be governed by the commercial law, such bills and notes are, nevertheless, under sect. 1839, 'subject to all payments, set-offs, and discounts had or possessed against the same, previous to notice of the assignment or transfer.' We concur with the court below in holding that construction to be wholly inadmissible. It seems that upon this precise point there has been no direct adjudication by the Supreme Court of Alabama, to which primarily belongs the duty of giving authoritative construction of the statutes of that State. The only case in that court to which we are referred, that has any bearing upon this question, is Cook v. Mutual Insurance Co., 53 Ala. 37. Jones, it seems, gave to Cook, in 1871, a promissory note, payable to the order of the latter at the office of W. H. Roberts, Mobile, and indorsed by the payee to the insurance company. In an action instituted by the latter against Cook, the question arose as to whether the note was commercial paper, protected, in the hands of a bona fide holder for value, against defences resting upon payment, set-off, or discount. The inferior State court ruled that it was paper of that kind; but the Supreme Court of Alabama held that the note, when made, was not commercial paper, and that the rights and liabilities of the parties were to be determined by the statute in force at the date of its execution. That court, speaking by its Chief Justice, said: 'Since the making of the promissory note, on the indorsement of which this suit is founded, the statute of April 8, 1873, has converted promissory notes, payable in money at a designated place, into negotiable instruments governed by the commercial law. It operates on the nature and obligation of the contract of the parties to such notes, and cannot be construed as affecting notes made and indorsed prior to its passage. The law in force when the note is made and indorsed regulates and defines the liability of the parties.' No other reasons are assigned in support of the conclusion that the act of 1873 did not control the case. It is quite manifest from the language employed by the court, that, had the note there in suit been executed subsequently to the act of 1873, it would have sustained the ruling of the inferior State court, and excluded all defences inconsistent with the established doctrines of the commercial law. Such, in our opinion, must have been its determination upon any proper construction of the act of 1873. It is true that that statute does not in express words amend sect. 1839, whereby only 'bills of exchange and promissory notes, payable in money at a bank or private banking-house, and paper issued to circulate as money,' are, in terms, protected against payments, set-offs, and discounts, which the maker might assert in the case of all other contracts and writings. But it is perfectly evident that the object of the act of 1873 was to place bills of exchange and promissory notes, payable at a certain designated place of payment, upon...

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