Paepcke v. Paine, 102.

• Decision Date: 07 April 1931
• Docket Number: No. 102.,102.
• Citation: 235 N.W. 871,253 Mich. 636
• Parties: PAEPCKE v. PAINE et al.
• Court: Michigan Supreme Court

253 Mich. 636

235 N.W. 871

PAEPCKE

v.PAINE et al.

No. 102.

Supreme Court of Michigan.

April 7, 1931.

Error to Circuit Court, Wayne County; Ormond F. Hunt, Judge.

Action by Elizabeth H. Paepcke against William A. Paine and others copartners doing business as Paine, Webber & Co. Judgment for plaintiff, and defendants bring error.

Reversed and remanded, with direction.

Argued before WIEST, C. J., and BUTZEL, CLARK, McDONALD, POTTER, SHARPE, NORTH, and FEAD, JJ. George E. Brand, of Detroit, for appellants.

Miller, Canfield, Paddock & Stone, of Detroit, for appellee.

Beaumont, Smith & Harris, of Detroit (Don M. Dixon, of Detroit, of counsel), for Michigan Bankers' Ass'n.

Bulkley, Ledyard, Mills & Dickinson, of Detroit, Fisher, Boyden, Bell, Boyd & Marshall, of Chicago, Ill., and Shearman & Sterling, of New York City (Philip A. Carroll, of New York City, of counsel; Charles H. L'Hommedieu and William B. Cudlip, both of Detroit, on the brief), amici curiae.

SHARPE, J.

Plaintiff brought replevin to recover from defendants, a firm of brokers, certain corporate debentures, hereafter spoken of as bonds, which had been stolen from her, but which had been acquired by defendants in good faith, for value, and without notice. Trial was had before the court without a jury. An agreed statement of facts was filed. It is conceded that, if the bonds are negotiable instruments, defendants have title thereto. The court found as a matter of law that they were not, and entered a judgment for the plaintiff, of which defendants seek review by writ of error.

It seems to be further conceded that, in decision of the question presented, we should apply the law of the state of New York, where the bonds were issued and are made payable. This is in accord with the holding of this court. Fidelity & Deposit Co. v. Andrews, 244 Mich. 159, 221 N. W. 114;City Bank & Trust Co. v. Atwood, 197 Mich. 116, 163 N. W. 941.

The applicable provisions of the Negotiable Instruments Law of that state (Cahill's Consolidated Laws of New York, 1930, c. 39, art. 3) appear in the margin.¹ While this act does not in express terms refer to bonds of corporations, the Court of Appeals of that state in an early day ( Brainerd v. New York, etc., R. Co., 25 N. Y. 496), and courts generally since that time, have attached to them the attributes of commercial paper. See note, 31 A. L. R. 1390. It must be assumed that the bonds here in question were issued with full knowledge of the prevailing usage, and with the manifest design that they should be so circulated.

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.

‘If in the bond or note 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. What that document may provide is immaterial. Reference to the paper itself said to be negotiable determines its character. Old Colony Trust Co. v. Stumpel, 247 N. Y. 538, 161 N. E. 173.’ Enoch v. Brandon, 249 N. Y. 263, 267, 164 N. E. 45, 47.

‘In the instant case the question as to whether the note in question is negotiable or not must be determined by an examination of the note itself. (See Continental Guaranty Corp. v. People's Bus Line, 1 W. W. Harr. (Del.) 595, 117 A. 275;International Finance Co. v. Northwestern Drug Co. [D. C.] 282 F. 920.) As stated in the last-mentioned case, a departure from this rule would throw the whole law of commercial paper into confusion.’ National Bond & Inv. Co. v. Lanners, 253 Ill. App. 262, 270.

There is, however, authority to the contrary. See Hubbard v. Wallace Co., 201 Iowa, 1143, 208 N. W. 730, 45 A. L. R. 1065, and the copious note appended thereto in the latter.

Much of the difficulty in decision is due to the application of the rule that two or more instruments, executed by the same parties at the same time and referring to each other; must be read together as constituting but a single contract between the parties. But a note and a mortgage securing its payment do not constitute a single contract. They are separate instruments, executed for different purposes and not of the same nature. The note, if it be negotiable in form, is governed by the law applicable to negotiable instruments, and the mortgage by the law of real property. The holder of such a note may abandon his security, and seek to enforce payment of it according to its terms as written. The question of its negotiability will be determined by the law relating thereto. If they be construed together as but one instrument, the note loses its character as such, and recovery must be had upon the contract as evidenced by both instruments. What has been said relative to a note and mortgage applies with equal force to a bond, negotiable in form, and the trust agreement securing its payment.

The better rule, as we view it, is that announced in the New York and Illinois cases above referred to and the cases cited in support thereof. The form of the note or bond may alone be considered in determining its negotiability. The mortgage or trust agreement, unless referred to in a way to incorporate its provisions into the note or bond, is but an incident thereto, and is to be regarded as a security only. If the note or bond contains ‘an unconditional promise or order to pay a sum certain in money’ at ‘a fixed or determinable future time’ and is ‘complete and regular upon its face,’ it may be enforced according to its terms.

The bonds in question are undertakings on the part of the Container Corporation of America to pay to the bearer, or, if registered, to the registered owner thereof, on June 15, 1936, the sum of $1,000, and interest payable semiannually at the office of the trustee in the city of New York. Each of them recites that it is one of a duly authorized issue of $1,000,000, ‘all issued under a certain Trust Agreement, dated as of June 15, 1926, executed by the Company to the National City Bank of New York, as Trustee, to which Trust Agreement reference is hereby made for a statement of the terms under which the said Debentures are issued and the rights and obligations of the Company, of the Trustee and of the respective holders of the said Debentures under the said Trust Agreement. To the extent provided in the said Trust Agreement all rights of action upon this Debenture are vested in the Trustee.’

Under the statute an instrument to be negotiable ‘must contain an unconditional promise or order to pay a sum certain in money,’ but such provision is not affected ‘though coupled with * * * a statement of the transaction which gives rise to the instrument.’ Section 22.

‘But when such instruments contain special stipulations, and their payment is subject to contingencies not within the control of their holders, they are, by the established rules, deprived of the character of negotiable instruments, and become exposed to any defense existing thereto as though still held by the original parties to the instrument.’ 3 R. C. L. p. 845.

‘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. p. 883.

Negotiable paper is frequently used as a substitute for money, and the essential elements of negotiability are the certainty in the sum to be paid and in the time of payment. If the instrument on its face contains language creating uncertainty in either of these respects, it fails to meet the statutory requirements.

The reference in the bond above quoted does not assume to in any way affect the unconditional promise to pay. A purchaser is referred to the trust agreement for a statement of the rights and obligations of the company, the trustee and the holders of the bonds ‘under the said Trust Agreement.’ It in no way refers to or qualifies the unconditional promise of the company to pay the bond at maturity theretofore clearly expressed. The reference gives notice to the bondholder that he may examine the trust agreement to ascertain the nature and kind of the security pledged to insure payment and the procedure provided for to enforce the same, should be care to do so before making purchase thereof. But it in no way imposes that duty upon him in order to determine the status of the bond as a negotiable instrument. In Enoch v. Brandon, supra, page 268 of 249 N. Y., ...