Rich v. Pappas

• Decision Date: 09 February 1956
• Docket Number: No. 12486.,12486.
• Citation: 229 F.2d 308
• Parties: Ralph P. RICH, Receiver, and City of Erlanger, Appellants, v. Anthony PAPPAS (Intervening Petitioner), Irene Gross, Administratrix, and Stewart G. Stewart (Intervening Petitioners), Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

229 F.2d 308 (1956)

Ralph P. RICH, Receiver, and City of Erlanger, Appellants, v. Anthony PAPPAS (Intervening Petitioner), Irene Gross, Administratrix, and Stewart G. Stewart (Intervening Petitioners), Appellees.

No. 12486.

United States Court of Appeals Sixth Circuit.

February 9, 1956.

Carl H. Ebert, Newport, Ky., William Hyman, Cincinnati, Ohio (Henry J. Cook and Walter J. Burke, Ebert, Cook & Burke, Newport, Ky., on the brief), for appellees.

John Colville Taylor and Walter E. Beckjord, Cincinnati, Ohio (Peck, Shaffer & Williams, Cincinnati, Ohio, Ervin L. Bramlage, Cincinnati, Ohio, Ralph P. Rich, Covington, Ky., on the brief), for appellants.

Before SIMONS, Chief Judge, and ALLEN and MILLER, Circuit Judges.

SHACKELFORD MILLER, Circuit Judge.

The appellees, Anthony Pappas, Irene Gross, Administratrix of the Estate of Irwin C. Gross, deceased, and Stewart G. Stewart, sought by these proceedings to enforce collection of certain Sanitary Sewer System Bonds, and coupons attached, owned by them and alleged to have been issued by the City of Erlanger, appellant herein. The City contended that the bonds were not legally issued and were unenforceable in the hands of the appellees. The District Judge, hearing the case without a jury, gave judgment for the appellees, from which this appeal was taken.

In 1936, the City of Erlanger, Kentucky was duly authorized by ordinance to issue bonds in the principal amount of $150,000 bearing date of March 15, 1936 and bearing interest at the rate of not to exceed 6% per annum payable semi-annually, for the purpose of defraying the cost of construction of sanitary sewers in the City. The bonds were printed and executed by the Mayor and the Town Clerk, but no ordinance was ever enacted authorizing the delivery of the bonds to anyone. However, certain of the bonds thereafter came into the hands of persons who claimed to be holders in due course thereof. Upon refusal of the City of Erlanger to pay past due interest coupons and the principal of matured bonds, some holders thereof brought action in the United States District Court to enforce collection by applying the revenue from the operation of the sewer system to the payment of the bonds and for the appointment of a Receiver to accomplish that result. The District Court held the bonds valid and the appellant, Ralph P. Rich, was appointed Receiver. On appeal, City of Erlanger v. Berkemeyer, 6 Cir., 207 F.2d 832, 38 A.L.R.2d 918, we reviewed the facts giving rise to the controversy. It is unnecessary to repeat them here. We held that although the bonds had not been validly issued, they were by reason of certain provisions of the Kentucky Statutes negotiable in character and were enforceable in the hands of a holder in due course or of one acquiring title through a holder in due course and who was not himself a party to any fraud or illegality affecting the instrument. We also held that one who was a holder in due course by reason of being a pledgee of the bonds, rather than a purchaser, was a holder in due course only to the extent of the indebtedness which the pledge secured.

Following the remand to the District Court for further factual findings and further proceedings in connection with the receivership, the appellee Pappas filed an intervening petition therein in which he alleged that he was the owner and holder of a past due and unpaid promissory note in the principal amount of $1,580, secured by a pledge of five $1,000 bonds of the same issue carrying past due and unpaid coupons, in the total amount of $5,400.00 He sought enforcement of his pledge interest. Appellees Gross and Stewart also filed their intervening petition seeking enforcement of eighteen $1,000 bonds of the same issue held by them. The District Judge, following the ruling of this Court on the prior appeal, found the appellee Pappas to be a holder in due course to the extent of his pledge interest in the five bonds held by him and entered judgment to that effect. The appellees Gross and Stewart were holders of the bonds through inheritance from one Julius Berends, who owned the bonds at the time of his death and whose rights therein they sought to enforce. The District Judge found Berends to be a holder in due course of the eighteen bonds held by him, and under the provisions of Section 356.058 Kentucky Revised Statutes entered judgment for the appellees Gross and Stewart.

Appellants recognize the ruling that the bonds are negotiable in character and that the rights of holders in due course will be enforced. They contend, however, that in order to be a holder in due course it was necessary for the appellees to comply with the requirements of Section 356.052 Kentucky Revised Statutes, which provides as follows:

"A holder in due course is a holder who has taken the instrument under the following conditions:

"(1) That the instrument is complete and regular upon its face.

"(2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact.

"(3) That he took it in good faith and for value.

"(4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."

They contend that the evidence not only fails to fulfill these requirements but also affirmatively shows that both Pappas and Berends had notice of the infirmity in the instrument and defect in the title at the time they became holders. The evidence was devoted largely to this phase of the case, and it is urged upon us on this review that the findings of the District Judge are unsupported by the evidence and are clearly erroneous.

A preliminary question is presented by the pleadings. Section 356.059 Kentucky Revised Statutes provides in part as follows: "Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. * * *" The intervening petition of Gross and Stewart states that Berends was the holder of the eighteen bonds prior to his death. The intervening petition of Pappas states that he was the owner and in possession of the five bonds he sought to enforce. The evidence fully sustained those allegations, and under the statute constituted a prima facie case of holder in due course.

Appellants contend, however, that since it was shown that there was a defective title in the negotiation of the bonds the burden was on the appellees to prove themselves holders in due course as defined by Section 356.052. Appellants' answers do not plead affirmatively the defect in title now relied upon, and it is well settled that proof without pleading does not raise an issue and is as unavailable as pleading without proof. Conley v. Boyd Oil & Gas Co., 220 Ky. 753, 754, 295 S.W. 1025; Mannington Fuel Co. v. Ray's Adm'x., 250 Ky. 736, 741, 63 S.W. 2d 933; Wigginton's Adm'r v. Louisville Ry. Co., 256 Ky. 287, 294, 75 S.W.2d 1046. Although the answers deny material allegations of the intervening petitions, such denials do not raise affirmative defenses. Hatcher-Powers Shoe Co. v. Hitchens, 232 Ky. 87, 22 S.W.2d 444. But the parties tried the present issues against the background of the prior litigation. Pleadings and evidence in that litigation was referred to as a part of these proceedings. We are of the opinion that the issue of whether the appellees were actually holders in due course was one of the issues...