Rosemond v. Graham

CourtSupreme Court of Minnesota (US)
Citation56 N.W. 38,54 Minn. 323
PartiesFred L. Rosemond v. John Graham
Decision Date26 July 1893

Argued June 6, 1893.

Appeal by defendant, John Graham, from a judgment of the District Court of Ramsey County, J. J. Egan, J., entered December 21 1892, in favor of plaintiff for $ 794.10.

On October 20, 1890, defendant made and delivered to L. H Maxfield his negotiable promissory note for $ 625 with interest, due ninety days thereafter. The note was given for the purchase price of fifty shares of the stock of the Northwestern Autographic Register Company, that day sold by Maxfield to Graham at $ 12.50 per share. The face value of the shares was $ 50 each. The principal assets of the company consisted of an interest in a patent right for this register and defendant claimed to have been deceived by false representations and defrauded in the transaction, so that the note in Maxfield's hands would be voidable. Maxfield was owing Charles M. Campbell, William A. Campbell and Fred L Rosemond $ 25,000 for a large amount of stock in this same corporation, and he indorsed Graham's note, and sent it on October 25, 1890, to Rosemond at Chicago, Ill., as collateral security for the payment of his debt to them. On the trial, after the evidence was all in, the Judge directed a verdict for plaintiff. The defendant made a case containing exceptions and moved for a new trial. This was denied, and judgment was entered on the verdict. From that judgment defendant appeals.

Judgment affirmed.

Warner, Richardson & Lawrence, for appellant.

The court below erred in taking the case from the jury. Under the evidence as it stood at the conclusion of the trial no contract had been consummated between Maxfield and the three eastern men in relation to the note. The evidence at best tended to show neither a sale nor a pledge, but merely an agency. The circumstances in evidence coupled with such inferences as the jury could legitimately draw, were sufficient to sustain a finding, that plaintiff and the two Campbells did not obtain the note for a valuable consideration, and without notice to any of them that it was obtained by fraud.

The testimony of Rosemond was at war with that of Maxfield as to whether the note was transferred in payment, or in pledge, that is, whether it was sold, or pledged. There had been no meeting of minds down to the date of the trial. Lanz v. McLaughlin, 14 Minn. 72, (Gil. 55;) Steele v. Etheridge, 15 Minn. 501, (Gil. 413;) Bryant v. Lord, 19 Minn. 396, (Gil. 342;) Eagan v. Faendel, 19 Minn. 231, (Gil. 191.)

The evidence all really came down to this, whether four men can engage in a conspiracy to cheat, form a plan of execution, enter on it, devise the false token, find it successful, then three of them sell out their interest in the scheme to the fourth, and can then claim to be bona fide innocent holders of the notes taken by him as the proceeds of the established business, when delivered in pledge for the purchase money he owes.

In such cases after the defendant has introduced evidence sufficient to establish the fraud, then the plaintiff must introduce some evidence warranting belief that he gave value, without notice of such fraud. In cases of actual purchase, an actual payment of the purchase price, an actual parting with something, has been held to warrant inference that it was done without notice; but we can find no case, where nothing has been parted with, and yet plaintiff has been allowed to rest his case, on the bare presumption that because he had received the paper in pledge for an antecedent debt, he must therefore be supposed to have received it without notice, and in good faith. In such a case the plaintiff's conduct furnishes no foundation whatever for any inference of want of notice or of good faith, and the counter inference that the original perpetrator of the fraud has put away the paper because he could not enforce it himself, is left outstanding and in full force. Newton v. Newton, 46 Minn. 33; Munroe v. Cooper, 5 Pick. 412; Frank v. Blake, 58 Iowa 750; Hamilton v. Marks, 63 Mo. 167; Swett v. Hooper, 62 Me. 54; Giberson v. Jolley, 120 Ind. 301; Roberts v. Lane, 64 Me. 108; Vosburgh v. Diefendorf, 119 N.Y. 357; Canajoharie Nat. Bank v. Diefendorf, 123 N.Y. 191; Shain v. Goodwin, 46 F. 564; Goodwin v. Smith, 72 Ind. 113; Zook v. Simonson, 72 Ind. 83; Smith v. Popular Loan & Bldg. Ass'n, 93 Pa. St. 19; Totten v. Bucy, 57 Md. 446; Wright v. Larsen, 51 Minn. 321; Cummings v. Thompson, 18 Minn. 246, (Gil. 228;) Cochran v. Stewart, 21 Minn. 435; Mac Laren v. Cochran, 44 Minn. 255; Merchants' Exchange Bank v. Luckow, 37 Minn. 542; Herrick v. Swomley, 56 Md. 439.

The question whether a note obtained by fraud can be enforced by one taking it merely in pledge for an antecedent debt, without notice of such fraud, has been much considered. We shall not attempt to present all that has been urged pro and con on that point. It has been held twice by this court that such a party occupies the shoes of the original holder, and those decisions have remained unquestioned many years. Becker v. Sandusky City Bank, 1 Minn. 311, (Gil. 243;) Baze v. Arper, 6 Minn. 220, (Gil. 142.)

Lusk, Bunn & Hadley, for respondent.

Maxfield sent to Rosemond a number of notes payable to him and indorsed by him in blank. The note in this case was so sent among others. Rosemond received the note and wrote over the blank indorsement the words, "Pay to the order of Fred L. Rosemond." The legal title to the note passed to Rosemond, though of course he was under obligation to account to the Campbells for their interest in the proceeds. The legal holder of a negotiable note may sue the maker in his own name and recover the contents. Vanstrum v. Liljengren, 37 Minn. 191; Elmquist v. Markoe, 45 Minn. 305.

The notes were taken by Rosemond as collateral security, or pledge, and not as an absolute sale.

The question whether the transfer of negotiable paper, in the usual course of business before maturity in good faith as collateral security for a pre-existing debt without other consideration, cuts off defenses that would be good between maker and payee, is one upon which the authorities are not harmonious. The statement that this court has twice decided this point is not correct. The question has not been passed upon in any reported case in which the question was involved.

In Becker v. Sandusky City Bank, 1 Minn. 311, (Gil. 243,) Judge Sherburne, after deciding the case in favor of the respondent, goes out of his way to give his opinion as to the effect of indorsing negotiable paper as collateral security for a pre-existing debt, and to attack the opinion of Judge Story in Swift v. Tyson, 16 Pet. 1. But the point was not involved in the case. If it had been, and the court had followed the views expressed by Judge Sherburne, the case would have been reversed, whereas it was affirmed. In the case of Baze v. Arper, 6 Minn. 220, (Gil. 142,) the question of the effect of indorsing negotiable paper as collateral security is in no way decided. There was no question of negotiable paper in the case at all. The rule laid down in the opinion in that case was that the payment of a pre-existing debt is not such a consideration, as places the grantee of land in the position of an innocent purchaser. And further, this court long ago refused to apply the rule of Baze v. Arper, to negotiable paper. Stevenson v. Hyland, 11 Minn. 198, (Gil. 128.)

The question is one that has been discussed in the various courts of the country with different results down to 1880, when it was taken up by the Supreme Court of the United States, and an elaborate discussion of the question and review of the authorities was given in three opinions, extending over forty-five pages of its reports, with a view to finally settling the question, and nothing need be added to the opinions in that case. Railroad Co. v. National Bank, 102 U.S. 14.

It is stated in Colebrooke on Collateral Securities, that this rule has been established by the courts of last resort in the following states: California, Connecticut, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, New Jersey, Rhode Island, South Carolina, Texas and Virginia, and also in England and Canada, and he cites a long list of cases to support this statement. Jones on Pledges, note to § 110, enumerates the States which follow the rule in Railroad Co. v. National Bank, and in addition to the list given above he includes Delaware, Michigan, Mississippi, Missouri, North Carolina and Vermont. This rule is indorsed in Daniel, Negotiable Instruments, § 831a; 2 Randolph, Commercial Paper, § 465.

In this State where the rule is yet to be established, it is important that we should have the same rule in the State court that exists in the United States courts, for the United States courts do not follow the rule in the various states in matters of commercial law, and it would lead to great injustice and confusion to have one rule for commercial paper in the State courts and another in the United States court, and it would in many cases be a discrimination against our own citizens. National Bank of C. v. Chicago, B. & N. R. Co., 44 Minn. 224.

If in an action by an indorser against the maker a negotiable note is shown to have been obtained by fraud, the presumption arising merely from possession of the instrument, that the holder in good faith paid value, is so far overcome that he cannot have judgment unless it appears affirmatively that he in fact purchased for value. That fact being established, he will be entitled to recover, unless it is proved that he purchased with actual notice of defect in title or in bad faith, implying guilty knowledge or wilful ignorance. The authorities on this question are carefully discussed in ...

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