Opinion
July 10, 1916.
I.R. Oeland, for the plaintiff.
Elon R. Brown, for the defendants.
I recommend an affirmance of this judgment upon the opinion of Mr. Justice GREENBAUM at Trial Term, and would add a few words only to that opinion. In that opinion the facts are fully stated. For the purposes of this memorandum the facts may be briefly summarized as follows:
Plaintiff as attorney in fact assumed to sell some lands in Tennessee to defendants' testator. Under the power of attorney, as was known to defendants' testator, plaintiff was to receive the full purchase price in excess of $10,000. The defendants paid what was equivalent to $10,000 in cash and $10,000 in notes, drawn payable to the plaintiff's principal. Those notes were immediately turned over to the plaintiff to represent his interest in the sale. The title to the property failed and plaintiff seeks to escape the defense of failure of consideration by claiming to hold the notes as a purchaser for value.
The deed was originally drawn in form from plaintiff acting as attorney in fact to defendants' testator. One Louise J. Traynor joined in the deed to convey any right of dower that she might have. Afterwards the plaintiff's principal, McMurray, also joined. The deed recites a covenant on behalf of the parties of the first part that they are lawfully seized and possessed of said property and that they have full right and authority to convey it. Defendants' counterclaim is upon this covenant.
In Schlemmer v. Nelson ( 123 Minn. 66) the plaintiff was the agent of the Sperry Realty Company in making a contract for the sale of certain real estate. The Sperry Realty Company did not have the title to the real estate, but had an option thereupon. A note for $500 was delivered for the first installment of the purchase price and by the Sperry Company transferred to plaintiff. Under its contract the Sperry Company was limited to sixty days in which to perfect title, and if it failed, the contract by its terms became void. It appearing that the company never acquired title, and prior to the trial had transferred its rights under the option to parties other than the defendant, it was held that the consideration for the note had wholly failed, and plaintiff, having taken the note with knowledge of all the facts, was not in a position to invoke the rule protecting a good faith purchaser.
A similar holding was that in Boit McKenzie v. Whitehead ( 50 Ga. 76). In this case the plaintiffs were the agents of a manufacturer of guano, and as such by their local agent, sold to the defendant a lot of guano, with warranty, taking a note for the price payable to themselves. Afterwards, before the note became due, they became the real owners of the note by arrangement between themselves and the manufacturer. Held, that the plaintiffs were not such bona fide purchasers without notice, of defendants' note, as that defendants could not set up as a plea that the guano was of no value, even though it be not proven that plaintiffs knew it to be of no value at the time they became the real owners of the note. Upon the trial the court refused to charge "that if the note sued on had been transferred by indorsement, before due, and plaintiffs had bought the same in good faith and for a valuable consideration, without any notice of any defect, latent or otherwise, in the guano, or of any defense of defendants to said note, then, under the pleadings, the failure of consideration could not be set up." In the opinion it is stated: "We can hardly see, even if the note was not payable to the plaintiffs, they could be innocent purchasers, since the defendant has nothing to do with the manufacturer except through them. They were the means by which the defendants were imposed on, if they were imposed on. We think the plaintiffs too clearly mixed up with the sale and warranty, and with the note itself, to become innocent holders of the note." In Vander Floeg v. Van Zuuk ( 135 Iowa 350; 13 L.R.A. [N.S.] 490; 112 N.W. Rep. 807) the head note in L.R.A. reads: "A payee who takes a note for past indebtedness, in which a blank has been wrongfully filled out, is not a holder in due course, within the meaning of the section in the Negotiable Instruments Law requiring blanks to be filled according to instructions, but providing that, if such an instrument, after completion, is negotiated to a holder in due course, he may enforce it as if it had been filled up strictly in accordance with the authority given." While the question decided differs from the question involved in this action, the discussion I think throws some light upon the situation here presented. After discussing the Negotiable Instruments Law of the State of Iowa, which does not differ materially from ours, the opinion reads: "It seems to us, under these definitions and the applications thereof the plaintiff was a holder of the note, but not a holder in due course. The latter term seems unquestionably to be used to indicate a person to whom, after completion and delivery, the instrument has been negotiated. In the ordinary case the payee of the instrument is the person with whom the contract is made, and his rights are not in general dependent on any peculiarities in the law of negotiable instruments. The peculiarities of that law distinguishing negotiable instruments from other contracts relate to a holder who has taken by negotiation, and not as an original party. This is the construction put on the same phrase used in the English Negotiable Instruments Act by Lord RUSSELL, C.J., in Lewis v. Clay, 67 L.J. [N.S.] Q.B. 224, in which he says: `"A holder in due course," is a person to whom, after its completion by and as between the immediate parties, the bill or note has been negotiated. In the present case the plaintiff is named as payee on the face of the promissory note, and therefore is one of the immediate parties. The promissory notes, held and sued on [by the person named as payee therein] have, in fact, never been negotiated within the meaning of the Act.'" While this citation from Lewis v. Clay is probably dictum, and while the question decided was different from the question here arising, the opinion has clearly indicated that the persons for whose protection immunity is given to negotiable instruments are those who have negotiated the purchase of the paper after its inception. It may be that the payee named in a note is so separated from the consideration of the note that he may still have the rights of a purchaser for value of commercial paper. On the other hand a transferee may be so associated with the consideration of the note and the transaction in which the note was given as not to be within the intended protection of the Negotiable Instruments Law. By the original arrangement in the case at bar these notes were to be made payable to Miller directly. When the matter was consummated, however, the defendants' agents had made the notes payable to McMurray, the defendants' principal. If they had been made payable to Miller directly, who entirely negotiated the sale, it hardly seems possible that the defendants could not assert a failure of consideration, as the defendants knew the terms of the power of attorney under which Miller was acting, and that the consideration in excess of $10,000 was to go to him. Nor do I think can Miller gain any greater right because McMurray was made the original payee, who immediately transferred the notes to him. I am unable to escape the conviction that by reason of Miller's relationship to this transaction, as well as his interest in the proceeds of the sale, he has not become a holder in due course of this note, so as to be protected against the defense of failure of consideration.
The holding that Miller was not the holder of this note in due course does not necessarily involve the holding that he is bound by the covenant of seisin in the deed. The deed was first executed by Miller, the attorney in fact, without McMurray. He became grantor in the deed within the statutes of Tennessee only in execution of his power of attorney. He was not a record holder, so that any conveyance was necessary from him, and as the grant was of his interest as attorney, and not his individual interest, so without specific declaration his covenant is his covenant as attorney and not individually. The fact that McMurray afterwards signed the deed is not sufficient to indicate any intention upon the part of Miller to become personally liable upon the covenant.
The judgment should be affirmed, without costs.
McLAUGHLIN and DOWLING, JJ., concurred; PAGE, J., concurred in result; CLARKE, P.J., dissented in part.
I dissent from so much of this opinion as affirms the dismissal of the complaint and vote to reverse and concur in the affirmance of the dismissal of the counterclaim.
Judgment affirmed, without costs.