Case ID: ohio-st_15/html/0299-01.html
Source: Caselaw Access Project
Author: {"author": "\n      \"White, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

L. A. Bassett v. D. A. Avery et al.
    1. The sending by a party, before purchasing a negotiable note, to the makers for information respecting its validity, does not authorize the declarations given in response to such inquiry but not communicated to the purchaser, to be given, in evidence to charge him with notice that the note was without consideration or obtained by fraud.
    
      2. Notice of defenses to a negotiable instrument, does not affect an indorsee in no way responsible for the wrong in obtaining or putting the instrument in circulation, and whose title is derived from a party who held it discharged of such infirmity.
    Error to the court of common pleas of Wood county. Reserved in the district court.
    The defendants in error, D. A. Avery and Thomas D. Avery, executed two promissory notes payable to the order of A. T. Jefferson, who indorsed the notes, before due, to one Squire Barrett, who purchased for a valuable consideration, and, it is claimed, without notice of any defense. Afterward, before the notes matured, Barrett indorsed them, for a valuable consideration, to Bassett, the plaintiff in error, who brought suit upon each note as it matured. The two suits, by consent of parties, were consolidated in the common pleas.
    The defendants answered, that the notes were obtained without consideration and by fraud; of which, it is averred, both Barrett and the plaintiff had notice, at the time of receiving the notes.
    The reply denies the allegations of the answer, and sets up, that both the plaintiff and Barrett purchased the notes, in good faith, for a valuable consideration, in the ordinary course of business, before they became due, and without notice of any fraud or failure of consideration.
    It appears, from the bill of exceptions taken on the trial, that Barrett, being a witness for the plaintiff, testified that before he purchased the notes of Jefferson, he, being sick, sent his neighbor, Samuel Starr, to the defendants to “ ascertain whether every thing was right concerning the notes, as he did not wish to- buy a lawsuit or have any trouble,” and that after Starr’s return from the defendants, he, Barrett, “ believing that every thing was all right,” bought the notes in good faith, before due, and for a full and adequate consideration.
    The information that Starr gave Barrett, as the result of his inquiries of the defendants, was all that Barrett knew in regard to the notes. The plaintiff offered to prove that the information Starr brought to Barrett, as the result of his inquiries, was that the defendants “ assured him, among other things, that the notes were all right, and would be promptly paid by defendants.” The court refused to permit proof of this information, given by Starr to Barrett, to go to the jury; and plaintiff excepted.
    But the court allowed one of the defendants, to testify, among other things, that they told Starr, in answer to his inquiries about the notes, that Jefferson had obtained them by fraud. The witness also testified that Starr said he came to see him because he talked of buying the notes. To this testimony, as to what defendants told Starr, the plaintiff objected, unless it was shown that Starr communicated the same to Barrett before he purchased the notes. The court overruled the objection, and the plaintiff excepted.
    The plaintiff, among other things, asked the court to charge the jury in substance: That if they should find, from the testimony, that Barrett, the assignor of the plaintiff, previous to purchasing the notes of the original payee, had, as a measure of precaution for his own safety sent Starr, a disinterested neighbor, a credible man as he believed, and one in whom he placed confidence, to the defendants, with directions only to make inquiry of them, whether the notes were all right, and would be paid promptly, and Starr did go and make such inquiry of the defendants; and if Starr was then told by the defendants that the notes were fraudulently obtained by Jefferson, yet, that this information so given by the defendants to Starr, would not be notice to Barrett, unless Starr communicated it to Barrett; and, notwithstanding such communication by defendants to Starr, if Barrett afterward purchased the notes, without any other notice of the fraud or defense, than such communication to Starr, which was not reported to Barrett, before they were due, in good faith, and without suspicion of any fraud or failure of consideration, that Barrett could hold and transfer the note to the plaintiff, divested of any such defense that might have existed between Jefferson and the defendants.
    The court refused thus to charge the jury, but did charge, in substance, that if they found that Barrett sent Starr to the defendants to get information for Barrett, as to the validity of the Trotes, and the defendants knew that to be the purpose of the visit, Barrett would be bound by any information given by the defendants to Starr, whether Starr communicated the same to Barrett or not.
    The verdict was for the defendants, and the plaintiff filed a motion for a new trial, assigning among other grounds, the rulings excepted to as above stated. This motion was overruled, and judgment entered on the verdict.
    To reverse this judgment, the plaintiff filed a petition in error in the district court, and it was therein reserved tc this court for decision.
    
      Dodge ‡ Tyler, for plaintiff in error:
    1. The second assignee'of a negotiable note succeeds to the rights of the first.
    This legal proposition was called in question in the district court and stands at the threshold of the case. We believe in to be a principle universally laid down by elementary writers and sustained by the cases, that a purchaser of a note who, by reason of his purchase before it fell due, in good faith, without notice, etc., holds it divested of those defenses for fraud, failure of consideration, etc., which existed between the maker and the original payee, can for a valuable consideration transfer his own title to his assignee, after the note becomes due, or even if the assignee had notice sufficient to charge him had he purchased of the payee, and such second purchaser will hold the note divested of such defense.
    In other words, the law will not recognize a property in the first purchaser and at the same time rob that property of its commercial value by forbidding its transfer. This principle in reference to real estate has been expressly recognized by our supreme court in Card v. Patterson, 5 Ohio St. Rep. 319. The same doctrine in reference to notes is expressly laid down in Story on'Promissory Notes, p. 326, sec. 191; Story on Bills, p. 321, sec. 188; Haley v. Lane, 2 Atk. 182; Lickbarrow v. Mason, 2 Term Rep. 71; Chalmore v. Lanion, 1 Camp. 383; Robinson v. Reynolds, 2 Adolph. & Ellis,.New Rep. 196-311.
    We have yet to find an authority to the contrary. True, it is held’ that the plaintiff must hold the note in good faith, and it is claimed that the holding can.not be in good faith if he had notice of defense. But in reference to notes as to land, can not a person purchase in good faith relying upon the title of the seller ?
    2. The court, in effect, charged the jury that a mere sending of Starr to make inquiries concerning the notes, rendered Starr an agent of Barrett, so far as to bring Barrett within the rule that notice to an agent is notice to his principal. To this ruling plaintiff excepted, because:
    1st. In order to bring notice home to the principal by the notice or knowledge to a third person, the fact that such person was the agent of the principal must be passed upon and found affirmatively by the jury. It is the duty of the court to inform the jury what constitutes an agent in law, and then leave them to pass upon the agency as a question of fact. Thurman v. Wells, 18 Barb. 590; Jones et al. v. Ransom, 3 Ind. 327.
    2d. In all cases where notice to an agent has been held to be notice to his principal, the agent has been authorized to act, to make the contract for his principal. And notice must come to the agent while engaged in making the bargain or effecting the purchase for his principal, and not at another time. Phillips Ev. vol. 3, 409-411, and see cases cited; 20 Barb. 468; Willard’s Eq. Jurisp. 251; 2 Hill, 451; 13 Vesey, 120; 1 Pet. 309.
    3d. In order to make a case where the rule that notice to an agent is notice to the principal, applies, the notice must be given to an agent authorized to treat, not a mere bearer of proposals. 1 B. C. C. 293; case quoted in Hammond’s Digest 560.'
    4th. We claim that sending Starr to make the inquiry was a badge of good faith; an evidence of a desire to gain all proper information; a means taken to get information, and such means as men would ordinarily rely upon; and that if in the end, after taking these measures to act advisedly, he failed to get the information; that he still acted in good faith and purchased without sufficient notice to charge him.
    
      Asher Cook, for defendants in error:
    1. I am advised, that the presence of five righteous would Xiave saved Sodom and Gromorroh, but I am unadvised of any law which bestows upon this innocent holding of negotiable paper, such vicarious power, as to wash it from all iniquity, and allow a guilty party to enforce the collection of it. And it is sought to extend this doctrine to all subsequent parties, simply because the paper has once been in the hands of an innocent holder.
    I will suppose a case : A, B and C are all present, and A obtains from B his note through fraud, of which 0 has knowledge. It will be admitted that 0 can not recover on this note, if he take it from A. Will it be contended then, if A transfer the note to D for a valuable consideration and without notice of the fraud, that 0 can buy the note of B, and enforce the collection of it ?
    If C’s knowledge of the fraud will prevent him from recovering on the note when taken from A, what prevents the same knowledge from being a defense when the note is taken from I) ? Is it less criminal for 0 to take the note from D than from A, or is it more consonant with legal morality to allow the defense' in one case than in the another ?
    What mercantile regulation or commercial transaction is there which can not be as well guarded, or what public or private interest as much promoted, by the rule for which I am contending, as by the other ? •
    It must be admitted that it is O’s guilty knowledge which allows the defense to he made; if he take the note from A, what miraculous charm is wrought on the note, in the hands of D, by which the former guilty knowledge of 0 is turned from a defense against him, to a sword of justice in his hands, by which he is to cut his way to a judgment ? Does the legal Lethe run through the hands of an innocent holder of commercial paper, washing out and obliterating all former guilty knowledge, thereby fixing upon it an irresistible legal feud ? Sectors liehe sterht in Lethe nicht.
    
    Instead of inviting transactions of this kind, it seems to me the language of the law frowns on them. 1 Parsons on Bills, 175, 176, 183, 195; Story on Promissory Notes, secs. 191, 196; Bailey v. Bidwell, 13 Mees. & Welsh. 75; Vallett et al. v. Parker, 6 Wend. 615; 3 Kent’s Com. 96, 97; Munsal v. Cooper, et al., 5 Pick. 412.
    
      2. The plaintiff is bound by what was communicated by Avery to Starr.
    The proof shows that Starr was the plaintiff’s agent, and, the law is that the principal is deemed to have notice of whatever is communicated to his agent. 20 Barb. 468 ; 2 Hill, 452.
    Was not this defense communicated to them ? This was a question of fact for the jury to determine, from the evidence as they had it before them from the living witnesses, and I apprehend this court will not here weigh that evidence, and see whether it was sufficient to satisfy the jury.
    It is enough for this court to know, that no principal of law has been violated, in the rendition of the verdict.
    
      James Murray, also for defendants in error:
    1. In regard to the extent to which the plaintiff was bound by the statements made to his agent Starr, by the defendants:
    What matters it to us as to the report which he in fact made to his principal; he was that principal’s agent to obtain certain information in response to certain inquiries which he was authorized and directed to make. By the information communicated to this agent by these defendants his principal was bound. I care not what it was — whether communicated to him correctly, incorrectly, or not at all. It was within the direct scope of the agent’s authority; in fact, it was that which he was directly and exclusively sent to do, and having done it, his principal was on every principle of law as well as of equity bound by it. If the agent failed to communicate .the information thus received, or did communicate it incorrectly, that is a question between the principal and his agent; but which can in no way, shape, or manner, affect these defendants.
    The plaintiff must be held bound by that notice to his agent, which he was sent and directed to obtain in. his behalf. To say that this agent may falsify or failed to deliver to his principal the very information which he was sent to obtain, and1 thereby relieve the principal from the effect of notice to such agent, is to violate every well-settled rule as to the relation-existing between principal and agent. To say that the principle does not apply, because defendants did not know that Starr was an agent of the plaintiff, is absurd. It is no more true than is the doctrine, that one who contracts in secret as agent for another, will not render that other responsible when he is discovered. A principal has constructive notice of an agent’s knowledge while he is acting for him. Ingalls v. Morgan, 10 N. Y. Rep. 178.
    This principle is not confined to cases in which the agent is authorized' to contract in behalf of his principal; true, it may be limited to cases in which he is authorized to act for his principal (vide cases cited by the plaintiffs in error); but this is that precise case. In this case, Starr was authorized to .act, and it was while doing the very act which he was authorized to do, that this notice is brought home to him directly, :and through him constructively to his principal. There is no •error in the charge of the court, because they told the jury 'that these acts of, this notice to, Starr, would only bind Bas•sett, if, i. e., in case they found him to be the agent of Bassett for that particular purpose; the whole question of agency was submitted to the jury, and had to be found affirmatively by them, in the first instance.
    This agent was ‘not a mere bearer of proposals — nothing of that kind was intrusted to him — he was authorized to act— to ascertain from defendants certain stated facts, and to that •extent his authority was full, complete, and absolute.
    2.. As to the point — that if Barrett, the first purchaser of >the notes, obtained them in good faith, etc., then his transfer to the plaintiff would convey them in good faith, even if the plaintiff had actual notice to the contrary, etc.:
    The evidence is not set out in the bill of exceptions, and no ■motion was made for a new trial, “ because the verdict was against the weight of evidence.” The charge of the court, as to this point, was in favor of the plaintiff; no exception was taken, and he is now prosecuting this petition in error. I am unable to see in what manner that question is now before, this .court.
   "White, J.

The plaintiff in error, Bassett, who was likewise plaintiff below, brought his suit, as second indorsee, against the makers of the notes in controversy, to recover the amounts due thereon.

The matters of error, upon which the plaintiff relies for the reversal of the judgment in favor of the defendants, arise out of the rulings of the court on the trial in relation to charging the first indorsee, Barrett, who was the plaintiff’s immediate indorser, with notice of the defenses set up to the notes by the makers. In order to establish this notice the defendants were permitted to give in evidence a communication which they claimed to have made to Starr prior to the purchase of the notes by Barrett. The giving effect to this information was not made to depend upon whether it was communicated to Barrett. Indeed, Barrett was prohibited from showing that the communication from the defendants, as reported to him by Starr, was “ that the notes were all right and would be promptly paid by the defendants.” There was no pretense, on the part of the defendants, that the information, which they claimed to have given to Starr, .came to the knowledge of Barrett. The ground upon which the declarations of the defendants, offered in their own behalf, were held admissible, and effect given to them to charge Barrett with notice, was that Starr was his agent. The only proof of this agency, and the only evidence of notice to Barrett, beside the alleged communication to Starr, consisted of the testimony of Barrett, that he was in the habit of purchasing notes; that Jefferson came to him to sell the notes, when he (Barrett) was sick; that he was willing to purchase the notes if they were all right, and, 1 eing sick, he sent Starr, a neighbor, to see the defendants, and ascertain whether every thing was right concerning the notes, as he did not wish to buy a lawsuit or have any trouble; that after Starr’s return he bought the notes, in good faith, before due, for a full and adequate consideration, believing that every thing was all right, without any knowledge, • notice or suspicion of any fraud, failure of consideration, or of any other defense whatever.

Before the defendants would be authorized to treat their declarations to Starr, as charging Barrett, on the ground of agency, it should appear that the latter derived some right through -the alleged agency, or, at least, that such agent was employed, at the time, in the discharge of a duty which his principal was bound, toward the defendants, to perform. Barrett did not derive title to the notes through Starr, in any respect, but through the payee alone. What was said to Starr could not affect Barrett if the latter was not otherwise chargeable, either with notice, or with the duty of making inquiry, as to the consideration of the notes. If he was not thus otherwise chargeable, the declarations in question had no tendency to make him so. They were irrelevant to the matter in issue; and their admission as evidence was calculated to mislead the jury in ascertaining the fact they were required to determine. If such circumstances of suspicion had been shown to exist as ought to have put Barrett upon inquiry before purchasing, he would be presumed to have either made the inquiry and ascertained the truth, or to have been guilty of a degree of negligence equally fatal to his claim' to be considered a bona fide purchaser. Williamson v. Brown, 15 N. Y. R. 354. If for the purpose of repelling this presumption, and showing that he had exercised due diligence, on his part, he had relied upon his efforts to ascertain the truth, through Starr, in regard to the validity of the notes, a different question would, have arisen.

The mere fact that Barrett, under the circumstances stated in the bill of exceptions, sent to have inquiry made of the defendants respecting the notes, does not show that it was his legal duty to have made application to them before purchasing. And if, in adopting the means he did to get information, he was doing an unnecessary and gratuitous act, he can only be charged with the information he actually acquired.

The same view of the law that governed the court in admitting, in evidence, the objectionable declarations, was observed by it, in refusing to give the charge to the jury asked by the plaintiff’s counsel, and likewise in the charge as actually given. We are of opinion, therefore, that the rulings of the court, in the matters referred to, were erroneous, and that the plaintiff was thereby prejudiced.

II. There is another position assumed, and argued by the counsel of the defendants, which, if well taken, would render the foregoing errors immaterial.

It is claimed that although the notes may have been held by Barrett discharged of the alleged infirmity, yet, that the defenses are available against the plaintiff if he purchased with notice. The verdict and judgment having been for the defendants, it will be presumed that the plaintiff was found to have been affected with notice; otherwise, judgment should have been in his favor, notwithstanding Barrett may have had notice. But the proposition contended for is not tenable. In regard to the authorities cited and examined by counsel, we only deem it necessary to state that, in our opinion, they do not warrant the conclusion which he seeks to have drawn from them.

The reason why notice lets in a defense, in cases in which, without notice, it could not be set up, is the bad faith involved in the purchase. But if a party holds a negotiable instrument discharged of defenses which may have existed between the antecedent parties, no reason is perceived why his right of sale should be any more restricted than' his right to collect. The liability of the maker is then fixed. It is not Increased by a subsequent sale or gift of the note to another; and it would be inconsistent that the law should recognize a perfect title in a party, and yet limit his power of disposition in the manner claimed.

Nor do we perceive the principle upon which a knowledge of the prior infirmity can be made the ground of imputing bad faith to a purchaser in no way responsible for the wrong in obtaining the paper, or putting it in circulation. Notwithstanding its former invalidity he knows that it has now become valid. Payment alone, by the maker, will discharge it, and, to Mm, it must be a matter of indifference, -whether it be made to the holder or his indorsee.

Judgment reversed and cause remanded to the court of common pleas for further proceedings.

Brinkerhoee, O.J., and Scott, Day, and Welch, JJ., concurred.