Case ID: us-ct-cl_20/html/0229-01.html
Source: Caselaw Access Project
Author: {"author": "Scofield, J.,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

THOMAS W. CORNELL v. THE DISTRICT OF COLUMBIA.
    [No. 118.
    Decided March 23, 1885.]
    
      On the Proofs.
    
    Coupon Bonds, called sewer certificates, redeemed before maturity, are stolen and sold to innocent purchasers. At the time of sale they appear soiled, and coupons have been cut off and pasted over the cancellation marks, but there is nothing in their appearance to excite suspicion.
    I. An innocent purchaser cannot recover upon District of Columbia sewer ertificates (i. coupon bonds) stolen from the obligor after they had become due.
    
      II.One who purchased after maturity, if he would avail himself of the rights of prior holders, must show that they purchased before maturity.
    III. The statement in a municipal bond that value was received in a particular way does not affect the negotiability of the paper.
    IV. The negotiability of municipal bonds is not affected by the fact that they give the holder a special means of payment in addition to ordinary taxation.
    V.The Act 20th June, 1874 (18 Stat. L., pp. 119, 120), which provided a means for redemption before maturity, did not impair the negotiability of sewer certificates.
    VI.If the only suspicious fact about a negotiable bond is that some of its coupons have been cut off and pasted on its face, or that it is stained and soiled, and these are susceptible of explanation, the purchaser is not put upon an inquiry.
    
      The Reporters’ statement of the case:
    Before the trial the parties entered into the following stipulation :
    “ It is hereby stipulated and agreed that it appears by the records of the late Board of Audit and of the sinking-fund commissioner that the following sewer certificates were presented and delivered to the Board of Audit, by the respective parties in the claims and at the dates hereinafter set forth, for audit, and conversion, under the act of June 20, 1874, and that the same were audited by said board, and certificates, convertible into 3.65 bonds, were issued to the said several parties for the full amount of said-sewer certificates, which certificates were afterwards converted into the said 3.65 bonds of said District provided for by the said act; and that the said sewer certificates were stamped across their face with a ribbon stamp the words “ Canceled by the Board of Audit,” and were entered on the numerical book of said board as redeemed, except as to certificates Nos. 3860 and 3861, as to which no entry of their redemption appears on said numerical book.”
    With regard to the theft of the bonds, the removal of the cancellation marks, and the sale of them to the claimant and his assignors, the court found the following facts:
    After the redemption and cancellation of the certificates embraced in the foregoing stipulation, and while they were in the custody of the Board of Audit, they were stolen, in February or March, 1876, by one George H, Faruham, who was then a clerk in the employ of the board, and occupying a desk behind the counter under which the certificates were deposited. but whose duties were not connected with the redemption or care of the certificates.
    By the use of detersive soap Farnham entirely removed from a large portion of the certificates the marks of cancellation. From other certificates, on which some ink marks still appeared, he cut off the coupons and pasted them over the partially effaced marks. In this condition no signs or marks of cancellation or redemption were visible on the certificates, but some of them still had a soiled or stained appearance.
    Farnham sold the stolen certificates to brokers in Washington, at prices ranging from 35 to 40 per cent, of their par value. That was at that time about their market val u e. These brokers had no notice of the redemption and cancellation, and purchased them in good faith. By these brokers they were sold to Samuel S. Bitchie, for value received. Bitchie purchased in like good faith, without knowledge of any defense. Bitchie sold them to the claimant, who resided at Akron, Ohio, and forwarded them to him in parcels immediately after his own purchase.
    The claimant purchased the certificates from Bitchie in good faith and paid a valuable consideration therefor, without notice that the same had been redeemed or canceled or that any defense to their payment existed.
    The certificates were in the same condition then in respect of their appearance as to indicating signs or evidences of cancellation or redemption as they were at the time they were first negotiated by Farnham, and as they are now.
    
      Mr. Samuel Shellabarger for the claimant:
    Where a municipality, or even a sovereign State, becomes party to a negotiable instrument, in virtue of due authority of law, there every such municipality or State is bound by all the rules of the commercial law applicable to such securities. This doctrine is thoroughly settled and quite familiar, and is stated by the Supreme Court of the United States in the case of Goolc et al. v. The United States (1 Otto, 189); United States v. State Bank (6 Otto, 36, and cases cited).
    Such purchasers of such municipal securities are entitled to the full benefit of their purchase, unaffected by the consideration of the hardship involved in requiring the municipality to repay obligations once redeemed,, and also unaffected by any circumstances merely tending to excite suspicion regarding the purchased obligation (as, for example, in this case, suspicion arising from the alleged fact that some of the bonds had coupons pasted upon them).
    The doctrine here last stated is affirmed by the Supreme Court in Cromwell v. The Comity of Sao (6 Otto, 57 et seq.).
    
    Where municipal obligations of a negotiable character are, as a matter of law, duly authorized to be issued and put and kept in circulation, and they are, as a matter of fact, in such circulation, at any given time before their maturity, and are purchased by a bona-fide purchaser before due, when so in fact in actual circulation, in such case it is no defense to the liability of the government or municipality that such issue and circulation were the result of fraud, negligence, and wrong-doing, or even theft, by agents or officers of the municipality or government whose bonds were so put in circulation. (Coolce et al. v. The United States, 1 Otto, 389.)
    The case at bar is surely more than brought within the doctrine of Cooke & Go. v. The United States. These bonds were, therefore, never, in contemplation of law, out of circulation or redeemed or canceled. We, however, desire to direct the court’s attention to some other analogous cases : State of California v. Wells, Fargo & Co. (15 California, 336); Wheeler v. Guild (20 Pickering); Murray v. Lardner (2 Wall., 110); Welsh v. Sage (47 N. Y., 143); 35 N. Y., 67; 29 N. Y., 249; 20 Howard (U. S.), 365; 2 Wall., 121; 4 Ad: and El., 867.
    In the present case the application is obvious. The most culpable negligence of some of the officers of the defendant, and the actual larceny and fraud of another, not only rendered the loss possible, but in fact inflicted it.
    And we submit that if such a criminally culpable taking up of negotiable papers before due shall by this court be held to- be a withdrawal from circulation and a destruction of the instrument, then it will be a new experience in the judicial history of commercial paper. It is a settled rule of the law merchant, which is expressed by Lord Mansfield in Burbridge v. Manners (3 Camp., 6, 193; and see Byles on Bills, sec. 171), that payment of bills before due does no more extinguish them than if the note were merely “discounted.” “It is the duty of bankers to make some memorandum on bills and notes which have been paid, and if they do not the holders of such securities can not be affected by any payment made before they were due.”
    In the case at bar, though such memorandum was faintly made by one officer, yet it was so made that another could, as he swears, readily remove all traces of it, and he did so remove them, and sold them before due. Shall this corporation be allowed, in this or any court, to say, as against their victims, that such a payment and cancellation is an extinguishment of the security ?
    
      Mr. John .G. Fay (with whom was the Assistant Attorney-General) for the defendant:
    1. The certificate contains no promise to pay. No suit could be maintained thereon against the District upon default in its paym ent at its face maturity. The character of these securities is defined by the court in Fenclall’s Case (16 C. Gis. B., 122).
    2. The defendant insists that all of these certificates matured, by virtue of the provisions of the Act of June 20, 1874 (18 Stat. L., 119, 120), at that date, and it is not claimed that any of the certificates were purchased before that, date. This court, in Fend all’s Case, so held in determining the rate of interest allowable on the judgment in that case.
    3. Was the Board of Audit negligent? It is admitted that the certificates were stamped in ink with the words “ Canceled &c.j” the evidence does not disclose any other way that is usually employed to evidence the cancellation of paper.
    If Farnham had been charged with the redemption of these certificates, or even the custody of them, or any duty with respect of them, he might come within the reason of the rule referred to in 6 Otto, 36; but if he had no business to touch them, if he had no employment or duty with respect to them, if his possession of them could only have been wrongful and acquired by larceny, which is shown to be so by the testimony, then the fact that he was in the employ of the Board of Audit makes not the slightest difference between a theft by him or by some one out of the employ of the Board of Audit.
    The defendant further contends that the claimant had notice” from the appearance of the certificates themselves sufficient to put him upon inquiry, and that in the exercise of reasonable diligence, to wit, inquiry at the office of the Board of Audit, or afterwards of the Commissioners of the District, he could have ascertained that they had been redeemed; and having been thus put upon notice, he was bound to make the inquiry.
   Scofield, J.,

delivered the opinion of the court :

July 1, 1873, the Board of Public Works for.the District of Columbia issued “ certificates of indebtedness,” commonly called sewer certificates, to the amount of about $2,000,000. They were issued in sums of $50 and multiples thereof, and made payable to bearer. They became due at different dates, beginning with July 1,1874, and ending July 1,1878. Coupons for the semi-annual interest, at the rate of 8 per cent., were attached.

The certificates were paid out to contractors, laborers, and others, and were bought and sold by brokers and speculators at depreciated prices.

By act of Congress approved June 20,1874, the Board of Public Works was abolished, and a Board of Audit, consisting of the First and Second Comptrollers of the United States, created, authorized to audit the floating indebtedness of the District, including the sewer certificates, and to issue therefor Auditor’s certificates, convertible into a new District bond, bearing interest at the rate of 3.65 per cent.

Under the operation of this act all the sewer certificates, except about $65,000, were redeemed prior to February, 1876, and canceled by stamping in ink across the face the words “ Canceled by the Board of Audit.” When so stamped they were tied up in bundles and placed on a shelf under a counter in the room where the work had been done. In February or March, 1876, a package of the certificates thus canceled, amounting to $11,850, was stolen by George H. Farnhara, a clerk in the employ of the Board of Audit, with a desk in this room, but who had no connection with the redemption, cancellation, or care of the certificates. From a large portion of the certificates Farnham easily and entirely removed the marks of cancellation by the use of detersive soap. Upon some of them ink-marks were still visible. From these he cut off the coupons and pasted them over the partially effaced cancellation.

In this condition he sold the certificates to brokers in Washington, who sold them to S. S. Ritchie, from whom the claimant purchased.

All these several parties purchased the certificates for a valuable consideration, in good faith, without knowledge or suspicion that they had been redeemed or canceled.

A portion of the certificates thus purchased, amounting to $2,500, became due July 1,1874 and 1875, and were therefore overdue when stolen.

Another portion, amounting to $7,750, were purchased by Ritchie and transferred to the claimant before due.

The remainder, amounting to $1,600, were not purchased by Ritchie until after due. Whether they were purchased from Farnham by Ritchie’s assignors before or after due does not appear.

Ritchie forwarded and sold to the claimant, who resided at Akron, Ohio, the certificates as fast as purchased.

That the claimant is not entitled to recover upon the certificates which became due in 1874 and 1875, amounting to $2,500, there can be no doubt. They were due before they were stolen, and the purchaser took them subject to all legal defenses.

Another portion of the certificates, amounting to $1,600, cannot be considered as standing in any better position. It having been shown that they were acquired by the claimant and his immediate assignor, Mr. Ritchie, after due, it became part of his case, in order to avail himself of the rights to prior holders, to show that they purchased the certificates before they were due. The claimant has not proved that fact, and the law will not presume it.

To the remaining $7,750 several defenses are set up.

It is said the certificates were not negotiable, because they contained the following recitation: That for work done under direction of the Board of Public Works, and chargeable to private property adjoining and benefited thereby, * * * secured by pledge to the commissioners of the sinking fund, of assessments made in accordance with the act approved June 26,1874, against private property benefited by improvements and receivable in payment of such assessments.”

The first clause only recited the consideration, and is equivalent to saying “ for value received.” The-statement that value was received in a particular way does not affect the negotiability of the paper. The second clause recites the manner in which the District expected to reimburse itself for the payment of the certificates, but does not limit the liability of the District to this one source of revenue. It was apparently inserted to give the certificates greater credit by announcing- that the District had this means of payment in addition to ordinary taxation. The general liability of the District and the negotiability of the certificates are declared in these words: “This certifies that * * * there is due to the bearer,” &c.

The defendant further contends that under the operation of the Act June 20, 1874 (18 Stat. L., 119,120), all the certificates became due August 1,1874, and were thus overdue and subject to any defense-existing at the time of claimant’s imrehase. We do not concur in this position. By this act a new bond, running from August 1, 1874, was created, into which the creditors of the District were permitted, at their option, within a limited time, to fund their claims. In this way most of the securities were funded within the prescribed time.

By the Act June 16,1880 (21 Stat. L., 284), the holders of certificates not thus funded were allowed to establish their claims in this court. By sections o aud 6 of that act the judgments rendered by the court against the District are tobe paid in the manner provided in the act of June 20, 1874. • The District could not be called upon to pay the certificates before they become due by their own terms in any other way than the one prescribed bj- this act.

The defendant further contends that the appearance of the certificates was such that the claimant was bound, at his peril, to make inquiry at the office of redemption. The rule applicable to the case is stated by the Supreme Court in Cromwell v. The County of Sac (96 U. S. R., 57, 58), as follows:

“Obligations of municipalities in the form of those in suit here are placed by numerous decisions of this court on the footing of negotiable paper. They are transferable by delivery, and, when issued by competent authority, pass into the hands of bona fide purchasers for value before maturity, freed from any infirmity in their origin. Whatever fraud the officers authorized to issue them may have committed in disposing- of them, or however entire may have been the failure of consideration promised by parties receiving them, these circumstances will not affect the title of subsequent bona fide purchasers for value before maturity, or the liability of the municipalities. As with other negotiable paper, mere suspicion that there may be a defeat of title in its holder, or knowledge of circumstances which would excite suspicion as to his title in the mind of a prudent man, is not sufficient to impair the title of the purchaser ; that- result will only follow where there has been bad faith on his part. Such is the decision of this court, and substantially its language, in the case of Murray v. Lardner, reported in 2 Wall., where the leading authorities on the subject are considered.”

The court has been unable to find in the appearance and condition of the certificates the facts which, according to the requirements of this rule, should defeat a recovery.

The only suspicious facts about the certificates were overdue coupons attached to them, coupons not due cut off and pasted on the face of some of them, añd the soiled or stained appearance of others. All these appearances might escape the attention of a cautious man ; but if they did not, explanations satisfactory even to suspicious persons would naturally occur. It was well known that after the act of June 20, 1874, the coupons had not been paid, and the absence of overdue coupons would have been more suspicious than their presence. It was also well known that the certificates, having been issued in small sums, were paid out to contractors, jobbers, and laborers, and passed from hand to hand. In this way both the soiled condition and the unusual way of attaching severed coupons might readily be accounted for.

The Board of Audit, which for the purpose of redeeming and caring for the certificates was the defendant’s agent, are not free from blame. Considering that they were redeemed long before they were due, the cancellation was entirely insufficient to protect the public against imposition. They should have been punched or otherwise mutilated, or burned, as required by section 10 of the Act Mareh'5,-l§15 (18 Stat. L., 505), or at least deposited in a safe or vault. Instead of that they were stamped with ordinary ink, easily washed off, and left in a room exposed to the view of all persons visiting it, in a way to lead weak or dishonest persons into temptation.

Considering this fact in connection with the rules of law and the facts before referred to, the court arrives at the conclusion that the claimant is entitled to recover for the amount of certificates purchased before due, to wit, $7,750. This does not enable him to recover for the coupons attached but long overdue at the time of purchase.

Judgment will be entered for $7,750, due and payable as of January 1, 1876.