Source: https://supreme.justia.com/cases/federal/us/100/239/
Timestamp: 2019-04-24 11:58:46+00:00

Document:
1. The courts of the United States are not bound by the decisions of state courts upon questions of general commercial law.
2. A creditor who before its maturity accepts a negotiable note, so endorsed that he becomes a party thereto, as collateral security for a preexisting debt in consideration of an extension of time granted to the debtor is, according to the law merchant, a holder for value, and his rights as such are not affected by equities between antecedent parties of which he had no notice.
3. "Bills of exchange and promissory notes, payable in money at a certain place of payment therein designated," are, by an act of the Legislature of Alabama, put upon the same basis as to immunity from setoff, discount, or equities as bills and notes payable at a bank or private banking house. Such declared to be the intention and effect of the Act of April 8, 1873, amending sec. 1833 of the Revised Code of that state.
4. The legislative intent, clearly expressed, should not be defeated by too rigid an adherence to the mere letter of the statute nor an interpretation adopted which leads to absurd consequences.
5. At the request of its debtor, a national bank in Alabama gave him further time, in consideration of his transferring, before maturity, a negotiable note, as collateral security and paying in advance usurious interest, for the period of extension. The note was so endorsed as to make the bank a party to the instrument, responsible for its due presentation and for due notice of nonpayment. The consideration being in part legal and in part vicious, it was held 1st, that the former was itself sufficient to sustain the contract of extension and transfer, and to constitute the bank a holder for value; 2d, that the National Banking Act subjects the bank to liability for taking usurious interest, but does not declare the contract of endorsement void, and that no such penalty being prescribed, the courts cannot superadd it.
B. H. Micow, president, at the office of the Tallassee Manufacturing Company, No. 1, in the City of Montgomery. The consideration of the note was fifty shares of the capital stock of that company purchased by Oates, for which, at the time, he received a certificate in the customary form. As part of the contract of purchase, he took from the company a separate written obligation, reserving to him the option, on the 1st of December, 1873, at the maturity of the note, of surrendering the certificate of stock and receiving his note duly cancelled. It appears that he was induced to buy the stock upon certain representations of the special agent of the company as to its financial condition. These representations were subsequently ascertained by him to have been false and fraudulent.
On or about Nov. 4, 1873, Micow applied to the bank for an extension of time upon certain indebtedness then held by it against the company, amounting to about $40,000, and all of which matured thereafter and in that month. That indebtedness had been previously extended on several occasions at usurious rates of interest, paid invariably in advance. The bank signified its willingness to give an extension for thirty, sixty, ninety, and one hundred and twenty days, upon collateral security being furnished, and upon the payment in advance for such extension of interest at the rate of one and one-quarter percent per month, upon the different classes of the company's paper by it held. These conditions were complied with, and the extension was accordingly made for the periods stated. The required interest was not carried into the extension bills, but was paid in advance. Among the collaterals placed with the bank under this arrangement was the note for $5,200 already described, endorsed in blank, "B. H. Micow, Prest."
which he might have against its payment. But it was proven by them that when the extension was given to the company, they had no notice of any defect in or defense to the note or of any equities except such notice as might be implied from the foregoing facts and the relations of the parties. It is not claimed that the bank had at that time any notice of the separate written obligation of the manufacturing company to which we have already referred.
On the 24th of November, 1873, the bank gave written notice to Oates that it held his note as collateral security for the indebtedness of the company. A few days thereafter, he transmitted to the bank the company's agreement or obligation, under which he had purchased the stock and given his note, informing its officers that he had, by the same mail, returned his stock certificate to the company, and demanded the surrender and cancellation of his note. The bank, replying to this notification, stated that it had purchased the note as negotiable paper, in good faith, for a valuable consideration and without notice of any private understanding between Oates and the company, its officers or agents.
These are the essential facts developed in the record. We are to inquire whether the court below committed any error of law to the prejudice of the plaintiff in error.
The first contention of the plaintiff in error is that by the terms of the contract under which he purchased the stock and gave his note, and in view of the false and fraudulent representations of the company's agent as to its financial condition, he was entitled, as of absolute right, to surrender the certificate of stock and have his note returned or cancelled, and further that his defense upon that ground was secured to him by the statutes of the State of Alabama in force when the contract was made.
extent, if at all, the rights of parties are affected or controlled by the statutes of Alabama.
"Bills of exchange and promissory notes payable in money at a bank or private banking house are governed by the commercial law except so far as the same is changed by this code."
"All contracts or writings, except bills of exchange, promissory notes payable in money at a bank or private banking house, and paper issued to circulate as money, are subject to all payments, setoffs, and discounts had or possessed against the same, previous to notice of the assignment or transfer."
"be so amended as to read as follows:"
" Bills and notes payable at a banker's or a designated place of payment, are negotiable instruments; bills of exchange and promissory notes payable in money at a bank or a certain place of payment therein designated, are governed by the commercial law."
Acts 1872-73, p. 111. By the same statute, sec. 1833, as it then stood in the Revised Code, was expressly repealed. It should be observed that the words "except so far as the same is changed by this code" in sec. 1833 as it originally stood are omitted from that section as remodeled by the act of 1873.
"Since the making of the promissory note on the endorsement of which this suit is founded, the statute of April 8, 1873, has converted promissory notes, payable in money at a designated place, into negotiable instruments governed by the commercial law. It operates on the nature and obligation of the contract of the parties to such notes, and cannot be construed as affecting notes made and endorsed prior to its passage. The law in force when the note is made and endorsed regulates and defines the liability of the parties."
at a certain designated place of payment, upon exactly the same basis, as to immunity from setoff, discount, or equities, as the statute prescribed in reference to bills and notes payable at a bank or private banking house. In declaring that bills and notes of the former class were negotiable instruments, to be governed by the commercial law, the legislature necessarily intended to throw around such paper the same protection that had previously been given by statute to bills and notes payable at banks or private banking houses. If such was not its object, then confessedly the act of 1873 was both meaningless and illusory. The duty of the court, being satisfied of the intention of the legislature, clearly expressed in a constitutional enactment, is to give effect to that intention, and not to defeat it by adhering too rigidly to the mere letter of the statute, or to technical rules of construction. Wilkinson v. Leland, 2 Pet. 627; Sedgwick, Const. and Stat.Constr. 196. And we should discard any construction that would lead to absurd consequences. United States v. Kirby, 7 Wall. 482. We ought rather, adopting the language of Lord Hale, to be "curious and subtle to invent reasons and means" to carry out the clear intent of the lawmaking power when thus expressed. The defense of the plaintiff in error would be good under sec. 1839 if no regard was had to the act of 1873, but since that statute expressly included notes payable at a certain designated place in the class of negotiable instruments to be governed by the commercial law -- which could not be if sec. 1839 be enforced according to its literal import -- the judiciary must respect the latest expression of the legislative will, and not permit it to be eluded by mere construction.
"A thing which is within the intention of the makers of a statute is as much within the statute as if it were within the letter, and a thing which is within the letter of the statute is not within the statute unless it be within the meaning of the makers."
Suckley v. Furse, 15 Johns. (N.Y.) 338; The People v. Utica Insurance Co., id., 357, 380.
in cases where the note is payable at a bank or private banking house.
Giving to the Alabama statute the construction indicated, our next inquiry is whether the bank, under the circumstances disclosed in this case, became, according to the recognized principles of commercial law, a bona fide holder for value of the note in suit. That it acquired the note in good faith, without fraud, we are not permitted by the evidence to doubt. Its officers were not bound to inquire of Oates, before they took the note, whether he had any defense or setoff. They rightfully supposed, as the face of the note imported, that he had undertaken absolutely to pay the amount specified at the time and place designated. That the president of the bank had reason to believe it was given for stock of the Tallassee Manufacturing Company is a fact of no significance whatever in determining the question of good faith. Having no knowledge or notice of the private agreement between Oates and the company, as set forth in the separate obligation of the latter, which was withheld from the public, the bank officers justly assumed that there was no circumstance attending the sale of the stock which could lessen the obligation of Oates to pay the note according to its tenor and effect.
which he may have been persuaded by the collateral security, and may have resulted from a consciousness of security; but such forbearance was not the result of contract, and is not shown to have been the consideration of it."
Had there been in that case a present consideration for the transfer of the note beyond giving security for a preexisting debt, or had the forbearance of the creditor to enforce his remedies been an element in a binding contract under which the collateral security was furnished, we are persuaded that the Alabama court would have ruled that the creditor, in receiving the collateral, became a holder for value in the course of business. But if we are mistaken in our interpretation of the decision of the Supreme Court of Alabama, the result will not follow for which plaintiff in error so earnestly contends. While the federal courts must regard the laws of the several states and their construction by the state courts (except when the Constitution, treaties, or statutes of the United States otherwise provide) as rules of decision in trials at common law in the courts of the United States in cases where applicable, they are not bound by the decisions of those courts upon questions of general commercial law. Such is the established doctrine of this Court, so frequently announced that we need only refer to a few of the leading cases bearing upon the subject. Swift v. Tyson, 16 Pet. 1; Carpenter v. Prov. Ins. Co., 16 Pet. 495; Watson v. Tarpley, 18 How. 517. We have already seen that the statutes of Alabama placed under the protection of the commercial law promissory notes, payable in money at a certain designated place; but how far the rights of parties here are affected by the rules and doctrines of that law is for the federal courts to determine upon their own judgment as to what these rules and doctrines are.
"It seems now to be agreed that if there was a present consideration at the time of the transfer, independent of the previous indebtedness, a party acquiring a negotiable instrument before its maturity as a collateral security to a preexisting debt, without knowledge of the facts which impeach the title as between the antecedent parties, thereby becomes a holder in the usual course of business, and that his title is complete, so that it will be unaffected by any prior equities between other parties, at least to the extent of the previous debt, for which it is used as collateral."
contract for indulgence, would constitute a valuable consideration within the established rules of commercial law, protecting the creditor against defenses or equities between antecedent parties of which he had no notice, it is not necessary now to decide. That precise question is not presented in this case, and we forbear to express any opinion upon it.
"who has become the endorsee of a bill, by violating the provisions of a statute, cannot with any degree of propriety be said to be a bona fide holder in the usual course of trade."
13 Ala. 410; 14 id. 688; 16 id. 406. Without extending this opinion by a critical examination of those cases, we repeat that in the determination of such a question, we are not bound by the decisions of the state court. The question is one of general law, and depends in nowise for its solution upon local laws and usages.
We are referred in this connection to two cases, Levy v. Gadsby, 3 Cranch 180, and Gaither v. The Farmers' & Mechanics' Bank, 1 Pet. 37. The first is so meagerly reported that it is difficult to see the precise ground upon which the conclusion of the Court was placed, and the second is clearly distinguishable from this. There, a note was endorsed and delivered as collateral security for a preexisting debt, evidenced by a note given on a usurious contract. The case was held to be governed by the statute of Maryland which declared "all bonds, contracts, and assurances whatever, taken on a usurious contract," to be utterly void. Under that statute, the contract of endorsement was held to be void. In the eye of the law, it was as though it had never existed, and consequently no cause of action, it was adjudged, passed to the endorsee.
which the bank was organized, known as the National Banking Act, does not declare the contract under which the usurious interest is paid to be void.
It denounces no penalty other than a forfeiture of the interest which the note or bill carries, giving to the debtor the right to sue for and recover twice the amount of interest so paid. If we should declare the contract of endorsement void, and consequently that no right of action passed to the bank on the note transferred as collateral security, an additional penalty would thus be added beyond those imposed by the law itself. "On what principle could this Court add another to the penalties declared by the law itself?" De Wolf v. Johnson, 10 Wheat. 367; Farmers' & Mechanics' National Bank v. Dearing, 91 U. S. 29; Barnett v. National Bank, 98 U. S. 555.
Besides, in this case, the forbearance extended to the debtor was not upon the sole consideration of usurious interest paid in advance; it was upon the additional and substantial consideration that the debtor corporation gave collateral security for the payment of indebtedness about to mature, and which it confessed its inability to meet. We have already seen that the transfer of the note before maturity, as collateral security, and so endorsed that the bank became a party to the instrument under obligation to make due presentment and give due notice of nonpayment, was itself a sufficient consideration to constitute the bank a bona fide holder for value, within the recognized principles of the law merchant. The presence, then, in the contract under which the note was endorsed and delivered to the bank of an additional consideration -- the payment in advance of usurious interest -- which the law declares to be vicious and illegal, ought not to destroy the entire contract of endorsement, when there is a sufficient consideration, aside from the usury paid, upon which it may rest.
We are of opinion that no error of law was committed by the court below.

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