Case Name: Mrs. M. M. Frazier v. W. T. Lafferty et al.
Court: Tennessee Supreme Court
Jurisdiction: Tennessee
Decision Date: 1923-12
Citations: 150 Tenn. 105
Docket Number: 
Parties: Mrs. M. M. Frazier v. W. T. Lafferty et al.
Judges: 
Reporter: Tennessee Reports
Volume: 150
Pages: 105–116

Head Matter:
Mrs. M. M. Frazier v. W. T. Lafferty et al.
(Nashville.
December Term, 1923.)
1. BILLS AND NOTES. Rule stated, as to rights of hona fide holder of note, executed in transaction prohibited by statute.
Bona-fide holder of a negotiable paper, executed as part of a transaction prohibited by statute, may generally enforce its collection, except where statute has expressly or by implication declared paper void. (Post, p: 107.)
2. LICENSES. Notes transferred as part of transaction in violation of Blue Sky Law held not recoverable back from bona-fide holder.
Notes owned by complainant and transferred by him in payment oi stock in corporation which did not comply with Blue Sky Law 7ielcl not recoverable back from holder in due course and for value; the statute having no application to business of noncomplying corporation independently of sale to investors of its securities, in view of section 6 (Shannon’s Code, section 3273al26. (Post, pp. 107-109.)
Acts cited and construed: Acts 1913, eh. 31, sec. 6.
Cases cited and approved: Snoddy v. Bank, 88 Tenn., 573; Bank v. Chapman, 122 Tenn., 415; Cohn v. Lunn, 133 Tenn., 547; Edwards v. Fruit Products Co., 133 Tenn., 142; Pontiac Savings Bank v. Reinforced Concrete Pipe Co., 178 Mich., 261.
Laws cited and construed: Laws 1913, ch. 31.
Code cited and construed: Sec. 3273a 126(S).
3. ESTOPPEL. One transferring note for stock in corporation not complying with Blue Sky Law held estopped because of negligence to recover back from transferee of corporation.
Complainant who transferred note owned by her in payment of stock in corporation which did not comply with Blue Sky Law, and
who indorsed note while it-was in hands of transferee of corporation and at his request, under circumstances affording her opportunity to protect herself and him, held estopped from rescinding transfer on theory that, where one of two persons must suffer loss, the one who occasioned loss must suffer, and in view of Shannon’s Code, sections 3516a7S, 3516a74. (Post, pp. 109, 110.)
ON PETITION TO REHEAR.
4. LICENSES. Buyer of note from corporation not complying with Blue Sky Law held not chargeable with notice that corporation' acquired it in exchange for stock.
While noncompliance by corporation with Blue Sky Law renders its stock-selling transactions unlawful, its corporate existence, general powers, and ordinary business, are corporate existence, general powers, and ordinary business, are not affected by such noncompliance, any buyer of note, indorsed by it without notice on its face or otherwise, that it was acquired by corporation in exchange for its stock, is not legally charged with notice of the illegality of transaction of which original transfer of note was part. (Post, pp. 110-116.)
Acts cited and construed: Acts 1913, ch. 31.
Cases cited and approved: Goodyear v. Menx, 143 Tenn., 287; Dixie Rubber Co. v. McBee, 148 Tenn., 168; 'S. S. McConnell, Receiver, v. Cy. IT. Lyle et al., 263 S. W., — ; Snoddy v. Bank, 88 Tenn., 573; Edwards v Fruit Products Co., 133 Tenn., 142.
FROM LAWRENCE.
Headnote 1. Bills and Notes, 8 C. J., sections 1032, 1033; 2. Blue Sky Law, 8 C. J., p. 1130; 3. Estoppel, 21 C. J., section 176; 4. Blue Sky Law, 8 C. J., p. 1130.
Appeal from tlae Chancery Court of Lawrence County. —Hon. Thos. B. Lytle, Judge.
Webster & "V^ebster, for appellant.
Morrison & Morrison, for Lafferty.
C. C. Davis and Roberts & Cooper, for Citizens Bank and Am. Nat. Bank.
On constitutionality of Blue Sky Laws, see note in L. R. A., 1917F 524.
For authority discussing the validity and interpretation of the Blue Sky Laws see notes in 15 A. L. R., 262; 24 A. L. R., 524, 27 A. L. R., 1169.

Opinion:
Mr. Justice Chambliss
delivered the opinion of the Court.
The bill seeks to recover from defendants three real estate notes of $1,000 each, which complainant owned and transferred by delivery to a corporation known in the record as the Bynn Yanns Company for shares of its stock, on the ground of fraudulent misrepresentation, and she alleges and particularly relies on the fact that this corporation was subject to. the Blue Sky Law of 1913 (Laws, Ex. Sess. 1913, chapter 31), and had failed to comply therewith. It is insisted for defendants that they are holders in due course of this negotiable paper and had paid value therefor, without notice of complainant's claims or rights, or of the fact that the transaction involved a sale of stock of the corporation, or that the corporation had failed to comply.
Two of the notes are held by defendant hanks, and the proof sustains their contention that they bought for value without notice and are holders in due course. The pertinent question as to them, conceding the transfer to these hanks of the notes by the complainant to the corporate vendor and indorser thereof to he subject to attack as between said parties because in' violation of the Blue Sky Law, is whether or not this attack is available as against these innocent transferees and present holders for value.
We find that the court of civil appeals is correct in its holding and is sustained by the authorities cited in its opinion, that the illegality attaching to the transaction as between the noncomplying corporation and the pur chaser of its stock does not affect the right of innocent holders in dne course of these negotiable instruments.
This is not a case of an obligation issued or transferred in violation of- a statute expressly declaring it void as in Snoddy v. Bank, 88 Tenn., 573, 13 S. W., 127, 7 L. R. A., 705, 17 Am. St. Rep., 918. This distinction has been clearly recognized by this court. Bank v. Chapman, 122 Tenn., 415, 424, 123 S. W., 641; Cohn v. Lunn, 133 Tenn., 547, 550, 182 S. W., 584.
The rule is that a bona-fide holder of negotiable paper, executed as part of a transaction prohibited by statute, may enforce its collection, except where the.statute has expressly or by necessary implication declared it void. This principle is applied in Edwards v. Fruit Products Co., 133 Tenn., 142, 180 S. W., 163, and is in accord with our Negotiable Instruments Act of 1899.
In Joyce's Defenses to Commercial Paper (2d Ed.) vol. 1, section 163, it is said:
"Except where it is provided by statute that a bill or note issued by a corporation shall be. void, such an instrument, which does not appear upon its face to be illegal or unauthorized, will not, in the hands of a bona-fide holder without notice who has paid a valuable consideration therefor, be subject to the defense that'it is illegal or issued without authority. ' '
To the same effect see 8 C. J. sections 1032,1033, 1038; also Pontiac Savings Bank v. Reinforced Concrete Pipe Co., 178 Mich., 261, 144 N. W., 486.
It satisfactorily appears that the defendant banks have carried the burden lawfully thrown upon them on the facts of this case of showing that they purchased these notes without knowledge of the alleged infirmity in the original transaction.
The court of civil appeals in its opinion also correctly limits the scope of the Bine Sky Law to transactions covered by its terms. Neither the corporate existence nor the general business of a corporation are necessarily affected by non-compliance with this act, which relates alone to transactions touching sales of its stocks or other securities. This law is expressly so limited providing that it shall be unlawful for any noncomplying company "to transact any business in form or character similar to that set forth in section 1 of this act" (section 6, chapter 31, Acts 1913, Ex. Sess. Shan. Code section 3273al26).
With respect to the third note held by defendant Laf-ferty, the facts as to notice and knowledge on his part acquired before, or at the time of, his acquisition of his note are more involved in doubt. While he insists that he did not understand that stock in this corporation was the consideration passing between the complainant and her vendees of the note, there are circumstances which would seem to have put him on notice of the truth of the situation. However, we find it unnecessary to determine this exact issue of fact, since, further agreeing with the holding of the learned court of civil appeals, we find that the complainant has estopped herself from extending to defendant Lafferty her right of rescission and recovery of this part of the consideration.
It appears that, before finally parting with all control of the consideration paid-by him to those delivering the note to him, he took the precaution to interview the complainant and secure from her, in the nature of a guarantee of the legitimacy of the transaction by which he was acquiring the note, and particularly her acquiescence, her personal indorsement, under circumstances which put her on notice of his pending investment in the note and afforded her opportunity to object and protect both herself and him. While she says that she indorsed the note when so approached and advised unwillingly, the facts do not sustain her claim of compulsion or duress, and, having thus affirmatively ratified the sale to defendant Lafferty of this notq, she cannot now be heard to complain against him. Granting that the complainant suffers a loss, the equitable principle that, where one of two persons must suffer loss, he should suffer whose act or neglect occasioned the loss, has application. She waived her right to pursue her remedy of rescission and recovery of this note against this defendant by her in-dorsement of it for the identical purpose of assuring the defendant in his pending purchase of it, and she thus'became a party to its transfer to him. It is insisted that the defendant had previously made the purchase, but it is reasonably clear that he had taken steps to protect himself in case the complainant had elected to exercise her rights at that time.
Moreover, our Negotiable Instruments Law again has application. Therein it is expressly provided that ' ' every indorser who indorses without qualification warrants to all subsequent holders in due course," among other things, "that the instrument is genuine and in all respects what it purports to be; that all prior parties had capacity to contract; that the instrument is at the time of his indorsement valid and subsisting." Shannon's Code, sections 3516a73, 3516a74.
It follows that the decree of the court of civil appeals must be affirmed.