Case Name: Mrs. Sally C. Pugh vs. Moore, Hyams & Co.
Court: Louisiana Supreme Court
Jurisdiction: Louisiana
Decision Date: 1892-03
Citations: 44 La. Ann. 209
Docket Number: No. 10,870
Parties: Mrs. Sally C. Pugh vs. Moore, Hyams & Co.
Judges: Watkins, J., adheres to his dissenting opinion.
Reporter: Louisiana Annual Reports
Volume: 44
Pages: 209–253

Head Matter:
No. 10,870.
Mrs. Sally C. Pugh vs. Moore, Hyams & Co.
1. If a broker or other agent transfer paper by delivery without disclosing who-his principal is, he is himself to be regarded as a principal in the transaction, and the party responsible to refund money paid for bonds which were valueless.
2. The term assignment is applied to the transfer of instruments which are negotiable without endorsement. If a bond is not a valid subsisting obligation according to its purport the assignor is liable in a suit to recover amount paid him, as the price, because it was not that which it was held to be, and the assignee did not receive any consideration.
3- A State bond in negotiable form, which has come into the hands of innocent holders after having been fraudulently reissued from the Treasurer’s office, is subject to defence. •
1. An officer can not ratify an irregular issue of securities of the State or give value to paper issued ultra vires, or fraudulently.
5. The State is not liable for its paper promises fraudulently issued and put into circulation, not even when put in circulation by its Treasurer.
PPEAL from the Civil District Court for the Parish of Orleans. King, J.
Charles F. Claiborne, for Plaintiff and Appellee,
cited: 20 Wendell 533; Daniel, Negotiable Instruments, Secs. 305, 308; Tiedmen, on Commercial Paper, Sec. 85; 2 Parsons on Bills, pp. 38 and 39; 4'N. S. 528; 2 An. 559; 14 An. 444; C. C., Art. 2474 and seq.; Troplong, Vente, 2 Vol., Secs. 934, 932; Aubry and Rau, p. 442; 16 Duranton, Sec. 510; 24 Laurent, Secs. 542, 543; 6 Mareadé, on Art. 1693, p. 351, Sec. 1. _
Bayne, Denegre & Bayne, for Defendants and Appellants,
cited: C. C. Art. 3018; 12 M. 84; 11 An. 170; 20 An. 564; 92 U. S. 447; 124 U. S. 545; 7 Wall. 557; 15 Pet. 377; 91 U. S. 398; 31 An. 175; 107 U. S. 740 ; 97 U. S. 445 ; 91 U. S. 398; 28 An. 552.
H. L. Lazarus, Amicus Curias.

Opinion:
The opinion of the court was delivered by
Breaux, J.
Piaintiff sues to recover of defendants the amount paid them for five State bonds she alleges are worthless.
They were bought by her on the 24th of April, 1889, for the sum of $4443.75.
She subsequently discovered that these bonds were not valid, and that the State claimed them, as they had been fraudulently reissued.
Pour of them are numbered 742, 842, 866 and 883, and are part of the consolidated bonds held by the Treasurer of the State of Louisiana for the use of the "Agricultural and Mechanical College," and which are null and void since the 1st day of January, 1880, under Article 233 of the Constitution. In addition to their nullity, this article prescribes that the General Assembly shall never make any provision for their payment, and that they shall be destroyed.
Another of the bonds bought is numbered 5611, and is a consolidated bond which had been exchanged under Act 121 of 1880, for a constitutional bond.
The act just quoted orders in matter of the exchange of constitutional for consolidated bonds, that the Treasurer, before delivering the former, shall designate in blank kept for the purpose, on the face thereof, the number of the old consolidated bond for which the new was given in exchange, and shall stamp the consolidated bond received, after having detached from it the coupon which fell due on the 1st of January, 1880.
Reports were to be made by the Treasurer to the Auditor at the end of each quarter, showing the number and denomination of all the consolidated bonds stamped as required. They were to be destroyed.
It was under the provisions of the said act that this bond 5611 was received by the Treasurer.
Plaintiff tendered the bonds to the defendants and demanded valid bonds in lieu, or the price.
The defendants in their answer plead, that they acted as brokers, and not as vendors; that these bonds were negotiable instruments, not yet due, transferable by delivery, and'did not entail any liability or warranty upon the vendor, and that they had been issued by the State and put in circulation by its officers for full value, and that their rights are protected by the Constitution and laws of the United States and the law merchant, by which they must be decided.
There was judgment for plaintiff and the defendants have appealed.
With reference to the capacity in which the defendants acted, whether as brokers or principals, we summarize the evidence as follows:
That defendants are brokers by occupation, and that at the date of the sale of these bonds to the plaintiff they were engaged in buying bonds for themselves and others; that plaintiffs' agent asked a member of the defendant firm to let him have some of these bonds for his principal at cost price.
That this was declined unless a broker's commission was paid; that this the agent finally consented to pay.
This is corroborated by another member of the firm.
The agent corroborates these statements in some particulars, but denies that he dealt with the defendants as brokers and that there was any brokerage compensation.
It appears that no statement of the purchase was made and handed to the purchaser, as is customary when brokers act for third parties.
That the defendants did not at any time make known to plaintiff who was the principal and owner of these bonds, if they were not.
With reference to the fraudulent reissuing of the " Mechanical and Agricultural College " bonds Nos. 742, 842, 866 and 883 and the possession of the state:
The facts are that they were designated in statement "E" of the report of the State Treasurer to the Governor for the year 1879, from which we copy:
To His Excellency F. T. Nieholls, Governor of the State of Louisiana:
Sir — In accordance with the requirements of law (Art. No. 96, Extra Session, Section 80, of 1877) I respectfully submit the following report of the financial operations of this department for the past fiscal year, commencing the 1st day of January, 1879, to the 31st day of December, 1879, inclusive, embracing its receipts, disbursements, etc., from the various funds, as provided by existing laws.
The treastfrer's report consists of statements A, B, C, D and E.
Statement " A " shows an account *
Statement " B" shows an account *
Statement " C " shows an account
Statement " D " shows an account *
Statement " E " shows a detailed statement of the bonds held by the State Treasurer in trust for the Mechanical and Agricultural College, and the bonds belonging to the Louisiana State University; also of the bonds returned by A. Luria, cashier Louisiana National Bank, on June 7, 1878, in exchange of warrant No. 2222 as per judgment of the Third District Court of New Orleans, No. 25,115, and of the Supreme Court of Louisiana, No. 7149, and pledge of the lessees of the Louisiana State penitentiary, etc.
, The residue of the report is a compilation of the monthly reports of the banks, banking institutions, savings banks, etc., published in accordance with the provisions of Art. 91 of Section 6 of 1877.
All of which is respectfully submitted.
(Signed) E. A. Burke, State Treasurer.
Extract from the said report:
"Statement 'E.'
" Description of bonds on hand in the State Treasury held.by, and belonging to, the 'Agricultural and Mechanical College,' and to the 'Louisiana State University,' etc.
" ' Mechanical and Agricultural College,'
One hundred and ninety-six bonds of §1000 each, issued by the State of Louisiana, under Act No. 3 of 1879, Nos. 710 to 905 inclusive, ' §195,000.
Necessarily including the bonds involved in this suit, viz.: Nos. 742, 842, 866 and 883.
Other oficial reports, of subsequent date, were offered in evidence. They were objected to on the ground that they were not the best evidence which could be produced.
The court overruled the objection and admitted the testimony.
The first report, that of 1879, shows that the bonds were in the treasury at the time it mentions, and while those made subsequently do not, from personal knowledge, establish that they were in the treasury in 1879, nevertheless they tend to prove the correctness of that of 1879. The records of the State make proof of the verity of their contents. Best on Evidence, p. 454.
The fact that the Treasurer was indicted in 1888 for alleged criminality in the fraudulent reissue of these bonds, and that .he is a fugitive from justice, will not destroy the effect of records as evidence accepted at all times as correct previous to 1888.
With reference to the consolidated bond (5611), it is proven that in 1883 it was presented to the State Treasurer to be exchanged for a constitutional bond. It was exchanged and extinguished.
The State claims their return and refuses to recognize them as a debt.
The Brokers' Responsibility in Transferring Bonds by Delivery.
The first proposition presented by the defendants is that they acted as brokers, and are not indebted for the amount claimed.
In considering this defence, it is necessary to determine what are the functions of a broker.
He is an intermediary employed to negotiate a matter between? two parties, and for that reason is considered the mandatary of both. When he is the mandatary of the purchaser and buys from a third party, the agency must be disclosed, either at the time of the contract or at the trial, in order that he may be considered the broker and relieved from all responsibility as principal.
If the plaintiff has a right of action, it can not be defeated, as in this case, by withholding the name of the principal and pleading the exemption of a broker.
We quote from Daniels, Vol. 1, p. 684:
"It is quite clear that if a broker or other agent transfer property by delivery without disclosing who his principal is, he is himself to be regarded as principal in the transaction, although the party dealing with him may have known that he was the broker and agent for some person.
"And this doctrine has been applied to compel a broker to refund money paid for note sold by him to the plaintiffs, although he had paid over the money to the principal."
Liability op the Assignor op Bonds Payable to Bearer.
In the order of the defence the defendants next contend that it is well established that the buyer has no cause of complaint if he gets the exact thing he buys; that each had the same means of information ; neither had ány suspicion that there was anything wrong with the bonds, that it was an ordinary case of bargain and sale, but essentially a transaction in which both took their chances of loss, that these bonds were current in the market as Louisiana State bonds.
The representations made by vendors were in good faith and believed by both parties to be true, that they were selling valid bonds of the State of Louisiana.
The unquestioned intention of the plaintiff was to buy valid obligations of the State; instead, she received five bonds that were null and void.
For these she paid a price for which she did not receive any consideration.
The question for our determination, on this point, is whether a purchaser who buys bonds in the market must lose the price, if he receives fraudulent reissues of bonds instead of valid and binding obligations upon the State, which he intended to buy. This question iavolves the necessity of deciding what are the liabilities of assignors of instruments payable to bearer.
The assignor of such an instrument guarantees that he has a good title to the instruments and has a right to sell them.
The illegality of the instruments constitutes a failure of consideration.
Knowledge of the illegality on the part of the vendor is not essential to make him liable for the price received.
"We think whoever gives negotiable paper, transferable by delivery, warrants that the signatures are genuine."" And Mr. Justice Story, in his work on promissory notes, lays it down that there is a warranty of title. Promissory Notes, Sec. 118.
He warrants "by implication, unless otherwise agreed, that its face is a true description of its character, both in respect to its genuineness, to its validity and legal operation, to the competency of the parties, and also that he is the lawful holder, having a valid title and right to transfer it, and that he has no knowledge of any facts which prove the paper, as originally valid, to be worthless, either by the insolvency of the principal, or by having been paid, or otherwise by having become void and defunct." Daniel, Sec. 787, 3 Ed.
The assignor engages that the instrument is what it purports to be, i. e., the valid obligation of those whose names are upon it.
The rule, says Judge Parsons, is of universal application that the vendor, without endorsement, warrants that the paper is of the kind and description it purports to be.
This is a well settled principle of commercial law, i. e., implied warranty in sales as applicable to negotiable instruments transferable by delivery.
An exception arose under a decision of the United States Supreme Court and a different rule was announced as applying to assignors and assignees of government securities, i. e., that the assignor does not impliedly guarantee that the officer has authority to issue the securities he transferred by delivery. In Otis et. al. vs. Cullom, receiver, 92 U. S. 447, a city bond issued in Kansas was sold to plaintiffs.
The court held the bond void on the ground that the Legislature had no power to adopt the act authorizing its issue.
The transferrees sued to recover back what they had paid for the invalid bond.
The court held that in such cases there is only an implied warranty of title and genuineness, and that if there was no guaranty and no fraud or misrepresentation on the part of the vendor the transferees were without rights to recover.
This case followed Lambert vs. Heath, an English case (15 Mee. and W. 486). The rule is the same in both. In the last case the de fendant bought for the plaintiff certain certificates of Kentish •Coast Railway scrip.
The directors repudiated the scrip on the ground that the secsetary had acted without authority in issuing them.
An action was brought to recover back the money paid for these invalid scrips.
The court said: "The question is simply this: Was what the parties bought in the market Kentish Coast Railway scrip? It appears that it was signed by the secretary of the' company, and if this was the only Kentish Coast Railway scrip in the market, as appears to have been the case, and one person chooses to sell and another to buy, then the latter has got all that he contracted to buy."
In both of these cases all the securities were null and void.
In the case at bar only comparatively few bonds were worthless, and it happens in buying a larger number those sued on were of the worthless.
In a Nebraska case the distinction was made that there were two sets of securities in the market of the same general description, one legal and the other illegal, proof of which fact enabled the purchaser of the illegal securities to recover back the purchase money, on the ground that he had purchased something very different, viz.: the legal security of the same description. 12 Neb. (1888) 28.
Judge Daniel, referring to this case, says, Vol. 1, Sec. 734: "The distinction is a clear one, and the decisions of the Supreme Court, limited to the facts of the case before it, is not irreconcilable with the general principles stated in the test, to which we have had occasion to refer as applying to this case.
" While an assignment is not equivalent to an endorsement, a transfer without endorsement is of the same force as a sale of goods, and does not fall under mercantile law." Randolph on Commercial Paper, Vol. 11, p. 442.
The principles of implied guarantee by the assignors of securities payable to bearer is but slightly removed, if at all, from those laid down in the Civil Code respecting the liability of the vendor.
The seller is bound to warrant the thing which he sells, to maintain the buyer's peaceable possession, and to guarantee against the hidden defects of the thing sold.
" He who sells a credit or an incorporeal right warrants its existence at the time of the transfer, though no warranty be mentioned in the deed." C. O. 2646.
The authorities agree that the assignor of a security transferable by delivery warrants that it is not fictitious. "
The defendants contend that plaintiff had the knowledge they had with reference to these bonds; each had the same means of information; neither had any suspicion that there was anything wrong about the bonds.
That is undoubtedly true. Against each of the parties to the suit the same presumption arises, that they had knowledge of the laws relating to these bonds. They had the notice every one is presumed to have of the law.
The fact remains that in an intended purchase plaintiff has paid an amount for which she did not receive anything in return.
The State Is Not Responsible for Bonds Fraudulently Reissued in Violation of Her Laws.
The third and last ground of defence is, that the defendants were holders for value before maturity of negotiable paper of the State of Louisiana, and that, applying the law governing commercial paper, she is liable, and has incurred all the responsibilities of private persons under the same circumstances.
While this is in the main true, the State is not lightly exposed to pay its securities twice.
These bonds could not have any legal vitality after they were withdrawn from commerce.
The embezzlement committed in reissuing them, and the flagrant violation of law, made them valueless in any hands.
It is settled that debts unlawfully contracted by a municipal corporation are not binding upon it, although negotiable in form.
If there is no authority to issue its bonds or commercial paper, there can be no bona fide holder in the commercial sense of the term. Townsip of East Oakland vs. Skinner, 4 Otto, 255; Marsh vs. Fulton County, 10 Wall. 676; School Directors vs. Fogleman, 76 Ill. 189; Cecil vs. Board of Liquidation, 30 An. 34.
In Chisholm vs. The City of Montgomery, 2 Woods, p. 594, it was held that the negotiable form of the security did not preclude the defendant from denying, the authority of the officers by whom the faith of the city had been pledged; that the officers and agents of private corporations, entrusted by them with the management of their own business and property, may subject their principals to the consequences of their unauthorized act, but that the body politic is not thus bound by the acts or declarations of its agents. " If it could be, unbounded scope would be given to the peculations and frauds of public officers; " that third persons holders of the bonds were bound to take notice of the defects.
These and other exceptions have led us to the conclusion that all the responsibilities of private persons do not form part of the obligations of municipal corporation on its bond, nor of the State.
In John S. Caguin, Respondent, vs. The Town of Hancock, 84 New York, it was held that there can be no bona fide holder of town bonds within the meaning of the law applicable to negotiable paper, as they are only binding upon the town when issued in the way pointed out by statute.
In Moffat vs. United States, 112 U. S., the court decided that the United States do not guarantee the integrity of its officers and hold themselves bound by their misconduct or fraud.
Says the court in that case: "The position that as the frauds charged were committed by officers of the United States, the court erred in not holding their acts to be binding, and in not giving to the patents the force of valid conveyances, is certainly a novel one. The government does not guarantee the validity of the acts of its officers. It prescribes rules for them, requires an oath for the faithful discharge of their duties, and exacts from them a bond with stringent conditions. It also provides penalties for their misconduct and fraud, but there its responsibility ends. They are but the servants of the law, and, if they depart from their requirements, the government is not bound. There would be a wild license to crime if their acts, in disregard of the law, were to be upheld to protect third parties." See also District of Columbia vs. Cornell, 130 U. S., p. 665.
The State government requires similar formalities i¡o be complied with by its officers. The required oath was taken and bond furnished.
The criminal statutes provide punishment against their frauds. If with these requirements the responsibility of the United States ends, for similar reasons that also of the State ends.
"It has been held in England in recent cases that a corporate bond in negotiable form, which had come into the plaintiff's hands for value after having been stolen from the rightful owner, was subject to defence." Randolph on Oommercial Paper, Sec. 327.
Free school bonds were sold by the Auditor and Treasurer under act 81 of 1872.
The court declared the act unconstitutional, and denounced it as an act of spoliation, intended and designed to deplete the treasury of every available asset or fund. State of Louisiana vs. Durant, 29 An. 81.
The Sun Mutual Insurance Company became the owner of eleven of these bonds before maturity for valuable consideration. Suit was brought by the company against the Board of Liquidation to have them funded.
The court decided against the application to fund, and held that the laws of 1855 and 1857 setting aside these bonds for the schools took them out of commerce, and that third persons, however innocent, could not hold them as owners.
These bonds were sold under some color of' law. The sale had legislative sanction, and the Auditor and Treasurer acted in compliance with a statute which was subsequently declared unconstitutional.
In the matter of the bonds now under consideration, their reissue from the treasurer's office was an outrageous fraud which absolutely vitiates them in any hands in which they may be found.
By taxation, private property is appropriated to public ends and legitimate purposes. The element of negotiability of bills, notes and bonds makes a contract founded upon paper adopted for circulation different, in meny important particulars, from other contracts known to the law.
That element loses all force when paper has been placed in commerce, in violation of law, to perpetrate a frand upon the State.
The holder of the bonds of a municipal corporation is bound to look to the action of the officers and ascertain whether the law has been so far followed by them as to justify the issue.
The rights of a State can not be less. The decisions relating to private corporations and to persons do not apply against the State.
The 'State's authority to issue bonds is founded on law, of which every one is presumed to have knowledge.
Those who deal in State securities will he presumed to have examined them and ro have known whether they could be in commerce.
The dealer in bonds of private corporations, or in bills and notes of individuals, has not the same opportunity of examination and the same presumption of law does not arise.
The by-laws of corporations are not open to inspection by those who deal in securities.
Those who dealt in State securities had - opportunity to know whether the treasurer had any lawful right to issue them, for the reason that his authority, if any existed, was to be found in public statutes; and if they did not, in fact, examine, as it was their privilege to do, before buying, they will be presumed to have done so and to have known that they were issued, without authority of law, and therefore void in the hands of any holder, either with or without notice.
The bonds sued upon are the property of the State, and were within her reach and in her possession when they were ordered to be destroyed.
In argument, it is urged that the State is estopped by the information given by one of her officers that the bouds sued upon were valid bonds.
If that plea were maintained it would be equivalent to maintaining a ratification. No such ratification could be made.
We have found no grounds to reverse the judgment appealed from.
Judgment affirmed, at defendants' costs.