Opinion ID: 237615
Heading Depth: 1
Heading Rank: 1

Heading: Were These Bonds Overdue?

Text: 35 The first question in the case has to do with the effect of the fact that these bonds had been called for redemption on May 1, 1944. By the time they came into the hands of these defendants in 1948 there were interest coupons attached to the bonds which by their terms were overdue. It appears that there was nothing on the face of these bonds to indicate that they had been called. It also appears that the effect of the calling of the bonds was to stop the liability of the obligor to pay interest on them. 1 36 Was this 'overdue paper'? If the paper was overdue, it is quite clear that there can be no such thing as a holder in due course 2 and that anyone who interferes with the rights of the true owner is liable for conversion under the same circumstances that he would be liable for conversion of any other chattel. 3 Overdue paper is 'negotiable' in the sense that it can be transferred, if bearer paper, by transfer of possession, if order paper, by endorsement and delivery, in the same way as if it were not overdue. But one acquires under those circumstances no special rights from the fact that he is dealing with negotiable paper except that if he takes from a person who is a holder in due course he succeeds to that person's rights. Of course, so does one who takes a chattel from another. 4 37 As said above, we think federal law controls the nature of the obligation embodied in these instruments. There is one Supreme Court decision which deals at length and thoroughly with the problem of the rights of one who acquires a called negotiable bond for value and in good faith but shortly after the call has been made. That case is Morgan v. United States, 1885, 113 U.S. 476, 5 S.Ct. 588, 28 L.Ed. 1044. The Court there said that, 113 U.S. 498, 5 S.Ct. 596, 'the bond becomes, after the maturity of a call for redemption, payable at the option of the holder on demand, but without future interest    it cannot be that the legal effect of such a call for the purpose of redemption is the same as if the bond had been originally framed as an obligation to pay absolutely on a day previously fixed.' 5 38 In Smyth v. United States, 1937, 302 U.S. 329, 58 S.Ct. 248, 82 L.Ed. 294, Mr. Justice Cardozo stated categorically that redemption clauses in Government bonds 'are provisions for the acceleration of maturity at the pleasure of the Government, and upon publication of the notice of call for the period stated in the bonds the new date became substituted for the old one as if there from the beginning.' 302 U.S. at page 353, 6 58 S.Ct. at page 252. 39 To us it seems apparent that the language of the Supreme Court in 1937 differs quite materially from the language of the Supreme Court in 1885. If the Cardozo language is taken literally the bonds which we deal with in this case were certainly overdue at the time of their negotiation to the First National Bank in Indiana. 40 There is a further complication here. There is good authority which indicates that if one knows that negotiable instruments have been accelerated, they become, at least as to him, overdue instruments. 7 There is testimony in this case from the cashier of the Indiana bank that he knew these bonds had been called. If the authorities just cited are correct, then the bank knowingly took overdue instruments. But in the Morgan case the Court stated as a fact that the purchasers of the bonds knew that they had been called. And it is quite evident what the Court, through Mr. Justice Matthews, attached no significance to that fact. What would be held if the case came up today we have no way of knowing. 8 41 But there is one further point, however, which we think is controlling. In the Morgan case the negotiation to the purchaser by the thief or one who held from him was within three months of the effective date of call. Does the time element make any difference? We think it does. Again reverting to language in the Smyth case and also language in the Morgan case, itself, we think this called bond became an instrument payable on demand at the option of the holder. Mr. Justice Matthews speaks of the instrument, after call, as 'a bond redeemable at the treasury on demand, without interest after the maturity of the call   .' Whether these bonds would be treated as 'demand instruments' as to someone who did not know of the call, we need not decide. But we refer again to the admissions of the cashier of the bank in Indiana. He knew that the bonds had been called. Certainly as to his bank these instruments became payable on demand at the option of the holder. 42 The rule for determining rights of purchasers of demand paper has been many times litigated. 9 A demand instrument circulates free from equities for a reasonable time. What is a reasonable time depends upon the nature of the paper, the usage of business with respect to such instruments and the facts of the particular case. 10 If the paper is currency it is hard to say when a reasonable time has passed. But a bond no longer bearing interest and with a batch of coupons calling for interest which have now become ineffective is hardly to be compared with a federal reserve note which one picks up as he cashes a check at a bank counter. In this case the bank in Indiana got these bonds about four and one-half years after the effective date of the call. We think that was not a reasonable time after they had become 'due' and that, therefore, the taker could not claim the rights of a holder in due course. 11 43