Court Opinion

ID: 6642354
Source: CourtListenerOpinion
Date Created: 2022-07-20 20:46:47.900618+00
Date Added: 2024-06-11T15:59:17.650475
License: Public Domain

CALDWELL, District Judge.
The board of directors of the insurance company had an undoubted right to sell the defendants’ notes and other securities to Davis, and authorize its secretary to indorse them as was done. Banks, insurance companies, and other like corporations, have the power to take and hold negotiable notes and other securities in the general conduct of their business, and this includes the power to negotiate them. Hardy v. Merriwether, 14 Ind. 203; McIntire v. Preston, 5 Gil. [10 Ill.] 48; Nicholas v. Oliver, 36 N. H. 218; Spear v. Ladd, 11 Mass. 94; Northampton Bank v. Pepoon, Id. 288; Lester v. Webb, 1 Allen, 34. The notes were negotiable, and their assignment and delivery invested Davis with the legal and equitable title to them and the right to receive payment and cancel them. He did receive payment from the makers — the defendants— in shares of stock in the company, then worth par in the market, and cancelled and surrendered up the notes to them.
The amended answer and the deposition of J. J. Horner malee it certain that the defendants, in this case, had no knowledge or suspicion personally, or through their agents, that Darts had obtained their notes by fraud, or that there was any infirmity in his title; and, having paid the notes in good faith to Davis, the indorsee and holder, the plaintiff cannot compel the defendants to pay the notes a second time, even if Davis was a fraudulent holder. Payment to the thief or finder himself, of a negotiable note transferable by delivery, will discharge the maker, provided such payment was not made with knowledge or suspicion of the infirmity of the holder’s title, or under circumstances which might reasonably awaken the suspicions of a prudent man. Byles, Bills, 213. Nothing short of fraud, not even gross negligence, if unattended with mala tides, will invalidate the payment so as to take away the rights founded thereon. Story, Bills, § 416; Edw. Bills, § 337. The bill counts upon the notes exclusively; it does not seek a recovery upon a stock subscription, nor does it even allege that the notes were stock notes. The answer discloses that the notes were given for a subscription to the capital stock of the company, but that fact did not render the notes any the less negotiable, or prevent the company from negotiating them, or excuse the defendants from paying them to the indorsee and holder; and when paid in good faith to the holder, the company can have no claim against the makers, either upon the notes or for the original consideration.
It is not true the defendants paid nothing of value for the notes. The shares of stock owned by the defendants were issued as full paid shares; the stock was then worth par in the market; the defendants refused to sell it for less, and Davis agreed to give par for it. The test is its then market value, and not what it was really worth in the light of subsequent events. The company having indorsed and transferred the notes to Davis, it is not open to it to object that he dis*369charged the debt for an Inadequate consideration, if the defendants had no notice of the alleged fraud and acted in good faith. If Davis had been a bona fide holder of the notes, he could not successfully maintain that they had not been fully paid, and no more can the company.
The bill is fatally defective for want of proper parties. The gravamen of the plaintiff’s bill is that Davis and the life association, acting in concert, fraudulently procured the assignment and transfer of the defendants’ notes from the company to Davis. It is not alleged in the bill, nor was it claimed in argument, that defendants were parties to that fraud; it is claimed that their agent only had notice of it before paying the notes. Obviously the plaintiff has no case unless he can impeach and set aside the sale and transfer of these securities to Davis. Davis ought to be a party to any bill seeking to do this. He is entitled to an opportunity to repel the imputation of fraud and protect himself from liability if he can do so; the defendants are entitled to his aid in defending the action; and as he would be liable over to the defendants, in the event of the plaintiff’s recovering, he must be made a party for the protection of the defendants, and to avoid multiplicity of suits. Robertson v. Carson, 19 Wall. 186 U. S.] 94. The defendants have a right to insist that Davis shall be brought in; and on the averments in the bill the life association also, because if they are compelled to pay their notes a second time they are entitled to an action over against these parties, to be reimbursed the amount paid them or Davis in satisfaction of their notes, which would be the par value of their stock, that being the market value as well as the agreed value between Davis and the defendants. But as Davis and the life association are not made parties, it would be open to them in any suit that the defendants might bring against them to be reimbursed the amount of plaintiff’s recovery, to contest the question of fraud in the transfer of these securities to Davis, and it might result that the court or jury trying that issue would find the transfer was not fraudulent, and thus the defendants would be wronged in* a mode that would leave them no redress. Equity will not permit a plaintiff to put a defendant in this predicament. The rule is well settled that where, in the event of the plaintiff’s succeeding, the defendants will be subjected to undue inconvenience, or to danger of loss or to future litigation, or to a liability under the decree more extensive and direct than if the absent parties were before the court; or will thereby acquire a right to call upon the absent parties either to reimburse him the whole or a part of the plaintiff’s demand; then such absent parties must be brought before the court in order that the rights and liberties of all may be settled by one proceeding and a multiplicity of suits avoided, with a possible different determination of the same issue, to the irreparable injury of the defendant sued. Story, Eq. Pl. §§ 136, 138; 1 Daniel, Ch. Pl. & Pr. 281, 282; Robertson v. Carson, 19 Wall. [86 U. S.] 94; Milroy v. Stockwell, 1 Cart. (Ind.) 35.
Anticipating this objection, and with a view to avoid it, the plaintiff alleges in his bill that Davis and the life association are beyond the jurisdiction of the court and citizens of the same state as the plaintiffs, and cannot therefore be made parties without ousting the jurisdiction of the court. The learned counsel for the plaintiffs argued earnestly that these averments, under the act o'f congress of February 28, 1839, (section 737, Rev. St.,) and the 47th equity rule, dispensed with the necessity of making these parties defendants. This argument has often been made before, and always unavailingly in a case like this. The supreme court of the United States have divided parties to suits in equity into three classes: (1) formal; (2) necessary or proper; and (3) indispensable. The first two classes may be dispensed with; the third, never. The absent parties in this case are indispensable parties, as that term is defined and applied by the supreme court. The act of congress and the 47th rule effected no change of the law on this subject of parties to suits in .equity. In the leading case upon this subject the supreme court say: ‘‘The act of congress does not affect any case where persons are not joined because their citizenship would defeat the jurisdiction; and so far as it touches suits in equity it is no more than a legislative affirmance of the rule previously established by the decisions” of that court. “And the 47th rule is only a declaration for the government of practitioners and courts, of the effect of this act of congress and of the previous decisions of the court on ihe subject of that rule. It remains true, notwithstanding the act of congress and the 47th rule, that a circuit court can make no decree affecting the rights of an absent person, and can make no decree between the parties before it, which so far involves or depends upon the rights of an absent person that complete and final justice cannot be done between the parties to a suit without affecting these rights, or leaving the controversy in such a condition that its final termination may be wholly inconsistent with equity and good conscience.” Shields v. Barrow, 17 How. [58 U. S.] 130. And in a late case the court say: “The act" of congress of 1S39, and the rule of this court upon the subject, give no warrant for the idea that parties whose presence, was before indispensable could thereafter be dispensed with.” Ribon v. Railroad Co., 16 Wall. [83 U. S.] 450; and the rule established in these cases has been affirmed, Illustrated and applied in many other cases. Kendig v. Dean, 97 U. S. 423; *370Florida v. Georgia, 17 How. [58 U. S.] 508; Coiron v. Millaudon, 19 How. [60 U. S.] 115; Barney v. Baltimore City, 6 Wall. [73 U. S.] 284; Florence Sewing-Mach. Co. v. Singer Manuf’g Co., [Case No. 4,884;] Tobin v. Waikenshaw, [Id. 14,068;] Litchfield v. Register, [Id. 8,388.] The ruling in Robertson v. Carson, 19 Wall. [86 U. S.] 94, is directly in point in this case, and concludes the question.
Counsel for plaintiff urge that the rules as to parties in equity are somewhat flexible; that the 47th rule in terms empowers the courts to dispense with “necessary or proper parties, in their discretion;” and attention is called to the case .of Elmendorf v. Taylor, 10 Wheat. [23 U. S.] 152, where it is said the objection for want of parties does not affect the jurisdiction, but addresses itself to the policy of the court, and is subject to its discretion. Neither the rule nor the case cited touch the question of indispensable parties; the term itself implies they can never be dispensed with. And the absent persons in this case belong to that class, and not only cannot be brought in on account of their common citizenship with the plaintiff, but they would not be permitted to come in; and in all such cases the court cannot act at all, but will leave the parties to terminate their dispute by other means. Florida v. Georgia, 17 How. [58 U. S.] 508; Florence Sewing-Mach. Co. v. Singer Manuf’g Co., [Case No. 4,884;] Kendig v. Dean, 97 U. S. 423. And if the absent persons were not indispensable parties but only “necessary or proper,” and if the 47th rule invested the court with the discretion to proceed or not with the case in the absence of . such parties, there is nothing in the case calling for an exercise of that discretion favorable to the plaintiff, but the reverse, as will be seen from a. brief resume of the case.
The bill only seeks to set aside the contract between Davis and the company so far as It concerns the defendants’ notes; it does not seek to set aside the contract as to the other securities embraced in it; nor does the plaintiff offer to repay what the company received in cash on this sale of its securities or any part of it; or to surrender back to defendants their stock; or to place any of the parties in statu quo, nor does it seek to annul the subsequent action of the company by which it blotted out of existence nine-tenths of its capital stock, including the shares formerly owned by the defendants, and which reduction was effected by using as cash the draft received from Davis on the life association. The validity of the company’s action in reducing its stock $900,-000 by the purchase of nine thousand shares from the life association and its cancellation ought to be determined before any relief is granted; for if that action was valid, it .amounted to a ratification of all that had gone before, and the company ought not to be ..heard to assert that Davis did not pay value for securities transferred to him when it appropriated and used the draft received from him as money. But that transaction cannot be inquired into in this case, because the bill does not attack, or even refer to it; and if it did the indispensable parties to its determination are not before the court.
Passing by the originators, actors and participants in the alleged fraud, all of whom are citizens of the same state as the plaintiff, and solvent, so far as the record discloses anything on that subject; affirming the sale of the company’s securities to Davis, so far as it profited by it; keeping all that was obtained by that transaction and tne subsequent operations based on the fruits of that transaction; the plaintiff seeks a recovery against defendants, admittedly innocent of any participation in the alleged fraud, by proceeding in a mode that would deprive them of that sure recourse on the actual parties to the alleged fraud, to which they would be entitled, and in a mode that would probably result in exempting the actual perpetrators of the fraud from liability altogether.
A plaintiff occupying this attitude has no claims to the favorable exercise of an equitable discretion on the subject of parties, if such discretion exists, which is not decided. Objection for the non-joinder of necessary parties need not be taken by demurrer, plea or answer; it is open to the defendant to make it any time; and it may, and in a clear case ought to, be raised and acted upon by the court on its own motion. These conclusions render it unnecessary to decide whether the transactions between Davis and the life association and the life insurance company were or not fraudulent, or to rule upon the other questions presented at the hearing.
Decree dismissing bill without prejudice.