Court Opinion

ID: 3224553
Source: CourtListenerOpinion
Date Created: 2016-07-05 16:00:25.781884+00
Date Added: 2024-06-11T13:51:50.640903
License: Public Domain

A majority of the court hold that the purchaser of a negotiable warehouse receipt, under the Uniform Warehouse Receipts Act (Code 1923, §§ 10505-10564; Uniform Laws Annotated, vol. 3), is not protected against a landlord's lien for rent in any case where he has knowledge of facts which would put a prudent man on inquiry, and which, if followed up, would disclose to him the existence of the lien.
This, of course, is the common-law rule applicable to purchasers of property in general, including nonnegotiable instruments. Lomax v. Le Grand, 60 Ala. 537; Scaife v. Stovall,67 Ala. 237; Townsend v. Brooks, 76 Ala. 311; Kyle v. Ward,81 Ala. 120, 1 So. 468; Warren v. Barnett, 83 Ala. 208, 3 So. 609; Atkinson v. James, 96 Ala. 214, 10 So. 846; Foxworth v. Brown,114 Ala. 299, 21 So. 413; Id., 120 Ala. 59, 24 So. 1; Norton v. Orendorff, 191 Ala. 508, 67 So. 683; Street v. Treadwell,203 Ala. 68, 82 So. 28.
More specifically, it has been thoroughly settled that a purchaser of crops is charged with knowledge of the lien, as a matter of law, if he knows they were raised on rented premises. Lomax v. Le Grand, 60 Ala. 537; Gillespie v. McClesky, 160 Ala. 289,299, 49 So. 362; Sloan v. Hudson, 119 Ala. 27, 24 So. 458; City Nat. Bank v. Nelson, 214 Ala. 297, 107 So. 849.
Under our former Warehouse Receipts Act (Code 1907, §§ 6135 (4222) 1178), the common-law rule as to notice was applied to purchasers of the receipts for value — this for the reason that the simple terms and narrow scope of the act embraced but two purposes: (1) To prevent the issue of false receipts by warehousemen; and (2) to permit the transfer of the storedgoods by the transfer of the receipt as their symbol. There was nothing in the act otherwise affecting the status and rights of the purchaser of such receipts — nothing suggestive of a change as the test or measure of the good faith that would protect him against unknown liens. Commercial Bank v. Hurt,99 Ala. 130, 141, 12 So. 568, 19 L.R.A. 101, 42 Am. St. Rep. 38; 17 Ann. Cas. 672, 673, note.
It must be understood that the underlying principle of the common-law rule as to good faith in the purchase of property is the exercise of due diligence by the purchaser to ascertain the existence of outstanding liens or charges, which means simply the exercise of due care, or the absence of negligence. "If the want of notice — of actual knowledge or information — result from the failure to use proper diligence to ascertain whether the fact or right exists, protection against it cannot be claimed." Per Brickell, C. J., in Lomax v. Le Grand, 60 Ala. 537,543. In Chapman v. Glassell, 13 Ala. 50, 55
(48 Am. Dec. 41), it was said that "want of notice of a fact, which is the result of a want of that diligence which the law requires for its ascertainment, furnishes no ground for protection." This was repeated in Herbert v. Hanrick, 16 Ala. 581, 597, and McGehee v. Gindrat, 20 Ala. 95, 101. This basis of diligence or due care has been constantly recognized. Overall v. Taylor,99 Ala. 12, 16, 11 So. 738; M.  M. R. Co. v. Felrath, 67 Ala. 189,191; Taylor v. A.  M. Ass'n, 68 Ala. 229, 240. Finally, in 27 R. C. L. 710, 711, § 475, the rule is thus explained:
"The reason on which this rule is based is that notice is imputed because of the negligence of the purchaser in making the inquiry. Therefore, to charge a purchaser with constructive notice, the circumstances relied on as putting him on inquiry must be such as would naturally raise a suspicion in the mind of a reasonably or ordinarily prudent man and necessitate an inquiry, or such that a charge of negligence or neglect of duty in failing to make inquiry may be reasonably based" (italics supplied).
See, also, 3 R. C. L. 1072, §§ 278, 279, explaining the difference between negligence in this connection and willfulignorance, which is bad faith or dishonesty; and 8 Corpus Juris, 501, § 710, and page 505, § 711. The difference *Page 96 
between "negligence" and "dishonesty" (34 L.R.A. 69) is well stated in Cheever v. Pittsburg, etc., R. Co., 150 N.Y. 59,44 N.E. 701, 34 L.R.A. 69, 55 Am. St. Rep. 646.
With this understanding of the common-law rule, we now consider the provisions of the Uniform Warehouse Receipts Act, which has been adopted by 46 states, and which was adopted by Alabama on September 25, 1915 (Acts 1915, p. 661), and is embodied in sections 10505-10564, Code 1923.
The purpose of this act is "to provide a uniform law for the issuing, assignment or transfer of such receipts, and to fix the rights and liabilities of all parties to, or connected with, the issue, assignment, transfer or negotiation of such receipts, and to regulate the same." Acts 1915, p. 661. It contains 61 sections, and deals elaborately anddistinctively with the rights and title acquired by negotiation on the one hand (section 10550), and by a mere transfer or assignment on the other (section 10551).
Section 10550 declares:
"A person to whom a negotiable receipt has been duly negotiated acquires thereby: (1) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value; and (2) * * *"
Section 10557 declares that:
"The validity of the negotiation of a receipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the negotiation, or, * * * if the person to whom the receipt was negotiated, * * * paid value therefor, in good faith, without notice of the breach of duty or loss, theft, fraud, accident, mistake, duress or conversion."
Section 10560 declares:
"In any case not provided for in this article, the rules of law and equity, including the law merchant, * * * shall govern." (Italics supplied.)
Section 10562, defining terms used in the act, declares:
"(1) * * * (2) A thing is done in 'good faith' within the meaning of this article when it is in fact done honestly, whether it be done negligently or not."
"Honestly," in this connection, scarcely needs definition, but Webster's New International Dictionary defines it as "free from fraud, guile, or duplicity." Certainly a thing is honestly done if the doer is not at the time conscious of fraud or wrong in the act or its consequences. "The cardinal principle of the act — which has been adopted in many states — is to give effect, within the limits stated, to the mercantile view of documents of title." Commercial National Bank v. Canal-La. Bank, 239 U.S. 520, 36 S.Ct. 194, 60 L.Ed. 417, Ann. Cas. 1917E, 25.
The majority view is that there is nothing in this act that changes or enlarges the common-law rule as to purchasers for value. With this view I am unable to agree. To my mind, the meaning and effect of the definition of good faith found in section 10562 (section 58 of the act) is too plain to permit of valid controversy.
Prior to the adoption of our Negotiable Instruments Law (Code 1923, §§ 9029-9214) — which merely declares the pre-existing law in that respect — this court, per Stone, C. J., stated the rule for negotiable instruments as follows:
"The rules as to notice, sufficient to charge a purchaser of commercial paper before maturity, are widely different from those which obtain in the purchase of property and of noncommercial paper. * * * 'Even gross negligence at the time of purchase does not, alone, defeat the purchaser's title a purchaser may have had suspicion of a defect of title, or knowledge of circumstances which would excite such suspicion in the mind of a prudent man; or he may have disregarded notices of stolen bonds; and yet, if he has purchased for value in good faith, his title cannot be impeached. * * * It must be shown that he did not purchase honestly.' " (Italics ours.) Spence v. M.  M. Ry. Co., 79 Ala. 576, 586.
I see no escape from the conclusion I have reached that the definition of good faith in section 10562 (section 58 of the act) is a condensed, but comprehensive, restatement of the rule thus stated by Chief Justice Stone. In each, honesty (the exclusion of bad faith) is made the test, and in each merenegligence (the failure to diligently follow up suspicious or suggestive facts) is excused.
How, then, can any court say, in the face of the statute, that one who has purchased a negotiable warehouse receipt by negotiation honestly, though negligently, is not to be protected against an unrecorded lien? I agree with the Supreme Court of the United States, as noted above, that such protection is a cardinal purpose of the act. The majority hold either that the statute has not changed the common-law rule of notice, or that the purchaser's knowledge of the seller's tenancy renders his purchase dishonest as a matter of law. In my judgment, neither alternative is defensible, and both are violative of the plain, unambiguous language of the statute.
I agree that in general the question of honesty or bad faith depends upon the character and cogency of the facts known to the purchaser when he buys, and will usually be a matter for the jury to determine. 3 R. C. L. 1075, § 280. It was clearly a jury question in this case. It will not do to say that this defendant's former knowledge of the fact that his vendor was a tenant of the plaintiff several years before his purchase is inconsistent with the theory of an honest purchase. He *Page 97 
may have honestly forgotten the fact, or he may, in any case, have credited the statement actually made to him by the seller that the cotton represented by the receipts was free of all liens and charges, or he may have negligently assumed that this seller would never be guilty of selling the receipts wrongfully or in fraud of his landlord's rights, or a long course of such dealings with the tenant, without ever a complaint from the landlord, may have induced a belief, however imprudent, that the tenant habitually paid up his rent, and had done so in this instance, and all this without anything approaching dishonesty or bad faith, as we may choose to call it.
The trial court refused to defendant a number of special instructions framed in the very language of the act (Code, § 10562; Act, § 58), predicating protection to him against plaintiff's lien if he took the receipts "honestly," and did not know of the lien, and instructed the jury ex mero motu that knowledge that the cotton was raised on premises rented from plaintiff, or knowledge of any other facts which would excite suspicion and cause a reasonable man to inquire about it, and lead to its discovery, would destroy his status as an innocent purchaser, and give plaintiff a superior right. In these matters I think the trial court was clearly in error.
Another point of view is worth noting: If, as the majority hold, the language of the statute makes no change in the common-law rule of notice, why is not the defendant entitled to have instructions given to the jury in the simple language of the statute? It is not consistent to say that the statute is in harmony with the common-law rule, but that aninstruction based on that statute is in conflict with that rule.
The majority are content to dispose of the statutory definition by simply saying:
"We cannot believe that this was intended by the Legislature to overturn or upset the well-understood meaning of a bona fide purchaser as heretofore defined or as used in the article."
The fallacy here, as I think is very clear, is in the assumption that there had been heretofore only one definition of a bona fide purchaser. On the contrary, there have been two distinct and conflicting definitions for more than 100 years (8 Corp. Jur. 500, § 7100), the one applicable to purchasers of property and of nonnegotiable instruments, and the other to purchasers of negotiable instruments. Spence v. M.  M. R. Co.,79 Ala. 576, 586. The obvious purpose of section 58 of the Uniform Warehouse Receipts Act is to make clear which of these two variant definitions or theories should be applied to bona fide purchasers of negotiable warehouse receipts, and it clearly adopts the rule applicable to negotiable instruments in general; that is, the rule of honesty as opposed to the rule ofnegligence. In excluding negligence it rejects the very heart of the common-law rule; and in making honesty the test it adopts the very heart of the negotiable instruments rule. The purpose, therefore, cannot be misunderstood.
Our case of Farmers' Warehouse Co. v. Barnett, 214 Ala. 202,107 So. 46, correctly held that as against a legally recorded title to the property — a mortgage — a purchaser of the warehouse receipt acquired no title. That case presents no question of good or bad faith. It involves, not a rule of evidence, but of substantive law, and the law protects absolutely every legally recorded title. The doctrine of bona fide purchaser has never been conceived of as affecting such a title. Nor can one not the owner of property defeat the true owner's title by the expedient of depositing it in a warehouse and wrongfully negotiating receipts taken in his own name, even to a bona fide purchaser for value. Climber Motor Corporation v. Fore (Tex.Civ.App.) 273 S.W. 284, 288. Statutes providing for the negotiation of warehouse receipts are intended to protect the negotiatee against latent equities only, and not against the legal title of an innocent owner. Ala. State Bank v. Barnes, 82 Ala. 607, 616, 2 So. 349; Nat. Union Bank v. Shearer, 225 Pa. 470, 74 A. 351, 17 Ann. Cas. 664; Decker v. Milwaukee Cold Storage Co., 173 Wis. 87, 180 N.W. 256, 14 A.L.R. 416, 421; Weaver Cotton Co. v. Batesville Compress Co.,168 Ark. 387, 270 S.W. 509, 38 A.L.R. 1200.
I concur in the reversal of the judgment on the ground stated in the opinion of the court, but must dissent from the construction given to section 10562 of the Code (Act, § 58), and from the rule of notice declared as applicable to a bona fide purchaser of negotiable receipts for value.
BROWN, J., concurs in the foregoing opinion.