Court Opinion

ID: 9866296
Source: CourtListenerOpinion
Date Created: 2023-09-26 03:05:27.826327+00
Date Added: 2024-06-11T14:18:20.467781
License: Public Domain

On the Merits.
The facts as shown by the testimony offered at the hearing of the cause are substantially as follows:
During the year 1920, the appellant, J. L. Wilkinson, was indebted to the Shelby Citizens’ Bank, which after-wards became the Shelby-Citizens ’ Bank & Trust Company, in the sum of about seventeen thousand dollars, evidenced by a promissory note to which was attached as collateral security warehouse receipts for ninety-nine bales of cotton. The price of cotton having declined, the bank called upon the appellant to put up additional security for this indebtedness. Thereupon he pledged to *536the hank a note for two thousand two hundred fifty dollars, signed by. his mother, Mrs. M. C. Wilkinson, andi secured by a deed of trust on her home. This deed of trust was duly recorded, and constituted a first lien on the home of Mrs. Wilkinson. Thereafter this indebtedness of J. L. Wilkinson was rearranged, a large sum apparently being charged to profit and loss, while the balance was renewed in two notes,- one for the sum of nine thousand five hundred eighty-nine dollars and fifty-three cents and the other for two thousand dollars. The cotton receipts were continued as security for the large note, while the above-mentioned note and deed of trust, executed by Mrs. M. C. Wilkinson to J. L. Wilkinson, were by agreement attached to the two thousand dollar-note as collateral security therefor. None of this indebtedness having been paid, except such part thereof as may have been discharged by the sale of cotton represented by the pledged cotton receipts, the bank applied to the credit of the large note the sum of nine hundred ninety-six dollars and ninety-six cents which J. L. Wilkinson had on deposit in the bank. Wilkinson apparently resented this action on the part of the bank, and contended that if applied at all, the deposit should have been applied to the note which was secured by the pledge of the deed of trust on his mother’s home, and he thereafter refused to renew or pay his note to the bank. The bank officials testified that after some controversy with Wilkinson it was finally agreed that the bank' would waive the interest accrued on this two thousand dollars-and allow sufficient credit on the principal to leave a balance of two thousand and fifty dollars due, and that it would accept a note for that sum signed by Mrs. M. C. Wilkinson, payable directly to the bank, this note to be secured by a new deed of trust on Mrs. Wilkinson’s home, thereby entirely releasing J. L. Wilkinson from this note. The president of the bank further testified that it was agreed.that upon the execution of the new note and deed of trust by Mrs. *537M. C. Wilkinson, the former deed of trust would be satisfied, canceled and surrendered, thereby causing the later deed of trust to become the-first lien upon the property covered thereby, but that when the new deed of trust was delivered to the bank, the bank officials, through inadvertence and as a result of negligence on their part, delivered to J. L. Wilkinson the prior note and deed of trust executed by Mrs. M. C. Wilkinson to the said J. L. Wilkinson, without placing thereon any notation showing that this note had been paid and satisfied, or that the said note and deed of trust had ever been held by the bank.
J. L. Wilkinson testified that there was no agreement between him and the officers of the bank that the note and deed of trust executed in his favor by his mother was to be paid or satisfied by the new note and deed of trust executed by her to the bank, but that, on the contrary, it was distinctly understood and agreed that the lien of the deed of trust to the bank was to be secondary to that of the deed of trust in his favor, and that the note and deed of trust in his favor was to be surrendered to him as live instruments constituting a first lien on the property, as indicated and shown by the record thereof in the chancery clerk’s office. Mrs. M. C. Wilkinson testified that when she executed the deed of trust to the bank she understood that it was a second lien on her property and that it was intended to and did secure a bona-fide indebtedness to her son which she owed him in addition to the two thousand two hundred fifty dollars secured by the first deed of trust, and that the indebtedness secured by each of these deeds of trust was due and owing by her at the time of the trial. J. L. Wilkinson likewise testified that the note and deed of trust to the bank was in settlement and satisfaction of an indebtedness due him by his mother, which was entirely separate from and additional to the indebtedness secured by the first deed of trust.
Some months after the execution of the deed of trust to the bank and the surrender of the old note and deed *538of trust to J. L. Wilkinson, the payee therein, the said J. L. Wilkinson, assigned the note and deed of trust to his brother, M. L. Wilkinson, as collateral security for a note of about three thousand four hundred dollars, executed by J. L. Wilkinson in favor of the said M. L. Wil- • kinson. Both J. L. and M. L. Wilkinson testified that this three thousand four hundred dollar-note was given for money loaned by M. L. Wilkinson to J. L. Wilkinson at various times, the note including the sum of these loans and accrued interest, and that these loans had been made under an agreement between them that if J. L. Wilkinson was unable to repay the sum loaned whenever demanded, he would assign the indebtedness of his mother to him as security for or in part payment of these loans. M. L. Wilkinson also testified that he had no knowledge whatever of the fact that the bank had ever held the note and deed of trust which were assigned to him, that he did not know and had no reason to suspect that the bank held or claimed a first lien on the property covered by his deed of trust, and that he had no knowledge whatever of the fact that the bank held any deed of trust on the said property.
The disputed question of fact as to what, the agreement between the bank and J. L. Wilkinson was as to the effect of the deed of trust from Mrs. Wilkinson to the bank, and as to the priority of the lien of this instrument, was decided by the court below in favor of the bank; and therefore, for the p’urpose of this decision, it must be considered as settled that it was (¡agreed between the parties that the original indebtedness to J. L. Wilkinson was to be satisfied by the execution of the new note and deed of trust, and the bank was thereby to secure a first lien on the property. However, with this fact settled in favor of the bank, we are still of the opinion that under the proof and law applicable thereto, the decree of the chancellor establishing the priority of the lien of the bank’s deed of trust must be reversed.
*539Aside from whatever suspicion may he aroused on account of the relationship of the parties, there is no proof in this record to controvert the positive testimony that M. L. Wilkinson, the assignee of the prior deed of trust, had no knowledge of the existence of the second deed of trust, or of the claim of the hank that the first deed of trust had been paid and satisfied, or that it held a lien that was superior to the lien of the instrument which was assigned to him. Through the admitted gross negligence of the officials of the bank, this note and duly recorded deed of trust were placed in the hands of the payee in the instruments, without any sort of mark or notation thereon to indicate that they had been paid or in any manner satisfied or canceled, or that the lien of the deed of trust was not what is purported on its face and upon the records—a valid, subsisting, first lien on the property conveyed thereby.
Under these facts there are two principles which we consider applicable, either of which would require a reversal of the decree of the court below.
The note which the bank surrendered to the payee, J. L. Wilkinson, ^although overdue, was negotiable, and it seems to be the settled rule that the assignee of overdue negotiable paper takes it with notice of all the equities or defenses which the maker may have, but he does not take it with notice of the secret equities of third parties, or those arising out of collateral transactions.
In the case of Gee v. Parks (Tex. Civ. App.), 193 S. W. 757, this rule is clearly stated and many authorities are collated sustaining it, the language of the court upon this point being as follows:
“It is contended by appellant that appellee is affected with the equity of Mrs. Gee, for the reason that the note which he purchased from the trustee in bankruptcy was past due. The purchaser of a past-due note takes it with notice of any defense to the note which the 'maker may have, but does not take it with notice of the secret equities of third persons.”
*540In the ease of Plymouth Cordage Co. v. Seymour, 67 Minn. 311, 69 N. W. 1079, the rule is stated in the following language:
‘ ‘ The mere fact that the notes were past due when they were pledged to the trustees is not, it would seem, sufficient to charge them with notice of the equity of the plaintiff, a third party. The general rule is that a purchaser of past-due commercial paper takes it subject to all equities existing between the parties to the paper, but not to any latent equities in favor of a third party. A purchaser, however, with notice thereof, acquires only the title of his assignor; and the burden rests upon such purchaser to bring himself within the rule in favor of bona-fide purchasers. He is bound to deny notice of the prior equity, and prove his want of notice. This fact rests within his own knowledge.”
In the case of Beneficial Loan Ass’n v. Hillery, 95 N. J. Law, 271, 113 A. 324, the Supreme Court of New Jersey said:
“Next, it is argued that the rule should be made absolute because the plaintiff was not a holder of the note in due course, not having acquired it before maturity and in good faith. It is true that the plaintiff is not a holder in due course within the meaning of the statutory definition, in that it did not acquire the instrument before maturity; but that fact is entirely immaterial in determining the plaintiff’s right. The holder of a promissory note which comes into his hands after maturity takes it subject to all legal defences which the maker may have against its enforcement, but with that exception his right of recovery is as complete as if he was a holder in due course.”
In the case of Hanssen v. Pusey & Jones Co., 276 F. 296, a United States District Court of Delaware stated the rule in the following language:
“The second contention overlooks the doctrine that overdue paper is negotiable, and that an indorsee takes *541the paper subject only to such equities as attach to the notes themselves, and that in his hands it is not subject to claims against the payee, or an intermediate indorser, arising out of collateral matters or independent transactions. 3 R. C. L. 1046; Daniel on Negotiable Instruments, section 725.”
The case last above mentioned was appealed, and in affirming the judgment of the district court, the Circuit Court of Appeals of the Third Circuit, in a decision appearing in 279 F. 488, said:
“The general rule, or, perhaps, the common-law rule, followed by the Supreme Court of the United States in National Bank of Washington v. Texas, 20 Wall. 72, 22 L. Ed. 295, is stated by Mr. Justice Swayne as follows: ‘The transferee of overdue negotiable paper takes it liable to all the equities to which it was subject in the hands of the payee, but those equities must attach to the paper itself, and not arise from any collateral transaction. A debt due to the maker from the payee at the time of the transfer cannot be set off in a suit by the indorsee of the payee, although it might have been enforced if the suit had been brought by the latter.’ ”
In the case of National Bank of Washington v. Texas, 20 Wall. 72, 22 L. Ed. 295, from which the Circuit Court of Appeals took the above-mentioned quotation, in a further discussion of this rule, the Supreme Court of the United States said:
“Chancellor Kent, speaking of this rule in this class of cases, says: ‘ The assignee can always go to the debtor and ascertain what claims he may have against the bond or other chose in action which he is about purchasing from the obligee, but he may not be able with the utmost diligence to ascertain the latent equity of some third person against the obligee. Be has not any object to which he can direct his inquiries, and for this reason the assignee, without notice, of a chose in action, was preferred in the late case of Redfearn v. Ferrier (1 Dow. *54250), to that of a third party setting up a secret equity against the assignor. Lord Eldon observed in that case „ that if this were not so no assignment could ever be taken with safety.’ ”
Under the rule as announced in these authorities, we have reached the conclusion that since there is no testimony in the record to controvert the positive testimony of the assignee of the note and deed of trust that he had no notice or knowledge of the claim of the bank, arising out of a collateral transaction, the decree of the court establishing the priority of the lien of the deed of trust held by the bank must be reversed.
There is an additional proposition which we think, under the facts, requires a reversal of the decree. The bank through its proper officers, negligently placed this note and deed of trust in the hands of the payee, J. L. Wilkinson, without any mark or notation thereon to in any way indicate that the note had been paid or that the lien of the deed of trust had been canceled or in any way subordinated to the lien of the deed of trust held by the bank. By the neglect of these officers, these instruments were placed in the hands of the payee of the note in such form and condition that he was thereby clothed with the apparent authority to negotiate the note and security. The deed of trust was properly recorded in the office of the chancery clerk of the county, and no notation was ever placed upon the records to indicate that this deed of trust had ever been held by the bank, or to indicate that the lien thereof had been subordinated to any other lien. In view of the fact that the testimony is uncontroverted that the assignee of these instruments had no notice or knowledge of the equities of the bank, or its claim to a superior lien, we think the loss, if any, resulting from the negligence of its officers, must be borne by the bank. This doctrine was recognized by this court in the case of Hall v. Box, 131 Miss. 218, 94 So. 221, in which the court said:
*543“We are of the opinion that the plaintiff should have been given the instructions set out announcing the principle that if the defendant was negligent in the transaction that he would be liable on the note in the hands of a bona-fide purchaser. The issue should have been submitted to the jury as to whether or not, under all of the facts and circumstances, Box was guilty of negligence in failing to exercise the care and prudence that an 'ordinary man would have exercised. We think that a party who signs a note without exercising such ordinary and reasonable care as an ordinarily prudent person should under the circumstances, and his note passes into the hands of a purchaser for value without notice, and he cannot set up a defense that involves his negligence as against such bona-fide purchaser.”
The decree of the court below will therefore be reversed and the cause remanded.

Reversed and remanded.