American National Bank v. American Wood Paper Co.

Stiness, J. The plaintiff sues to recover the principal and interest due on certain bonds and coupons issued by the defendant May 1, A. D. 1890, and payable May 1, 1900, or sooner after five years. The bonds are secured by a mortgage of all the defendant’s property, in the State of Pennsylvania, given to a trustee for the bondholders, in which it is provided that in case of default in the payment of interest for more than six months, the principal of said bonds shall be due and payable. The declaration sets out the bonds and mortgage, profert of which is made, and alleges default in payment of interest for more than six months after demand made therefor. The defendant demurs to the declaration, upon several grounds ; but the two grounds pressed in the argument are that the bonds are not negotiable so as to give the plaintiff a right of action in its own name, and that the terms of the mortgage cannot be imported into the bonds so as to give a right of action for the principal thereof before maturity. We think that the bonds must be treated as negotiable securities. While there has been some diversity of opinion upon this subject, the tendency of recent decisions and the weight of authority and reason seem now to be in favor of negotiability. At first, before such' bonds had become common, courts naturally held that they lacked the technical and established characteristics of negotiable instruments. Thus, in Crouch v. The Credit Foncier, L. R. 8 Q. B. 374 (1873), it was held that the contract embodied in similar bonds prevented them from being promissory notes, even if they had been without a seal, and that the custom to treat them as negotiable, being of recent origin, could not attach an inci *153 dent to a contract contrary to the general law. But in Goodwin v. Robarts, L. R. 10 Exch. 337 (1875), the court, by Cockburn, 0. J., does not concur in thinking the latter ground conclusive. In the recent case Venables v. Baring, L. R. 3 Ch. Div. 527 (1892), American railroad bonds, upon the evidence of an American lawyer as to their negotiability in this . country, were held to have acquired in England, in the city of London, among English merchants, the character of negotiability. Notwithstanding the limitations of this decision we think it may be taken as practically settling the rule in England. See also In re Imperial Land Co., L. R. 11 Eq. Gas. 478. In this country the decisions have been quite explicit. The principle on which they rest was well stated by Mr. Justice Grier, in Mercer County v. Hacket, 1 Wall. 83 (1863), as follows : “This species of bonds is a modern invention, intended to pass by manual delivery and to have the qualities of negotiable paper; and their value depends mainly upon this character. Being issued by States and corporations they are • necessarily under seal. But there is nothing immoral or contrary to good policy in making them negotiable, if the necessity of commerce require that they should be so. A mere technical dogma of the courts of common law cannot prohibit the commercial world from inventing pr using any species of security not known in the last century. Usage of trade and commerce are acknowledged by courts as part of the common law, although they may have been unknown to Bracton or Blackstone. And this malleability to suit the necessities and usages of the mercantile and commercial world is one of the most valuable characteristics of the common law. When a corporation covenants to pay to bearer and gives a bond with negotiable qualities, and by this means obtains funds for the accomplishment of the useful enterprises of the day, it cannot be allowed to evade the payment by parading some obsolete judicial decision that a bond, for some technical ■ reason, cannot be made payable to bearer. That these securities are treated as negotiable by the commercial usages of the whole civilized world and have received *154 the sanctions of judicial recognition, not only in .this court (White v. Vermont R. R., 21 How. 575), but of nearly every State in the Union, is well known and admitted.” After this strong statement it is needless to say more, except to refer to a few cases to the same effect. Kneeland v. Lawrence, 110 U. S. 209 ; Chicago Railway Co. v. Merchants’ Bank, 136 U. S. 268 ; DeHass v. Roberts, 59 Fed. Rep. 853; Reid v. Bank of Mobile, 70 Ala. 199 ; National Exchange Bank v. Hartford, Prov. & Fishkill R. R. Co., 8 R. I. 375 ; 1 Randolph on Commercial Paper, § 71, note 1, and cases cited. It is true that some States have statutes which declare bonds of this kind to be negotiable, (see 2 Amer. & Eng. Ency. of Law, 319), and the point is taken that it is not so in this State, since Pub. Stat. R. I. cap. 112, §§ 6, 7, relate only to promissory notes. We do not think, however, that this fact prevents us from holding these'bonds to be negotiable. Such statutes are declaratory and remedial and are evidently not intended to exclude other forms of negotiable paper. Bonds of this sort are clearly within the intent of the statute to give a title by delivery and a right of action to the holder of negotiable paper, and the bonds in effect are promissory notes. The special provisions contained therein are not such as to deprive them of their fundamental character of a promise to pay at a certain time. These bonds are not given as collateral to a note secured by mortgage, but the mortgage is security for the bonds themselves. Riker v. Sprague Manuf. Co., 11 R. I. 402. See Costello v. Crowell, 127 Mass. 293, and 134 Mass. 280. Upon the question of importing the terms of the mortgage into the contract, so as to give a present right of action for the principal, we think the objection is well taken. The bonds do not make the terms of the mortgage a part of the contract. They simply recite that they are secured by a mortgage. Turning to the mortgage we find that in case of default one third of the bondholders, in amount, may require the trustee to sell the property and in the same clause occurs the provision that the bonds shall forthwith become due and payable upon the default. We think that this is *155 a provision only for the purposes of foreclosure by entry or sale. If one third, in amount, of the bondholders is required' for a sale, out of the proceeds of which the principal is to be paid, it would be quite incompatible with this limitation to hold that a single bondholder could precipitate the maturity of the bonds by a suit. When one is due all are due, and the provision implies that the large majority may think it best not to foreclose at once, and, if so, the right to give time is secured in this provision. It is a provision for a' special purpose and not intended to give a right of action upon default, independently of foreclosure proceedings. Such is the construction given to similar provisions in Bachelder v. Council Grove Water Co., 131 N. Y. 42; White v. Miller , 52 Minn. 361; McClelland v. Bishop, 42 Ohio St. 113 ; Mallory v. West Shore & Hudson River R. R. Co., 35 N. Y. Superior Court, 114. Richard B. Comstock & Rathbone Gardner, for plaintiff. Arnold Green & James Tillinghast, for defendant. Of the cases cited by the plaintiff to sustain the point that the bonds and mortgage, being connected and contemporaneous, are to be construed together, nearly all are suits for foreclosure, or actions for a balance due after foreclosure. This is a very different matter. Clearly after such an agreement the obligation may be treated as due for the purpose of foreclosure and the maker of the note or bond would be liable for the balance remaining due, in some form of action; but whether upon the note or the covenant we are not now called upon to say. Such a liability, however, does not give the right of action which is claimed in this case. Venables v. Baring, supra, was a suit to establish a title. Bank v. Peck, 8 Kan. 660, and Chambers v. Marks, 93 Ala. 412, are in favor of the plaintiff’s claim, but we think that the weight of authority, the purpose of the provision and the reason on which its construction depends are against it. Our conclusion is that the demurrer to the negotiability of the bonds must be overruled and the demurrer to the statements of the plaintiff’s present right of action must be sustained.