Taylor v. American National Bank

Shackleford, J. (after stating the facts) — The counsel for the appellants frankly state in their brief: “As the court will observe the pleadings are carefully framed for the purpose of testing the validity of the Bank’s mortgage, and its priority over or equality with the mortgages of Mrs. Taylor without the expense and trouble of taking testimony. At the hearing no technical question relating to the sufficiency of the pleadings to present these question was raised, but the Judge was requested to and did decide the demurrer upon the merits. We shall therefore address ourselves directly to the questions mentioned above, as we have no doubt counsel for the Bank will do, as all parties desire a decision upon the merits.” As we said in Burton v. McMillan, 52 Fla. 228, text 241, — 648 — 42 South. Rep. 879, text 882, 11 L. R. A. (N.S.) 159: “We pause for a moment to express our approbation and appreciation of the skill and laudable spirit exhibited by the attorneys of the respective parties in so shaping the record as to present to the court the naked questions of law involving the real merits of the case, without undue prolixity and without unnecessary complications.” We would also pay a merited tribute to the full and able briefs with which the respective counsel have favored us. The counsel for E. R. Caro, one of the defendants in the court below, has also submitted a brief, but, as Caro entered no appeal from the order overruling his demurrer, he is not before us, we have never acquired jurisdiction of his person, and we are not in a position to adjudicate his rights. We are not even apprised as to the grounds of his demurrer, ■ as the same is not copied in the transcript. We have copied the pleadings in the foregoing statement, without any attempt at condensation, in order to render this opinion the more readily intelligible. We would first call attention to Section 2936 of the General Statutes of 1906, which is as- follows: “2936. Sum Payable To Be Certain.- — -The sum payable is a sum certain within the meaning of this chapter, although it is to be paid: 1. With interest; or 2. By stated installments; or 3. By- stated installments, with a provision that upon default in payment of any installment of of interest, the whole shall become due; or 4. With exchange, whether at a fixed rate or at the current rate; or 5. With costs of collection or an attorney’s fee, in case payment shall not be made at maturity.” It will be observed that the note for $2,250.00, pur — 649 — chased by the appellee, as alleged in the bill of complaint, is for a sum certain, and would be, under the provisions of such section, even if it contained a provision to the effect that, upon default in payment of any installment of interest, which interest is payable quarter annually, the whole amount of such note should thereby become due and payable. The note contains no such provision, but the accompanying mortgage, given to secure the payment of the indebtedness and which was assigned to the appellee at the same time that the note was endorsed to it does contain such provision. It cannot be successfully contended, then, that such note was not negotiable or that the accompanying mortgage was not assignable. The appellee states in its brief that the negotiable character of the note and mortgage was conceded by the appellants at the hearing in the court below, and that it understands from the brief of the appellants that such concession is likewise made here. That this is the law see the well-reasoned case of Thorp v. Mindeman, 123 Wis. 149, 101 N. W. Rep. 417; 107 Amer. St. Rep. 1003, construing the section of the negotiable instrument law which we have copied above. Also see the discussion in Frost v. Fisher, 13 Colo. App. 322, 58 Pac. Rep. 872, and Carpenter v. Longan, 16 Wall (U. S.) 271. It should be borne in mind that the “Negotiable Instrument Law,” which has been adopted by a majority of the States, including Florida, is “primarily a codification of the rules of the law merchant.” It has also been termed “in substance a codification of the principles of the common law governing negotiable instruments.” See Section 1 of Selover’s Negotiable Instrument Law, 2nd ed. Having found that the note in question was negotiable, we must now determine whether or not, at the time it was purchased and taken by the appellee, it was overdue, as — 650 — disclosed by the allegations in the bill. Here again we must have recourse to our statute upon the subject. Section 2985 of the General Statutes of 1906, which also forms part of the Negotiable Instrument Law, is as follows: “2985. Who Is Holder in Due Course. — A holder in due course is a holder who has taken the instrument under the following conditions: 1. That it is complete and regular upon its face; 2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; 3. That he took it in good faith and for value; 4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.” As we have already seen, the note in question itself contained no provision to the effect that, upon default in payment of any installment if interest, which interest was payable quarter-annually, the whole sum of such note should thereby become due and payable, but the accompanying mortgage, given to secure the payment of the indebtedness, which was executed on the same day with the note and was assigned to the appellee at the same time that the note was endorsed to it, contains the following provision: “The mortgagor agrees that the indebtedness covered •by this mortgage shall become immediately due and payable and this mortgage shall become immediately foreclosable, for all sums secured hereby, if the said indebtedness, or any part thereof, or the said interest, or any installment thereof, shall not be paid according to the terms of the said note, or if the mortgagor shall omit the — 651 — doing of anything herein required to be done for the projection of the mortgagee.” It may be well also to call attention to the fact that the mortgage expressly states that it “is intended to be, and is, a mortgage to secure payment of” the note therein described. The appellants rely upon Graham v. Fitts, 53 Fla. 1046, 43 South. Rep. 512, 13 Ann. Cas. 149, which holds that “where a note evidencing a debt and a mortgage to secure its payment are executed at the same time in one transaction, and the mortgage refers to the note, they should be considered together in determining their meaning and effect.” Conceding the correctness of this holding, read, as it must be, in the light of the facts .stated in the opinion, we fail to see wherein it helps the contention of the appellants. In that case the note itself contained a provision to the effect that, upon default in payment of the interest, the entire sum of principal and interest should become due and payable, at the option of the payee in the note or of the legal holder thereof. Moreover, in that case, as a reading of the opinion readily discloses, the questions now before us for consideration and determination were not then presented to the court. As far back as Stewart v. Preston, 1 Fla. 10, 44 Am. Dec. 621, it was held that “as a general rule, the endorsement of the notes secured by a mortgage carries with it the mortgage,” the court deeming the principle so well settled that it stated it was not “necessary to cite authorities in support of it.” This being true, it necessarily follows, as is laid down in 1 Jones on Mortgages (6th eel.), Sec. R34, that “the debt being the principal think imparts its character to the mortgage.” In the same paragraph it is stated that “the mortgage rather is regarded as following the note, and as taking the same character; and it is the generally — 652 — received, doctrine that the assignee of a mortgage securing a negotiable note, taking it in good faith before maturity, takes it free from any equities existing between the original parties.” See the numerous authorities cited in the note thereto, and in the note on pages 149 to 152 of 5 Ann. Cas. Also see to. the same effect 1 Daniel on Negotiable Instruments (5th ed.), Sec. 834. As was said in Frost v. Fisher, 13 Colo. App. 322, 58 Pac. Rep. 872, “The general .doctrine is that the note is the principal thing, and the mortgage an accessory, and that the transfer of the debt ipso facto carries with it the security.” This is quite an instructive case, as is also Thorp v. Mindeman, 123 Wis. 149, 101 N. W. Rep. 417, 107 Amer. State Rep. 1003, wherein it was held as follows: “The promise to pay is one distinct agreement, and, if couched in proper terms, is negotiable. The pledge of real estate to secure that promise is another distinct agreement, which ordinarily is not intended to affect in the least the promise to pay, but only to give a remedy for failure to carry out the promise to pay. The holder of the note may discard the mortgage entirely, and sue and recover on the note.” Our own holding in Scott v. Taylor, filed this day, is squarely in line with the principle enunciated in the authorities which we have cited. An instructive note upon the point will be found in 35 L. R .A. 536. Even if it be true, as was held in Hodge v. Wallace, 129 Wis 84, 108 N. W. Rep. 212, 116 Amer. St. Rep. 938, that “a note providing expressly that delinquency in payment of any interest 'shall cause the whole note to, immediately become due and collectible, becomes due in such case absolutely, not merely at the option of the holder, and one thereafter taking the note from the payee takes it subject to the equities between the original parties,” that would not prove decisive of the case at bar, for the reason that — 653 — the note involved therein contains no such provision, as we have already had occasion to emphasize. As is also recognized and expressly stated in the cited case, “there are adjudications the other way, notably one particularly relied upon by counsel for the plaintiffs, Chicago Ry. Co. v. Merchants’ Bank, 136 U. S. 268, 284, 286, 10 Sup. Ct. Rep. 999, 34 L. Ed. 349, affirming (C.C.), 25 Fed 809.” The decisions of the Wisconsin court itself upon this point are by no means in entire harmony as a reading of the prior decisions cited in the opinion from which we have just quoted will show. See also Kelly v. Whitney, 45 Wis. 110, 30 Amer. Rep. 697. The Missouri courts would also seem to have been on both sides of the question. See Noell v. Gaines, 68 Mo. 649, noting the vigorous dissenting-opinion of Judge Hough; Owings v. McKenzie, 133 Mo. 323, 33 S. W. Rep. 802; Rumsey v. People’s Ry. Co., 154 Mo. 215; 55 S. W. Rep. 615; Board of Trustees of Westminster College v. Piersol, 161 Mo. 270, 61 S. W. Rep. 811; Merchants’ Nat. Bank v. Brisch, — Mo. App —, 136 S. W. Rep. 28. It must be admitted that the authorities upon this point are in irreconcilable conflict. We shall not attempt to cite all that we have examined. Neither do we feel called upon to go into any extended discussion of it, since the note with which we are dealing contains no provision to the effect that it shall be dishonored by reason of the failure to pay the installments of interest as therein stipulated. It would seem that the weight of authority supports the principle enunciated by Mr. Justice Harlan in Chicago Ry. Co. v. Merchants’ Bank, supra. See Rose’s Notes to such case; 7 Cyc. 953; U. S. National Bank of Portland v. Floss, 38 Ore. 68, 62 Pac. Rep. 751, 84 Am. St. Rep. 752; Gillette v. Hodge, 170 Fed. Rep. 313; Kelley v. Whitney, 45 Wis. 110, 30 Am. Rep. 697; Cooper v. Hocking Valley National Bank, 21 Ind. App. 358, 69 — 654 — Amer. St. Rep. 365. We would also refer especially to Judge Freeman’s able discussion in monographic note on 196 of 100 Amer. Dec. It is not alleged in the bill that, at the time of the purchase of the note and mortgage by the appellee, it knew that there had been a default in the payment of interest, but the contrary is alleged. Upon this point see First National Bank of Waverly v. Forsyth, 67 Minn. 257, 69 N. W. Rep. 909, 64 Amer. St. Rep. 415. We would also refer, with approval, to National Bank of North America v. Kirby, 108 Mass. 497, text 500, from which we take the following excerpt: “This note was due at the end of forty-eight months, and the interest was made payable annually. It was taken by the plaintiffs before maturity; but, upon it appearing that no interest had been paid for two years or more, the court was asked to rule that this alone amounted to a dishonor, and would subject the note to all defenses. It is to be noticed, that the fact relied on is only that the interest had not been paid; not that any knowledge of it was ever brought home to the plaintiffs beyond the fact that no payments were indorsed. The court declined to rule as requested; and we are of opinion that the mere fact that there appears to be no indorsement of one or more installments of interest will not justify the ruling asked for. _If, as it is argued, it be true that the failure to pay interest ever as matter of law amounts to a dishonor of a note, it can only affect one who has knowledge of the fact. Payment of interest is not always indorsed, and other evidence is often relied on to prove it. Want of indorsement does not apprise the party, to whom such note is transferred, that there has been no payment; and when the note is only taken as collateral, and accuracy — 655 — is not required in ascertaining the amount due for interest, the fact that overdue interest is not indorsed might have slight influence in putting the purchaser upon his inquiry.” It follows from what we have said that we have reached the conclusion that, upon the allegations in the hill in the instant case, which are admitted to be true by the demurrer, the appellee must be held to be a holder in due course of the promissory note, under the provisions of Section 2985 of the General Statutes of 1906, which we have copied above. In other words we are of the opinion'that the allegations of the bill show that, at the time such note was negotiated to the appellee, it “had no notice of any infirmity in the instrument or defect in the title of the person negotiating it,” and “that he became the holder of it before it was overdue.” We are strengthened in this conclusion by the provisions of Section 2989 of the General Statutes of 1906, which section is as follows “2989. Infirmity in Instrument. — To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.” We are clear that the allegations in the bill fail to show any “bad faith” in the action of the appellee in taking the note and mortgage. As is well said by Mr. Crawford in. his Annotated Negotiable Instrument Law (2nd ed.), page 54, discussing this section of such law: “The holder is not bound at his peril to be on the alert for circumstances which might possibly excite the suspicion of wary vigilance; he does not owe to the party who puts the paper afloat the duty of active inquiry in order to avert the im — 656 — putation of bad faith. The rights of the holder are to be determined by the simple test of honesty and good faith, and not by a speculative issue as to his diligence or negligence. The holder’s rights cannot be defeated without proof of actual notice of the defect in title or bad faith on his part evidenced by circumstances. Though he may have been negligent in taking the paper, and omitted precautions which a prudent man would have taken, nevertheless, unless he acted mala fide, his title, according to settled doctrine, will prevail.” See the numerous authorities there collected. This language of Mr. Crawford was also quoted with approval by Mr. Chief Justice Rudkin, in Gray v. Boyle, 55 Wash. 580, 104 Pac. Rep. 829, 133 Amer. State Rep. 1042. Also see Judge Freeman’s note thereto and the authorities which he cites. From the many cases upon this point which we have examined we select the following: Mass. National Bank v. Snow, 187 Mass. 159, 72 N. E. Rep. 959; DeTriot National Bank v. Union Trust Co., 145 Mich 656, 108 N. W. Rep. 1092, 116 Amer. St. Rep. 319; Winter v. Nobs, 19 Idaho 18, 112 Pac. Rep. 525; Union National Bank of Kansas City v. Neill, 149 Fed. Rep. 711; First State Bank of Pleasant Dale v. Borchers, 83 Neb. 530, 120 N. W. Rep. 142; Smith v. Livingston, 111 Mass. 342; Spencer v. Alki Point Transp. Co., 53 Wash. 77, 101 Pac. Rep. 509. Also see Selover’s Negotiable Instrument Law (2nd ed.), page 225. As we have already seen, the fact that the interest was payable quarter-annually and that no payments thereof were endorsed on the note or accompanying mortgage did not make the note dishonored, it being positively alleged in the bill that, at the time of the purchase of the note, the appellee had no knowledge that there had been any default in the payment of interest, or that there was — 657 — any defense on the part of Caro against the note and mortgage. The writer hereof is of the opinion that what has already been said is sufficient for the disposition of this appeal. He does not consider it necessary to consider the. contention of the appellants as to the effect of the constructive notice afforded to the appellee by the record of the $2,500.00 mortgage. However, he is in full accord with the views of the Chief Justice upon this point, who, at the request of the writer hereof, has briefly expressed them in writing, and the writer willingly makes such written statement, which here follows, a part of this opinion : The record of the $2,500.00, bearing the same date as the $2,250.00 mortgage, covering the same property and being to the same original mortgagee, was constructive notice only that it was a lien not superior to, if of equal dignity, with the $2,250.00 mortgage. The fact alleged in the bill and admitted by the demurrer that the $2,500.00 mortgage was in reality executed some days after the execution of the $2,250.00 mortgage, was, at the time of the assignment, actually or constructively admittedly not known to the assignee of the $2,250.00 mortgage, and it is assumed that the record of the $2,500.00 mortgage indicated only that it was executed on the same day as the $2,250.00 mortgage, and to the same original mortgagee, and the assignee of the $2,250.00 mortgage apparently had no knowledge or notice of the facts that the $2,500.00 mortgage was in reality executed some days after the execution of the $2,250.00 mortgage, and was in substitution of the $2,250.00 mortgage. The holder of the $2,500.00 mortgage took it with notice of the record of the $2,250.00 mortgage, which record apparently indicated that the $2,250.00 mortgage was at — 658 — least of equal dignity with the $2,500.00 mortgage. If the holder of the $2,500.00 mortgage claims superiority because the $2,500.00 mortgage was executed in substitution for the $2,250.00 mortgage, this fact was not of record, and was not -known to the bank who became the holder of the $2,250.00 mortgage and note, that had been by the maker and mortgagor left in its negotiable state in the hands of the original payee and mortgagee. The holder of the $2,500.00 mortgage cannot have priority over the bona fide holder for value of the $2,250.00 mortgage because of the latent equity of which the holder of the $2,-250.00 mortgage had no notice or knowledge. As to this latent equity the holder of the $2,500.00 mortgage has no better right than the original mortgagee had, since the record' of the $2,250.00 had not been cancelled, and the negotiable note had been left in the hands of the original payee and subsequently came into the hands of the bank as a bona fide holder for value and without notice of the latent equity growing out of the intended substitution. Tf the holder of the $2,500.00 mortgage claims superiority over the $2,250.00 mortgage by virtue of the intended substitution she should at least show either that the note and mortgage for which hers was intended to be substituted were surrendered or cancelled, or that the subsequent holder of the $2,250.00 mortgage had knowledge or notice of the intended substitution or took the assignment under such circumstances as amount to a fraud or had faith, or some other ground of equitable right to priority. It follows that all of the contentions of the appellants must be decided adversely to them, and that the order overruling the demurrer must be affirmed. Whitfield, C. J., and Taylor, Cockrell and Hocker, J. J., concur.