Fairchild v. Brown

Huntington J. delivered the opinion of the court. The plaintiff seeks, by this bill, to obtain the possession of certain promissory notes, and the securities attached to them, now in the hands of the defendant, Brown, to which, lie alleges, he has an equitable title superior to that of the holder. We are of opinion, that the case presented by the record, is not one which calls for the interference of the court, to protect any equitable rights of the plaintiff. Although L. & A. Freeman are made parties to the bill, they seek no relief. They do not insist upon any equities, disclosed, by the facts found by the committee, which require the protection of the court, in their behalf, against the claims of the defendant Brown. The controversy is wholly between the plaintiff and Brown:-and the question submitted to us, is, whether the former has made out a case, which will justify any decree in his favour ? That a gross fraud has been practised upon the plaintiff, which has deprived him of his property, and caused him to sustain a severe loss, is abundantly evident from the record before us :-And it is as clearly manifest, that neither Luther nor Arza Freeman, nor Brown, were parties or privies to that fraud. No imputation rests upon them, or either of them. They have acted, in all respects, with perfect honesty and good faith. While, therefore, it is cause of regret, that the effects of a fraudulent combination should ever be felt, except by those who perpetrate or are privy to it; and although a court of equity will lend its aid, so far as justice and established principles will permit, to prevent such consequences from being visited upon the innocent subject of the fraud, it will take care, in its endeavours to do justice to one innocent person, not. to do injustice to others equally innocent and equally entitled to its protection. It is too clear to admit of argument, that the makers of the three notes payable to Bales, had a perfect, right to substitute for them, the five notes, which were subsequently executed and delivered to Botsford, Hawley & Co. West had the lawful possession of them-they had been “ signed over” and delivered to him, before they became due-they were negotiable, — 36 — -he requested the makers to execute the new notes, and they were accordingly executed and delivered to Botsford, Hawley & Co., “ in payment of the three first mentioned notes, which were then taken up,” without any notice either to L. or A. Freeman, that West was not the lawful owner of them. The three notes were, therefore, paid in good faith, and delivered to the makers, who have an equitable, as well as legal, right to retain them, as against all the parties to this bill. If the plaintiff has any equitable claim arising from the facts found in this case, which constitutes a part of the record, it must attach on all, or some of the five notes, made payable to Botsford, Hawley & Co. Three of these notes were negotiable; and were purchased by Brown, before they became due, “ for a sufficient and valuable consideration, paid in good faith, and without notice of any wrong or fraud concerning them.” These three notes are dated August 31, 1826; signed by L. & A. Freeman ; made payable to Botsford, Hawley Co., or bearer ; each for the sum of 346 dollars, 76 cents ; one payable one year from May 1, 1827,-and one three years from May 1, 1827; and were purchased by Brown, on the 29th Feby., 1828, The other is payable four years from May 1, 1827, and was purchased, by Brown, on the 2d of July. 1829. It cannot be seriously contended, that the purchaser, under such considerations, is not the equitable and legal owner of them. It is too well established, by authority, founded on obvious principles of justice and commercial policy, to admit of doubt. These notes were taken, by Brown, innocently ;-in the course of trade ;-purchased for a valuable consideration . paid at the time ;-due caution was used ;-there was neither gross neglect, nor any circumstance raising the slightest suspicion of the legality of the transfer;-they were negotiable-and not due. Peacocks v. Rhodes, Doug. 633. Collins v. Martin, 1 Bos. & Pull. 648. Grant v. Vaughan, 3 Burr. 1516. Bay v. Coddington & al. 5 Johns. Ch. Rep. 54. S. C. 20 Johns. Rep. 637. 1 Madd. 153. The two other notes are dated August 31, 1826 ; are signed by Luther Freeman, payable to Botsford, Hawley & Co., two years from May 1, 1827, for the sum of 346 dollars, 76 cents; and were purchased by Brown, Feby. 29, 1828 ; the other, signed by Luther Freeman, payable on the first of May 1829, to Botsford, Hawley & Co., for 350 dollars, and was — 37 — purchased, by Brown, some time in the year 1829, It appears, that these notes are not negotiable, not being parable to order, or bearer, and one of them was purchased, by Brown, when it was over-due. It is insisted, that as to these, the plaintiff is entitled to a decree in his favour. We think otherwise. We are of opinion, that the plaintiff has not any equitable claim to these notes, superior, or equal to that of the defendant Brown. 1. The fraud which was committed on the plaintiff, was the consequence of his own folly or negligence. He delivered the three notes payable to Bales, and the securities therefor, ditectly to West, instead of a third person, as escrows, to be delivered over, on the performance of certain conditions, without any indemnity, and relying solely upon a receipt, and the personal confidence he reposed in West. That confidence was mis-placed. This was his fault, as well as his misfortune. West, by means of it, was enabled to commit a fraud, the consequences of which, the plaintiff seeks, through the aid of the court, to visit upon the defendant. A court of equity cannot require the pecuniary loss sustained by the plaintiff, by means of a fraud committed under such circumstances, to be reimbursed, by one who has acted in good faith and without notice of such fraud. It cannot, as against a bona fide purchaser for value, give such an effect to the agreement between the plaintiff and West. It cannot, under any just and legal principles, hold the defendant, Brown, responsible for the unfortunate results of the plaintiff’s negligence and inattention. Where one of two innocent persons must suffer, by the fraud of a third, the loss must be borne by him who furnished the means (however honest may have been his intentions) of perpetrating it. 1 Madd. 322. Goodtitle v. Morgan & al. 1 Term Rep. 755. Ryall v. Rolle, 1 Atk. 168. Lickbarrow v. Mason, 2 Term Rep. 70. Good & al. v. Harrison, 5 Barn. & Ald. 147. Gloucester Bank v. Salem Bank, 17 Mass. Rep. 38. 2, The notes were purchased by Brown, not only without notice of any fraud, but there were no circumstances of suspicion attending the purchase. There was no negligence, on his part, in not making enquiry ;-for he had no reason to suppose, that any fraud had been committed upon the plaintiff. He did not know that the plaintiff ever had, or claimed to have, an interest in the notes. It would not, therefore, have occurred to him, to have sought information from that source. If — 38 — enquiry had been made of either of the makers of the notes,it would have been fruitless;-for they were ignorant of any fraud :-and had he addressed himself to the promisees, they doubtless, would have in formed him, that they were the lawful holders of the notes, and had a perfect right, to assign them. No fact existed, within the knowledge of Brown, which should have put him on enquiry: and if there had been, he neither knew, nor had the means of ascertaining, who could answer his enquiries. It would require great ingenuity to convinces court, acting upon principles, which give equitable jurisdiction, and authorize equitable interference, that justice demanded a decree to be passed against a defendant, under such circumstances ;-or a series of precedents too long and too firmly established to be overruled, to justify such a decree. No such conviction has been produced in our minds ;-no such precedents have been furnished us :-we think none can be found. 3. The equity of the plaintiff, arises out of the agreement made between him and West, and is contained in the receipt" of Feby. 24, 1824, The existence of this agreement was unknown to Brown, when he became the purchaser of the notes. He had no reason to suppose any such agreement had been made, and, therefore, the equity arising from it, in favour of the plaintiff, was a secret equity, against which Brown could not protect himself: and being a purchaser in good faith and for value, and without notice, he is not bound by such an equity. If a third person were permitted to set up a secret equity against the assignor, to defeat or controul the interest of the assignee," no transfer could be made, which would be safe for the assigned. Redfern & al. v. Fernei & al. 1 Dow 50. Murray & al. v. Lylburn & al. 2 Johns. Ch. Rep. 441. To give to a secret agreement, such an effect, would he to tolerate a fraud upon a bona fide assignee, and a reproach to the law. Suydam v. Jones, 10 Wend. 180. It is, however, strongly insisted, that the assignee of a mere chose in action not negotiable, takes it subject to all the equities to which it was liable in the hands of the assignor; and that the indorsee of negotiable paper, indorsed after if is due, takes it subject to similar equities:-and that as two of the notes purchased by the defendant, were choses in action not assignable it law, and one of them was over-due when it was purchased, they fall within the operation of this rule. The general princi — 39 — ple stated by the plaintiff, is admitted. It is just in itself, and well established by authority. Bishop v. Dexter, 2 Conn. Rep. 419. Nevins v. Townsend, 6 Conn. Rep. 5. Robinson v. Lyman, 10 Conn. Rep. 30. But we do not concur in the opinion that it is applicable to the present case, for the following reasons, in addition to those we have already mentioned. First, the equity which is sought to be enforced, in this case, is not one growing out of the notes which are the subject of this controversy. The plaintiff has no interest in, or connex-ion with them, except as they are connected with notes which once existed, but which have been properly paid by the makers. His name does not appear on these notes, in any form. He is neither maker nor promisee, assignor, nor assignee. His only equity arises form a collateral matter, and that is, the private agreement between himself and West, contained in the receipt of Feby. 24, 1824. This court, in the late cases of Robinson v. Lyman, 10 Conn. Rep. 30., and Stedman & al. v. Jillson & al. 10 Conn. Rep. 55., established the principle, “ that the indorsee of an over-due bill or note, is liable to such equities only as attach on the bill or note itself, and not to claims arising out of collateral matter.” The same doctrine is recognised in Burrough v. Moss & al. 10 Barn. & Cress. 558. and in Holland v. Makepeace, 8 Mass. Rep. 418. These cases are decisive against the claim of the plaintiff. Secondly, the equity referred to, which attaches to paper not negotiable, or to negotiable paper assigned after it is due, is the equity which exists in favour of the original debtor,-not that of a third person against the assignor. The assignee receives it subject to such infirmities, equities, or (as has been said) de-fences, as existed against it, when it was assigned. But in whose favour must these equitios exist? We think, in favour whose favour must these assignee might reasonably suppose, could have such an equity-the debtor-of whom he could en-quire, and from whom, by the exercise of ordinary diligence, he could ascertain whether any claims existed, which might defeat what would otherwise be his just rights. We concur in the opinion expressed by Chancellor Kent, in the case of Murray & al. v. Lylburn & al. 2 Johns Ch. Rep. 441., that the equity is one “residing in the original obligator or debtor, and not an equirt residing in ome third person against the assign- or;” and in the remark of the court in the case of Norton v. — 40 — Rose, 2 Wash. Rep. 233. that the assignee “ takes such paper subject to all the equities of the obligor and of Story, J., in Green v. Darling & al. 5 Mason, 214 ; where a chose in action “ is assignable, it maybe admitted that the assignee likes it subject to all the equities existing between the original parties, as to that very chose in action so assigned.” Similar language is used, by the court, in the cases of Rosa v. Brotherson, 10 Wend. 85, and Hackley v. Sprague, Id. 113. In the case first named, it is said, the holder “ takes it subject to all the equities existing between the original parties and in the latter case, if the note is transferred after it arrives at maturity, “ the holders take it, as he does negotiable paper, subject to any defence which the maker has as against the payee.” Upon the whole, we are clearly of opinion, that the claim of the plaintiff has no support, either from principle or authority ; and therefore, that the superior court be advised to dismiss the bill. The other Judges concurred in this opinion. Bill to be dismissed.