Montgomery v. Scott

The opinion of the Court was delivered by McIver, A. J. The object of this action is to have a bond and mortgage of real estate, which had been signed in due form by the plaintiff, in the presence of two subscribing witnesses, in favor of the defendants, Scott & Son, canceled, upon the ground that the plaintiff had been induced to sign the same by the false and fraudulent representations of the defendant Houston that the paper she was signing was only a recogpizance for his appearance at the — 33 — Court of Sessions to answer to an indictment to be preferred against him, whereas, in fact, the bond was the joint and several obligation of Houston and the plaintiff to pay Scott & Son $1,000 one year from its date, secured by a mortgage of real estate, the property of the plaintiff, signed by the plaintiff alone. The defendants, Scott & Son, in their answer, (the other defendant, Houston, having made default,) deny all knowledge or suspicion of the fraud alleged, and say that, having received the bond and mortgage for full consideration and without notice or suspicion of the fraud alleged, the plaintiff has no cause of action against them, but that, if she has suffered loss, it is the result of her own misplaced confidence in the defendant Houston, and to him alone must she look for redress. The issues of law and of fact having been referred to a Referee, he made his report, wherein he finds as matters of fact: 1. That the bond and mortgage were executed by the plaintiff, but that she was induced to do so by the false and fraudulent representations of Houston that they were nothing but a bond for his appearance at Court. 2. That upon the execution of these papers they passed into the hands of Houston, who very soon afterwards delivered them to Scott & Son “to secure a debt of some $1,600 which he owed them for so much money by them lent and advanced to him; that upon receiving from the said C. J. Houston the said bond and mortgage deed, the defendants, Edwin J. Scott & Son, delivered and returned to said C. J. Houston other securities for his said debt which he had previously deposited with them, amounting to a large sum, and that when the said bond and mortgage deed were so delivered to them by the said C. J. Houston, they, the said Edwin J. Scott & Son, had no knowledge, notice or suspicion of the said fraudulent means by which said O. J. Houston had procured the said bond and mortgage from the said plaintiff.” And he finds as matter of law that the bond, so far as the liability of the plaintiff thereon is concerned, and the mortgage are invalid, and that she is entitled to have the same delivered up and canceled, and that the costs should be paid by defendant Houston. To this report exceptions were filed, both by the plaintiff and by the defendants, Scott & Son, which, being overruled by the Circuit Judge, are again presented here by way of appeal. The defendants, Scott & Son, take several exceptions, as well to the findings of fact as to the conclusions of law, which, from the view we take — 34 — of this case, it will be unnecessary to consider in detail. For, while this is a case in which it would be entirely competent for this Court to review the findings of fact as well as the conclusions of law of the Court below, and while such review might well be invited by the conflict in the testimony, which seems to have been so great that the able and experienced Referee could only reach his conclusions after much hesitation, prompting him to a suggestion that perhaps the safer and more satisfactory course would have been to have submitted the issue of fraud to a jury, in which suggestion we fully concur, though, of course, we are not to be understood as interfering with the right of parties to choose their own mode of trial by ordering such a trial, yet, as the case must go back for a new trial upon another ground hereafter to be noticed, we do not propose to prejudice the interest of either party upon such new trial by giving expression to any views which we might take of the testimony. The only question, therefore, which we propose to consider is that raised by one of the exceptions taken by the defendants, Scott & Son, namely, whether it is not necessary that it should be made to appear not merely that the plaintiff was induced by the fraud of a third person (Houston) to sign the bond and mortgage, but that, without negligence on her part, she was so induced to sign these papers, before she can ask the Court for the relief demanded against the holders, who were innocent of any knowledge of such fraud at the time they, for valuable consideration, took such bond and mortgage. It will be observed that this is a case in which the plaintiff seeks relief, which was formerly obtainable alone in a Court of equity, and the rule of that Court, which we consider still binding on this Court in the adjudication of a case to which it is appropriate, notwithstanding the fact that the Court of Equity has been abolished, was that “ a party coming into a Court of equity is bound to show that his title to relief is unmixed with any gross misconduct or negligence of himself or his agents.”- — -Story Eq., § 105. Chief Justice Marshall, also, in Marine Insurance Company vs. Hodgson, (7 Cr., 332,) seems to have recognized the correctness of this rule. In speaking of the power of a Court of equity to restrain parties from availing themselves of the benefit of judgments obtained at law, he uses this language: “It may safely be said that any fact which clearly proves it to be against conscience to execute a judgment * * * of which he might have availed himself at law, but was prevented by fraud or — 35 — accident, unmixed with any fault or negligence in himself or his agents, will justify an application to a Court of Chancery.” (See, also, Penny vs. Martin, 4 Johns. Ch., 566.) Again, Story, in Section 200, a, in speaking of a purchaser who asks to be relieved from a purchase made on the ground of misrepresentations by the vendor, says: “ If he does not avail himself of the knowledge or means of knowledge open to himself or his agents, he cannot be heard to say that he was deceived by the vendor’s misrepresentations. * * * It is his own folly and laches not to use the means of knowledge within his reach, and he may properly impute any loss or injury in such a case to his own negligence and indiscretion. Courts of equity do not sit for the purpose of relieving parties, under ordinary circumstances, who refuse to exercise a reasonable diligence or discretion.” This rule, which has received the sanction of this eminent text writer, as well as of Courts of the highest authority, is but the expression of a natural feeling of equity which would prompt any just man to say that where one comes into a Court of equity and asks, against an innocent party, the interposition of its extraordinary powers, to protect him from danger or loss occasioned by the fraud of a third party, he ought to be required to show that he has in no way, either by his misconduct or negligence, contributed to the perpetration of the fraud, from the consequences of which he seeks to be relieved at the expense of such innocent party. An examination of the decided cases, which seem to be but few in number, will show that this rule has been applied even by Courts of law in cases analogous to the one now under consideration. In Foster vs. McKinnon, 38 L. J. R., (N. S.) 310, which may be regarded as the leading case, the action was by the endorsee, a holder for value before maturity without notice of any fraud against the endorser of a bill of exchange, and the defense set up was that the endorsement had been obtained by fraud, the party obtaining it representing to the defendant that the paper he was signing was nothing but a guaranty. The jury were instructed that if the defendant signed not knowing that it was an endorsement, but being induced by the fraudulent and false representations made to him to believe that it was a mere guaranty, and if the defendant was not guilty of any negligence in so signing the paper, then the defendant would be entitled to the verdict. On a rule for a new trial this instruction was endorsed as correct, and the Court, per Byles, J., in delivering its opinion, uses — 36 — this language: “ It seems plain, on principle and authority, that if a blind man or a man who cannot read, or who for some reason (not implying negligence) forbears to read, has a written contract falsely read over to him, the reader misreading to such a degree that the written contract is of a nature altogether different from the contract pretended to be read from the paper which the blind or illiterate man afterwards signs, then, at least, if there be no negligence, the signature so obtained is of no force.” And after citing Thoroughgood’s case, 2 Co. Rep., 9 b, and other cases, says: “Accordingly it has been recently decided in the Exchequer Chamber that if a deed be delivered and a blank left therein be afterwards improperly filled up, (at least if this be done without the grantor's negligence,) it is not the deed of the grantor.” — Swan vs. The, North British Australasian Co., 2 Hurls, &c., 175 S. C. 32, L. J. R. 573. A new trial was, however, granted upon the ground that the verdict was against the evidence. And although it is not so stated, the facts of the case would seem to imply that the Court was not satisfied with the verdict upon the question of negligence, and this is the inference drawn by the Court in the case of Chapman vs. Rose, hereinafter cited. In the case of Douglass vs. Matling, (26 Iowa, 498, 4 Am. Rep., 238,) the action was on a negotiable note by an innocent holder before maturity for value, and the defense was that the maker had been induced to sign under the false and fraudulent representation that the paper was of a different character from what it proved to be. The Court held the maker liable, saying: “It would be manifestly unjust to permit the maker, while admitting the genuineness of his• signature, to defeat the note on the ground that, through his own culpable carelessness while dealing with a stranger, he signed the instrument without reading it or attempting to ascertain its true contents. * * * * The maker had it in his power to protect himself from the fraud, but failed to do so. When the consequences of this act are about to be visited upon him he seeks to make another bear it, on the ground that he was defrauded through his own gross negligence.” Garrarel vs. Hadden, (67 Penn. St., 5 Am. Rep., 412,) was also an action on a negotiable note, by an innocent holder, before maturity, and the defense was that the note, which was on a printed form, had been altered by the insertion of the words “and fifty” in the blank space left after the word “hundred.” The Court held the maker liable on the ground of his negligence in not taking some — 37 — precaution, as, for example, by scoring the blank space with his pen, by which such alteration could have been prevented or detected. The Court places its decision upon the maxim cited from Story, § 387: “That where one of two innocent persons must suffer, he shall suffer who, by his own acts, occasioned the confidence and the loss,” and from the doctrine cited from the same author, as “but an elaboration of a great principle of justice, that if one, by his own acts, or silence or negligence, misleads another, or in any manner affects a transaction, whereby an innocent person suffers a loss, the blaraable party must bear it.” In the case of Chapman vs. Rose, (56 N. Y., 137, 15 Am. Rep., 401,) the action was on a negotiable note by an innocent holder before maturity, and the defense was that defendant’s signature'had been obtained by the false representations of the payee that the paper was an order for a hay fork and two pulleys, instead of a promissory note, as it proved to be. It was held that the maker, if guilty of negligence in signing the paper, would be liable, notwithstanding the fact that he was induced by the payee to believe that the paper signed was a mere order of the kind above stated and not a promissory note. The Court reviews the authorities, and rests its decision, not upon any doctrine peculiarly applicable to negotiable paper, but upon a principle stated in the following language: “ He who, by his carelessness or undue confidence, has enabled another to obtain the money of an innocent person, shall answer the loss. If it be objected that there must be a duty of care in order to found an allegation of negligence upon the neglect of it, it must be answered that every man is bound to know that he may be deceived in respect to the contents of a paper which he signs without reading. When he signs an obligation without ascertaining its character and extent, which he has the means to do, upon the representations of another, he puts confidence in that person, and if injury ensues to an innocent third person, by reason of that confidence, his act is the means of the injury, and he ought to answer to it.” In the Citizens’ National Bank vs. Smith, (55 N. H., 593, reported also in 3 Cent. Law Jour., 163,) the subject is fully discussed, and, after a review of the authorities, the conclusion is readied that, to sustain such a defense, it is necessary to show that the maker was not guilty of negligence; and this doctrine is based upon the broad general principle that “whenever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss — 38 — must sustain it,” and not upon any doctrines peculiar to negotiable notes. The case of Brown vs. Reed, decided by the Supreme Court of Pennsylvania in November, 1875, and reported in 3 Cent. Law Jour., 83, is somewhat peculiar in this respect: that the paper in question was not, in its inception, in the form of a negotiable note, but was, when it was signed, nothing but an agreement in writing, by which the maker bound himself to pay to the payee or bearer $50 whenever he should sell $250 worth of hay and harvest grinders, and was signed by Brown, “ agent for hay and harvest grinders.” But, by an ingenious device, the paper was so written that, by cutting it into two pieces, one of them, to all appearances, would be a perfect promissory note, with the name of Brown signed to it, without the addition of the words “agent for hay and harvest grinders;” and upon this piece of paper the action was brought by Reed, an innocent holder, for value, before maturity. The defense was that no such paper had ever been signed by the maker, and yet the Court held that negligence of the maker, which was a question for the jury to pass upon, would preclude such a defense. Now, while it is true that in the most of these cases the question arose under actions brought on negotiable notes by innocent holders for value before maturity, it is equally true, as we have seen, that the decisions are not based, upon any doctrines peculiar to negotiable paper; for, although the Judges have, in some of the cases, fortified their conclusions by suggesting the tendency that a contrary rule would have to destroy confidence in commercial paper, such suggestions are merely additional reasons for, and do not constitute the basis upon which, such decisions rest. This is obvious from the consideration that the very gist of such a defense is that the paper sued upon is not a negotiable paper; for, while it is so in form, yet the fact that the signer was deceived into the act of signing, that “his mind never went with his act,” that “he never intended to sign, and, therefore, in contemplation of law, never did sign, the contract to which his name is appended,” it is argued, deprives it of that character and demonstrates that it is not his note. This defense must necessarily be placed upon this ground, as it cannot possibly stand upon any other; for the very moment it is conceded that the paper in question is the negotiable note of the maker, it immediately becomes subject to the incidents which belong to such a paper in the hands of an innocent holder for — 39 — value before maturity. How, then, a defense, which necessarily rests upon the theory that the paper in question is not a negotiable paper, can be said to derive its efficacy from doctrines peculiar to negotiable paper, it is difficult to perceive. This seems to be the view taken by Dixon, C. J., in Walker vs. Egbert, (29 Wis., 194, 9 Am. Rep., 548,) where, in discussing this question, he uses this language: “The inquiry in such cases goes back of all questions of negotiability, or of the transfer of the supposed paper to a purchaser, for value, before maturity and without notice. It challenges the origin or existence of the paper itself; and the proposition is to show that it is not in law or in fact what it purports to be, namely, the promissory note of the supposed maker. For the purpose of setting on foot or pursuing this inquiry, it is immaterial that the supposed instrument is negotiable in form, or that it may have passed to the hands of a bona fide holder for value. Negotiability in such cases presupposes the existence of the instrument as having been made by the party whose name is subscribed; for, until it has been so made, and has such actual legal existence, it is absurd to talk about a negotiation or transfer, or bona fide holder of it, within the meaning of the law merchant. That which, in contemplation of law, never existed as a negotiable instrument, cannot be held to be such ; and to say that it is and has the qualities of negotiability because it assumes the form of that kind of paper, and thus to shut, out all inquiry into its existence, or whether it is really and truly what it purports to be, is petiiio principii — begging the question altogether. * * For the purposes of this first inquiry, which must be always open when the objection is raised, it is immaterial what may be the nature of the supposed instrument, whether negotiable or not, or whether transferred or negotiated, or to whom or in what manner, or for what consideration or value paid by the holder. * * * * qn these and all like cases no additional validity is given to the instruments by putting them in the form of negotiable paper.” While it may be very true, as a general rule, that a party ought not to be bound by a mere mechanical act which his mind did not accompany, because such act is not, in truth, the act of the party, it is equally true that such party may, by his acts or omissions, be estopped from denying that he did such act; for we know that it not unfrequently happens that parties, by reason of some act or omission on their part, debar themselves from taking positions which, abstractly considered, are — 40 — incontestably correct, both in law and in fact. Row, in this case, the plaintiff knew that she was signing some kind of written obligation, and if she, through carelessness or negligence, signed a paper of a different character from that which she intended, and that paper has been received by an innocent third person, for value, she ought not to be allowed, when called upon to respond to the obligations imposed by terms of the paper, to say: “It is true I performed the mechanical act of signing the paper, but my mind did not accompany the act, and, therefore, it is not in reality my act, and I am not bound by it,” unless she can at the same time say that the act, which she now disavows, was brought about solely by the fraud of a third person, and was in no way occasioned by or resulted from any fault or negligence on her part; still less ought she to be allowed to say this when she invokes the active aid of the Court, by the exercise of its extraordinary powers, to Relieve her from the consequences of such an act at the expense of an innocent third person, unless she can show that these consequences are in no way attributable to any fault or negligence on her part. This would be allowing a party in a Court of equity, in violation of every principle governing such a Court, to trace his title to relief through his own misconduct or negligence. There are other cases in which the question of negligence has been recognized as an important and necessary inquiry. — Putnam vs. Sullivan, 4 Mass., 54; Gibbs vs. Linabury, 22 Mich., 479, 7 Am. Rep., 675; Walker vs. Egbert, 29 Wis., 194, 9 Am. Rep., 548; and even Taylor vs. Atchison, 54 Ill., 196, 5 Am. Rep., 118, which, in some of the cases, is cited as an authority to the contrary. This case, however, can have but little influence in determining the question, as it is rested main!}’ upon the terms of a statute of that State, and in it there is not a single authority cited. We may also add the case of Burson vs. Huntington, 21 Mich., 417, 4 Am. Rep., 497, in which the question was whether, in an action by an innocent holder, for value before maturity, a person could be made liable who had signed but had not delivered a negotiable note, it having been taken from the table by the payee, where the parties were sitting engaged in a negotiation which had not been completed, during a temporary absence of the maker. The Court, in discussing this case, after declining to apply to it the rule that where one or two innocent parties must suffer, the loss must fall upon him by whose act or omission it was caused, upon the ground that such rule “is mainly confined to cases where — 41 — the party who is made to suffer the loss has reposed a confidence in the third person whose acts have occasioned the loss,” uses this language: “ We do not assert that the general rule we are discussing (that where one of two innocent parties must suffer, &c.) must be confined exclusively to cases where a confidence has been placed in some other perso’n (in reference to delivery) and abused. There may be cases where the culpable negligence or recklessness of the maker in allowing an undelivered note to get into circulation might justly estop him from setting up non-delivery.” The decision of the Court below is based upon the authority of Thoroughgood’s case (2 Coke, 9 b,) and the case of Schuylkill County vs. Copley, (67 Penn. St., 386, 5 Am. R., 441) ; but even Thoroughgood’s case seems to recognize the question of negligence as important to be considered in cases of this .kind; for in the second resolution we read: “That such layman, not learned, is not bound to deliver the deed if there be not one present which can read the deed to him in such language that he who should m'ake the deed may understand it; and that is the reason that if it be read to him in other words than are contained in the writing, it shall not bind' the party who delivereth it, for it is at the peril of the party to whom the writing is made that the true effect and purport of the writing be declared, if it be required, but if the party who should deliver the deed doth not require it, he shall be bound by the deed, although it be penned against his meaning.” Now, does not this necessarily imply that if the grantor is guilty of negligence he shall be bound ? For the doctrine announced in this case rests upon the idea that, as the mind of the party did not accompany the merely physical act of signing, it is not in reality his act, and, therefore, he is not bound; and yet in this second resolution two conditions of things are presented, in neither of which does the mind of the grantor go with the physical act of signing — one where the deed, at the request of the grantor, an illiterate person, is read wrongly, in which case the grantor is not bound. Why? Because he has used proper precautions to inform himself of what he was signing; the other where the grantor omits to require the reading of the deed, in which case he is bound by the deed, “ although it be penned against his meaning.” Why ? Because he has omitted to use proper precautions to protect himself, that he has been guilty of negligence. In the case of Schuylkill County vs. Copley, it was held that where an illiterate person signed a páper which was falsely — 42 — represented to be a petition, but which was really a bond, he was not liable thereon, although the obligee was not aware of the fraud until after the bond had been accepted. The only controversy in this case, not mentioning a question of evidence irrelevant to the matter we are considering, was whether the obligor would be liable unless it was shown that the obligee was aware of the fraud before accepting the bond, and this is the only point that can be said to have been decided. No question of negligence was raised or considered in the case; and, therefore, this case cannot be regarded as any authority upon the question now under consideration by this Court. So, too, the case of Jackson vs. Hayne, (12 Johns., 469,) cited to sustain the decision below, cannot be regarded as authority upon the question we are considering, for there the action was by a purchaser at Sheriff’s sale, to which the doctrine of caveat emptor applies, the purchaser only getting whatever title the defendant in execution may have had, and of course, therefore, if the assignment of the lease under which such defendant held was void for fraud, the purchaser, though innocent of any participation in or knowledge of such fraud, bought nothing. The cases of Green vs. Buffalo (6 P. F. Smith, 110,) and Gourdin vs. Read, (8 Rich., 230,) which were also cited in support of the Circuit judgment, do not, in our opinion, conflict with the view Ave take of this case ; for in the former the abstract proposition, taken from the first resolution in Thoroughgood’s case, is announced as law. But the Court did not have occasion to consider, and did not decide, the point which is now under consideration; and in the latter the only point decided is, that if a surety on a bond who, by parol, has authorized his principal to fill up blanks in the bond with the date and name of the obligee, has, before such blanks are filled, revoked such authority, he would not be liable to the obligee, whose name had been subsequently inserted, even though such obligee had no notice of such revocation when he took the bond, and hence it cannot affect the question now before the Court. The case of Briggs vs. Ewart (51 Mo., 245, 11 Am. R., 445,) is also relied on as authority for the proposition that negligence of the maker cannot affect the inquiry; but an examination of that case will show that no such point was there decided, and, on the contrary, the instruction asked for, which, on exception, Avas endorsed, recognized the qualification of negligence, although the Judge who delivered the opinion of the Court did seem to ignore — 43 — the question of negligence as an unnecessary and unimportant inquiry in a case of this kind. But the same Court, in the subsequent case of Shirts vs. Overjohn, decided in May, 1875, and reported in 2 Cent. Law. Jour., 423, decided that “ where it appears that the party sought to be charged intended to bind himself by some obligation in writing, and voluntarily signed his name to what he supposed to be the obligation he intended to execute, having full and unrestricted means of ascertaining for himself the true character of such instrument before signing the same, but by his failure to inform himself of its contents, or by relying upon the representations of another as to the contents of the instrument presented for his signature, signed and delivered a negotiable note in lieu of the instrument intended to be signed, he cannot be heard to impeach its validity in the hands of a bona fide holder.” In this case the Court, with a view, doubtless, to correct any misapprehension which the language used by the Judge who delivered the opinion in Briggs vs. Ewart might give rise to, says: “In the cases of Briggs vs. Ewart (51 Mo., 245,) and Martin vs. Smylee, (55 Mo., 577,) which were similar to the case at bar, the instructions which were brought under review, and which received the approval of this Court, declared the law to be that a person signing a promissory note could not be held liable as maker by a bona fide holder, if his signature was obtained without his fault or negligence, on the fraudulent representations of the payee that the paper offered for signature was not a note, and that the party sought to be charged did not know it was a note and did not intend to sign a note. Some observations, however, of the Judge who delivered the opinion of the Court in the case of Briggs vs. Ewart seem to reject the qualification of negligence and to announce the broad doctrine that, to be binding, the instrument must be executed as and for the paper it purports to be, and if the party to be charged did not intend to make a promissory note he cannot be held bound even in favor of a bona fide holder for value. These observations and the subsequent case of Corley vs. Weddle, (57 Mo., 452,) in so far as it is based upon them, are disapproved.” This question of negligence seems to have been wholly ignored, both by the Referee and the Circuit Judge, although distinctly made and insisted upon by the defendants, Scott & Son; for, although it is stated in the brief submitted by the counsel for the plaintiff that the Referee found “ that the plaintiff was guilty of — 44 — no negligence,” we have been utterly unable, after a most careful examination of the report, to discover any such finding, or even any evidence that the Referee considered the question at all, and we must, therefore, conclude that this statement in the brief of the plaintiff’s counsel is an error, doubtless altogether inadvertent. Holding, then, as we do, that the question whether the plaintiff was guilty of negligence in allowing herself to be imposed upon by Houston, if, in fact, she was so imposed upon, is not only an important, but an essential inquiry, and this question not having been joassed upon by the Court below, the case must go back for a new trial. It is, therefore, unnecessary, at this time, to consider the question of costs raised by the plaintiff’s exception. A new trial is ordered. Willard, C. J., concurred.