Drennan v. Bunn

Mr. Justice Scholfield delivered the opinion of the Court: The circuit court, in effect, ruled, as a matter of law, and that ruling is affirmed by the judgment of the Appellate Court, that proof that appellee was notified of the pendency of the foreclosure suit, and of the defence of usury thereto interposed, and requested to rebut and disprove such defence, will not render the decree of foreclosure conclusive against appellee in this suit. Two questions for our consideration arise upon this ruling: First, is the vendor of negotiable bonds or notes, in the absence of express representation, and who assigns them “without recourse,” liable, on an implied warranty, for any deficiency between the amount apparently due upon the face of the instrument and the amount legally collectible upon it ? Second, if liable, is he concluded by the judgment between his vendee and the payor of the instrument, by reason of having been notified, in apt time, of the pendency of the suit and of the defence of usury set up by the payor, although not expressly requested to take charge of the suit, and not notified that the vendee intends to hold him responsible for the result of the suit ? First—Daniell, in his work on Negotiable Instruments, (3d ed.) vol. 1, see. 670, says: “When the indorsement is ‘without recourse,’ the indorser specially declines to assume any responsibility as a party to the bill or note; but, by the very act of transferring it, he engages that it is what it purports to be,—the valid obligation of those whose names are upon it.” And he then proceeds to show that the holder may recover against the indorser “without recourse,” where the note was invalid between the original parties, because of the want or the illegality of the consideration, as well as in certain other cases. See, also, to like effect, Parsons on Bills and Notes, p. 39. In Ticonic Bank v. Smiley, 27 Maine, 225, an over-due note was transferred with the indorsement, “indorser not holden, ” and it was held the indorser was, nevertheless, liable to his vendee for any payment made on the note before the transfer, or any set-off existing against it of which the note gave no indication and the vendor gave no information. In Challiss v. McCrum, 22 Kan. 157, a negotiable promissory note was transferred by indorsement “withoutTrecourse. Suit was brought by the assignee upon the note, and the defence of usury was set up. It seems that by the law of Kansas, as by our statute, usury only forfeits the interest. The defence was sustained, and the assignee, in consequence, recovered $229.50 less than the amount which, upon the face-of the note, purported to be due thereon. The assignee thereupon sued the indorser, and recovered a judgment for this deficiency. It was held that the indorser, although he indorsed without recourse, was liable on the implied warranty that the note was valid for the amount expressed upon its face.. Brewer, J., in delivering the opinion of the court, after a somewhat elaborate examination of the authorities bearing, upon the question, said: “These authorities fully sustain the1 ruling of the district court. The note was not the legal obligation of the maker to the full amount. As to the usurious-portion, it was as it were no note. This was a defect in the' very inception of the note. It was known to the vendor, and it arose out of his own dealings in the matter. By all these' authorities there is an implied warranty against such a defect, and the vendor is liable for a breach thereof.” See, also,. Randolph on Com. Paper, sec. 120. It is conceded by counsel for appellee, that this case is-precisely in point here, but it is contended that it was not-correctly decided, because there was no fraud there, and in. support of that contention it is argued, that unless that whichi is claimed to be fraud rendered the note absolutely void, and not merely voidable, it can not be considered. No authority is cited in behalf of this contention, and, in our opinion, it is-predicated upon a misconception of what is necessary to constitute a breach of an implied warranty. That which is absolutely void, in the sense of this contention, is incapable of ratification. See Bishop on Contracts, (enlarged ed.) sec. 610,. et seq. But it is manifest a sale which will authorize an action for a breach of an implied warranty, in many, if not in most,, cases, is but voidable. The purchaser may elect to waive his right to avoid it, and ratify it if he will. As illustrative of this, may be mentioned all those cases where the buyer does not inspect the thing bought, but trusts to the vendor, and the quantity and kind of goods are delivered, but upon inspection they prove unsalable, by reason of defects in quality. See Benjamin on Sales, (1st Am. ed.) 484; Bigelow on Fraud, pp. 34, 35. A note or bond given without consideration, whether voluntarily, or through mistake as to the state of indebtedness between the parties, or for a consideration that totally fails; as, in consideration of a sale and warranty where the warranty is broken, is not absolutely void in the sense as here contended for by counsel; and yet, in the first two instances there would be a total want of consideration, and in the last, a failure of consideration, which might be set up as defences to the collection of the note in a suit by the payee, or by an assignee after maturity, or with notice, against the payor. But none of these defences would be admissible to a suit by an assignee before maturity and without notice, as would any defence showing that the note was absolutely void. See Story on Bills, see. 188. Where money is paid by one party to another for a given article assumed to be sold, but the seller delivers to the purchaser only a worthless imitation of that article, there is a legal fraud, and an action for money had and received will lie for the money thus paid for which nothing has been received. (Lunt et al. v. Wrenn, 113 Ill. 168. And see, also, Bigelow on Fraud, p. 35, supra.) So if the buyer has paid for a certain quantity of goods, and the vendor has delivered only a part, and makes default in delivering the remainder, the buyer may rescind the contract for the deficiency, and recover the price paid for the quantity deficient, for the parties in this case have, by their conduct, given an implied assent to a severance of the contract, by the delivery, on the one part, and the acceptance, on the other, of a portion, only, of the goods sold. This is, in its nature, a total failure of consideration for part of the price paid, as contradistinguished from cases of a partial failure of the whole. (Benjamin on Sales, (1st Am. ed.) p. 310,—citing Deveau v. Connolly, 8 C. B. 640.) And so we said, in Robinson v. McNeill, 51 Ill. 225, where there had been a transfer of book accounts by the defendant to the plaintiff, and suit was brought for a failure to realize the amount from the debtors: “The mere transfer of the accounts as unpaid, amounted to a warranty that they were so, as Robinson knew whether he had received payment, and would be guilty of a fraud in selling as unpaid a debt which had been actually discharged.” It is true that the defence of usury is personal to the borrower and his privies, and that it does not therefore render the instrument affected absolutely void, but only voidable; but in this respect, an instrument to which that defence may be interposed, is in nowise different from instruments to which the defence of payment, or failure of consideration by reason of a fraudulent and deceitful sale, may be interposed. The borrower and his privies can alone set up the latter as well as the former defence. The only instances, of which we are aware, where it may be material to distinguish between that which renders an instrument absolutely void and that which renders it voidable, when considered as a ground of defence, are in suits upon instruments negotiable by the law merchant. In certain cases, under that law, an assignee, before dishonor, will not be affected by defences rendering the instrument voidable, merely, as between the original payor and payee, but will be concluded by defences rendering it absolutely void; but there is no question, here, as to the rights of parties under the law merchant, nor even under our statute in relation to negotiable instruments. The indorsement transferred title, and it gave no notice of deceit in the sale. It is not claimed there is, under such an indorsement, liability by virtue of any contract of indorsement, and upon no principle that we are aware of, is such an indorser, by the fact of indorsement, less hable for deceit in the sale than he would have been had he transferred a chose in action without indorsement, as in Robinson v. McNeill, supra. That the sale of a chose in action, by the party to whom it is payable, expressed and understood to be for a given amount, but in fact subject to be reduced to a sum materially less than that amount, by the defence of usury, to a party having no previous notice of the usury, and without informing him of the usury, is a legal fraud, must be as clear as it is that it is a legal fraud to transfer to a purchaser in good faith, without notice, an account for an expressed amount which had never been incurred, or which had been paid. The usury is the act of the party selling. He does not own the sum forfeited by the usury, has no legal right to collect it, and therefore has no right to sell and transfer it to another. To that extent he has nothing to sell or transfer. The note, too, is his act, and by him, therefore, it is made to express what, in law, is a, falsehood upon its face, and by this legal falsehood he induces another to believe what is not legally true, and to pay him money which he would not pay if he knew the legal truth. There is willful deception, in a legal aspect, and consequent gain, upon the one side, and, legally speaking, ignorant credulity, and pecuniary loss as its consequence, upon the other side. See Kerr on Fraud, (Bump’s ed.) 42. Second—Where one party is liable to indemnify another against a particular loss, it is because, by law or by contract, the primary liability for such loss is upon the party indemnifying, and in such instances the party bound to indemnify is in privity with the party to be indemnified, and he therefore has a direct interest in defeating any suit whereby there may be a recovery as to the subject matter of the indemnity, against the party to be indemnified. The party to be indemnified, moreover, is, manifestly, directly interested in having him defeat all recovery in such suit, and so their respective interests and duties in respect of such suit must be the sapie. Bawle, in his work on “Covenants for Title,” (2d ed.) page 242, after alluding to the ancient practice of “vouching to warranty,”' says: “Partly, perhaps, from analogy to that practice, it is well settled in this country, in most if not in all of the States, that in general, upon suit being brought upon a paramount claim against one who is entitled to the benefit of a covenant of warranty, the latter can, by giving proper notice of this action to the party bound by that covenant, and requiring him to defend it, relieve himself from the burden of being obliged afterwards to prové, in the action on the covenant, the validity of the title of the adverse claimant.” He then adds: “A similar course of decision has also been adopted in England, Testing, however, rather upon general principles than any analogy to the old common law practice of voucher.” In Duffield v. Scott, 3 Burn. & East, 374, (1st series Eng. Com. R. vol. 6, p. 208,) Bulleb, J., speaking of this question, :said: “The purpose of giving notice is not in order to give a .ground of action, but if a demand be made which the person indemnifying is bound to pay, and notice be given to him, and he refuse to defend the action, in consequence of which the person to be indemnified is obliged to pay the demand, that is equivalent to a judgment, and estops the other party from saying that the defendant in the first action was not bound to pay the money.” In Littleton v. Richardson, 34 N. H. 179, the court, per Bell, J., said: “Y(hen a person is responsible over to another, •either by operation of law or by express contract, and he is ■duly notified of the pendency of the suit, and requested to take upon himself the defence of it, he is no longer regarded as a stranger, because he has the right to appear and defend the action, and has the same means and advantages of controverting the claim as if he were the real and nominal party "upon the record. In every such case, if due notice is given to •such person, the judgment, if obtained without fraud or collu•sion, will be conclusive against him, whether he has appeared •or not.” In numerous other decisions, the general doctrine that notice, in such cases, to the party responsible over, imposes upon .him the duty of defending, and renders him liable for the result of the suit, is asserted. Blasdale v. Babcock, 1 Johns. 516, *517; Barney v. Dewey, 6 id. 224; Inhabitants of Milford v. Holbrook, 9 Allen, 17; City of Boston v. Worthington et al. 10 Gray, 496; Pitkin v. Leavitt, 13 Vt. 379; Turner v. Goodrich, 26 id. 708; Bond v. Goodrich, 1 Nott & McCord, 201; Ryerson v. Chapman, 66 Maine, 563. See, also, Wade on Notice, sec. 180c; Freeman on Judgments, sec. 181. The only question, in this connection, upon which we find any diversity in the authorities, is, whether it is indispensable that the indemnifying party should, in addition to having notice of the pendency of the litigation, be requested to take charge of it, and notified that if he fail, he shall be held responsible. That view -is taken in Sowers v. Schmidt, 24 Wis. 417, and Paul v. Whitmore, 3 Serg. & Watts, 410, and, it may be, also in other cases. But, in our opinion, the weight of . reason and of authority is the other way. An obligation to •' indemnify against the result of a particular suit, necessarily assumes, that as between the party obligated to indemnify and the party to be indemnified, the entire burden of the suit should fall on the former, and that the latter should be entirely free of it, and therefore, that, as between them, the former, and not the latter, should be the real party to the suit, and --.prosecute or defend it. But since the latter may sue or be sued without the knowledge of the former, he might not know of the existence of the suit, and therefore could not prosecute or defend it, but if notified of the existence of the suit in apt time, he could prosecute or defend it, and it being his duty to do so, his failure to do so successfully would be conclusive against him that he -was unable to do so, and that the judgment was right. In such ease, the obligation to indemnify operates, from the making of the contract, as to every burden or loss ' within its contemplation, and although no suit could be maintained until after loss, the recovery would be because it was the duty of the indemnifying party to have prevented loss, / and it is absolute, and not conditioned upon request^We are unable to perceive why, in this case, more than in any other, a party shall have been requested to do that which it was his duty to do without request, or how a. notice that he will be held responsible can be necessary, where he is, by contract, already legally responsible. In Blasdale v. Babcock, supra, the action was for -the price paid for a horse which the defendant had sold to the plaintiff, but which belonged to another person, who had recovered it from the plaintiff. The record of the judgment in favor of the owner of the horse, and against the plaintiff, was admitted in evidence as conclusive of the question of title. On objection to the competency of this evidence, it was insisted that it ought to appear not only that the defendant had notice of that suit, but also that he had notice of the time when the cause was actually tried; but the court held that the first notice given to the defendant, of the pendency of that suit, was sufficient, and he was bound to know all the subsequent proceedings, without a special notice of the time every court was to be held. In Barney v. Dewey, supra-, the declaration stated that the defendant, intending to deceive, etc., falsely represented a certain horse to be the property of the defendant, thereby inducing the plaintiff to purchase him; that the defendant well knew that the horse belonged to another person,—one Thaddeus Dewey,— and in an action brought against the plaintiff by T. Dewey, testified that the horse was the property of T. Dewey, and that he, the defendant, had no right to part with the horse. There was a demurrer to the declaration, which was overruled. The court, in considering the sufficiency of the declaration, said: “There is no allegation of notice to the defendant, of the pendency of the suit brought by Thaddeus Dewey, but there is an averment of a fact tantamount. It is alleged that the defendant was a witness on that trial, and proved, himself, that he did not own the horse when he sold him to the plaintiff.” In Beers v. Pinney & Green, 12 Wend. 309, in an action on a bond to indemnify special bail, it was held that notice, merely, of the pendency of the suit against the bail, was sufficient to conclude the obligor in the indemnity bond. The court said: “The declaration avers that the plaintiff gave immediate notice to the defendants, of the commencement of the suit against him, upon his recognizance, by Johnson, and of the nature and pendehcy thereof, and the proceedings therein. After such notice, they were bound to defend the suit.” In City of Chicago v. Robbins, 2 Black, 418, the city had ¡been sued, and a recovery for damages had, because of a nuisance created and maintained by Bobbins, in making and failing to properly guard an excavation in one of the streets of the city, and sought to recover back from Bobbins the amount thus recovered from it. One of the questions discussed in argument and considered by the court was, whether Bobbins had been sufficiently notified of the pendency of the suit against the city, to be concluded by the judgment therein. The court saidi '“An express notice to him to defend the suit was not necessary in order to charge his liability. (Barney w. Detvey, 13 Johns. 226; Warner v. McGary, 4 Vt. 500; Beers v. Pinney, 12 Wend. 309.) He knew that the ease was in court, was told of the day of trial, was applied to, to assist in procuring testimony, and wrote to a witness, and is as much chargeable with notice as if he had been directly told that he could contest Woodbury’s right to recover, and that the city would look to him for indemnity.” The same ease was again before the Supreme Court of the United States as Robbins v. City of Chicago, and is reported in 4 Wall. 657. The sufficiency of the notice was again considered, and the foregoing ruling was re-affirmed. An instruction was there sustained which told the jury that if the attorney of the corporation informed the defendant of the suit and its nature, and of the day of the trial, and conversed with him about the testimony for the defence, he was as much chargeable with notice as if he had been directly told that he could contest the right of the injured party to recover, and that the corporation would look to him for indemnity in case of an adverse result. In City of Boston v. Worthington, 10 Gray, 496, the action was similar to that in City of Chicago v. Robbins, supra, and the question of notice to the party causing the nuisance, and hence bound to indemnify, was also there discussed and considered. The court said: “Had the defendants such notice of the pendency of Southwick’s action as renders the judgment recovered therein conclusive against them, to any extent ? We are of opinion that they had. They were informed when Southwick’s writ was returnable; that he had sued for an injury received oil a day named, by a defect in the highway called Congress Square, in a place occupied by them. They were directed to take notice that the plaintiffs would hold those responsible who had the charge and custody of the place of the accident, and they were required to govern themselves accordingly. They were not, in terms, requested to take upon themselves the defence of that action; and this was not necessary in order to render the judgment conclusive against them as to the facts thereby established. * * * The defendants, by the notice given to them of Southwick’s action, had an opportunity to defend it, and the case shows that they ‘were present and at the trial, and testified therein.’ This fact, according to Spencer, J., in 13 Johns, ubi supra, is sufficient to show such notice as to render the judgment conclusive against them.” In Holbrook v. Holbrook, 15 Maine, 12, the court said: “It can not be material to the person agreeing to indemnify, that he should have a formal notice served upon him. The law requires that he should have notice before the judgment can be used against him, because he is the real party in interest. But any notice which will enable him to present any defence which he may have, either in law or fact, is all that can be useful to him, and the law requires no vain or useless ceremonies in such cases.” See, also, Veazie v. Railroad Co. 49 Maine, 119. A recent case in point, also decided by the Supreme Court of Maine, is Davis v. Smith, 79 Maine, 351. Suit was brought upon a bond given by the defendant to indemnify the plaintiff against loss on account of paying the defendant, who claimed to be a guardian, the amount of a promissory note given to another as guardian of the same person. The person to whom the note was given, sued the plaintiff, and recovered a judgment for the amount due upon the note, which he paid. One of the material questions in the case was, whether the defendant had such notice of the pendency of the suit against the plaintiff that she was concluded by that judgment. The court said: “We are of the opinion, from the evidence before us, and with the inferences legitimately to be drawn from it, that the defendant had such notice of the pendency of the suit as renders the judgment recovered therein conclusive against her. She employed and paid the counsel who tried the ease. She-went, in company with the plaintiff, twice to Dover, to have the case tried, it being continued the first time because the other side was not ready. She was present at the trial, testified in the case, and paid all the expenses of this plaintiff and his witnesses. * * * The facts shown are sufficient to render the judgment conclusive against her, although the plaintiff had not, in terms; requested her to take upon herself the defence of that action. ‘This was not necessary,’ say the court in Boston v. Worthington, supra, ‘to render the judgment conclusive against them as to the facts thereby established/ And this principle is established by the great weight of authority, that where one stands in the position of indemnitor to another who is liable over to a third party, his liability may be fixed and determined in the action brought against such third party, by notice of 'the pendency of such action, and an opportunity offered him to defend it. * * * In such case, the authorities hold that notice in writing, or even express notice, is unnecessary, but that notice may be implied from his knowledge of a pendency of the action and a participation in the defence.” See, also, Ryerson v. Chapman, 66 Maine, 563; Warner v. McGary, 4 Vt. 508. We are therefore of opinion, that the circuit court erred in refusing the third, fourth, fifth and sixth requests as asked by . the appellant, and that the Appellate Court erred in affirming that ruling. Some point was made in argument that appellee was a mere broker, having no interest in the notes or bonds. No question arises upon the record in that respect. No question of that kind was raised in the trial court or considered in the Appellate Court. Although in fact a broker; unless the evidence showed that appellant knew him to be a broker, and dealt with him as such, he occupies the position of a principal. No question was raised as to the good faith of the adjudication in the foreclosure case, either by requests to rule in that respect, or by objections to the introduction or exclusion of evidence. Of course, a decree by- collusion would not be conclusive against the indemnitor, but there is nothing in that respect before us, as a question of law. The judgments of the Appellate and circuit courts are reversed, and the cause is remanded to the circuit court for a trial de novo, in conformity with the views hereinbefore expressed. Judgment will be entered in this court for the costs of the appellant in the Appellate Court as well as in this court. Judgment reversed.