National Bank v. Dakin

[659] The opinion of the court was delivered by Johnston, J.: D. D. Bemis, who was the owner of a quarter section of land in Phillips county, executed a mortgage thereon to Judith Dakin to secure the payment of a debt. Afterward, he sold one-half of the tract to W. J. Gould, and as a part of the purchase price took Gould’s note for $700, payable in five years, with annual interest at the rate of 8 per cent, per annum, and took a mortgage on the same land to secure the payment of the note. It was stipulated and agreed in writing by the parties that the $700 debt, to be paid by Gould should be paid to Judith Dakin, to extinguish the mortgage debt due to her, and to satisfy and discharge a part of the original mortgage which Bemis executed to her. There was a further stipulation that the note and mortgage given by Gould should be deposited with the banking firm of Bodwell & Hamilton, and that payments made to them thereon should be immediately applied to the satisfaction of the Dakin mortgage debt. Afterward, the firm of Bodwell & Hamilton had other dealings with Bemis, and took several notes from him, among which was one for the sum of $2,062, which was secured by another mortgage upon the land previously mortgaged to Judith Dakin. The last-mentioned note was sold and transferred to the First National Bank of Frankfort, and several other of the notes mentioned were used by Bodwell & Hamilton as collateral security to obtain a loan from the National Bank of St. Joseph, Mo. Default having been made in the payment of the Dakin mortgage, a proceeding in foreclosure was begun, in which all of those interested in the land were made parties. All of the various claims and liens were adjusted without difficulty, except the note for $700 due from Gould to Bemis,. which, with the mortgage to secure the same, was deposited with Bodwell & Hamilton under the contract heretofore mentioned. From the record, it appears that this $700 note, which was. payable to the order of Bemis, was indorsed in blank and left [660] with Bodwell & Hamilton, and that, instead of retaining it and collecting and using the proceeds to discharge the Dakin mortgage debt, in accordance with the agreement, they wrongfully indorsed and transferred the same to the National Bank of St. Joseph, Mo., as collateral security for a loan obtained from that bank, and, subsequently, they made an absolute sale and transfer of the same in payment of a portion of the debt due from them to the National Bank of St. Joseph. Afterward Bodwell & Hamilton became insolvent, and when the foreclosure proceeding was begun the National Bank of St. Joseph was allowed to interplead and set up the Gould note for $700, and under the mortgage to secure the same they claimed a second lien upon the premises. Some of the other claimants contested the validity of the transfer of the $700 note to the National Bank of St. Joseph, alleging that Bemis did not indorse or transfer the note, but merely left the same with Bodwell & Hamilton in trust, the proceeds of which were to be collected by them and used to extinguish the Dakin debt; that they wrongfully diverted the $700 note so left with them to the National Bank of St. Joseph, which bank obtained no title or' ownership therein. Bemis, the payee of the note, also answered, setting up the fraud of Bod-well & Hamilton, and averring that the note was never indorsed or transferred to the bank as its absolute property, but was only delivered as collateral for the debt of Bodwell & Hamilton, and that the debt has since been paid from other collaterals held by the bank. He further averred, that the bank is not a bona fide owner or holder for value, but obtained the same unlawfully and in fraud of the rights of Bemis and the other claimants. The main issue on this branch of the case was the validity of the transfer of the Gould note, or whether the bank was a bona fide owner and holder of the same. On this issue, the court found against the bank, that Bemis was the owner, and that there was due to him thereon $976.88, and decreed that the money when collected should be paid in discharge of the Dakin debt and lien. It is undisputed that the note was [661] negotiable in form; that it was transferred to the bank before due in the regular course of business; that it was received by the bank in good faith, as collateral security for a loan of money by the bank to Bodwell & Hamilton ; and, that it was finally transferred absolutely in partial payment of the debt for which it was originally transferred as security. It was accepted as security for an actual debt, and there is nothing to show that the bank had any notice of the true ownership of the note, or that Bodwell & Hamilton had put it in circulation in violation of any trust or of any condition under which they held it. Under such circumstances, the bank must be regarded as a bona fide holder, unaffected by the wrongful transfer of Bodwell & Hamilton, or of any equities existing as between the antecedent parties. Although there was a denial of the allegation of indorsement and transfer by Bemis, the proof is clear that he did indorse it in blank, and in his own testimony he declines to say that he did not so indorse it. Having indorsed a negotiable promissory note in blank and intrusted it to others, he cannot complain if he is held liable to an innocent holder for value, although it may have been wrongfully used or diverted from the purpose for which it was intended. Under the unrestricted indorsement, anyone without notice of the title had a right to assume-that Bodwell & Hamilton were the owners of the same. “The mere possession of a negotiable instrument payable to order and properly indorsed is prima facie evidence that the holder is the owner thereof; that he acquired the same in good faith, for full value, in the usual course of business, before maturity, without notice of any circumstance that would impeach its validity, and that he is entitled to recover upon it its full face value as against any of the antecedent parties.” (Mann v. National Bank, 34 Kas. 747.) It is true that Bodwell & Hamilton committed a flagrant fraud upon Bemis and the other parties in the transfer of the note, but as Bemis intrusted the paper to others in such form as to enable them to hold themselves out as the absolute own [662] ■ers of the note, he should suffer rather than the bank, which had no notice or knowledge of the wrong. In such cases, the rule is, that of two innocent persons, the one who placed ■it in the power of others to commit the wrong must suffer for his misplaced confidence rather than the one who is not in fault. As far as the testimony goes, nothing on the face of the ■paper or in the circumstances of the transfer would give rise to any suspicions in regard to the title of Bodwell & Hamilton. They had frequently borrowed money from the bank, and had transferred to it as collateral security numerous promissory notes of their customers, and among them were several others •upon which Bemis was liable. The bank having made a loan ■upon the pledge and transfer of the collateral security, is entitled to the position of a bona fide holder for value, and to .protection against equities, offsets and other defenses which might have been available between antecedent parties. It is even held that a preexisting debt affords sufficient consideration for the transfer of collaterals as security for its payment. (Best v. Crall, 23 Kas. 482; Swift v. Tyson, 16 Pet. 1; Goodman v. Simonds, 20 How. 343; Oates v. National Bank, 100 U. S. 239; Railroad Co. v. National Bank, 102 id. 14; Spencer v. Sloan, 108 Ind. 183; Maitland v. National Bank, 40 Md. 540; Jones, Pledges, § 107; Story, Prom. Notes, § 195; Dan. Neg. Inst., § 824, et seq.) If there was no indorsement of the ■note by Bemis, or if the bank knew of the conditions under which Bodwell & Hamilton held the note, the bank would not be entitled to protection as a holder for value. The testimony in the record fails to show that the debt which was secured by the transfer of the note has been paid. Indeed, it would appear that, if the note should be collected by the bank and the proceeds applied on what was due to it from Bod-well & Hamilton, a considerable part of the debt would still remain unsatisfied. We conclude that the testimony is insufficient to sustain the judgment that was rendered, and for that reason there must be a reversal and a new trial. All the Justices concurring.