Harrison v. Pike Bros. & Co.

SlMRALL, J.: Pike Brothers & Co. brought their bill in chancery to foreclose a mortgage made by R. E. Harrison and wife, to secure two promissory notes, made by Harrison, payable to Waddy Thompson, and by him indorsed to the complainants, one for $2,632.24, at one year after date,' the other for $3,062.28, at two years after date. The answer and cross-bill of Harrison alleges that the notes and mortgage to Thompson were executed in liquidation of a debt, due by Harrison to Waddy Thompson & Co., a commercial firm composed of Waddy Thompson and William B. Morris. This copartnership was formed in 1865, and dissolved, by consent, 10th of June, 1868. Thompson and Morris had two places of business, one in New Orleans, under the firm name above stated, the other at Shreveport, La., under the style of Thompson, Morris & Co. That Thompson was charged with the liquidation of the business until the 1st of May, A. D. 1869, during which time he collected of the assets $31,752.98, and paid to the creditors $20,625.70, thereby leaving himself debtor to the firm $11,124. Of firm debts he left unpaid over $5,000. In-June, 1869, Thompson becoming involved, turned over the business of the two firms to his late partner, Morris, for settlement. Morris has collected over $6,000 — 55 — of debts; has paid out to creditors over $7,000, leaving a balance in his favor of over $600. In April, 1869, Thompson negotiated and sold to the complainants, Pike Brothers & Co., two drafts for $10,000 each, drawn by himself on W. J. Porter & Co., New York, one of which was not paid. That, in order to protect the complainants, on account of the protested bill, Thompson transferred to them the two notes aforesaid of the defendant, Harrison, and a note of Caughn & Fleming for $2,194, which was of the assets of the firm of Waddy Thompson & Co. These notes were held as collateral security .for Thompson’s indebtedness to the complainants. There was also, on the same consideration, transferred to them the note of Perry Fuller, for $10,000. Morris, in May, 1869, notified the complainants, in writing, that the notes of defendant Harrison belonged to the co-partnership of Waddy Thompson & Co., and were not the individual property of Thompson. Suit is pending in New York by the complainants against W. J. Porter & Co. on the protested draft of Thompson. Morris, in 1869, gave notice to defendant not to pay his notes to Pike Brothers & Co. The defendant asserts an indebtedness of Waddy Thompson & Co. to him of $1,650, for work and labor, which should be an offset pro tanto against his notes. The case has been brought here from the decision of the chancellor sustaining the complainants’ demurrer to the cross-bill. The notes are payable to the defendant’s own order, and by him indorsed and delivered to Thompson, who indorsed and delivered them to the plaintiffs. They are payable in New Orleans. Pike Brothers & Co. and Waddy Thompson are residents of Louisiana, and were doing business at New Orleans. In order to determine the right of the defendant to set up the defenses and matters contained in his answer and cross-bill, it becomes necessary to define — 56 — the relations of the several parties in respect to the mortgage notes. By the law merchant the indorser of a bill of exchange or promissory note, who has paid a consideration, takes the paper freed from the. equities existing between the antecedent parties. But our statute, Code of 1857, p. 255, art. 2, allows as against the indorsee, the “ benefit of all want of lawful consideration, failure of consideration, payments, discounts, sets-off, made or had against the paper previous to notice of assignment.” This radical innovation on commercial law has been uniformly held to apply to negotiable paper purely domestic; as, where the note is made payable here, or the bill of exchange is inland, or, more properly, “ domestic.” If the bill is drawn upon a party in another state or in a foreign country, or the note is made payable there, neither is, as a general rule, ,affected by our statute, but is governed by the law of the place where performance is to be made. Such is the character of a bill of exchange or promissory note drawn or made here, but payable in New Orleans or New York. Miller v. Mayfield, 37 Miss. 688; Emanuel v. White, 35 Miss. 56; Bank of Kentucky v. Coffman, 41 Miss. 212; Fellows v. Harris, 12 S. & M. 462; Bank of Louisiana v. Williams et ux. 46 Miss. 625. The effect is to select the laws of the other state or country, and “ locate” the contract there, subject to them. Case last cited, and Dalton v. Murphy, 30 Miss. 75. The holder of negotiable paper, indorsed to him, is presumed to have a bona fide title, and to have parted with value for it-; and it devolves upon the maker of the note who sets up defenses and equities between himself and the payee, to lay a foundation for the right claimed, by showing that the indorsee parted with no valuable consideration, or that he took the paper when discredited after it was due, or some other facts which throw suspicion upon his title, and which would put — 57 — him upon his guard, and enjoin inquiry. Such is the law merchant. Winstead v. Davis, 40 Miss. 785. The defendant, by making his note payable to his own order at New Orleans, and indorsing and delivering it to Thompson, domiciled the transaction in Louisiana, and submitted it to the laws of that state, and engaged that if the paper in due course of business was negotiated in that state by Thompson, the rights of his indorser should be measured by that law. The averment of the cross-bill is that the notes were passed to the complainant before their maturity. That constitutes the plaintiffs presumptively bona fide holders, unless the allegation that they took them as collateral security from Thompson, deprives the plaintiffs’ title, of the protection which attaches to one who has parted with value. Was the transfer of the notes to the complainants, as collateral security for Thompson’s indebtedness, a negotiation for value, so as to constitute them bona fide holders, and thereby shield them from any equties which might exist between Thompson and the defendant. That question must be referred to the law of Louisiana, where the transaction between Thompson and the complainants took place. In the succession of Dolhonde, 21 La. Ann. 4, it was pressed upon the court, that although the commercial law protects the bona fide holder of the note, who acquires it before maturity, yet, if the note has been received as collateral security for a pre-existing debt, the rule does not apply. But the court adopt the doctrine of the supreme court of the United States in Swift v. Tyson, 16 Peters, 20, where- it was distinctly laid down that a pre-existing debt does constitute a valuable consideration. In President and Directors of Louisiana State Bank v. Gaiennie, 21 La. Ann. 556, it is again affirmed that a transfer “ as collateral security, before maturity, constitutes the indorsee holder “ in good faith for value.” These decisions were — 58 — made in 1869, and establish that the complainants are unaffected by any equities or defenses that may have existed between prior parties to the paper. ' it cuts off the claim of the defendant to be credited as against the complainants with the offset of $1,650. The other subjects of the answer and cross-bill are the misbehavior of Thompson in closing the account of Waddy Thompson & Co. against the defendants, with notes payable to himself personally, and that he has otherwise appropriated the assets of the firm to his own use to such degree that he • is the debtor to his late partner, Morris, to a large amount. What benefit can the defendant derive from an investigation of these matters ? How can they avail in this suit ? What does it matter to him how the partnership account stands between Thompson and Morris ? If these things were proper to be adjudicated in this suit, then he ought to have made Morris a party to his cross-bill, or ought to have put the complainants under a rule to do so. Morris, as shown by the cross bill, was aware that the complainants held these notes; if he desired to intervene in the suit in order to protect his interests, by having any surplus there might be after liquidating the debt of Thompson to complainants, paid over to himself, he would' have been permitted to do so. It is reasonable to infer that he preferred relying upon his notice to the complainants, rather than to interfere in this suit, and hereafter to assert his claims against the complainants, in respect to any fund they may realize out of it in a separate suit. The cross-bill does not aver that - Morris repudiated the settlement made by Thompson with the defendant; but on the contrary, that he recognized that settlement as valid, the notes and mortgage as representing the indebtedness ; claiming that in reality the money due upon them was assets of the co-partnership. Such was the purport of the written notice given to the complainants. — 59 — But if Harrison, the defendant, could he permitted to interpose against the complainants whatever right Morris might have, what is its nature and extent? Morris might claim that the proceeds of these notes ought to go first to the creditors of the partnership, and the surplus to make good the balance due from Thompson to him on the partnership account. If the complainants were out of the way, that would be the equitable appropriation of the fund. But can the defendant set up that equity in favor of Morris to defeat the complainants’ legal title to the note ? If Morris could not himself successfully plead it, a fortiori, the defendant cannot. If Morris were setting it up in this suit, it would be answered by the case of Bank of Manchester v. Lewis, 13 S. & M. 230-1. It was claimed that there had been á misappropriation of the notes of Wilkinson, the agreement being that the notes should be applied to take up the liabilities of C. L. & D., with the knowledge of Cusack, who indorsed them to the bank. The proceeds were actually applied to the debts of C. & D. In the view of the court, although such agreement may have existed, yet if the bank had no notice of it, it was not bound by it. The legal title to the notes was in the bank. The complainant set up a prior equity which was unknown to the bank, and, therefore, should not prevail against its legal title. The asserter of the equity is not a party to the paper as maker, payee, or indorsee. The staute only lets in the defenses as against a holder of the note. Morris is not a party to the notes. He has an equity prior to the indorsement of the paper to the complainants, that the proceeds shall go to the partnership account, and not to the personal benefit of Thompson. But that equity being unknown to the complainants before they received the note, cannot prevail- against their legal title. Such is undoubtedly the rule under the law merchant of — 60 — Louisiana, and such, too is declared to be doctrine here in the case cited. • But there is another view of the case made in the cross-bill. As we have shown, the complainants became the bona fide holders and owners of the notes in due course of business. The entire equity, except the offset set up, is for the benefit of Morris, and yet the defendant omits to make Morris a party. Reduce the cross-bill to the simplest analysis and it is this: Morris is entitled to the money due upon the notes, because the notes are partnership assets which Thompson attempted to misapply, and upon the account between the partners, Thompson is indebted the full amount of the notes to Morris; besides, the joint-creditors have not been fully paid off. It is very manifest that, as to all, the only parties concerned are Morris and Thompson, and yet the defendant interposes to litigate these equities in this suit without making Morris a party. The answer and cross-bill proceed throughout on the postulate, that the defendant owes the debt in the mortgage mentioned, has no discount, defense or offset to any part of it (except $1,650 for Avork and labor); but the notes are held by the complainants as collateral security for Thompson’s debt, which defendant does not think giA^es them a good title, but that really the money ought to go for the reasons stated to Morris. If in good faith the defendant admits his indebtedness, except his claim of offsett, but was in doubt to which of the two claimants he ought to pay it, he should have made his answer a bill of interpleader, put himself in the attitude of a stakeholder, indifferent between the parties, deposited the money in court with his bill, and prayed that the complainants and Morris, or Thompson and Morris, should litigate between themselves, so that the court might adjudge which was entitled to the fund. Instead of that, the defendant volunteers to become the — 61 — exponent and champion of the rights of Morris, hoping to defeat the plaintiffs by showing a better claim in this stranger to the record. A court of equitjr is not disposed to aid a debtor in that sort of litigation, which only tends to delay and postpone and multiply suits. There is only one view that can be taken of the offset of $1,650 which could authorize its consideration in this suit. This claim might have been set up against the debt of Waddy Thompson & Co. against the defendant. But when the defendant gave his negotiable notes to Thompson to close up that indebtedness, he must be presumed as assenting to a negotiation of the notes, which would defeat the offset, and also as consenting to separate his offset altogether from the settlement resulting in the notes and mortgage, leaving himself open to assert it as an ordinary debt against W. Thompson & Co. But if the defendant elects now, and in this suit, to press his offsett, he ought to have prepared the way for its consideration and allowance by proper allegations ; chief of which would be, that unless now allowed to him, it would be lost, because of the insolvency of Waddy Thompson & Co.; and then only would it avail, unless it should turn out that there should be a surplus from the notes and mortgage after satisfying to the complainants Thompson’s indebtedness. to them. But the defendant cannot litigate the offsett for any purpose, unless Morris is a party. The cross-bill contains another defect; it does not aver that if the mortgage debt were collected by the complainants, and there should be an excess after the satisfaction of Thompson’s debt, that Morris or Thompson and Morris would be in danger of loss on account of the insolvency of the complainants. If the defendant should go forward and pay the mortgage debt in full to the complainants, they would have the right to apply the money to pay Thompson’s debt to themselves, and would hold the balance for the use — 62 — of whoever might- he entitled to it. Through them Harris would obtain all that he could receive in this suit. In view of the whole case, we think the demurrer to the cross-bill ought to be sustained. If the defendants can show by proof that the complainants have been paid the debt for which the notes were transferred as collaterals (which may be done under the answer), then they would prove that the complainants have no interest in the notes and subject-matter of the suit, and would defeat a recovery. Decree is affirmed.