Reed, Murdoch & Co. v. Brown Bros.

89 Iowa 454

• Court: Supreme Court of Iowa
• Decided: October 17, 1893
• Status: Published

Opinion

Given, J.

The certificate upon which this appeal is taken is as follows:

“Where goods are purchased from an insolvent firm, but without any knowledge on the part of the purchaser of said insolvency, to be paid for in part with a pre-existing debt, and a promise on the part of the purchaser, to pay the balance on demand, but where the balance is not demanded or paid, and a receipt given to the vendor by the purchaser for the debt, as aforesaid, and when the purchase!' is told to take any goods he chooses from a large quantity, and the purchaser takes goods that were obtained by fraud on the part of the vendee, and the defrauded vendor rescinds the sale, does such a purchase constitute a purchase for value, as against the defrauded vendor?”

It is not questioned in the record, or in argument, but that the appellees had the right to, and did, rescind the contract by which they sold* the goods in controversy to the appellants’ vendors, Rae & Harker, and would be entitled to recover them from Rae & Harker, if still held by them. Nor is it questioned but that the appellants were innocent purchasers of the goods from Rae & Harker. The sole contention is whether they were purchasers for value, or, in other words, whether the pre-existing debt, and the promise to pay the excess of the value of the goods over the amount of the debt, was a valuable consideration, as against the defrauded vendors, the appellees.

. , 1. Sales: consideraticm: preI. We first inquire whether the pre-existing debt was a valuable consideration for the purchase. This question is presented for the first time in -1 x this court. Though the amount m eontroversy is small, counsel ui’ge the importance of the question, and have aided us in its solution by the marked care and ability with which it is presented. Cobbey, in his Law of Replevin, section 286, states the law to be as follows: “Goods obtained by fraud, and used to pay a pre-existing debt, may be replevied by the true owner. Where goods obtained by fraud are turned over to pay a pre-existing debt of the vendee, either by actual sale or by pledge, such second vendee is not considered as an innocent purchaser for value, as, if he is compelled to surrender the goods to the true owner, he is in no worse condition than before. In such cases it is well- settled that the true owner may retake his property.” SeeNewmark on Sales, section 205. Of the many cases which we find fully supporting this statement of the law, we cite the following, most of which are directly in point: Root v. French, 13 Wend. 570; Sargent v. Sturm, 23 Cal. 359; Durell v. Haley, 1 Paige, 491, 492; Linnard's Appeal, (Pa. Sup.) 3 Atl. Rep. 840; Bradley v. Obear, 10 N. H. 477; Farley v. Lincoln, 51 N. H. 577; Sleeper v. Davis, (N. H.) 6 Atl. Rep. 201; Johnson v. Peck, 1 Woodb. & M. 334; Ruth v. Ford, 9 Kan. 17; Thompson v. Rose, 41 Am. Dec. 121; Dickerson v. Tillinghast, 4 Paige, 215; Stevens v. Brennan, 79 N. Y. 254; Poor v. Woodburn, 25 Vt. 234; Ratcliffe v. Langston, 18 Md. 383; Spira v. Hornthall, 77 Ala. 137; Henderson v. Gibbs, 39 Kan. 680, 18 Pac. Rep. 926; Eaton v. Davidson, 46 Ohio St. 355, 21 N. E. Rep. 442. In Oswego Starch Factory v. Lendrum, 57 Iowa, 573, this court held, that an attaching creditor of a fraudulent vendee parts with no consideration; that he stands in the shoes of the vendee, and can not hold the property attached, as against the defrauded vendor. The reasoning in that case is in harmony with the cases cited above.

The only cases we have discovered, holding contrary to the above mentioned cases, áre Shufeldt v. Pease, 16 Wis. 689; Butters v. Haughwout, 42 Ill. 18. The appellants cited Johnson v. Barney, 1 Iowa, 531, and Trustees v. Hill, 12 Iowa, 463. In the former case it is held, in harmony with the general current of decisions, “that the rights of the holder of a negotiable instrument are the same whether the debt for which it is transferred is pre-existing, or contracted at the time of the transfer. ” The latter case recognizes this rule as applying to transfers of negotiable paper in payment of a pre-existing debt, and holds that if the transfer is as collateral security for a pre-existing debt, without any new consideration, an assignee of the negotiable instrument is not a purchaser for value, in the usual course of trade. This case has been followed in Ryan v. Chew, 13 Iowa, 589; Ruddick v. Lloyd, 15 Iowa, 441; Union Nat. Bank v. Barber, 56 Iowa, 559; Bone v. Tharp, 63 Iowa, 223.

It being thus settled, as the law of this state, that a pre-existing debt is a valuable consideration for the transfer of a negotiable instrument, the appellants contend that the same rule should apply to the transfer of any chattel property. In considering this claim, we must have in mind the distinction between negotiable instruments and other chattels. It is unquestionably the policy of the law, in the interest of trade and commerce, to facilitate the circulation of commercial paper. The necessities of commerce require that bills of exchange and promissory notes shall be treated as possessing some of the attributes of money; and to give them this attribute, and to give confidence in their reception, they are protected in the hands of an innocent holder for value, before due, from defenses growing out of the dealings of the prior parties. Negotiable instruments are excepted from the rule with regard to other property. It is only he who has a title himself to a personal chattel that can convey it to another; but the bona fide assignee for value of even a stolen note, who takes it innocently, in the course of trade, before due, with due caution, has a valid title, although his assignor had no title whatever. It is these distinctions between commercial instruments and other property that have led the courts to hold that a pre-existing debt is a valid consideration for the transfer of a negotiable instrument. See]3 Kent’s Commentaries, 79; Eaton v. Davidson, 46 Ohio St. 355; Carlisle v. Wishart, 11 Ohio, 172; McLeod v. Bank, 42 Miss. 112.

In Swift v. Tyson, 16 Pet. 1, Justice Story, after reviewing the authorities, and holding that a pre-existing debt does constitute a valuable consideration for the transfer of a negotiable instrument before due, gives the following reasons: “It is for the benefit and convenience of the commercial world to give as wide an extent as practicable to the credit and circulation of negotiable paper, that it may pass, not only as security for new purchases and advances made upon the transfer thereof, but also in payment of, and as security for, pre-existing debts. The creditor is thereby enabled to realize or to secure his debt, and thus may safely give a prolonged credit, or forbear from taking any legal steps to enforce his rights. The debtor also has the advantage of making his negotiable securities of equivalent value to cash. But, establish the opposite conclusion that negotiable paper can not be applied in payment of, or as security for, pre-existing debts, without letting in all the equities between the original and antecedent parties, and the value and circulation of such securities must be essentially diminished, and the debtor driven to the embarrassment of making a sale thereof, often at a ruinous discount, to some third, person, and then, by circuity, to apply the proceeds to the payment of his debts. What, indeed, upon such a doctrine, would become of that large class of eases where new- notes are given by the same or by other parties, by way of renewal or security, to banks, in lieu of old securities discounted by them, which have arrived at maturity? Probably more than one half of all bank transactions in our country, as well as those of other countries, are of this nature. The doctrine would strike a fatal blow at all discounts of negotiable securities for pre-existing debts. This question has been several times before this court, and it has been uniformly held that it makes no difference whatsoever, as to the rights of the holder, whether the debt for which the. negotiable instrument is transferred to him is a pre-existing debt, or is contracted at the time of the transfer. In each case he equally gives credit to the instrument.”

Manning v. McClure, 36 Ill. 490, cited, only determines that a negotiable note taken as collateral security for a pre-existing debt was taken for value. The question under consideration was not involved in that case. We think it is entirely clear, upon reason and from these authorities, that while, from the necessities of the case, and the nature of negotiable instruments, a preexisting debt is a valuable consideration for their transfer, it should not be so held as to other personal property.

_____ payment^ II. It only remains to determine whether the promise to pay the excess of the value of the goods over the amount of the debt is such a valuable consideration as will sustain the transfer. We have seen that, where a prior debt is the only consideration, it is held not to be a purchase for value, because the purchaser parts with nothing; that, if he is compelled to surrender the goods to the true owner, he has his claim against his debtor, and is in no worse position than before. The same reasons apply to this promise to pay the difference. If, as some of the cases hold, Rae & Harker had no title to the goods that they could transfer, as against the appellees, then there was no consideration for the promise to pay this difference.

The question certified is whether this purchase by the appellants constitutes a purchase for value, as against the defrauded vendors. Our conclusion is that the question must be answered in the negative, and the judgment of the district court affirmed.