Chicago Railway Equipment Company v. Merchants' National Bank/Opinion of the Court

Are the writings in suit to be regarded as promissory notes, to be protected, in the hands of bona fide holders for value, according to the rules of general mercantile law as applicable to negotiable instruments, or are they anything more than simple contracts, subject, in the hands of transferees, to such equities and defenses as would be available between the original parties? This is the question upon which, it is conceded, depends the correctness of the several rulings to which the assignments of error refer.

By the statute of Illinois revising the law in relation to promissory notes, bonds, due-bills, and other instruments in writing, approved March 18, 1874, and in force July 1, 1874, (Rev. St. Ill. 1874, p. 718; 2 Starr & C. Ann. St. p. 1651, c. 98; Rev. St. 1845, p. 384,) it is provided:

'Sec. 3. All promissory notes, bonds, due-bills, and other instruments in writing, made or to be made by any person, body politic or corporate, whereby such person promises or agrees to pay any sum of money or article of personal property, or any sum of money in personal property, or acknowledges any sum of money or article of peson al property to be due to any other person, shall be taken to be due and payable, and the sum of money or article of personal property therein mentioned shall, by virtue thereof, be due and payable as therein expressed.

'Sec. 4. Any such note, bond, bill, or other instrument in writing, made payable to any person named as payee therein, shall be assignable by indorsement thereon, under the hand of such person and of his assignees, in the same manner as bills of exchange are, so as absolutely to transfer and vest the property thereof in each and every assignee successively.'

Other sections of the statute throw some light on the question before us. The fifth section provides that any assignee to whom such sum of money or personal property is by indorsement made payable, or, he being dead, his executor or administrator, may in his own name institute and maintain the same kind of action for the rocovery thereof against the person making and executing the note, bond, bill, or other instrument in writing, or against his heirs, executors, or administrators, as might have been maintained against him by the obligee or payee, in case it had not been assigned. By the sixth section no maker of or other person liable on such note, bond, bill, or other instrument in writing is allowed to allege payment to the payee made after notice of assignment as a defense against the assignee. The eighth section provides: 'Any note, bond, bill, or other instrument in writing, made payable to bearer, may be transferred by delivery thereof, and an action may be maintained thereon in the name of the holder thereof. Every indorser of any instrument mentioned in this section shall be held as a guarantor of payment, unless otherwise expressed in the indorsement.' The ninth section allows the defendant, when sued upon a note, bond, or other instrument in writing for the payment of money or property, or the performance of covenants or conditions, to prove the want or failure of consideration: 'provided, that nothing in this section contained shall be construed to affect or impair the right of any bona fide assignee of any instrument made assignable by this act, when such assignment was made before such instrument became due.' The eleventh section provides that 'if any such note, bond, bill, or other instrument in writing shall be indorsed after the same becomes due, and any indorsee shall institute an action thereon against the maker of the same, the defendant, being maker, shall be allowed to set up the same defense that he might have done had the action been instituted in the name and for the use of the person to whom such instrument was originally made payable, or any intermediate holder.' Under the twelfth section, if the instrument has been assigned or transferred by delivery to the plaintiff after it became due, 'a set-off to the amount of the plaintiff's debt may be made of a demand existing against any person or persons who shall have assigned or transferred such instrument after it became due, if the demand be such as might have been set off against the assignor, while the note or bill belonged to him.' If the instrument is assigned before the day the money or property therein mentioned becomes due and payable, then, by the thirteenth section, the defendant, in an action brought by the assignee, is allowed to give in evidence at the trial any money or property actually paid on the note, bond, or bill, or other instrument in writing before it was assigned to the plaintiff, on proving that the plaintiff had 'sufficient notice of the said payment before he accepted or received such assignment.'

It is contended by the defendant that these statutory provisions, so far as they embrace instruments not negotiable at common law, relate only to the manner of their indorsement or transfer, and that the indorsee takes them, as before the statute, subject to all the defenses that might be interposed in an action between the original parties. This view is inconsistent with the decisions of the suprme court of Illinois. Some of these decisions will be referred to as indicating the scope and effect of the local statute, as well as the views of that court upon the general principles of commercial law involved in this case.

In Stewart v. Smith, 28 Ill. 397, 406, 408, the principal question was as to the negotiability under the above statute of the following instrument: 'Chicago, 21st of January, 1859. Received from teams in our pork house, No. 114 West Harrison street, 280 hogs, weighing 45,545 pounds, the product of which we promise to deliver to the order of Messrs. Stevens & Brother indorsed hereon. G. & J. STEWART.' The court said: 'Testing the writing by this statute, there cannot be a doubt upon its assignability. It is an instrument in writing. It purports to be made by persons. By it those persons promise and agree to deliver a certain article of personal property to the order of certain other persons. By force of the statute, this article of personal property mentioned in the instrument of writing so made, by virtue of its being so mentioned and in such form of words, must be taken to be due and payable to the person to whom the instrument in writing is made. The statute does not require that the note or instrument in writing shall be payable at any particular time or place, or be expressed for value received, or that any consideration whatever should appear in the writings. An acknowledgment of indebtedness, in the simplest form, would seem to be all the statute requires to give it the character of negotiability. A writing in this form, probably the simplest, would be a perfect negotiable note under this statute: 'Due John Brown ten thousand dollars. July 4, 1862;' and signed by the maker. Such an instrument is clothed with all the attributes of negotiability, and imports a consideration, and no averments or proofs are necessary on those points. * *  * The other point made by plaintiffs, that the instrument was overdue on the 26th of January, 1859, when it was indorsed, to such an extent as to put a prudent man upon inquiry in respect to all equities which the makers might have against it in the hands of the promisee, we do not consider a strong one. * *  * The indorsement, being in season, cuts off all equities, if there were any, in defendant's favor, and the only hazard incurred in holding it back for payment was that the release of the indorsers might have been caused by it, but not the release of the maker.'

In Cisne v. Chidester, 85 Ill. 524, the action was upon the following note: '$120. May 2, 1871. On the first day of September, 1871, (or before, if made out of the sale of J. B. Drake's horse hay fork and hay carrier,) I promise to pay James B. Drake, or to order, one hundred and twenty dollars, for value received, with use.' On this note was an indorsement by Drake to Chamberlain, and by the latter to Chidester. The trial court instructed the jury that, in the hands of an assignee before maturity, the question of consideration did not arise until it was shown by evidence that the assignee purchased the note with actual knowledge of the want of consideration; and also that the note was, in its effect, payable absolutely on the 1st day of September, 1871, with interest at 6 per cent. from date. The supreme court of Illinois said: 'The pleas were the general issue, and fraud and circumvention in obtaining the making of the note. There was no evidence whatever as to the time of the indorsement of the note, or of any want of good faith in, or notice of the indorsee in respect to, the consideration of the note, or the circumstances under which it was given, more than appears upon the face of the note itself. The plaintiff was presumed to be a bona fide indorsee of the note for a valuable consideration. As against the plaintiff, there was, under the evidence, no question of consideration before the jury, and the giving of the first instruction could form no just cause of complaint. The construction of the note was a question o la w, and for the court. The proper construction was put upon the note.'

In White v. Smith, 77 Ill. 351, 352, the principle was said to be undoubted that, to constitute a valid promissory note, it must be for the payment of money, which will certainly become due and payable one time or another, though it may be uncertain when that time will come. In Bank v. McCrea, 106 Ill. 281, 289, 292, the court, construing the local statute, said that it did not embrace 'covenants or agreements for the performance of individual services in and about property,-mutual, dependent, and conditional covenants and agreements, or covenants and agreements to pay money or deliver property upon uncertain contingencies or events,'-but applied 'only to absolute and unconditional promises to pay money or deliver property.' It was further said to be clear, under previous cases, that 'the promise or undertaking must be restricted to the payment of money or delivery of property at a time that will certainly happen.' 'It may be,' the court added, 'unknown, in advance, when it will be, but it must be absolutely certain that it will be some time; and although it may be within the power of the party to whom the promise is made to render it certain, by his subsequent act, that the time will happen, this will not be sufficient. It cannot depend upon his will or pleasure.' See, also, Harlow v. Boswell, 15 Ill. 56; McCarty v. Howell, 24 Ill. 341; Bilderback v. Burlingame, 27 Ill. 338; Houghton v. Francis, 29 Ill. 244; Baird v. Underwood, 74 Ill. 176.

It is clear from these cases that the statute of Illinois has a much wider scope than the counsel for the defendant supposes. It evidently intended to place negotiable promissory notes in the hands of bona fide holders for value on the same footing, substantially, that they occupy under the general rules of the mercantile law. It does not, in our judgment, do anything more. So that we are to inquire whether the notes in suit are not negotiable securities according to the custom and usages of merchants.

The defendant insists that, in view of the agreement for the retention by the payee of the title to the cars until all the notes of the same series, principal and interest, are fully paid, the transaction was only a conditional sale of the cars. It is contended that the promise to pay the notes given for the price, so far from being absolute as required by the mercantile law, is subject to the condition, running with the notes, that the title to the cars should not pass until all the notes were paid, which could not occur if, before payment, the cars had been destroyed or sold to other parties. The fact that, by agreement, the title is to remain in the vendor of personal property until the notes for the price are paid, does not necessarily import that the transaction was a conditional sale. Each case must depend upon its special circumstances. In Heryford v. Davis, 102 U.S. 235, 243-246, the question was as to whether a certain instrument relating to cars supplied to a railway company, and for the price of which the latter gave its notes, showed a conditional sale, which did not pass the ownership until the conditions were performed, or whether, taking the whole instrument together, the seller reserved only a lien or security for the payment of the price, or what is sometimes called a mortgage back to the vendor. In that case the instrument construed provided that, until a certain payment was made, the railway company should have no right, title, claim, nor interest in the cars delivered to it, 'except as to their use or hire,' nor any right or authority in any way to dispose of, hire, sell, mortgage, or pledge the same; but that they 'are and shall remain the property' of the manufacturing company, and be redelivered to it when demanded, upon default in the above payment. This court, after observing that the true construction of the contract was not to be found in any name which the parties may have given to the instrument, nor lon e in any particular provisions it contained, disconnected from all others, but in the ruling intention of the parties, gathered from all the language used, said: 'It is the legal effect of the whole which is to be sought for. The form of the instrument is of little account. Though the contract industriously and repeatedly spoke of loaning the cars to the railroad company for hire, for four months, and delivering them for use for hire, it is manifest that no mere bailment for hire was intended. No price for the hire was mentioned or alluded to, and in every bailment or letting for hire a price or compensation for the hire is essential. * *  * It is quite unmeaning for parties to a contract to say it shall not amount to a sale, when it contains every element of a sale, and transmission of ownership. This part of the contract is to be construed in connection with the other provisions, so that if possible, or so far as is possible, they may all harmonize. Thus construed, it is quite plain these stipulations were inserted to enable the manufacturing company to enforce payment, not of any rent or hire, but of the selling price of the cars for which the company took the notes of the railroad company. They were intended as additional security for the payment of the debt the latter company assumed. This is shown most clearly by the other provisions of the contract. The notes became the absolute property of the vendors. As has been stated, they all fell due within four months, and it was expected they would be paid. The vendors were expressly allowed to collect them at their maturity, and it was agreed that whatever sums should be collected on account of them should be retained by the vendors for their own use. No part of the money was to be returned to the railroad company in any event; not even if the cars should be returned. * *  * What was this but treating the notes given for the sum agreed to be the price of the cars as a debt absolutely due to the vendors? What was it but treating the cars as a security for the debt? * *  * In view of these provisions, we can come to no other conclusion than that it was the intention of the parties, manifested by the agreement, the ownership of the cars should pass at once to the railroad company in consideration of their becoming debtors for the price. Notwithstanding the efforts to cover up the real nature of the contract, its substance was an hypothecation of the cars to secure a debt due to the vendors for the price of a sale. The railroad company was not accorded an option to buy or not. They were bound to pay the price, either by paying their notes, or surrendering the property to be sold in order to make payment. This was in no sense a conditional sale. This giving property as security for the payment of a debt is the very essence of a mortgage, which has no existence in a case of conditional sale.'

It is a mistake to suppose that there is any conflict between these views and those expressed in the subsequent case of Harkness v. Russell, 118 U.S. 663, 680, 7 Sup. Ct. Rep. 51, where the whole doctrine of conditional sales of personal property was carefully examined, and in which the particular instrument there in question was held to import, not an absolute sale, but only an agreement to sell upon condition that the purchasers should pay their notes at maturity. With the principles laid down in the latter case we are entirely satisfied. But as pointed out in Cattle Co. v. Mann, 130 U.S. 69, 77, 78, 9 Sup. Ct. Rep. 458, the agreement in Harkness v. Russell was upon the express condition that neither the title, ownership, nor possession of the engine and saw-mill which was the subject of the transaction should pass from the vendor until the note given by the vendee for the stipulated price was paid. Turning to the notes here in suit, we find every element of a sale and transmission of ownership, despite the provision that the title to the cars should remain in the payee until all the notes of the series were fully paid. The notes, upon their face, show theywer e given for the 'purchase price' of cars 'sold' by the payee to the maker, and they are 'secured' equally and ratably on the cars, in order to prevent the holder of one of the notes from obtaining out of the common security a preference over holders of others of the same series. This provision placed the parties upon the same footing they would have occupied if a chattel mortgage, covering all the notes, had been executed by the purchaser of the cars. If the notes had been in the usual form of promissory notes, and the maker had given a mortgage back to the payee, the title would, technically, have been in the payee until they were paid. But they would, in such case, have been negotiable securities, protected in the hands of bona fide holders for value against secret defenses, and their immunity from such defenses would have been communicated to the mortgage itself. In Kenicott v. Supervisors, 16 Wall. 452, 469, it was said that where a note secured by a mortgage is transferred to a bona fide holder for value before maturity, and a bill is filed to foreclose the mortgage, no other or further defenses are allowed against the mortgage than would be allowed were the action brought in a court of law upon the note. To the same effect is Carpenter v. Longan, 16 Wall. 271, 274. See, also Swift v. Smith, 102 U.S. 442, 444; Collins v. Bradbury, 64 Me. 37; Towne v. Rice, 122 Mass. 67, 73.

The agreement that the title should remain in the payee until the notes were paid-it being expressly stated that they were given for the price of the cars sold by the payee to the maker, and were secured equally and ratably on the property-is a shortform of chattel mortgage. The transaction is, in legal effect, what it would have been if the maker, who purchased the cars, had given a mortgage back to the payee, securing the notes on the property until they were all fully paid. The agreement, by which the vendor retains the title, and by which the notes are secured on the cars, is collateral to the notes, and does not affect their negotiability. It does not qualify the promise to pay at the time fixed, any more than would be done by an agreement of the same kind embodied in a separate instrument in the form of a mortgage. So far as the notes upon their face show, the payee did not retain possession of the cars, but possession was delivered to the maker. The marks on the cars showed that they were to go into the possession of the maker, or of its transferee, to be used. The suggestion that the maker could not have been compelled to pay if the cars had been destroyed before the maturity of the notes is without any foundation upon which to rest. The agreement cannot properly be so construed. The cars having been sold and delivered to the maker, the payee had no interest remaining in them except by way of security for the payment of the notes given for the price. The reservation of the title as security for such payment was not the reservation of anything in favor of the maker, but was for the benefit of the payee and all subsequent holders of the paper. The promise of the maker was unconditional.

Without deciding whether the notes here in suit would or would not have been negotiable securities if the transaction between the parties had been a conditional sale, we are of opinion that they are of the class of instruments that are negotiable according to the mercantile law, and which, in the hands of a bona fide holder for value, are protected against defenses of which the maker might avail himself if sued by the payee. they are promises in writing to pay a fixed sum of money to a named person or order, at all events, and at a time which must certainly arrive. School-Dist. v. Hall, 113 U.S. 135, 139, 140, 5 Sup. Ct. Rep. 371; Story, Prom. Notes, § 27; Cota v. Buck, 7 Metc. 588. It is true that, upon the failure of the maker to pay the principal and interest of any note of the whole series of 25, the others would become due and payable: that is, due and payableat the option of the holder. But a contingency under which a note may become due earlier than the date fixed is not one that affects its negotiability. In Ernst v. Steckman, 74 Pa. St. 13, 16, cited with approval in Cisne v. Chidester, 85 Ill. 525, the question was whether the following instrument was a negotiable promissory note: '$375. Paradise, Lancaster Co., Pa., June 11, 1869. Twelve months after date, (or before, if made out of the sale of W. S.C.offman's improved broad-cast seeding-machine, a promise to pay to J. S. Huston, or bearer, at the First National, Bank of Lancaster, three hundred and seventy-five dollars, without defalcation, for value received, with interest.' It was there contended that the character of the instrument was changed by the fact that, in the contingency of the sum being sooner realized from the sale of the machinery, it might become payable within the year. The court, after observing that the general rule, to be extracted from the authorities, undoubtedly requires that, to constitute a valid promissory note, it must be for the payment of money at some fixed period of time, or upon some event which must inevitably happen, and that its character as a promissory note cannot depend upon future events, but solely upon its character when created, said: 'Yet it is an equally well-setted rule of commercial law that it may be made payable at sight, or at a fixed period after sight, or at a fixed period after notice, or on request, or on demand, without destroying its negotiable character. The reason for this, said Lord TENTERDEN, in Clayton v. Gosling, 5 Barn. & C. 360, is that it 'was made payable at a time which we must suppose would arrive." To the same effect are Cota v. Buck, 7 Metc. 588; Walker v. Woollen, 54 Ind. 164; Woollen v. Ulrich, 64 Ind. 120; Charlton v. Reed, 61 Iowa, 166, 16 N. W. Rep. 64; Andrews v. Franklin, 1 Strange, 24; Cooke v. Horn, 29 Law T. (N. S.) 369.

Upon like grounds it has been held that the negotiability of the note is not affected by its being made payable on or before a named date, or in installments of a particular amount. In School-Dist. v. Hall, 113 U.S. 135, 140, 5 Sup. Ct. Rep. 371, it was held that municipal bonds, issued under a statute providing that they should be payable at the pleasure of the district at any time before due, were negotiable; for, the court said, 'by their terms, they were payable at a time which must certainly arrive. The holder could not exact payment before the day fixed in the bonds. The debtor incurred no legal liability for non-payment until that day passed.' In Mattison v. Marks, 31 Mich. 421, which was the case of a note payable 'on or before' a day named, it was said: 'True, the maker may pay sooner if he shall choose; but this option, if exercised, would be a payment in advance of the legal liability to pay, and nothing more. Notes like this are common in commercial transactions, and we are not a ware that their negotiable quality is ever questioned in business dealings.' Carlon v. Kenealy, 12 Mees. & W. 139; Colehan v. Cooke, Willes, 393; Jordan v. Tate, 19 Ohio St. 586; Curtis v. Horn, 58 N. H. 504; Howard v. Simpkins, 70 Ga. 322; Insurance Co. v. Bill, 31 Conn. 534, 538; Goodloe v. Taylor, 3 Hawks, 458; Riker v. Manufacturing Co., 14 R. I. 402. In the last-named case it was said that if the time of payment named in the note must certainly come, although the precise date may not be specified, it is sufficiently certain as to time. It was consequently held that a reservation in a note of the right to pay it before maturity, in installments of not less than 5 per cent. of the principal, at any time the semi-annual interest becomes payable, did not impair its negotiability; the court observing that a note is negotiable if one certain time of payment is fixed, although the option of another time of payment be given. In view of these authorities, as well as upon principle, we adjudge that the negotiability of the notes in suit was not affected by the provison that, upon the failure of the maker to pay any one of the notes of the series to which those in suit belonged, the rest should become due and payable to the holder.

Our conclusion is that the court below did not err in holding the notes in suit to be negotiable according to the custom and usage of merchants. They bear upon their face evidence that they were so intended by the maker and the payee. It was well said by Judge BUNN, at the trial, that the inference that any one contemplating the purchase of the notes would naturally and properly draw would be (25 Fed. Rep. 809, 811) 'that the freight-cars had already been sold by the payee to the maker, and that the payee was to retain a lien and security upon them, in the way of a mortgage, for the payment of the purchase price, which would inure equally and ratably to all the holders of the notes, according to their several amounts, without regard to the time when such notes should fall due. If this be so, then the contract was an executed one, the consideration for the notes had already passed, and the payment of the notes would not be made to depend upon any condition whatsoever.' Judgment affirmed.