1. The courts of the United States are not bound by the
decisions of state courts upon questions of general commercial
law.
2. A creditor who before its maturity accepts a negotiable note,
so endorsed that he becomes a party thereto, as collateral security
for a preexisting debt in consideration of an extension of time
granted to the debtor is, according to the law merchant, a holder
for value, and his rights as such are not affected by equities
between antecedent parties of which he had no notice.
3. "Bills of exchange and promissory notes, payable in money at
a certain place of payment therein designated," are, by an act of
the Legislature of Alabama, put upon the same basis as to immunity
from setoff, discount, or equities as bills and notes payable at a
bank or private banking house. Such declared to be the intention
and effect of the Act of April 8, 1873, amending sec. 1833 of the
Revised Code of that state.
4. The legislative intent, clearly expressed, should not be
defeated by too rigid an adherence to the mere letter of the
statute nor an interpretation adopted which leads to absurd
consequences.
5. At the request of its debtor, a national bank in Alabama gave
him further time, in consideration of his transferring, before
maturity, a negotiable note, as collateral security and paying in
advance usurious interest, for the period of extension. The note
was so endorsed as to make the bank a party to the instrument,
responsible for its due presentation and for due notice of
nonpayment. The consideration being in part legal and in part
vicious, it was
held 1st, that the former was itself
sufficient to sustain the contract of extension and transfer, and
to constitute the bank a holder for value; 2d, that the National
Banking Act subjects the bank to liability for taking usurious
interest, but does not declare the contract of endorsement void,
and that no such penalty being prescribed, the courts cannot
superadd it.
The facts are stated in the opinion of the Court.
MR. JUSTICE HARLAN delivered the opinion of the Court.
This is a writ of error to a judgment in favor of the First
National Bank of Montgomery against Oates, the plaintiff in error,
upon a promissory note for $5,200, executed by him at Eufala, Ala.,
on the twenty-fifth day of July, 1873, and made payable on the 1st
of December thereafter, to the order of
Page 100 U. S. 240
B. H. Micow, president, at the office of the Tallassee
Manufacturing Company, No. 1, in the City of Montgomery. The
consideration of the note was fifty shares of the capital stock of
that company purchased by Oates, for which, at the time, he
received a certificate in the customary form. As part of the
contract of purchase, he took from the company a separate written
obligation, reserving to him the option, on the 1st of December,
1873, at the maturity of the note, of surrendering the certificate
of stock and receiving his note duly cancelled. It appears that he
was induced to buy the stock upon certain representations of the
special agent of the company as to its financial condition. These
representations were subsequently ascertained by him to have been
false and fraudulent.
On or about Nov. 4, 1873, Micow applied to the bank for an
extension of time upon certain indebtedness then held by it against
the company, amounting to about $40,000, and all of which matured
thereafter and in that month. That indebtedness had been previously
extended on several occasions at usurious rates of interest, paid
invariably in advance. The bank signified its willingness to give
an extension for thirty, sixty, ninety, and one hundred and twenty
days, upon collateral security being furnished, and upon the
payment in advance for such extension of interest at the rate of
one and one-quarter percent per month, upon the different classes
of the company's paper by it held. These conditions were complied
with, and the extension was accordingly made for the periods
stated. The required interest was not carried into the extension
bills, but was paid in advance. Among the collaterals placed with
the bank under this arrangement was the note for $5,200 already
described, endorsed in blank, "B. H. Micow, Prest."
The evidence was somewhat conflicting as to whether the officers
of the bank, at the time of receiving the note in question, had
actual notice from Oates as to its consideration. It was, however,
conceded that its president had reason to believe the note was
given for stock of the company. Oates, although residing at Eufala,
was a stockholder and director of the bank. No inquiry was made of
him by the officers of the bank before receiving the note as
collateral security as to any defense
Page 100 U. S. 241
which he might have against its payment. But it was proven by
them that when the extension was given to the company, they had no
notice of any defect in or defense to the note or of any equities
except such notice as might be implied from the foregoing facts and
the relations of the parties. It is not claimed that the bank had
at that time any notice of the separate written obligation of the
manufacturing company to which we have already referred.
On the 24th of November, 1873, the bank gave written notice to
Oates that it held his note as collateral security for the
indebtedness of the company. A few days thereafter, he transmitted
to the bank the company's agreement or obligation, under which he
had purchased the stock and given his note, informing its officers
that he had, by the same mail, returned his stock certificate to
the company, and demanded the surrender and cancellation of his
note. The bank, replying to this notification, stated that it had
purchased the note as negotiable paper, in good faith, for a
valuable consideration and without notice of any private
understanding between Oates and the company, its officers or
agents.
These are the essential facts developed in the record. We are to
inquire whether the court below committed any error of law to the
prejudice of the plaintiff in error.
The first contention of the plaintiff in error is that by the
terms of the contract under which he purchased the stock and gave
his note, and in view of the false and fraudulent representations
of the company's agent as to its financial condition, he was
entitled, as of absolute right, to surrender the certificate of
stock and have his note returned or cancelled, and further that his
defense upon that ground was secured to him by the statutes of the
State of Alabama in force when the contract was made.
It is clear that as between the Tallassee Manufacturing Company
and Oates, the defense of the latter is perfect. And it would
undoubtedly be sustained, even against the defendant in error were
it true as claimed that, by the statutes of Alabama, the transfer
of the note was without prejudice to any defense which the maker
might assert against the payee. This renders it necessary that we
should ascertain to what
Page 100 U. S. 242
extent, if at all, the rights of parties are affected or
controlled by the statutes of Alabama.
By sec. 1833 of the Revised Code of that stat, it is declared
that
"Bills of exchange and promissory notes payable in money at a
bank or private banking house are governed by the commercial law
except so far as the same is changed by this code."
Sec. 1839 declares that
"All contracts or writings, except bills of exchange, promissory
notes payable in money at a bank or private banking house, and
paper issued to circulate as money, are subject to all payments,
setoffs, and discounts had or possessed against the same, previous
to notice of the assignment or transfer."
Thus stood the law of Alabama until April 8, 1873, when, by
statute of that date entitled "An Act to amend sec. 1833 of the
Revised Code of Alabama," it was enacted that sec. 1833 (copied in
full in the act)
"be so amended as to read as follows:"
" Bills and notes payable at a banker's or
a designated
place of payment, are
negotiable instruments; bills
of exchange and promissory notes payable in money at a bank or
a certain place of payment therein designated, are
governed
by the commercial law."
Acts 1872-73, p. 111. By the same statute, sec. 1833, as it then
stood in the Revised Code, was expressly repealed. It should be
observed that the words "except so far as the same is changed by
this code" in sec. 1833 as it originally stood are omitted from
that section as remodeled by the act of 1873.
The argument of the plaintiff in error is that although by the
explicit declaration in the act of 1873, "bills and notes payable
in money at a certain place of payment, therein designated," are
negotiable instruments, to be governed by the commercial law, such
bills and notes are nevertheless, under sec. 1839, "subject to all
payments, setoffs, and discounts had or possessed against the same,
previous to notice of the assignment or transfer." We concur with
the court below in holding that construction to be wholly
inadmissible. It seems that upon this precise point, there has been
no direct adjudication by the Supreme Court of Alabama, to which
primarily belongs the duty of giving authoritative construction of
the statutes of that state. The only case in that court to which we
are
Page 100 U. S. 243
referred that has any bearing upon this question is
Cook v.
Mutual Insurance Co., 53 Ala. 37. Jones, it seems, gave to
Cook in 1871 a promissory note payable to the order of the latter
at the office of W. H. Roberts, Mobile, and endorsed by the payee
to the insurance company. In an action instituted by the latter
against Cook, the question arose as to whether the note was
commercial paper, protected, in the hands of a
bona fide
holder for value, against defenses resting upon payment, setoff, or
discount. The inferior state court ruled that it was paper of that
kind, but the Supreme Court of Alabama held that the note, when
made, was not commercial paper, and that the rights and liabilities
of the parties were to be determined by the statute in force at the
date of its execution. That court, speaking by its chief justice,
said:
"Since the making of the promissory note on the endorsement of
which this suit is founded, the statute of April 8, 1873, has
converted promissory notes, payable in money at a designated place,
into negotiable instruments governed by the commercial law. It
operates on the nature and obligation of the contract of the
parties to such notes, and cannot be construed as affecting notes
made and endorsed prior to its passage. The law in force when the
note is made and endorsed regulates and defines the liability of
the parties."
No other reasons are assigned in support of the conclusion that
the act of 1873 did not control the case. It is quite manifest from
the language employed by the court that had the note there in suit
been executed subsequently to the act of 1873, it would have
sustained the ruling of the inferior state court and excluded all
defenses inconsistent with the established doctrines of the
commercial law. Such, in our opinion, must have been its
determination upon any proper construction of the act of 1873. It
is true that that statute does not in express words
amend
sec. 1839, whereby
only "bills of exchange and promissory
notes, payable in money at a bank or private banking house, and
paper issued to circulate as money" are in terms protected against
payments, setoffs, and discounts which the maker might assert in
the case of all other contracts and writings. But it is perfectly
evident that the object of the act of 1873 was to place bills of
exchange and promissory notes, payable
Page 100 U. S. 244
at a certain designated place of payment, upon exactly the same
basis, as to immunity from setoff, discount, or equities, as the
statute prescribed in reference to bills and notes payable at a
bank or private banking house. In declaring that bills and notes of
the former class were negotiable instruments, to be governed by the
commercial law, the legislature necessarily intended to throw
around such paper the same protection that had previously been
given by statute to bills and notes payable at banks or private
banking houses. If such was not its object, then confessedly the
act of 1873 was both meaningless and illusory. The duty of the
court, being satisfied of the intention of the legislature, clearly
expressed in a constitutional enactment, is to give effect to that
intention, and not to defeat it by adhering too rigidly to the mere
letter of the statute, or to technical rules of construction.
Wilkinson v.
Leland, 2 Pet. 627; Sedgwick, Const. and
Stat.Constr. 196. And we should discard any construction that would
lead to absurd consequences.
United States v.
Kirby, 7 Wall. 482. We ought rather, adopting the
language of Lord Hale, to be "curious and subtle to invent reasons
and means" to carry out the clear intent of the lawmaking power
when thus expressed. The defense of the plaintiff in error would be
good under sec. 1839 if no regard was had to the act of 1873, but
since that statute expressly included notes payable at a certain
designated place in the class of negotiable instruments to be
governed by the commercial law -- which could not be if sec. 1839
be enforced according to its literal import -- the judiciary must
respect the latest expression of the legislative will, and not
permit it to be eluded by mere construction.
"A thing which is within the intention of the makers of a
statute is as much within the statute as if it were within the
letter, and a thing which is within the letter of the statute is
not within the statute unless it be within the meaning of the
makers."
Suckley v. Furse, 15 Johns. (N.Y.) 338;
The People
v. Utica Insurance Co., id., 357, 380.
For these reasons, we are of opinion that the statutes of
Alabama do not permit, as against a
bona fide holder for
value of a "promissory note, payable in money at a certain place of
payment therein designated," defenses which are disallowed
Page 100 U. S. 245
in cases where the note is payable at a bank or private banking
house.
Giving to the Alabama statute the construction indicated, our
next inquiry is whether the bank, under the circumstances disclosed
in this case, became, according to the recognized principles of
commercial law, a
bona fide holder for value of the note
in suit. That it acquired the note in good faith, without fraud, we
are not permitted by the evidence to doubt. Its officers were not
bound to inquire of Oates, before they took the note, whether he
had any defense or setoff. They rightfully supposed, as the face of
the note imported, that he had undertaken absolutely to pay the
amount specified at the time and place designated. That the
president of the bank had reason to believe it was given for stock
of the Tallassee Manufacturing Company is a fact of no significance
whatever in determining the question of good faith. Having no
knowledge or notice of the private agreement between Oates and the
company, as set forth in the separate obligation of the latter,
which was withheld from the public, the bank officers justly
assumed that there was no circumstance attending the sale of the
stock which could lessen the obligation of Oates to pay the note
according to its tenor and effect.
But it is contended that, by the rules of commercial law as
recognized by the Supreme Court of Alabama, one who receives a
promissory note as collateral security for a preexisting debt does
not become a purchaser for value in the course of business, so as
to cut off equities which the maker may have against the payee.
Such was declared to be the settled doctrine of that court in
Fenouille v. Hamilton, 35 Ala. 319. But the opinion in
that case contains some passages which apply with peculiar force to
a suit like this. The court said:
"In this case, there was no other consideration for the transfer
of the note to the defendant than the security of the preexisting
indebtedness of the defendant's endorsee. The fact that the
defendant may have been led to grant indulgence or forbear to
enforce his remedies for the collection of the debts does not prove
that such indulgence or forbearance was an element of the contract
or the consideration upon which it was made. If there was any
forbearance by the defendant, it was a voluntary act to
Page 100 U. S. 246
which he may have been persuaded by the collateral security, and
may have resulted from a consciousness of security; but such
forbearance was not the result of contract, and is not shown to
have been the consideration of it."
Had there been in that case a present consideration for the
transfer of the note beyond giving security for a preexisting debt,
or had the forbearance of the creditor to enforce his remedies been
an element in a binding contract under which the collateral
security was furnished, we are persuaded that the Alabama court
would have ruled that the creditor, in receiving the collateral,
became a holder for value in the course of business. But if we are
mistaken in our interpretation of the decision of the Supreme Court
of Alabama, the result will not follow for which plaintiff in error
so earnestly contends. While the federal courts must regard the
laws of the several states and their construction by the state
courts (except when the Constitution, treaties, or statutes of the
United States otherwise provide) as rules of decision in trials at
common law in the courts of the United States in cases where
applicable, they are not bound by the decisions of those courts
upon questions of general commercial law. Such is the established
doctrine of this Court, so frequently announced that we need only
refer to a few of the leading cases bearing upon the subject.
Swift v. Tyson,
16 Pet. 1;
Carpenter v. Prov. Ins.
Co., 16 Pet. 495;
Watson v.
Tarpley, 18 How. 517. We have already seen that the
statutes of Alabama placed under the protection of the commercial
law promissory notes, payable in money at a certain designated
place; but how far the rights of parties here are affected by the
rules and doctrines of that law is for the federal courts to
determine upon their own judgment as to what these rules and
doctrines are.
Upon principle and authority, we do not doubt that the defendant
in error was, in the sense of the commercial law, a
bona
fide holder for value of the note in suit. In
Swift v.
Tyson, supra, cited by counsel, this Court, speaking by Mr.
Justice Story, said that it entertained no doubt
"that a
bona fide holder for a preexisting debt of a
negotiable instrument is not affected by any equities between
antecedent parties, when he had received the same before it became
due, without notice or any
Page 100 U. S. 247
such equities."
In some of the state courts, the authority of that case has been
disputed, so far as the language of the court referred to
collateral security received for a preexisting debt, upon the
ground that the note there in suit was transferred in payment of,
and not as security for, a preexisting debt, and that consequently
the opinion expressed in the language just quoted was unnecessary
to the decision of the point in issue. In the more recent case of
Goodman v.
Simonds, 20 How. 334, it was contended that a party
who took negotiable paper
merely as collateral security
for a preexisting debt did not acquire it in the usual course of
business, but took it subject to prior equities. The Court, being
of opinion that no such question was presented by the record,
waived its consideration. But after an extended review of the
authorities, American and English, the Court, speaking through MR.
JUSTICE CLIFFORD, said:
"It seems now to be agreed that if there was a present
consideration at the time of the transfer, independent of the
previous indebtedness, a party acquiring a negotiable instrument
before its maturity as a collateral security to a preexisting debt,
without knowledge of the facts which impeach the title as between
the antecedent parties, thereby becomes a holder in the usual
course of business, and that his title is complete, so that it will
be unaffected by any prior equities between other parties, at least
to the extent of the previous debt, for which it is used as
collateral."
That language would seem to be conclusive of the question under
consideration. There was here a present consideration at the time
of the transfer, independent of the indebtedness of the
manufacturing company to the bank. That consideration as to the
bank was the unconditional extension of time upon all the company's
indebtedness, for different periods reaching beyond the maturity of
the note transferred as collateral security. Such extension for
fixed periods was a cardinal element of the contract. The creditor
forbore pursuit of the remedies which the law supplied for the
enforcement of his demands, then soon to mature, in consideration
of collateral security being furnished, and in consideration also
of the payment by the debtor of usurious interest in advance.
Besides, having received the note, endorsed so that it became a
party thereto,
Page 100 U. S. 248
the bank was bound to observe all the rules of the law merchant
as to presentation, protest, and notice of nonpayment. It did not
receive the note as the agent of the debtor and merely for
collection. It took it under all the responsibility as to
presentation, protest, and notice of dishonor, which attached to
absolute ownership, and became liable to have the note treated as
payment
pro tanto, if there were a failure to make due
presentation, and, in the event of nonpayment, to give proper
notice to the creditor. The debtor could not withdraw his
endorsement after delivering the note under the contract for
extension, nor could the bank, after receiving the note under that
contract, disregard its agreement for forbearance. Nor was the bank
any the less bound by the contract for extension because of the
payment in advance of usurious interest by its debtor. Although the
taking of usurious interest subjected the bank to certain
forfeitures prescribed by law, and to an action by the debtor, if
he so elected, to recover twice the amount so paid by him, it could
not, of its own volition or by its own act, avoid the contract for
indulgence because of such payment of usury. The payment in advance
was itself a sufficient consideration for the extension in the
sense that the bank would not be allowed to repudiate its
agreement, upon the ground that it had taken usurious interest in
violation of law. 2 Daniel, Neg.Inst., sec. 1317. But, independent
of that aspect of the case and throwing out of view altogether the
usurious feature of the contract, we are of opinion that a creditor
who takes a negotiable note before maturity, so endorsed that he
becomes a party to the instrument as collateral security for a
preexisting debt, and in consideration of an extension of time to
the debtor, actually granted, is, according to the law merchant, a
holder for value, and that his rights as such holder cannot be
affected by equities between antecedent parties, of which he had no
notice.
Goodman v. Simonds, supra; 1 Parsons, Notes and
Bills, 221-228; Story, Promissory Notes, sec. 195, notes (7th ed.,
by Thorndike); 1 Daniel, Neg.Inst. (2d ed.), secs. 820, 832, and
notes; Leading Cases upon Bills of Exchange and Promissory Notes,
by Redfield and Bigelow, 186-217, and notes. Whether the taking of
such note merely as collateral security for antecedent debts,
without any binding
Page 100 U. S. 249
contract for indulgence, would constitute a valuable
consideration within the established rules of commercial law,
protecting the creditor against defenses or equities between
antecedent parties of which he had no notice, it is not necessary
now to decide. That precise question is not presented in this case,
and we forbear to express any opinion upon it.
One other question remains to be considered. Counsel for
plaintiff in error have pressed with much vigor the suggestion that
the bank, consistently with public policy, should not be regarded
as a
bona fide holder for value of the note in suit, since
the contract under which it received the note involved in its
execution a direct violation of the statutes against usury. We are
referred in support of that position to several decisions of the
Supreme Court of Alabama which, it must be conceded, announce the
broad doctrine that one
"who has become the endorsee of a bill, by violating the
provisions of a statute, cannot with any degree of propriety be
said to be a
bona fide holder in the usual course of
trade."
13 Ala. 410; 14
id. 688; 16
id. 406. Without
extending this opinion by a critical examination of those cases, we
repeat that in the determination of such a question, we are not
bound by the decisions of the state court. The question is one of
general law, and depends in nowise for its solution upon local laws
and usages.
We are referred in this connection to two cases,
Levy v. Gadsby,
3 Cranch 180, and
Gaither v. The Farmers' &
Mechanics' Bank, 1 Pet. 37. The first is so
meagerly reported that it is difficult to see the precise ground
upon which the conclusion of the Court was placed, and the second
is clearly distinguishable from this. There, a note was endorsed
and delivered as collateral security for a preexisting debt,
evidenced by a note given on a usurious contract. The case was held
to be governed by the statute of Maryland which declared "all
bonds, contracts, and assurances whatever, taken on a usurious
contract," to be utterly void. Under that statute, the contract of
endorsement was held to be void. In the eye of the law, it was as
though it had never existed, and consequently no cause of action,
it was adjudged, passed to the endorsee.
The case in hand is altogether different. The statute under
Page 100 U. S. 250
which the bank was organized, known as the National Banking Act,
does not declare the contract under which the usurious interest is
paid to be void.
It denounces no penalty other than a forfeiture of the interest
which the note or bill carries, giving to the debtor the right to
sue for and recover twice the amount of interest so paid. If we
should declare the contract of endorsement void, and consequently
that no right of action passed to the bank on the note transferred
as collateral security, an additional penalty would thus be added
beyond those imposed by the law itself. "On what principle could
this Court add another to the penalties declared by the law
itself?"
De Wolf v.
Johnson, 10 Wheat. 367;
Farmers' &
Mechanics' National Bank v. Dearing, 91 U. S.
29;
Barnett v. National Bank, 98 U. S.
555.
Besides, in this case, the forbearance extended to the debtor
was not upon the sole consideration of usurious interest paid in
advance; it was upon the additional and substantial consideration
that the debtor corporation gave collateral security for the
payment of indebtedness about to mature, and which it confessed its
inability to meet. We have already seen that the transfer of the
note before maturity, as collateral security, and so endorsed that
the bank became a party to the instrument under obligation to make
due presentment and give due notice of nonpayment, was itself a
sufficient consideration to constitute the bank a
bona
fide holder for value, within the recognized principles of the
law merchant. The presence, then, in the contract under which the
note was endorsed and delivered to the bank of an additional
consideration -- the payment in advance of usurious interest --
which the law declares to be vicious and illegal, ought not to
destroy the entire contract of endorsement, when there is a
sufficient consideration, aside from the usury paid, upon which it
may rest.
We are of opinion that no error of law was committed by the
court below.
Judgment affirmed.