The ruling in
Texas v.
White, 7 Wall. 700, that the Legislature of Texas,
while the state was owner of the bonds there in suit, could limit
their negotiability by an act of legislation, with notice of which
all subsequent purchasers
Page 113 U. S. 477
were charged, although the bonds on their face were payable to
bearer, overruled.
The ruling in that case, that negotiable government securities,
redeemable at the pleasure of the government after a specified day,
but in which no date is fixed for final payment, cease to be
negotiable as overdue after the day when they first become
redeemable, limited to cases where the purchaser acquires title
with notice of the defect or under circumstances discrediting the
instrument, such as would affect the title of negotiable demand
paper purchased after an unreasonable length of time from the date
of the issue.
The distinction between redeemability and payability commented
on in that case embraces and defines the five-twenty bonds in suit
in this case.
Holders of government bonds must be presumed to have knowledge
of the laws by authority of which they were created and put in
circulation, and of all lawful acts done by government officers
under those laws.
The obligations of the United States under the five-twenty
bonds, consols of 1655, are governed by the law merchant regulating
negotiable securities, modified only, if at all, by the laws
authorizing their issue.
The five-twenty consols of 1865 en their face were "Redeemable
at the pleasure of the United States after the 1st day of July,
1810, and payable on the first day of July, 1885." In conformity
with provisions of law, notice was duly given, as to the bonds of
this class in suit in these actions, that in three months after the
date of such notice, the interest on the bonds would cease.
Held that the exercise of the right of redemption made the
bonds payable on demand, without interest, after the maturity of
the call, until the date for absolute payment.
Ordinary negotiable paper payable on demand is not due without
demand until after the lapse of a reasonable time in which to make
demand.
What is reasonable time in which to demand payment of negotiable
paper payable on demand depends upon the circumstances of the case
and the situation of the parties.
A holder of a called five-twenty consol could without prejudice,
except loss of interest, wait without demand for the whole period
at the expiration of which the bond was unconditionally
payable.
In stamping upon these bonds the faculty of passing from hand to
hand as money, and in conferring upon the Secretary of the Treasury
the power to receive them in payment, in the great exchange of
bonds by which the annual interest on the public debt was reduced,
it was intended to leave with the called bonds the character of
unquestioned negotiability and to protect
bona fide
purchasers for value in the due course of trade without actual
notice of a defect in the obligation or title.
These four cases involve claims against the United States for
the payment of certain bonds of the United States, known as
"five-twenty bonds," consols of 1865, issued in pursuance of the
authority conferred upon the Secretary of the Treasury by the Act
of Congress approved March 3, 1865, entitled "An act
Page 113 U. S. 478
to provide ways and means for the support of the government."
Twenty bonds of the denomination of $1,000 each and sixteen of $500
each were embraced in the suits. The controversy relates to the
title only, all of them being claimed by the Manhattan Savings
Institution, and ten of each denomination by J. S. Morgan &
Co., and the others, being ten of $1,000 each and six of $500 each,
by L. Von Hoffman & Co. The bonds having been called in for
redemption, were presented at the Treasury for that purpose by the
holders, respectively, J. S. Morgan & Co. and L. Von Hoffman
& Co., but payment was refused by the United States on account
of the adverse claim of the Manhattan Savings Institution, and the
claims of the several parties to the proceeds were Treasury, March
12, 1880, pursuant to § 1063, Revised Statutes. Judgments were
rendered by that court in favor of the Manhattan Savings
Institution, and against the other claimants respectively. 18
Ct.Cl. 386. The several appeals bring up all the cases as they
stood in the Court of Claims; the United States appealing from the
judgment in favor of the Manhattan Savings Institution, the other
parties from the judgments dismissing their respective petitions.
The controversy is wholly between the claimants, the United States
being merely in the position of a stakeholder, not denying its
liability to pay to the true owners of the bonds.
The act of Congress in pursuance of which the bonds in question
were issued, being "An act to provide ways and means for the
support of the government," approved March 3, 1865, 13 Stat. 468,
c. 77, provided:
"That the Secretary of the Treasury be, and he is hereby,
authorized to borrow from time to time, on the credit of the United
States, in addition to the amounts heretofore authorized, any sums
not exceeding in the aggregate six hundred millions of dollars, and
to issue therefor bonds or Treasury notes of the United States in
such form as he may prescribe, and so much thereof as may be issued
in bonds shall be of denominations not less than fifty dollars, and
may be made payable at any period not more than forty years from
date of issue, or may be
Page 113 U. S. 479
made redeemable at the pleasure of the government at or after
any period not less than five years nor more than forty years from
date, or may be made redeemable and payable as aforesaid, as may be
expressed upon their face,"
&c.
The bonds issued under this act were called the consolidated
debt or consols of 1865, because, in addition to the loan of six
hundred millions of dollars authorized by it, the Secretary of the
Treasury was empowered to permit the conversion, into any
description of bonds authorized by it, of any Treasury notes or
other obligations, bearing interest, issued under any act of
Congress.
The bonds themselves, differing only in numbers and
denomination, were in the following form:
~165,120] [165,120
"[Consolidated debt. Issued under act of Congress approved March
3, 1865. Redeemable after five and payable twenty years from
date.]"
"
1,000] [1,000"
"It is hereby certified that the United States of America are
indebted unto the bearer in the sum of one thousand dollars,
redeemable at the pleasure of the United States after the first day
of July, 1870, and payable on the first day of July, 1885, with
interest from the first day of July, 1865, inclusive at six percent
per annum, payable on the first day of January and July in each
year, on the presentation of the proper coupon hereunto annexed.
This debt is authorized by act of Congress approved March 3,
1865."
"Washington, July 1, 1865."
"J. LOWERY"
"
For Register of the Treasury"
"Six months' interest due July 1, 1885, payable with this
bond."
"(Thirteen coupons attached from and including coupon for
interest due January 1, 1879, to and including coupon for interest
due January 1, 1885.)"
They were accordingly known as "five-twenty bonds," being
redeemable after five years, but not payable until twenty years
after July 1, 1865.
Page 113 U. S. 480
The Act of July 14, 1870, "to authorize the refunding of the
national debt," 16 Stat. 272, authorized the issue of three classes
of bonds, according as they bore interest at the rates of five
percent, 4 1/2 percent, and 4 percent per annum, amounting in the
aggregate to $1,500,000,000, which the Secretary of the Treasury
was, by the second section of the act, authorized to sell and
dispose of at not less than their par value in coin, and "to apply
the proceeds thereof to the redemption of any of the bonds of the
United States outstanding, and known as five-twenty bonds at their
par value," or, the act continues, "he may exchange the same for
such five-twenty bonds, par for par."
By the fourth section of this act, it was provided:
"That the Secretary of the Treasury is hereby authorized, with
any coin of the Treasury of the United States which he may lawfully
apply to such purpose, or which may be derived from the sale of any
of the bonds, the issue of which is provided for in this act, to
pay at par and cancel any six percent bonds of the United States of
the kind known as five-twenty bonds which have become, or shall
hereafter become, redeemable by the terms of their issue. But the
particular bonds so to be paid and cancelled shall in all cases be
indicated and specified by class, date, and number, in the order of
their numbers and issue, beginning with the first numbered and
issued, in public notice to be given by the Secretary of the
Treasury, and in three months after the date of such public notice
the interest on the bonds so selected and advertised to be paid
shall cases."
By an Act passed January 20, 1871, 16 Stat. 399, the foregoing
act was amended so as to authorize the issue of five hundred
millions of five percent bonds instead of two hundred millions, as
limited by the Act of July 14, 1870, but not so as to permit an
increase of the aggregate of bonds of all classes thereby
authorized.
During the period from July, 1874, to January, 1879, the
Secretary of the Treasury made various contracts, in writing, for
the negotiation of 5, 4 1/2, and 4 percent bonds issued under the
refunding act of 1870, in Europe and
Page 113 U. S. 481
this country, with associations of bankers and banking
institutions in London and New York, which became known as
syndicates.
The claimants, J. S. Morgan & Co., were members of such a
syndicate, between which and the Secretary of the Treasury a
contract was entered into on the 21st of January, 1879. The members
of that syndicate were Messrs. August Belmont & Co., of New
York, on behalf of Messrs. N.M. Rothschild & Sons, of London,
England, and associates, and themselves; Messrs. Drexel, Morgan
& Co., of New York, on behalf of Messrs. J. S. Morgan &
Co., of London, and themselves; Messrs. J. & W. Seligman &
Co., of New York, on behalf of Messrs. Seligman Brothers, of
London, and themselves, and Messrs. Morton, Bliss & Co., of New
York, on behalf of Messrs. Morton, Rose & Co., of London, and
themselves. The subscription was for ten millions of dollars of 4
percent bonds of that date, and five millions additional each month
until June 30, 1879, when the contract terminated, the proceeds to
be applied to the refunding of the public debt, the Secretary of
the Treasury agreeing, on receiving each subscription under the
contract for not less than five millions of dollars, to issue a
call for the redemption of United States six percent five-twenty
bonds equal to or exceeding said sum. The syndicate agreed to pay
to the Treasury at Washington, within the running of such call, the
amount of four percent bonds subscribed for at par and accrued
interest to the date of subscription, in United States gold coin,
United States matured coin coupons, coin certificates of deposit
issued under the Act of March 3, 1863, or United States six percent
five-twenty bonds called for redemption not later than the date of
the subscription to which the payment was to apply. It was also
agreed that the United States should maintain an agency at London
for the purpose of making deliveries of the bonds subscribed for to
the parties as they should desire, and the agent appointed for that
purpose was authorized by the Secretary of the Treasury to receive
the stipulated payment therefor, including the five-twenty bonds
offered in exchange.
On October 27, 1878, the Manhattan Savings Institution, a
Page 113 U. S. 482
savings bank in New York, was the owner in possession of the
thirty-six United States five-twenty coupon bonds which are the
subject of these suits, sixteen for $500 each and twenty for $1,000
each, and on that day, the building in which was its banking house
was entered by burglars, and these bonds, among others, amounting
in all to about two and a half million dollars, were stolen from
the safe, without any negligence or want of proper care in their
safekeeping on the part of the officers and servants of the
institution.
On July 30, 1878, the Secretary of the Treasury issued a call
for the redemption of $5,000,000 of five-twenty bonds, designated
by numbers, in which it was stated as follows:
"By virtue of the authority given by the act of Congress
approved July 14, 1870, entitled 'An act to authorize the refunding
of the national debt,' I hereby give notice that the principal and
accrued interest of the bonds herein below designated, known as
'five-twenty bonds,' of the Act of March 3, 1865, will be paid at
the Treasury of the United States, in the City of Washington, on
and after the thirtieth day of October, 1878, and that the interest
on said bonds will cease on that day."
Successive notices of other like calls were issued thereafter
from time to time, according to which the dates on which the
interest would cease on the bonds designated were from October 30,
1878, to and including March 18, 1879, which calls embraced all the
bonds involved in these suits.
The twenty bonds claimed by J. S. Morgan & Co., and the
sixteen claimed by L. Von Hoffman & Co., were bought by them,
respectively at different times, during the year 1879, in London,
from well known and responsible parties, the latter purchasing from
R. Raphael & Sons, bankers of high respectability in London,
dealing largely in United States government securities; but all the
bonds when bought, as well by R. Raphael & Sons as by the
claimants, had been called for redemption by the Secretary of the
Treasury, and designated in one of the notices to that effect, and
the call in each case had matured, and the bonds were bought by
them, respectively, with knowledge in each case of that fact; but
they bought them, in
Page 113 U. S. 483
the due course of their business as bankers, and paid the full
market price for them, to-wit, par and accrued interest, in good
faith, without suspecting, or having any reason whatever to
suspect, that the bonds, or any of them, had been stolen by or from
any person, or that there was any defect in the titles of the
persons from whom the purchases were made, or that the numbers of
any of the bonds had been changed, or that the numbers of any of
the bonds were not the original and genuine numbers as issued by
the Treasury Department of the United States. In point of fact
great publicity was given through the newspapers to the fact of the
robbery, and some kind of a circular was issued by the Manhattan
Savings Institution in regard to it, but it did not appear what its
terms were, nor where nor to whom it was sent. It was also shown
that the serial numbers of four of the bonds purchased by J. S.
Morgan & Co., and five of those purchased by L. Von Hoffman
& Co., had been, in fact subsequently to the robbery,
wrongfully altered, but when, where, or by whom could not be
ascertained, and there was nothing in the appearance of the altered
bonds or the numbers, when purchased, calculated to excite the
suspicion or notice of a prudent and careful man; the alterations
having been so skillfully effected that they were only discoverable
with the aid of a magnifying glass.
The twenty bonds claimed by J. S. Morgan & Co. were
purchased by them for the purpose of making payment to the United
States for four percent bonds subscribed for under the contract
entered into with them and their associates by the Secretary of the
Treasury on January 21, 1879, for the negotiation of four percent
bonds, and to avoid the transmission of gold to settle their
accounts with the Treasury Department. They were delivered by the
claimants at different times soon after their purchase to the
officer in charge of the agency of the United States for the
refunding of the national debt in London, who received them in
payment for four percent bonds of the United States then delivered
by him to the claimants, and were by him transmitted to the
Treasury Department at Washington for redemption. The Secretary of
the Treasury, in consequence of notice of the adverse claim of
the
Page 113 U. S. 484
Manhattan Savings Institution, having withheld payment of these
bonds, the claimants, J. S. Morgan & Co., in a letter to the
secretary of September 1, 1879, stated the grounds of their claim
as follows:
"We would submit that this course is in entire contradiction to
the practice of the department hitherto, and in violation of the
agreement upon the face of the bonds to pay them to bearer."
"The government has hitherto always paid its bearer obligations,
as every other state, company, or individual does, to any innocent
holders who had paid full value for them. This we have done for all
these bonds, having purchased them in the regular way of business
in the market, and even paying a small premium for them to avoid
the transmission of gold to settle our accounts with the Treasury
in America."
"They had no fixed maturity; they were arbitrarily drawn by the
government for payment at the present time; they carried no notice
on their face that they were not payable in accordance with their
tenor, and the only penalty for not presenting them was the
cessation of interest. The analogy drawn from the equities
attaching to an overdue note, as carrying notice on the face of
nonpayment, has consequently no bearing on the case. These bonds
are scattered all over Europe, and the notice that they are due,
frequently does not reach the holder for months, and sometimes
years. We buy them in the regular course of our business, nor could
we do otherwise."
"If the government were to decide not to pay bonds to bearer of
which the ownership is disputed, except after decision of courts,
they would do what neither they nor any other government has ever
done before. It would prevent dealing in their securities, be a
distinct injury to their negotiability, and a loss to the public
credit."
The sixteen bonds claimed by L. Von Hoffman & Co. were
transmitted by them directly to the Treasury Department at
Washington for redemption. It was from letters from the department,
written in answer to their letters of transmittal, that they
received first the information that the bonds had been stolen and
some of them altered, and learned of the claim
Page 113 U. S. 485
of the Manhattan Savings Institution, as owners, to await the
decision of which the bonds were retained by the secretary in the
custody of the Treasury Department.
In addition to the foregoing facts, found by the Court of
Claims, it also found that
"during the period of the refunding transactions under the Act
of July 14, 1870, many five-twenty bonds of every call were not
sent in promptly for redemption, but were held, in this country and
Europe, through want of information, or otherwise, until long after
the maturity of the call,"
and that
"during the period of the refunding transactions of the
government under the Act of July 14, 1870, large numbers of the
European holders of the five-twenty bonds, of the Act of March 3,
1865, called for redemption, from want of facility for sending
their bonds to the United States, or to avoid the risk and expense
of transmission, or various other reasons, were obliged to and did
sell and dispose of their bonds, in the market, in London, to
money-changers, bankers, and merchants, as the only means of
obtaining the money for them. Many millions of the said called
bonds were thus sold and disposed of in the London market, and
dealt in by money dealers during that period, long after the
maturity of the various calls,"
and also that,
"according to the custom and practice in London, the said called
bonds of the United States were commonly dealt in by buying and
selling after the time fixed for their redemption, in the same way
and just as freely as the bonds not called for redemption. "
Page 113 U. S. 490
MR. JUSTICE MATTHEWS delivered the opinion of the Court. He
recited the facts as above stated and continued:
The conclusions of law reached by the Court of Claims, on which
its judgments are founded, and which are stated and supported in
its opinion by the late learned Chief Justice of that court, are
comprised in these propositions: that if the claimants, J. S.
Morgan & Co. and L. Von Hoffman & Co., or any other party
from whom they are shown to have bought, had purchased the bonds in
good faith for value before maturity, their title would prevail
against that of the Manhattan Savings Institution, from whom they
had been stolen; that on the face of these bonds, the United
States, while fixing a day of ultimate payment, after which they
would certainly be overdue, had also reserved the right of
redemption at an earlier time at its pleasure after five years from
date; that, as this option could be exercised only by the United
States, and not by any officer or department of the government of
its mere motion, it could be declared only by law, as was done in
the act of Congress of July 14, 1870; that this right of redemption
being expressly reserved on the face of the bonds, was part of the
contract, of which every holder had notice by its terms, and, as it
could be exercised only by a public law, every holder
subsequent
Page 113 U. S. 491
to the passage of such a law must be held to know that it might
be and when it had been exercised; that consequently the contract
is to be read, after the passage of the Act of July 14, 1870, as
though the time of redemption fixed and declared in pursuance of it
by the call of the Secretary of the Treasury had been originally
written in it as the final day of payment, and, that by way of
conclusion, it must therefore be adjudged that the claimants,
against whom the judgment was passed, were purchasers of overdue
paper, and not entitled to the protection of the rule which
otherwise would shield their title against impeachment.
And it is insisted in argument that this conclusion is
anticipated and required by the decisions of this Court in the
cases of
Texas v.
White, 7 Wall. 700, and
Vermilye v. Adams Express
Co., 21 Wall. 142. It becomes necessary therefore
at the outset, to examine those cases with particularity.
The bonds in controversy in the first of them were United States
coupon bonds, dated January 1, 1851, payable, by their terms, to
the State of Texas or bearer, with interest at five percent,
payable semiannually, and "redeemable after the 31st day of
December, 1864." Each bond contained a statement on its face that
the debt was authorized by act of Congress, and was "transferable
on delivery," and to each were attached six-month coupons,
extending to December 31, 1864. White and Chiles acquired their
title on March 15, 1865.
The rules established in
Murray v.
Lardner, 2 Wall. 118
"that the purchaser of coupon bonds, before due, without notice
and in good faith, is unaffected by want of title in the seller,
and that the burden of proof in respect to notice and want of good
faith is on the claimant of the bonds as against the purchaser"
were repeated and reaffirmed, but it was added:
"These rules have never been applied to matured obligations.
Purchasers of notes or bonds past due take nothing but the actual
right and title of the vendors. The bonds in question were dated
January 1, 1851, and were redeemable after the 31st of December,
1864. In strictness, it is true, they were not payable on the day
when they became redeemable, but the known usage of the United
States to pay all bonds as soon as
Page 113 U. S. 492
the right of payment accrues, except when a distinction between
redeemability and payability is made by law and shown on the face
of the bonds, requires the application of the rule respecting
overdue obligations to bonds of the United States, which have
become redeemable, and in respect to which no such distinction has
been made."
It appeared in the case that the bonds were the property of the
State of Texas on January 11, 1862, having come into her possession
and ownership -- so the court declares -- "through public acts of
the general government and of the state, which gave notice to all
the world of the transaction consummated by them," and the state,
while thus their owner, in 1851, passed a legislative act declaring
that the bonds should be disposed of "as may be provided by law,"
but that no bond should be "available in the hands of any holder
until the same shall have been endorsed, in the City of Austin, by
the Governor of the State of Texas." It was in reference to this
legislation that the court said:
"And we think it clear that if a state, by a public act of her
legislature, imposes restrictions upon the alienation of her
property, that every person who takes a transfer of such property
must be held affected by notice of them. Alienation in disregard of
such restrictions can convey no title to the alienee."
In 1862, the Legislature of Texas repealed this act of 1851, but
the repealing act was held to be void, as an act of the state
government established in hostility to the Constitution of the
United States, and "intended to aid rebellion by facilitating the
transfer of these bonds."
It further appeared that all the bonds which had been put in
circulation with the endorsement of the governor had been paid in
coin on presentation at the Treasury Department
"while, on the contrary, applications for the payment of bonds
without the required endorsement, and of coupons detached from such
bonds, made to that department, had been denied. As a necessary
consequence, the negotiation of these bonds became difficult. They
sold much below the rates they would have commanded had the title
to them been unquestioned. They were bought in fact and, under the
circumstances, could only have been bought, upon speculation. The
purchasers took the risk
Page 113 U. S. 493
of a bad title, hoping, doubtless, that through the action of
the national government, or of the government of Texas, it might be
converted into a good one."
"On the whole case," the conclusion was that the State of Texas
was entitled under the bill, filed for that purpose, to reclaim the
bonds from persons who had acquired title under the circumstances
stated.
The case came before the Court again in another aspect, and is
reported as
Texas v.
Hardenberg, 10 Wall. 68, in which the grounds of
the former decision were reconsidered and declared to be
satisfactory.
The same question, as to part of the same issue of bonds, came
again before the court in
Huntington v.
Texas, 16 Wall. 402, in which the two prior
decisions were relied on, on behalf of the State of Texas, as
conclusive. The Court rehearsed the propositions decided in those
cases, and referring to the question in regard to the invalidity of
the act of 1862, repealing the act of 1851 restricting the
negotiability of the bonds, said:
"But it must be observed that we have not held that such a
repealing act was absolutely void, and that the title of the state
could in no case be divested. On the contrary, it may be fairly
inferred from what was said in
Texas v. White that if the
bonds were issued and used for a lawful purpose the title passed to
the holder unaffected by any claim of the state. Title to the bonds
issued to White and Chiles was held not to be divested out of the
state, because of the unlawful purpose with which they were issued,
and because the holders were, in our opinion, chargeable with
notice of the invalidity of their issue and of their unlawful
use."
Some of the same issue of bonds were in litigation before this
Court in
National Bank of Washington v.
Texas, 20 Wall. 72. In that case, the title of the
appellant was acquired after the 31st day of December, 1864, when
they became redeemable, and they were not endorsed by the governor.
It was alleged that they were issued and used in aid of the
rebellion, but the fact, and all knowledge of it on the part of the
appellant, was denied, and the court found the allegations were not
sustained by the proof. The question
"whether the bonds were overdue,
Page 113 U. S. 494
in the sense which puts a purchaser of dishonored negotiable
paper on the inquiry as to defenses which may be set up against
it"
was expressly waived in the opinion of the Court, because, it
being "quite clear that they were transferable by delivery after
due, the same as before," it followed that, "to invalidate the
title so acquired by a purchaser, it is necessary to make out some
defect in that title," which the court decided had not been done.
In answer to the point that the title of the appellant failed for
want of an endorsement by the governor, in support of which
Texas v. White and
Texas v. Hardenberg were
cited, the Court said:
"On an examination of the report of that case it will be seen
that the court was of opinion that it was established, both in
evidence and by the answers of some of the parties, that the bonds
then in controversy were all of them issued to White and Chiles,
and the illegal contract on which they were issued was in evidence,
and the court was further of opinion that the parties had notice of
these facts."
As to what was said in
Texas v. White, that the
endorsement of the governor was essential to the title of a
purchaser, on the ground that the state could, by statute, while
the bonds were in its possession, limit their negotiability by
requiring as one of its conditions the endorsement of the governor,
and that the repeal of that statute, in view of its supposed
treasonable purpose, was void, it is remarked by the court: "All of
this, however, was unnecessary to the decision of that case, and
the soundness of the proposition may be doubted."
In the case of
Vermilye v. Adams Express
Co., 21 Wall. 138, the controversy involved the
title to Treasury notes issued under the Act of March 3, 1865, 13
Stat. 468, payable to the holder three years after date, and dated
July 15, 1865, bearing interest payable semiannually, for which
coupons were attached, except for the interest of the last six
months; that was to be paid with the principal when the notes were
presented. On the back of each note was this statement:
"At maturity, convertible at the option of the holder into
bonds, redeemable at the pleasure of the government at any time
after five years, and payable twenty years from June 15th,
Page 113 U. S. 495
1868, with interest at six percent per annum, payable
semiannually in coin."
The notes in question were stolen from the express company and
subsequently sought by Vermilye & Co., bankers in New York; but
at the time of the purchase, more than three years had elapsed from
the date of their issue, and the Secretary of the Treasury had
given notice that they would be paid or converted into bonds at the
option of the holder on presentation to the department, and that
they had ceased to bear interest.
The judgment of the court sustaining the title of the express
company was founded on the fact that the purchase was made after
the maturity of the obligations. MR. JUSTICE MILLER, delivering the
opinion of the Court, said:
"They had the ordinary form of negotiable instruments, payable
at a definite time, and that time had passed an they were unpaid.
This was obvious on the face of the paper."
It was further shown that the fact that the holder had an option
to convert them into other bonds did not change their character in
this respect, and "that the simple fact that they were the
obligations of the government" did not take them
"out of the rule which subjects the purchaser of overdue paper
to an inquiry into the circumstances under which it was made, as
regards, the rights of antecedent holders."
And referring to the case of
Texas v.
White, 7 Wall. 700, where the bonds were redeemable
after the 31st day of December, 1864, it was stated that the court
had there held
"that after that date they were to be considered as overdue
paper, in regard to their negotiability, observing that in
strictness, it is true they were not payable on the day when they
became redeemable, but the known usage of the United States to pay
all bonds as soon as the right of payment accrues, except when a
distinction between redeemability and payability is made by law and
shown on the face of the bonds, requires the application of the
rule respecting overdue obligations to bonds of the United States
which have become redeemable and in respect to which no such
distinction is made."
MR. JUSTICE MILLER then added:
"We have not quoted the language from the opinion in that case
with any view of affirming it. It may admit of grave
Page 113 U. S. 496
doubt whether such bonds, redeemable but not payable at a
certain day, except at the option of the government, do become
overdue in the sense of being dishonored if not paid or redeemed on
that day. But the notes in the case before us have no such feature.
They are absolutely payable at a certain time, and we think the
case is authority for holding that such an obligation, overdue,
ceases to be negotiable in the sense which frees the transaction
from all inquiry into the rights of antecedent holders. This ground
is sufficient of itself to justify the decree in favor of the
express company."
It is apparent that the original decision of the court in
reference to the Texas indemnity bonds in
Texas v.
White, 7 Wall. 700, has been questioned and limited
in important particulars in the subsequent cases involving the same
questions. The position there taken, that the Legislature of Texas,
while the state was owner of the bonds, could limit their
negotiability by an act of legislation, of which all subsequent
purchasers were charged with notice, although though the bonds on
their face were payable to bearer, must be regarded as overruled.
And the further position, that negotiable government securities,
redeemable at the pleasure of the government after a specified day,
but in which no date is fixed for final payment, cease to be
negotiable as overdue after the day named when they first become
redeemable, must be regarded as limited to cases where the title of
the purchaser is acquired with notice of the defect of title, or
under circumstances which discredit the instrument, such as would
affect the title to negotiable paper payable on demand, when
purchased after an unreasonable length of time from the date of
issue.
In addition to this, the opinion of Chief Justice Chase in the
first case expressly excepts from the rule of the decision, out of
the class of overdue obligations to which it is applied, those in
which "a distinction between redeemability and payability is made
by law, and shown on the face of the bonds" -- an exception which
embraces and defines the very bonds now in question, for by law as
well as by the terms of the obligation, they were redeemable at the
pleasure of the government after the first day of July, 1870, but
were payable, finally and unconditionally,
Page 113 U. S. 497
on the first day of July, 1885, and the interest coupons
attached covered the whole period until the date of ultimate
payment. So that, in no aspect, and the cases cited by considered
as governing the present, unless, indeed, the implications from
them may be treated as furnishing the rule which determines that at
the time when the title of the claimants in these cases, adjudged
invalid, accrued, these bonds were not overdue.
The single question in the present cases is whether the bonds in
controversy were overdue at the time of the purchase by those who
claim title against the Manhattan Savings Institution. That
question must be resolved by a proper construction of the contract
contained in the bonds themselves, assuming it to be still open, so
far as effected by previous judicial decisions; and, in construing
the contract, it must be conceded that the obligations of the
government in this form are governed by the rules of the law
merchant regulating negotiable securities, modified only, if at
all, by the laws of the United States, under the authority of which
they were created and put in circulation, and of those laws, and of
whatever was lawfully done or declared by the government or its
officers in pursuance of them, it is also to be admitted, every
holder must be conclusively presumed to have had knowledge.
On their face, these bonds are payable on the first day of July,
1885, and are redeemable at the pleasure of the United States after
the first day of July, 1870. This was in conformity to the Act of
March 3, 1865, 13 Stat. 468, under which they were issued, which
expressly authorized that they might be made payable at any period
not more than forty years from date of issue, or that they might be
made redeemable at the pleasure of the government at or after any
period, not less than five nor more than forty years from date, or
might be made both redeemable and payable, as aforesaid, as should
be expressed upon their face. They were, accordingly, made both
redeemable and payable as was expressed upon their face.
The pleasure of the government to redeem them, or any part of
them, of course, could only be declared by law. Provision to this
effect was made by the Act of July 14, 1870, which provided
Page 113 U. S. 498
the means for actual redemption by the sale or exchange of the
bonds which it authorized the Secretary of the Treasury to issue,
and required him to designate by public notice from time to time,
by class, date, and number, in the order of their numbers and
issue, the particular bonds to be redeemed by payment and
cancellation. And the effect, as to all bonds called for redemption
and not sooner presented, was declared to be that, "in three months
after the date of such public notice, the interest on the bonds so
selected and advertised shall cease."
It may be admitted, for the sake of the argument -- although the
proposition cannot be considered indisputable -- that after the
maturity of a call for the redemption of designated bonds, the
obligation of the government to pay them thereby became fixed and
irrevocable, so that thereafter, on demand and refusal of payment,
an action would accrue to the holder for the recovery of the
principal and accrued interest, the Court of Claims having
jurisdiction in such cases.
In that view, preserving the distinction expressly made by the
law between redeemability and payability, the bond becomes, after
the maturity of a call for redemption, payable at the option of the
holder on demand, but without future interest at any time prior to
the day fixed for ultimate payment, when it becomes unconditionally
due. The construction which, after the maturity of such a call,
reads the contract as if the day when interest is to cease had been
originally inserted as the day of ultimate payment, confounds and
obliterates the express distinction made in the law itself between
redeemability and payability, and rewrites the contract upon a
different basis. The legal effect of the call undoubtedly is to
entitle the holder to demand payment at its maturity, and, even
though not demanded, to exonerate the government from liability for
interest accruing after that date; but, consistently with the terms
of the statutes, and the obvious purposes in view, in the original
creation and issue of the securities in the form adopted, it cannot
be that the legal effect of such a call for the purpose of
redemption is the same as if the bond had been originally framed as
an obligation to pay absolutely on a day previously fixed.
Page 113 U. S. 499
The acts of Congress, under which these and similar bonds of the
United States were authorized and issued, do not in terms attach to
them the legal quality of negotiable securities; but they are such
in form and fact, and obviously for the purpose of giving them the
highest credit and the widest and most unfettered currency by
passing, by delivery, with a title unimpeachable in the hands of
bona fide purchasers for value. In the form in which those
now in question were issued, until a call for their redemption was
advertised, they were not due upon their face until the day fixed
for final payment, and the right reserved to the government at its
option, to anticipate the payment cannot be construed as affecting
the contract injuriously to the holder any further than the law
declaring it, either expressly or by necessary implication,
requires. That law gives to the holder three months after the date
of the call for redemption within which to present his bonds for
payment or exchange, with interest to the date of redemption; but
the only penalty it prescribes, if the holder chooses to retain his
original security, is the loss of future interest. In no other
respect does it alter the original contract. It seeks to impose
upon it no other disability, nor take from it any other immunity.
It stands, therefore, upon its statutory basis as a bond redeemable
at the Treasury on demand, without interest after the maturity of
the call, payable according to its original terms, and not overdue,
in the commercial sense, till after the day of unconditional
payment. If the obligation had been originally written in that form
-- a promise to pay absolutely on the first day of July, 1885, with
interest according to coupons attached, but redeemable at the
Treasury at and after July 1, 1870, interest to cease three months
thereafter if not presented for redemption within that period -- it
would have expressed in advance the exact contract as it became by
the exercise of the reserved option of redemption, and in that form
it seems to us quite plain that it could not be considered an
overdue obligation, in the sense in which that term is applied to
ordinary commercial paper, until after the limit fixed for final
payment had been passed.
The title of the purchaser of overdue negotiable paper, such
Page 113 U. S. 500
as a bill of exchange or a promissory note, stands on the same
footing as if it had been dishonored by a refusal to accept or pay,
and had been put under protest. When transferred after it has
become due, although not reduced to the rank of an ordinary chose
in action, the legal title to which cannot pass by assignment or
delivery, it carries on its face the presumption which discredits
it, and deprives it of that immunity which, while the time for
payment was still running, was secured to it in favor of a
bona
fide purchaser for value without actual notice of any defect,
either in the obligation or the title. This was put by Mr. Justice
Buller, in
Brown v. Davies, 3 T.R. 80, on the ground that
to take an overdue note or bill was "out of the common course of
dealing." Ordinarily a note or bill when due becomes
functus
officio, because it was made to be paid at maturity, and if it
fails of its intended operation and effect, the presumption is that
it is owing to some defect, which has furnished a sufficient reason
to the party apparently chargeable for not having punctually
performed his obligation. In the strong language of Lord
Ellenborough in
Tinson v. Francis, 1 Camp. 19, "after a
bill or note is due, it comes disgraced to the endorsee."
No such presumption, in our opinion, arises to affect the title
of a holder of the bonds of the United States such as those now in
question, acquired by a
bona fide purchaser for value
prior to the date fixed in the bonds themselves for their ultimate
payment; for, as we have already shown, the only change in the
original effect of the contract by the exercise of the right of
earlier redemption is to stop the obligation to pay future
interest. And as against one choosing for any purpose of his own to
retain his bond as a continuing security for the value it always
represents, having impressed upon it by the law of its creation the
faculty of passing from hand to hand as money, and therefore just
as useful in the pursuits of trade and the exchanges of commerce
and banking as so much money in the form of coin or banknotes, and
more convenient because more portable, no such presumption can be
entertained on the ground that its continued circulation is not in
the due course of business, that it has fully performed all its
intended functions,
Page 113 U. S. 501
and that it has been in any sense dishonored by a refusal on the
part of the obligor to fulfill its obligation. On the contrary,
supposing the purchaser bound to know, what in fact does not appear
on its face, that the bond has been called for redemption under
penalty of a stoppage of interest after three months, the very
notice which it is said discredits his title is in fact an
advertisement not that the maker has any ground to refuse payment,
but that the previous holder preferred to hold the security for the
money, rather than to accept the money which it represents.
As we have seen, the true effect to be given to the exercise of
the right of redemption within the period of absolute payment is to
make the bonds payable during that interval on demand but without
interest after three months from the maturity of the call. But the
rule as to ordinary negotiable paper, payable on demand, is that it
is not due without demand until after the lapse of a reasonable
time within which to make demand, and what the length of that
reasonable time is may vary according to the circumstances of
particular cases, and must be governed very largely by the
intentions of the parties as manifested in the character of the
paper itself and the purposes for which it is known to have been
created and put in circulation. It was said by Baron Parke in
Brooks v. Mitchell, 9 M. & W. 15, that "a promissory
note, payable on demand, is intended to be a continuing security."
And in
Losee v. Dunkin, 7 Johns. 70, it is said: "The
demand must be made in reasonable time, and that will depend upon
the circumstances of the case and the situation of the parties." In
reference to the bonds involved in this litigation, we have no
hesitation in saying that at the time the title of the purchasers
was acquired, no unreasonable length of time had elapsed after the
maturity of the call. On the contrary, we think any holder had a
right, without prejudice except as to loss of interest, to wait
without demand for the whole period at the expiration of which the
bond was unconditionally payable.
The fact that interest was to cease to accrue three months after
the date of call had no tendency to discredit the bonds or affect
the title of a
bona fide purchaser for value in the
due
Page 113 U. S. 502
course of trade. While it has been held that a note the
principal of which is payable by installments is overdue when the
first installment is overdue and unpaid, and is thereby subject to
all equities between the original parties,
Vinton v. King,
4 Allen 562, yet it is said by the Supreme Judicial Court of
Massachusetts in
National Bank of North America v. Kirby,
108 Mass. 497, 501:
"We are referred to no case in which it has been held that
failure to pay interest, standing alone, is to be regarded
sufficient in law to throw such discredit upon the principal
security upon which it is due as to subject the holder to the full
extent of the security to antecedent equities."
"To hold otherwise," said this Court in
Cromwell v. County
of Sac, 96 U. S. 51,
96 U. S. 58,
"would throw discredit upon a large class of securities issued
by municipal and private corporations having years to run, with
interest payable annually or semiannually."
And the doctrine was reaffirmed in
Railway Co. v.
Sprague, 103 U. S. 756.
These were cases where nonpayment of interest was in breach of the
contract, and constituted a default. It is much stronger in its
application here, where the obligation to pay interest ceases
because that is the contract, to which the holder of the bond has
consented and to which he submits, because he prefers to hold a
security, although not bearing interest, rather than to surrender
it at once.
But an adequate and complete view of the nature and function of
the right of redemption reserved in these bonds, and of its
intended effect upon the rights of the parties under the contract,
cannot be had without considering it in its actual operation and
execution. The clause which makes the bonds redeemable was not a
casual provision occurring in a single obligation, but was an
effective and significant instrument in a series of great financial
transactions. The five-twenty bonds issued under the Acts of March
3, 1865, 13 Stat. 668, and April 12, 1866, 14 Stat. 31, as we are
informed by public official documents, amounted to $958,483,550,
nearly a thousand millions of dollars.
On March 1, 1871, the nearest date prior to the commencement of
operations under the Refunding Act of 1870, the following amounts
of six percent five-twenty bonds were outstanding:
Page 113 U. S. 503
Five-twenties of 1862 . . . . . . . . . . $493,738,350
Five-twenties of March, 1864. . . . . . . 3,102,600
Five-twenties of June, 1864 . . . . . . . 102,028,900
Five-twenties of 1865 . . 182,112,450
Act March 3, Consols of 1865 . . . . . 264,619,700
1865 Consols of 1867 . . . . . 338,832,550
Consols of 1868 . . . . . 39,663,750
"The National Loans of the United States," by Bailey,
Washington, 1882, p. 94.
Of these, large amounts were held abroad by investors in foreign
countries, and had been dealt in by bankers in the principal money
centers of the world. It was expected and desired by Congress that
this should be so, as the Secretary of the Treasury had been
expressly authorized by law to dispose of any of the bonds of the
United States, "either in the United States or elsewhere." Act
March 3, 1865, § 2. And under the Refunding Act of July 14, 1870,
as we have already seen, the Secretary of the Treasury established
an agency in London for the purpose of delivering the bonds sold
under that act and receiving in exchange therefor the outstanding
securities of the United States agreed to be received in payment
therefor. The object of this great exchange was to reduce the
annual interest on the public debt of the United States from six to
the lower rates of five, four and one-half, and four percent. To
have called in the redeemable debt and paid for it in gold coin,
and to have obtained the gold coin for that purpose by sales of the
new securities, would have been awkward, circuitous, and
impracticable, involving the needless export and import of a mass
of the gold coin distributed by the necessities of the world's
commerce throughout its markets, the attempt to do which would have
produced disturbances of market values, certain to have defeated
it. Any transfer of specie in large amounts to meet balances
occasioned by these operations would have been almost as serious in
its effects, and was therefore by every consideration of public and
private interests to be avoided. The difficult practical question
was how to avoid it -- how to substitute in the markets of the
world one
Page 113 U. S. 504
loan for the other by an exchange of securities without any
serious and disturbing movement of coin. Congress had placed it
within the power of the Secretary of the Treasury to accomplish
this by authorizing him to receive the five-twenty bonds, to be
redeemed in exchange at par for the bonds to be issued at a lower
rate of interest. This he was enabled to do by calling in the
five-twenty bonds for redemption, by which they were made equal in
value as money to par and interest then due and by agreeing to
treat and receive them as money in the exchange. This created a
demand for the "called bonds" to be used for that purpose, and they
were bought from the holders by bankers and agents of the
syndicates who had contracted to place the new loans under the act
of 1870. This transaction could only have been successfully
effected upon the assumption that the call for redemption did not
affect the negotiable quality of the bonds, nor impose upon them
any disability except the cessation of interest after the maturity
of the call, nor deprive them of any other immunity which had
previously belonged to them. On the contrary, it must have been
within the contemplation of the Treasury Department and of those
with whom it was dealing that the "called bonds," until finally
absorbed by payments into the Treasury in exchange for new bonds,
which constituted the fact of redemption, were equivalent in all
legal qualities to money itself or to those usual equivalents of
money which circulate, without question as such, like Treasury
notes, payable on demand. And this view, we have already seen, the
parties were authorized and justified in adopting by the language
and purposes of the statutes under which the transactions were
accomplished. By this means, an enormous public debt was shifted
and converted, so as largely to reduce the burden of its interest;
the agents of the government were facilitated in the great work
they had undertaken; the individual holders of the securities of
the United States, scattered throughout the countries of Europe,
received the money due them on the bonds for which they subscribed
at their own domiciles, and this series of great financial
operations was successfully accomplished without interference with
the usual course of the business of
Page 113 U. S. 505
the world, without disturbing the fixed distribution of currency
which commerce had apportioned to its appropriate markets, and
without unsettling the value of property or labor either at home or
abroad. These beneficial results were greatly facilitated, if not
made feasible, by the unquestioned negotiability of the called
bonds, which, when subjected to the right of redemption reserved by
their terms, were thereafter considered and treated as the
equivalent of money. This could not have been if the principles
which protect
bona fide purchasers for value, in the due
course of trade, without actual notice of a defect in the
obligation or title, had not been practically adopted. The practice
as found to have existed was in our opinion well warranted by
law.
This confidence was invited by the convenience of the government
itself, and certainly promoted its interests and advanced its
purposes. The practice it engendered on the part of the public
dealing in its securities had been expressly sanctioned by formal
recognition and approval by the Treasury Department long prior to
the negotiation of the war loans, which commenced in 1862. In 1860,
Attorney General Black officially advised the Secretary of the
Treasury, 9 Opinions 413, that Treasury notes, redeemable after one
year from date, interest thereon to cease at the expiration
thereafter of sixty days' notice of readiness to pay and redeem the
same, were intended to be a continuing security and to pass by
delivery, after the period of redemption equally as before, as
money or banknotes not liable to any equities between the original
or intermediate parties.
It was by force of such a custom declared by Lord Selborne
"to be the legitimate, natural, and intended consequence (unless
there should be any law to prohibit it) of that representation and
engagement which appears on the face of the scrip itself, when
construed according to the obvious import of its terms,"
that in the case of
Goodwin Robarts, first in the
Exchequer Chamber, L.R. 10 Exch. 337, and afterwards in the House
of Lords, 1 App. Cas 476, an instrument, payable to bearer in the
bonds of a foreign government, was held to be negotiable by
delivery on the ground that
"after those payments had been made and receipts for them
signed, the scrip was as much a
Page 113 U. S. 506
symbol of money due and as capable of passing current upon the
principle explained in the authorities, with respect to banknotes
and exchequer bills as the bonds themselves would have been if they
had been actually delivered in exchange for it."
1 App.Cas. 497.
We are therefore of opinion that the title of J. S. Morgan &
Co. and of L. Von Hoffman & Co., respectively, to the bonds
claimed by them ought to have prevailed against that set up by the
Manhattan Savings Institution, and for error in not so holding,
The several judgments of the Court of Claims in these cases
are reversed, and the causes are remanded to that court with
directions to render judgments in accordance with this
opinion.
