A commercial house sent to a correspondent eight bills of
exchange, four purporting to be the first and the other four the
second of exchange, and the whole eight accepted on their face by
that commercial house, and each of the four made payable to the
order of their correspondent, but in blank as to the names of the
drawers, and the address of the drawers, and as to date and amount
and time and place of payment.
The correspondent filled up and had discounted the four which
were the first of exchange, which were not involved in the present
suit.
Page 63 U. S. 97
Two of the four of the second of exchange were filled up,
varying from the others, not only in dates and amounts, but also as
to time and place of payment.
These bills were discounted by a bank without any knowledge
whatever that either had been perfected and filled up by the prayee
without authority, or of the circumstances under which they had
been entrusted to his care, unless the words "second of exchange,
first unpaid" can be held to have that import.
The effect of these words was a question of law, and not of fact
for the jury.
The bills described above were not parts of sets of bills of
exchange. They were perfected, filled up, and negotiated, by the
correspondent of the defendants, to whom the blank acceptances had
been entrusted as single bills of exchange, and for the acts of
their correspondent, in that behalf, the defendants are responsible
to a
bona fide holder for value without notice that the
acts were performed without authority.
The case falls within the rule that where one of two innocent
parties must suffer through the fraud or negligence of a third
party, the loss shall fall upon him who gave the credit.
This was an action brought by the bank upon two bills of
exchange, one dated on the 18th of August, 1857, at Pittsburgh,
drawn by L. O. Reynolds & Son upon J. S. & R. E. Neal, at
Madison, Indiana, requesting them to pay, four months after date of
this second of exchange, first unpaid, to the order of L. O.
Reynolds, at the Ohio Life Insurance and Trust Company, at
Cincinnati, in the State of Ohio, two thousand one hundred and
sixty-eight dollars. Reynolds endorsed this bill to L. Wilmarth
& Co., who endorsed it to the bank. The bill was accepted by J.
S. & R. E. Neal.
The other bill sued upon was similar in all its circumstances
except that it was dated on the 1st of August, 1857, payable four
months after the date of this second of exchange, first unpaid, for
thirteen hundred and fifty dollars. It was endorsed and accepted
like the other.
In order to present a distinct view of the transactions which
led to this suit and the nature of the defense, it seems necessary
to state particularly all the bills mentioned in the proceedings,
designating each bill by a letter, which is the reporter's mark,
and used for easy reference.
In June, 1857, J. S. & R. E. Neal, residents of Madison,
Page 63 U. S. 98
Indiana, for the purpose of raising money, delivered to L. O.
Reynolds, of Pittsburgh, the four following bills,
viz.:
"Exchange for $_____."
"_____ after _____ of this first of exchange, second unpaid, pay
to the order of L. O. Reynolds _____ dollars, value received,
without any relief from valuation or appraisement laws."
"To _____."
"Accepted: J. S. & R. E. NEAL."
(This bill we will call A)
"Exchange for $_____."
"_____ after _____ of this first of exchange, second unpaid, pay
to the order of L. O. Reynolds _____ dollars, value received,
without any relief from valuation or appraisement laws."
"To _____."
"Accepted: J. S. & R. E. NEAL."
(This bill we will call B)
"Exchange for $_____."
"_____ after _____ of this second of exchange, first unpaid, pay
to the order of L. O. Reynolds _____ dollars, value received,
without any relief from valuation or appraisement laws."
"To _____."
"Accepted: J. S. & R. E. NEAL."
(This bill we will call C)
"Exchange for $_____."
"_____ after _____ of this second of exchange, first unpaid, pay
to the order of L. O. Reynolds _____ dollars, value received,
without any relief from valuation or appraisement laws."
"To _____."
"Accepted: J. S. & R. E. NEAL."
(This bill we will call D)
With these bills, instructions were sent to Reynolds to have
them filled up for sums not less than $1,500, nor more than $3,000
each, to have them discounted at Pittsburgh, and remit the proceeds
to J. S. & R. E. Neal, at Madison, Indiana.
In July, 1857, four other bills like the preceding were sent to
Reynolds. These last bills were sent to Reynolds at his
Page 63 U. S. 99
request, and intended for his use, as accommodation acceptances
of the Neals.
These bills we will call E, F, G, H.
A was filled up by Reynolds as follows: Date, July 1; amount,
$1,965; time, four months; drawers, L. O. Reynolds & Son;
drawees, J. S. & R. E. Neal. Thus filled up, it was negotiated
by Reynolds to the Mechanics' Bank of Pittsburgh. Reynolds failed
to remit the proceeds according to instructions. When the paper
matured, the defendants, as acceptors, paid it.
B was filled up as follows: Date, July 10; time, four months;
amount, $2,035; drawers, L. O. Reynolds & Son; drawees, J. S.
& R. E. Neal. Thus filled up, it was negotiated by Reynolds to
the Merchants and Manufacturers' Bank of Pittsburgh. The proceeds
of this bill were remitted by Reynolds to the defendants. Before
the commencement of this suit, the Merchants and Manufacturers'
Bank, as holder and owner of the bill, recovered judgment on it
against the acceptor in the Jefferson Circuit Court of the State of
Indiana. C and D were for the present retained by Reynolds in his
own possession.
E, being similar to A, was filled up as follows: Date, July 30;
time, four months; amount, $2,450; drawers, L. O. Reynolds &
Son; drawees, J. S. & R. E. Neal. Thus filled up, it was
negotiated by Reynolds to the Merchants and Manufacturers' Bank of
Pittsburgh, Reynolds retaining the proceeds. The holders of this
bill brought suit against the defendants, as acceptors, in the
Jefferson Circuit Court, Indiana, which action was still pending
when the pleas in this case were filed.
F, being similar to B, was filled up by Reynolds as follows:
Date, July 24; time, four months; amount, $2,750; drawers, L. O.
Reynolds & Son; drawees, J. S. & R. E. Neal. Thus filled
up, it was negotiated by Reynolds to the Citizens' Bank of
Pittsburgh, Reynolds retaining the proceeds. John Black & Co.
became the holders, and after its maturity, and before the
commencement of this suit, they recovered judgment against the
acceptors of the bill for its full amount in the Jefferson Circuit
Court of Indiana.
Page 63 U. S. 100
Thus, the bills A, B, E, F, being the first of exchange, second
unpaid, are accounted for. What became of G and H, the record did
not show. Let us now account for C and D.
C was filled up as follows: Date, August 1st; time, four months;
amount, $1,350; drawers and drawees, as above.
D was filled up as follows: Date, August 18; time, four months;
amount, $2,168; same drawers and drawees. These bills were both
negotiated to the Bank of Pittsburgh, and were the ones sued on in
this case. It will be observed that they were both second of
exchange, first unpaid, and that the sums of money did not
correspond in amount with any of those for which the first of
exchange had been filled up, nor in date, time, or place of
payment.
There were four counts in the declaration, and eight pleas,
which were all demurred to except the plea of the general issue. It
is not necessary to state these pleadings, because they were only
intended to raise the questions of law which arise from the
statement of facts given above. The court overruled the plaintiffs'
demurrers, so that judgment went for the defendant; and upon this
ruling upon the demurrers, the case was brought up by the plaintiff
to this Court.
Page 63 U. S. 104
MR. JUSTICE CLIFFORD delivered the opinion of the Court.
This is a writ of error to the Circuit Court of the United
States for the District of Indiana. All of the questions presented
in this case arise upon the pleadings and the facts therein
disclosed. It was an action of assumpsit, brought by the plaintiff
in error as the holder of two certain bills of exchange, against
the defendants as the acceptors. An amendment to the declaration
was filed after the suit was commenced. As now exhibited in the
transcript, it contains four counts. Two of the counts were drawn
up on the respective bills of exchange, and are in the usual form
of declaring in suits, by the holder of a bill of exchange against
the acceptor. Those contained in the amendment are special in form,
setting forth the circumstances under which the respective bills of
exchange were drawn, accepted, and negotiated and averring that
these
Page 63 U. S. 105
acts were subsequently ratified by the defendants. To the merits
of the controversy the defendants pleaded the general issue and
filed seven special pleas in bar of the action. Demurrers were
filed by the plaintiff to each of the special pleas which were duly
joined by the defendants, and after the hearing the court overruled
all of the demurrers. Those filed to the pleas responsive to the
first and second counts were overruled upon the ground that the
pleas were sufficient and constituted a good bar to the action, but
those filed to the fifth, sixth, seventh, and eighth pleas were
overruled upon the ground that the third and fourth counts, to
which those pleas exclusively applied, were each insufficient in
law to maintain the action. Whereupon the plaintiff abiding his
demurrers, the court directed that judgment be entered for the
defendants, and the plaintiff sued out a writ of error and removed
the cause into this Court. It being very properly admitted by the
counsel of the defendants that the first and second counts of the
declaration are in the usual form, it is not necessary to determine
the question as to the sufficiency of the third and fourth, and we
are the less inclined to do so from the fact that the counsel on
both sides expressed the wish at the argument that the decision of
the cause might turn upon the question whether the plaintiff, on
the facts disclosed in the pleadings, was entitled to recover
against the defendants. That question is the main one presented by
the pleadings, and inasmuch as it might well have been tried under
the general issue, we think it quite unnecessary to consider any of
the incidental questions which do not touch the merits of the
controversy. Special pleading in suits on bills of exchange and
promissory notes ought not to be encouraged, except in cases where
by law the defense would otherwise be excluded or rendered
unavailing. Full and clear statements of the facts as disclosed in
the pleadings were presented to the court, at the argument, by the
counsel on both sides. They are substantially as follows:
In June, 1857, the defendants, residents of Madison, in the
State of Indiana, being desirous of procuring a loan of money, made
their certain acceptances in writing of two blank bills of
exchange, in sets of two
Page 63 U. S. 106
parts to each bill, and transmitted the four blanks thus
accepted to their correspondent, Lot. O. Reynolds, then and still
residing at Pittsburgh, in the State of Pennsylvania. Both sets of
blanks were in the form of printed blanks usually kept by merchants
for bills of exchange in double sets, except that each of the four
was made payable to the order of the correspondent to whom they
were sent, and was duly accepted on its face by the defendants, in
the name of their firm. They were in blank as to the names of the
drawers and the address of the drawees, and as to date, and amount,
and time, and place of payment. When the defendants forwarded the
acceptances, they instructed their correspondent to perfect them as
bills of exchange, by procuring the signatures of the requisite
parties, as accommodation drawers and endorsers, and to fill up
each with the appropriate date, and with sums not less than fifteen
hundred nor more than three thousand dollars, payable at the
longest period practicable, and to sell and negotiate the bills as
perfected, for money, and remit the proceeds to the defendants.
Afterwards, in the month of July, of the same year, the defendants,
at the request of the person to whom those acceptances were sent,
made four other similar acceptances, and delivered them to him, to
be sold and negotiated as bills of exchange, in double sets, for
his own use, and with power to retain and use the proceeds thereof
for his own benefit. They were in all respects the same, in point
of form, as the four acceptances first named, and, like those, each
of the four parts was made payable to the order of the person at
whose request they were given, and was duly accepted by the
defendants in the name of their firm. When they delivered the sets
last named, they authorized the payee to perfect them as bills of
exchange, in two parts, in reasonable amounts, and with reasonable
dates. Eight acceptances were thus delivered by the defendants to
the same person, corresponding in point of form to four bills of
exchange, but with blanks for the names of the drawers and the
address of the drawees, and for the respective amounts, dates, and
times and places of payment. Four contained, in the printed form of
the blanks, the words, "first of exchange, second unpaid," and the
other four contained in
Page 63 U. S. 107
the corresponding form the words, "second of exchange, first
unpaid," but in all other respects they were alike. All of the
first class were perfected by the correspondent as bills of
exchange of the first part, and were sold and negotiated by him at
certain other banks in the City of Pittsburgh. He perfected them by
procuring L. O. Reynolds & Son to become the drawers, addressed
them to the defendants, endorsed them himself in blank, and
procured another individual or firm to become the second endorser.
They were filled up by him for sums varying from about two thousand
to three thousand dollars, with dates corresponding to the times
when they were negotiated, and were respectively made payable in
four months from date. Contrary to his instructions, he retained
the proceeds of the one first negotiated, which he had been
directed to remit, and he also retained in his possession, but
without inquiry or complaint on the part of the defendants, the
other four acceptances, constituting the second class. On the first
day of August, 1857, he perfected and filled up as a separate bill
of exchange one of the last-named acceptances, and sold and
negotiated it to the plaintiff for his own use and benefit. He also
perfected and filled up, on the eighteenth day of the same month,
another of the same class in the same manner and for the same
purpose, and on the same day sold and negotiated it to the
plaintiff. Both of these last-mentioned bills of exchange vary from
those of the first class not only in dates and amounts, but also as
to time and place of payment, and are in all respects single bills
of exchange. They were each received and discounted by the
plaintiff, without any knowledge whatever that either had been
perfected and filled up by the payee without authority, or of the
circumstances under which they had been entrusted to his care,
unless the words, "second of exchange, first unpaid," can be held
to have that import.
In all other respects, the bills must be viewed precisely as
they would be if they had been perfected and filled up by the
defendants, and for two reasons, deducible from the decisions of
this Court:
First. Because, where a party to a negotiable instrument
Page 63 U. S. 108
entrusts it to the custody of another with blanks not filled up,
whether it be for the purpose to accommodate the person to whom it
was entrusted or to be used for his own benefit, such negotiable
instrument carries on its face an implied authority to fill up the
blanks and perfect the instrument, and as between such party and
innocent third parties, the person to whom it was so entrusted must
be deemed the agent of the party who committed such instrument to
his custody -- or, in other words, it is the act of the principal,
and he is bound by it.
Goodman v.
Simonds, 20 How. 361;
Violet v.
Patton, 5 Cranch 142.
Secondly. Because a
bona fide holder of a negotiable
instrument, for a valuable consideration, without notice of the
facts which impeach its validity between the antecedent parties, if
he takes it under an endorsement made before the same becomes due,
holds the title unaffected by these facts, and may recover thereon
although, as between the antecedent parties, the transaction may be
without any legal validity.
Swift v.
Tyson, 16 Pet. 15;
Goodman v.
Simonds, 20 How. 363.
Applying these principles, it is obvious that the only question
that arises on this branch of the case is as to the effect of the
words "second of exchange, first unpaid" which appear on the face
of the bills. That question, under the circumstances of this case,
is a question of law, and not of fact for the jury. Three decisions
of this Court sustain that proposition, and in view of that fact,
we think it unnecessary to do more than refer to those decisions,
without further comment in its support.
Andrews v.
Pond, 13 Pet. 5;
Fowler v.
Brantly, 14 Pet. 318;
Goodman v.
Simonds, 20 How. 366.
Another principle, firmly established by this Court and closely
allied to the question under consideration, will serve very much to
elucidate the present inquiry. In
Downes
v. Church, 13 Pet. 207, this Court held that either
of the set of bills of exchange may be presented for acceptance,
and if not accepted, that a right of action presently arises, upon
due notice, against all the antecedent parties to the bill, without
any others of the set being presented, for, said the
Page 63 U. S. 109
Court, it is by no means necessary that all the parts should be
presented for acceptance before a right of action accrues to the
holder.
Now if either of the set may be presented, and when not accepted
a right of action immediately ensues, it is difficult to see any
reason why, if upon presentation the bill is accepted, it is not
competent for the endorsee to negotiate it in the market, and
clearly, if the endorsee may properly negotiate the bill, a
bona fide holder for value, without notice, may acquire a
good title. In this connection Mr. Chitty says that
"Unless the drawee has accepted another part of a bill, he may
safely pay any part that is presented to him, and that a payment of
that part will annul the effect of the others; but if one of the
parts has been accepted, the payment of another unaccepted part
will not liberate the acceptor from liability to pay the holder of
the accepted part, and such acceptor may therefore refuse to pay
the bearer of the unaccepted part,"
from which he deduces the rule that a drawee of a bill drawn in
sets should only accept one of the set. Chitty on Bills, 10 Am.
ed., by Barb. 155.
Mr. Byles says:
"The drawee should accept only one part, for if two accepted
parts should come into the hands of different holders and the
acceptor should pay one, it is possible that he may be obliged to
pay the other part also,"
which could not be, unless it was competent for the holder of a
second part to negotiate it in the market. Byles on Bills 310.
Where the drawee accepted and endorsed one part to a creditor,
as a security, and afterwards accepted and endorsed another part
for value to a third person, but subsequently substituted another
security for the part first accepted, it was held in
Holdsworth
v. Hunter, 10 Barn. & Cress. 449, that under these
circumstances the holder of the part secondly accepted was entitled
to recover on the bill, and Lord Tenterden and Baron Parke held
that the acceptor would have been liable on the part secondly
accepted, even if the first part had been endorsed and circulated
unconditionally.
Judge Story says, in his work on bills of exchange, that the
Page 63 U. S. 110
bona fide holder of anyone of the set, if accepted, may
recover the amount from the acceptor, who would not be bound to pay
any other of the set which was held by another person, although he
might be the first holder. Story on Bills, sec. 226.
No authority is cited for the defendant to impair the force of
those already referred to, but it is not necessary to express any
decided opinion upon the point at the present time. Suffice it to
say that in the absence of any authority to the contrary, we are
strongly inclined to think that the correct rule is stated by Mr.
Chitty, and that such is the general understanding among mercantile
men.
But another answer may be given to the argument for the
defendant which is entirely conclusive against it, and that is that
the bills described in the first and second counts were not parts
of sets of bills of exchange. They were perfected, filled up, and
negotiated by the correspondent of the defendants to whom the blank
acceptances had been entrusted as single bills of exchange, and for
the acts of their correspondent in that behalf the defendants are
responsible to a
bona fide holder for value, without
notice that the acts were performed without authority.
When the transaction is thus viewed, as it must be in
contemplation of law, it is clearly brought within the operation of
the same rule as it would be if the defendant himself had
improvidently accepted two bills for the same debt. In such cases
it is held that the acceptor is liable to pay both in the hands of
innocent holders for value.
Davidson v. Robertson, 3
Dow.P.C. 228.
Lord Eldon said in that case:
"Here were two bills for the same account, and supposed to be
for the same sums; they who were to pay them had a right to
complain that there were two, and yet they were bound to pay both,
in the hands of
bona fide holders, if accepted by them or
by others for them, having authority to accept."
To suppose, in this case, that the words "second of exchange,
first unpaid" import knowledge to the plaintiff that the bills were
drawn in sets would be to give them an effect contrary to the
averments of the defendants' pleas, as well as
Page 63 U. S. 111
contrary to the admitted fact that they were not so drawn, and
for those reasons the theory cannot be sustained.
In view of all the facts as disclosed in the pleadings, we think
the case clearly falls within the operation of the rule generally
applicable in cases of agency that where one of two innocent
parties must suffer through the fraud or negligence of a third
party, the loss shall fall upon him who gave the credit.
Fitzherbert v. Mathen, 1 Term. 16, per Buller;
Androscoggin Bank v. Kimball, 10 Cush. 373;
Montague
v. Perkins, 22 Eng.L. & Eq. 516.
Businessmen who place their signatures to blanks suitable for
negotiable bills of exchange or promissory notes and entrust them
to their correspondents to raise money at their discretion ought to
understand the operation and effect of this rule, and not to expect
that courts of justice will fail in such cases to give it due
application.
According to the views of this Court, the demurrers to the
several pleas filed to the first and second counts of the
declaration should have been sustained. Having come to that
conclusion, it is unnecessary to examine the other propositions
submitted on behalf of the defendants.
The judgment of the circuit court is therefore reversed,
with costs, and the cause remanded, with directions to enter
judgment for the plaintiff as upon demurrer on the first and second
counts of the declaration.
