The rule of law that he who takes a note overdue and dishonored,
takes it encumbered with all the equities between the prior parties
to it, being the law of Louisiana as well as of those states which
have adopted the common law, a person who takes such a note from
one entrusted by the owner with the collection of it only, cannot
come in that state more than elsewhere upon the proceeds of a
mortgage given to secure the note so taken along with several
others, the mortgaged property, on sale, proving insufficient to
pay all.
Mrs. Smith, the appellee, having sold to McHatton a plantation
in the Parish of East Baton Rouge, received from him notes for
$70,000 of the purchase money, secured by a mortgage on the
property sold. One of these notes for the sum of $15,000 was placed
by Mrs. Smith before due in the Bank of Kentucky for collection,
and that bank forwarded it for the same purpose to the Citizens'
Bank of New Orleans. The note was endorsed in blank by Mrs. Smith
and by the Bank of Kentucky. Not being paid at maturity, it was
duly protested, and in this condition remained in the Citizens'
Bank for over seven months, when one McKnight, who had been acting
as the agent of the Bank of Kentucky at New Orleans, took the note
from the Citizens' Bank, and sold and delivered it for full value
to Foley & Co. McKnight was supposed to have acted under a
power of attorney from the Bank of Kentucky, which was not
produced. He transferred the note by a public notarial act in
writing, by which he professed to assign the note to Foley &
Co., with all rights, remedies and mortgages to which the said Bank
of Kentucky was or might be entitled as holder of the note, but
without warranty on the part of said bank, except as to the
existence of the debt represented by the notes.
When the other notes, falling due after the one above mentioned,
had matured and were unpaid, Mrs. Smith instituted proceedings
under the law of Louisiana to foreclose her mortgage, and under
these proceedings the land was sold, and
Page 73 U. S. 493
she became the purchaser. The sale did not bring enough to
satisfy the remaining notes in her hands.
Foley & Co. intervened in these proceedings, and asked that
the amount of the note which they held might first be paid to them
out of the proceeds of the property sold. The court below dismissed
their claim.
MR. JUSTICE MILLER delivered the opinion of the Court.
We cannot see how the circuit court could have rendered any
other decree than that which it did, namely, to dismiss the
appellant's claim.
The rule of law that he who takes a note overdue and dishonored,
takes it encumbered with all the equities between the prior parties
to it, is the law of Louisiana as well as of those states which
have adopted the common law. This is well established by the
numerous decisions cited in the brief of counsel for appellee filed
in the circuit court.
Under this rule the purchaser from the Bank of Kentucky could
get no better title than the bank had when it sold. It is conceded
that it had no title whatever. The appellants purchased of
McKnight, as agent of the Bank of Kentucky, and as the note was not
the property of McKnight, or of the
Page 73 U. S. 494
bank which he represented, appellants must show some authority
for the sale from the real owner, or the sale is invalid. Such
authority is claimed in argument to result from the possession of
the note by McKnight. But if mere possession by the person who
professes to transfer a note were sufficient authority, there would
be no difference, as regards its negotiability, in a note before
its maturity and after its protest.
The appellants in this case relied upon the public act of
transfer by McKnight, and if this was without authority, their
purchase was void.
The principle is invoked by appellants, that in case of a loss
of this kind, in which one of two innocent persons must suffer,
that one should sustain the loss who has most trusted the party
through whom the loss came. It is a sound principle, and its
application to this case does not favor the appellants. If Mrs.
Smith trusted the Bank of Kentucky with her note, it was for a
purpose which was ended when the note was protested. By endorsing
the note she did trust the bank with full power to dispose of it
before due, although that was not intended, and she trusted the
bank for the return of the money to her if the money had been paid.
This trust the law implied. But her trust ceased, except as to the
mere possession of the note as a bailment, after the note was
protested. It was the appellants, who, with notice of the dishonor
of the note, purchased it, who trusted the bank for the title,
which it professed to sell.
It is to be remembered that the intervention of appellants did
not claim a personal judgment against McHatton or Mrs. Smith on the
note, but an appropriation of the proceeds of the sale to the
payment of the note held by them.
As Mrs. Smith is the real owner of the debt due from McHatton,
evidenced by the note in the possession of plaintiffs, there can be
no equity in making her substantially pay the note out of the
proceeds of the sale, or in postponing her just claim, to that of
appellants, who are not innocent holders without notice.
Decree affirmed.
