1. In May, 1863, the Milwaukee & St Paul Railway Company
issued coupon bonds, by each of which the company acknowledged its
indebtedness to certain persons named, or bearer, in the sum of
$1,000, and promised to pay the amount to the bearer on the 1st day
of January, 1893, at the office of the company in the City of New
York, with semiannual interest at the rate of seven percent per
annum, on the presentation and surrender of the coupons annexed as
they severally became due. Immediately following this
acknowledgment of indebtedness and promise of payment, there was in
each of the instruments a further agreement of the company to make
what was termed "the scrip preferred stock," attached to the bond,
full-paid stock at any time within ten days after any dividend
should have been declared and become payable on such preferred
stock, upon surrender, in the City of New York, of the bond and the
unmatured interest warrants. To each of the bonds there was
originally attached by a pin the certificate of scrip preferred
stock thus referred to, which stated that the complainant was
entitled to ten shares of the capital stock of the company,
designated as "scrip preferred stock," and that upon the surrender
of the certificate and accompanying bond and all unmatured coupons
thereon, as provided in the agreement, he should be entitled to
receive ten shares of full-paid preferred stock. Three of these
bonds with certificates attached were stolen from the plaintiff,
and were taken by the defendants as collateral security for notes
discounted by them, without actual notice of any defect in the
title of the holder, but the certificates were at the time detached
from the bonds.
Held, 1st, that the bonds were negotiable
instruments notwithstanding the agreement respecting the scrip
preferred stock contained in them, that agreement being independent
of the pecuniary obligation of the company, and 2d, that the
absence of the certificates originally attached to the bonds, when
the latter were taken by the defendants, was not of itself a
circumstance sufficient to put the defendants upon inquiry as to
the title of the holder.
2. The title of a person who takes negotiable paper before due
for a valuable consideration can only be defeated by showing bad
faith in him, which implies guilty knowledge or willful ignorance
of the facts impairing the title of the party from whom ho received
it, and the burden of proof lies on the assailant of the taker's
title
This was a suit to compel the defendants to surrender to the
complainant three coupon bonds of the Milwaukee & St. Paul
Railway Company, each for $1,000, of which he
Page 88 U. S. 355
professed to be owner and which he alleged were received by the
defendants in bad faith, with notice of his rights. The instruments
were dated May 6, 1863; by each of them, the company acknowledges
its indebtedness to certain persons named or bearer in the sum
designated, and promises to pay the amount to the bearer on the 1st
of January, 1893, at the office of the company in the City of New
York, with semiannual interest at the rate of seven percent per
annum, on the presentation and surrender of the coupons annexed as
they severally become due, with a provision that in case of
nonpayment of interest for six months, the whole principal of the
bond shall become due and payable.
Immediately following this acknowledgment of the indebtedness of
the company and its promise of payment, there was in each of these
instruments a further agreement of the company to make what is
termed "the scrip preferred stock," attached to the bond, full-paid
stock at any time within ten days after any dividend shall have
been declared and become payable on such preferred stock upon
surrender, in the City of New York, of the bond and the unmatured
interest warrants.
The several instruments also stated that the bonds were parts of
a series of bonds issued by the company, amounting to $2,200,000,
and that upon the acquisition of certain other railroads the issue
of bonds might be increased in certain designated amounts; that the
bonds were executed and delivered in conformity with the laws of
Wisconsin, the articles of association of the company, the vote of
the stockholders, and resolution of the board of directors; and
that the bearer of each bond was entitled to the security derived
from a mortgage of the property and franchises of the company,
executed to certain designated trustees, and to the benefits to be
derived from a sinking fund, established by the mortgage, of all
such sums of money as are received from the sales of lands granted
to the company by the United States or by the state of
Wisconsin.
To each of these bonds there was originally attached by a pin
the certificate of scrip preferred stock which is referred
Page 88 U. S. 356
to in the body of the instrument. This certificate was to the
effect that the complainant was entitled to ten shares of the
capital stock of the company, designated as "scrip preferred
stock;" and that upon the surrender of the certificate and
accompanying bond, and all unmatured coupons thereon, at any time
within ten days after any dividends should have been declared and
become payable on the full stock of the preferred stocks of the
company, the complainant should be entitled to receive ten shares
of such full-paid preferred stock, and that this scrip preferred
stock was only transferable on the books of the company at their
office in the City of New York, in person or by attorney, on the
surrender of the certificate.
In November, 1868, these bonds, with coupons and certificates
attached, belonged to the complainant, and during that month were
stolen from a bank in Bridgeport, Connecticut, together with a
large amount of other property there on deposit. They were received
in January and February, 1869, by the defendants, banking
institutions in the City of New York, as collateral security for
notes discounted by them, and were now held as such security for
those notes, or new notes given in renewal of them, and they were
received without actual notice of any defect in the holders' title.
At that time, the certificates of scrip preferred stock, originally
pinned to the bonds, were detached from them.
And the questions for determination were whether the agreement
in the instruments as to the scrip preferred stock affected their
negotiability and whether the absence of the certificates attached
was a circumstance sufficient to put the banks upon inquiry as to
the title of the holder.
MR. JUSTICE FIELD, having stated the case, delivered the opinion
of the Court as follows:
Page 88 U. S. 357
The character and form of the instruments which are the subject
of controversy in the present suit would seem to furnish an answer
to the questions that are raised before us. The agreement
respecting the scrip preferred stock is entirely independent of the
pecuniary obligation contained in the instrument. The latter
recites an indebtedness in a specific sum, and promises its
unconditional payment to bearer at a specified time. It leaves
nothing optional with the company. Standing by itself it has all
the elements and essential qualities of a negotiable instrument.
The special agreement as to the scrip preferred stock in no degree
changes the duty of the company with respect either to the
principal or interest stipulated. It confers a privilege upon the
holder of the bond, upon its surrender and the surrender of the
certificate attached, of obtaining full preferred stock. His
interest in and right to the full discharge of the money obligation
is in no way dependent upon the possession or exercise of this
privilege.
Whether the privilege was of any value at the time the bonds
were received by the defendants we are not informed, nor in
determining the negotiability of the bonds is the value of the
privilege a circumstance of any importance. Its value can in no way
affect the negotiable character of the instrument. An agreement
confessedly worthless, providing that upon the surrender of the
bonds the holder should receive, instead of full paid-up stock in
the railway company, stock in other companies of doubtful solvency
would have had the same effect upon the character of the
instrument.
In
Hodges v. Shuler, [
Footnote 1] which was decided by the Court of Appeals of
New York, we have an adjudication upon a similar question. There,
the action was brought upon a promissory note of the Rutland and
Burlington Railway Company, by which the company promised, four
years after date, to pay certain parties in Boston one thousand
dollars, with interest thereon semiannually, as per interest
warrants
Page 88 U. S. 358
attached, as the same became due,
"or, upon the surrender of this note, together with the interest
warrants not due, to the treasurer, at any time until six months of
its maturity, he shall issue to the holders thereof ten shares in
the capital stock in said company in exchange therefor, in which
case interest shall be paid to the date to which a dividend of
profits shall have been previously declared, the holder not being
entitled to both interest and accruing profits during the same
period."
It was contended that the instrument was not in terms or legal
effect a negotiable promissory note, but a mere agreement, and that
the endorsement of it operated only as a mere transfer, and not as
an engagement to fulfill the contract of the company in case of its
default. But the Court of Appeals held otherwise. "The possibility
seems to have been contemplated," says the court,
"that the owner of the note might, before its maturity,
surrender it in exchange for stock, thus cancelling it and its
money promise, but that promise was nevertheless absolute and
unconditional, and was as lasting as the note itself. In no event
could the holder require money and stock. It was only upon a
surrender of the note that he was to receive stock, and the money
payment did not mature until six months after the holder's right to
exchange the note for stock had expired. We are of opinion that the
instrument wants none of the essential requirements of a negotiable
promissory note. It was an absolute and unconditional engagement to
pay money on a fixed day, and although an election was given to the
promisees, upon a surrender of the instrument six months before its
maturity, to exchange it for stock, this did not alter its
character or make the promise in the alternative in the sense in
which that word is used in respect to promises to pay."
In
Welch v. Sage, [
Footnote 2] the effect of the certificate attached to the
bonds issued by the Milwaukee & St. Paul Railway Company,
identical with those in this case, was considered
Page 88 U. S. 359
by the same Court of Appeals, and the court there held that the
certificate constituted no part of the bond, that the latter was
entire and perfect without it, and that the admission of the debt
and the promise to pay were in no degree qualified by it.
The absence of the certificates at the time the bonds were
received by the defendants was not of itself a circumstance
sufficient to put the defendants upon inquiry as to the title of
the holder. There is no evidence in the case, as already observed,
that the privilege which the certificates conferred was of any
value, and if it had value, no obligation rested upon the holder to
preserve the certificates. He was at liberty to abandon the
privilege they conferred and rely solely upon the absolute
obligation of the company to pay the amount stipulated. The absence
of the certificates when the bonds were offered to the defendants
amounted to little if anything more in legal effect than a
statement by the holder that in his judgment they added nothing to
the value of the bonds. In the case of
Welch v. Sage,
already cited, it was held that the absence of the certificate from
the bond when taken by the purchaser would not of itself establish
the fact that the purchaser was guilty of fraud or bad faith,
although it would be a circumstance of some weight in connection
with other evidence.
The law is well settled that a party who takes negotiable paper
before due for a valuable consideration, without knowledge of any
defect of title, in good faith, can hold it against all the world.
A suspicion that there is a defect of title in the holder or a
knowledge of circumstances that might excite such suspicion in the
mind of a cautions person, or even gross negligence at the time,
will not defeat the title of the purchaser. That result can be
produced only by bad faith, which implies guilty knowledge or
willful ignorance, and the burden of proof lies on the assailant of
the title. It was so expressly held by this Court in
Murray v.
Lardner, [
Footnote 3]
where MR. JUSTICE SWAYNE examined the leading
Page 88 U. S. 360
authorities on the subject and gave the conclusion we have
stated.
In the present case, it is not pretended that the defendants,
when they took the bonds in controversy, had notice of any
circumstances outside of the instruments themselves, and the
absence of the certificates referred to in them, to throw doubt
upon the title of the holder.
We see no error in the rulings of the court below, and its
judgment is, therefore
Affirmed.
[
Footnote 1]
22 N.Y. 114.
[
Footnote 2]
47 N.Y. 143.
[
Footnote 3]
69 U. S. 2 Wall.
110;
See also Goodman v.
Simonds, 20 How. 343.
