1. An overdue and unpaid coupon for interest, attached to a
municipal bond which has several years to run, does not render the
bond and the subsequently maturing coupons dishonored paper, so as
to subject them, in the hands of a purchaser for value, to defenses
good against the original holder.
2. A
bona fide purchaser of negotiable paper for value,
before maturity, takes it freed from all infirmities in its origin,
unless it is absolutely void for want of power in the maker to
issue it, or its circulation is by law prohibited by reason of the
illegality of the consideration. Municipal bonds, payable to
bearer, are subject to the same rules as other negotiable
paper.
3. Though he may have notice of infirmities in its origin, a
purchaser of a municipal bond from a
bona fide holder, who
obtained it for value before maturity, takes it as freed from such
infirmities as it was in the hands of such holder.
4. A purchaser of negotiable securities before their maturity,
whatever may have been their original infirmity, can, unless he is
personally chargeable with fraud in procuring them, recover against
the maker the fall amount of them, though he may have paid therefor
less than their par value.
5. When, at the place of contract, the rate of interest differs
from that at the place of payment, the parties may stipulate for
either rate, and the contract will govern.
6. Under the law of Iowa, municipal bonds in that state drawing
ten percent interest before maturity draw the same interest
thereafter, and matured coupons attached to them draw six percent.
Judgments there rendered upon such bonds and coupons draw interest
on the amount due on the bonds at the rate of ten percent a year,
and on that due on the coupons at the rate of six percent a
year.
This action was brought by Cromwell upon four bonds of the
County of Sac, in the State of Iowa, each for $1,000, and four
interest coupons attached to them, each for $100. The bonds were
issued on the 1st of October, 1860, and made payable to bearer on
the 1st of May, in the years 1868, 1869, 1870, and 1871,
respectively, at the Metropolitan Bank, in the City of New York,
with annual interest at the rate of ten percent a year. The coupons
in suit matured after the 1st of May, 1868. They were, at the
option of the holder, payable at that bank or receivable for county
taxes at the office of the Treasurer of Sac County.
Page 96 U. S. 52
As a defense, the county relied upon the estoppel of a judgment
rendered in its favor in a prior action, brought by one Samuel C.
Smith upon certain earlier maturing coupons upon the same bonds,
accompanied with proof that Cromwell was, at the time, the owner of
those coupons, and that the action was prosecuted for his benefit.
It appears from the findings in that action that the County of Sac
authorized, by a vote of its people, the issue of bonds to the
amount of $10,000 for the erection of a courthouse; that they were
issued by the county judge and delivered to one Meserey, with whom
he had made a contract for the erection of the courthouse; that
immediately thereafter, the contractor gave one of the bonds as a
gratuity to the county judge; that a courthouse was never
constructed by the contractor or any other person pursuant to the
contract; and that the plaintiff became the holder before maturity
of the coupons in controversy, but it does not appear that he gave
any value for them. Upon these findings, the court below decided
that the bonds were void as against the county, and accordingly
gave judgment in its favor upon the coupons, holding that any
infirmity of the bonds by reason of illegality or fraud in their
issue necessarily affected the coupons attached to them. When that
case was brought here on a writ of error, this Court held that the
facts disclosed by the findings were sufficient evidence of fraud
and illegality in the inception of the bonds to call upon the
holder to show not only that he had received the coupons before
maturity, but that he had given value for them, and, not having
done so, the judgment was affirmed.
Smith v.
Sac County, 11 Wall. 139.
When the present case was first tried, the court below, holding
that the judgment in the
Smith case was conclusive against
Cromwell, excluded proof of his receipt of the bonds and coupons in
this suit before maturity for value, and gave judgment for the
county. But when the case was brought here at the last term, this
Court held that the court below erred in excluding this proof, and
that the point adjudged in the
Smith case was only that
the bonds were void as against the county in the hands of parties
who had not thus acquired them before maturity and for value. The
judgment was accordingly reversed
Page 96 U. S. 53
and the cause remanded for a new trial.
Cromwell v. County
of Sac, 94 U. S. 351.
Upon the second trial, the plaintiff proved that he had
received, before their maturity, the bonds payable in 1870 and
1871, with coupons attached, and given value for them without
notice of any defense to them on the part of the county.
As to the bonds payable in 1868 and 1869 and coupons annexed, it
appears that the plaintiff purchased them from one Clark on the 1st
of April, 1873, after their maturity, for the consideration of a
precedent debt due to him from Clark, amounting to $1,500; that
they had previously been held by one Robinson, who had pledged them
to a bank in Brooklyn as collateral security for a loan of money;
that Clark purchased them of Robinson on the 20th of May, 1863, by
paying this loan to the bank, then amounting to $1,192, and
applying the excess of the amount of the bonds over the amount thus
paid in satisfaction of a precedent debt due to him by Robinson. To
each of these bonds there were attached, at the time of Clark's
purchase, the coupon due May 1, 1863, and all the unmatured
coupons. Robinson stated to Clark that the coupons previously
matured had been paid and that those due on the first of the month
would be paid in a few days. Clark had no notice at the time of any
defense to the bonds except such as may be imputed to him from the
fact that one of the coupons attached to each of the bonds was then
past due and unpaid. There was a special verdict referring to the
judgment in
Smith v. Sac County and showing the facts
above stated as to the purchase of the bonds and coupons.
The law of New York allows interest at the rate of seven percent
a year and any agreement for a greater rate avoids the whole
contract. The law of Iowa provides that the rate of interest shall
be six percent a year on money due by express contract where a
different rate is not stipulated, and on judgments and decrees for
the payment of money, but that parties may agree in writing for the
payment of interest not exceeding ten percent a year, and that in
such case any judgment or decree thereon shall draw interest at the
rate expressed in the contract.
The main questions determined in the court below -- such, at
Page 96 U. S. 54
least, as are deemed sufficiently important to be here noticed
-- were in substance these:
1st, whether the judgment in
Smith v. Sac County barred
a recovery by Cromwell;
2d, whether as to the bonds maturing in 1868 and 1869, and the
coupons annexed, he had the rights of a holder for value before
dishonor, and without notice of any defense to them;
3d, whether, if entitled to recover on the bonds and coupons, he
should be allowed interest on them after maturity at the rate
prescribed by the law of New York, or by that of Iowa, and
4th, whether the judgment should bear interest at the rate of
ten, or only six, percent a year.
The judges of the circuit court were divided in opinion on these
questions. Conformably to the opinion of the presiding judge, who
held that the bonds which matured in 1868 and 1869, and the coupons
thereto attached, were, when purchased by Clark, dishonored paper,
judgment, bearing six percent interest per annum, was entered in
favor of Cromwell only for the amount mentioned in the bonds which
matured in 1870 and 1871, and the coupons annexed, with interest on
them at seven percent a year after maturity. This judgment is now
brought here for review, each party having sued out a writ of
error.
Page 96 U. S. 56
MR. JUSTICE FIELD, after stating the case, delivered the opinion
of the Court.
It appears that on the second trial of this case, the plaintiff
proved that he had received two of the bonds in suit -- those
payable in 1870 and 1871 -- with coupons attached, before their
maturity, and given value for them, without notice of any defense
to them on the part of the county. Under our ruling when the case
was first here, there can be no doubt of his right to recover upon
them. The only questions for our determination as respects them
relate to the interest which they shall draw after maturity and the
interest which the judgment shall bear. These questions we shall
hereafter consider.
As to the other two bonds in suit -- those payable in 1868 and
1869 -- and coupons annexed, it appears that when Clark purchased
them on the 20th of May, 1863, there were attached to each the
coupon due on the first of that month and all subsequent unmatured
coupons. His vendor stated to him that the coupons previously
matured had been paid, and that those due on the first of the month
would be paid in a few days. He
Page 96 U. S. 57
had no notice at the time of any defense to the bonds except
such as may be imputed to him from the fact that one of the coupons
attached to each of the bonds was then past due and unpaid. And the
principal question for our determination is whether, this fact
existing, the plaintiff had, as to these bonds, the right of a
holder for value before dishonor without notice of any defenses by
the county, or, as stated by counsel, whether this fact rendered
the bonds themselves, and all subsequently maturing coupons,
dishonored paper and subjected them in the hands of Clark and the
plaintiff succeeding to his rights, to all defenses good against
the original holder. The judges of the circuit court were divided
in opinion upon this question, and as in such cases the opinion of
the presiding judge prevails, the decision of the court was against
the plaintiff, and he was held to have taken the bonds and
subsequent coupons as dishonored paper, subject to all the
infirmities which could be urged against them in the hands of the
original holder. In this decision we think the court erred. The
special verdict does not show that the coupons overdue had been
presented to the Metropolitan Bank for payment and their payment
refused. Assuming that such was the fact, the case is not changed.
The nonpayment of an installment of interest when due could not
affect the negotiability of the bonds or of the subsequent coupons.
Until their maturity, a purchaser for value, without notice of
their invalidity as between antecedent parties, would take them
discharged from all infirmities. The nonpayment of the installment
of interest represented by the coupons due at the commencement of
the month in which the purchase was made by Clark was a slight
circumstance, and, taken in connection with the fact that previous
coupons had been paid, was entirely insufficient to excite
suspicion even of any illegality or irregularity in the issue of
the bonds. Obligations of municipalities in the form of those in
suit here are placed, by numerous decisions of this Court, on the
footing of negotiable paper. They are transferable by delivery and,
when issued by competent authority, pass into the hands of a
bona fide purchaser for value before maturity freed from
any infirmity in their origin. Whatever fraud the officers
authorized to issue them may have committed in disposing of them,
or however entire may have been the failure
Page 96 U. S. 58
of the consideration promised by parties receiving them, these
circumstances will not affect the title of subsequent
bona
fide purchasers for value before maturity or the liability of
the municipalities. As with other negotiable paper, mere suspicion
that there may be a defect of title in its holder, or knowledge of
circumstances which would excite suspicion as to his title in the
mind of a prudent man, is not sufficient to impair the title of the
purchaser. That result will only follow where there has been bad
faith on his part. Such is the decision of this Court, and
substantially its language, in the case of
Murray v.
Lander, reported in the 2d of Wallace, where the leading
authorities on the subject are considered.
The interest stipulated was a mere incident of the debt. The
holder of the bond had his option to insist upon its payment when
due, or to allow it to run until the maturity of the bond -- that
is until the principal was payable. Many causes may have existed
for a failure to meet the interest as it matured entirely
independent of the question of the validity of the bonds in their
inception. The payment of previous installments of interest would
seem to suggest that only causes of a temporary nature had
prevented their continued payment. If no installment had been paid
and several were past due, there might have been greater reason for
hesitation on the part of the purchaser to take the paper, and
suspicions might have been excited that something was wrong in
issuing it. All that we now decide is that the simple fact that an
installment of interest is overdue and unpaid, disconnected from
other facts, is not sufficient to affect the position of one taking
the bonds and subsequent coupons before their maturity for value as
a
bona fide purchaser.
National Bank of North America
v. Kirby, 108 Mass. 497. To hold otherwise 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. Temporary financial pressure, the falling
off of expected revenues or income, and many other causes having no
connection with the original validity of such instruments, have
heretofore, in many instances, prevented a punctual payment of
every installment of interest on them as it matured, and similar
causes may be expected to prevent a punctual payment
Page 96 U. S. 59
of interest in many instances hereafter. To hold that a failure
to meet the interest as it matures renders them, though they may
have years to run, and all subsequent coupons dishonored paper,
subject to all defenses good against the original holders would
greatly impair the currency and credit of such securities and
correspondingly diminish their value. We are of opinion, therefore,
that Clark took the two bonds in suit and the subsequently maturing
coupons as a
bona fide purchaser, and as such was entitled
to recover upon them whatever may have been their original
infirmity. The plaintiff, Cromwell, succeeded by his purchase from
Clark to all Clark's rights, and can enforce them to the same
extent. Nor does it matter whether, in the previous action against
the county by Smith, who represented him, he was informed of the
invalidity of the bonds as against the county and knew when he
purchased the circumstances attending their issue or whether he was
made acquainted with them in any other way. The rule has been too
long settled to be questioned now that, whenever negotiable paper
has passed into the hands of a party unaffected by previous
infirmities, its character as an available security is established
and its holder can transfer it to others with the like immunity.
His own title and right would be impaired if any restrictions were
placed upon his power of disposition. This doctrine, as well as the
one which protects the purchaser without notice, says Story,
"is indispensable to the security and circulation of negotiable
instruments, and it is founded on the most comprehensive and
liberal principles of public policy."
Story, Prom.Notes, sec. 191. The only exceptions to this
doctrine are those where the paper is absolutely void, as when
issued by parties having no authority to contract or its
circulation is forbidden by law from the illegality of its
consideration, as when made upon a gambling or usurious
transaction.
The plaintiff therefore holds the bonds and the subsequent
coupons as his vendor held them -- freed from all infirmities
attending their original issue. Nor is he limited in his recovery
upon them, or upon the other two bonds, as contended by counsel for
the county, to the amount he paid his vendor. Clark had given full
value for those he purchased, and could have recovered their amount
from the county, and his right passed to
Page 96 U. S. 60
his vendee. But independently of the fact of such full payment,
we are of opinion that a purchaser of a negotiable security before
maturity, in cases where he is not personally chargeable with
fraud, is entitled to recover its full amount against its maker,
though he may have paid less than its par value, whatever may have
been its original infirmity. We are aware of numerous decisions in
conflict with this view of the law, but we think the sounder rule,
and the one in consonance with the common understanding and usage
of commerce, is that the purchaser, at whatever price, takes the
benefit of the entire obligation of the maker. Public securities
and those of private corporations are constantly fluctuating in
price in the market, one day being above par and the next below it,
and often passing within short periods from one-half of their
nominal to their full value. Indeed, all sales of such securities
are made with reference to prices current in the market, and not
with reference to their par value. It would introduce, therefore,
inconceivable confusion if
bona fide purchasers in the
market were restricted in their claims upon such securities to the
sums they had paid for them. This rule in no respect impinges upon
the doctrine that one who makes only a loan upon such paper or
takes it as collateral security for a precedent debt may be limited
in his recovery to the amount advanced or secured.
Stoddard v.
Kimball, 6 Cush. (Mass.) 469;
Allaire v. Hartshorne,
1 Zab. 665;
Williams v. Smith, 2 Hill (N.Y.) 301;
Chicopee Bank v. Chapin, 8 Met. (Mass.) 40;
Lay v.
Wissman, 36 Ia. 305.
The only questions remaining which we deem of sufficient
importance to require consideration relate to the interest which
the bonds and coupons in suit shall draw after their maturity and
the interest which the judgment shall bear. The statute of Iowa on
this subject provides that the rate of interest shall be six
percent a year on money due by express contract unless a different
rate be stipulated, and on judgments and decrees for the payment of
money in such cases, but that parties may agree in writing for any
rate of interest not exceeding ten percent a year, and that any
judgment or decree thereon shall draw the rate of interest
expressed in the contract.
The bonds by their terms, as already stated, bear interest
at
Page 96 U. S. 61
the rate of ten percent until maturity. The plaintiff claims
that they should draw the same rate of interest after maturity, and
that under the statute of Iowa, the judgment should also bear ten
percent interest. The court below allowed only seven percent on the
bonds after maturity, that being the rate in New York, where the
bonds were payable, and only six percent on the judgment. In this
ruling, we think the court erred. By the settled law of Iowa, as
established by repeated decisions of her highest court, contracts
drawing a specified rate of interest before maturity draw the same
rate of interest afterwards.
Hand v. Armstrong, 18 Ia.
324;
Lucas, Thompson & Co. v. Pickel, 20
id.
490. A like decision has been made in several of the states upon
similar statutes.
Brannon v. Hursell, 112 Mass. 63;
Marietta Iron Works v. Lottimer, 25 Ohio St. 621;
Monett v. Sturges, id., 384;
Kitgore v. Powers, 5
Blackf. (Ind.) 22;
Phinney v. Baldwin, 16 Ill. 108;
Etnyre v. McDaniel, 28
id. 201;
Spencer v.
Maxfield, 16 Wis. 178, 541;
Pruyn v. City of
Milwaukee, 18
id. 367;
Kohler v. Smith, 2
Cal. 597;
McLane v. Abrams, 2 Nev. 199;
Hopkins v.
Crittenden, 10 Tex. 189. There are, however, conflicting
decisions, but the preponderance of opinion is in favor of the
doctrine that the stipulated rate of interest attends the contract
until it is merged in the judgment.
Pearce v. Hennessey,
10 R.I. 223;
Lash v. Lambert, 15 Minn. 416;
Searle v.
Adams, 3 Kan. 515;
Kitchen v. Branch Bank at Mobile,
14 Ala. 233. The statutory rate of six percent in Iowa only applies
in the absence of a different stipulated rate. As the judgment in
case of a stipulated interest in the contract must bear the same
rate, it could not have been intended that a different rate should
be allowed between the maturity of the contract and the entry of
the judgment.
The case of
Brewster v.
Wakefield, 22 How. 118, is cited against this view.
That case came from a territorial court, and arose under a statute
which allowed parties to agree upon any rate of interest, however
exorbitant, and only prescribed seven percent in the absence of
such agreement. This Court, bound by no adjudication of the
territorial court and looking with disfavor upon the devouring
character of the interest stipulated in that case, gave a strict
construction to the contract of the parties.
Page 96 U. S. 62
"The law of Minnesota" (then a territory), said the Court,
"has fixed seven percent per annum as a reasonable and fair
compensation for the use of money, and when a party desires to
extort, from the necessities of a borrower, more than three times
as much as the legislature deems reasonable and just, he must take
care that the contract is so written in plain and unambiguous
terms, for with such a claim, he must stand on his bond."
The statute of Iowa only allows the parties by their agreement
to stipulate for interest up to ten percent a year -- a rate which
has not been deemed extravagant or unreasonable in any of the
states lying west of the Mississippi. Be that as it may, the
question is one of local law under a statute of a state, and the
construction given by its tribunals should conclude us.
The position of counsel, that because the rate of interest in
New York, where the bonds were payable, is only seven percent, the
bonds can only draw that rate after maturity, is not tenable. When
the rate of interest at the place of contract differs from the rate
at the place of payment, the parties may contract for either rate,
and the contract will govern.
Miller v.
Tiffany, 1 Wall. 298;
Depau v. Humphreys,
8 Mart. (La.) 1;
Chapman v. Robertson, 6 Paige (N.Y.) 627,
634;
Peck v. Mayo, 14 Vt. 33;
Butters v. Olds, 11
Ia. 1. The bonds were made with reference to the law of Iowa as to
interest, and not to that of New York, where interest above seven
percent is deemed usurious and avoids the whole contract. The
obligor is a municipal corporation of Iowa, the bonds were
deliverable in that state, and proceedings to enforce their payment
could only be had in courts sitting there.
With reference to interest on the coupons after their maturity,
that can be allowed only at the rate of six percent under the law
of Iowa.
See, as to coupons drawing interest,
Aurora City v.
West, 7 Wall. 82.
It follows from the views expressed that the plaintiff was
entitled to judgment for the amount of the four bonds and the
coupons in suit, with interest on the bonds after maturity until
judgment at the rate of ten percent a year, and with interest on
the coupons after their maturity until judgment at the rate of six
percent a year, and that the judgment should draw
Page 96 U. S. 63
interest at the rate of ten percent a year upon the amount found
due on the bonds, and at the rate of six percent a year upon the
amount found due on the coupons, including the costs of the
action.
The judgment of the circuit court must therefore be reversed and
the cause remanded with directions to enter a judgment for the
plaintiff in conformity with this opinion, and it is
So ordered.
