Kirkpatrick v. Muirhead , 16 Pa. 117 ( 1851 )

The opinion of the court was delivered May 19, by

Bell, J.

On the trial of this action, brought by the plaintiff below as payee of a promissory note drawn by the defendant below, the latter offered to prove, as a full defence, that the note in question was given in lieu of another note previously drawn by William and Ephraim Kirkpatrick in favor of Capron & Co., and delivered to them, with other notes, in payment of certain personal property, and the lease of certain real estate, purchased by the defendant for the drawees; that a portion of the personal chattels so purchased, to an amount greater in value than the sum called for by the note in suit, was never received by the purchasers, through the default of ,the sellers, whereby there was a total failure of consideration, and that the original notes were transferred by Capron & Co. to the plaintiff, not in the usual course of business, but simply as collateral security against certain!-liabilities incurred by him for the firm.

By the evidence given, or proposed to be given, it appeared that in the year 1840 William Kirkpatrick, or he with his brother Ephraim Kirkpatrick, purchased from Capron & Co., (of which firm Jonathan Muirhead was a partner,) certain machine-shops, with castings, materials, and patterns, necessary in the construction of machines, in payment of which the Kirkpatricks drew and delivered to the vendors their promissory notes for between seven and eight thousand dollars. "Very shortly after this transaction, Capron & Co., who were in failing circumstances, transferred these notes to third persons, one of whom was the plaintiff below, who received two of the securities, as the defendant below alleges, merely as security for a pre-existent debt, or to protect him against certain prospective and contingent liabilities he had assumed in favor of the endorsers. One of the notes thus held being unpaid, it was, in the year 1842, on the proposition of the defendant below, broken into two notes, drawn by William Kirkpatrick alone, in favor of the plaintiff below, payable in thirty and sixty days. The reason given why Ephraim Kirkpatrick did not join in them, was his absence from home at the time; and this appears to have been accepted as sufficient by the plaintiff’s agent. No objection was then made by Kirkpatrick to the original note, nor was any thing said about the defence now set up. As an excuse for this omission, evidence was offered to show that the defendant, until very recently, was under the impression the plaintiff had received the original notes in due course, and for a valuable consideration, and having, before the present note was given, consulted counsel, was instructed that if such was the fact, the defence now attempted would be unavailing, from whence he would deduce the reason for his silence in 1842.

One of the notes last given was paid, but the other remaining unsatisfied at maturity, the present suit was brought upon it shortly after it fell due. The action has been four times tried. On the first three investigations the defence was made to rest upon an averred set-off, and it was not until this failed, and upon the last trial in 1849, the objection now relied on was set up.

The Court of Common Pleas rejected the evidence offered to establish the facts I have briefly recapitulated, on several grounds. One of these was that, if made out, they would not constitute an available defence against the plaintiff’s claim. In this conclusion we cannot concur.

"Whatever contrariety of opinion may have existed elsewhere on this subject, it is the undoubted law of Pennsylvania that, though the holder of a negotiable instrument received in payment of a pre-existing debt, before maturity, cannot be subjected to equities which might have furnished a defence as between the original parties, and of which he had no notice, yet, if the paper be taken as collateral security merely, for the payment of a debt, or for protection against previously assumed liabilities, the defendant may aver any ground of defence which would have been competent between antecedent parties to the bill or note ; unless, indeed, there was some new and distinct consideration moving between the parties to the transfer; such as giving up some other available security; releasing another party, drawer or endorser ; conceding further time for payment, and the like: Petrie v. Clark, 11 Ser. & R. 377; Walker v. Geissee, 4 Whar. 258; Depeau v. Waddington, 6 Whar. 220. In all these cases, it is laid down that the transfer of mercantile paper as collateral security does not constitute the transferree a holder for a valuable consideration. The doctrine here proclaimed is in strict accordance with the decisions of several of our sister States. Thus in the leading case of Bay v. Coddington, 5 Johns. Ch. R. 54, it was ruled that the bona fide holder of negotiable paper, who has received it for a valuable consideration, without notice or reasonable ground to suspect a defect in the title of the person from whom it was taken •in the usual course of business or trade, is entitled to full protection. But where he has taken it for an antecedent debt, either as nominal payment or as security for payment, without giving up any security he previously had, paying any money, or affording some new consideration, he is not a holder for value, who may recover, in despite of fraud practised by the person putting the note in circulation, or the failure of the consideration from which it originally sprang. “It is,” said Chancellor 'Kent, who decided the cause, “ the credit given for the paper, and the consideration bona fide paid on receiving it, that entitle the holder, on grounds of commercial policy, to extraordinary protection, even in cases of the most palpable fraud.” In the same case, on appeal, 20 Johns. Ch. R. 637, Woodworth, J., observed, that “ the reason of the rule affording protection would seem to be founded in the loss incurred by an innocent holder by giving credit to the paper, and having paid a fair equivalent for it.” And he stated the true question to be, has he paid value for the note transferred, or made any new engagements as the consideration of the transfer ? So in Kimbro v. Lytle, 10 Yerger 428, it was determined that, to prevent a note from being subjected to previous equities, it must be taken in. due course of trade, that is, by one who has given his money for it, his goods, or his credit, at the time of receiving it, or who, then, on account of it, sustained some loss, or incurred some liability. Nichol v. Bate, in the same court, 10 Yerger 429, is to the same effect. There the note sued had been taken in lieu and by -way of satisfaction of a previous note with a distinct endorser, which was given up at the time, and the learned judge who delivered the opinion, very clearly pointed out the distinction between.such a case and that presented in Bay v. Coddington, where the paper sued on had been given to the holder as collateral security only, for liabilities incurred by him as endorser. This was followed by Wormley v. Lowry, 1 Humph. (Tenn.) R. 468, where the broad proposition was laid down, that a bill assigned before it fell due, for a pre-existing debt, is not an assignment within the meaning of the words “ due course of trade,” and it is, therefore, subject to be defeated in the hands of the assignee, upon proof of failure of consideration. In both these latter instances, it was particularly noticed, that the admissibility of the defence turned upon the question whether, by permitting it, the holder of the transferred securities would be placed in a worse or different situation than he would have occupied had he never received them. Where, said the court, one receives a note for a pre-existing debt, due from him only who assigns the note, he parts with nothing; he is in the same situation after a successful defence by the maker, as before he took the note.

I am not unaware of the apparent conflict of opinion, on this subject, between the Supreme Court of the United States, in Swift v. Tyson, 16 Peters’s R. 16, and the courts of New York, in Bay v. Coddington, and other adjudications, the last of which is Stalker v. McDonald, where all the prior determinations are collected and reviewed in an elaborate and very able opinion pronounced by Chancellor Walworth, 6 Hill 93. That conflict does not, however, touch the precise question before us, for though Mr. Justice Story, who delivered the judgment of the Federal tribunal, does intimate that a note endorsed simply as a collateral, is not open, in the hands of a stranger, to prior equities, the point for .^decision was, whether a negotiable instrument, received in payment of a pre-existing debt, is so open ? A query, it was thought, the' New York courts had answered affirmatively. Perhaps the seeming discrepancy is satisfactorily explained by Mr. Justice Shepley, in Holmes v. Smyth, 4 Shep. Maine R. 177, as originating in the New York rule, which is said to be the English also, that a bill or note, whether of the debtor or a third person, taken for a prior debt, is not considered as payment, unless expressly so agreed; -while in Maine and some other of the States the rule is different. Under this difference it is pointed out that, while in Maine and elsewhere the loss of the note taken in exchange would, consequently, occasion the loss of the whole debt, in New York it would put the party only where he was before; a difference of result which, as we have seen, works the whole distinction between a bona fide transfer for a valuable consideration, and such a transfer for a valid consideration only. Whether these suggestions are competent to reconcile the seeming jar, I need not stop to inquire, since, for our present purpose, it is enough to know that our decisions have recognised the difference between payment and security only; ruling that the former protects the bona fide 'holder against all defences founded in fraud or latent equities practised upon or existing between the original parties; while the latter leaves the door open to every inquiry which would have been pertinent had there been no transfer of the paper.

Conceding then as proved what the defendant below offered to prove, there can he no hesitancy in saying that were this action founded on the negotiable notes first transferred to the plaintiff, the defence relied on must have been available, since its success would leave the plaintiff in the same plight he was before he accepted the collateral security. The proposition is this: — The plaintiff having incurred certain liabilities as endorser of the paper of Capron & Co., the latter being in failing circunistances and unable to meet their engagements, transferred to the former one or more of the notes just before drawn by the Kirkpatricks in favor of the firm, as a security against any eventual loss that might overtake the plaintiff in consequence of his endorsements. Now, a failure of this security would leave him precisely in the position he occupied before the transfer; and consequently, in reference to the notes first transferred, he is to be regarded as a holder for a valid, and not a valuable consideration.

Did the subsequent transaction, which resulted in the creation of the note now sued, change this position, and, as a consequence, invest the holder with rights and remedies not before possessed ? The court below seems to have so thought, for as one reason for rejecting the proffered proof, it is said the facts averred, if proved, would constitute no defence against the plaintiff, after giving him a new note, upon a new consideration as to time and parties, three years after knowledge of the alleged failure of the consideration. If, otherwise, the proposed defence is sustainable, the mere lapse of time before averring it, and even the making of a new note in silence, would not operate to destroy it, unless the laches misled the plaintiff into the assumption of fresh liabilities, or induced him to relinquish some advantage he might otherwise have availed himself of. No feature of this kind appears to characterize the case. Were it so, the neglect to inform the holder of the failure.of consideration might possibly compromise the defence. But, in the absence of such an element, I cannot concede it was ’the duty ox the drawer to inform himself of the terms of the transfer, or that he was culpably remiss in entertaining, without special inquiry, the impression, that his notes had been passed to the plaintiff for a valuable consideration and in the due course of business. Certainly, up to the time when the two last notes were given, his silence will not operate to stop his averment of failure of consideration ; and I do not perceive how the mere fact of his giving new notes should work such an effect, or whjr this should preclude him from showing the reason of his silence, as explanatory of what might otherwise be a suspicious circumstance. Nor will his neglect to avail himself of his present defence until that first set up failed him detract from its vigor. One having several answers to a legal claim, may choose which he will first aver, and can only be precluded from resorting to others by a final verdict. Here, the prior verdicts were set aside, and consequently, upon the last trial the field of attack and defence was as open and unincumbered to both parties as though no prior jury had passed upon the dispute.

But a more serious reason for the rejection of the evidence is found in the assumption that the last notes were given upon a new consideration as to time and parties. If this were so, it would be decisive. I have already intimated that where the transferred bill or note is taken upon % distinct consideration, it is within the general rule of protection; and certainly the extension of the time' of payment, or the release of an endorser or other party before bound might constitute such a consideration. But upon the case as it is now presented, I have failed to perceive any such. Consideration, like every other part of a contract, must be the result of agreement. The parties must understand and be influenced to the particular action by something of value or convenience and inconvenience, recognised by all of them as the moving cause. That which is a mere fortuitous result flowing accidentally from an arrangement, but in no degree prompting the actors to it, is not to be esteemed a legal consideration. • Now, in the instance before us, it is true that when Houser, as the agent of the plaintiff, called on William Kirkpatrick, the latter complained he was not ready to pay, and proposed, if he could have more time, to divide the note then in Houser’s possession into .two notes, and it was accordingly so done. 'But it is nowhere said, or hinted, that the extension of the time of payment, was the consideration which influenced Kirkpatrick to give, or Houser, as representing the plaintiff, to accept the new notes. Indeed, it is difficult, under the circumstances, to entertain any such belief. The plaintiff could derive no advantage from taking new notes, unless he intended to negotiate them; more especially as the name of Ephraim Kirkpatrick was omitted, and time could as well have been given on the old note as upon the new. Looking to the facts developed, I should incline to say the old note was split into two merely for the convenience of payment, and not because of a new consideration contemplated by the parties. As to the omission of Ephraim Kirkpatrick as one of the drawers, it certainly did not enter into their imagination that release of his prior liability induced, in the slightest degree, the execution of the new notes. William, from the beginning, appears to have been the principal party, and the one looked to for payment. On the negotiation between him and Houser, not a word was said about releasing his brother Ephraim, nor does it appear to have been considered as of any importance whether he joined in the new notes or not. All said upon the subject was, that if Ephraim was at home, he would put his name to the paper. His absence seems to have been accepted without comment, as a sufficient reason why he did not, and no proposition was submitted for preparing the notes with reference to his joining in them at some other time. In short, Houser was profoundly indifferent as to Ephraim becoming a party, and the transaction was finally concluded as though he never had been. At least it so appears to me. But if the hypothesis I have indulged, as to time and party, be entirely unfounded, it was not for the court below to say so. Whether there was a new consideration leading to the execution of the note sued, was a question of fact for the jury. By altogether excluding the offered evidence, the court precluded the jury assuming of itself to determine the fact. In this, a mistake was committed.

There is yet, however, another objection urged against the admissibility of the proposed evidence. The witnesses called to prove the facts to which reference has been made, were Ephraim Kirkpatrick and Jonathan Muirhead one of the firm of Capron & Co., and, as such, an endorser of the note in question. The former of these was first objected to on the ground of interest, but he was released at the bar. It was insisted that, notwithstanding this, he remained incompetent, either under the doctrine of Post v. Avery, 5 W. & Ser. 509; Read v. Patterson, 7 W. & Ser. 44, and the subsequent cases of that class ; or, as a party to the note, excluded from impeaching it on grounds of policy. But neither of these grounds of objection are tenable. The rule established by the cases just cited is applicable only to assignors of dioses in action, called to assist in their recovery by their oaths. It was so applied to the very witness adduced on a former trial of this cause to prove an alleged set-off: 2 Barr 225; but his present relation to the contest is entirely different. It is unnecessary to say more on this point, after the repeated reviews this rulé of evidence has recently been subjected to.

As to the remaining objection, it might be sufficient to say the proposed witness is not a party to the note in suit. He was purposely omitted as such, and it may therefore admit of strong doubt, whether, for any purpose, he can be so treated. If, however, it be conceded the last notes were emanations of the first, and so connected with them that Ephraim’s original relation to them must be considered as still subsisting, he will stand in the same category as Jonathan Muirhead, the other proposed witness, and subject to the same objection. We may, therefore, conveniently consider as one the exceptions taken to the admission of each of them.

Though, in a great measure, departed from in England, the rule of policy broached in Walton v. Shelley, has been adhered to in Pennsylvania, where the contest is in reference to mercantile paper. That rule prohibits a party t'o a negotiable instrument, actually negotiated, from impeaching it as a witness, by showing facts destructive of its validity which had place at its inception. The law says, one who assists to give currency to negotiable security is not afterward receivable to prove that it is not, in truth, what it purports to be on its face, or to show fraud or other defect in its origin. Nor will he be permitted to remove a preliminary difficulty to make way for his evidence in chief; as, for instance, by testifying that one apparently a bona fide endorser is, in fact, an original party tb the paper, or that he paid no value for it; for, say the cases, if he could thus clear the way for his evidence attacking the note itself, he might as well be admitted to swear in chief at once, since both species of proof, are equally within the prohibitory policy. While a primary objection remains to his competency unremoved, he cannot be permitted to open his mouth. Following prior cases, so much was determined in Bank of Montgomery v. Walker, 9 Ser. & R. 236, and Griffith v. Reford, 1 Rawle 296. But admitting the validity of the transfer, there is no rule which closes the mouth of a party from stating facts subsequent to the date of the note, tending to discharge it or to destroy the title of the holder. Thus in Woodhull v. Holmes, 10 Johns. Rep. 231, it was ruled the endorser of a note is a good witness to prove the note was fraudulently put in circulation by an agent to whom it was delivered to be discounted, but who, instead, put it into the hands of a broker; “for,” said the court, “though a party cannot be called to invalidate the note in its inception or creation, by showing force or fraud, or that the consideration was corrupt or illegal, he may be called to show that after it was regularly drawn and endorsed and delivered to a third person, for a lawful purpose, and consistent with the validity of the note, that person deceived them, and fraudulently circulated the note.” So in White v. Robbing, 11 Johns. Rep. 128, an endorser was admitted to prove payment of a note before its transfer. In Gilpin v. Howell, 5 Barr 52, a party to a note was received to show a subsequent failure of consideration, upon the broad ground that he may prove any subsequent facts subversive of the- holder’s right to recover, which do not touch its original validity. An examination of the numerous cases cited for the defendant in error, will manifest that in every case whore the witness’s mouth has been closed, the proposition was to impeach the instrument in its- concoction, or, by attacking the propriety of the transfer, to open the way for such an impeachment. But nothing of this kind was offered here. The validity of the original endorsement to the plaintiff was fully conceded, together with the entire effectiveness of the original notes as securities at their inception. Making this concession, the defendant proposed nothing more than to show a subsequent failure of consideration, partial or total, after the notes reached the plaintiff’s hands. Any party to the note, having no interest in the issue, was competent for this purpose.

The defendant had a right, too, to introduce so much of Jonathan Muirhead’s former testimony as showed the consideration of the transfer to the plaintiff, simply because the object was not to destroy the original notes ; and it was no objection to this course that the jury might infer from other portions of the same testimony that the first.notes were accepted as payment of pre-existent debts.

The paper-book states the offer of the inventory and the proof connected with it, so obscurely, it is difficult to say whether or not it was properly rejected. If it contained an enumeration of the goods for the purchase of which the first notes were given, certainly it was evidence. But some proof must be given of this. It is said there was some. Probably no difficulty will be experienced on this head upon another trial.

Judgment reversed and a venire de novo awarded.