Diamond v. Lawrence County

The opinion of the court was delivered, by

Woodward, J.

This case is here as a case stated. The plaintiff claims a judgment for the amount of a coupon accompanying bond No. 56, issued by the county to the North-Western Railroad Company, in part payment of the county’s subscription to the stock of said company; which bond and coupon the company transferred to a contractor for work done on their road, and by several successive transfers the said bond and coupon came into the hands of the plaintiff for a valuable consideration.

It is made a part of the case, that on the 5th of June 1857, before the railroad company had transferred this bond, the county of Lawrence Jiled her bill in equity in the Supreme Court of Pennsylvania, against theVailroad company and others, praying for an injunction upon the company against any disposition of the bonds of the county, and for a decree that said bonds be delivered up for cancellation, The subpoena issued, and was served before the company parted with this bond. On the 14th of March 1859, this court made their decree in the said suit (8 Casey 152), that the entire subscription of $200,000 on the part of the county to the stock of the company be, and the same was thereby annulled and set aside, without prejudice, however, to any rights which third persons may have lawfully acquired as purchasers of the bonds issued; and it was further decreed that the company restore to the county the $2000 of bonds that remained on hand, and pay to the county $198,000 in satisfaction of the bonds they had sold and transferred.

The pleadings and proofs in that case exhibited irregularities in the making of the subscription, and conduct exceedingly dishonest on the part of the directors of the company in the use they made of the bonds. The court, however, held the subscription valid, but the sale of the bonds void, because sold at 64 cents in the dollar, in direct violation of the Act of Assembly under which they were issued. It was on this ground, the illegal sale of the bonds below par, that the decree was founded. See the opinion of Lowrie, C. J., 8 Casey 149.

It is manifest, from this statement, that the bond now in suit was transferred by the company in contempt of the authority of this court. After the service of the subpoena in the equity suit, the company had no authority, under any pretence whatever, to part with a bond. The directors, who were the governors of the company, were trustees of tile stockholders. One of the largest of the stockholders had come into court on the equity side, and complained of fraudulent mismanagement of the corporation, of the illegal issue of the bonds to the company, and of the illegal disposition of a portion of them by the company. Of our right to take jurisdiction of such a case there can be no question. That our jurisdiction attached from the moment the subpoena was awarded, is equally clear. Though no special or preliminary injunction was issued, it is apparent that if the company could, after' service of subpoena, go on and sell bonds, they might defeat our jurisdiction altogether. I am not now speaking of the right of a purchaser from them, but only of their right to sell, and, under the circumstances of the case, we hold that the sale of bonds, after service of the subpoena in equity, and before final decree, was an attempt to remove the subject of litigation beyond our jurisdiction, and so a contempt.

Now, as to the purchaser. Whether the purchaser of bond No. 56 is within the saving clause of the decree, depends upon the question whether he is to be affected with notice of the equity suit. He, and all under whom he claims, purchased after the institution of that suit. Were their rights lawfully acquired ?

The doctrine of lis pendens in this country is founded on Chancellor Kent’s opinion, in Murray & Winter v. Ballou & Hunt, 1 Johns. C. R. 566, delivered in 1815. Winter, a trustee of lands, was sued in equity by his cestui que trust, for breach of trust. Pending the suit he sold part of the trust lands to Ballou without any actual "notice of any breach of trust, or of any suit against the trustee, and for a full consideration, which Ballou paid. After full argument, Ballou was held to be a purchaser with notice, and was decreed to give up the land to the cestui que trust or to pay for it again. “ The established rule is,” said the chancellor, “ that a lis pendens, duly prosecuted, and not collusive, is notice to a purchaser so as to affect and bind his interest by the decree; and the Us pendens begins from the service. of the subpoena after the bill is filed.” He added, “that it is no more than the adoption of the rule in a real action at common law, where, if the defendant aliens after the pendency of the writ, the judgment in the real action will overreach such alienation.” It was one of the ordinances of Lord Bacon (see his Works, vol. 4, p. 511), laid down for the better and more regular administration of justice in the Court of Chancery — that “no decree bindeth any that cometh in bond fide, by conveyance from the defendant, before the bill exhibited, and is made no party, whether by bill or order; but where he comes in pendente lite, and while the suit is in full prosecution, and without any colour of allowance or privity of the court, there regularly the decree bindeth.”

In Murray v. Lylburn, 2 Johns. C. R. 441, the principles asserted in Murray v. Ballou were held to apply to choses in action as well as to real estate, and to entitle a cestui que trust whose land had been fraudulently disposed of by the trustee during a suit brought against him, not merely to the land itself, but to the mortgages or other securities taheri for the purchase-money against purchasers or assignees claiming title under sales or assignments made while the suit toas pending.

“The ground,” said Chancellor Kent, “on which I place the right of the cestui que trust to pursue the bond and mortgage in the hands of the assignee of Winter, is the constructive notice to all the world, arising from the bill and supplementary bill, filed in 1809, against Winter, for a breach of trust.” This hé held to be agreeable to the doctrine that an assignee of a chose in action takes it subject to all the equity of the obligor, though not subject to latent equities residing in third persons against the assignor; but he made a doubt, whether the rule of lis pen-dens was to be carried so far as to affect cash, negotiable paper not due, or movable personal property, such as horses, grain, &c., when received in payment for the trust estate.

The doctrine laid down in these cases is said by Hare & Wallace, in the 2d vol., p. 123, of their Leading Cases in Equity, to be generally adopted throughout the United States, both by courts of law and equity. And they cite Griffith v. Griffith, 1 Hoffman 153; Jackson v. Ketchum, 8 Johns. 479; Harris v. Carters’ Adm’r. 3 Stewart 233; Tongue v. Martin, 6 Harris; 1 Johns. 21; Orwigs v. Myers, 3 Bibb 279; Jackson v. Andrews, 7 Wend. 152; Lodge v. Simonton, 2 Pa. R. 439. To which I take leave to add Bolling v. Carter, 9 Alabama R. 921; Chandron v. Magee, 8 Id. 570; Green v. White, 7 Blackford 242; Walker v. Butz, 1 Yeates 574.

The American cases, which have limited and qualified the doctrine of lis pendens as here stated, will be found collected in a note to page 385 of Adams’ Equity. The most material of these cases is French v. The Loyal Company, 5 Leigh 627, where it was held that the doctrine of Us pendens can only affect a purchaser from the party to the suit of the subject of controversy. This is a very material limitation, and would, if it were followed, save the plaintiff’s case.

But considering the peculiarities of this case, and especially the extraordinary notoriety which attended the equity suit against the railroad company, we think the rule is applicable here without that limitation. And according to the rule, the suit was notice to all the world, of all the facts alleged in the pleadings, so that this plaintiff stands in no better situation for enforcing the bond against the county than the company themselves would stand. If we would not compel the county to pay the coupon to the company, for the reasons to be found in that suit, for the same reasons we will not compel them to pay the •plaintiff.

It is argued that the bonds and coupons are negotiable instruments, and therefore, that this defence, like all others, is excluded. We have said, on several former occasions, that we will not treat bonds like these as negotiable securities. On this ground we stand alone. All the courts, American and English, are against us. Be it so. We are not insensible to the importance of this fact, nor are we wanting in deference to the learning and wisdom of the judges who differ from us. But we are a Pennsylvania tribunal, sitting in judgment on an occasional and extraordinary security for money created under Pennsylvania statutes. We know the history of these municipal and county bonds — how the legislature, yielding to popular excitements about railroads, authorized their issue; how grand juries, • and county commissioners, and city officers, were moulded to the purposes of speculators; how recklessly railroad officers abused the overwrought confidence of the public, and what burdens of debt and taxation have resulted to the people. A moneyed security was created and thrown upon the market by this paroxysm of the public mind, and the question is now, how shall the judicial mind regard it ?

According to the law merchant, the purchaser of negotiable paper takes it discharged of all equities betwixt the original parties, but the, law merchant is a branch of the common law that is founded in the usages of trade and business among merchants. It is not a temporary, local, statutory system, but a permanent and universal jurisprudence, having no root in any statute; the same thing, substantially, all over the civilized world, and its uniformity essential to the maintenance of the commerce of the world.

■ Why should these bonds be referred to that system of jurisprudence ? They are temporary, and will never be repeated again whilst the world stands. They are local in their origin, issued by counties, cities, and boroughs here in Pennsylvania, not for ordinary indebtedness, nor for purposes which belong naturally to such municipalities, and they are rendered lawful only by a special and extraordinary exercise of legislative omnipotence. Unlike bills of exchange, they do not grow up out of the daily business of mankind, but are creatures of statute law. They generally recite on their face, or refer to, the authority by which they exist. They are called by the legislature “ certificates of loans or bonds” — never notes or bills. They always bear a broad plain impress of a seal, which is the only test of their authenticity, and which, added to a bill of exchange, would instantly destroy its commercial character the world over. The only point of resemblance between them and bills of exchange is, that both are payable to bearer; but let it be remembered, that any sealed instrument for money may be made to a particular payee “or bearer,” whilst no negotiable instrument can be made under seal. It may be added that the Constitution of Pennsylvania has been so amended as to forbid a future issue of such bonds — a provision which nobody ever regarded as a blow at commercial paper. These are distinctions which justify any court in refusing to treat bonds of this nature as commercial paper.

But it is said the rights of innocent purchasers cannot be protected unless these distinctions be disregarded. I reply, the rights of innocent tax-payers cannot be protected if they are. No man can go over the history of these bonds and fail to see that there are two parties involved, both of whom are wprthy of the regards of the judicial eye. On the one hand, there are the purchasers who have invested their money, generally at a large discount, but on the faith that the people whose representatives have issued the bond will see to its redemption; and on the other, there are the people whose representatives have hurried them thoughtlessly into oppressive indebtedness, without an equivalent. Now, if equal justice is to be administered to both parties, no narrow and technical grounds can be assumed, and certainly the bond must not be treated as a bill of exchange. Nor can the coupon, for it is part of the same instrument, and is not of itself a complete contract.

What then is equal justice both to purchasers and people in respect of these bonds ? Seeing that the people have, at the least, permitted their accredited agents to issue them, and that some consideration was received for them in the stock subscribed, and in the progress of the work, there is reason in holding them bound to pay so much money on each bond as it brought into the treasury of the company. That money, whether honestly applied to the work or not, was honestly paid in, for the purpose of being so applied. For that money, when it falls due, and for the interest as it accrues, the county would seem, on all principles of equity and fair dealing, to be justly liable to the holder of the bond. But the holder ought not to have more than that money, because he, or others under whom he claims, purchased the bond of the company in violation of the only law which ever legalized the bond. It was forbidden to be sold under par, and all purchasers were bound to take notice of this. Generally, second and third, and more remote purchasers, pay less for such securities than the first purchaser from the company. So that when we give them the amount the first purchaser paid, they have nothing to complain of, except that the speculation turns out not quite as large as was intended.

This, then, is our ground — enforcement of the bond to the extent of the money it actually brought the company, but no entanglements of communities in the meshes of commercial law, for the purpose of holding them liable beyond this extent. We intimated in Thomas’s Case, 8 Casey 230, that this would be our ground when a case was presented in proper shape; and, though no case has yet been presented, we have stood firmly against the tendency of the judicial mind, everywhere else, to treat these special and peculiar securities as bills of exchange. And we have maintained this position perseveringly, in order that we may the better administer even-handed justice to both parties.

This explanation of our position is necessary, as showing why we allow the rule of Us pendens its natural and legal operation in this case. Diamond did not buy mercantile paper, but a, bond^ — a bond that was the subject of a pending suit in equity, and, therefore, he purchased it with notice of all the facts of that record.

But the statement of pur position on the above question, bears a more direct relation to one of the questions now before us. It is made a part of the case that the bonds were sold at sixty-four cents in the dollar, contrary to the Act of Assembly, and one of the questions submitted is, whether the plaintiff, if entitled to a judgment at all, would be entitled to a judgment for more than the bond sold for. We decide that he is entitled to no judgment, because of the Us pendens ; but that if he could recover at all, he could recover only the amount for which the company sold the bond.

It is not necessary for us to discuss the irregularities of the subscription made by the county, nor the authority of the county to make it. In the case in 8 Casey, the subscription was held to be valid, and we should doubtless reach the same conclusion again, if we were to review the whole ground. But because it is not necessary, we forbear to do it.

The judgment is affirmed.