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bond? What is there that makes the same conduct official in one view and personal in the other? Ordinarily the test is the scope of the officer's powers and duties and the nature of the transaction in question.
It is also said that loss by the bank could not have been caused by the official misconduct of the deputy, because such loss does not naturally follow the forgery of nonnegotiable orders. With the greatest respect for the views of my associates, I think this conclusion results from a misapplication of an admixture of rules of commercial paper with the doctrine of remote and proximate cause. They say in effect: If a county officer forges negotiable bonds and sells them the purchaser who sustains loss may recover from a surety which has contracted to protect everyone against official misconduct; but if he forges nonnegotiable county orders the purchaser who sustains loss. may not recover. It cannot be denied that the officer is equally guilty of official misconduct in each case; but it is said that in the latter case the loss is too remote from the original cause, for the reason that it could not reasonably have been foreseen in the light of attending circumstances. This latter proposition is qualified by the observation that a purchase of nonnegotiable orders without inquiry as to their genuineness is out of the ordinary course of business, unnatural, improper, and incapable of anticipation. If this observation is vital to the position taken, it may be said that two answers suggest themselves: (a) The case before us is presented upon bill and demurrer. There is not the remotest suggestion in the bill that the bank purchased the orders without making inquiry as to their genuineness. (b) Nor is it averred that the purchase of such orders was not pursuant to a well-known business custom. I take it that every banker acquainted with the conduct of the fiscal affairs of counties knows that the purchase for investment of county orders which the county issuing them is not ready to pay is a common course of business. So in the last analysis the proposition is reduced to this: A loss sustained by the purchaser of forged nonnegotiable county orders is as a matter of law so remote from the act of forgery that the latter cannot be regarded as an efficient cause of the loss; that the mere fact that the orders were not payable to order or bearer breaks the otherwise obvious causal connection between the official misconduct and the loss. Even if the case before us can properly be reduced to this status, it seems to me to leap to the common understanding that the conclusion is unsound. It was just as likely that the orders would be dealt in by innocent parties as it was that the county treasurer would be finally so deceived as to pay them; and it is admitted that the payment by the treasurer was a proximate result of the forgery.
There is another view of the case: Even conceding that the surety company would not be liable to the bank, it does not necessarily follow that the former is entitled to the subrogation sought and to a recovery from the latter. There remain to be considered the equities of the parties as between themselves, in view of their relations to the entire transaction. The final question in a case of this character is: Who in good conscience ought to stand the loss? In answering it, I am unwilling to say that the surety for a forger should
be allowed to indemnify himself at the expense of an innocent victim. The surety company says to the bank:
"The indorsement and sale of the orders by the deputy were his personal acts. I am not responsible for them. Therefore, because you bought the orders, you should stand the loss."
But the bank may reply:
"You are responsible for his forgery, which was the first act and the dominant one in his scheme to defraud. Without it no one would have suffered loss. For a paid consideration you guaranteed the county and the public, including myself, against his official misconduct; and as between us you should not visit the loss upon one who acted innocently, and so wholly escape every consequence of a conceded breach of your bond."
The bank, which is a defendant here, is in possession of and holds the legal title to the money it got from the county. At law the surety company has no right against the bank, but must make a case that challenges the conscience of a court of equity-not one that merely follows the devious technicalities of the law. When equities are equally balanced, the position of the defendant or the possessor of the thing in controversy is the better. The legal title added to an equity prevails over an equal equity that is not so supported. In Insurance Co. v. Clark, 203 U. S. 64, 27 Sup. Ct. 19, 51 L. Ed. 91, a man and his sister conspired to defraud an insurance company. The former, having insured his life, disappeared. The latter, as beneficiary, sued and obtained judgment, which was paid. Interests in the policies had been assigned to attorneys under contingent fee contracts, and they got their portions of the judgment. It was afterwards discovered that the insured was living and that a gross fraud had been perpetrated. The company brought suit in equity against the beneficiary and the attorneys to recover the money paid. In fact, the attorneys acted innocently and had paid for their shares by their services. Recovery from the beneficiary was allowed, but denied as to the attorneys, who held under the assignments from the guilty beneficiary. The company sought to charge the attorneys with notice because of the nonnegotiable character of the policies. The Supreme Court said:
"But notice cannot be established by the mere fact that, while the appellees (the attorneys) held an interest in the policies, they were assignees of choses in action, and took them subject to the equities. This is due to a chose in action not being negotiable. It does not stand on notice."
In a consideration of the equities of the parties, an important feature of the position of the bank is its innocence and good faith. Reference is made in the foregoing opinion to supposed negligence of the bank in buying the orders. The case comes here on bill and demurrer, and if the bank is to be charged with negligence the foundation for it must be found in the bill. I can find no averment in the bill directly or indirectly charging the bank with any negligent conduct whatever. It is not even said that in purchasing the orders it acted irregularly or out of the usual well-known course of business. On the contrary, there is an affirmative admission that it knew nothing of the fraudulent character of the orders. Moreover, the absence of any charge of negligence against the bank is given emphasis by the fact that there are affirmative charges of negligence against
the county treasurer, the chairman of the board of county commissioners, and the depositary of the county funds. It is true that it appears from the bill that the bank purchased nonnegotiable orders and obtained payment of them by the county treasurer; but the status of the parties in such a case results from a fixed rule in the law of choses in action, and not from any supposed negligence of the purchaser in failing to make inquiries. Insurance Co. v. Clark, supra. As bearing upon the assumption of negligence, it is said that an inquiry at the auditor's or treasurer's office would have quickly disclosed the fraud; but the bill fails to charge either that such inquiry. was not made or that, if it had been made, it would have resulted in the information. So how can we assume this fact prejudicial to the bank? On the contrary, we know from the averments of the bill and the statutes of Minnesota (Gen. St. Minn. 1878, c. 8, § 169) that about the time of the purchase of the orders they were taken to the treasurer, who indorsed on them a recital of lack of funds for their payment. We also know that about a year later these very orders were paid by the treasurer without question of their validity. The orders were fair on their face, every written evidence of their validity being genuine. When the bank secured them they bore the genuine signature of the deputy auditor, who had authority to execute valid orders; also an impression of the official seal of the auditor's office; also the genuine signature of the chairman of the board of county commissioners to a recital that they were issued by the authority of the board. Under these circumstances, would it not have been an unusual exhibition of diligence had the bank ignored these evidences of regularity and instituted an independent investigation of its own? Are we to say, in the absence of information from the pleader, that the bank omitted to do what ordinarily prudent men engaged in that business would have done under the same circumstances? It is a matter of common knowledge that such orders are widely dealt in by investors, much the same as special tax warrants are in the larger cities. If, when they are presented to the county treasurer, there is no money in the fund upon which they are drawn, the treasurer indorses that fact upon them, and thenceforth they draw interest until funds are available for their redemption. The interest is the inducement to the investors. State v. Bourne, 86 Minn. 432, 90 N. W. 1108.
It is suggested that, if the bank did not have actual knowledge of the fraud (and the bill admits it did not) it had constructive knowledge of all the facts which reasonable inquiry would have disclosed, and therefore of the fraud itself. As to this I need only refer to the rule applied by Mr. Justice Brewer in United States v. Detroit Lumber Co., 200 U. S. 321, 333, 26 Sup. Ct. 282, 285, 50 L. Ed. 499, a case in which conflicting equities were weighed:
"When a person has not actual notice, he ought not to be treated as if he had notice, unless the circumstances are such as enable the court to say, not only that he might have acquired, but also that he ought to have acquired, it but for his gross negligence in the conduct of the business in question. The question, then, when it is sought to affect a purchaser with constructive notice, is not whether he had the means of obtaining and might by prudent
caution have obtained the knowledge in question, but whether not obtaining was an act of gross or culpable negligence."
So when it is said that the orders, being nonnegotiable, were taken subject to the defenses of the county, all is said that is relevant. Negligence, ordinary or gross, and notice, whether actual or constructive, have nothing to do with the case made by the bill in this cause. They are not for our consideration in weighing the equities of the bank, and were not considered by the trial court.
In my opinion the decree should be affirmed.
(156 Fed. 36.)
MCELROY v. MASTERSON.
(Circuit Court of Appeals, Eighth Circuit. June 27, 1907.)
1. CANCELLATION OF INSTRUMENTS-GROUNDS-IMPROVIDENCE OR UNCONSCIONABLENESS.
An unmarried man 77 years old, and in feeble health, deeded his farm to his nephew on the expressed consideration of $1 and other considerations, the deed reserving to the grantor a life estate. It was also orally agreed that the grantee should furnish support to the grantor at the grantee's own home, which he did so long as the grantor remained with him, and also paid the interest on a mortgage on the farm. Subsequently the grantor returned to the farm and commenced suit for cancellation of the deed. He was shown to have been mentally competent, and there was no evidence to establish coercion or undue influence. Held, that the fact that the deed did not impose a positive obligation on the grantee for the grantor's care and support did not authorize the court to set it aside as improvident and unconscionable.
[Ed. Note. For cases in point, see Cent. Dig. vol. 8, Cancellation of Instruments, § 3.]
2. EQUITY-POWERS OF CHANCELLOR-CONTRACT RIGHTS.
There is no comprehensive discretion reposed in the chancellor by modern equity jurisprudence to make and unmake contracts of parties sul juris subject to such limitations only as meet the approval of his conscience, but courts of equity are now required as much as courts of law to enforce contracts free from fraud, and to refrain from making contracts for the parties on which their minds never met.
3. SAME-MODERN JURISPRUDENCE.
In the process of development, equity jurisprudence has assumed the qualities of a composite system of settled rules and principles by which the property rights of parties are measured and limited, and are rendered more certain and stable.
Appeal from the Circuit Court of the United States for the District of Minnesota.
William D. Mitchell and Pierce Butler (Jared How, on the brief), for appellant.
A. A. Stone and Thomas Hessian, for appellee.
Before SANBORN and HOOK, Circuit Judges, and PHILIPS, District Judge.
PHILIPS, District Judge. This is a suit in equity to set aside and annul a deed executed by the appellee to the appellant February
3, 1903. The land conveyed consists of about 194 acres, valued at between $9,000 and $10,000. The grounds of attack on the deed are that it was given without consideration and obtained through undue influence and misrepresentation. At the time of the conveyance the appellee was about 77 years of age, and the appellant was about 58. The appellee is the uncle and godfather of the appellant. They were born in Ireland, immigrating to America in 1850. In the party was the sister of the appellee, and mother of appellant, and her husband and perhaps some children. The appellant's parents established a home in the city of New York, and the appellee was a guest in their home for about a year. After that he drifted for a number of years, working as a common laborer, attempting once to establish a homestead in Illinois, until finally, in 1865, he pre-empted the land involved in this suit, in Nicollet county, Minn. Neither he nor this nephew ever married. The latter continued to live in the city of New York, engaged in the trade of a hatter, and succeeded in earning an independent, respectable competence.
While there were other near relatives-a brother and some nieces -the appellee had no communication with them. The father and mother of the appellant died several years prior to 1903. While the said nieces lived in the city of New York, all the information the appellee seems to have had about them came from occasional correspondence with this nephew, the appellant. So much of the correspondence between them as was preserved, ranging from perhaps 1885 to January, 1903, shows that an unusual relation of affectionate attachment existed between this uncle and nephew. In his isolation, in the far away Northwest, the uncle's heart went out with an unceasing tenderness towards this nephew. He seemed to have regarded him as indeed his godchild. He was an illiterate man. and his letters bear evidence that to him writing was indeed a severe labor, and he seems to have assumed the burden of writing only when prompted thereto by the yearning desire to keep in touch with this nephew. Though expressed in crude form, his letters were invariably characterized by a sentimental feeling of unaffected regard for the appellant. He nearly always addressed him as "Dear Patrick," and closed his letters with the words "I remain your loving uncle to death." The solicitation for this correspondence, as a general rule, came from the uncle. He often chided the appellant when he neglected writing to him for a considerable length of time, and expressed himself as being delighted whenever he did receive a letter from him. This fact is of especial moment as indicating the entire absence of any selfish or sinister motive on the part of the appellant in maintaining a correspondence with his uncle. While his letters breathed the most kindly and considerate spirit and a tender solicitude for his uncle's welfare, there does not appear in one line of any of them a word or thought that should suggest to a reasonable, candid person a lurking purpose in the mind of the appellant to obtain aught from his uncle save a continuance of their affectionate relation. Any contrary suggestion is a perversion of the language of a simple-hearted, sincere man. Several years prior to 1903, the appellant visited his uncle, evidently on invitation, and certainly to the deep pleasure of the latter. In his