U.S. Supreme Court
Pearce v. Rice, 142 U.S. 28 (1891)
Pearce v. Rice
Argued October 26-27, 1891
Decided December 7, 1891
142 U.S. 28
F. owed H. & Co. on account about $22,000. He settled this in part by a cash payment and in part by a transfer of promissory notes payable to himself, the payment of two of which, for $5,000 each, was guaranteed by him in writing. H. & Co. transferred these notes to a bank as collateral to their own note for about $13,000. They then became insolvent, and assigned all their estate to P. as assignee for distribution among their creditors. The bank sued F. on his guaranty. He set up in defense that his indebtedness to H. & Co. grew out of dealings in options in grain and other commodities, to be settled on the basis of "differences," and that it was invalidated by the statutes of Illinois, where the transactions took place. The court held that he could not maintain this statutory defense as against a bona fide holder of the guaranteed notes, and gave judgment against him. Execution on this judgment being returned unsatisfied, a bill was filed on behalf of the bank to obtain a discovery of his property and the appointment of a receiver, to which F. and the maker of the notes, and R., with others, were made defendants. P., the assignee of H. & Co., was, on his own application, subsequently made a defendant. An injunction issued restraining each of the defendants from disposing of any notes in his possession due to F. Subsequently to these proceedings, F. assigned to R. the two notes which H. & Co. had transferred to the bank. P., as assignee of H. & Co., filed a cross-bill in the equity suit, showing that the judgment in favor of the bank was in excess of the balance due the bank by H. & Co. R. filed an answer and a cross-bill in that suit, setting up his claim to the said notes, and maintaining that the judgment in favor of the bank was invalid as being in conflict with the statutes of Illinois.
(1) That the liability of F. upon the guaranty was, as between the bank and him, fixed by the judgment in the action at law.
(2) That all the bank could equitably claim in this suit was the amount actually due it from H. & Co., which was considerably less than the amount of the face of the notes. chanroblesvirtualawlibrary
(3) That the transfer and guaranty of the notes to H. & Co. were void under the Illinois statutes, and passed no title to them or their assignee.
(4) That R. was the equitable owner of the notes, and was entitled to receive them on payment to the bank of the amount of the indebtedness of H. & Co. to it.
(5) That the assignment to R. having been made in good faith and for a valuable consideration, he was a person interested in the object to be attained by the proceedings within the intent of the statute. When, by filing a replication to a plea in equity issue is taken upon the plea, the facts, if proven, will avail the defendant only so far as in law and equity they ought to avail him.
Hughes v. Blake, 6 Wheat. 453, explained and distinguished from this case.
The case was stated by the Court as follows:
This case involves the conflicting claims of the appellant and the appellee to the balance due upon a judgment in favor of Huntington W. Jackson, receiver of the Third National Bank of Chicago, and to two promissory notes in his or its hands.
The history of that judgment, and the circumstances under which the bank got possession of the notes, are as follows:
Hooker & Co., June 29, 1876, rendered to Ira Foote an account for $22,165.72, which the latter settled in part by delivering to that firm four notes, of $5,000 each, executed to him by the trustees of the estate of Ira Couch, deceased. The balance, $2,165.72, was paid at the time in cash through James H. Rice. Upon each of two of the Couch notes, due respectively on the first days of July and October, 1877 -- the ones here in dispute -- was the following endorsement: "I hereby guarantee the payment of the within note, for value received at maturity. Ira Foote, By J. H. Rice, Attorney in Fact."
On the 30th of December, 1876, Hooker & Co. made their note to the Third National Bank of Chicago for $13,912.97, payable ninety days after date, with interest at the rate of ten percent per annum, and as collateral security for its payment deposited several promissory notes with the bank, including the above two notes guaranteed by Foote.
For the purpose of making a distribution of their estate among creditors, that firm executed, February 28, 1877, an chanroblesvirtualawlibrary
assignment to J. Irving Pearce of all their property of every kind.
The bank, by its receiver, brought suit against Foote, April 26, 1878, in the court below, upon the above guaranty of the two Couch notes. He pleaded that he did not promise in manner and form as alleged; also that the promises alleged had no other consideration than the buying and selling by Hooker & Co. for him upon the Chicago Board of Trade, deals and options in grain, wheat, lard, pork, and other commodities wherein neither party had or was to deliver or receive any articles so bought or sold, and which transactions were to be settled entirely upon the basis of "differences." He pleaded, in addition, a set-off for money lent and advanced, money paid, laid out, and expended, etc. The issues were found for the bank, and judgment was rendered against him for the sum of $14,635.55. In that case, the court said that while Foote may have contemplated dealing wholly in "differences" to such an extent as would make the transactions, under the decisions of the courts of Illinois, wager or gambling contracts at common law, he did not, according to the evidence, intend that his brokers should make for him such contract -- options to buy or sell at a future time property that was not to be delivered -- as were expressly made illegal by the Illinois statute. It was said, among other things:
"The defendant having delivered these notes, with his guarantee upon them, to Hooker & Co., in settlement of their demand against him, even though their demand was tainted as a gambling claim at common law, he cannot be allowed to set up the illegality of the dealings between himself and Hooker & Co. as a defense to these guarantees in the hands of a bona fide holder. He has put this paper, with his guarantee affixed to it, afloat upon the market. Unless a clear case of violation of the statute is made out -- and the burden of making such a case is upon the defendant -- this guarantee in the hands of a bona fide holder for value is valid, and not tainted by any of the defenses between the original parties."
Jackson v. Foote, 12 F. 37, 41.
Execution against Foote having been returned no property chanroblesvirtualawlibrary
found, the bank, to obtain satisfaction of its judgment, brought the present suit September 21, 1882, to obtain a discovery of his property and effects and the appointment of a receiver. To this suit Foote, Rice, the trustees of Couch's estate, and others were made defendants. An injunction was issued restraining the defendants from selling, assigning, negotiating, receiving, collecting, or in any manner disposing of any debts, ction was issued restraining the defendants from selling, assigning, negotiating, receiving, collecting, or in any manner disposing of any debts, ction was issued restraining the defendants from selling, assigning, negotiating, receiving, collecting, or in any manner disposing of any debts, bonds, or notes due Foote, whether, in his possession or held by other persons in trust for his use or benefit. A receiver having been appointed, Foote was directed, by an order of court, to execute and deliver a general assignment of all his property and effects. This was done by him November 1, 1882. Pearce was made a defendant on his own petition, and with leave of the court filed a cross-bill showing, among other things, that the judgment of the bank against Foote was largely in excess of the balance really due it from Hooker & Co., and claiming that he, as assignee of that firm, was entitled not only to the above two notes, but to such balance as might be realized on that judgment after paying the amount due from his assignors to the bank.
Rice filed an answer and cross-bill asserting his ownership of the two Couch notes by assignment from Foote. That assignment was made February 16, 1885, and is in these words:
"For value received, I hereby sell, assign, transfer, and set over unto James H. Rice, of Chicago, Illinois, all my right, title, interest, claim, and demand in and under two (2) certain notes executed by the trustees of Ira Couch's estate to my order, each of said notes being for the sum of five thousand dollars ($5,000.00) and are dated the first day of July, 1876, and are now in the hands of Huntington W. Jackson, receiver of the Third National Bank of Chicago, said notes being held by said Jackson, receiver as aforesaid, as collateral security for a certain indebtedness due said Third National Bank from S. G. Hooker & Co. I hereby give said Rice full power and authority to prosecute, in my name or his own, any and all suits touching said notes in any manner that he may deem best."
The principal consideration for this assignment was the taking care of Foote by Rice. The evidence chanroblesvirtualawlibrary
of Rice on this point is uncontradicted. He testified:
"I have spent a good deal of money on him, taking care of him. He had no money of his own except what I let him have. He has been an invalid, and had to have somebody to look after him, and have somebody to attend to him. . . . I had paid out money for Mr. Foote. He had got suits on his hands that he had to carry out, and I had become responsible for some of his fees, attorney's fees, and in fact had advanced him money to carry on his cases. It had gone so far that I didn't care about taking a great many chances more, and he assigned that [the two Couch notes] to me. . . . There are a good many other considerations besides the advancement of money that Mr. Foote is indebted for. He has made his home with me; been provided with nurses and doctors, and taken good care of. Outside of the friendship I have for Mr. Foote, there would be no money consideration for what I have gone through with."
"Mr. Foote has made his home with me for nine years. He has been very feeble, especially for the past two years. He is in his sixty-eighth year. He has had to travel for his health, and has been away both winter and summer. He has had no money within the last five years except what I have furnished him; no nurses or doctors except what I have paid for since he has been sick."
Rice's answer and cross-bill proceeds upon the ground that the original transaction between Hooker & Co. and Foote was based upon a mere wager or bet upon the price of grain or provisions constituting an option contract prohibited and declared void by the statutes of Illinois, and therefore that the consideration of Foote's guarantee upon the two notes failed, no title to them passing to Hooker & Co. The relief asked by him was that the judgment rendered in favor of the bank against Foote be vacated and set aside; that if for any reason that could not be done, then that the judgment be set aside upon the payment to the bank of any balance due from Hooker & Co., which payment he offered to make upon the surrender of the above notes to him, and that the bank be ordered to return the notes to him. He asked such other relief as equity require. chanroblesvirtualawlibrary
Foote adopted the answers of Rice to the original and cross-bills of Pearce as his own. The bank and Pearce each relied upon the judgment against Foote in bar of the claim asserted by Rice. They denied that the original transactions between Foote and Hooker & Co. were in violation of law or that Rice was a bona fide owner for value of the Couch notes.
Upon final hearing, it was adjudged that the bank was entitled to be paid upon its judgment against Foote the balance due on the note of Hooker & Co. after crediting all payments thereon, including one by Pearce as assignee of Hooker & Co. The cross-bill of Pearce was dismissed for want of equity.
In respect to the claim of Rice, it was adjudged that he was the equitable owner of the two notes in question; that, they having been transferred by Foote to Hooker & Co. for a gambling consideration, the transfer was void as between those parties; that upon payment by Rice to the bank of the amount due upon the indebtedness to it of Hooker & Co., he, as assignee of Foote, was entitled to have the notes delivered to him, together with a transfer of the bank's judgment against Foote, the judgment to be satisfied of record by Rice upon the collection by him of the notes, or enough thereon to satisfy the amount to be paid to the bank, together with his costs and expenses, and that upon such payment within thirty days from the date of the decree, the bank should deliver the notes to Rice with an assignment duly executed of its judgment against Foote. Pearce alone appealed from the decree. chanroblesvirtualawlibrary