SCOTT v. WILKINSON

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Docket Number

6 Div. 536.

Attorney(S)

Samuel Wilder, of Birmingham, for appellants. One who deals with an agent is bound to ascertain the nature and extent of his authority. 3 Brickell's Dig. 22; Bank of Menlo v. Arnold Co., 13 Ala. App. 462, 68 So. 699. An agent can bind his principal only to the extent of his authority. Lytle Co. v. Bank of Dothan, 121 Ala. 215, 26 So. 6. An agent to collect or receive payment cannot bind his principal by a sale of the claim. 2 C. J. 635; Rigby v. Lowe, 125 Cal. 613, 58 P. 153. The note was specially indorsed to the Scotts, and in order to make it negotiable it was necessary that they should indorse it. Code 1923, § 9060. Appellee investment company is not a holder in due course. Code 1923, § 9078. Arthur L. Brown, of Birmingham, for appellee. The note was negotiable, and delivery before maturity passed title. Blackman v. Lehman, Durr Co., 63 Ala. 550, 35 Am. Rep. 57. Appellants cannot complain of the sale to appellee, since they armed their agent with indicia of title, and clothed him with apparent authority to dispose of same. Davidson v. Farrow Mer. Co., 13 Ala. App. 614, 68 So. 602. Where one of two innocent parties must suffer by a fraud perpetrated by another, the law imposes the loss upon the party who enabled the fraud to be committed by his misplaced confidence. J. R. Watkins Co. v. Hargett, 209 Ala. 165, 95 So. 811; Dinsmore v. Cooper, 212 Ala. 485, 103 So. 460.

Judges

SOMERVILLE, J.

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Smart Summary

Factual and Procedural Background

The appellants, the Scotts, held a negotiable note by special indorsement from the payee. Their agent, Kelley, was authorized only to collect the note. Kelley sold and indorsed the note to the appellee, Traders' Investment Company, without authority. The trial court adjudged that the Scotts' title was defeated by Kelley's act in selling the note. The Scotts appealed this decision.

Legal Issues Presented

Whether Kelley had authority, either written or verbal, from the Scotts to sell the note.
Whether the appellee, as a purchaser for value in due course, acquired title to the note despite Kelley's lack of authority.
Whether the Scotts were negligent or otherwise estopped from asserting their title due to entrusting possession of the note to Kelley.

Arguments of the Parties

Appellee's Arguments

Kelley had written authority from the Scotts to dispose of the note, including selling it at a discount.
Alternatively, Kelley had verbal authority to sell the note.
Even without authority, appellee's title should be protected because the Scotts enabled Kelley to appear as owner by entrusting him with possession of the note.
Appellee was a purchaser for value in due course of a negotiable instrument, entitled to protection.

Appellants' Arguments

One dealing with an agent must ascertain the agent's authority; Kelley was authorized only to collect the note, not to sell it.
An agent to collect payment cannot bind the principal by selling the claim.
The note was specially indorsed to the Scotts, requiring their indorsement to be negotiable.
The appellee is not a holder in due course.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bank of Menlo v. Arnold Co., 13 Ala. App. 462, 68 So. 699	Agent can bind principal only within scope of authority.	Supported the principle that Kelley lacked authority to sell the note.
Lytle Co. v. Bank of Dothan, 121 Ala. 215, 26 So. 6	Agent’s binding power limited to authority granted.	Confirmed limitation on Kelley's authority to collection only.
Rigby v. Lowe, 125 Cal. 613, 58 P. 153	Agent to collect payment cannot sell the claim.	Supported appellants’ argument that Kelley’s sale was unauthorized.
Blackman v. Lehman, Durr Co., 63 Ala. 550, 35 Am. Rep. 57	Delivery of negotiable note before maturity passes title.	Appellee relied on this to claim good title as purchaser.
Davidson v. Farrow Mer. Co., 13 Ala. App. 614, 68 So. 602	Authority and indicia of title can bind principal.	Appellee argued they relied on apparent authority from possession.
J. R. Watkins Co. v. Hargett, 209 Ala. 165, 95 So. 811	Loss falls on party whose negligence enabled fraud.	Court rejected application here due to absence of negligence by appellants.
Dinsmore v. Cooper, 212 Ala. 485, 103 So. 460	Same principle on negligence and loss allocation.	Used to analyze appellants’ alleged negligence.
Citizens' Bank v. Commercial Bank, 209 Ala. 280, 96 So. 324	Negligence required to invoke loss allocation maxim.	Applied to reject appellee’s claim of appellants’ negligence.
Spires v. Jones, 212 Ala. 117, 101 So. 753	Buying at discount can be factor in bad faith.	Supported conclusion appellee acted in bad faith due to circumstances.

Court's Reasoning and Analysis

The court first established that the appellants had perfect title to the note by special indorsement. It then examined whether Kelley had authority to sell the note. The written authority limited Kelley to collecting the note and did not authorize disposition beyond cancellation upon payment. The claimed verbal authority was unsupported and disbelieved by the court based on Kelley's own inconsistent testimony.

The court rejected appellee’s reliance on the principle that loss should fall on the party at fault, finding no negligence or culpability in the Scotts’ entrusting possession of the note to Kelley. The note’s indorsement plainly evidenced ownership, and no negligence facilitated Kelley’s fraudulent sale.

Regarding appellee’s status as a purchaser in due course, the court noted that appellee had constructive notice of the indorsement and failed to inquire into the irregularities, including the note’s discount and cancellation markings. This negligence, combined with other factors, led the court to conclude appellee acted in bad faith.

Consequently, the court held that the fraudulent act of the agent could not divest the appellants of title, and appellee's claim was invalid absent appellants’ negligence or estoppel.

Holding and Implications

The court REVERSED AND RENDERED the trial court's decision, holding that the appellants, the Scotts, retained ownership of the note and were entitled to its proceeds.

As a direct consequence, the register of the circuit court was ordered to pay the fund in court to the appellants and to mark the mortgage as satisfied. The appellee was required to deliver up the mortgage document for satisfaction endorsement.

No new legal precedent was established; the decision reaffirmed existing principles concerning agent authority, purchaser in due course protections, and the allocation of loss in fraud cases.

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SCOTT et al. v. WILKINSON.

SOMERVILLE, J.

It appears without dispute that the appellants, the Scotts, acquired a perfect title to the note in controversy by special indorsement of the payee plainly written on the instrument. The only question presented for review is the decision of the trial court on the evidence, adjudging that the title of the Scotts, as indorsers, was defeated by the act of their agent, Kelley, in selling and indorsing the note to the appellee, the Traders' Investment Company.

In support of the judgment, appellee urges four propositions: (1) That Kelley had written authority from the Scotts to dispose of the note as he saw fit, including the power to sell it even at a substantial discount.

(2) That, in any event, Kelley had verbal authority from the Scotts to do so.

(3) That even though Kelley had no such authority, appellee's title to the note should nevertheless be protected against the claim of the Scotts, because they were at fault in arming Kelley with an indicium of ownership — possession of the note — by means of which he was able to deceive appellee as to his right to sell it.

(4) That appellee was a purchaser for value in due course of a negotiable instrument.

1. An examination of the terms of the written authority given to Kelley to collect the note shows clearly that he had no authority beyond the mere collection of the notes. The stipulation that the notes were "to be used by W. E. Kelley in collecting these notes as he desires, by foreclosure or as he sees fit to do," armed him with a discretion only as to his mode of procedure in effecting the intended collection, but certainly not with any power of disposition other than the cancellation and surrender of the notes when paid.

2. The verbal authority, claimed by Kelley to sell the notes to raise money for his own use, rests upon the unsupported testimony of Kelley himself. Apart from its intrinsic improbability, it is specifically denied by the Scotts. Moreover, our reading of the record, and especially of Kelley's own testimony, utterly discredits his veracity and renders it unacceptable as a basis for any conclusion of fact. Our conclusion is that Kelley was without authority, verbal or written, to sell the notes.

3. To render available the maxim that, where one of two innocent parties must suffer loss from the act of a third party, he must bear the loss whose conduct has primarily caused it, the party invoking the principle must show that the other party has done or omitted some act in the nature of negligence which prompted and rendered feasible the deception practiced upon himself. Citizens' Bank v. Commercial Bank, 209 Ala. 280, 96 So. 324.

That maxim can have no application to a case like this. Here the Scotts did no more than intrust the possession of the note to Kelley, with authority to collect it and with implied authority, of course, to cancel and surrender it when paid. It carried on its face the plain evidence of its ownership; viz., the special indorsement of the payee to the Scotts. Except by a fraudulent alteration, sweeping and apparent, the agent could not use the notes as the property of any one but the indorsees; and the act of the indorsees in giving the mere possession of the notes to Kelley was in no sense negligent or culpable, nor was it promotive of Kelley's fraudulent deception of the appellee in any legal sense.

4. The purchaser of negotiable paper in due course is a favorite of the law, but he is nevertheless chargeable with notice of every fact shown upon the face or the back of the instrument. The note here in question showed that it had been indorsed by the payee to the Scotts. It was not in the custody of the payee. It was offered to appellee at a discount of about 12 per cent. of its face value, although it was known to be far less than one-third of the purchase money for the land and was secured by a mortgage on the land itself. Appellee's officers, who were representing it in this transaction, made no inquiry whatever as to the presence of the indorsement on the note — why it was placed there, why it was canceled by crosslines and by whom, or who and where the indorsees were. Presumably, the payee and indorser, Ida Kelley, would have given information warning appellee of the true ownership of the note had it been asked for in connection with the power of attorney required of her. Our clear conviction is that appellee was guilty of flagrant negligence, which compels the conclusion of bad faith, in the purchase of the note. We do not mean to hold that the mere fact of buying the note at a substantial discount would alone be sufficient to show bad faith, but, in connection with the other circumstances of the case, it is a factor to be considered in aggravation of that conclusion. Spires v. Jones, 212 Ala. 117, 119, 101 So. 753.

The fraudulent act of appellants' agent, Kelley — in legal effect, a forgery — could not destroy their title; and his transfer of the note to appellee, acting as agent for the payee, who was not the owner, could not pass the title, in the absence of negligence on the part of appellants or of some conduct resulting in their equitable estoppel to assert their title as against appellee. Nothing of that nature appearing, we are constrained to hold that appellants are the owners of the note and are entitled to its proceeds.

The decree of the trial court will be reversed, and a decree will be here rendered to that effect, ordering the register of the circuit court to pay to appellants the sum of $825, being all of the fund paid into court by the original complainant in satisfaction of the note in suit.

It is further ordered and decreed that the original complainant is entitled to the relief prayed; and that the respondent, the Traders' Investment Company, shall deliver up to the register the Wilkinson mortgage transferred to it by Kelley, to be indorsed "satisfied" by the register and delivered by him to said complainant; and, further, that the register shall appropriately indorse upon the margin of the record of said mortgage the fact of its payment and satisfaction.

Reversed and rendered.

ANDERSON, C. J., and THOMAS and BOULDIN, JJ., concur.