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IS IT A TORT TO CREATE AN OBLIGATION AGAINST A THIRD

PARTY, WITHOUT RIGHT OR HIS CONSENT, WHEREBY

ANOTHER MAY RIGHTFULLY DEPRIVE HIM OF

HIS PROPERTY?

A holder of a negotiable instrument with notice of fraud, claiming under the defrauder and another having notice of the fraud, has passed it on to a bona fide purchaser without notice. Can he be held by the defrauded party in a quasi-contract action for money had and received, even before the obligation has been met by the plaintiff?

It is well settled that a holder with notice, not claiming under a bona fide purchaser for value, may not recover from the defrauded party on the instrument.1 The personal creditor of

'Mooney v. Mooney Co., 128 Pac. (Wash.) 225; First Nat'l Bank v. Flour City Co., 136 N. W. (Minn.) 563; Shur v. Hall & Lyon Co., 88 Atl. (R. I.) 801.

the treasurer or other fiscal officer of a corporation is held to have notice that such officer is misappropriating the funds of the corporation when he attempts to meet his debt with a corporation check or note. But the cases have gone further. Such creditor, having accepted the check or note and realized on it, is liable to the corporation in an action for money had and received. We have a different question before us. Suppose such creditor passes the instrument on to A for value, making him acquainted, however, with the whole situation; then suppose A passes it on to a bona fide holder for value, without notice,' who collects from the corporation; may the corporation recover from A in indebitatus assumpsit?

What is the basis of this quasi-contract action in which the defrauded party recovers from the personal creditor? The cases say that it is because he has gotten money to which he knows he has no right, and because he knows of the officer's disability so to use his principal's funds. The courts do not hesitate to give this relief because of considerations of public policy, for the negotiability of instruments is interfered with in no way. But there seem to be more fundamental bases for these decisions. In the first place, the creditor, so long as he has the check or note in his own hands, is a converter of nothing but the actual paper itself. In his hands it is worth only a fraction of a cent, the value of the paper, and in an action of trover it is submitted that damages should be only one cent. He does not have legal

2 Rochester & C. T. R. Co. v. Paviour, 164 N. Y. 281; Lanning v. Trust Co. of America, 127 N. Y. Supp. 485.

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Reynolds v. Gerdelman, 170 S. W. (Mo.) 153, semble; St. Louis Charcoal Co. v. Lewis, 154 Mo. App. 548; Lampson v. Beard, 94 Fed. 30; Ward v. City Trust Co., 192 N. Y. 61.

'A corporation check drawn by its fiscal officer does not carry on its face notice of any infirmities. Merchants Bank v. State Bank, 10 Wall. 644.

Buck v. Kent, 3 Vt. 99, allows a recovery of the face value of the instrument in an action for conversion, as do several other cases. However, it seems obvious that so long as the note is in the hands of one against whom the maker has a defense, the maker has been deprived of nothing but a piece of paper. As Justice Holmes says, in Danforth v. Groton Water Co., 178 Mass. 472, "Perhaps the reasoning of the cases has not always been as sound as the instinct which directed the decisions." There has been no technical conversion of anything equal to the face value of the note. Some cases can be distinguished, for example, Inhabitants of Otisfield v. Mayberry, 63 Me. 197, where the note was paid, but the holder refused to give it up.

title to the instrument, for there has been no contract between him and the corporation. The fiscal agent had no actual authority to pass title from his principal to the creditor, and the creditor is in no position to claim that he had apparent authority. But the fact that the creditor does not himself have legal title does not preclude him from vesting legal title in an innocent purchaser, in accordance with the doctrines of the law merchant. Along with possession of the paper he has the power, by passing the instrument into the hands of a bona fide purchaser for value without notice, of creating in that purchaser a right against the corporation to which the corporation has no defense, yet which was created without its consent. Depriving another of his property, without right and without his consent, is a tort-conversion. Why is not the creation of an obligation, without right or consent, whereby another may rightfully deprive him of his property, also a tort? The corporation is entitled to an injunction in equity to restrain the creditor from passing it on to an innocent purchaser. This tort (not conversion) the creation of a liability in the corporation, without right, and against its will-is the tort which is waived by the corporation when it sues in indebitatus assumpsit.

But now suppose, instead of passing it on to a bona fide purchaser, that the creditor sells it to A, with notice. Is not A in a position exactly analogous to that of the creditor above? And when he passes it on to a bona fide purchaser for value without notice, is there any reason why he should not be held, just as the creditor himself would be?

This position is strengthened by the recent case of Hamlin's Wizard Oil Co. v. U. S. Express Co. In that case the payee's

"The reason for this doctrine is that same public policy which gave rise to (a) market overt; (b) "money carries a clear title"; (c) the doctrine that a vendor, retaining possession after a sale to one person (by which that person gets title), may by subsequent acts vest title in another; (d) the Recording Acts, according to which one retaining title on the books, although it is actually in another, may transfer it to a third party; (e) the rule that one having ostensible, though not actual, authority to pass title may vest it in a third party, although contrary to the explicit, but secret, instructions of the true owner.

'In Schmidt v. West, 104 Fed. 272, the maker's name had been forged, and although the instrument could never be valid in anyone's hands, equity restrained its negotiation. A fortiori in this case, where it becomes Ivalid in the hands of an innocent purchaser.

106 N. E. (Ill.) 623.

indorsement was forged and the instrument came into B's hands. B had negotiated for value, being without knowledge of any irregularity. But he had committed a technical conversion, having constructive notice. The payee waived the tort and recovered in indebitatus assumpsit. In that case the defendant was morally guiltless; in ours he was conscious of his unjust enrichment. In that, the plaintiff might have had recourse to his original debtor on the original contract, and also to the tortfeasor; in this, the corporation has recourse only against its treasurer, the tort-feasor."

It is not necessary that the corporation should have been forced to meet the obligation before suit brought, for, in determining the measure of damages in an action, the plaintiff may show that he is under a liability to pay to another, as a result of the defendant's breach of duty, although he has not yet paid.1o

It is submitted that a defrauded party may recover in an action of indebitatus assumpsit from anyone claiming under the defrauder and having notice of the fraud, if such person has negotiated the instrument to a bona fide purchaser for value.

SALE OF INTOXICATING LIQUORS BY A BONA FIDE SOCIAL
CLUB WITHOUT A LICENSE.

There has been a great conflict in the cases on this subject in the past. Recently two more cases have been added to the already large number.1 The first case deals with an unincor

'If the corporation waives his tort and recovers from him in assumpsit, of course it may not recover from the creditor. Security Co. v. Amer. Exch. Nat'l Bank, 103 N. Y. Supp. 399.

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Josling v. Irvine, 6 H. & N. 512. (Liability arose because of plaintiff's inability to deliver goods, due to defendant's breach of contract.) Randall v. Raper, E. B. & E. 84. (Plaintiff's vendee claims compensation from plaintiff on a warranty. Defendant sold to plaintiff on same warranty.) Spark v. Heslop, 1 E. & E. 563. (Defendant agreed to answer to plaintiff for all expenses undergone in maintaining a certain suit. Held, plaintiff may recover the amount of his attorney's bill, which has been rendered, but not paid.) Richardson v. Chasen, 10 Q. B. 756. (Action for breach of agreement to assign a lease. Plaintiff recovers the bill of costs due his attorney for investigating the title, though such bill was not paid before action was brought.)

1

1 Gevinis v. State, 107 N. E. (Ind.) 78; and Commonwealth v. Woelz, 106 N. E. (Mass.) 560.

porated club, and the second with an incorporated club. Both hold that the transfer of liquor by the club to a member constitutes an illegal sale and is a misdemeanor.

The facts of the first case are briefly these: the club was a social order, unincorporated, having rooms and equipment. Appellant was steward, having charge of the liquors, which had been purchased with club money. The plan of disposing of the liquor was to sell tickets or coupons (to lodge members only) which were good in exchange for definite quantities of liquor. There was no profit and the club had a select membership. The court held that when the liquor was purchased it belonged to the club members in common, and when a member received a definite portion, it belonged to him and that this constituted a sale within the meaning of the Statute forbidding sales without a license.

The second case differed from the first only in the fact that the club was incorporated. "In the present case the beer was owned not by the members but by the corporation, which is a distinct legal entity. He (member) had no individual right or interest in the liquors owned by the corporation. In short, the transaction discloses the transfer of property from one person to another for a consideration of value, or a 'sale' in the ordinary meaning of the word."

Are these two cases right? On the first question, where the club is unincorporated, the decisions and courts are in hopeless conflict as to whether the transaction is a sale. The courts of Massachusetts have held that such a transaction is not a sale, but that it is merely a method of distributing common property.2 So have the courts of other states. Is this view sound? Whose property is it when it is purchased with the club funds? It is the property of all in common? Each one has as much right to it as the next member. When the liquor is drawn off, and the member passes over his coupon or money, the title to the property has changed, from an undivided interest with the other members to an absolute ownership of the amount in question. This transaction contains all the elements of sale, call it what

1Com. v. Smith, 102 Mass. 144; Cpm. v. Pomphret, 137 Mass. 564. 'Barden v. Montana Club, 10 Mont. 330; Graff v. Evans, 8 Q. B. 373; Davies v. Bennett, 1 K. B. 666; Klein v. Livingston, 177 Pa. 224; Leim v. State, 55 Md. 566; People v. Adelphi Club, 149 N. Y. 5; State v. McMaster, 35 S. C. 1.