
    Edgar v. Haines et al.
    
      Negotiable instruments — Transfer of interest of one joint payee —Benders note nonnegotiable, when — Equitable interest assigned, when — Assignment induced by fraud — Equities of assignee superior to original assignors, when,
    
    1. Where a promissory note is made payable to the order of two .payees, who are not partners, and neither payee ha3 authority to transfer the interest of the other, an assignment by one payee of his part interest in the note to a third-party takes away the negotiable character of the instrument and renders it a nonnegotiable chose in action.
    2. Such assignment is not void, but operates as an assignment of the equitable interest of the assignor.
    3. Where E transfers to M a nonnegotiable chose in action, which assignment is induced by the fraud of M, and after-wards M transfers the same to K, and K thereafter assigns the same to S, all of which transfers are by indorsement and delivery, and both K and S pay a valuable consideration therefor without notice or knowledge of the fraud of M, the equities of S are superior to those of E, and the situation is a proper one for the application of the legal maxim that, where one of two innocent persons must sustain a loss from the fraud of a third, such loss must fall upon the one, if either, whose act has enabled such fraud to he committed.
    (No. 17852
    Decided December 18, 1923.)
    Error to the Court of Appeals of Harrison county.
    This cause comes to this court on error from the Court of Appeals of Harrison county, in which court it was tried on appeal from the common pleas court of that county. On November 8, 1919, Robert Haines and Ethel M. Haines executed their promissory note of that date “to the order of Frank 8. Edgar and John W. "Wells,” which note became due and payable November 8, 1920. The note was collaterally secured by a real estate mortgage properly executed, delivered, and recorded. On January 10, 1920, F-. S. Edgar, the owner of the one-half interest in the note, and who had possession of it, indorsed the same as follows:
    “'Cadiz, Ohio, January 10, 1920.
    “I hereby transfer my one-half interest, $950, in this note to J. E. Mayer without recourse.
    “F. S. Edgar.”
    Thereafter, and before November 8, 1920, J. E. Mayer indorsed his name on the back of the note, and delivered the note to one Louis Kaufman, and thereafter, on February 10, 1921, about three months after its maturity, Louis Kaufman assigned and transferred his interest in the note and mortgage, and delivered the note and mortgage to the Sixth Real Estate Security Company. It was in course of time discovered that in the business transaction between F. S. Edgar and J. E. Mayer, resulting in the transfer of the one-half interest in the note and mortgage, Edgar was defrauded, and that he received no value for his interest in the note. This fact was, however, not known to subsequent indorsees and holders of the note and mortgage at the time they acquired their interest in and possession of the note and mortgage, and it is undisputed that each and all of said owners and holders other than J. E. Mayer paid a valuable consideration for same. It is conceded that the payees of the note, John W. Wells and Frank S. Edgar, were not partners and that Edgar did not have any authority from Wells to indorse or transfer the note..
    On April 8, 1922, Frank S. Edgar and John W. Wells brought an action to foreclose the mortgage and to cause the sale of the real estate, and prayed that out of such sale the amount due each of them be paid. The Sixth Real Estate Security Company was made a defendant in that action, and that company answered, denying that plaintiffs were the owners of the note, and setting forth the facts aforesaid, and in a cross-petition alleged the possession of the original note and ownership of onehaif interest therein, and prayed that the makers thereof be ordered to pay the same, and in default thereof that the proceeds of the sale of the mortgaged property be paid to such cross-petitioner. In a reply to that pleading Edgar pleaded fully the fraudulent transaction with Mayer as a defense thereto. The makers of the note are solvent, and made no defense, but, on the contrary, filed an interpleader, and deposited the amount of the note in court, to be disbursed in accordance with the final outcome of the controversy between Edgar and the Sixth Real Estate Security Company.
    
      Mr. Cheever W. Pettay and Messrs. Buchanan, Reed & Russell, for plaintiff in error.
    
      Messrs. Caldwell, Brunner & Van Buren; Mr. Frank B. Grove and Mr. E. S. McNamee, for defendants in error.
   Marshall, C. J.

The first problem presented by this record relates to the law of negotiable instruments and may be solved by reference to the provisions of the Uniform Negotiable Instruments Act, Sections 8106 to 8230, inclusive, General Code. This instrument was originally a negotiable instrument, meeting all the requirements of the provisions of Sections 8106 to 8109, inclusive, General Code, but being payable to two joint payees, who were not partners, and neither having any authority to transfer the interest of the other, it was clearly subject to the provisions of Section 8137, General Code, which provides:

“The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable * * * does not operate as a negotiation of the instrument.”

The transfer of the instrument in the manner in which the same was transferred by Edgar, being in contravention of the plain provisions of that section, stripped the instrument of some of the qualities of a negotiable instrument and left it a nonnegotiable chose in action. It may be inquired at this point whether Section 8137 makes an attempted transfer in violation of its provisions an utterly void act. Our answer is that the word “negotiation,” as used in that section, is a technical term, and is used in a technical sense as the transfer of a negotiable instrument in due course. It is true that in Section 8135 it is provided that:

“An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof.”

This section being a part of the uniform act, all sections of which are in pari materia, it must necessarily refer to a negotiable instrument, and the holder of such an instrument, and no one can be such holder who does not measure up to all of the requirements of Sections 8157 to 8164, inclusive, General Code. By virtue of the provisions of Section 8160, General Code, a person is not a holder in due course who acquires title by unlawful means, and it must necessarily be considered unlawful if in contravention of the statutory provisions.

If, therefore, it is attempted to transfer a negotiable instrument in such manner as to violate the provisions of Section 8137, General Code, it does not operate as a negotiation of a negotiable instrument. It does not follow, however, that the transfer of only a part of the amount payable is a void act, or that the transferee acquires nothing by the transaction. It cannot be doubted that any legislative attempt to deny the right of a holder of a part interest in a negotiable instrument to sell and transfer such interest would be unconstitutional. As a general rule, any person may sell and transfer property, or any interest therein, under the inherent power to make contracts, all of which is recognized by the letter and the spirit of Section 1 of the Ohio Bill of Rights. It is, of course, an exception to such general rule that the Legislature may limit such right on the ground of public policy, the best examples of which are champertous and usurious contracts, contracts in restraint of trade, and other agreements which need not be enumerated. It is likewise within the limits of legislative power to give to promissory notes and bills of exchange the attribute of negotiability, to place limitations thereon, and to take the same away under certain prescribed conditions. The Legislature would not, however, have the power to take away from a promissory note the force and effect of a contract, if it possesses all of the formal requisites and essential attributes of a contract. In the instant case, after the transfer of the part interest in the note, it still had all of the character and quality of a contract, and as such it could lawfully be transferred. We have no difficulty, therefore, in reaching the conclusion that Mayer and the subsequent transferees were holders of a nonnegotiable chose in action.

At this new starting point, and based upon the foregoing conclusions, we will proceed to a consideration of the next legal question, and to a determination of the respective rights and claims of Edgar and the Sixth Real Estate Security Company in this chose in action. It was not quite clear what theory counsel for Edgar entertained in disregarding the notes and bringing action to foreclose the mortgage. It is well settled by the former adjudications of this court that a mortgage is not property separate and distinct from the note which it secures, but that, on the other hand, the mortgage security is an incident of the debt which it is given to secure, and, in the absence of a specific agreement to the contrary, passes to the assignee or transferee of such debt. These principles are settled by the following cases: Paine v. French, 4 Ohio, 318, Executors of Swartz v. Leist, 13 Ohio St., 419, and Allen v. First Nat. Bank of Xenia, 23 Ohio St., 97. This entire problem must therefore be solved by determining which of these parties has the better title to this nonnegotiable chose in action, and this question must he determined by principles of law having no relation whatever to the law of negotiable instruments. If the fraud had arisen out of the transaction between the maker and the original payee of the note, the law of negotiable instruments would apply, and the Sixth Real Estate Security Company not being a holder in due course, the maker would have a valid defense. In that event the maker would also have a valid defense against Edgar, so that neither party could recover. On the other hand, if the maker were insolvent, and the Sixth Real Estate Security Company were seeking personal judgment against Edgar as an indorser, Edgar would likewise have a valid defense on the ground that the real estate company is not a holder in due course. Neither of the foregoing hypotheses is true, but, on the contrary, the maker of the note is perfectly solvent, makes no defense to the note, and has paid the amount of the same into court. The only question remaining for determination is the rights of the respective parties in that fund. This determination must be made accoi'ding to well-settled principles of equity, without regard to the rules and principles of commercial paper. The situation is exactly the same as though tangible property were involved instead of a chose in action.

Edgar was induced by fraud to part with' his title to this chose in action and could undoubtedly have recovered the title from Mayer, before Mayer parted with it, and could have recovered the title from any other person who acquired it with knowledge of the fraud; but it is conceded in this case that the Sixth Real Estate Security Company acquired title without notice or knowledge of fraud or even circumstances which would have put that company upon inquiry. The situation is the same as though Edgar, admitting that the real estate company was not a party to the fraud, but, on the contrary, had acquired the same for a valuable consideration without notice or knowledge thereof, had brought an action against the real estate company to recover the property on the ground that his transfer of it to Mayer was induced by fraud. It being admitted that Edgar indorsed the note, and delivered the note and mortgage to Mayer, that he thereby clothed Mayer with apparent indicia of title, with power to further dispose of the note and mortgage, and the same having in fact been disposed of to an innocent purchaser for a valuable consideration, Edgar is, by well-settled principles of equity, estopped from setting up against such second assignee the fact that the title of Mayer was not absolutely perfect. Edgar, by his own affirmative act, conferred the apparent title and ownership upon Mayer, and it was upon the faith of this transfer that Kaufman and the real ’estate company purchased the same for a valuable consideration. Edgar is thereby precluded from asserting his real title. Edgar, having been defrauded, seeks to be made whole at the expense of the Sixth Real Estate Security Company, an innocent party, not at the expense of Mayer, the real wrongdoer. This case is therefore governed by the legal maxim that, where one of two innocent persons must sustain a loss from the fraud of a third, such loss must fall upon the one, if either, whose act has enabled such fraud to be committed. The instant case is exactly parallel to the case of Combes v. Chandler, 33 Ohio St., 178, and upon the authority of that case, as well as upon principle, the judgment of the Court of Appeals must be affirmed.

Judgment affirmed.

Wanamaker, Robinson, Jones, Matthias, Day and Allen, JJ., concur.  