John E. Leonard's Appeal

1. Where inquiry becomes a duty, the party who neglects to perform il should bo visited with at least constructive notice of the facts that probably would have been brought to light if it had been duly made. 2. As a general rule, inquiry of the obligor is sufficient to ascertain whether there is any defence to the payment of a judgment entered on a note, but where the obligor has assigned all his property for the benefit of creditors, and the assignee, by accepting the trusts, has undertaken to pay the creditors, as far, at least, a's the assets in his bands will reach, inquiry should be made of him also.

Appeal from the Court of Common Pleas of Chester county: Of July Term 1878, No. 81. Appeal of John É. Leonard from the decree of the court confirming the report of the auditor in the matter of the petition of Lewis Davis. The proceedings in the court below and the facts are set forth in the following portions of the report of the auditor — “John R. Stapleton and wife, on the 12th of August 1869, executed and delivered to Lewis Davis a deed of voluntary assignment in trust for the benefit of creditors. Lewis Davis accepted the trust, and on the 13th day of August filed his petition for the appointment of appraisers, and on the 9th of September 1869, an inventory of the assigned estate. On the 15th day of November 1870, a. second bond (the first one being defective in form), in which Robert Neeley and Alexander Martin were sureties, was filed and approved by the court. On the 20th day of May 1871, the assignee filed an account to which, on the 13th day of June, exceptions were filed by W. B. Maitland, and other exceptions by John R. Stapleton, and on the same day a petition was presented to the court for an auditor to distribute the balance standing on the account. George M. Rupert, Esq., was appointed auditor upon the exceptions, and also to make distribution. The report of the auditor was filed on the 18th day of December 1871, and the same day the court made an order that the assignee pay in accordance with said report. The claims upon the fund were presented to the auditor on the 21st 'day of October 1871. The claims were handed in by Rees Davis, Esq., who was acting as principal counsel for the assignee, and among them was the following, viz.: “ Judgment in favor of John E. Leonard entered November 19th 1868, in judgment docket E, page 453 :— For.........$3000.00 Int. from September 9th 1869, to December 1st 1871, 401.00 Total claim, ....... $3401.00 “ On this claim the auditor awarded to John E. Leonard as follows, viz.:— From personal property, .....$ 299.16 From real estate, ....... 2457.60 Total award, ...... $2756.76” “ On the 19th day of June 1873, an action of debt was brought in the Court of Common Pleas of Chester county, on the official bond of Lewis Davis, assignee of John R. Stapleton, the case being as follows, viz.:— The Commonwealth of Pennsylvania, ^ at the suggestion of John E. Leonard, v. Lewis Davis, Robert Neely and Alexander Martin. In the Common Pleas of Chester county, No. 85 to August Term 1873. Summons Debt. “The plaintiff’s statement, filed at the time of issuing the praecipe, exhibited a copy of the said bond, and also of the distribution reported by the auditor as above stated, and demanded the said sum of $2756.76, with interest thereon from the 18th day of December 1871. The sheriff returned that he had summoned Lewis Davis personally, and the other two defendants by leaving a copy of the writ at tbeir respective homes on the 27th of June 1873. On the 3d day of July 1873, Lewis Davis filed an affidavit of defence, alleging payment on or about the 10th of April 1871, of the judgment above mentioned, a copy whereof accompanied this report. On the ninth day of August 1873, the plaintiff filed a narr., and on the same day entered a rule to plead. The defendant on the 18th and 29th days of August filed their plea of nil debet, whereby the case was put at issue. At this stage of the proceedings, the defendant, Lewis Davis, on the 11th of September 1873, presented his petition to the court asking for relief, by having the report of auditor referred back to him for correction, and the court so referred it for hearing upon the matter alleged in the affidavit. “ Mr. Davis alleges that about the 1st day of April 1871, Mr. Leonard demanded payment of the judgment in question, and took steps to enforce his demand by legal processthat thereupon he raised the money and paid off the debt, and took up the hill single, which represented it; that subsequently he handed this bill single to his attorney, Rees Davis, to be presented to the auditor in Stapleton’s estate, under the belief that that was the proper course to be pursued, and that the money awarded thereon belongs rightfully to him, and not to Mr. Leonard. On the other hand, Mr. Leonard alleges that, although about the 1st of April 1871, lie demanded payment of the judgment, and sought to enforce it, yet that Mr- Davis at first resisted payment, and afterwards entered into an arrangement whereby it was postponed for the time being; that he, Leonard, on or about the 8th day of April 1871, sold and transferred the obligation to Rees Davis, and about the 16th day of June following, repurchased it from him; and that ever since he has been the owner of it, and is justly entitled to the money awarded to him by the auditor as aforesaid. * * * “ We find the following facts: That John E. Leonard, being the holder of the Stapleton note for $3000, gave notice to Lewis Davis, the assignee, through Rees Davis, Esq., his attorney, sometime in March 1871, that he would require payment of the same at the 1st of April following. That Lewis Davis, in consequence of that demand, on the'27th day of March 1871, sent to Rees Davis the sum of $1549,88, and on the 3d of April, the further sum of $1110, and about the 10th of April, the additional sum of $590.60, an aggregate of $3250.48, which moneys were directed by him, and were received by Rees Davis, to be applied to the payment of the note in question. That, on the 3d day of April 1871, Mr. Leonard, not having received, any moneys in response to his demand for payment, issued a pluries fi. fa. on the judgment entered upon this note. * * * That on the 5th or 6th of April 1871, Rees Davis paid over to Mr. Leonard, on account of the Stapleton note, a check of $600, andón the 7th of April, in cash, $1000; and on the 8th of April, a check for $800, and in cash, $175. He also gave to Mr. Leonard, on the 8th of April, his own judgment-note for $75, payable in two days, $25 of which was to be applied towards the payment of the Stapleton note, and the balance was intended to cover the costs of the execution above mentioned. “ He further gave to Mr. Leonard, at the same time, his own judgment-note for either $400 or $500, payable in two months (for which he transferred the Whiteside bond as collateral), making a total of $3000 or $3100, which Mr. Leonard then accepted in full payment, satisfaction and discharge of the Stapleton note, and thereupon delivered the same over to him, which he, on the next day, the 9th of April, carried up to his father and delivered over to him. On the 10th of April, Rees paid to Mr. Leonard the $25 balance on the Stapleton note and the costs of execution, and took up the $75 note which he had given two days before; that on the 8th of April Mr. Leonard executed a blank assignment of the Stapleton note and judgment, which he delivered over to Rees, along with the note itself, but whether this assignment passed into the hands of Lewis Davis, along with the note, does not satisfactorily appear. That during the first half of the month of June 1871, Rees Davis got the Stapleton note from his father, upon the pretext that it was necessary he should have it to lay before the auditor, who had been, or was about to be, appointed to report distribution in the assigned estate of Stapleton. That Lewis' Davis parted with its possession upon this representation and for that purpose, and without any knowledge or understanding on his part, that it was to be used for any other purpose whatever; and he -was, in fact, not aware that any other use had been made of it until so informed by Mr. Leonard, in the spring of 1873. That on the 16th of June 1871, Rees being unprepared to pay off the note which he had given on the 8th of April, at two months, gave in lieu thereof, his note for .$500, payable on the 1st day of April 1872, and at the same time he gave Mr. Leonard another note for $1500, also payable on the 1st of April 1872, and received from Mr. Leonard, in consideration thereof, a check for $1120, the difference of $380 being discount on the two notes, at the rate of two per cent, a month, retained for the use of the money. At the same time, and as a part of thé same transaction, papers were made and delivered, and Mr. Davis then passed over to Mr. Leonard the Stapleton note, together with the blank assignment which the latter had executed on the 8 th of April previously; but whether the words, ‘ collateral for Stapleton and Whiteside bonds,’ were put on the notes at that time, or not until afterwards, the auditor is unable to determine, as the two witnesses who alone have knowledge on the subject stand diametrically opposed to each other. “ That Lewis Davis was not privy to this transaction of the 16th of June, and did not become fully cognisant of the facts until they were developed in the course of the present investigation. * * * That when the audit for distribution in the Stapleton estate was held in the fall of 1871, the judgment entered on the note in question participated therein, being awarded $299.16 out of the personal property, and $2457.60 out of the proceeds of real estate — the latter sum being the balance of such proceeds, after paying prior liens in full; and it appears that this judgment was presented along with the other claims against the assigned estate by Rees Davis, as attorney for the assignee, and the dividend was awarded to Mr. Leonard, because the judgment stood upon the record in his name. That Mr. Leonard made no demand upon the assignee for payment of the dividend so awarded to him, until the month of April 1873, at which time Rees Davis had disappeared from West Chester, and his whereabouts W'ere unknown. “ There was a collateral issue raised during the investigation respecting the genuineness of the signatures of a paper purporting to be an acknowledgment of no set-off to the Stapleton note by the assignee. This paper purports to have been signed by Lewis Davis, as maker, and by Rees Davis as a witness. * * * There is no presumption, legal or otherwise, in favor of the genuineness of these signatures, and the burden is upon Mr. Leonard, who offered them in evidence, to establish their verity. This, we think, in view of all the evidence, he has failed to do. It must not be understood, however, that we pronounce them to be forgeries. That is not the issue. We simply find that they have not been proved to be genuine. We might, perhaps, find upon the same evidence that they had not been proved forgeries; but as that is not the issue, we are not called upon to record our opinion.” The auditor then proceeded : “ Now, was the taking up of this obligation a payment or a purchase on the part of Lewis Davis? We have already seen that payment was what Mr. Leonard demanded and sought to enforce ; and we have also observed that the money was forwarded by Mr. Davis, accompanied by a stipulation that it was to be used in making payment of the obligation. But it is said this purpose which both parties had in view was not carried into effect, and that a transaction, essentially different in its consequences was substituted in its place. Why should this intention of the parties be so changed ? And would it not be a fraud upon' Lewis Davis to so act ? And could anyone privy to the transaction reap any advantage from it subsequently ? “ It is clear, so far as Lewis Davis is concerned, payment was what he intended should be made, and payment was what after-wards had been made. And it is also clear he believed at that time he had enough trust funds in his hands to pay 'off the obligation in full; and he actually had enough, and more than enough, before taking out his commissions as assignee. There was no motive or inducement to purchase which did not exist also to pay, or was superior in the former to the latter case. The moneys employed to take up the obligation were the trust funds belonging to Stapleton’s estate, and we are persuaded Mr. Leonard had knowledge of that fact' at the time the transaction was consummated ; at least the probabilities are in consonance with this opinion. * * * There was no consideration whatever for this contract for sale, and the delivery of the note in contract for sale, and the delivery of the note in question, and the blank assignment of the judgment, except what, if any, is to be found in the $1120 which Mr. Davis received from Mr. Leonard on the $1500 note. The design and real purpose was that these judgments should be pledged as collateral for the $1500 note; and the words on the note, “ collateral for the Stapleton and Whiteside bonds,” are a perversion of the truth, the fact being precisely the reverse of the statement therein contained. We are conscious that this finding in the face of the writing itself, may seem strange, but an acquaintance with all the facts makes the conclusion inevitable. Recurring now to the transaction in April, we are of opinion, from a careful consideration of all the facts and evidence in the case, that it should be regarded as a payment of the obligation, and not as a purchase thereof.. Indeed, it might well be doubted, as before intimated, whether the assignee could huy up the obligations of the assignor, and thus put himself in a more hostile attitude towards the estate or' its creditor, than he had previously occupied. He certainly could not do so with the trust funds, and it is very questionable whether he could do so with his own funds, unless some equity was to be enforced by reason of the proceedings. * * * Being a payment, the effect was an extinguishment of the debt — an absolute wiping it out of existence. And it was thenceforth incapable of being used for any purpose whatever. It follows, of course, that any attempt thereafter to sell or assign or pledge the security, would be invalid and fruitless. No title can be acquired to a dead security. But it may be contended that whilst payment with the trust funds would at law be an extinguishment of the debt, and the judgment could not afterwards be kept on foot without the consent of persons interested, yet in equity, the judgment would still exist, to enable the payor to indemnify himself in the marshalling of the assets or to obtain an order in his favor in the distribution, and that if he chose to assign or to allow an agent or attorney to assign to another, whatever sum he might be entitled to in distribution, there is no principle of law or equity will interfere to prevent it. * * * But Mr.- Leonard could not obtain title through this fraudulent proceeding; even if he were an innocent purchaser for value he would acquire no title. The fraudulent vendor having no title, he could not invest his vendee with any. * * * But we do not think Mr. Leonard is to be regarded in exactly the light of an innocent purchaser for value. There was enough in the case and in the manipulation of this particular security to have put him on inquiry. He was entirely acquainted with the transaction of 1871, and he knew or ought to have known that the bond had been taken up by Lewis Davis with trust funds. Whilst we do not imagine that he was cognisant of the fraud that was being perpetrated, or was lending a willing and knowing assistance thereto, we nevertheless think that he did not exercise that caution and make that inquiry which his knowledge of the circumstances and of the relation of the parties made it incumbent upon him to exercise. In other words, he was in default in accepting this transfer without first endeavoring to ascertain Bees Davis’s status in connection with the obligation. This is not to his discredit, but it is unfortunate for his claim.” * * * • The auditor then reported that the sum of $2756.76 was improperly paid to Mr. Leonard, in the distribution of the Stapleton estate, and that the said sum should have been awarded to Lewis Davis. Exceptions were filed to the report of the auditor, which the court dismissed, whence this appeal.