Story Case

William Howett borrowed $2,000 from the Lincoln Trust Company, giving the bank two negotiable notes, each for $1,000 and secured by a mortgage on his store. The notes were purchased from the Lincoln Trust Company by Henry Mitchell. Interest thereon was paid from time to time by Howett to the bank, and the latter forwarded the money to Mitchell. On August 1, 1915, the notes became due, and Howett paid $2,000 to the Lincoln Trust Company, receiving the assurance of the company that the cancelled notes and mortgage would be returned to him in a few days' time. The trust company, however, did not account for the money to Mitchell, and on August 3,1915, went into the hands of a receiver. Mitchell now attempts to hold Howett on the notes and mortgage. Mitchell contends that the mortgage is incidental to the notes which are negotiable, and, therefore, he can hold them against Howett, who should not have paid the money until he received the notes. Is this correct?

Ruling Court Case. Spencer And Washington Trust Company Vs. Alhai Point Company, Volume 53 Washington Reports, Page 77; Volume 132 American State Reports, Page 1058

Spencer, the president of the Alkai Point Company, desired to use the credit of the company for his own purposes and that of a friend. He executed four notes in the name of the company, each for $2,500; they were all alike except that they became due at four different and successive dates. They were secured by a mortgage covering the company's present and future property, and discounted to the Washington Trust Company as collateral for an advance of $7,000. The mortgage securing these notes provided that, if one note was not paid at maturity, all four should become due. At the time of discount by the trust company, one note was past due. None of the notes was ever paid, and the trust company now seeks to have the mortgage foreclosed. The Alkai Point Company proposed to show that the mortgage and notes were given without consideration, and since one was overdue at the time of discount, they were all overdue, and this lack of consideration is a good defense against the trust company. The trust company maintained that the mortgage was a mere incident to the notes which were negotiable, and since the company took the notes for value, ignorant of the original lack of consideration, it could now collect the money due.

Justice Gose held in substance: "Where the debt is evidenced by negotiable paper, the mortgage securing that debt partakes of the negotiable character of the note, and, therefore, the mortgage will pass free of those defenses to which the note is not subject. It appears that the trust company was not actuated by fraud, and acted in good faith; therefore, it can exercise its rights to the mortgage as to the three notes not due when they were discounted. The fourth note was taken after maturity, and, therefore, subject to the defense of lack of security."

Ruling Law. Story Case Answer

Where a mortgage is made without a negotiable note or bond evidencing this debt, a payment made to the mortgagee before notice of assignment will protect the mortgagor; this is true although he does not ask for a return of the mortgage, and does not ask to see it. But when the debt is evidenced by negotiable paper, the rule in many states is different, and to the effect that the mortgage partakes of the negotiable character of the paper. Therefore, if the mortgagor pays the mortgagee at maturity without demanding and receiving a surrender of the note, and the note is in fact held by a third person, who purchased before maturity, the mortgagor has not cancelled the obligation, and has no defense against the holder.

The Story Case is based upon the court cases of Security Company vs. Graybeal, Volume 85 Iowa Reports, Page 647, where the judge ruled that the mortgages were incidental to the notes, and that the burden of showing the authority of the person to whom the payment was made, as agent, is upon the person paying; that the mere fact that former payments were made through the trust company, did not give authority to make subsequent payments thereto. It was held that the holder of the notes could recover from the mortgagor.