Story Case

The Great Western Stone Company loaded two cars of granite stone for the Harper Construction Company, executing and sending the bill of lading to this company before the stone left the quarry. Immediately upon receiving the bill of lading, the Harper Construction Company indorsed and delivered it to James Iddings, who paid a reasonable value for the stone it represented. After this was done and before the cars of stone were taken from the quarry, the Great Western Stone Company learned that the Harper Construction Company was insolvent. The stone company held the stone and refused to deliver it. Iddings demanded the shipment on the ground that the bill of lading represented the stone and passed the title thereto from the Harper Construction Company. Which party is correct?

Ruling Court Case. Friedlander Vs. Texas And Pacific Railway Company, Volume 130 United States Reports, Page 416

E. D. Easton was a station agent of the Texas and Pacific Railway Company, at Sherman, Texas. Purporting to act as agent, he issued a bill of lading to Joseph Lohstein, in which it was stated that two hundred bales of cotton had been received from Lohstein for shipment from Sherman to New Orleans. As a matter of fact, Lohstein owned no cotton whatever, and the whole transaction was a gross fraud. Lohstein indorsed the bill to Friedlander, a cotton merchant in New Orleans, drew a draft upon him for $8,000 and sent them to Friedlander. As Friedlander had previously transacted business with Lohstein, he paid the draft. When he presented the bill of lading, it was discovered that there was no cotton as stipulated by the bill.

Friedlander sued the railway company for nondelivery of the cotton. He claimed that he was a bona fide purchaser of the bill of lading and had no notice of fraud and was therefore in the position of a bona fide purchaser of negotiable paper.

Decision: A bill of lading is only quasi-negotiable. It is not negotiable in the same sense and to the same extent that bills and notes are. Bills and notes are intended to serve as money. In order that they may effectually perform this function, a bona fide purchaser is not bound to look beyond the instrument. But a bill of lading is symbolical of goods and is not intended to serve as a medium of exchange. Thus, a bill of lading issued where no goods are delivered, imposes no liability upon the carrier, even as against a bona fide purchaser who has no notice of the fraud in connection therewith.

Mr. Chief Justice Fuller said: "Bills of exchange and promissory notes are representatives of money, circulating in commercial world as such, and it is essential, to enable them to perform their peculiar functions, that he who purchases them would not be bound to look beyond the instrument, and that his right to enforce them should not be defeated by anything short of bad faith on his part. But bills of lading answer a different purpose and perform different functions. They are regarded as so much cotton, grain, iron or other articles of merchandise, in that they are symbols of ownership of goods they cover." Judgment was given for the railway company.

Ruling Law. Story Case Answer

The holder of a negotiable instrument is given far more consideration and protection by law than the holder of an ordinary claim or chose-in-action, because negotiable instruments were devised as a substitute for money; were the holders not protected, the instruments would not effectually serve this purpose. It is not always convenient or safe for a man to have in his possession sufficient money to pay his obligations as they are presented. For this reason, early recognized by the merchants in England, bills and notes were devised as a safe and convenient means of meeting one's obligations.

The Ruling Court Case illustrates this point of complete negotiability by showing the nature of the instrument only partly negotiable. A bill of lading is partly negotiable in that it passes the right and title which the indorser actually possesses and no more. In the Story Case, at the time the Harper Construction Company indorsed the bill to Iddings, it owned the stone, since the bill of lading gave it the title thereto. Therefore, title was passed to Iddings and the Great Western Stone Company cannot defeat him of his property.