This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The leading case in England, in which it was held that as between two successive assignees each claiming under a total assignment and each taking for value and without notice, priority should be given to the first who gave the notice, although he might be a subsequent assignee in point of time,1 was a case which was not decided in accordance with the principles of equity, but under a provision of the bankrupt act of James I.2 The only question which was involved in this case was whether the phrase, "any goods or chattels whereof they shall be reputed owners," included choses in action which the bankrupt had assigned prior to his bankruptcy. It was held that these words were broad enough to include choses in action,3 and that as against the assignee in bankruptcy of an individual partner his assignment of his interest in the partnership to his co-partner was invalid as to specific existing chattels,4 and also as to choses in action of which the assignee had not taken possession as fully as the nature of the thing would permit. In the case of a bond, it was said that the assignor must deliver the bond to the assignee; and apparently in cases of all choses in action, notice must be given by the assignee to the debtor, in order to vest the assignee with such an interest that he could retain the benefits of the chose in action as against a subsequent assignee in bankruptcy.5 In deciding the case the court did not purport to be acting upon general principles of equity. The only question discussed was the construction of the bankrupt act, and of the acts which must be done in order that the assignor of a chose in action could be said not to have such chose in action in his "possession, order and disposition" after such assignment, within the meaning of the bankrupt act.
2 Lee v. Howlett, 2 Kay & J. 531; Bernard v. Whitney National Bank, 43 La. Ann. 50, 12 L. R. A. 302, 8 So. 702; Dillingham v. Traders' Ins. Co., 120 Tenn. 302, 16 L. R. A. (N.S.) 220, 108 8. W. 1148; Peters v. Goetz, 136 Tenn. 257, 188 S. W. 1144.
1Ryall v. Rowles, 1 Ves. Sr. 348, 9 Bligh (N.S.) 377 [sub nomine, Ryall v. Rolle, 1 Atk. 165].
221 Jac. Ic. 19, Sec. X and XI, provided: "And for that it often falls out, that many persons before they become bankrupts, do convey their goods to other men upon good consideration, yet still do keep the same, and are reputed the owners thereof, and dispose the same as their own:
"Be it enacted, That if at any time hereafter any person or persons shall become bankrupt, and at such time as they shall so become bankrupt shall by the consent and permission of the true owner and proprietary have in their possession, order and disposition, any goods or chattels, whereof they shall be reputed owners, and take upon them the sale, alteration or disposition as owners; that in every such case the said commissioners or the greater part of them shall have power to sell and dispose the same, to and for the benefit of the creditors which shall seek relief by the said commission, as fully as any other part of the estate of the bankrupt; and for the better payment of debts and discouraging men to be-come bankrupts."
In a later case in which the question of necessity of notice to the debtor in order to protect an assignee as against a subsequent bona fide assignee was considered, the first assignee of an equitable interest in personalty had omitted to give notice to the trustees for four years and had permitted the assignor to hold himself out to the world as the owner of such equitable interest. The second assignee made actual inquiry of the trustees and was informed by them that they still held in trust for the assignor. For these reasons priority was given to the second assigne6; a result which would probably be reached in jurisdictions in which priority would be given to the first assignee in point of time unless he had been guilty of laches or negligence.7 In deciding this case, however, language was used which seemed to indicate that priority of notice, and not priority of assignment, was the sole test for determining the rights of the parties.8 In discussing the earlier case,9 the court, furthermore, said that while it was a case in bankruptcy, the chancellor had called to his assistance some eminent common-law judges, and that the. grounds upon which this case was decided were not limited to cases of bankruptcy, but were of general application.10
3 Citing on this point, under another statute, Ford and Sheldon's case, 12 Coke 1.
4 Distinguishing and criticising the reasoning in Copeland v. Gallant, 1 P. Wms. 314.
5 Ryall v. Rowles, 1 Ves. Sr. 348, 9 Bligh (N.S.) 377 [sub nomine, Ryall v. Rolle, 1 Atk. 165].
6 Dearie v. Hall, 3 Russ. 1 (for opinion on appeal see 3 Russ. 55).
7 See Sec. 2280.
8 "Where a contract, respecting property in the hands of other persons who have a legal right to the possession, is made behind the back of those in whom the legal interest is thus vested, it is necessary, if the security is intended to attach on the thing itself, to lay hold of that thing in the manner in which its nature permits it to be laid hold of - that is, by giving notice of the contract to those in whom the legal interest is. By such notice, the legal holders are converted into trustees for the new purchaser, and are charged with responsibility towards him; and the cestui que trust is deprived of the power of carrying the same security repeatedly into the market, and of inducing third persons to advance money upon it, under the erroneous belief that it continues to belong to him absolutely, free from incumbrance, and that the trustees are still trustees for him, and for no one else. That precaution is always taken by diligent purchasers and incumbrancers: if it is not taken, there is neglect; and it is fit that it should be understood that the solicitor, who conducts the business for the party advancing the money, is responsible for that neglect. The consequence of such neglect is, that the trustee of the fund remains ignorant of any alteration having taken place in the equitable rights affecting it: he considers himself to be a trustee for the same individual as before, and no other person is known to him as his cestui que trust. The original cestui que trust, though he has in fact parted with his interest, appears to the world to be the complete equitable owner, and remains in the order, management, and disposition of the property as absolutely as ever; so that he has it in his power to obtain, by means of it, a false and delusive credit. He may come into the market to dispose of that which he has previously sold; and how can those, who may chance to deal with him, protect themselves from his fraud? Whatever diligence may be used by a puisne incumbrancer or purchaser - whatever inquiries he may make in order to investigate the title, and to ascertain the exact state of the original right of the vendor, and his continuing right - the trustees, who are the persons to whom application for information would naturally be made, will truly and unhesitatingly represent to all who put questions to them, that the fund remains the sole absolute property of the proposed vendor. These inconveniences and mischiefs are the natural consequences of omitting to give notice to trustees; and they must be consid-ered as foreseen by those who, in transactions of that kind, omit to give notice, for they are the consequences which, in the experience of mankind, usually follow such omissions. To give notice is a matter of no difficulty, and whenever persons, treating for a chose in action, do not give notice to the trustee or executor, who is the legal holder of the fund, they do not perfect their title; they do not do all that is necessary in order to make the thing belong to them in preference to all other persons; and they become responsible, in some respects, for the easily foreseen consequences of their negligence." Dearie v. Hall, 3 Russ. 1 (for opinion on appeal, see 3 Russ, 55). 9Ryall v. Rowles, 1 Ves. Sr. 348, 9 Bligh (N.S.) 377 [sub nomine, Ryall v. Rolle, 1 Atk. 165].