Central Law Journal. ST. LOUIS, MO., JUNE 10, 1898. The opinion of the United States Supreme Court recently delivered by Mr. Justice Harlan in the case of Smyth v. Ames, 18 S. C. Rep. 418, prohibiting the enforcement of the Nebraska maximum freight-rate act of 1893 is the last of a long line of cases affecting railway property, and involving the power of legislatures to fix and regulate charges by public carriers. Until the decision of the now well-known case of Munn v. Illinois, it had always been assumed that railway property was protected against invasion by State authority through the clause in the constitution which prohibits interference with the "obligation of contracts," in accordance with the doctrine of the Dartmouth College case. But in the Munn case and other cases which followed it all property was held subject to a right of legislative supervision and regulation provided it was "affected with a public interest." This doctrine originally applied only to private grain elevators, which was the property involved in the Munn case, was by later decisions given a wider application and justified some of the courts in upholding statutes undertaking to regulate and fix arbitrarily the charges to be made by carriers. It became soon obvious that if the constitutional guarantees which protect the citizen against the legislature were to be of any avail, some way must be found to qualify the control over property conceded to it by these cases. A long line of decisions, culminating in the Nebraska case, have been rendered which have gradually established the doctrine that while the legislature may regulate the charges to be exacted by the owners of railroads, elevators, ferries, and other property "affected by a public interest," they derive this right from the supreme "police power" of the State, and must exercise it reasonably, so as not to violate those provisions of the constitution which guard the citizen against being deprived of his property by a State without due process of law. Applying this principle to railroads, it follows that while a State can by legislation and through legislative commissions fix the rates at which per sons and property shall be transported, if it fixes these rates at such an unreasonable figure as to operate as destruction or confiscation or deprivation of capital invested, the regulation is void and of no effect, and that this is wholly a judicial and not a legislative question; and, further, that such unjust regulation can be prevented by injunction. In the Nebraska case, though the action was nominally against certain officers of the State, the decision was in effect to uphold an injunction against the State itself, absolutely forbidding the enforcement of its whole freight tariff, on the ground of its injustice. The court holds that the State legislature can never in any case decide the question what is reasonable for railroads to charge so as to preclude a judicial examination of its action by federal courts. As to how the court is to determine what are and what are not reasonable rates, the answer is that the cost of the railroad, its running expenses, the average return on similarly invested capital are all to be taken into account and the court then decides whether the rate is fair or unfair. In the Nebraska case the court prepared a table showing the effect of the tariff, year by year, from 1891 to 1893, supposing it to be in operation on the seven railroads affected. In the last column the result is shown, and the result was that the profits would have been swept away. To sum up the principles of the decision, which the court explicitly states will apply to future cases, it is not enough to show that a State tariff prevents a railroad from paying its operating expenses, fixed charges, and a dividend upon its stock. This would make the profit to the railroad the sole consideration. A railroad is a public highway, and the "rights of the public" would be ignored if other matters were not taken into the account. These other matters are the fair value of the property invested, fictitious capitalization, and the question whether the rates exacted by the company in order to pay dividends, would "impose upon the public" a burden "for the purpose of realizing profits upon such excessive valuation or fictitious capitalization." What evidence is relevant to such an inquiry? The court says: "The original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses," are all matters for consideration; but "we do not say that there may not be other matters." NOTES OF IMPORTANT DECISIONS. FOREIGN CORPORATIONS-CONTRACTS-NEGOTIABLE PAPER. In Lanter v. Jarris-Conklin Mortgage Trust Co., decided by the United States Circuit Court of Appeals, Sixth Circuit, it was held that a State statute declaring it unlawful for any foreign corporation to do business or acquire property in the State without first registering its charter with the secretary of state, and in each county where it proposes to do business, and imposing a fine for violation thereof (Acts Tenn., 1891, ch. 122) does not render invalid, in the hands of an innocent purchaser for value, negotiable paper taken by a foreign corporation without complying with the statute, nor render unenforceable a trust deed, securing the same, on property in the State. The court said in part: "The general and well-settled rule in favor of negotiable paper is that an innocent purchaser for value, before maturity, is unaffected by the fact that the consideration was illegal, and the note void and unenforceable by one having notice of the facts. If the illegality of the consideration results from a statute merely prohibiting a business, or imposing a penalty, but does not declare a note or bill based upon such a prohibited transaction absolutely null and void, a bona fide holder of such paper will be protected. 1 Daniel, Neg. Inst., secs. 197, 198; 2 Rand. Com. Paper, sec. 559; Farmers' Nat. Bank v. Sutton Mfg. Co., 6 U. S. App. 312-334, 3 C. C. A. 1, and 52 Fed. Rep. 191; Williams v. Cheney, 3 Gray, 329; Cazet v. Field, 9 Gray, 329; Converse v. Foster, 32 Vt. 828; Bank v. Thompson, 42 N. H. 369; Vallett v. Parker, 6 Wend. 615; Vinton v. Peck. 14 Mich. 286; Lacy v. Sugarman, 12 Heisk. 354-364. There are a few exceptions to this general rule, mainly dependent on statutes against usury and gaming. The Tennessee statute relied upon as making this note void, contains no provision either expressly or impliedly declaring a note made in course of such a prohibited business void in the hands of an innocent holder for value. In Vinton v. Peck, cited above, the note in suit was made on Sunday, in violation of a statute prohibiting the doing of business on that day. Campbell, J., said: This note bore on its face a legal date, which was placed upon it for the express purpose of obtaining credit for it as a lawful instrument, and it would certainly be valid in the hands of a bona fide holder. The statute has not declared that notes made contrary to the Sunday law shall be void under all circumstances. Their invalidity is only to be implied from the prohibition of Sunday business, and under such a statute a bona fide holder is protected.' "In Cazet v. Field, 9 Gray, 329, a note given in violation of a statute regulating the liquor business was held valid in the hands of a bona fide holder. In Williams v. Cheney, 3 Gray, 215-222, a note executed to a foreign insurance company, engaged in doing business within the State in violation of a statute prohibiting the doing of business until qualification under the law, was held valid in the hands of a bona fide holder, although the payee could have maintained no action thereon. In Converse v. Foster, 32 Vt. 828, the suit was upon a note made for the purchase of liquor, in violation of a statute prohibiting the business. The note was assigned to an innocent purchaser for value, who brought suit thereon. The court said: "The statute of this State in force at the time of this transaction prohibited all sales of spirituous liquors, except for certain specified purposes, and by certain persons duly licensed therefor, and imposed a penalty for all acts of selling in contravention of the law, but contained no provisions in reference to the legal effect or binding force of such illegal contracts of sale, or of any securities given for the price of liquors so illegally sold. The English statutes against usury and gaming not only impose a penalty for such illegal acts, but expressly declare that all notes, bills, bonds and other securities given upon such illegal considerations, shall be utterly void. All the cases that have been cited, and all that can be, so far as we know, both English and American, upon this subject, turn upon this very distinction and difference between these statutes. In those cases in which the legislature have declared that the illegality of the contract or consideration shall make the security, whether bill or note, void, the defendant may insist upon such illegality, though the plaintiff, or some other party between him and the defendant, took the bill or note bona fide, and gave a valuable consideration for it. But, unless it has been so expressly declared by the legislature, illegality of consideration will be no defense in an action at the suit of a bona fide holder for value, without notice of the illegality, unless he obtained the note or bill after it became due. This doctrine is fully stated by Mr. Chitty and Judge Story in their treatises on bills and notes. See, also, Bank v. Barnard, 1 Hall, 70; Vallett v. Parker, 6 Wend. 615.' "The case of Lumber Co. v. Thomas, 92 Tenn. 593, 22 S. W. Rep. 743, has been cited as holding that the Tennessee act made void all contracts of corporations doing business in violation of the statutes. That was a suit by the non-complying corporation upon a contraet made in the course of a business conducted in the State without compli ance with the terms of the statute. The question as to whether a bona fide holder of negotiable paper would be affected, because of the illegal character of the business out of which the note issued, was not before the court. In the case of Lacy v. Sugarman, 12 Heisk. 354, it was held by the Tennessee Supreme Court that an innocent holder, for value, of a note made in violation of the act of congress, prohibiting business between belligerents during the Civil War, was protected, and might recover against the maker and indorsers. The mortgage to secure this note was a mere security, and followed the debt." SHERIFF LIABILITY OF SURETIES-LYNCHING OF PRISONER.-In State v. Wade, Sheriff, 40 Atl. Rep. 104, decided by the Court of Appeals of Maryland, it was held that a sheriff, in the absence of malicious intent, is not liable for the acts of a mob in taking a prisoner, charged with murder, from the county jail, wherein he had been confined, although such jail was insecure, and the guard had been removed therefrom and the keys given to an old and infirm negro, and the sheriff had knowledge of the existence of public excitement and had been requested by the prisoner and his counsel to remove him to a more secure jail. It was further held that the sureties on a sheriff's bond would not be liable for the acts of the sheriff in maliciously aiding a mob to lynch a prisoner in his charge. The suit was on the sheriff's bond on behalf of the children of the prisoner who was lynched. Bryan, J., in a concurring opinion, takes the express ground that the statute of Maryland, creating a liability for a wrongful act resulting in death, was not broad enough to cover the case before the court, so that on no theory could there be a cause of action. The principal opinion discusses the general principles of the liability of a sheriff and his sureties. MASTER AND SERVANT-SERVANT OF ONE MASTER AS THE SERVANT OF ANOTHER.-The very recent decision of the Court of Appeals of New York, in the case of Higgins v. Western Union Tel. Co., involves a somewhat novel application of the doctrine of the liability of the master for negligent acts of the servant. The court holds in that case that the doctrine of respondeat superior applies only when the relation of master and servant is shown to exist between the wrongdoer and the person sought to be charged with the result of the wrong, at the time and in respect to the very transaction out of which the injury arose, and that the fact that the party, to whose wrongful or negligent act an injury may be traced, was, at the time, in the general employment and pay of another person, does not necessarily make the latter the master and responsible for his acts. The master is the person in whose business he is engaged at the time, and who has the right to control and direct his conduct. Servants who are employed and paid by one person may, nevertheless, be ad hoc the servants of another in a particular transaction, and that, too, when their general employer is interested in the work. "Beyond the scope of his employment," says O'Brien, J., in the course of the opinion for the court, "the servant is as much a stranger to his master as any third person, and the act of the servant, not done in the execution of the service for which he was engaged, cannot be regarded as the act of the master. And if the servant step aside from his master's business, for however short a time, to do an act not connected with such business, the relation of master and servant is for the time suspended, and an act of the servant during such interval is not to be attributed to the master. Here the relation of master and servant between the conductor of the elevator and the defendant was suspended during the time that he was doing the work of the contractor in moving the plaintiff up and down in the shaft. "I am unable to distinguish this case in principle from the cases in this court already cited; and the best considered cases in other jurisdictions are to the same effect. Murray v. Currie, L. R. (6 Com. Pleas) 26; Rourke v. White Moss Colliery Co., L. R. (2 Com. Pleas Div.) 205. In the latter case Lord Cockburn stated the rule in these words: 'But when one person lends his servant to another for a particular employment, the servant, for anything done in that particular employment, must be dealt with as the servant of the man to whom he is lent, although he remains the general servant of the person who lent him.' The true test in such cases is to ascertain who directs the movements of the person committing the injury." BILLS AND NOTES-FORGED SIGNATURE-ESTOPPEL-RATIFICATION.-In Barry v. Kirkland, 52 Pac. Rep. 771, decided by the Supreme Court of Arizona, it appeared that a note was renewed by the maker, forging the signatures of his sureties. After its maturity, and without consideration, the sureties promised to pay, under apprehension that they had signed. The payee was not induced by the promise to do or omit to do anything to his disadvantage. It was held that they were not estopped to deny the genuineness of the signatures. A party whose signature to a note was forged, after its maturity, without consideration, or seeing it, and under the apprehension that he signed it, promised to pay. It was held that his promise was not such a ratification as would make him liable. The court said in part: "Under these circumstances, no foundation for an estoppel exists. 1 Daniel, Neg. Inst. sec. 859; Workman v. Wright, 33 Ohio St. 405; Moore v. Robinson, 62 Ala. 537; Crossan v. May, 68 Ind. 242. If it be contended that, without regard to the principle of estoppel, the defendants are liable as having adopted the forgery, the authorities cited by appellant will not sustain his contention, under the facts in this case, as a short review of the former will readily disclose. In Woodruff v. Munroe, 33 Md. 147, it was held: 'If in an action against an indorser of a promissory note by the bona fide holders thereof, it be shown that the indorsement was not genuine, and the defendant did not ratify or sanction it prior to the maturity of the note and its transfer to plaintiff, he is not lia 1 ble. But if he adopted the note prior to its maturity, and by such adoption assisted in its negotiation, he would be estopped from setting up the forgery in a suit by a bona fide holder. But any admissions by the defendant, made subsequently to the maturity of the note, would not be evidence that he had authorized the indorsement of his name thereon.' Bank v. Keene, 53 Me. 103, is a case where, on account of the defendant's admission of the genuineness of the signature, the bank refrained from proceeding against the person from whom it received the note, and the court held the defendant thereby estopped from denying his signature. In Greenfield Bank v. Crafts, 4 Allen, 447, the court was considering the case of a party acting with full knowledge of the manner in which the note was signed, and the want of authority on the part of the actor to sign his name, but who understandingly and unequivocally adopted the signature, and assumed the note as his own. Dow v. Spenny, 29 Mo. 390, went on the proposition that the lower court erred in charging the jury that the plaintiff must prove that the signatures of the defendants on the note were their genuine signatures. In Crout v. De Wolf, 1 R. I. 393, the third clause of the syllabus is, 'Where the person whose signature is forged promises the forger to pay the note, this amounts to ratification of the signature, and binds him.' But an examination of the case shows that evidence was offered to prove that the plaintiff had bought the paper in consequence of what the defendant said to him, and the court charged that if, before purchasing the note, plaintiff asked defendant if he should buy, and was told he might, defendant could not excuse himself on the ground of forgery. So that the case may be put upon the ground of estoppel. In Shisler v. Vandike, 37 Am. Rep. 704, it was held that a promise, by one whose indorsement on a note is forged, to pay the same, is void as against public policy. This is the entire line of authorities cited by counsel for appellant, and it will be seen that, in so far as they are applicable to the case at bar, they support, rather than impugn, the holding of the lower court. There are numerous authorities which hold that a forgery cannot be ratified. Brooke v. Hook is an English case reprinted in 3 Alb. L. J. 255. This was a case where the defendant's name was forged, and he had given a written memorandum that he would be responsible for the bill. Chief Baron Kelly places his opinion upon the grounds (1) that the defendant's agreement to treat the note as his own was in consideration that plaintiff would not prosecute the forger; and (2) that there was no ratification as to the act done, the signature to the note being illegal and void, and, though a voidable act may be ratified, it is otherwise when the act is originally, and in its inception, void. The opinion fully recognizes the proposition that when acts or admissions alter the Condition of the holder of the paper the party is estopped, but it is necessary that such a case be made. In McHugh v. Schuylkill Co., 67 Pa. St. 391, the defense to a bond was forgery. The court below charged that if the obligor subsequently approved and acquiesced in the forgery, or ratified it, the bond was binding on him. It was held that, there being no new consideration, the instruction was error; also, that a contract infected with fraud was void, not voidable, and confirmation, without a new consideration, was nudum pactum. This proposition is recognized in 2 Daniel, Neg. Inst. section 1352: 'When no principle of estoppel applies, and when, through mistake. a party states that his signature is genuine, and afterwards, discovering his error, corrects it before the holder has changed his relations to the paper, or anyone has dealt with it upon the faith of his admissions, we know of no principle of law which prevents the forgery from being pleaded." Upon the principles laid down in these authorities, we cannot see how any mere promises to pay a forged note can lay the foundation for liability of the appellees, when there appear no circumstances to create an estoppel, and the promises were made after maturity, without consideration, and without full knowledge of the material facts in relation to said note." PARTNERSHIP-ILLEGAL CONTRACT-GAMBLING- - HORSE RACING.It is held by the Supreme Court of Montana, in Morrison v. Bennett, 52 Pac. Rep. 553, that an agreement between three persons to buy a race horse, each to pay one-third of the price and to own a one-third interest, and each to share equally the expenses of keeping and training the horse, and the losses and profits made from racing it, but one of them to be allowed $50 per month and his board for attending to and driving it, makes the parties partners as to ownership of the horse and profits and losses resulting therefrom; that where three persons entered into an agreement to buy a race horse, and race it for a stake against a horse owned by another, they to share equally in the winnings, it being agreed among the three that they would import a better horse than the other party had, and deceive him as to its being an imported or a better horse, and one of the three secured possession of the winnings, and refused to share them with the others, no action for accounting will lie, as the agreement was dishonest and immoral; that where the purposes of a partnership agreement were dishonest and immoral, the law will not aid the parties thereto in adjusting their rights among themselves, on the ground that the purposes of such agreement have been accomplished and executed; and that where three persons agree to fraudulently induce another to bet with them on a horse race, and to divide the winnings among themselves, the agreement to divide the profits is not a subsequent collateral agreement founded on a new consideration, so as to bring it within the rule that such agreements are not contaminated by the original illegal agreement. EFFECT OF INSOLVENCY UPON THE STATUTE OF LIMITATIONS. The creditor of an insolvent debtor having a claim against which the remedy is not barred by the statute of limitations, may ignore the debtor's assigned estate and bring an action against the debtor to recover the debt, trusting to his future acquisition of property out of which payment may be had, or the creditor may resort to the fund or estate which his debtor has provided under the circumstances for the extinguishment of his debt; or he may abandon the fund, after having filed his claim, before participating in a dividend declared by the assignee, and bring his action, unless prohibited by the insolvency law. This separation of the debtor from his estate by the in or's property in the custody of the law introduces a third person into the situation and creates a new relation between the creditor and the assigned estate. An assignee or a receiver has taken the debtor's property for a particular purpose-to administer it and settle his affairs with his creditors. The assignee's position is one of trust, and to him the doctrine of trust relation has been applied; and so long as it exists the statute of limitations has no application and no length of time is a bar, because the possession of the trustee is the possession of the cestui que trust. This doctrine seems to have been first directly applied in England in Ex parte Ross, the case of a bankrupt. The lord chancellor said: "The effect of the commission is tervention of insolvency proceedings places clearly to vest the property in the assignees the right in personam, or the right in rem, as a choice of legal pursuits before the creditor. By the insolvency the personal liability is not affected with reference to the statute of limitations. It continues to run until action is brought. But as a proceeding against the sequestered estate is one in rem,2 the right of a creditor as affected by the sequestration may bring into question that statute; as where an assignment for the benefit of creditors has been made by a debtor and under the law, and direction of the court having jurisdiction of the matter, time for filing claims against the estate in the hands of the assignee has been fixed, and in pursuance of the same a claim is filed, but between the date of assignment and that of the filing, the statutory time within which an action might be brought on it against the debtor has elapsed. Clearly, the statute of limitations once put in motion is not arrested as against the debtor or his property except by some recognized rule of law. Eliminating from the discussion the matter of personal liability, what is the effect of sequestration upon the rights of the creditor? For, if they are fixed at the date of sequestration the formal filing of claims is a secondary matter governed by the direction of the court. Hence the lapse of intervening time becomes immaterial. Placing the debt for the benefit of creditors, and, therefore, they are trustees; and it is an admitted fact that unless debts are already barred by the statute of limitations when the trust is created, it is not afterwards affected by time." As there can be no difference in principle between voluntary and involuntary insolvency, sequestration of the debtor's estate is the act by which all rights of general creditors are determined. If a debt is not then barred by lapse of time it is provable and should be allowed to participate in the distribution of the estate. That is the law as applied in the United States.7 There is one exception to the unanimity of decision and that is from a United States District Court. Judge Deady expressed his dissatisfaction with the rule. But it is submitted that his decision betrays its weakness in the following language: "Of course a case may arise where the limitations upon the proof of the claim would expire between the filing of the petition and the adjudication in bankruptcy, in which event it might be necessary to hold that this period should not be counted in the limitation, or that the creditor should have some reasonable 2 Perry, Trusts, § 863, cases notę 2; Cholmondley v. Clinton, 2 Jac. & W. 141. 6 Ex parte Ross, 2 Glyn & Jam. 330. 77 Metc. 348; In re Leiman, 32 Md. 225 (1869); Parker v. Sanborn, 7 Gray, 191; In re St. Paul G. F. Ins. Co., supra; Von Sachs v. Kretz, 72 N. Y. 548; Kirkpatrick v. McElroy, 41 N. J. Eq. 539; Ludington v. Thompson, 4 App. Div. (N. Y.) 117; In re Eldridge, 12 Nat. B. Reg. 540; Wood, Limitations, § 202; Bump, Bankr. (10 Ed.) 581; Angell, Limitations, § 167; Houck v. Dunham, 92 Va. 211, 23 S. E. Rep. 238. 85 Sawyer, 320 (1878). |