author: BROOKE, J.

text:
    ZIELINSKI v. HERNIG.
    (No. 239.)
    (Court of Civil Appeals of Texas. Beaumont.
    June 4, 1917.
    Rehearing Denied June 13, 1917.)
    Bills and Notes <®=375 — Innocent Purchaser — Illegality of Transaction — Effect.
    A note given for issuance of corporation stock in violation of statute is not void and unenforceable by a purchaser in due course before maturity for a valuable consideration and without notice of the infirmity.
    [Ed. Note. — For other cases, see Bills and Notes, Cent. Dig. §§ 971-981.]
    Appeal from Harris County Court; Murray B. Jones, Judge.
    Suit by Peter Hernig against A. J. Ziel-inski. Judgment for plaintiff, and defendant appeals.
    Affirmed.
    E. Y. Hardway, of Houston, for appellant. Hunt & Teagle and Campbell, Myer, Myer & Freeman, all of Houston, for appellee.
   BROOKE, J.

This suit was instituted by the appellee against the appellant to recover on two promissory notes dated August 28, 1914, executed and delivered by the appellant to John H. Jones, each for the sum of $250, maturing two and four months after dates, respectively, and being payable in Houston, Harris county, Tex., and drawing 6 per cent, interest. Appellee further alleged that before maturity of each of said notes, he purchased the same in good faith, in due course for a valuable consideration from the said John H. Jones, and that at the time of the institution of said suit he was the legal and equitable holder and owner thereof. Appellee further alleged that at the maturity of said notes he caused the same to be protested in due course, the protest fees amounting to $11.35, and appellee sued to recover the amount of said notes and protest fees.

The appellant, in addition to general demurrer and general denial, by way of special answer, pleaded that the notes were without consideration, and were obtained by the said John H. Jones from him fraudulently, and that, the appellee, at the time he acquired said notes, knew of said fraud and failure of consideration for the notes, and did not pay an adequate consideration therefor, and that the appellee and John H. Jones conspired together for the purpose of cheating and defrauding the appellant. Appellant further pleaded that said notes were given in payment for stock of the Gas Products Company, a Delaware corporation, and that stock was issued to him in consideration of said notes, and before either of’ said notes were .mature or paid, and that the notes, being issued in payment for stock of a corporation, were void and unenforceable.

Upon the trial had upon the 18th day of February, 1916, a jury, which had therefore been demanded, was by both parties waived, and the whole ease submitted to the court, who took the case under advisement, and on, February 18, 1916, found for the appellee- and rendered judgment against the appellant in appellee’s favor for $532.34, with 6. per cent, interest from the date of said judgment until paid. Motion for new trial was-filed and overruled, and notice of appeal given, and the case is before this court properly for adjudication.

In addition to the above statement, it will,, perhaps, be well to set out the findings of fact and conclusions of law found by the court, as follows, to wit:

“Findings of Fact.
“I 'find that on the 28th day of August, A. D. 1914, in the city and state of New York, the defendant executed and delivered to John II. Jones the two notes sued on, dated August 28,. 1914, for the sum of $250 each, maturing two- and four months after date, respectively, payable in Houston, Harris county, Tex., and drawing interest at the rate of 6 per cent, per an-num, together with two other notes for the sum of $250 each, but which are not involved in this, suit.
“(2) I find that said notes were given by the defendant to the said John H. Jones in payment for stock of the Gas Products Company, a corporation not then in existence, but which was later incorporated on the 14th day of September, 1914, under the laws of the state of Delaware and having its principal office in Delaware, the purpose of said corporation being the transaction of a manufacturing business and other purposes; and at the time of the execution of the notes, it was agreed by Jones that he would immediately issue said stock to defendant; that thereafter on the 20th day of September, 1914, certificates for $2,000 in stock of' said corporation were issued to said defendant by said Gas Products Company in consideration of the execution of said notes, and that said stock was issued and delivered to the defendant before any of said notes were mature or paid.
“(3) I find that John H. Jones at the time of' the execution of the notes was engaged in promoting what was afterwards known as the Gas Products Company, a Delaware corporation, and at the time of the incorporation of said company said John H. Jones became its president, and' shortly thereafter the stock in said corporation was issued to the defendant and was signed by said corporation through said John H. Jones, as president.
“(4) I find that prior to the execution of the notes defendant had known John H. Jones for-only a few days, and that there was no fiduciary relationship between them; that Jones represented to defendant that the stock was a good business venture and would pay good returns. Defendant believed the representations made by Jones and acted upon them.
“(5) No evidence was introduced on the trial to show that the corporation laws of Delaware and New York are in any wise different from those of Texas.
“(6) I find that said notes were on the 4th and 9th days of September, 1914, respectively, indorsed in blank by the said John H. Jones and delivered to the plaintiff herein, and that plaintiff paid value for said notes, and bought same-before maturity and in the usual course of business and with no notice, actual or constructive,, of any vice or infirmity of the paper as between the immediate parties thereto.
“From the foregoing facts I arrive at the fol- ■ lowing conclusions of law:
“Conclusions of Law.
“(1) Whatever may have been the legal effect of the representations and dealings prior and at the time of the execution of the notes between Jones and the defendant, the defendant was the author of the notes and put them in circulation, and plaintiff is an innocent purchaser of said notes for value, and under the laws of this and other states is entitled to protection as such, and is entitled to a judgment against defendant for the amount of said notes, with interest and costs.
“(2) I further conclude that the notes having been executed in consideration for the promise of Jones to deliver the stock in the corporation are probably invalid and unenforceable as between the parties, unless the fact that the corporation was not then in existence would make the transaction merely a subscription for stock. I do not deem it necessary to pass on this question, that is, as to whether the transaction between Jones and Zielinski was a straight out sale of stock, or whether it was a subscription to stock.”

The assignments of error are:

(a) Because the court erred in rendering judgment for plaintiff against defendant, because the judgment rendered herein is contrary to the law, and is not supported by the evidence adduced on the trial of said cause.

(b) Because the judgment is rendered against the weight and preponderance of the testimony.

(c) Because as a matter of law the plaintiff is not entitled to recover.

The proposition is as follows:

“A note given in an illegal transaction, i. e., one forbidden by a statute, expressly or by necessary implication, is void and unenforceable by any one, even by a purchaser, in due course, before maturity, for a valuable consideration and without notice of the infirmity thereof.”

This question has been raised in various forms in a great many of th,e courts of this state heretofore. It was raised and passed upon by the Supreme Court in the ease of Thompson v. Samuels (Sup.) 14 S. W. 143. We transcribe in full the opinion of the court in that case, for the reason that we believe the correct solution of a proposition heretofore rather obscure in this state has been reached. The opinion, which was rendered by Acker, Justice, is as follows:

“It is contended that the court erred in rendering the judgment for defendant because, ‘the evidence haying shown that the note sued on had passed into the hands of an innocent purchaser for value before maturity, and without any notice of an illegal consideration, the fact that it may have been given for a gambling debt would not relieve the maker thereof.’ If the suit was by Hilmbrower to enforce the payment of a note given by Samuels for money lost by gaming, there could be no doubt that the defense interposed by Samuels would be good, for we believe it to be settled by the decisions in this state that such contracts are voidable as between the parties thereto, and also between the maker and indorsee after maturity, and will not be enforced by the courts if the defense be properly interposed. Norvell v. Oury, 13 Tex. 31; Connor v. Mackey, 20 Tex. 747; Monroe v. Smelly, 25 Tex. 586 [78 Am. Dec. 541]; Donnelly v. Bank, 3 Willson, Civ. Cas. Ct. App. § 169. But it is contended by appellee that the note sued on was not only voidable, but void, and therefore incapable of enforcement even in favor of an innocent indorsee for value before maturity; and the authorities supra are relied on in support of this contention. It is true that, in several of the pases cited, it is said that such contracts are void; but, upon a careful examination of ■the decisions by the Supreme Court, we are induced to believe that the word ‘void’ is used more through inadvertence than by design. If such contracts are void, then the illegality of the consideration may be made available as a defense under all circumstances, without regard to the innocence and good faith of the holder.
“The case of Norvell v. Oury, 13 Tex. 31, was a suit by the payee against the maker of the note for money lost at a game of cards. The defense was pleaded, and sustained by verdict and judgment in the trial court. On appeal it was contended that, the contract being valid in the state where it was made, the court erred in charging the jury that, if they believed that the consideration for the note was money lost by gaming, they should find a verdict for defendant, it matters not where the contract was made. It was held that the charge was not error, because plaintiff had not pleaded that the contract was made at a place where the law recognized it as valid, and could not, therefore, have proved it. The court remarked, in concluding the opinion, that, ‘Until the question is presented properly * * * for our decision, we will forbear the expression of an opinion whether a contract founded on a gambling consideration invalid by our own law can be enforced in our courts when entered into in a foreign state, where such consideration would be valid and lawful.’ The opinion does not hold such contracts void. The case of Connor v. Mackey, 20 Tex. 748, was a suit by the payee against the makers on a note given for a gambling consideration. The defense was pleaded, and sustained by the evidence and judgment. Justice Wheeler, in delivering the opinion of the court, uses this language: ‘The pase of Norvell v. Oury, 13 Tex. 31, is an authority for holding that a note given for money won at cards is void by our law.’ We have just seen that the case of Norvell v. Oury did not so hold, but simply that the defense was available in that suit between the parties to the contract; and that case is not an authority for the use of the word ‘void’ in Connor v. Mackey. We are therefore persuaded that Justice Wheeler used the word in the sense of ‘voidable,’ as many distinguished judges have done before and since his opinion in Connor v. Mackey. The case of Monroe v. Smelly, 25 Tex. 586 [78 Am. Dec. 541], was a suit on a promissory note for money lost at a game of tenpins, and transferred to the plaintiff by the payee after maturity. In delivering the opinion of the court, Justice Bell said: ‘The uniform tendency of thé later decisions is to treat all gaming contracts and all wagers as utterly void.’ And again: ‘We think that, in the true spirit and meaning of the exceptions to the old rule, all idle wagers, and all gaming contracts, may properly be held to be void.’ The plaintiff in the case of Monroe v. Smelly, having acquired the note after maturity, was in no better condition than the original payee would have been. The decision of the Court of Appeals in the case of Donnelly v. Bank, in which it is held that such contracts are void, is placed upon the authorities just considered and reviewed, in none of which, it will be observed, was it necessary to do more than hold the contract voidable to sustain the conclusion reached. The case of Connor v. Mackey, 20 Tex. 748, rests upon the authority of Norvell v. Oury, 13 Tex. 31; and the case of Monroe v. Smelly, 25 Tex. 586 [78 Am. Dec. 541], rests upon the authority of the two preceding cases. So the case of Donnelly v. Bank rests upon the authority of Norvell v. Oury, which we have seen is no authority for the doctrine that a contract entered into upon a gaming consideration is void. Following the inevitable sequence of this doctrine, it was held in the case of Donnelly v. Bank that a note given for a gaming consideration, ‘is void even in the hands of an innocent holder for a valuable consideration.’ This conclusion is rested upon the following authorities: Unger v. Boas, 13 Pa. 601; Tidmore v. Boyce, 2 Mill, Const. (S. C.) 200; Holman v. Ringo, 36 Miss. 690; Chapin v. Dake, 57 Ill. 295 [11 Am. Rep. 15]; 7 Wait, Act & Def. 87, 88. In Wait’s Actions and Defenses, it is said: ‘So a note or other security given in consideration of money won at gaming is void even in the hands of an innocent holder for a valuable consideration.’ The Texas cases of Connor v. Mackey and Monroe v. Smelly, being cited in support of the doctrine that such contracts are void, and the other authorities last cited by the Court of Appeals in Donnelly v. Bank, are cited by Wait in support of the doctrine that such contracts are void even in the hands of an innocent holder for value. We have carefully examined the cases of Unger v. Boas, 13 Pa. 601, Holman v. Ringo, 36 Miss. 690, and Chapin v. Dake, 57 Ill. 295 [11 Am. Rep. 15], and find that these decisions rest upon statutes expressly declaring all such contracts void. We have not been able to see the case of Tidmore v. Boyce, 2 Mill, Const. (S. C.) 200; but we believe it will be found that it rests, as do the others, upon a statute denouncing as void all contracts entered into upon a gaming consideration. In the absence of such statutes, we do not believe authority can be found for holding that the maker of a negotiable promissory note can defend against it, in the hands of an innocent holder for value, upon the ground that it was given in consideration of money won at gaming.
“In 1 Daniel, Neg. Inst. par. 197, it is said: ‘The bona fide holder for value, who has received the paper in the usual course of business, is unaffected by the fact that it originated in an illegal consideration, without any distinction between cases of illegality founded in moral crime or turpitude, which are termed “mala in se,” and those found in positive statutory prohibition, which are termed “mala prohibita.” The law extends this peculiar protection to negotiable instruments because it would seriously embarrass mercantile transactions to expose the trader to the consequences of having the bill or note passed to him impeached for some covert defect. There is, however, one exception to this rule— that, when a statute expressly, or bjj necessary implication, declares the instrument absolutely void, it gathers no vitality by its circulation in respect to the parties executing it, though even upon such instruments an indorser may * * * be held liable.’ In Vallelt v. Parker, 6 Wend. [N. Y.] 615, it was said: ‘Wherever the statute declares notes void, they are and must be so in the hands of every holder; but, where they are adjudged by the court to be so for failure or illegality of the consideration, they are void only in the hands of the original parties, or those who are chargeable with, or have had notice of, the consideration.’ To the same effect are the following authorities: Story, Prom. Notes, par. 192; Pars. Cont. 457, 458; Story, Bills, par. 189. While gaming of various kinds is denounced by our Penal Code, we have no statute in this state declaring that all contracts entered into upon gaming considerations are void. We are of opinion that the court below erred in rendering judgment for the defendant; and, as there is no controversy as to the facts that appellant acquired the note before its maturity for a valuable consideration, and without notice of any vice in the consideration for which it was executed, and that the notes remain unpaid except the sum of $4.50, credited thereon as interest, the judgment of the court below is reversed, and judgment is rendered here for appellant for the amount for which the note was given, and interest at 10 per cent, per an-num from the 1st day of September, 1887, less the credit thereon, and all costs.”

In addition to the opinion set out above, the matter has recently received thorough consideration in a most learned opinion written by Chief Justice Huff of the Amarillo Court of Civil Appeals, in the case of Lockney State Bank v. Martin, reported in 191 S. W. 796. A portion of said opinion is as follows :

“The note on its face shows to be a plain, promissory, negotiable note, payable to R. _L. Underwood or order, and without any indication on its face for what it was given or that the Bankers’ Trust Company was in any way connected with it. The facts are uncontroverted that Underwood took the note and traded it to Waller & Dyer for an automobile in the town of Eloydada; that they took this note in part payment of' the automobile, together with some horses and a small amount of money; that Underwood represented to them that Martin had executed to him the note in payment of a span of mares that Underwood had sold_ to Martin. The evidence is conclusive that this note was then indorsed in blank by Underwood and delivered to Waller & Dyer, and that it was so transferred before maturity. Some of the testimony is that it was transferred in the latter part of February. Martin himself shows that he knew that Underwood had the automobile not later than in June following its date. There is no controversy in the testimony but that Waller & Dyer paid value before maturity of the note, and that they had no notice that it was executed for stock in the corporation. The evidence also shows that within a few days after selling this auto to Underwood for the note, in a deal for another auto in the town of Amarillo, Waller & Dyer procured the money from appellant bank to pay therefor, executing their note for something over $600, and put the note in question up with the bank as collateral security therefor. All the bank officials testifying state that they had no notice or knowledge that this note was given for stock in the corporation. Martin himself admits that he never told any of these parties that he had executed the note on that consideration. The evidence is certain that neither the bank nor Waller & Dyer had any notice of the consideration for the note until after its maturity. There is an assignment to the effect that the evidence does not conclusively show that the Bankers’ Trust Company issued the stock to Martin for the note. Without discussing this evidence, we are inclined to believe the testimony was not so conclusive to that effect that the court was authorized to take the case from the jury, but that he should have submitted the question to the jury.
“On the question of whether or not an innocent holder can recover on a note given for stock in corporation, the decisions of this state leave the question very much in doubt This court, in the case of Prudential life Insurance Co. v. Smyer, 183 S. W. 825, hold that a note given for stock in a corporation is void in the hands of an indorsee for value, and without notice of its illegal issue. A writ of error has been granted by the Supreme Court in that case, on the ground, so we are informed, that there is doubt by that court as to the correctness of the holding with reference to an innocent holder of such note. The Court of Civil Appeals for the Fifth District, in the case of Republic Trust Co. v. Taylor, 184 S. W. 772, reached the same conclusion as did this court in the Smyer Case. In F. & M. Bank v. Falvey, 175 S. W. 833, the Court of Civil Appeals for the First District announced the same rule, while the question was not there necessary to a decision of the case. This coux-t, in the case of Jones v. Abernathy, 174 S. W. 682, announced substantially the same rule, but not on a note given for stock. It should be noted, however, the holding therein was based upon a statute which expressly provided such indebtedness secured by a lien upon railroad property, without complying with other provisions of the act, should be void. In the case of Sturdevant v. Falvey, 176 S. W. 908, the court found and held in that case that the indorsee had notice that the note was given for the issuance of stock by the note itself. The action of the Supreme Court in the Smyer Case, having cast a doubt on the correctness of the holdings by this court, has induced us to again enter into an examination of the authorities, which has resulted in bringing us to the same condition of mind the Supreme Court appears to be in. ‘The protection which the law extends to an innocent holder, who for value in the usual course of trade has received negotiable paper, is of no avail where the the statute in terms, or by unavoidable implication, has pronounced the instrument absolutely void.’ Ruling Case Law, vol. 3; Bills and Notes, par. 225.
“As a general rule, one who executes a negotiable instrument, knowing it is subject to barter and sale in the commercial world, and does not put into it words which give warning to •others not to buy it, is estopped to make a defense after it has passed into the hands of the holder in due course of trade. ‘Wherever the statutes declare notes void, they are and must be so in the hands of every holder; but where they are adjudged by the court to be so, for failure or illegality of the consideration, they are void only in the hands of the original parties, or those who are chargeable with or have had notice of the consideration.’ Vallett v. Parker, 6 Wend. (N. Y.) 615. The above is cited and quoted in Bohon’s Assignee v. Brown, 101 Ky. 354, 41 S. W. 273, 38 L. R. A. 503, 72 Am. St. Rep. 420. ‘The effect of illegality on a bona fide purchaser is held by. the authorities to be different from that of mere insufficiency of consideration, at least in certain cases. Where the consideration is declared by the decisions of the court or by statutory enactments to be simply void on account of illegality, it does not affect the validity of the contract any more than the mere absence of a consideration -would affect it; and the bona fide holder of a commercial instrument would nevertheless be able to maintain his action upon it. But where the statute making the consideration illegal declares a contract founded on such a consideration to be absolutely void, the language of the statute must be given its proper effect, and so the courts have held that the commercial paper founded on such consideration is void, even in the hands of bona fide holders.’ Tiedemann on Commercial Paper, par. 178. Where the statute merely declares •expressly or by implication that the consideration shall be deemed illegal, the bill or note founded upon such consideration will be valid in the hands of a bona fide holder without notice, but the burden of proof will be upon the plaintiff.’ 1 Daniel on Negotiable Inst. par. 198.
“The constitutional provision (article 12, par. •6) with reference to issuing stock is: ‘No corporation shall issue stock or bonds except for .money paid, labor done, or property actually received, and all fictitious increase of stock or indebtedness shall be void.’ Article 1146, R. C. S., provides that a corporation violating this provision forfeits its charter; ánd article 1147, R. C. S., provides when stock is issued for anything but money, labor, or property, the Attorney General may institute' quo warranto proceedings to cancel .and hold for naught such stock. These provisions and others, it appears to us, simply show that the law applies to the corporation and its stockholders, rendering the issuance of stock without money paid illegal, and the stock' therefore void. It does not occur to us that the Constitution or the statutes intended to inflict upon innocent third parties a penalty that should be borne by a corporation or stockholder seeking to foist upon the public a worthless concern. The execution of a note for such stock is doubtless void as between the corporation and the maker of the note. The Constitution and laws do not declax-e the contract absolutely void, the consideration of which is void or illegal. It must, if so held, be adjudged by the courts on the ground that the note is given for an illegal or void consideration. It is not by an unavoidable implication from the wording' of the law made manifest that it was the pui-pose thereof to declare such note void absolutely as to all the world. It is the issuance of the stock for the note which is forbidden. It is such act which subjects the corporation to a forfeiture of its charter and which will cancel the stock. It appears to us that in constniing the Constitution it has been treated as if it declared the note given for the stock absolutely void. This is not our interpretation. It declares the issuance of stock, or, in other words, the consideration for the note, illegal or void. Union Trust Co. v. Preston National Bank, 136 Mich. 460, 99 N. W. 399, 112 Am. St. Rep. 370 [4 Ann. Cas. 347]; Hart v. Livermore, 72 Miss. 809, 17 South. 769. Certain conditions may arise which would estop the corporation or stockholder from defeating the obligation. The law which is intended to protect innocent third parties ought not to be construed so as to defraud others who do not know of such fraud or illegal acts. The doctrine of estoppel has been applied by this coui't to notes of this character in the interest of the creditors of a corporation upon it becoming insolvent. We held a corpo-l-ation in such a situation would preclude the contention by the maker that the note was void. McWhirter v. First State Bank, 182 S. W. 684; Thompson v. Bank, 189 S. W. 116. If this proposition there announced is sound, the note is not absolutely void as to all the world. If the maker in that instance could not defeat the creditors out of collection, the l'eason is as strong, it occurs to us, that the maker should not defeat an innocent purchaser of his note, which he had knowingly placed in circulation without any evidence of its character or'the consideration upon which it was based. He should be estopped from claiming that he executed it in violation of the law and for the purpose of defeating the law. The case of Mason v. Bank, 156 S. W. 366, is cited in the Taylor Case, supra, apparently as supporting the proposition that the note is absolutely void. In that case the court held according to the plea that the holder had notice of the note’s infii-mities, and hence he stood in the shoes of the original payee. The Mason Case, also, while apparently holding the note void, yet distinguishes it from Mathis v. Pridham, 1 Tex. Civ. App. 58, 20 S. W. 1015, and Nenny v. Waddill, 6 Tex. Civ. App. 244, 25 S. W. 309, on the ground that those cases were brought on behalf of the creditors of the corporation. Those cases evidently recognized the lights of creditors to be the same as found by us in the Thompson and McWhirter Cases, supra. The case of Seeligson v. Lewis, 65 Tex. 215, 57 Am. Rep. 593, is cited in the Taylor Case as supporting the contention that the note is absolutely void in the hands of an innocent holder. In that case the note was given for a debt growing out of ‘cotton futures.’ Judge Stayton, who rendered the opinion, was careful to hold that as between the parties it was' void. Davis v. Sittig, 65 Tex. 497. The note in that case, though negotiable in form, was transferred without indorsement, was not in the possession of the payee, and the assignee was not shown to have paid value. In Wegner Bros. v. Biering, 65 Tex. 506, the question of innocent purchaser was not involved. The suit was brought by the payee in the note, who was charged with the illegal act in obtaining- the agreement to pay. Thg question discussed in that case was whether the entire note was tainted, since part of it was for a valid debt, and the other portion for an illegal consideration.
“In the case of Thompson v. Samuels (Sup.) 14 S. W. 143, the facts, as stated by the court, are: Ben Hilmbrower was indebted to J. R. Mahone, and Mack Samuels owed Hilmbrower $100 for money lost at a game of cards. Hilm-brower drew a draft on Samuels in favor of Mahone for the $100. In settlement of the_ draft Samuels executed and delivered his promissory note, dated March 1, 1887, payable to Mahone or bearer six months after date. Mahone transferred the note by indorsement to John 0. Thompson, before maturity, for a valuable consideration, without notice of any vice or illegality in the consideration for which it was given. The Commission of Appeals rendered the opinion in that case. Judge Acker reviewed various decisions in this state and others declaring that a gambling note was void and some that it was void in the hands of an innocent holder. .After citing cases from various states the court in the Thompson Case said: “That these decisions rest upon statutes expressly declaring all such contracts void,’ and ‘in the absence of such statutes, we do not believe authority can be found for holding that the maker of a negotiable promissory note can defend against it, in the hands of an innocent holder for value, upon the ground that it was given in consideration of money won at gaming.’ 1 .Daniels on Negotiable Instruments par. 197, is also quoted, and also the excerpt quoted by us from Vallett v. Parker, 6 Wend. (N. Y.) 615, and then concludes: ‘While gaming of various kinds is denounced by our Penal Code, we have no statute in this state declaring that all contracts entered into upon gaming considerations are void.’
“In the case of State Bank of Chicago v. Holland, 103 Tex. 266, 126 S. W. 564, the Supreme Court cites the case of Thompson v. Samuels with approval. It is said in that case: ‘In Thompson v. Samuels (Sup.) 14 S. W. 143, the question now -before the court was presented and decided. In writing the opinion Mr. Justice Acker reviewed prior decisions of this court at length and arrived at the conclusion that, while some of the opinions used the expression that contracts similar to that then under consideration were void, yet the court did not mean to hold such contracts to be void in the sense that they were not enforceable as between the maker of the contract and an innocent holder for value.’ It was further said therein that the Thompson Case had not been officially reported, ‘but it is authority, and appears to- be the latest authority, from this court upon the question.’ The expression or use of the tez-m ‘void’ is used in the Deutschmann Case, 102 Tex. 201, 105 S. W. 486, 114 S. W. 1174, with reference to contracts in violation of the provision of the Constitution now under consideration. The opinion in the Holland Case, supra, was written by the same judge, and is, we think, persuasive that the court only used the term ‘void’ as applicable between the original parties and persons having notice of the infirmity of the note.
“In Campbell v. Jones, 2 Tex. Civ. App. 263, 21 S. W. 723, it was held the holder of a note by indorsement before maturity for value, and without notice of the defense against the original payee, could recover, even though it was given in consideration of intoxicating liquors sold to the maker in violation of the law and the bond executed by the sellers, to the effect that they would not sell to habitual drunkards, nor to persons after having received notice from the wife, mother, etc. In the case of Scheffel v. Smith, 169 S. W. 1131, it is held a note given for commission on the sale of stock in a corporation in violation of the law could not be defeated in the hands of an innocent purchaser. It is said therein: ‘The laws of this s.tate do not expressly or by necessary implication declare void a note given for commissions on a sale of the stock of a corporation; * * * therefore, under the rule quoted in State Bank of Chicago v. Holland, the protection of the law is extended to the instrument here sued upon and to the appellee as a purchaser thereof for value before maturity and without notice of any infirmity in its execution.’
“In Seeligson v. Lewis, 65 Tex. 215, 57 Am. Rep. 593, it is there expressly held that the broker who effected the sale was a particeps crimi-nis, and could not recover for services rendered or money paid in the sale of the cotton futures. By analogy' and the principles of law, if a note given for a commission earned in the sal© of stock is good in the hands of an innocent holder, the note given for the stock should be held good under the same -circumstances. Snoddy v. American National Bank, 88 Tenn. 573, 13 S. W. 127, 7 L. R. A. 705, 17 Am. St. Rep. 918, is frequently referred to by the various courts and commentators as authority for the proposition that a note given for a gambling debt is void in the hands of an innocent holder. Thompson v. Samuels, above cited, rendered by our court, based on statutes against gambling, reached a different conclusion, on the ground that our statutes do not so declare the note void. It will be seen, upon investigation that nearly all the cases holding a note void in the hands of an innocent holder are based on statutes expressly so declaring. It appears to us, after examining- quite a number of authorities, that the rule that should govern this case is stated in Sondheim v. Gilbert, 117 Ind. 71, 18 N. E. 687, 5 L. R. A. 432, 10 Am. St. Rep. 23: ‘The authorities justify the statement that a defendant may insist upon the illegality of the contract or consideration, notwithstanding the note is in the hands of an innocent holder for value, in all those cases in which he can point to an express declaration of the Legislatuz-e that the illegality insisted upon shall make the security, whether contract, bill, or note, void; -but, unless the Legislature has so declared, then, no matter how illegal or immoral the consideration may be a commercial note in the hands of an innocent holder for value will be held valid and enforceable.’ See, also, Union Trust Co. v. Preston National Bank, 136 Mich. 460, 99 N. W. 399, 112 Am. St. Rep. 370 [4 Ann. Cas. 347]; Pope v. Hanke, 155 Ill. 617, 40 N. E. 839, 28 L. R. A. 568; Lynchburg National Bank v. Scott, 91 Va. 652, 22 S. E. 487, 29 L. R. A. 827 50 Am. St. Rep. 860; Citizens’ State Bank v. Nore, 67 Neb. 69, 93 N. W. 160, 60 L. R. A. 737 [2 Ann. Cas. 604].
“Under the rule above announced, in order for the note to be void in the hands of an innocent -holder, the statute or Constitution must expressly, or ‘by necessary implication, declare the instrument absolutely void.’ By necessary implication the statute must declare the note absolutely void. Where it is an inference by the court that the instrument is void, because of failure or illegal consideration, it is not void as to an innocent holder. It is against the law to gamble or bet on games. A note given for a debt so created is upon an illegal consideration and void as -between the original parties not because the statute so deelaz-es, or because of an implication from the terms of the statute. It is against the law to sell intoxicating liquors to an habitual drunkard, and a note for such sale is upon an illegal consideration. The statute does not so declare, neither is it necessarily implied, from the wording of the statute that it was the purpose of the act to declare a note so given void; but it is so, if at all, because adjudged to be upon an illegal consideration. The Constitution forbids the issue of stock except for money, etc., but it does not declare a note void executed for that purpose. It may be adjudicated and determined that it is upon an illegal consideration, and therefore void, but it is not a necessai-y implication from the Oonstitution that it so declares. The statutes do not declare the note void as a punishment inflicted upon the corporation, or for any other purpose, hut the charter of' the corporation may be forfeited and the stockholder’s stock canceled. The court mar from the constitutional and statutory provisions, adjudge and determine the consideration for the note to be illegal and therefore void, but the statutes do not expressly so declare, nor is it a necessary implication from the statutes that they declare such a note void.
“To hold the statute expressly or by implication declares a note void because it is an inference from the Constitution or statute that the consideration therefor is illegal and therefore void, unless the note is so declared by statute, would be to hold every note based upon an illegal consideration void in the hands of a bona fide holder. That such is not the rule is universally recognized by our courts and all the courts, except in such cases where the statute, as in Georgia, provides the defenses a maker may set up against a bona fide holder, under section 3694 of that state’s Code, ‘which declares that such a holder, without notice, shall be protected from any defenses set up by the maker, * * * except non est factum,' gambling, or immoral and illegal consideration, or fraud in its procurement.’ Jones v. Dannenberg, 112 Ga. 426, 37 S. E. 729, 52 L. R. A. 271. We cite in support of this rule Daniels on Neg. Inst.: ‘The bona fide holder for value, who has received the paper in the usual course of business, is unaffected by the fact that it originated in an illegal consideration, without any distinction between the cases of illegality founded on moral crime or turpitude, which are termed mala in se, and those founded in positive statutory prohibition, which are termed mala prokibita. The law extends this peculiar protection to negotiable instruments because it would seriously embarrass mercantile transactions to expose the trader to the consequences of having the bill or note passed to him impeached for some covert defect. There is, however, one exception to this rule, that when a statute expressly or by necessary implication declares the instrument absolutely void, it gathers no vitality by its circulation in respect to the parties executing it, though even upon such instrument an indorser may, as we shall hereafter see, be held to be a bona fide holder without notice. There are very few cases in which the statute renders such instruments absolutely void, and the most important, if not the only, instance now to be met with are the statutes against usury and gaming.’ Daniel on Neg. Inst. par. 197; also sections 807 and 808.
“It will be observed that in Thompson v. Sam-uels, supra, our court held a note for a gambling debt not absolutely void on the ground that our statute did not so expressly declare. In the case of Gilder v. Hearne, 79 Tex. 120, 14 S. W. 1031, the rule stated by Daniels is recognized as to usury. The statute of this state provides that when usury is charged the contract for interest is void. We therefore hold, under the established rule by all or nearly all of the courts, and by all the writers on negotiable instruments, that a note given for the issuance of stock in a corporation is void as between the original parties to the note and those with notice or who have not paid value; but in the hands of the holder, who acquired it before maturity for value, without notice of its infirmities, and in due course of trade, it is not as to such holder void.”

The two opinions referred to above and which we have liberally quoted have considered perhaps the larger part of the opinions heretofore handed down in this state with reference to the matter.

After having considered the matter as thoroughly as was possible with the authorities that we have, we are of opinion that the reasoning of the court in the last case above cited, and the conclusion arrived at, are both sound and abundantly supported by authority, and that the conclusion is, and of right should be, the law in this state upon the matter. The protection thrown around the innocent purchaser of commercial paper, in our judgment, and in so far as' can be legitimately accomplished, should be strengthened by our courts, and the vitality of same should not be impaired without a clear necessity, or a legislative enactment demand that it should be done. We are not unmindful of the fact that learned judges are in seeming conflict with the views above announced, and which we have adopted as the views of this court, but we are constrained to believe that the views announced and adopted by this court-are founded upon the right, and that they will prevail. We are therefore of opinion, after having considered the assignments of error, that as the whole matter is to be decided, not upon whether or not the notes were enforceable as between the original parties, because in our judgment they are not enforceable between the original parties in this cause, but the rights of the innocent purchaser for value creates a different situation, in our judgment, and therefore we deem it unnecessary to pass upon the rights, specifically, that have arisen or might arise between the original parties to this controversy.

Being of the opinion that the judgment of the lower court, as announced, is correct, each of appellant’s assignments is therefore overruled, and the judgment of the lower court is in all things affirmed.
      <£s>For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes


source: Caselaw Access Project

author: TALBOT, J.

license: Public Domain

text:
    HILL v. ALEXANDER.
    (No. 7779.)
    (Court of Civil Appeals of Texas. Dallas.
    April 7, 1917.
    Rehearing Denied June 16, 1917.)
    1. Pleading <&wkey;>110 — Plea oe Privilege— WAIVER.
    Where defendant’s plea of privilege to be sued in the county of his alleged residence was first sustained, and then, upon plaintiff’s motion, such action of the court was set aside on the last day of the November term, 1915, and the cause passed until the January term, 1916, which continued until the first Monday in March, and, during the January term defendant failed to appear and urge his plea of privilege, and no order was made in respect thereto, by defendant’s failure to appear during the January term and present his plea of privilege the plea was waived, and by operation of law overruled.
    [Ed. Note. — For other cases, see Pleading, Cent. Dig. §§ 231-233.]
    2. Brokers &wkey;>74^-REALTY Broker — Recovery oe Lost Commission erom Contracted Purchaser.
    A broker selling realty had no such interest in a contract for the purchase of .the land secured by him as authorized him to recover damages for lost commission from the proposed purchaser who refused to comply with the contract.
    [Ed. Note. — For other cases, see Brokers, Cent. Dig. § 62.]

      3. Judgment <&wkey;248 — Pdeadings and 'Pkooe.
    A judgment must be supported by both pleadings and proof, and the absence of either is fatal to the judgment.
    [Ed. Note. — For other cases, see Judgment, Cent. Dig. § 434.]
    Error from Dallas County Court, at Law; T. A. Work, Judge.
    Suit by George Alexander against W. T. Hill. To review a judgment for plaintiff, defendant brings error.
    Affirmed in part, and reversed and remanded in part.
    J. R. Stubblefield, of Eastland, for plaintiff in error: W. L. Mathis, of Dallas, for defendant in error.
   TALBOT, J.

• George Alexander sued W. T. Hill, in the county court at law of Dallas county, Tex., and in substance alleged: That Hill was a resident of Dallas county, Tex., or, if the plaintiff is mistaken as to the residence of Hill, that he was a transient person, or had more than one residence; that the plaintiff and the defendant entered into a contract under the terms of which plaintiff was to secure a purchaser of 320 acres of land in Morris county for a commission of 5 per cent, on the purchase price of the same, at the agreed price of $4,160, and that the aggregate amount of commissions which he was to be paid by Hill was $208 for securing the said purchaser; that the plaintiff secured such a purchaser, in the person of Et. L. L. Kniffin; that the terms of an exchange of property was agreed upon by the said Hill and Kniffin under and by virtue of which ICtfiffin was to exchange property in Dallas for the said 320 acres of land owned by the said Hill; and that, though Kniffin was ready and willing to carry out the said contract of exchange, Hill refused to do so, and on this account the defendant became liable and promised to pay to the plaintiff the said commission, aggregating $208. The plaintiff further alleged that Kniffin had agreed to pay him a commission of 5 per cent, for securing a purchaser for the property of the said Kniffin, which was situated in the city of Dallas, and that this commission amounted to the sum of $208, and that Hill had full knowledge of this contract, and consented to the same; that by reason of the plaintiff securing the purchaser of the property of the said Kniffin in the person of Hill, and by •reason of the further fact that Kniffin was ready and willing to carry out the said contract, and by reason of the further fact that Hill refused to carry out the said contract with Kniffin, the plaintiff was entitled to recover of Hill the commission which would have become due ,and payable to the said plaintiff by Kniffin, and on this account the plaintiff was entitled to recover ’ of the said Hill the additional sum of $208. The defendant Hill filed a plea of privilege to be sued in the county of his residence, that is, in Eastland county, Tex., and a general denial. At the first term of the court after the defendant was served with citation, that is, at the September term of the court, 1915, the defendant appeared, and urged his plea of privilege to be sued in Eastland county, and the plaintiff urged some exceptions to the said plea of the defendant, which were by the court sustained, and the defendant filed an amended answer, and the case was continued to allow the plaintiff to have time in which to meet the said answer, and at the next term of the court, that is, on the 3d day of November, 1915, the defendant appeared, and urged the said plea of privilege, and the same was sustained by the court, and later a new trial was granted to the plaintiff, and to the action of the court the defendant excepted. On March 22, 1916, the case was tried on its • merits in the absence of the defendant or his counsel, and judgment was rendered for the plaintiff for the sum of $416, and interest. On March 23, 1916, the defendant filed a motion for new trial, and on March 29, 1916, the defendant filed an amended motion for new trial, which was by the court overruled on April 28, 1916, to which action of the court the defendant duly excepted, and gave notice of appeal to the Court of Civil Appeals. The appeal was not perfected, but the case is now before this court on writ of error.

The first assignment of error is that:

“The court erred in overruling the defendant’s plea of privilege, and in not sustaining the same, as shown by the defendant’s bill of exception.”

This assignment will be overruled. As shown by the record, defendant’s plea of privilege to be sued in the county of his alleged residence was first by the trial court sustained. Then upon motion of the plaintiff, Alexander, that action of the court on the last day of November term, 1915, of the court was set aside and the cause passed until the January term, 1916. The January term of the court began on the 3d day of that month, and continued until the first Monday in March, 1916. During the January term, 1916, of the county court the defendant, Hill, failed to appear and again urge his said plea of privilege, and no order was made with respect thereto. At the March term, 1916, of the court, and on the 22d day of said month, the ease was called for trial, and the defendant, Hill, .failing to appear either in person or by attorney, a verdict and judgment were rendered in plaintiff’s favor for the amount sought to be recovered. There is no assignment of error complaining of the action of the court in setting aside its order sustaining the defendant’s plea of privilege to be sued in the county of his residence, and, as shown by the record, no further order was made by the court in reference to such plea. The trial judge, in his qualification of the bill of exception found in the record reserved by the defendant, Hill, after stating the course taken with reference to the plea of privilege and the proceedings upon the whole case, substantially as stated in this opinion, expressed the opinion that, as consequence of the defendant’s failure to appear during the January term of the court and present his said plea of privilege, the same was waived and by operation of law overruled. This, we .think, is the correct view of the matter, and the plaintiff in error, Hill, is in no position to complain and have the case reversed because said plea was not sustained and the cause transferred to the county of his residence.

The third assignment of error is as follows:

“The pleadings in this case are not sufficient to warrant a verdict for the sum of $416 and interest thereon, in this: The plaintiff seeks to recover a commission from _ the defendant, on account of the profits, which he could have made, by the sale of property which belonged to Kniffin to the defendant, and it is not shown that the plaintiff had any interest in the property which belonged to Kniffin, or that the value of Kniffin’s property had diminished, and further it is not shown that the plaintiff was other than a mere selling agent or broker, and had no such interest in the contract with the said Kniffin as would entitle the plaintiff to recover from the defendant, and the pleadings of the plaintiff are not sufficient to warrant a verdict for the sum of $416, and do not show a cause of action for said sum of money.”

The proposition advanced under this assignment is that:

“The plaintiff was not entitled to recover from the defendant the sum of $20S, which he would have earned from Kniffin, by making a sale of Kniffin’s property, even though the defendant contracted to purchase Kniffin’s property, and thereafter refused to consummate such contract.”

This assignment and proposition must be sustained. The plaintiff, Alexander, sought to recover, and did recover, of the defendant, Hill, a judgment not only for the sum of $208, as commissions which he alleges the defendant agreed to pay him for securing a purchaser of the defendant’s property, but also for the sum of $208 which plaintiff claims he would have received from Knif-fin for making a sale of Kniffin’s property. It was not alleged that the plaintiff, Alexander, had any interest in Kniffin’s property, or that the value of said property had diminished, and we find no fact alleged which would entitle the plaintiff, Alexander, to recover any sum in excess of the $208 which it is alleged defendant, I-Iili, agreed to pay to plaintiff for securing a purchaser of his (defendant’s) property. It is alleged, in substance, that at the instance of the defendant, Hill, the plaintiff, Alexander, after great diligence and in an effort to find and procure a purchaser of defendant’s 320 acres of land, finally secured the contract alleged with Kniffin, but the only allegations bearing in any degree upon plaintiff’s claim of right to recover the $208 which he says he would have been entitled to receive from Kniffin had said contract been carried into effect are as follows:

“And by agreement made and entered into between the plaintiff and Kniffin, of which defendant had full knowledge and notice, and to which he expressly consented, plaintiff was to receive a commission upon the consummation of said deal, from the said Kniffin in a sum equal to the- amount of commission of said deal he was entitled'to receive from the defendant, to wit, the sum of $208.”

These allegations may serve to show that the defendant, Hill, knew that the plaintiff, Alexander, was to receive from Kniffin a commission for securing the alleged contract for the exchange of the lands between Hill and Kniffin amounting to $208, and consented thereto, but they do not show any promise whatever on the part of the defendant to pay to plaintiff said amount or liability on the part of the defendant in any event therefor as a result of the breach of said contract. Nor is such liability shown by any other allegation in the petition. In Tinsley v. Dowell, 87 Tex. 23, 26 S. W. 946, it is held:

“That a mere selling- agent or broker has no such interest in a contract for the .purchase of land secured by him as authorizes a recovery of damages in the way of lost commissions from the proposed purchaser who has refused to comply with the contract.”

And to the same effect are the holdings in the cases of Tinsley v. Anderson, 33 S. W. 266; Le Master v. Dalhart Real Estate Agency, 56 Tex. Civ. App. 302, 121 S. W. 185; McGrew v. Norris, 140 S. W. 1143; Yzaguirre v. Garcia, 172 S. W. 139.

The effect of the recovery in this case under the allegations of the petition is to make the defendant, Hill, liable to the plaintiff, the real estate broker, for the commissions which the latter claims he was entitled to receive from Kniffin simply because defendant agreed to purchase Kniffin’s property and thereafter refused to carry out the contract. Such we do not believe is the law. The plaintiff, Alexander, testified:

“My commission in the sum of $416 was agreed upon, Mr. Hill agreeing to pay one-half, or $208, and Mr. Kniffin paying one-half, or $208, representing 5 per cent, on each tract. Mr. Kniffin agreed to pay one-half of said commission, and instructed Mr. Hill to pay same to me out of said $340 cash Kniffin was to receive from Mr. Hill in exchange of said lands and properties. Said commission was to be paid to mo on the following morning, when Mr. Hill and Mr. Kniffin were to meet and exchange deeds to their property, all of which was fully understood and agreed upon by and between Mr. Hill and Mr. Kniffin at that time.”

Counsel for the plaintiff, Alexander, agrees that this testimony shows that the defendant, Hill, not only knew the terms between Kniffin and said Alexander for his commissions and agreed to them, but that he agreed to pay those very commissions out of moneys he was due Kniffin on the trade between Kniffin and plaintiff, Alexander, and hence liable.

If it should be conceded, which is .not done, that this testimony shows an absolute promise or agreement on the part of the defendant, Hill, to pay the commission which Kniffin agreed to pay plaintiff, still such, a promise or agreement is not alleged, and the judgment in this respect is without allegations to support it. It is elementary that a judgment must be supported by both pleadings and proof, and that the absence of either is fatal to the judgment. The rule announced in the authorities cited by the plaintiff, Alexander, is not believed to be applicable. If any one has- a cause of action against the defendant, Hill, for refusing to carry out the alleged contract for the purchase of Kniffin’s property, it is Kniffin, and not Alexander, the broker. It ■cannot, we believe, be said that the loss of the commissions which the plaintiff alleges he would have received from Kniffin had the trade for the exchange of lands between the defendant and Kniffin been consummated was a natural and probable consequence of the breach of the contract, and hence too remote to be recovered by plaintiff as an element of his damages against the defendant, Hill.

The other assignments of error need not be discussed. Our conclusion is that the judgment of the court below in favor of the plaintiff, Alexander, against the defendant, Hill, for the sum of $208, the amount of commissions agreed to be paid the plaintiff by Hill for his services in securing thie contract in question with Kniffin, should be affirmed, and that said judgment for the ■'$20S, the amount plaintiff alleges he was entitled to receive from Kniffin for securing •said contract, should be reversed, and the cause remanded for a new trial upon that phase of the case; and it is so ordered.'
      ®=>Por other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes

      <5fcs>For other cases see same tonic and KEY-NUMBER in all Key-Numbered Digests and Indexes


author: BOYCE, J.

text:
    GUARANTY STATE BANK & TRUST CO. v. THOMPSON et al.
    (No. 1186.)
    (Court of Civil Appeals of Texas. Amarillo.
    May 30, 1917.)
    T. CORPORATIONS <&wkey;559(5) — Insolvency and Receivers — Preferences to Creditors — Trust Fund Doctrine.
    Under Rev. St. 1911, art. 2128, § 3, providing for the appointment of receivers for in.-solvent corporations, held that,_ after the appointment of a receiver for an insolvent corporation in a proceeding which contemplates the ■administration and sale of the property for the 'benefit of those interested therein, no one will be permitted to acquire a lien thereon by •attachment, judgment, or otherwise.
    [Ed. Note. — For other cases, see Corporations, •Cent. Dig. §§ 2248, 2259.]
    .2. Corporations <&wkey;556 — Insolvency and Receivers — Necessary Parties — General Creditors.
    While the receiver of an insolvent corporation appointed under Rev. St. 1911, art. 2128, .§ 3, takes only such interest as the owner had at ■the time the court took jurisdiction, and valid ■existing liens cannot be affected unless the lien-holder is made a party to the suit, it is not necessary to make general creditors parties; as they are bound to take notice of the proceeding from the general notice to creditors.
    [Ed. Note. — For other cases, see Corporations, Cent. Dig. §§ 2219, 2226.]
    3. Corporations <&wkey;560(5) — Insolvency and Receivers — Jurisdiction.
    Where a court had jurisdiction to appoint a receiver and administer the property of an insolvent corporation, it could convey such title as the corporation had at the time it took possession thereof.
    [Ed. Note. — For other cases, see Corporations, Cent. Dig. §§ 2254, 2262.]
    4. Receivers &wkey;^l40 — Sale Under Order of Court — Collateral Attack.
    Where a court had jurisdiction to appoint a receiver and administer the property of an insolvent corporation, a creditor having no interest in the property at that time could not subsequently acquire a lien and question, in a collateral proceeding, the power of the court to sell the property.
    [Ed. Note. — For other cases, see Receivers, Cent. Dig. § 246.]
    5. Appearance <&wkey;8(4) — Motions—Receivership.
    In a proceeding for the appointment of a receiver and the administration of the property of an insolvent corporation, a creditor by a motion to vacate the receivership and dismiss that part of the proceeding thereby became a party to the suit.
    [Ed. Note. — For other cases, see Appearance, Cent. Dig. §§ 31-33.]
    6. Receivers <&wkey;140 — Sale—Collateral Attack-Claim in Judicial Proceeding.
    Where a party to the suit invoked a decision of the question of the insolvency of the corporation and the right of the court to administer its assets as a trust fund in that proceeding, and had a trial on the issue upon full introduction of the evidence, it is estopped, in a collateral proceeding, to question the right of the court to proceed with the sale of the property on such theory.
    [Ed. Note. — For other cases, see Receivers, Cent. Dig. % 246.]
    7. Receivers &wkey;>140 — Corporations — Motion to Vacate Receivership — Collateral Attack on Sale.
    A motion to vacate the receivership which also raised the issue of the insolvency of the corporation and the right of the court to administer its assets as a trust fund was in effect an intervention, and did not raise a collateral issue.
    [Ed. Note. — For other cases, see Receivers, Cent. Dig. § 246.]
    8. Execution &wkey;sl72(3) — Injunction — Subject of Reliei^-Cloud on Title of Real Estate.
    Rev. St. 1911, art. 4643, § 3, provides that district and county courts may grant injunction, where a cloud would be put on the title of real estate being sold under an execution against a person, partnership, or corporation having no interest in such real estate, or where irreparable injury is threatened irrespective of any remedy at law. Held, that the purchaser of property at a sale by the receiver of an insolvent corporation under order of the court may enjoin the sale of the property under execution in a subsequent suit against the corporation, although the facts showing the superiority of plaintiff’s title were a matter of record.
    [Ed. Note. — For other cases, see Execution, Cent. Dig. §§ 522, 523.]
    Appeal from District Court, Dallas County; W. F. Whitehurst, Judge.

      Suit for injunction by D. H. Thompson and another against the Guaranty State Bank & Trust Company and another to enjoin the sale of property under execution. Judgment for plaintiffs, and named defendánt appeals.
    Affirmed.
    Leake & Henry, of Dallas, for appellant. Supple & Harding, of Waxahaehie, and Lively & Goggans, of Dallas, for appellees.
   BOYCE, J.

On April IT, 1912, the judge of the Sixty-Eighth judicial district of Dallas county, in cause No. 11188c, D. H. Thompson v. Model Brick Company, appointed a receiver for the property of the defendant corporation, on allegations made by the plaintiff' in said suit, who had sued on an indebtedness alleged to be due him by said corporation, that said corporation was insolvent and was a non-going concern, and its properties about to be sold under executions on judgments against said corporation obtained by other creditors. The receiver qualified on April 19, 1912, and a general order of allowance to creditors to intervene in said suit was entered on May 7, 1912. Numerous creditors did intervene, and their claims, as well as the claim of the plaintiff in said suit, were established by judgment of the court. All of the property of the corporation was sold under order of the court entered February 7, 1913, directing the receiver to sell the same free of all liens and incumbrances with a provision in the order that the claims of all persons and creditors against said property should attach to and be established against the fund arising from said sale in lieu of said property. The sale was made at public auction on March 4, 1913. The appellees, D. H. Thompson and J. F. Dunaway, purchased the property at this sale, which was subsequently confirmed by the court, and receiver’s deed was executed conveying the same. The proceeds of the sale, after paying costs of receivership, taxes, and a prior vendor’s lien on certain of the property of the corporation, were distributed among the intervening creditors who had established their claims, and the receivership was closed and the receiver finally discharged by order of the court entered April 27, 1914.

The appellant, the Guaranty State Bank & Trust Company, on the same day of the appointment of the receiver above mentioned, obtained a judgment for $2,334.30 against the Model Brick Company, and on May 22, 1912, had an abstract of said judgment recorded in Dallas county, in which county the real property of said defendant was situated. On October 28, 1912, said bank filed a motion in said receivership ease to vacate the receivership, setting up the existence of its judgment and the record of abstract thereof, and alleging that said corporation was not in fact insolvent and had not ceased to do business when the receiver was appointed, but that the receiver was appointed through fraud and collusion between the plaintiff and the said Company, without notice to any of the creditors of the corporation, the corporation itself appearing without service of notice and confessing the allegations of plaintiff’s petition. The plaintiff in the receivership suit, as well as several of the intervening creditors, contested this motion. A hearing was had and the motion was overruled. At the request of said bank the court filed conclusions of fact and law finding that said corporation was insolvent at the time of the appointment of a receiver therefor; that it had not been doing business for several months prior to such time, and, on account of its financial condition, had no expectation of being able to resume business; and concluding as a matter of law that the receiver was properly appointed for the purpose of conserving the assets of the corporation and distributing the same among its creditors'. The bank gave notice of appeal from said order, but never perfected the same. Said bank, except by such proceeding, never otherwise appeared in said suit, did not have its claim established therein, and did not participate in the distribution of the funds realized from the sale of its assets. It was not made otherwise a party to the suit, though the receiver gave it written notice of the order of the court allowing creditors to intervene and of the various proceedings in the receivership case in which the creditors might be interested. The said bank, on November 25, 1913, caused an execution issued on its judgment against the Model Brick Company to be levied on a part of the real estate purchased by the appellees at the receiver’s sale, -and was proceeding to have the same advertised and sold under said execution as the property of the Model Brick Company.

This present suit was filed by the appellees, Thompson & Dunaway, against appellant bank and the sheriff levying said execution to enjoin the sale of said property under said process. All of the foregoing facts were substantially set up in plaintiffs’ petition and established upon the trial of said injunction suit before the court, whereupon the court below entered judgment perpetually enjoining the sale of said property under said execution and any further sale by virtue of said judgment and canceling any apparent lien created* against the property purchased by appellees at the receiver’s sale by reason of the record of the abstract of appellant’s judgment against the model Brick Company. This appeal is from this judgment of the court.

Appellant presents numerous assignments of error, but they may all be disposed of in the consideration of two general questions, to wit: (1) The effect of the receivership proceedings and the sale on the lien which appellant would have acquired by the abstract of its judgment but for such proceedings; (2) whether the claim asserted by appellant and any sale thereunder would cast a cloud on appellees’ title so as to authorize a court of equity to interfere by injunction.

The assets of an insolvent corporation which has ceased to do business are a trust fund for the payment of its debts pro rata, and when the trust character attached to the property a creditor may not secure a preference lien (Lyons-Thomas Hardware Co. v. Perry Stove Mfg. Co., 86 Tex. 143, 24 S. W. 16, 22 L. R. A. 802; Orr Lindsley Shoe Co. v. Thompson, 89 Tex. 501, 35 S. W. 473), and article 2128, § 3, of the Revised Statutes provides for the appointment of a receiver where a corporation is in such condition. The acquisition of liens subsequent to the possession of the property by the receiver would be inconsistent with' the trust fund theory of the property of the insolvent corporation and the object and purpose of the receivership proceeding. So it is generally held that, after the appointment of the receiver in a proceeding which contemplates the administration and sale of the property for the benefit of those interested therein, no one will be permitted to acquire a lien, thereon by attachment, judgment, or otherwise. Texas Trunk Ry. Co. v. Lewis, 81 Tex. 1, 16 S. W. 647, 26 Am. St. Rep. 776; Reisner v. G., C. & S. F. Ry. Co., 89 Tex. 656, 36 S. W. 53, 33 L. R. A. 171, 59 Am. St. Rep. 84; Ellis v. Vernon Ice, Light & Water Co., 86 Tex. 109, 23 S. W. 858; Cowan v. Pennsylvania Plate Glass Co., 184 Pa. 1, 38 Atl. 1079; Fidelity Insurance, Trust & S. D. Co. v. Roanoke Iron Co. (C. C.) 81 Fed. 448; Temple v. Glasgow, 80 Fed. 447, 25 C. C. A. 540; Clyde v. Richmond Ry. Co. (C. C.) 56 Fed. 539; Atty. Gen. v. Atlantic Mutual Insurance Co., 100 N. Y. 279, 3 N. E. 193; Watkins v. Minnesota Threshing Machine Co., 41 Minn. 150, 42 N. W. 862; Cyc. vol. 34, pp. 200, 202, 231; High on (Receivers, §§ 138, 349; Gluck & Becker, Receivers of Corporations (2d Ed.) pp. 23, 167.

The receiver, it is true, takes only, such interest as the owner had at the time the court took jurisdiction of the property, and valid liens that have already been acquired cannot be affected unless the lienholder is made a party to the suit, but it is not necessary to make general creditors parties, as they are bound to take notice of the proceeding from the general notice to creditors; and where the court had jurisdiction its power to make sale of the property in its possession cannot be collaterally attacked. Hutchinson v. I. & G. N. Ry. Co., 111 S. W. 1101; New Britain Machine Co. v. Watt, 180 S. W. 624; State ex rel. Connors v. Shelton, 238 Mo. 281, 142 S. W. 417; American Bonding Co. v. Williams, 62 Tex. Civ. App. 319, 131 S. W. 652; High on Receivers, § 39, a to c; Cyc. vol. 34, p. 164. The decisions of our courts, with possibly the exception of the case of Central Coal & Coke Co. v. Southern National Bank of New York, 12 Tex. Civ. App. 334, 34 S. W. 383, are in harmony with these general principles, and the conclusions to which they lead. In the case of Texas Trunk Ry. Co. v. Lewis, 81 Tex. 1, 16 S. W. 647, 26 Am. St. Rep. 776, a creditor levied an attachment on property on the same day that a receiver was appointed for the corporation owning it, but before he qualified. The attaching creditor was not a party to the receivership proceeding, and after the sale of such property by the receiver under order of the court administering the receivership such creditor secured a judgment of foreclosure of his attachment lien and was proceeding to have the property sold under an order of sale, and the Supreme Court held that he acquired no lien by the attachment, and that the sale should be enjoined. The court, in the course of the opinion, quotes the following with approval from a New York case (Steele v. Sturges, 5 Abb. Prac. 442):

“The title of the receiver is of the date at which it is ordered that a receiver be aijpointed. Then the title of the parties to control dies, and then the title of the court and of its agent and officer immediately succeeds. * * * The order of the court cither impliedly or expressly takes the title from the parties and vests it in the receiver from that moment. It is enough, however, if it took it from the parties; after that no execution against them could be levied upon it.”

In the case of Central Coal & Coke Co. v. Southern National Bank of New York, 12 Tex. Civ. App. 334, 34 S. W. 383, above referred to, an abstract of judgment was recorded after the appointment of a receiver for the corporation owning the property; the property was sold in the receivership proceeding, and suit was brought by a purchaser at the receiver’s sale to restrain the sale of the property on execution issued out of the judgment which had been abstracted as above stated, and the court held that the rights of the creditors were not affected by the receivership proceeding because he was not a party to such proceeding, and it was not alleged that it was necessary for him to intervene therein. The opinion does not disclose the grounds on which the receiver was appointed, though it does appear that a general order was entered in the case requiring all creditors to intervene within 60 days. The court, in support of its conclusion as announced, cites the case of Railway Co. v. Johnson, 76 Tex. 421, 13 S. W. 463, 18 Am. St. Rep. 60; Id., 151 U. S. 81, 14 Sup. Ct. 250, 38 L. Ed. 81. We do not think, however, that such case supports such conclusion. In the said case of Railway Co. v. Johnson, upon the close of the receivership for the Texas & Pacific Railway Company pending in the Circuit Court of the United States in Louisiana, the property was ordered delivered back to the railway company, free of claims not established hy intervention in the receivership case within a limited period of time thereafter. Johnson at the time had a suit for damages for personal injuries pending in Texas against the receiver, and upon his discharge made the railway company a party defendant, and it sought to escape liability by reason of the order above mentioned. It was shown that during the receivership the earnings of-the road had been invested in betterments of value in excess of plaintiff’s claim. The holding in the case was that the Circuit Court could not thus deprive Johnson of the lien on the earnings which the law gave him to secure payment of the judgment he might obtain for his damages, and could not place the limitation made upon the time within which he might establish his claim by intervention. The difference between such ease and the case before the court in Central Coal & Coke Co. v. Southern National Bank of New York and in this case is suggested by the Supreme Court of the United States in its review of the Johnson Case by this statement:

“The general equity jurisdiction of the Circuit Court no doubt embraced the authority to hold possession of the property and to determine the rights of all persons who were parties, or who made themselves parties to the proceedings before it; and if the property sequestrated had gone to sale and a fund been realized for distribution, then, upon notice appropriate to proceedings in rem, the defendant in error might have been bound by the disposition thereupon made. * * * The order was not a decree in rem condemning the particular thing seized, but an order providing for the resumption of possession thereafter. * * * The case was not one of a fund in court, and the authorities upon the question of limitation of time for the presentation of claims to share in the distribution of such a fund are not in point.”

Besides, the lien in that case was one created by law, and was rightfully acquired during the receivership resulting from the receiver’s administration of the property.

We are of the opinion that, as the court had jurisdiction to appoint the receiver and administer the property of the insolvent corporation, it could sell such title as the corporation had .at the time it took possession thereof, and that the appellant, having no interest in the property at such time, could not subsequently acquire a lien and question in a collateral proceeding the power of the court to sell said property, and that the lien attempted to be acquired in contravention of the receivership proceeding and the theory on which the court was administering the property is without effect.

It is not necessary, however, for us to rest our decision on this conclusion, for we are of the opinion that the appellant bank appeared in the receivership case by its motion to vacate the receivership and dismiss that part of the proceeding, and thereby became a party to the suit; and, having invoked a decision of the question of the insolvency of the corporation and the right of the court to administer its assets as a trust fund in that proceeding, and having had a trial of that issue upon full introduction of the evidence, is now, in this collateral proceeding, estopped from questioning the right of the court to proceed to the sale of said property on such theory. Black on Judgments, 576, 691; 23 Cyc. 1120; 34 Cyc. 161; Buckles v. C., M. & St. P. Ry. Co. (C. C.) 53 Fed. 567; Spitley v. Frost (C. C.) 15 Fed. 305; Freeman on Judgments, § 325; Second Nat. Bank v. Haerling, 106 Iowa, 505, 76 N. W. 826; Wilson v. McIntosh, 30 Kan. 234, 1 Pac. 572.

The motion of appellant in the receivership case was, in effect, an intervention; it was not a collateral issue, but struck at the foundation of that proceeding in its challenge of the right of the court to proceed with the administration of the property in its hands.

With respect to the second question suggested by us, appellant contends that, since appellee’s title comes through the receiver’s sale, and the validity of any claim asserted by appellant is dependent on the effect thereon of the proceedings in the receivership case, and such proceedings are a matter of record, the claim thus asserted by appellant and any sale thereunder would not put a cloud on appellee’s title within the meaning of that term as settled by the decision of our courts prior to the adoption of our present statute on injunction. Section 3 of article 4643 provides that the judges of the district and county courts may grant writs of injunction:

“(3) In all cases where the applicant for such writ may show himself entitled thereto under the principles of equity, and as provided by statutes in all other acts of this state, providing for the granting of injunctions, or where a cloud would he put on the title of real estate being sold under an execution against a person, partnership or corporation, homing no interest in such real estate sttbject to the execution at the time of the sale, or irreparable injury to real estate or personal property is threatened, irrespective of any legal remedy at law.”

That part of the provision which we have italicized was added to the statute by the act of the Legislature of 1909. Section 6 of said act of 1909, which adopted this amendment, declared an emergency for the following reasons:

“The fact that there is now no well defined and settled statutes on law and equity to properly prevent a cloud on title of real estate and all other property exempt from forced sale, under and by virtue of the exemption laws of this state, being sold under an execution against a person, partnership, or corporation, having no interest in such real estate, or all other property so exempt at the time of the sales without resorting to the legal remedy at law, creates an emergency,” etc. Gammel’s Laws, vol. 14, p. 356.

Prior to this enactment of 1909 it had been held that a sale of real estate under execution, issued against a third person, might not be enjoined by the owner of the property .when the evidence of the superiority of. his title was a matter of record. It is to be noted, however, that the holding of the earlier and leading cases in which the rule was adopted is put on the ground that no irreparable injury is threatened in such cases, and the party had an adequate remedy at law in an action of trespass to try title and it was not held that the • threatened sale would not cast a cloud on the title. Carlin v. Hudson, 12 Tex. 203, 62 Am. Dec. 521; Mann v. Wallis, 75 Tex. 611, 12 S. W. 1124. But it was further held that, where the evidence that would defeat the apparent claim being sold through the execution sale .was not a matter of record, an injunction would lie for the reason that an innocent purchaser might thus acquire title and irreparable in-jurs' result. In applying these holdings from time to time some of the courts have said that a threatened sale would not put a cloud on the title where the facts showing the superiority of the plaintiff’s title were of record. Spencer v. Rosenthall, 58 Tex. 4, a decision by the Commission of Appeals; Purinton v. Davis, 66 Tex. 456, 1 S. W. 343; Cook v. T. & P. Ry. Co., 3 Tex. Civ. App. 145, 22 S. W. 58; Carver v. First National Bank, 18 Tex. Civ. App. 425, 45 S. W. 475; Heath v. First National Bank, 32 S. W. 778. The cases of Carlin v. Hudson, 12 Tex. 203, 62 Am. Dec. 521, the first decision on the question, and Mann v. Wallis, 75 Tex. 611, 12 S. W. 1123, are the leading qases, and in both of these the injunction was denied on the ground that the petition in the case did not show that plaintiff would suffer irreparable injury, but did show that in the event of the threatened sale plaintiff’s right might be fully protected by the legal remedy of trespass to try title; and in the case of Mann v. Wallis, an opinion by Judge Stayton, following this holding and the discussion of a cited case, it is added;

“The decision in that case is in line with all the decisions which hold that injunction will issue to prevent cloud upon title, when the evidence on which the right depends is not of record, or shown in the papers through which the right depends.”

It will be seen that this case does not hold that a cloud on the title will not result from the sale, but simply that equity will not interfere in such cases because the party has an adequate legal remedy. That Judge Stay-ton did not hold that such a sale would not cloud the title is evident from the reading of an opinion .written by him in the case of Day Land & Cattle Co. v. State, 68 Tex. 526, 4 S. W. 865, from which we quote the following:

“It is also urged that, if the patents are void, there is no necessity for relief, and that, as a court will not do a useless thing, therefore it will not cancel the patents. As said by a distinguished author, this rule ‘leads to the strange scene, almost daily, in the courts, of defendants urging that the instruments under which they claim are void, and therefore that they ought to be permitted to stand unmolested, and of judges deciding that the court cannot interfere because the deed or other instrument is void; while, from a business point of view, every intelligent person knows that the instrument is a serious injury to the plaintiff’s title, greatly depreciating its market value, and the judge himself, who repeats the rule, would neither buy the property while thus affected nor loan a dollar upon its security. This doctrine is, in truth, based upon mere verbal logic, rather than upon considerations of justice or expediency.’ 3 Pom. Eq. 1399. * * * We are of the opinion that the better rule is that, notwithstanding an instrument may be void upon its face, a court has power, which it must exercise, not only to declare the instrument void, but to cancel it, when a defendant asserts claim under it. A defendant who asserts claim, even under an instrument void on its face, cannot be heard to say that it has not such semblance of validity as to create a cloud upon the title to property which it professes to convey that will prejudice the right of the real owner if it be not removed. He cannot be heard to say that others will not attach to it the same degree of faith and credit, as a title-bearing instrument, which he in good faith gives to it; and that, to the extent of the doubt or cloud thus cast upon the real title, its holder is injured, or is likely to be injured.”

This case was followed by the case of Morton v. Morris, 27 Tex. Civ. App. 262, 66 S. W. 94. See, also, Paddock v. Jackson, 16 Tex. Civ. App. 655, 41 S. W. 700.

The holding that equity would not enjoin such sales except in cases where extrinsic evidence was necessary to show the superiority of the plaintiff’s title was criticized and deplored by the Court of Civil Appeals for the Third District, in an opinion written by Judge Fisher, in Chamberiain v. Baker, 28 Tex Civ. App. 499, 67 S. W. 532. This, then, was the condition of the Law .when the Legislature passed the act of 1909, and we do not think that it can be doubted that the Legislature intended by the act to allow the courts to afford the relief that was theretofore denied in such cases. If we were to adopt appellant’s view of the law and hold that the Legislature contemplated that a cloud would only be put upon a title in those cases where the evidence of the superiority of plaintiff’s right was not of record, then the Act of the Legislature becomes a vain and useless thing, because the courts already afforded relief by injunction in such cases. We think the statute is clearly applicable to the character of case presented by this record.

These holdings dispose of all of the assignments presented by the appellant, and the judgment will be affirmed.
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