O'ROURKE v. WAHL, 109 F. 276

JENKINS, Circuit Judge, after the foregoing statement of the case, delivered the opinion of the court. The law is well settled that the rights of a bona fide purchaser of negotiable paper procured by fraud or issued in violation of authority will be protected. Delivery, actual or constructive, is indeed essential to the validity of every contract; but in respect of negotiable paper not in fact delivered, and obtained through fraud from the maker, where be has given to it the appearance of validity, he is, as against a bona fide holder for value before maturity, held bounden upon it.

And so where the maker has intrusted a negotiable instrument signed by him to another, and that other has fraudulently issued it, and it has come to the hands of a bona fide holder for value, the maker is bound, because he created the agency or trust through which the fraud was committed. The doctrine proceeds upon the equitable principle that, when one of two innocent persons must suiter from the wrong of a third, be whose act has opened the door to the fraud should.bear the loss, and he is equitably estopped to deny delivery.

With respect to a mortgage securing a negotiable note so fraudulently issued, there is possibly room for doubt, since a few courts hold that the rule stated does not apply, and that such security is taken subject to the equities existing between the parties to the instrument. The generally accepted doctrine is, however, to the contrary, and is upheld by the supreme court of the United States. The debt is the principal thing; the mortgage, the incident. The transfer of the note carries with it the security, without formal assignment or delivery, and the assignee has the same rights as to both. Carpenter v.

Longan, 16 Wall. 271, 21 L. Ed. 313; Kenicott v. Supervisors, 16 Wall. 452, 21 L. Ed. 319; Sawyer v. Prickett, 19 Wall. 146, 166, 22 L. Ed. 105; Banking Co. v. Montgomery, 95 U. S. 16, 18, 24 L. Ed. 346; Chicago Ry. Equipment Co. v. Merchants’ Nat. Bank, 136 U. S. 268, 283, 10 Sup. Ct. 999, 34 L. Ed. 349. Here the appellant purposely and deliberately signed negotiable paper, and the trust deed securing it.

She, through a deceit practiced upon her, delivered the security to the clerk* of the trustee named in the deed, supposing him to be the clerk of her attorney, to hand to Thompson, her attorney, for safe-keeping. She was the victim of an infamous fraud. The clerk by direction of the trustee filled up, and as notary signed, the acknowledgment of the deed, and handed it to his principal, the trustee, who negotiated the securities upon the market, and they were eventually and before maturity bought by the appellee, confessedly a bona fide purchaser for value.

Through the act of the appellant in delivering possession of the document to the clerk of the trustee named in the trust deed signed by her, she put it in the power of the trustee to defraud. It is a hard case. One . of the two — the maker or the holder of this negotiable paper — must suffer. The loss, under the law, must fall upon the one whose act clothed the trustee with power to make that wrong effective. The decree is affirmed.