CREWDSON v. SHULTZ, 254 F. 24

HUNT, Circuit Judge (after stating the facts as above). By the principle of estoppel as laid down by the authorities our opinion is that the former judgment rendered in the action between the same parties who are now at i$sue in this case, and which is set forth in the reply of the defendant in error herein, is conclusive against Crewdson upon the issue of Shultz being a bona fide holder for value. In the former action Shultz described the same note as that now sued upon.

It is true the first action was brought to recover only interest due up to the time of bringing suit, and that the principal sum was not then due; but the defenses went to the integrity of the note, for Crewdsoji set up that Shultz was not a holder of the note for value and before maturity; that the note was procured by Valentine under false and fraudulent representations as to the value of the property for which as

part consideration the note was given; that the note was taken to shield Valentine and aid him in the collection thereof; that Shultz was not the real owner of the note; that Shultz had refused to make Valentine a party to the action; that Valentine could respond to any judgment; and that the plaintiff should first be required to exhaust his possible rights as against Valentine. The fact that Shultz brought this action for the principal of the note and such interest as has accrued since the former action was instituted does not improve the position of the maker Crewdson.

His grounds of defense to the former suit for interest having been identical in substance with those he has pleaded herein, the conclusions of the state court which tried the issues must be accepted as controlling between the parties. Wilson v. Deen, 121 U. S. 525, 7 Sup. Ct. 1004, 30 L. Ed. 980; Black River Bank v. Edwards, 10 Gray (Mass.) 387; Lumber Co. v. Buchtel, 101 U. S. 638, 25 L. Ed. 1073; Edgell v. Sigerson, 26 Mo. 583; Cleveland v. Creviston, 93 Ind. 31, 47 Am. Rep. 367.

It is argued that, in the present action for the principal, defenses might be interposed which could not have been available in the first suit upon the interest; as, for example, that, after the institution of the former action for interest, litigation was pending between the appellee herein and the payee of the note, Valentine, wherein Shultz sought to recover from Valentine a debt of only $2,500, without setting up any indebtedness upon the note herein involved.

Just how the doctrine of res judicata might apply to such a state of supplementary facts is not necessary for decision, for here, of the defenses pleaded, none is sufficient to deprive Shultz of the benefit of having been adjudged a bona fide holder for value, at least to the extent of his lien. Shultz v. Crewdson, 95 Wash. 266, 163 Pac. 734. This further question then arises: Was it error to award judgment for the full amount of the note which is admitted to be more than the amount of the debt due by Valentine to Shultz, to secure which the no'te in question was given as collateral security ?

Many decisions hold that, where a note is held as collateral security for a debt and the holder is held entitled to recover, he is limited to the amount of the debt which the collateral secures, where there is a valid defense against the transferer of the note. In such case the holder is a beta fide holder, entitled to stand on a better footing, only pro tanto; but if there be no defense to the collateral note the holder may recover the full amount and become a trustee for the balance over what is due to him. Daniel, § 832a, and the cases cited.

On the other hand, there are decisions which permit of full recovery by the holder, notwithstanding equities as between maker and payee. Gowen v. Wentworth, 17 Me. 66; Smith v. Isaacs, 23 La. Ann. 454; Tooke v. Newman, 75 Ill. 215; Gold Glen Milling & Tunneling Co. v. Dennis, 21 Colo. App. 284, 121 Pac. 677. But as applicable to the present case discussion of general doctrines need not be had, because in Washington a positive statute (section 27 of the Negotiable Instrument Act [Rem.

Code 1915, § 3418]), declares that, “where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien,” and because the Supreme Court of the state has construed the statute, and held that one who for value has taken a note as collateral is a holder for value “only” to the extent of the lien arising from the contract. Citizens’ Bank & Trust Co. v. Limpright, 93 Wash. 361, 160 Pac. 1046.

In that case the court, in reversing a judgment which dismissed a bill for the whole amount of a note taken as collateral, directed a judgment for the amount of the sum remaining due to the holder, together with interest. Whether the defendant here may have any defense in a direct action against him by Valentine, the payee, for any surplus, is not a vital issue herein. We agree that his averments of fraud are merely conclusions, and wholly insufficient to create an issue. But as the decision of the Supreme Court in Shultz v.

Crewdson, supra, was that Valentine was neither a necessary nor a proper party to the action for interest, and as the maker, Crewdson, was not permitted to implead Valentine in the present action, it seems but a just application of the statute that the holder should be limited in his recovery to what is justly due to him upon the note held as collateral, and that any controversy over any further sum should be determined, as between Valentine and Crewdson.

Our conclusion is that the construction of the state statute by the Supreme Court of Washington is reasonable and just, and that under it the District Court should have limited the amount of the judgment in favor of Shultz to the amount of debt due to him by Valentine, payee of the note, together with lawful interest. The judgment of the District Court will therefore be modified to conform with this opinion, and, when so modified, it will be affirmed, with costs in favor of appellant.