insolvent debtors—"grab law."—when a debtor is insolvent there are several things that he may do. in the first place he may do nothing. he may let his creditors try to get any money out of him if they can, and in general let the creditors take the laboring oar. where there is no bankruptcy law prevailing, either state or federal—and that was the situation in many of the states of the union prior to the passage of the present national bankruptcy law—a debtor might get along that way for a long time. that is one thing he might do.
composition with creditors.—the second thing the debtor may conceivably do is to try to make a composition with his creditors. though it is the law that receiving a smaller sum will not discharge a liquidated and undisputed debt for a larger amount, even if it is so agreed, an exception is made in the case of a composition where a number of creditors agree that each of them will take a smaller sum for his claim. the debtor may try to get his creditors to do that, and occasionally he succeeds.
general assignments.—a third thing which he may do is to make a general assignment of all his property to trustees in trust to pay his creditors ratably. such an assignment is not valid in massachusetts, though in most states it would be, if[pg 426] free from fraudulent incidents. in massachusetts it would not prevent his creditors, or any one of them, from attaching his property just as if it had not been assigned, but if creditors assent to the assignment then, to the extent of their claims, the assignment becomes valid. in other states the assent of creditors is presumed if the assignment is not fraudulent, and therefore without any actual assent the situation is the same as in massachusetts after assent of all the creditors.
fraudulent incidents in general assignments.—in every state a general assignment under certain circumstances will be regarded as fraudulent against creditors. such a conveyance may be treated as void by the creditors, and the property conveyed seized by them as if the debtor had made no conveyance. some of these incidents which may make a general assignment fraudulent may be noted. if the assignor was solvent when the conveyance was made, the transaction is fraudulent, for if he has sufficient assets to pay his debts, the only object the assignment can have is to prevent them from being paid at once, and compel the creditors to wait until the assignees under the deed realize upon the property, that the debtor holds, at better advantage than if a forced sale were made at once. if the assignees are given unlimited power to continue business it is also fraudulent, since the business would in effect be carried on at the risk of the debtor. the debtor being insolvent will lose nothing if the business proves unprofitable whereas if profitable there may be a surplus[pg 427] after the payment of the debts. a provision authorizing continuance of business so far as is necessary to dispose of property on hand, or to work up raw material on hand, is generally upheld. a provision authorizing sales upon credit is often, though not uniformly, held fraudulent, since it permits the assignees to defer the settlement of the estate. the most important provisions likely to be attacked as fraudulent, however, are provisions in regard to preferences. aside from bankruptcy statutes, it is lawful for a debtor who has insufficient means to pay all of his creditors, to pay some in full, though this results in the total exclusion of others. accordingly a general assignment of a debtor's property on a trust, that the assignees shall pay in full certain named creditors and pay the remaining creditors ratably out of the residue, has generally been upheld though statutes in some states have altered the law in this respect. a kind of preference which is generally deemed fraudulent, however, is one which is made conditional on the creditors giving the debtor a discharge. a general assignment, unlike a bankruptcy law, or a composition, does not free the debtor from liability for so much of his debt as remains unpaid. debtors have sometimes sought to avoid this result by making a general assignment of their property in trust for ratable distribution among such creditors as should give the debtor a full release and discharge of all claims. such a provision, attempting, as it does, to impose as a condition of a creditor's sharing, that he should take his share in full satisfaction of his claim,[pg 428] is almost universally held to make a general assignment fraudulent. under the bankruptcy law, a general assignment may within four months be set aside by bankruptcy proceedings; but a creditor who has once assented to a general assignment cannot thereafter join in a bankruptcy petition against that debtor.
bankruptcy.—the fourth and most important way, however, now, of settling the estates of insolvent persons is provided by statute. the federal constitution gives congress power to pass uniform laws on the subject of bankruptcy throughout the united states, and the supreme court has held that when the federal government has not taken advantage of this privilege given by the constitution, states have power themselves to enact bankruptcy laws. in some states there were such laws, but in many there were not. the federal law now supersedes all state laws on the subject. it was passed in 1898, and under that law the debtor may either become a bankrupt by his own voluntary petition, or his creditors may petition him into bankruptcy if he commits what is called an "act of bankruptcy." this is true, at least, if the debtor is an individual, or is a moneyed business or commercial corporation (except railroads, insurance companies, and banking corporations). when corporations of the excepted class become insolvent, their affairs are settled by still a fifth method—receivership. a special privilege, also, is given to wage earners and farmers. they may, if they choose, become voluntary bankrupts, but are not liable to involuntary proceedings.[pg 429]
petitions in bankruptcy.—suppose a debtor wishes to become bankrupt himself. he files a petition in the united states district court, which is the court of bankruptcy jurisdiction, and is immediately adjudicated a bankrupt. if his creditors want to make him a bankrupt it is necessary that three of them, having claims amounting to not less than $500 in the aggregate, should join, unless there are less than twelve creditors in all. in that event one creditor only may petition. this petition must set forth (1) the creditors' claims, (2) the fact that the debtor has committed an act of bankruptcy, and (3) the fact that he owes debts aggregating $1,000 or more. however slight his indebtedness, if he cannot pay it, a man may be a voluntary bankrupt, but he must owe at least $1,000 to be liable to involuntary proceedings.
acts of bankruptcy—fraudulent conveyances.—now what are the acts of bankruptcy which render a debtor liable to a petition by his creditors? in the first place a fraudulent conveyance is an act of bankruptcy. reference to a fraudulent conveyance by general assignment has been made; but there are many kinds of fraudulent conveyances. if a debtor who is insolvent, or who is made insolvent through a gift made by himself, should give away a portion of his property, that would be a fraudulent conveyance, irrespective of the debtor's intent, because the necessary effect of the gift would be to hinder, delay and defraud his creditors. it would be a fraudulent conveyance for a debtor to seek to conceal his property from his creditors by putting it[pg 430] in the hands of some kind friend to hold for him until his creditors should cease to be so troublesome as at the present time. it would be a fraudulent conveyance for a man who is pressed by creditors to turn himself into a corporation for business purposes, and assign all his property to that corporation. this transfer to a corporation, even though done openly, would necessarily hinder and delay his creditors.
preferences.—as has already been said, paying one creditor to the exclusion of others is not a fraudulent conveyance, but it is a preference, and a preference is a second act of bankruptcy. either for the debtor to give a preference himself or to allow a creditor to get a preference, by legal proceedings, is an act of bankruptcy. any transfer made by an insolvent debtor, to pay or to secure in whole or in part a previously existing debt, is a preference.
general assignments.—a general assignment, whether fraudulent or not, is an act of bankruptcy. the consequence is, therefore, that if a debtor makes a general assignment, his creditors have the choice of letting it stand and having the estate settled under the general assignment, or of setting it aside and having bankruptcy proceedings.
receiverships.—still another act of bankruptcy is the appointment of a receiver on account of insolvency. there, also, the creditors virtually have an option of letting the receivership stand and having the receiver take charge of the distribution of the assets, or of petitioning the debtor into bankruptcy and having the bankruptcy court take charge.[pg 431]
admission of inability to pay debts.—one further act of bankruptcy is an admission by the debtor of his inability to pay his debts and his willingness to be adjudicated a bankrupt. an act of bankruptcy can form the basis of a petition only within four months after its commission.
insolvent debtors usually commit acts of bankruptcy.—now an insolvent debtor cannot very well avoid committing one of these acts of bankruptcy. he can avoid making a fraudulent conveyance, but he will find it pretty hard to avoid making a preference. he need not, it is true, pay any of his debts, and it is not a preference to pay money out for present consideration, or to transfer property for present consideration, as to make a mortgage for a new loan; but it will be hard for him to prevent creditors from getting a preference by legal proceedings, at least if the debtor has any assets at all; for if the debtor does not pay any of his creditors, some of his creditors will sue him, get execution, and endeavor to levy it on the debtor's property.
procedure after adjudication.—if a debtor has once been adjudicated a bankrupt, it makes no difference whether it was on a voluntary petition or an involuntary petition; the matter goes on in both cases the same way. the first thing, after the adjudication, is, that the referee, a sort of subordinate judge, requires the bankrupt to submit schedules of his assets and of his creditors. the debtor is induced to make these schedules as complete as possible, for the following reasons: if the schedule of[pg 432] assets is knowingly incomplete, the debtor is committing a crime and is likely to be shut up in jail. if the schedule of his creditors is incomplete, any creditor who is left out or whose address is so incorrectly given that the creditor does not get notice of the proceedings in time to prove his claim, is not affected by the discharge; and as the debtor wants a discharge from as many debts as possible, he, of course, will make his schedule of creditors as complete as possible. from this schedule of creditors, the referee sends notices out to all the creditors to meet and choose the trustee. the creditors meet and choose a trustee, who then endeavors to collect the assets of the estate, and under the direction of the court, pays dividends from the assets to the creditors.
property which the trustee gets.—the question may be asked: "what property does the trustee get?" he gets all tangible property that the debtor could transfer at the moment of his bankruptcy. he gets intangible property, patents, trademarks, copyrights, seats on the stock exchange, and good-will of a business, with the exception that the debtor still retains the right to carry on his old business himself, in the future, in his own name. the trustee gets rights of action of the bankrupt, except personal rights of action, as they are called. these consist of rights of action for personal injuries, as for assault, or for personal injury by negligence. a right of action for breach of promise of marriage also would not pass to the trustee in bankruptcy. not only does a trustee get this tangible and intangible[pg 433] property, but he gets also a right to recover any property fraudulently conveyed by the bankrupt, which is not in the hands of a bona fide purchaser, even if the fraudulent conveyance was made years before, provided the statute of limitations has not completely run against it. any preference, also made within four months before the filing of the petition in bankruptcy, may be recovered from the preferred creditor, if he had reasonable cause to believe, when he received it, that he was getting a preference, but not otherwise. the trustee in bankruptcy gets the debtor's life insurance policies, except in so far as they are made exempt by statute. life-insurance policies, in favor of a beneficiary other than the insured himself, are exempt, though if the premiums were paid by the debtor while insolvent, the premiums so paid within the past six years may be recovered, and the beneficiary would in effect have to pay those premiums back in order to hold the policy. even if the policy runs to the insured himself, in his own name, he has the privilege, under the bankruptcy act, to redeem it from the trustee in bankruptcy by paying its cash surrender value. property acquired by the bankrupt, after the beginning of bankruptcy proceedings, does not pass to the trustee. the bankrupt's property passes free of attachment or judgment liens, secured by creditors within four months prior to the beginning of bankruptcy proceedings. this has no bearing on a case, where, prior to bankruptcy, money has been actually collected by legal proceedings, but only to cases of seizure under legal[pg 434] proceedings which are still pending at the time the petition is filed. if a debtor becomes bankrupt, within four months after his property is attached, the attachment is dissolved. if the debtor does not become bankrupt until after four months, the attachment is a valid lien on the property attached, and so far as the property is sufficient to pay the creditor, he can collect his claim from it, even though the debtor becomes bankrupt before the creditor finally gets judgment and collects his claim.
proof of claims.—the trustee collects all this property and tries to reduce it to cash, as fast as he can, and while this is going on, creditors will also be proving their claims. it is only claims which exist at the time of filing the petition which are provable, but the debts need not be due at the time of the bankruptcy; it is only essential that they shall be in existence. interest is added or rebated, as the case may be, to the date of filing the petition. that is, if you have a non-interest-bearing note falling due july 1, and the debtor becomes bankrupt may 1, the face of the note will be proved less a rebate of two months' interest to may 1, because the present value of the note on may 1 is what is provable. on the other hand, if the note had been due on april 1, interest would be added up to the date of filing the petition, and if the note was an interest-bearing note, of course the interest would be provable up to may 1, even if the note did not fall due until july 1 or later. debts, arising subsequently to the date of filing the petition, must be enforced against the bankrupt's assets acquired[pg 435] after his bankruptcy. claims for tort are not provable, that is, claims for injuries to person or property not arising out of contact. but a judgment for tort, obtained before the filing of the petition, is provable. there has been a good deal of trouble in regard to what are called contingent claims. the commonest instance is the indorser's liability on a note which is not yet due when the indorser becomes bankrupt. at the time of filing the petition, the indorser's liability is contingent on the possibility that the maker may not pay the note at maturity, and that notice of dishonor will be given to the indorser. creditors, who have received a preference, cannot prove claims unless they have surrendered, within four months of the bankruptcy, any preference which they have received with reasonable cause to believe that it was a preference. secured creditors can realize on their security and then prove for the balance of their claims. a few claims are given priority over others and paid in full before any dividend to other creditors. the most important claims of this sort are the wages of workmen, clerks or servants earned within three months of the bankruptcy and not exceeding the sum of $300.
leases.—leases belonging to the bankrupt pass to the trustee in bankruptcy, if he wants them, but the trustee in bankruptcy need not take any kind of property which seems more burdensome than beneficial to him, and as a trustee would have to pay, the rent under a lease in full, if he took it, he frequently will prefer to abandon it. the landlord can prove for[pg 436] rent, which is already accrued, but he cannot prove for rent which has not already accrued, even though part of the period for which the rent is claimed has elapsed, unless there is a special covenant in the lease. if the trustee in bankruptcy assumed the lease, then, of course, the landlord would look to the trustee for the rest of the term. if the trustee did not assume the lease, the landlord would have his option of doing either of two things: he could leave the bankrupt in the premises and have a right of action against him for the rent, from time to time, as it accrued, or he could eject the tenant; but if he ejected the tenant he could not hold him for rent. generally he would eject a bankrupt tenant rather than let him stay.
set-off.—set-off may be made by a debtor of the estate who also has a claim against the estate. he does not have to prove his claim, taking a dividend on it and then paying, in full, the debt which he owes to the estate. he may set one off against the other, but he is not allowed to acquire claims for the purpose of set-off within four months prior to bankruptcy. otherwise, one owing money to an insolvent debtor, could buy up at a discount claims against the debtor, equal in amount to his indebtedness to the bankrupt.
examination and discharge of bankrupt.—the bankrupt may be examined by any creditor with a view to the disclosure of his assets. this is a most important right. finally, if in every respect, he obeys the bankruptcy law, the debtor gets a discharge. grounds for refusing him[pg 437] a discharge are, that he has made a fraudulent conveyance; that he has obtained credit by false representation; that he has failed to keep books of account for the purpose of concealing his financial condition; that he has committed an offence punishable by the bankruptcy law, as making a false oath or refusal to disclose his property or to submit to examination; and finally a debtor who has already been discharged in bankruptcy within the previous six years cannot, as a voluntary bankrupt, again obtain a discharge. these are reasons for refusing a discharge altogether, but even though a discharge is granted, certain liabilities are not discharged. claims for obtaining property by false pretences, or for false representations, are not discharged. claims for defalcation or embezzlement, as a public officer or as a fiduciary, and claims for wilful and malicious injury to the property of another, are not discharged. nor are taxes or claims for alimony or for the support of a wife or dependent children.
composition in bankruptcy.—at common law it was necessary to have the consent of all a debtor's creditors in order to make the composition operative as against all of them. in bankruptcy there is a special provision for composition, and with the approval of the court, a composition may be declared binding, not only as against those who have assented to it, but as against all creditors having provable claims, if a majority in number and amount of the creditors, taking part in the bankruptcy proceedings, assent to the discharge.[pg 438]
insurance.—insurance is a contract whereby, for an agreed premium, one party undertakes to compensate the other for loss on a specified subject from specified perils. policies of insurance are as various as the contracts which they cover. in 1779, lloyd's adopted a standard form of marine policy, which, with some changes, is in practically universal use in the british world. a standard form of fire policy has been adopted by many of the fire insurance companies in the united states.
policy provisions.—certain terms occur frequently in insurance law, with which one should be familiar. a valued policy is one upon which a definite valuation is put, by agreement of both parties, on the subject matter of the insurance written on the policy; for example, a policy "insuring the s.s. george washington, valued at $1,000,000." an open policy, on the other hand, is one in which a definite sum is written on the face of the policy, but instead of agreeing as to the value of the property insured, indicates the limit of recovery in case of the destruction of the property. floating policies are such as cover articles which cannot be designated with certainty, as for example, a constantly changing stock of goods. in life insurance there are many kinds of policies. probably the most common is the regular life, under which the insured pays certain fixed premiums throughout life, and the beneficiary receives the amount of the policy only upon the death of the insured. life insurance policies in which the investment feature is prominent, are generally called endowment policies, and they require[pg 439] the insured to pay a certain premium, annually, for a certain number of years. if the insured dies before premium payments cease, under the terms of the policy, the beneficiary receives the full amount of the policy. if the insured lives beyond the stated period, he is entitled to receive the amount written on the face of the policy or he may be allowed to receive a paid-up policy for some specified sum. a policy of reinsurance is simply a contract made by one insurance company with another, whereby the first reinsures with the second some individual risk which it has itself accepted and insured.
elements of contract.—in order that the contract of insurance shall be valid, it must possess all the essential elements of the ordinary contract. although there is a certain element of chance in an insurance contract, it is always held that it is not in the nature of a gambling contract. a peculiar feature of this contract is that it is one of the utmost good faith, and requires that each party shall disclose to the other all material facts in his knowledge that may affect the making of the contract.
insurable interest.—an essential element in the law of insurance is that of insurable interest. by this term we mean that interest of the insured, which is exposed to injury by reason of the peril insured against. such interest does not necessarily need to be a legal right, but only such as to justify a reasonable expectation of financial benefit, which will be derived by the continued existence of the person or property insured. while it is difficult to[pg 440] define accurately an insurable interest in property, section 2546 of the california civil code defines it thus: "every interest in property, or any relation thereto, or liability in respect thereof, of such a nature that a contemplated peril might directly damnify the insurer, is an insurable interest." in life insurance, an insurable interest is requisite, but this interest, if existing at the time the policy is issued, is sufficient, although such interest subsequently terminates. every person has an insurable interest in his own life, or he may procure insurance on the life of another, when so related to that other, either by reason of blood, marriage, or commerce, that he has well-grounded expectation of deriving benefit from that other's life, or suffering detriment through its termination. it is well settled that a creditor has an insurable interest in the life of his debtor. the courts are not clear as to just how much this interest is, but it will not be allowed to greatly exceed the sum of the debt. the relationship between the insured and the insurer is governed, to a very large extent, by the law of agency.
suretyship and guaranty.—suretyship has been defined as an accessory agreement by which one binds himself for another who is already bound. a surety is a person who is liable to perform any act, that his principal is bound to perform, in the event that his principal fails to perform as agreed. where there is more than one surety, the parties are known as co-sureties. the distinction between the contract of suretyship and that of guaranty is not altogether[pg 441] clear, and frequently not observed by the courts. so far as the distinction can be defined, we may say that if the parties undertake to pay money, or to do some other agreed act, in case the principal fails to perform his part, then they are sureties. on the other hand, if they assume performance, only in the event that the principal is unable to perform, then they are guarantors. the principles which apply to both, are, in many respects, similar. the terms used by the parties are not necessarily conclusive as to whether it is a suretyship or guaranty relationship. for example, in the case of saint v. wheeler, etc., mfg. co., 95 ala. 362, where a contract was under seal by which the parties "guarantee," along with one of their number, to pay absolutely and irrespective of solvency or insolvency, all damages which might result, etc., it was held that the contract was one of suretyship, and not of guaranty, although they had used the express term "guarantee" in the language of the contract.
qualification of a surety.—a surety may be distinguished from an indorser in that the undertaking of the surety is absolute, whereas that of the indorser is conditional. the negotiable instruments act provides that a general indorser "engages that on due presentment, it (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to[pg 442] pay it." hence, if an indorser is not notified, or if the instrument is not protested, if that is necessary, he is discharged.
principal and surety.—ordinarily, the relationship of principal and surety is entered into under the terms of a contract, the chief object of which is the creation of the relationship. as a general rule, any person who is capable of making a contract may be surety. formerly, it was sometimes said that an infant was absolutely unqualified to make a contract of this kind, but now his contracts of suretyship are held to be voidable, the same as his other contracts. in some states a married woman is still prevented by statute from becoming a surety for her husband. like ordinary contracts, a contract of suretyship must be supported by sufficient consideration. it is ordinarily a collateral engagement to pay a debt of another, and hence, comes under the section of the statute of frauds which requires a contract to answer for the "debt, default, or miscarriage of another," to be in writing.
suretyship liability.—the general extent of the suretyship liability is measured by the contract of the principal, which he guarantees. if no cause of action can be maintained against the principal on the contract, it follows necessarily that the surety is not liable. the tendency of the courts is to favor the surety. his obligation is ordinarily assumed without any pecuniary compensation, and it is accordingly said that his liability is "strictissimi juris," (strictly construed by the law). a surety has the[pg 443] right, then, to insist upon the very letter of his contract, and if there is a reasonable doubt as to whether his contract requires the doing of certain acts or not, that doubt should be resolved by the court in favor of the surety. consequently, a surety will not ordinarily be held liable for any default of the principal, which occurred prior to the surety's contract to be such. the death of the surety does not necessarily terminate his liability, and his personal representatives will be responsible for the carrying out of his contract, especially where the contract reads that the surety "binds his heirs, executors and administrators."
surety's obligation under new contract.—it frequently happens that the principal's contract is not completed, and a renewal is necessary. the question arises whether the surety's obligations are continued under the new contract, the same as under the old. the principle which the courts apply is that if the renewal amounts to an entirely new contract, then the surety's obligation is at an end. but if the renewal is simply a part of the original contract, and does not call for any new contract, his obligation continues under such renewal. as the contract between the principal and surety is of a more or less confidential character, the law requires, as we have mentioned in insurance, the exercise of the utmost good faith on the part of the principal. hence, if a surety, before entering into his contract, applies to the principal for information about any material matter pertaining to the contract, the principal is[pg 444] bound to give full information as to every fact within his knowledge, and if he does anything to deceive the surety, he vitiates the contract. another application of the same principle is found in the rule that the principal must not do any act injurious to the surety or inconsistent with his rights. consequently, if the principal makes any arrangement with his principal debtor, by which the risk of the surety is materially increased, or the terms of the contract are altered or varied or the time of payment is extended, the surety in any of these cases would be released from any liability unless he is consulted and gives his assent to such changes in his contract. it is necessary that the new contract, which the principal makes, be a valid contract in order to release the surety. hence, if the principal makes a contract extending the time of the payment on the obligation six months, and that is all there is to the contract, such extension agreement would be invalid because of lack of consideration, and the surety in such case would not be discharged from his liability under the old contract. if the obligation which the surety undertakes to pay is a promissory note, an agreement by the principal to extend the time of payment, would not, of itself, release the surety, there being no consideration. a part payment made by the maker, before the note was due, for which an extension of time to pay the remainder is granted, would be binding, because such part payment, before a note is due, constitutes good consideration for an agreement to extend the time to pay the balance, and consequently the surety is discharged.[pg 445]
negligence of the creditor.—it is generally true that the creditor is under no obligation to be diligent in the pursuit of the debtor. consequently, a mere negligence of the creditor, to sue or otherwise attempt to collect a claim against his debtor, although there is a surety for the creditor, does not relieve the surety of his liability. mere delay, then, in proceeding against the principal debtor, does not release the surety, unless there is between the creditor and principal debtor a valid and binding agreement, under which a delay does prejudice the surety.
discharge of surety.—a surety is discharged by the payment or performance, by the principal, of the condition in the agreement. it is even held that the surety is discharged if a tender of payment has been made to the principal, after the debt is due, and it is refused by him. in such a case, the tender amounts practically to a payment of the debt and a new loan creating a new contract. it sometimes occurs that the creditor has collateral security for the payment of the debt, or secures control of money or property of the debtor and which he may lawfully apply to the debtor's obligations under certain circumstances. the principal may voluntarily surrender or dispose of these securities. in such a case, the surety is discharged from liability to the extent of the value of the securities disposed of or surrendered. of course, the surety is not discharged where the principal takes additional securities, or if some securities are given up and sufficient are retained by the[pg 446] principal to pay the debt, the surety is not relieved and cannot complain, for the reason that he has not been injured.
rights of surety.—it is a well established rule of law that where the surety is obliged to make good on his contract he is entitled to relief, the law implying a promise on the part of the principal to reimburse the surety for any damages which he suffers. of course, this assumes that the surety was legally bound to pay the debt. if he pays it because it is a moral obligation or for any other reason which the law does not recognize as legally binding, he is not able to compel the principal to reimburse him.
right of contribution.—one of the peculiar remedies, which the courts of equity have developed, is that of contribution. this right is frequently used in the law of suretyship. when one of two or more sureties, for the same obligation, has paid more than his share of the debt, he is entitled to be reimbursed for the excess by his co-sureties. this right is known as the right of contribution. as has been said before, a surety, if he pays when he is not legally bound to do so, must stand the loss himself; and the same is true where he is one of several co-sureties. thus, if one co-surety pays a debt, which is barred by the statute of limitations, he would not, in that case, be entitled to contribution from his other co-sureties.
surety companies.—surety companies conduct such a large business at the present time that a word should be said about them in connection with[pg 447] this topic. the surety company is a corporation, and its powers are, of course, defined by its charter, and the laws of the state in which it is incorporated. in general, surety companies are authorized to guarantee performance of contracts and to execute bonds and undertakings required by the courts. one tendency is noticeable in recent years. the kind of suretyship, we have been referring to, is generally that in which the surety is an individual, who undertakes his task for no consideration, and for that reason, as we have said, the courts construe the contract of suretyship strictly in favor of the surety. more and more, now, the practice of the individual becoming a surety is decreasing, and in his place the surety companies offer their services in a more satisfactory manner, under modern business conditions, but with the striking difference, that the surety company offers its services only for pay, which will net the company a profit. hence, the rule that the contract should be construed strictly in favor of the surety does not fit the case of the surety company which is paid for its services. in the case of the american surety co. v. paulu, 170 u. s. 133, and in many other cases, the rule is laid down, that the contract will be construed against the surety company and in favor of the indemnity which the obligee has reasonable grounds to expect. so, it has been held that a surety company will not be relieved on its contract, by an extension of time to the principal, and that there is no presumption that the surety was injured by the extension unless the injury is actually proved.[pg 448]
patents.—the policy of encouraging monopolies, while generally frowned upon, finds two exceptions in the law of patents and copyrights. consequently, the federal constitution gives the exclusive right to congress to "promote the progress of science and useful arts by securing for limited times, to authors and inventors, the exclusive right to their respective writings and discoveries." the patent office is located in washington, and here the commissioner of patents has his official office, and applications for all patents are made through him, and he is authorized to establish regulations for the granting and issuance of patents. the duration of a patent right depends, of course, upon the statute. at the present time, the period is seventeen years, and at the end of that time, the person holding the patent must yield up his monopoly and all that pertains to it. a patent is in the nature of a contract, and the united states supreme court has said "the true rule of construction in respect to patents and specifications, and the doings generally of inventors, is to apply plain and ordinary principles to them, as we have endeavored to on this occasion, and not, in this most meta-physical branch of modern law, to yield up to subtleties and technicalities, unsuited to the subject, and not in keeping with the liberal spirit of the age, and likely to prove ruinous to a class of the community so inconsiderate and unskilled in business as men of genius and inventors usually are." a distinction is usually made between pioneer patents, and patents which are merely improvements on one already issued.[pg 449] the former are always given a liberal interpretation, while the latter should be strictly construed.
element of novelty.—it is the element of novelty which gives rise to the right to a patent. it is not possible to discuss in this limited space, the countless decisions upon this point. a thing may be novel and entitled to a patent, although very old. some lost art of the egyptians is re-discovered by an american. although the idea is several thousand years old, to all practical purposes it is new, and the inventor would be entitled to a patent. like any other property, an inventor's right may be lost by abandonment. thus, where an inventor taught a large number of people, with no suggestion that the thing was an experiment, and received pay for his instruction, the court held that this constituted an abandonment of his claim, and he was not entitled to a patent.
infringements.—a suit may be maintained by the owner of a patent against one who infringes, and as this is a matter under the united states laws, all patent suits are tried in the federal courts. a patent right is personal property, and upon the death of the owner, goes to his personal representative. patent rights, like other personal property, may be assigned and sold.
sale of patented articles.—in recent years, many cases have arisen over the question whether the manufacturers of patented articles are entitled to impose conditions respecting the use of their[pg 450] manufactured articles by purchasers. early cases seem to support the view that, as the theory of a patent was that of a monopoly, these conditions would be upheld even after the patented articles came into the hands of a purchaser. decisions of the united states supreme court, however, have tended the other way. so, attaching a notice to a patented article, stating that the article is licensed for sale and use at a specified price, and that the purchase is an acceptance of these conditions, and that in the case of a violation of this restriction, all rights revert back to the patentee, cannot convert an otherwise apparently unqualified sale into a mere license to use the invention. in bauer v. o'donnell, 229 u. s. 1, the supreme court said: "the right to vend conferred by the patent law has been exercised, and the added restriction is beyond the protection and purpose of the act. this being so, the case is brought within that line of cases in which this court, from the beginning, has held that a patentee, who has parted with a patented machine, by passing title to a purchaser, has placed the article beyond the limits of the monopoly secured by the patent act."
copyrights.—a copyright is the exclusive privilege of printing, or otherwise multiplying, publishing and selling copies of literary or artistic productions. the nature of a copyright is thus defined by the united states supreme court, in the case of caliga v. newspaper co., 215 u. s. 158: "statutory copyright is not to be confounded with the common law right. at common law, the exclusive[pg 451] right to copy existed in the author until he permitted a general publication. thus, when a book was published in print, the owner's common law right was lost. at common law, an author had a property in his manuscript, and might have an action against any one who undertook to publish it without authority. the statute created a new property right, giving to the author, after publication, the exclusive right to multiply copies for a limited period. this statutory right is obtained in a certain way, and by the performance of certain acts which the statute points out. that is, the author having complied with the statute, and given up his common law right of exclusive duplication, prior to general publication, obtained by the method pointed out in the statute an exclusive right to multiply copies and publish the same for the term of years named in the statute. congress did not sanction an existing right; it created a new one."
property right in ideas.—the doctrine that a person has a property right in his ideas has never been recognized, either by common law or by statute. to illustrate: if a, in the course of a conversation with b, gives his idea of what would be a brilliant thought to work up into a detective story, and b, possessing some literary ability, takes the idea and writes a successful detective story, he is entitled to the profits secured from the sale of the book, and there is nothing that a can do about it. the idea which a handed to b has been put by b into such form that it is practicable to allow b to[pg 452] copyright it, and protect his property right in the story. there is no practical way to protect a mere idea.
effect of copyright statutes.—one must bear in mind the effect of copyright statutes on common law rights. at common law, an author has a property in his manuscript, and may obtain redress for any attempt to deprive him of it, and the copyright act provides that nothing in the act shall limit the right of the author, at common law, or in equity, to prevent the copying, publication or use of an unpublished work, without his consent and it gives him the right to damages should this be done. at common law, the author of any literary composition had an absolute property right in his production, and he could not be deprived of it so long as it remained unpublished. interesting questions have arisen in regard to the nature of the property rights in letters. the question as to the rights of the sender and the recipient are frequently troublesome. the rights of the writer consist in the power to make or restrain a publication by the recipient, but he cannot prevent a transfer. the rights of the recipient are those of unqualified title in the material on which they are written. he has the right to keep them, to read them, and show them to a limited circle of friends, somewhat in the same way as a family picture album might be used.
property right in information or news.—another interesting question is as to whether there can be any property right in information[pg 453] or news which has been collected at great expense by the associated press or some similar organization. the most important case on this question is that of the international news co. v. the associated press, 248 u. s. 215. the associated press, organized in new york, is a corporation created for the purpose of collecting news and distributing it to about 950 newspapers at an annual expense of about $3,500,000. the international news service was a corporation organized in new jersey to collect and sell news to a chain of newspapers. the complaint was made by the associated press that the international news service was engaged in pirating its news in three ways: (1) by bribing employees of newspapers, published by complainant's members, to furnish associated press news to defendant, before publication, for transmission by telegraph and telephone to defendant's clients, for publication by them; second, by inducing associated press members to violate its by-laws and permit defendant to obtain news before publication; and, third, copying news from early editions of complainant's newspapers, and selling it, either bodily or after rewriting it, to defendant's customers. the court held that news should be regarded as quasi-property, and that it was unfair competition in business for the international news service to take from newspapers, which are members of the associated press, news furnished by it, and refused to modify the injunction issued by the district court restraining any taking or using of the associated press news, either bodily or in substance, from[pg 454] bulletins issued by the associated press, or any of its members, or from editions of its newspapers, until its commercial value to the complainant and all of its members had passed away.
application for copyright.—the formality of securing a copyright is comparatively simple. the register of copyrights, in the library of congress at washington, furnishes a blank which the applicant fills out and returns, giving the required information, and on or before the first day of publication, the applicant must send two copies of the copyrighted book to the library of congress. the copyright is good for twenty-eight years, with a right to renewal. the works for which copyrights may be secured may be classified as: (a) books, including composite and cyclopedic books, directories, gazetteers, and other compilations; (b) periodicals, including newspapers; (c) lectures, sermons, and addresses, prepared for oral delivery; (d) dramatic or dramatic-musical compositions; (e) musical compositions; (f) maps; (g) works of art, models or designs for works of art; (h) reproductions of a work of art; (i) drawings or plastic works of scientific or technical character; (j) photographs; (k) prints and pictorial records. there are certain things, which, while technically they are under the classification we have given, are not subject of copyright. the opinions handed down by the judges of all of our courts, although they are in the form which would ordinarily permit copyright, are not subject of copyright because of the general principle of law that a judge receives a stated[pg 455] annual salary and cannot, therefore, have any pecuniary interests in the fruits of his judicial labors. this does not mean, however, that the opinions of the united states supreme court, for example, are not to be found in a copyrighted book. the supreme court reporter, which is one of the systems of reporters published by the west publishing co. as a purely commercial enterprise, is copyrighted by that company. this is because of the fact that the editorial staff of the west publishing co. prepares a syllabus for each opinion, an exhaustive index in each volume, and a table of cases, and all of this matter arranged by that company, is subject to copyright, and they have the right to use the opinions of the supreme court the same as any other publisher would have. again, a copyright might be refused on the grounds that the book on which the copyright was sought was an immoral or obscene writing, and therefore not entitled to protection of the copyright law. the word "copyrighted" accompanied by the name of the copyright proprietor should appear on the page opposite the title page, or if the article copyrighted is a picture, the act provides that the device, accompanied by the initials or the symbol of the copyright proprietor, shall appear on the article.
subjects of copyright.—in the classification we have just given, mention is made of lectures, sermons, etc., as being the subject of copyright. it is held, however, that a lecture, delivered orally to a class of students, is not published to the extent that the instructor loses his right to it, although the students[pg 456] may be allowed to make notes for their own use. in the same way, the artist does not lose his common law copyright by an exhibition of his pictures in his studio or in a public gallery where they are placed for sale. similarly the public presentation of a dramatic production does not deprive the owner of his rights in it. the reason for this is that at common law the public performance of a play does not mean an abandonment to the public generally.
trade marks and trade names.—a trade mark or trade name is a mark or symbol which the tradesman puts upon his goods, so that they may be identified and known by the public generally. a trade name differs from a trade mark in that it is descriptive of the manufacturer himself, and involves the individuality of the maker. statutes will be found covering the registration of trade marks and trade names, but the protection which the law affords the owner of these is not confined to a statute alone. it is generally held that a trade mark, subject to some qualifications, arises without the aid of any statute.
subject matter of trade mark or trade name.—the question as to what is the subject-matter of a trade mark or a trade name, can only be determined by a careful reading of the cases. a trade mark may consist of a name, a symbol, a letter, some arbitrary form, or a newly-coined word. pictures of animals, coats of arms, and the like, are frequently used. no trade mark can be obtained by the mere use of a color or generally a geographical term, nor can a trade mark be obtained from the form[pg 457] of a package in which goods are packed, and generally, mere letters and numbers cannot form a trade mark, although the arbitrary combination of numbers, such as "babbitt's 1776" may be a valid trade mark.
names not valid trade marks.—generic names, and merely names of articles, are not valid trade marks, as "extract of wheat," and "new york cough remedy." a trade name of a firm, a corporate name, or the name of a publication, although they are not strictly trade marks, are, nevertheless, of the same nature as a trade mark, and will be protected in the same manner.
unfair competition.—the most common way in which trade marks and trade names become the subject of litigation, is in connection with unfair competition. by this term we mean, ordinarily, the imitation by one person, for the purpose of deceiving another, of the name, device, or symbol used by a business rival. the courts act in such cases upon the theory that the public should be protected, and should not have other goods pawned off on it in place of something else which a person thinks he is getting. this matter of unfair competition is the subject of much litigation in the courts, and one or two illustrations will show how the question arises. for example: in an english case, decided in 1897, the plaintiff had manufactured and sold a relish which was made under a secret recipe and was sold under the name "yorkshire relish." the defendant then put a sauce on the market resembling it, and sold it[pg 458] under the name of "yorkshire sauce." the court held that the plaintiff was entitled to an injunction. in the case of the international silver co. v. the rogers co., 66 n. j. equity 119, the court enjoined the use of the word "rogers" in the corporate title of the william h. rogers corporation, on the ground that its use was a part of the proceedings by which the public were deceived. in this case a manufacturer of silverware, in plainfield, n. j., was attempting to trade upon the reputation of the "1847" brand of plated silver made by the rogers company of connecticut, which company was at the time of the action, a constituent part of the international silver co. the connecticut company had built up a large and good reputation by a long period of sales of its silverware to the public under its trade devices, and the use of its business name. the new jersey company was simply attempting to trade on that reputation, which is almost always the case in unfair competition.
conflict of law.—although we have referred to the uniform legislation in the various topics of commercial law which we have been considering, there is still much in the subject of conflict of law which concerns the student of commercial law. international law is commonly divided into two branches, public and private. public is that which regulates the political intercourse of nations with each other; private, that which regulates the comity of states in giving effect in one to the municipal laws of another relating to private persons. conflict of[pg 459] law is one division of the broader subject of international law and is frequently called private international law. in the sense in which we are now using the term, the various states of the union are considered as foreign to each other. the problems embraced in this topic and their bearing on commercial law may be more fully appreciated if we take a simple illustration. a stock broker with offices in new york city seeks to sell the stock of a new oil mining company to a purchaser in indiana. the sale is one which is not allowed by the indiana "blue sky" law. new york has no such law. the sale is effected by means of circulars and correspondence between the new york broker and the indiana purchaser. is this transaction to be governed by the law of indiana or of new york? its validity will depend upon our answer to that question and this is the type of question one has to answer on the subject of conflict of law. with approximately forty different "blue sky" laws in the country at present, and the great number of stock transactions carried on between the states, the importance of this topic may be appreciated. again, even where we have a uniform act as, for example, the uniform negotiable instruments act, there are still differences in the law in some states. each statute must be interpreted by the courts, and although the judges are sincere in their efforts, it can not be expected that we will always have a uniform interpretation of the same act by the courts in each and every jurisdiction of the united states.[pg 460]
fundamental principles.—there are several fundamental principles we should keep in mind before we turn to the specific branches of commercial law as affected by our topic. the term comity is one of common use in conflict of law and is defined as the recognition which one nation or state allows within its territory to the legislative, executive, or judicial acts of another nation or state. comity is not a matter of right, but a courtesy, and one country may exercise its right and prohibit citizens of other countries from suing in its courts. of course the various states of the united states are not as completely free in this matter as separate countries, because of the provision in the federal constitution guaranteeing to the citizens of each state all the privileges and immunities of citizens in the several states. there are still many questions which are not affected by the federal constitution. for example, a suit is brought in new jersey upon a contract of suretyship made in new york by a wife for her husband. there is a statute in new jersey prohibiting a married woman from doing this. new york has no such statute. shall the new jersey court enforce the contract which the parties made in new york but which they could not have made in new jersey? under the principle of comity a new jersey court has held valid such a contract. again, it is entirely conceivable that a person living in turkey might make a binding contract to marry three women at the same time. suppose the turk before the time for performing the contract arrives, comes to new york and then refuses to marry[pg 461] the three women. could they sue him for a breach of contract in the new york court? clearly not. here they would be asking the new york court to enforce a contract which while admittedly valid, when made in turkey, is decidedly against the public policy of any monogamous country. comity being a courtesy, not a right, would not require a new york court to recognize the turkish contract. in our illustration of the wife acting as surety, no question of public policy was involved and hence there was no impropriety in new jersey recognizing as valid her contract, although such a contract could not have been made within the state of new jersey.
conflict of law as relating to the status of property.—as we have pointed out heretofore, property is divided into real property and personal property. reference should be made to the distinctions between these two kinds of property as described in a preceding chapter. suppose a dies intestate in texas owning real property in new york. the law relating to the descent of real property is different in texas from that in new york. a's heirs wish to know by which law this new york real estate will be governed. it is almost universally recognized that all matters concerning the title and disposition of real property are determined by what is known as the lex loci rei sitae, that is, the law of the place where the property is situated. accordingly the heirs in texas would be governed by the law of the state of new york and, similarly, if a had also owned property in illinois, that property would be[pg 462] governed by the illinois law. suppose, also, a had owned $50,000 worth of stock in various corporations and he kept one-half of this stock in his safe deposit box in galveston and the other half in new york city. while the dominion of a state over personal property within its borders is complete, nevertheless by virtue of the principles of comity, the rule has been recognized almost from time immemorial that personal property is governed by the law of the domicile of the decedent at the time of his death. hence a's stocks (and bonds for that matter) would be divided according to the law of texas whether they were in his safe deposit box in galveston, new york city, or chicago. it follows, when no rights of creditors intervene, that the law of the domicile of the testator will control in regard to his will of personal property, and the law of the place where the real property is situate will control in regard to it.
conflict of law as relating to contracts.—it is a general principle of contract law that the construction and validity of a contract is governed by the lex loci contractus, the law of the place where the contract is made. when the contract is made in one jurisdiction and is to be performed in another, the question becomes more difficult. the supreme court of the united states, in scudder v. union nat. bank, 91 u. s. 406, has laid down the following rules in reference to the law governing contracts in cases in which the place of making and the place of performance are not the same. "1. matters bearing upon the execution, interpretation and validity[pg 463] are determined by the law of the place where the contract is made; 2. matters connected with the performance are regulated by the law of the place where the contract by its terms is to be performed; 3. matters relating to procedure depend upon the law of the forum (i. e., the court where the case is heard)." these three general rules have been adopted and applied by many jurisdictions in a long line of cases involving every conceivable kind of contract. but perhaps it is even more generally stated, when the contract is to be performed in a place other than the place where it is made, that the law of the place where the contract is to be performed will determine the validity, nature, obligation and effect of the contract, or, in other words, in case of conflict the lex loci solutionis (the law of the place of performance) will prevail over the lex loci contractus. although these statements at first seem somewhat contradictory, we may always apply another rule which is a sound test for the determination of the proper law to be applied. we may properly say that the intention of the parties should control and it is generally agreed that the law of the place where the contract is made is, prima facie, that which the parties intended to govern the contract, and in the absence of a contrary intention ought to control. it frequently happens that a contract made in one state is sued upon in the courts of another state. the law governing the procedure in the trial of this case will be the law of the forum, that is of the state where the case is tried, regardless of what the law may be on the same matter in the state where[pg 464] the contract was made. there may be, for example, a peculiar rule as to a wife's being able to testify on the contract in question. this rule will be enforced by the court although no such rule existed in the state where the contract was made. there is no great hardship in the application of such principles because the courts of the state where the contract was made are open to the parties, and if they wish to avail themselves of the services of a court in a different jurisdiction they must take it as they find it with its rules of procedure.
illustration.—there is another type of contract which involves the question of conflict of law to which attention should be called. the facts in the case of fonesca v. cunard steamship company 153 mass. 553, illustrate this point. a passenger on one of the steamships of the cunard steamship company bought a ticket in liverpool for boston and on the ticket was a clause providing that the steamship company should not be liable for any damage to a passenger's baggage during transit, regardless of whether the steamship company was negligent in handling the baggage. when the passenger arrived in boston, and her trunk was delivered, it was found that the contents had been damaged by sea water due to the steamboat company negligently leaving a porthole open. the passenger sued, and the massachusetts court held there could be no recovery for the damage, for, although such a clause exempting a carrier for his negligence was not valid under the massachusetts law (and in fact the law of practically all[pg 465] american jurisdictions), nevertheless, since the law of england permits such a clause, and this was an english contract, the ticket having been bought in liverpool, the passenger was bound by the terms of her contract. there are many kinds of contracts of transportation of baggage, of passengers and of telegraph messages, involving the carrying out of such contracts in many different states. not all of the decisions in the various states of this country are harmonious. we must expect to find many such problems in business and the answer is often one that requires most careful study on the part of a lawyer.
conflict of law as relating to negotiable paper.—there is not so large a field for questions of conflict of law to come up in negotiable paper as in some of the other topics we have been considering. forty-seven states have now passed the uniform negotiable instrument law. but, as we have pointed out, the interpretation of this law in the various states is not invariably uniform. suppose a promissory note has six indorsers. every indorsement is governed by the law of the state where it was made, and should there be a different law in this matter, we would at once have a question in conflict of law. again, in determining the negotiability of a document made in one place and payable in another, we have a further question in conflict of law. the authorities do not agree here although perhaps we may say the majority hold that the law of place or payment controls. these problems will be considered in the text-book on negotiable instruments.[pg 466]
conflict of law as relating to interest and usury.—we find a variety of usury laws throughout the united states. some few states allow the lender to charge any rate of interest. others allow a fixed rate, usually 6%, and provide that the lender forfeits both principal and interest if he charges more. still others allow a fixed rate and provide that interest only is forfeited if a higher rate is charged. it is easy to see that a contract made in one state may be sued upon in another state and the usury laws of the two states may be entirely different. we may say as a general rule that usury laws do not offend any principles of public policy. there is nothing wrong in asking a new york court, where the legal rate of interest is 6%, to enforce a contract made in a state where a higher rate is allowed. on the other hand, no new york court would allow citizens of new york simply to date a contract boston, massachusetts, and provide for a 10% interest rate, thereby hoping to evade the new york usury law, when, except for the date on the contract, it was in reality wholly a new york contract.
