Winton versus Freeman

Supreme Court of Pennsylvania1883-03-26

102 Pa. 366

Summary · law.co

Holding. The judgment is reversed and a new trial awarded because the trial court incorrectly instructed the jury that the bank's knowledge of the underlying fraud would prevent recovery on the note. The defendant cannot defend against the note by asserting the fraud, as mutual fraud between the parties constitutes binding consideration that neither party may subsequently disavow.

Oscar F. Freeman executed a series of four promissory notes, each for $2,500, to O. W. Freeman with the admitted intent to defraud and delay their creditors. One of these notes was subsequently transferred to the Second National Bank of Scranton as collateral security for O. W. Freeman's debt to the bank. When the two Freemans later became concerned about the consequences of their fraudulent scheme, they attempted to undo the transaction, and three of the four notes were returned. The bank, however, refused to surrender the disputed note, and Oscar F. Freeman sought to invalidate the judgment based on it.

The central legal question involved whether the defendant could rely on the underlying fraud as a defense to the note, and whether the bank's potential knowledge of the fraudulent scheme would shield it from recovery. The court rejected both arguments, holding that fraud between the original parties constitutes valid consideration that neither party may subsequently repudiate. The trial court had erroneously instructed the jury that the bank's knowledge of the fraud would bar recovery, when in fact the bank's status as a transferee did not entitle the defendant to assert a defense he could not raise against the original payee.

Summary generated by law.co from the public-domain opinion. The opinion text itself is public domain.

Key issues

Whether fraud between parties constitutes valid consideration that binds both the maker and transferees
Whether a party to a fraudulent scheme may later seek court relief based on that same fraud
Whether a transferee's knowledge of fraud affects its right to enforce a note

Procedural posture

The defendant obtained a rule to open a judgment entered on a promissory note and an issue was framed to test the note's validity, resulting in a jury verdict for the defendant in the trial court.

Authorities cited

No cited authorities resolved to law.co cases yet.

Opinion · public domain

majority opinion

Mr. Justice Paxson

delivered the opinion of the court, March 26th 1883.

This was an issue in the court below to test the validity of a judgment entered upon a note given by Oscar F. Freeman, defendant in error, to 0. W. Freeman, and by the latter assigned to W. W. Winton for the Second NationalBank of Scranton. The bank claimed to hold it as collateral for the indebtedness-of 0. W. Freeman.

The note was one of a series of four notes of $2,500 each, and it was not denied that they were collusively given to hinder and delay the creditors of C. W. Freeman. After the note in controversy had been transferred to the bank the two Free-mans became alarmed at the possible consequences of the fraud, and as far as was in their power, traded back, to use their own expression, and three of the notes were surrendered to Oscar F. Freeman. The bank, however, did not surrender the note in controversy, and the defendant applied to and obtained a rule in the court below to open the judgment, and this issue was framed to try the question of its validity. The jury under the rulings of the court returned a verdict for the defendant.

It is settled by numerous authorities that there is no more binding consideration known to the law than the mutual fraud of the parties. The books ■ are full of cases where a party to the fraud has sought relief in the courts from the consequences of his unlawful act, but the decisions have been uniformly adverse to such applications.. It is not the province of the law to help a rogue out of his toils. The rule is to leave the parties where it finds them, giving no relief and no countenance to contracts made in violation of statutes : Hershey v. Wei ting, 14 Wright 240 ; Evans v. Dravo, 12 Harris 62. It follows that the defendant would have no defence to this note as against 0. W. Freeman the obligee or payee. The learned judge of the court below, however, was of opinion, and so instructed the jury, that if the bank had knowledge of the fraud and afterwards took the note, it became a party to the fraud and -could not recover. The fallacy of this ruling is obvious. The note is good as between the parties, for the reason that the maker cannot set up his fraud as a defence. If he cannot set it up against the payee, neither can he set it up against the bank, and the inquiry whether the bank had knowledge of the fraud was wholly irrelevant.

Nor does the question of a failure of consideration arise in the case. There never was any bona fide consideration given for these notes. The transaction was a fraud, the object of which was to hinder and delay the creditors of C. W. Freeman. There never was a delivery, actual or constructive, of the goods for which the notes were supposed to be given, nor was it intended that-there should be. Had there been no fraud, the failure of consideration could have been inquired] into. But just here the law steps in and says that the intended fraud is a binding consideration, and that although Oscar F. Freeman received no benefit whatever for the note, he cannot be allowed . to impeach it on that ground. This may seem hard, but it is •just. The rule is founded upon the highest considerations of public policy and must be sternly enforced in order to keep men honest.

If the bank had agreed to the rescission of the arrangement between the Freemans, and had cancelled or surrendered the note, the ease would have been different. But it did neither. There was no evidence to submit to the jury that it surrendered the note, or agreed upon a sufficient consideration to do so. The jury shauld have been instructed to find a verdict for the plaintiff.

Judgment reversed and a venire facias de novo awarded.