ERROR TO THE CIRCUIT COURT OF THE UNITED STATES FOR THE EASTERN DISTRICT OF LOUISIANA.
MR. JUSTICE WHITE, after stating the case, delivered the opinion of the court.
A strict construction of the pleadings would create the impression that the sale out of which the controversy arose was made upon an express oral warranty of the validity of the bonds sold. As, however, the case was submitted upon an agreed statement of facts which does not declare this to be a fact, and as both parties, as well as the court below, assumed such not to be the case, we will pretermit this aspect of the subject and consider the case upon the theory that the only warranty, if any, is one to be implied from the nature of the contract.
It is obvious from the facts just detailed that the thirteen bonds which were sold by the defendant in error to the plaintiff in error were at the time of the sale absolutely void. The twelve which originally belonged to the two college funds were in express terms declared by the constitution of the State to be "null and void," and the general assembly was forbidden to make any provision "for their payment," and they were ordered to be "destroyed in such manner as the general assembly may direct." This provision of the constitution was in existence while the bonds were in the hands of the State, and before they were fraudulently and surreptitiously sold. Indeed, these bonds were never lawfully put into circulation, because, having been originally issued to represent trust funds belonging to the State, they were held by officers of the State for its account. The remaining bond was also void under the constitution of the State, since it had been, under the express terms of that instrument, surrendered to the state treasurer for cancellation and another bond issued in its stead.
The bonds were undoubtedly sold by the defendant in error as lawful obligations of the State. Both parties to the contract of sale so considered. The pleadings and the statement of facts leave no question on this subject. The controversy here presented is wholly between the vendor and vendee as to the nature and extent of the obligation of warranty resulting from the sale. We are therefore not concerned with whether the defendant at the time of the sale stood in the attitude of a third holder of negotiable paper for value before maturity. Even if he were in such a condition, and at the time of the sale
there was a constitutional provision which rendered the bonds void and incapable of enforcement, it is clear that the delivery by the vendor to the vendee of bonds stricken with constitutional nullity was not the delivery of an existing obligation within the meaning of the contract if it imported a warranty of the existence of the bonds which it covered. The admission being that both parties contemplated the delivery of valid obligations, bonds of that character being outstanding, if warranty of existence was implied by law, such purpose was not fulfilled by the delivery of a mere equity, which one of the parties, the seller, claims was existing in his behalf. Valid bonds and not the mere claim by the seller to enforce invalid bonds was the object of the contract. This is especially true in view of the fact just referred to that at the date of the sale the constitution of the State in express terms forbade the enforcement of twelve of the bonds and practically stipulated to the same effect as to the other.
The sale was a Louisiana contract. We must consequently determine the rights and obligations of the parties by the law of that State. By the civil law, which prevails in Louisiana, warranty, whilst not of the essence, is yet of the nature of the contract of sale, and is, therefore, implied in every such contract unless there be an express stipulation to the contrary. Bayon v. Vavasseur, 10 Martin, 61; Strawbridge v. Warfield, 4 Louisiana, 20. The following provisions on the subject of warranty are found in the Louisiana code: "The seller is bound to two principal obligations, that of delivery and that of warranting the thing which he sells." C.C. 2475. "Although at the time of the sale no stipulations have been made respecting the warranty, the seller is obliged, of course, to warrant the buyer against the eviction suffered by him from the totality or part of the thing sold and against the charges claimed on such thing which were not declared at the time of the sale." C.C. 2501. "Even in case of stipulation of no warranty, the seller in case of eviction is liable to a restitution of the price, unless the buyer was aware, at the time of the sale, of the danger of the eviction, and purchased at his peril and risk." C.C. 2505.
These articles of the Louisiana Civil Code, which do but formulate the principles of the civil law as to warranty, are not wholly in accord with the doctrines of the common law. The distinction between the two systems may be briefly summed up by saying that the one, the civil law doctrine, finds its expression in the maxim caveat venditor, whilst the rule of the common law is conveyed by the aphorism caveat emptor. It is unnecessary to determine the scope, under the Louisiana law, of the obligation of warranty as to property generally, since we are in this case concerned only with its limit when arising from the sale of a credit or other incorporeal right. The code of that State contains express provisions defining the extent of the obligations arising in such case. "He who sells a credit or an incorporeal right, warrants its existence at the time of the transfer, though no warranty be mentioned in the deed." C.C. 2646. "The seller does not warrant the solvency of the debtor unless he has agreed so to do." C.C. 2647. These provisions, instead of causing the obligation of warranty in a sale of an incorporeal right to be broader than in the case of tangible property, on the contrary make it narrower.
As then, under the law of Louisiana, the seller under the contract of sale was obliged to warrant the existence of the thing sold, the case of the defendant in error involves the practical contention that a bond which at the time of the sale was declared by the constitution of the State to be non-existing, is yet for the purposes of the sale to be treated as an existing obligation. This proposition is an obvious contradiction in terms, and of course refutes itself. In Knight v. Lanfear, 7 Rob. (La.) 172, where a treasury note had been sold without recourse, and it was found that the note had been redeemed and cancelled and thereafter had been purloined and reissued, and the word "cancelled" erased, the court held that the seller was bound to return the price.
In Pugh v. Moore, Hyams & Co., 44 La. Ann. 209, the plaintiff sought to recover the purchase price of five bonds identical in character with the bonds embraced in the sale here in controversy, four of them being Mechanical and Agricultural
College bonds unlawfully issued under similar circumstances to those here presented, and one being a consolidated bond unlawfully issued after its surrender in exchange for another bond. The Supreme Court of Louisiana, after elaborate consideration, held, for one among other reasons, that the seller having been obligated to the warranty of the existence of the bonds at the time of the sale, and the bonds being void under the constitution, he was obliged to return the price. This implied obligation to warrant the existence of the claim at the time of the sale has also been frequently recognized in a collateral way by the court of last resort of the State of Louisiana. Thus, where the owner of several notes, secured by one mortgage, has transferred some of the notes, and where on a sale of the mortgage property, to pay the debt, the proceeds have proven inadequate to pay all the notes, the settled doctrine in Louisiana is that in consequence of the obligation of the seller to warrant the existence of the debt, he cannot take a part of the proceeds of the mortgaged premises to pay the notes retained by him and thus frustrate the right of his transferee to take the entire amount of the security to the extent necessary to pay the notes transferred. Salzman v. Creditors, 2 Rob. 241.
The provision of the civil law of Louisiana, imposing upon the seller of a credit or incorporeal right the obligation of warranting the existence of the debt at the time of the sale is not original in the code of that State, but was drawn in so many words from the Code Napoleon, article 1693. It was not new in that code, and but expressed the settled rule of the Roman and ancient law. L.L. 4, 5, 7, 10, 11, ff. de Haeredit. vel act. vendit.; L. 68, sec. 1; L. 74, ff. de Evictionib.; L. 30, ff. de Pignor et hyp. Merlin Rep. vol. 13, Verbo Garantie des Creances.
Where the provisions of the Louisiana Code and the Code Napoleon are identical the expositions of the civil law writers and the adjudications of the French courts are persuasive as to the proper construction of the Louisiana Code. Viterbo v. Friedlander, 120 U.S. 707, 728; Groves v. Sentell, 153 U.S. 465, 478.
Marcade, in his Commentary on the Law of Sale, thus states the rule:
"All sales of a credit subject the seller, unless there be a stipulation to the contrary, to a guarantee of the existence and the validity of the credit, as also of his right of ownership to it. Article 1693 speaks, it is true, only of the guarantee of the existence of the credit. But as the credit existing to-day, if subsequently declared to have been void, would in contemplation of law have never existed, and also as it would be equally immaterial for the buyer if the credit had a real existence; if that existence was available only to some one else, it is evident that by an existing credit is to be understood one which validly exists as the property of him who transfers it. The one who transfers, then, is held to guarantee in three cases: 1. If at the time of the sale the credit did not exist, either because it had never existed or because it was extinguished by compensation, by prescription or otherwise. 2. If the credit should be declared to have been void or the obligation be rescinded. 3. If it belonged to another person than the transferrer." Marcade, De la Vente, 335.
Troplong, in his learned treatise on the same subject, thus expounds the doctrine:
"In the sale of a credit, as in that of every other object, legal warranty is always understood. The vendor guarantees to the vendee the existence of the credit at the moment of the transfer, although there should be no expression in the contract to that effect. It is this which caused Ulpian to say: 'When a credit is sold, Celsus writes in the ninth book of the Digest, that the seller is not obliged to guarantee that the debtor is solvent but only that he is really a debtor, unless there has been an express agreement between the parties on this subject.' This guarantee is more strictly obligatory in the sale of a credit than in other matters, because the right to a credit is neither visible or palpable as it is in the case of other movable or immovable property. . . . And here let there be no misunderstanding. Do not confound the credit with the title by which it is established. Both law and reason exact that the credit should exist at the time
of the sale, and it is not sufficient that a title should have been delivered to the buyer. The title is not the credit. It can materially subsist, whilst the credit is extinguished. Thus, if the credit had been annihilated by compensation or by prescription it would serve no purpose to deliver to the buyer a title which would have nothing but the appearance of life. The buyer in such case would have a right to avail himself of the warranty." 2 Troplong, De la Vente, §§ 931, 932.
And Laurent, the latest and fullest commentator, says:
"Article 1693 says 'that the seller guarantees the existence of the credit.' We must understand this word 'existence' in the sense given to it by tradition. 'Whoever,' says Loyseau, 'sells a debt or a rent, guarantees that it is due and lawfully constituted, because, without distinction in all contracts of sale, the seller is bound to three things by the very nature of the contract, (1) that the thing exists; (2) that it belongs to him; and (3) that it had not been engaged to another.' Pothier resumes this doctrine by saying 'that the guarantee of a right consists in the undertaking that the right sold is really due to the vendor;' and the code is yet more brief since it speaks only of the existence of the debt. We must, therefore, see what the existence of the debt signifies according to the explanation of Loyseau. Firstly, the vendor is held to guarantee that the debt exists and subsists ('soit et subsiste'). If the debt had never existed because one of the conditions necessary for the existence of the contract makes default, the vendor has sold nothing; there is no object; he is held by the guarantee; this is obvious. The same rule would apply if the debt had existed, but was extinguished at the time of the transfer, because it is as if it had never existed. Such would be the case of a credit which was prescribed, or which had ...