The Commercial Doctrine of Good Faith Purchase

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The Commercial Doctrine of Good Faith Purchase +(,121/,1( Citation: 63 Yale L.J. 1057 1953-1954 Content downloaded/printed from HeinOnline (http://heinonline.org) Fri Apr 8 12:01:24 2011 -- Your use of this HeinOnline PDF indicates your acceptance of HeinOnline's Terms and Conditions of the license agreement available at http://heinonline.org/HOL/License -- The search text of this PDF is generated from uncorrected OCR text. -- To obtain permission to use this article beyond the scope of your HeinOnline license, please use: https://www.copyright.com/ccc/basicSearch.do? &operation=go&searchType=0 &lastSearch=simple&all=on&titleOrStdNo=0044-0094 THE YALE LAW JOURNAL VOLum 63 JUNE 1954 NUMBErS S THE COMMERCIAL DOCTRINE OF GOOD FAITH PURCHASE GRANT 1LMORE-I THE triumph 4 the good faith purchaser has been one of the most dramatic episodes in our legal history. In his several guises, he serves a commercial function: he is protected not because of his praiseworthy character, but to the end that commercial transactions may be engaged in without elaborate investigation of property rights and in reliance on the possession of property by one who offers it for sale or to secure a loan. As the doctrine strikes roots in one or another field, the "good faith" component tends to atrophy and the commercial purchaser is protected with little more than lip service paid to his "bona fides." GOOD FAITH PURCHASE IN THE LAW OF SALEs The commerciality of the good faith purchase doctrine can be demonstrated by a brief history of its growth in the law of sale of goods. The intangible evidences of property, with which the balance of this article Will be concerned, are by their nature almost exclusively commercial. Goods, however, lead a double life: as inventory, they are the subject matter of commercial transac- tions; as possessions, the things we live by, they have passed out of the stream of commerce and come to rest. Although Anglo-American law does not pur- port to distinguish between commercial and non-commercial transactions, goari faith purchase in the law of sales has, in fact, a very different operation in the two cases. The initial common law position was that equities of ownership are to be protected at all costs: an owner may never be deprived of his property rights without his consent. That worked well enough against a background of local distribution where seller and buyer met face to face and exchanged goods for cash. But as the marketplace became first regional and then national, a recur- rent situation came to be the misappropriation of goods by a faithless agent in fraud of his principal. Classical theory required that the principal he pr.- tected and that the risks of agency distribution be cast on the purchaser. The market demanded otherwise. The first significant breach in common law property theory was the protec- tion of purchasers from such commercial agents. The reform was carried out through so-called Factor's Acts, which were widely enacted in the early part t Professor of Law, Yale Law School. HeinOnline -- 63 Yale L.J. 1057 1953-1954 1058 THE YALE LAW JOURNAL [Vol. 63 :1057 of the 19th century.' Under these Acts any person who entrusted goods to a factor-or agent-for sale took the risk of the factor's selling them beyond his authority; anyone buying from a factor in good faith, relying on his possession of the goods, and without notice of limitations on his authority, took good title against the true owner. In time the Acts were expanded to protect people, i.e., banks, who took goods from a factor as security for loans made to the factor to be used in operating the factor's own business. 2 The Factor's Acts, as much in derogation of the common law as it is possible for a statute to be, were restrictively construed 3 and consequently turned out to be considerably less than the full grant of mercantile liberty which they had first appeared to be. Other developments in the law gradually took the pressure off the Factor's Acts, which came to be confined to the narrow area of sales through commission merchants, mostly in agricultural produce markets. 4 1. The first English Act (4 George IV, c. 83) was passed in 1824 and thereafter several times amended to overrule restrictive judicial constructions. See 2 WILUSTON, SALES §§ 318, 319 (rev. ed. 1948). A group of Eastern and Mid-Western States then enacted similar, although by no means uniform statutes: Maine, Maryland, Massachusetts, New York, Ohio, Pennsylvania, Rhode Island, and Tennessee. A comparable provision was included in the California Civil Code and copied in Montana and North Dakota. See 2 id. § 320, collecting the statutory citations. 2. Thus the Massachusetts Act, passed in 1845 (Mass. Stat. 1845, c. 193) covered only buyers. An amendment in 1849 was added to protect pledgees. Mass. Stat. 1849, c. 216, § 3. In Michigan State Bank v. Gardner, 15 Gray 362 (Mass. 1860), the court refused to protect a pledgee who took goods in 1847, commenting: "[The 1849 amendment] was passed after this transaction, and cannot affect it. But it shows that the former statute was insufficient... and by expressly giving the authority to pledge implies that the authority did not exist before, even where the pledge was made in good faith and with probable cause to believe that the agent had authority, and was not acting fraudulently therein against the owner of the property." Id. at 374. 3. The New York Commission of Appeals (the highest court in the state) ex- pressed the prevalent attitude in First Nat. Bank of Toledo v. Shaw, 61 N.Y. 283, 304 (1874) : "Considerable stress was laid at the argument, by counsel on either side of the case, on the great consequences to commerce of a decision in this cause adverse to their respective views. Finding the principles of law clearly settled, we are bound to ad- minister them as they have come down to us from our predecessors. While com- mercial convenience must be respected, the rights of property must not be sacrificed .... The true interests of commerce demand that the claims under bills of lading and other such instruments should be scrupulously protected, since commerce will not flourish where the rights of property are not respected." The case involved grain shipped to New York City. The New York factor, to whom the bill of lading was delivered by plaintiff's agent, warehoused the goods on delivery and pledged the resulting warehouse receipt to defendant. Plaintiff was allowed to replevy the goods on the theory that there had been no "entrusting" of the bill of lading and that the warehouse receipt was "mere waste paper." Ibid. No distinction is taken in the opinion between negotiable and nonnegotiable documents. For a relatively modern reiteration of the same restrictive construction of the Factor's Acts, see Gazzola v. Lacy Bros. & Kimball, 156 Tenn. 229, 299 S.W. 1039 (1927) (also involving a substitution of warehouse receipt for the original bill of lading). The Gazzola case is criticized in an excellent note in 12 MiNN. L. REV. 633 (1928) which collects much of the early material. 4. The practice in the jewelry trade of delivering diamonds on memorandum or consignment to peripatetic sales agents led to a flurry of litigation in New York. HeinOnline -- 63 Yale L.J. 1058 1953-1954 1954] GOOD FAITH PURCHASE 1059 Even while they were cutting the heart out of the Factor's Acts, the courts were finding new ways to shift distribution risks. Their happiest discovery was the concept of "voidable title"--a vague idea, never defined and perhaps incapable of definition, whose greatest virtue, as a principle of growth, may well have been its shapeless imprecision of outline. The polar extremes of theory were these: if B buys goods from A, he gets A's title and can transfer it to any subsequent purchaser; if B steals goods from A, he gets no title and can transfer none to any subsequent purchaser, no matter how clear the purchaser's good faith.5 "Voidable title" in B came in as an intermediate term between the two extremes: if B gets possession of A's goods by fraud, even though he has no right to retain them against A4, he does have the power to transfer title to a good faith purchaser.0 Nelkin v. Provident Loan Society, 265 N.Y. 393, 193 N.E. 245 (1934); Sweet & Co. v. Provident Loan Society, 279 N.Y. 540, 18 N.E.2d 847 (1939); Mann v. R. Simpson & Co., 286 N.Y. 450, 36 N.E.2d 658 (1941); Mendelsohn v. R. Simpson & Co., 267 App. Div. 564, 47 N.Y.S.2d 489 (1st Dep't 1944) ; Landau v. Cramer, 32 N.Y.S2d CIA (Sup. Ct. 1941) ; Lindner v. Winston, 151 Misc. 499, 270 N.Y.Supp. 829 (N.Y. City Ct. 1933). Before the passage of the Uniform Trust Receipts Act, and perhaps as a contribut- ing factor to its passage, there were suggestions in tv-o New York cases that the Factor's Act might be applicable to purchasers of collateral entrusted under trust receipts. Sce In re James, Inc., 30 F2d 555 (2d Cir. 1929) and Commercial Credit Corp. v. Northern Westchester Bank, 256 N.Y. 482, 177 N.E. 12 (1931). To the iameeffect in Massa- chusetts: Associates Discount Corp. v. C. E. Fay Co., 307 Mass. 577, 30 X.E.2d 876 (1940) (involving a transaction which occurred after the passage of the Trust Receipts Act but which, because there was no signed writing, fell outside that Act).
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