Farrington v. Frankfort Bank

24 Barb. 554, 1857 N.Y. App. Div. LEXIS 77

Opinion

W. F. Allen, J.

The bills in question, with the indorsement of the plaintiff, came into the possession of the defendant on' the day of their date, (January 17th, 1856,) and this suit was commenced and the preliminary injunction served two days thereafter, (January 19th.) As the circumstances under which the indorsements were obtained, if as alleged by the plaintiff, would not constitute a defense to an action at the suit of a bona fide holder for value, this action was necessary to the protection of the plaintiff and was properly brought, and may be sustained, if the evidence sustains the allegation of fraud, and the defendants are not holders for value without notice of the fraud by which the plaintiff was induced to make the indorsement. Although, in case the defendant should continue the holder of the bills until after they matured, the plaintiff might, if his allegations are true, defend himself at law in any action to be brought, as against him, the defense would be of no avail as against any other person or corporation to whom the defendants might transfer them before due ; and hence this action was necessary and proper. (Reed v. The Bank of Newburgh, 1 Paige, 215. Coddington v. Bay, 20 John. 637. Hamilton v. Conway, 1 K. 517.) That the indorsements were procured by a very gross fraud, is very clearly established by the evidence, and is not disputed by the counsel for the appellants. With this part of the finding of the justice, upon the trial, no fault was found upon the argument of the appeal, either in the printed points or otherwise; but on the contrary, it was conceded that the plaintiff was induced to indorse the bills by the false and fraudulent representations of the drawer, substantially as stated in the complaint, so that we are relieved from the examination of this branch of the case.

The serious question, and indeed the only question, upon the merits, is that arising out of the evidence of the circumstances and considerations of the transfer of the paper to the defendant; and upon this point there was some circumstantial but no substantial difference in the testimony of the two principal witnesses of the respective parties. The substance of the transaction is the same as detailed by both the witnesses. - The drawers of the bills indorsed by the plaintiff were, at their date, indebted to the defendants to a large amount, upon negotiable paper not yet due, and to the amount of $4500 upon paper over due and under protest, and were in bad credit and actually insolvent. The drafts, with the indorsements of the plaintiff, were procured in order to provide for the debt past due which was represented by two bills of Osborn’s on the firm of Osborn, Turnbull & McDonald, for $2000 and $2500, respectively, and that indebtedness constituted the only consideration of their transfer to the defendants. The protested drafts were not delivered to the parties at the time of the transfer of the new bills, but on the evening of the 19th of January,, a short time before the service of the papers for the commencement of this action, the parties to the old drafts were credited with the avails of the new, and eharged with the old, together with the expenses of the protest, &c., and the latter were marked or cut with the canceling iron of the bank and placed in a drawer with papers of the like character, where they remained up to the time of the trial. This was the transaction, and it must speak for itself. It was carried out, in substance, according to the understanding of the parties. There was no express agreement that the new bills should or should not be taken in absolute payment of the protested paper, or as collateral security for it. It was, doubtless, the understanding of both ^parties, that the debtors should have the benefit of the new paper in liquidation of the old, that the difference in amount between the two, growing out of the accumulation of interest, protest &c., should b.e settled and paid by the parties liable. The form which the transaction took upon the books of the defendants, and the disposal of the pretended paper, was the result of an orderly and proper method of bookkeeping and the course of business which was deemed proper by the officers of the bank under the circumstances, rather than by any express agreement between the parties.

Whether a title acquired under these circumstances, and upon this consideration, is a valid title as one acquired bona fide and for value, and perfect as against the equities of the plaintiff, is the principal question made upon the appeal; for although the counsel for the respondents makes a point upon the complicity of the cashier and the defendant in the fraud perpetrated upon the plaintiff, there is no proper allegation of such fraudulent combination, in the complaint, and the judge at the circuit did not base his decision upon any such fact; and it is not therefore deemed necessary to examine the evidence which it is claimed bears upon the question. In other words, as the case comes before us that question is not in it. That a holder for value can alone retain as against the defrauded party, or enforce the collection of, negotiable paper procured by fraud, is not questioned. (Rogers v. Morton, 12 Wend. 484. 14 id. 575.) It is conceded that something more is necessary to support the title of the holder, as against the true owner who has been fraudulently deprived of negotiable paper, or against the parties to such paper, obtained by fraud or without consideration, than that which must be sufficient as a consideration to support a transfer as between the parties negotiating it. In this case the bills were transferred to the defendants in the ordinary course of business and upon a good consideration as between them and Osborn, who, in the absence of any fraud, was fully authorized to deliver them to the defendants, so as to bind the plaintiff as indorser; but the question is whether they were transferred for value given at the time, so as to protect the defendants against the equities of the plaintiff. The general principle is settled in the case of Bay v. Coddington, (5 John. Ch. Rep. 54, and 20 John. 637,) that the consideration which will protect the indorser of negotiable paper against the latent equities of parties or third persons, must be something of value parted with in fact at the time, in money or property—some responsibility incurred—or some right relinquished, upon the / faith and credit of the paper. This is fully recognized in all the cases to be found in our books, and the only difficulty has arisen in the application of this principle to the circumstances of each ease. A precedent debt, when the note or bill is taken in payment and satisfaction of it, and securities are given up or lost in consideration of the transfer, has been held a sufficient consideration as a present parting with value on the faith of the note. One difficulty in this case is in the want of evidence that the bills in question were taken in payment of the precedent debt of Osborn, so as to bring this case within the principle contended for. The judge has found that they were not so taken, and his conclusion appears to be warranted by the evidence, and the course of the decisions in this state. As between the defendant and these original debtors, it could not have been claimed by the latter, under the authorities, that their liability was discharged by the transfer of these drafts, unless payment resulted from them. There was certainly no express agreement that they should be received in absolute payment. Upon the refusal of the drawees to accept, or upon the dishonor of the bills at maturity, the defendants could have resorted to the original liability of the debtors, and maintained an action against them upon the protested drafts. Olcott v. Rathbone, 5 Wend. 490. Cole v. Sacket, 1 Hill, 516.) The new bills were but the bills of the debtors themselves, and not the paper of a third person. The plaintiff was the accommodation indorser of the debtors, and was known by the defendants’ cashier to be such, which would bring the case within the principle of Cole v. Sackett, Watervliet Bank v. White, (1 Denio, 608;) Waydell v. Luer, (5 Hill, 442; 3 Denio, 418;) Highland Bank v. Dubois, (5 Den. 558;) Elwood v. Deifendorff, (5 Barb. 398.) If the transfer was not in payment and discharge of the prior indebtedness, as between the parties, and without affirmative evidence of the fact it could not be presumed, then it was not a transfer in payment so as to cut off the equities of third persons. I have met with no case in our own courts in which a transfer of commercial paper has been held to have been in payment of an existing debt so as to affect the parties to the paper transferred, as the persons claiming title to it, in which it was \ not in fact payment as between the parties to it. It is possible that the convenience and security of those dealing in commercial paper require that the law as held in this state should be somewhat modified, and perhaps be made to conform to the opinion of Justice Story, in Swift v. Tyson, (16 Peters, 1;) but if this be so held it can only properly be done by the court of last resort, who can alone authoritatively review and modify the decision of the court for the correction of errors.

The decisions in our own state are not, I think, inconsistent with each other, and with the exception of the case of White v. Springfield Bank, (3 Sandf. S. C. R. 222,) there has been no attempt to detract from the force of the case of Coddington v. Bay, (20 John. 636,) or the leading opinion of the chancellor in Stalker v. McDonald, (6 Hill, 93.) In Coddington v. Bay the notes were transferred to the defendants to indemnify them against responsibilities already incurred for the party transferring them. Chief Justice Spencer says, “ Now I understand by the usual course of trade, not that the holder shall receive the bills or notes thus obtained as securities for antecedent debts, but that he shall take .them in his business and as payment for a debt contracted at the time.” If the judge was right in his conclusion, as I think he was, that the drafts in question were not transferred in payment, absolutely, of the prior indebtedness of Osborn, Turnbull & McDonald, they were of course received as security, and the case is directly within Coddington v. Bay.

The next case was that of Wardell v. Howell, (9 Wend. 170,) and there- the note was transferred as collateral security for a prior debt, and in consideration of its receipt the plaintiff discontinued a suit which he had commenced against the debtor, and gave him time. This was not held a sufficient giving up or parting with any valuable right or thing to give the party the rights of a bona fide holder for value. In Rosa v. Brotherson, (10 Wend. 85,) the question was directly presented, and it was expressly decided that when a creditor receives the transfer of a negotiable note in payment of a precedent debt, he takes it subject to all equities existing between the original parties. In this case it did not appear that any security was given up. Chancellor Walworth says, in Stalker v. McDonald, that there is no doubt that Rosa v. Brotherson follows the decision of Coddington v. Bay. In Payne v. Cutler, (13 Wend. 605,) the notes were transferred and the value of them allowed on a settlement of accounts with the payee, and it was held that the holders were not holders for value, and that the consideration was inquirable into in an action by them against the maker. Chief Justice Savage says, “ The plaintiff in this case neither having advanced any thing nor incurred liability on the credit of these notes, we must on this motion assume that the notes were obtained by fraud, and the defense was therefore proper.” Francia v. Joseph, (3 Edw. Ch. 182,) was, like this, an equitable claim to recover possession of a promissory note which, as was alleged, had been fraudulently diverted from its proper use, and the defendant had received it as security for a precedent debt, of one who held it as the agent of the plaintiff, and had on receiving it given up another note made by a third person, which had been deposited with them as security for the same debt, and their title was declared invalid as against the claims of the rightful owner of the note. The Bank of Salina v. Babcock, (21 Wend. 499,) was decided upon grounds which were supposed to make the case an exception to the general rule, and was not considered by the court pronouncing it as overruling any of the antecedent cases in our own courts. The court held that the plaintiff did pay value for the note in the strict sense of the term. Ch. J. Nelson says, “The proceeds of the note were placed to the credit of Trowbridge <fc Co, for whom it. was discounted and were drawn out; not, I admit, by checking for the money, but by the Cancellation of securities held by the plaintiff, which was the same thing in legal effect. By this cancellation a responsible indorser had been discharged, or if not discharged, the remedy against him had been rendered doubtful. Upon this distinguishing feature of the case the decision is rested.” The Bank of St. Albans v. Gilliland, (23 Wend. 311,) was put upon the ground that the note was taken by the plaintiff in full satisfaction of the prior indebtedness, without recourse and the debt discharged. The court, in giving judgment, reaffirms the doctrine that “ receiving a note for a precedent debt is not receiving it for value, within mercantile usage,” and refers approvingly to the cases sustaining the doctrine. The plaintiff had discharged the personal responsibility of the original debtors on the credit of the note, and had thus parted with value. The decision in the case of The Bank of Sandusky v. Scoville, (24 Wend. 115,) is placed by the court upon the same principle. Bronson, J., says, “ The note was discounted by the plaintiff for the benefit of Ward to extinguish his debt, and the avails went to discharge Ms liability to the bank.” Emphasis is laid upon the fact that a debt was “ extinguished,” and a personal liability of the original debtor “ discharged.” The Mohawk Bank v. Corey, (1 ,) was an action against the defendant as the indorser of the note of one Borst, which had been transferred to the plaintiff in payment of two notes of the same maker, indorsed by one Yoorhees, which were delivered up, and a suit which had been commenced was thus discontinued. The court held, 1st, that there had been no diversion of the note from the purpose for which it was made and indorsed; and 2d, that if there had been, the plaintiffs would still be entitled to recover as bona fide holders for value, within the principle of The Bank of Salina v. Babcock. Securities had been given up. Stalker v. McDonald, (6 Hill, 93,) affirms a judgment of the supreme court, to the effect that the holder of negotiable paper would not be protected as against the equities of third persons when it appeared that the paper was received as a security for an antecedent debt, and the holders neither parted with value on the credit of it, nor relinquished any previous security. This is probably the extent to which the case goes as authority; but the chancellor, whose opinion is entitled to great weight, expresses the opinion that it would be the same if the paper were received nominally as payment. He does this upon a full review of all the cases, English and American, and giving to the cases in the 21st and 24th Wendell their full effect as deciding correctly the questions presented by them under the circumstances disclosed. Small v. Smith, (1 Denio, 583,) was someAvhat similar in its circumstances to this case, omitting what was done by the defendants at their banking house after the transaction between them and Osborn had been consummated, and in the absence of the latter. The plaintiff had a debt against the maker of the note in suit, and pressed him for security, and agreed to take his note at one year, indorsed by the defendant, and the note was procured and delivered accordingly. Judge Beardsley, in delivering the opinion of the court, held that it was error in the circuit judge to submit to the jury whether the note was received in satisfaction of the prior indebtedness, as there was no evidence tending to show that fact. The case was decided upon another point.

The Seneca County Bank v. Neass, (5 Denio, 329,) simply recognizes the principle that the satisfaction of a precedent debt may form a valuable consideration for the transfer of negotiable paper; but the case was decided upon another ground, and the question now presented was not considered by the court. White v. The Springfield Bank, (1 Barb. Sup. C. R. 225,) was not a well considered case, and under the circumstances, if they appeared upon that motion as they were developed upon the hearing of the case upon the merits, the decision might well have been different, and yet been consistent with all the cases that had gone before it. Stewart v. Small, (2 Barb. Sup. C. R. 559,) decided that a person could not be said to have parted with value for a note when he had only given credit for the amount of it upon the note of an insolvent party, which he knew to be of no value ; and that is all that has been done by the defendants in this action, upon the credit of the drafts which they claim to retain and enforce against the plaintiffs. The case cited was decided by Judges Cady, Willard and Edmonds, and the argument of Judge Cady was entirely applicable to the points of this case. In Montross v. Clark, (2 Sand. S. C. R. 115,) the note in suit was transferred to the plaintiff in part payment of a note they held against the payee, and Judge Sandford instructed the jury that if the note had been diverted from the purpose for which it was made by the defendant, and lent to the payee, the plaintiffs could not recover. Thus directly affirming the doctrine of Rosa v. Brotherson, and the other cases cited. Of course what Yanderpoel, J., said upon this point, the plaintiff having recovered, is entirely obiter, and the remark was not as well considered as it would have been if it had been material to the case. Spear v. Myers, (6 Barb. 445,) was decided by Judges Jones, Edmonds and Edwards, and distinctly reaffirms the doctrine of Rosa v. Brotherson, that parties who receive a note which has been improperly put in circulation, in payment of an existing debt, without parting with any value for it at the time, or surrendering any securities, are not entitled to hold it, as against the rightful owner. The plaintiffs had received the note from Knapp, their debtor, in payment of their debt, gave him a receipt for it, and balanced the accounts on the books. This is certainly as much as was done by the defendants here, for their canceling iron was of no more force, applied to the papers, than was the receipt given to the party. Both acts are open to explanation. ( Watervliet Bank v. White, 1 Denio, 608.) White v. The Springfield Bank, which was before Judge Edmonds in 1 Barbour, was before the superior court of the city of Hew York, on its merits, and is reported in 3 Sand. S. C. R. 222. The case was one of an absolute discharge of a precedent debt, and also one in which the defendants having collateral securities to a given amount and which covered the draft given up on the receipt of the note of the plaintiffs, made other advances in lieu of the advance made upon the draft, and which further advances fully exhausted the collaterals, so that the defendants made a case of very strong equity. By acting upon the faith and credit of the plaintiff’s note they had parted with value, and unless permitted to retain the note, they would be the losers to the full amount. But in this ease the defendants are in as good a situation, if they are compelled to surrender the bills indorsed by the plaintiffs, as they would have been if they had never taken them. They parted with nothing, and if they can collect the drafts, they are by so much the gainers by the experiment

Youngs v. Lee, (18 Barb. 187, affirmed 2 Kernan, 551,) was well decided, in accordance with the previous decisions by the courts of this state. In consideration of the note in suit, the plaintiff had withdrawn from the bank another note of the party, before it reached maturity, and surrendered it to the maker on receiving from him a new note payable in three months, indorsed by a third person. In other words, they had taken the note sued on, in satisfaction of a debt not yet due, and surrendered the evidence of that debt. The decision in the court of appeals was put upon this ground alone. Judge Johnson says, “ In the case before us the note was received in extinguishment of a demand upon a note not yet due, and the note was delivered up. The surrender upon the consideration of a security not due extinguished the security. The plaintiffs therefore became holders for value, and are entitled to recover.”

There was nothing in this case like the surrender of any security by the defendant, upon receiving the drafts indorsed by the plaintiff. The transaction, as between them and Osborn, was complete when the latter delivered to them the drafts. No other act was necessary, or was contemplated, to vest the title to the drafts in them, and they were then the holders of both sets of securities. The one was therefore collateral to the other, as found by the judge. The subsequent acts of the defendants were performed of their own volition, and not at the request or for the benefit of any third party, or in performance of any part of the agreement under which they acquired title to the paper. Their own acts cannot be resorted to to fortify their own title. They were, however, of no legal importance, even if done with the knowledge and assent of Osborn. The equities of the plaintiff are very manifest, and the defendant has failed to show a legal title to the drafts which can overcome them. The objection to the evidence of what passed between Osborn and the plaintiff at the time the indorsements were procured, is clearly untenable. The gist of the action, and the foundation of the plaintiff’s equities, is the false and fraudulent representations of Osborn; and to shut out the evidence of the declarations of Osborn would be simply to debar the injured party of all relief. The complaint does not necessarily mean that the representations were made in the presence of the defendants’ cashier, and if it did, that part of the averment would be immaterial, so far as the case upon which relief was finally granted is concerned, and might well have been disregarded or considered as struck out as surplusage. The proof offered, of the purpose for which the drafts remained in the possession of the defendant after the 19th day of January, 1856, was inadmissible, as only tending to show the understanding of the defendant of the agreement and the resulting legal rights of the parties, and this too after lis mota the practical construction of the agreement by the defendants after suit brought. The offer of the defendant to contradict Osborn as to an immaterial fact, to wit, the circumstances attending another transaction, a prior loan from the defendants of $5000, with which the plaintiff was not connected, was properly excluded. As to that matter the defendants had made Osborn their own witness, and were not allowed to contradict him by way of impeachment. So too, the evidence offered that the witnesses for the defendant refused to swear, in the affidavit which was introduced with a view to discredit him, to something much more favorable to the defendant and much more discordant with his evidence on the trial than was actually sworn to by him in the affidavit, was not competent, as it did not explain the facts stated in the affidavit, or tend to qualify them or explain or account for the discrepancy, if any existed, between the statements in the affidavit and the evidence given on the trial.

These are all the questions, and all the exceptions, which were made by the counsel for the defendants in his printed points or presented by him upon the argument; and I am unable to discover any error calling for a reversal of the judgment. The judgment must be affirmed with costs.

Bacon, J.

That the name of the plaintiff was procured to be placed upon the paper in question by gross fraud and misrepresentation is transparent upon the evidence, and is found by the justice before whom the trial took place. The only important question is whether it was received by the defendant in good faith and in the usual course of business, and whether the bank parted with securities, or extinguished an antecedent indebtedness ; or whether it was received only as collateral security and the indebtedness remained undischarged. The judge has found as a matter of fact that there was no agreement between Pomeroy and Osborn, that the drafts in question should be received by the defendant in payment of the prior drafts then under protest, but that on the part of Osborn they were delivered with the intention that they should be held as additional and collateral security to the indebtedness then existing in favor of the defendant. This conclusion is one drawn from the evidence in the case, and it seems to me it is conclusive as to the respective rights of the parties. The law is well settled, after a long series of adjudications in this state, that where paper thus obtained in fraud of the party executing it, is parted with to an innocent holder, in the usual course of trade, for a valuable consideration, such holder will be protected. But the valuable consideration must be either a new advance made at the time, or some prior security must be parted with, or an existing indebtedness actually discharged, in order to complete the title of the holder. See Stalker v. McDonald, (6 Hill, 93,) following and reaffirming the decision in the case of Coddington v. Bay, (20 John. 636,) and numerous cases since. Merely giving this the form of canceling the old drafts and still retaining them, was no discharge of the securities, nor did it exonerate the parties thereon from liability. But the finding of the court that the drafts indorsed by the plaintiff were delivered merely as collateral security, in my judgment puts an end to the question.

[Jefferson General Term, April 7, 1857.

I see nothing in the several objections made in the course of the trial, and the rulings thereon, which requires notice and upon the whole case my opinion is that the judgment should be affirmed.

Hubbard, J., and Pratt, J., concurred.

Judgment affirmed.

Hubhard, Pratt, Bacon and W. F. Allen, Justices.]