Huff v. Wagner , 63 Barb. 215 ( 1872 )

Talcott, J.

This is an action on a promissory note made by the defendant and delivered to one Ferguson. The defendant claimed that the note was obtained from him by Ferguson, by means of false and fraudulent representations made on the sale of a patent right, and the case states that “the defendant gave evidence showing that Ferguson obtained the note from him by fraud.” The plaintiff claimed to be a bona fide holder of the note for value, and gave evidence tending to establish such fact. It appeared, by the plaintiff’s evidence, that the consideration he gave for this and another note purchased by him of Ferguson, at the same time, was a span of horses. After this- evidence, the defendant offered to show “that the property traded for the notes was not, at the time of the trade, worth more than half as much as the amount of the notes.” This evidence, being objected to by the plaintiff, was held by the court to be inadmissible; to which decision the defendant excepted.

The plaintiff had a verdict, under the instruction of the court, that he was a bona 'fide holder, and was entitled to recover on the note, notwithstanding the fraud practiced by Ferguson in obtaining the note. The special term granted a new trial upon the exception to the ruling as to the admission of the evidence, and upon the principle that a bona fide holder of commercial paper, to which, as between maker and payee, there is a good defense, is entitled to be protected only to the extent of the value which he has paid. This, I think, is correct. The protection of the holder for value in such cases, as in other cases where the law protects bona fide purchasers against latent claims, is founded upon the idea of protecting such bona fide purchaser for value against any possible loss.^ And this is the precise reason why a bona fide holder of such paper, which has been transferred to him to secure an antecedent debt, cannot recover against the party who has been defrauded; namely, that he has lost nothing by his reliance upon the face of the paper. ^

These principles are discussed and laid down in a very elaborate opinion of the late chancellor, delivered in the court of errors in the leading case of Stalker v. McDonald, (6 Hill, 93,) in which he expressly holds that if the holder of such paper has paid but a part of the consideration or value of the property, he is only entitled to be considered as a bona fide purchaser pro tanto, and refers with approbation to the case of Edwards v. Jones, (7 Carr. & P. 633,) in which, in an action on a note for ¿6100, the consideration of which was impeached by a plea, the plaintiff replied that it was indorsed to him for the consideration of ¿649. And he was only permitted to recover the ¿649 advance.

The proposition sought to be maintained by the counsel for the appellant in this case, namely, that whatever may have been the consideration of .the transfer of a negotiable note, if it was a valuable one, the holder without notice of the invalidity of the note, may recover the entire face thereof, without reference to the amount paid by him for it, would produce most unjust and startling results. It would enable the holder of a stolen note for $1000 to recover the entire amount thereof from the maker, from whom it had been stolen, although the holder had purchased the same without notice, for. only $100—a result revolting to common sense, and going far beyond affording that protection which public policy requires should be extended to parties who purchase negotiable paper for value. I see no reason for any distinction between the case of a purchaser for money, and one where the note is exchanged for property. If such a distinction could be made, the maker of the note could have no protection. Such notes would then be used in the purchase of property, as in this case, instead of sold for money. The purchaser is fully protected against loss by being enabled to recover the full value of the property parted with on the purchase.

The doctrine laid down in Stalker v. McDonald was also expressly held in Williams v. Smith, (2 Hill, 301,) and in Youngs v. Lee, (18 Barb. 189;) in which Mr. Justice Welles, delivering the opinion of the court, says: “It follows that the plaintiffs are bona fide purchasers and holders of the note upon which the action is brought, and entitled to recover from the indorsers the amount they paid for it, with interest, and no more.” The case of Young v. Lee was affirmed on appeal. (2 Kern. 534.) The same principle was also asserted in Cardwell v. Hicks, (37 Barb. 458.) The truth is, that in such cases^he holder, excépt so far as he-has parted with value, has no equity superior to that off the party defrauded.^ There, is a remarkable silence on this precise point, in most of the elementary works I have examined. It is, however, explicitly laid down in Story on Bills, (§ 188,) that where a bill has been obtained by fraud, a bona fide holder can only recover the amount he has advanced. The English cases, where a question of this character appears to have been presented, appear, generally, to have been between the bona fide holder and the accommodation maker or indorser; and in such cases it has always been ruled that the holder only recovers the amount of his advanced) (See Chitty on Bills, 81. Nash v. Brown, Id. 85, note 1. Wiffen v. Roberts, 1 Esp. 261. Jones v. Hunt, 2 Stark. 304. Simpson v. Clarke, 2 Cromp., Mees. & Rosc. 343.)

I do not perceive any reason why a bona fide holder for value may not recover the full face of the note, without regard to the amount he has advanced, as well where he sues a mere accommodation maker, as where he sues one from whom the note has been obtained by fraud. In either case the amount of the recovery is limited to the amount advanced by the holder, because there was no sufficient valid and valuable consideration for the making of - the note, and the right to recover at all, grows out of the' advance which has been made by the holder,, which gives it validity in his hands to that extent. I think the discus-lions and opinions in the English cases show that this point has not been considered debatable, where the note was obtained by false and fraudulent representations. Indeed I think that until quite recently it has been assumed at nisi prius, in this State, that a holder of such paper for value, and without notice, was entitled to be protected to the extent of his advances, and no more. • The point has been expressly decided in Holman v. Hobson, (8 Humphrey, [Tenn. 22.,] 127,) and in Bettarue v. McCrary, (8 Georgia, 114.)

It is claimed, by the counsel for the respondent, that the case of the Essex County Bank v. Russell, (29 N. Y. 673,) countenances the doctrine maintained by him. There a bank had discounted or purchased a note which was diverted, and gave as the proceeds of the discount, a part in cash and the balance in a note held by it, made by one Brewster and indorsed by other parties, which was past due and under protest. The bank was allowed to recover the whole amount of the diverted note, on the ground that it was a bona fide holder for value, and upon the express ground that the Brewster note, which constituted a part of the consideration on the purchase, although under protest, was worth its nominal amount, and was good and collectable. And the principle laid down in Stalker v. McDonald, on this point, seems to have been expressly recognized as the law. Mr. Justice Hogebo'om says, speaking of the plaintiffs, (the bank,) “they were, therefore, on discounting this note, bona fide holders of it for value, at least to the extent of the sum advanced in cash, on the discount; and to that extent, at' all events, they would be entitled to recover in this action, * * * it becomes necessary to determine whether the plaintiffs are bona fide holders of the note in suit, in such a sense as to exclude the defense of its misapplication, so far as respects that part of the discount which was appropriated to the purchase of the Brewste.r paper. There was no want of consideration on the part of the plaintiff to the full amount of the note in suit, in the transaction in question. The Brewster note was, though over due, good and collectable paper. It was worth its nominal amount, and was collectable for two years afterwards. It was a chose in action which the plaintiffs had a right to sell and transfer to Comstock. To the full extent of its value, it was a valuable consideration.”

The case of the Park Bank v. Watson, (42 N. Y. 490,) is claimed by the counsel for the appellant to have overruled the. former cases on the subject, and to have established the doctrine for which he contends. In that case, the Park Bank had surrendered notes held as collateral security for a debt due it, on receiving the notes in suit, which proved to have-been diverted. One of the notes surrendered was the note of Thomas Parks, shown on the trial to be irresponsible. The defendant’^counsel had requested the court to charge, “ that the plaintiff cannot recover for any amount beyond that which remained after deducting the Parks note.” The request being refused, an exception was taken. The only opinion in the case is that of Judge Lott, who says: “The surrender of those notes, under the decision in Brown v. Leavitt, (31 N. Y. 113,) and the cases there cited, made the bank a holder for value, and entitled it to recover the full amount claimed in those actions, without deducting the amount of the note of Parks.”

The question in Brown v. Leavitt was simply whether the surrender and delivery up to the debtor of an existing note, and receiving another in payment of it, constituted a valuable consideration within the meaning of the rule which protects a Iona fide purchaser for value against defenses existing between prior parties; and neither in that case, nor in any one of the cases there cited, was any question presented like that in the case at bar; unless it be in the cases of Stalker v. McDonald, and Youngs v. Lee, (supra,) in wrhieh cases the doctrine laid down'was, as we have seen, directly contrary to the position of the appellant here. I have looked into the original points and case, on the argument in the Court of Appeals of The Park Bank v. Watson, and find that it was claimed there by the plaintiff that, notwithstanding the evidence touching the irresponsibility of Parks, the maker of one of the notes surrendered, his note was nevertheless of value, and would probably have been paid. It cannot be affirmed that a particular note of a party, shown to be of the character and in the position such as that of Parks, is wholly valueless. blow the request of the counsel for the defendant in that case was, that the judge charge that the entire amount of the Parks note must be deducted from any recovery. TJpon well settled practice, this request was too broad"sjhenote of Parks had some value, and an exception to the refusal to charge as requested was therefore unavailable, and the remark of Justice Lott, which has been quoted, so far as it is supposed to countenance the idea that the holder of negotiable paper, in good faith, for value, to which there is a defense as against the party from whom the holder received it, may recover the full face of the paper; without regard to the amount he has paid for it, if not inadvertent, was at least unnecessary to the decision, and wholly unsupported by the authorities on which it is supposed to have been placed. "We think, therefore, that the evidence rejected was admissible, upon the ground taken by Mr. Justice Daniels in the opinion delivered by him at the special term.

But we think the evidence was also admissible upon another ground. Where the question, is as to whether the plaintiff is a holder in good faith, all the circumstances of the transfer, and the relations and dealings between the parties are admissible in evidence.

The price paid upon the purchase is one of those circumstances, and usually a most material one. The other evidence in the case tended to cast some suspicion on the bona fides of the plaintiff’s holding; and we think that the fact that the plaintiff gave in horses, but fifty cents on the dollar, for the note of a perfectly responsible party, and within four days after the note was given, was a circumstance clearly admissible to be proved on the question of good faith. Direct notice cannot usually be proved. Fraud, or want of good faith, is usually to be inferred from circumstances.

[Fourth Department, General Term, at Buffalo, June 4, 1872.

The plaintiff’s counsel insists that the evidence rejected was inadmissible because not pleaded. It was not requisite that it should be pleaded. The fact that the note was obtained by fraud from the defendant, by Ferguson, had been proved, without objection. The evidence rejected was upon the issue presented by the plaintiff in reply to the defense of fraud in. obtaining the note, and came in by way of rejoinder to the plaintiff’s reply.

■ The order, setting aside the verdict and granting a new trial, should be affirmed.

Johnson, J., concurred.