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Cardwell v. Hicks

37 Barb. 458 Court N.Y. Gen. Term Decision date 1862-05-05 English

Decision Majority — Leonard, J. · Dissent — Ingraham, P. J.

Contents

Majority

p. 458
Cardwell vs. Hicks.

Headnote

A holder can claim protection from the defense of a party whose note or other negotiable mercantile obligation has been obtained by fraud, only in case he has parted with some value, or suffered some injury, upon the faith of it.
Where the holder will lose no right of which he was possessed when he obtained the note, and will be fully reinstated if he fails to recover, he is not a holder for value, and the equities of the party whose note has been obtained by fraud will be preferred.
One who purchases a promissory note, made by another, and pays for it partly in cash and partly by discharging a precedent debt due to him from the person of whom he buys it, is a bona fide holder, to the extent of the money paid by him; and may recover that sum of the maker. But if the jury finds that the note was fraudulently obtained, this will constitute a valid defense to the action, to the amount of the debt discharged. Ingraham, P. J. dissented, on the ground that a precedent debt, canceled by the party receiving the note, was a good consideration.
THIS was an action upon a promissory note for $517.54, dated 30th March, 1857, payable in six months. The defense was fraud in obtaining the note and putting it in circulation. The case was tried before Justice Welles, May 13, 1861. The defendant (who is the maker of the note) held the affirmative, and introduced evidence tending to prove the fraud, and rested. The plaintiff then proceeded, and introduced evidence tending to show that the plaintiff was ignorant of the fraud, and paid value for the note. And it appeared from the plaintiff’s testimony that he received
p. 459
the note from 0. Wirgman, for what he then owed the plaintiff, viz. $250, due from the 12th of March, 1856, making, with interest at that time, June 12, 1857, the sum of $271.87. . And the balance the plaintiff paid to Wirgman, in cash, about $232.49. The court held that although the note was passed to the plaintiff for a precedent debt in part, yet the plaintiff having paid the residue in cash, thereby became a bona fide holder for the whole amount of the note, and directed a verdict to that effect, subject to the opinion of this court, on a bill of exceptions to be made by the defendant; the case to be heard in the* first instance at general term; no judgment to be entered in the mean time. The case now came to this court for argument on the bill of exceptions.
E. B. Holmes, for the appellant.
I. The justice at the circuit erred in charging the jury that inasmuch as the plaintiff paid a part of the amount of the note in cash, he thereby became entitled to recover the whole amount, of the defendant, although the note was obtained from the defendant, and put in circulation by fraud. (1.) A bona fide holder of a promissory note is not entitled to recover in such case, beyond the actual value of the property parted with by him at the time of receiving the same. (Williams v. Smith and others, 2 Hill, 301 . Stalker v. McDonald, 6 Hill, 93 .) (2.) A party to whom such a note is passed, as collateral security for a precedent debt, or as nominal payment for such debt, is not even entitled to the possession of the note, as against the equitable owner. (Francis v. Joseph, 3 Edw. Ch. 182 .)
II. The bona fide holder of such a promissory note is protected to the same extent as a purchaser of other property, who has obtained the legal title without notice of the equitable rights of the third person; and all his rights arise and are controlled by the same equitable rules. (Williams v.
p. 460
Smith, 2 Hill, 301 . Stalker v. McDonald, 6 id. 93. Willard’s Eq. Juris. 257.) All that is required of -such real owner is to do equity, and place the legal holder in his original position, as a condition precedent to granting relief; and the only way of putting the plaintiff in his original position is by returning to him the precise amount he paid.
III. The ruling of the judge at circuit is repugnant to all the fundamental principles of equity, and would practically destroy the rule as to precedent debts. (1.) The judge decided in effect that, if the plaintiff had only advanced one dollar in cash, he was entitled to recover precisely the same amount as if he had advanced the whole amount in cash. This would allow the plaintiff to speculate out of the misfortune of the defendant; by thus using a rule of equity, which was merely designed for his protection. When the fraud was established, the plaintiff then had no strict legal rights to recover, and was obliged to sustain, his action on the ground of equitable protection. (2.) The precedent debt might have been worthless; and in fact probably was, as it seems to have been over due; yet by advancing one dollar in cash he converted, or could have converted, an unlimited amount of previous worthless indebtedness into new and valid claims. This clearly violates the rule that equity does not allow a party to use its equitable protection for purposes of oppression.
IV. The verdict should be set aside, and a new trial should he granted. (1.) When there are circumstances in the case which ought to have been submitted to the jury, a new trial will he awarded. (Fitzgerald v. Alexander, 19 Wend. 402 , Williams v. Smith, 2 Hill, 301 .) (2.) Even if the judge did not absolutely take the case from the.jury, yet if the charge was much stronger than it ought to have been, and was calculated to mislead the jury, the verdict should be set aside, and a new trial should be awarded. ( Ward v. Shaw, 7 Wend. 405 .)
p. 461
H. C. Van Vorst, for the plaintiff.
I. The fraud alleged in the answer as a defense against the payment of the note in suit, was not proved; nor was the jury asked by the defendant to pass upon the question of fraud. (1.) The bill of exceptions claims no more than that there was evidence tending to show false and' fraudulent representations made to the defendant in obtaining the note from him, and evidence tending to show that the note was put into circulation by false and fraudulent means. (2.) Fraud must be proved, and that clearly, and cannot be presumed. (Fleming v. Slocum, 18 John. 403 .)
II. If there had been fraud in the obtaining of the note, the defendant by acknowledging to the plaintiff, in his letter of June 13; 1857, that the note was given for value, and would be paid at maturity, estopped himself from setting up against this plaintiff (who was a stranger, and purchased the note upon that representation,) any defects in the transaction in which the note was given. Admissions which have been acted upon by others are conclusive against the party making •them, in all cases between him and the person whose conduct he has thus influenced. In such cases the party is estopped, on grounds of public policy and good faith, from repudiating his own representations. (1 Greenl. Ev. § 207. Burrall v. DeGroot, 5 Duer, 379 . Chamberlain v. Townsend, 26 Barb. 611 .) Burrall v. DeGroot was a case where a party purchased accommodation paper at less than its face, relying upon the representations of the parties to it that it was business paper, and yet was allowed to recover" the whole amount of the note, although more than he paid for it.
III. The defendant did not allege an entire failure in the title of the land, the purchase of which was the original consideration of the note in suit; he did not set up that it was entirely worthless, and he did not offer to rescind the contract at the time of or after the pretended discovery of the alleged fraud.
p. 462
IY. The plaintiff not having had any notice of the alleged fraud at the time he purchased the note, is not affected by such fraud, even though it had in fact existed. (1.) Although there may have been fraud or deception in obtaining the note, yet if the holder had no notice of it, the equities between the original parties are not open. (Riley v. Van Amringe, 2 McLean’s C. C. Rep. 589.) And see, to the same effect, Bullock v. Wilcox, ( 7 Watts, 328 .) (2.) The character of bona fide holder attaches when a purchaser of. a promissory note receives the same without notice, and for a valuable consideration; and no subsequent notice will affect the character of the paper in his hands. (Mickles v. Colvin, 4 Barb. 304 .)
Y. The plaintiff being a purchaser for a valuable consideration, is entitled to recover, as against this defendant, the amount of the note, without regard to the amount of the consideration actually paid by him for the note. (1.) Especially when, as in this case, the holder bought the security upon the representations of the maker, that "the note was given for value, and would be paid. (2.) Whether the note was originally given for a valid consideration, cannot be inquired into. The plaintiff acted upon the representations of the defendant in making the purchase, that it ivas given for value. The inquiry, therefore, as to whether any part of the price given by the plaintiff, on the purchase of the note by him, was the extinguishment of a precedent debt, avails nothing. The note, was in market, and came to the plaintiff as a third and innocent party. The evidence is that the precedent debt -was given up and extinguished; but whether it was or not, is of no consequence. The plaintiff gave value for the note. The amount paid is immaterial, so that the transaction was bona fide. (3.) But it has been- held that when a negotiable note is taken in good faith, before it becomes due, in payment and satisfaction of a pre-existing indebtedness, and the evidence of such indebtedness, or a security therefor, is at the same time surrendered
p. 463
or destroyed, the person taking such note becomes a holder for a valuable consideration. (Stettheimer v. Meyer, 33 Barb. 215 .) To a similar effect is Youngs v. Lee, ( 18 Barb. 187 ; S. C., 2 Kern. 571.) (4.) When a parting with value is proved, the amount of the consideration paid is not otherwise important than as hearing on the question of actual or constructive notice. (Gould v. Segee, 5 Duer, 260 .)

It must he assumed that the defendant offered evidence sufficient to go to the jury upon the question of fraud in the inception of the note, unless the plaintiff is a bona fide holder of it for value. The note is for $517.50. The plaintiff had a demand against 0. Wirgman for about $250, money collected by him for the plaintiff, which he discharged, and paid to Wirgman the balance of the note in money before maturity, and without any suspicion of the alleged fraud practiced upon the defendant when the note was obtained. To the extent of the money paid by the plaintiff on receiving the note, there is no doubt of his right to recover. The judge at the trial charged the jury that if they believed that the plaintiff paid a part of the note in cash, without knowledge of the fraud alleged by the defendant in the making and issuing of the note, he became thereby a bona fide holder and entitled to recover the whole amount with interest, and that the defendant had no defense to the part taken for a precedent debt.

Twenty years of judicial construction and decision have not • fully terminated the controversy in this state so ably discussed in the conflicting cases of Swift v. Tyson, (16 Peters, 1,) and Stalker v. McDonald, ( 6 Hill, 93 .) The case last mentioned was determined in the late court of errors, and is entirely adverse to the ruling of the judge in the case at bar. That case expressly indorses Ooddington v. Bay and Bosa v. Brotherson as the law of this state, and condemns the case of Swift v. Tyson.

In Rosa v. Brotherson, ( 10 Wend. 85 ,) it is decided that

p. 464
where 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. The case of Youngs v. Lee (2 Kern. 551) does not purport to overrule these cases. Referring to Stalker v. McDonald, Judge Johnson, delivering the opinion of the court of appeals, (p. 555,) says, that case does not decide that a receipt in extinguishment of a precedent debt not at the time over cfee, does not constitute the receiver a holder for value in good faith ; distinguishing the cases, but expressing no disapprobation of the case of Stalker v. McDonald as an authority.

I understand the principle of all the numerous cases on this subject to be, that the holder can claim protection from the defense of a party whose note or other negotiable mercantile obligation has been obtained by fraud, only in case he has parted with some value or suffered some injury upon the faith of it; and where the holder will lose no right of which,hg_was possessed when he obtained the note, and will be fully reinstated if he fails to recover, that he is not in such case a holder for value, and the equities of the party whose note has been obtained by fraud will be preferred.

In the present case the plaintiff will have his remedy against Wirgman, his original debtor. He will sustain no loss if he fails to recover, while the defendant will, on the contrary, lose the amount of the plaintiff's claim against Wirgman.

Unless the principle of “ stare decisis” is to be wholly disregarded, the defense in this case is good to the extent of $250, if the jury shall find that the note was fraudulently obtained.

The case of Youngs v. Lee has not overruled the former decisions. It is another application of the old rule. It is expressly stated that the note surrendered was not then due. It was not then received in payment or satisfaction of a debt, because the paper had not matured. It was still a chose in action—a negotiable note—at the time it was surrendered.

Dissent

p. 465
In the case of Stettheimer v. Meyer, ( 33 Barb. 217 ,) it is assumed that Youngs y. Lee has overturned the prior current of authority. I think the court of appeals would not have marked so carefully the fact that the note which was surrendered had not become due, and would not have cited with approbation cases which they were in fact overruling, if that court intended that the case of Youngs v. Lee should be understood as the learned judge has supposed who decided the case in 33 Barb, above cited.

I advise that a new trial be ordered, with costs to abide the event.

Clerke, J. concurred.

(dissenting.) The question in this case is whether a person who takes a note that has been diverted from the use for which it was made, and pays for it partly in cash and partly by giving up the note of the person who surrendered it, is a bona fide holder for value.

In Youngs v. Lee, (2 Kernan, 551,) the court of appeals hold that a party who receives accommodation paper and surrenders the note of the party from whom it is received, before such note is due, is a bona fide holder for value. And in Stettheimer v. Meyer, ( 33 Barb. 215 ,) the Monroe general term hold that where a note is so received, and the holder gives up the note of the party from whom he receives the note, although over due when it was surrendered, he is a bona fide holder for value. Johnson, J. says : “ We think the rule is now settled that whenever a negotiable note' is taken in good faith, before it becomes due, in payment of a preexisting indebtedness, and the evidence of such indebtedness is surrendered or destroyed, the person taking such note becomes a holder for a valuable consideration.”

As we follow the decisions of other general terms in the other districts, where there is no special reason for dissenting therefrom, I think this case should be followed.

p. 466
[New York General Term,

May 5, 1862.

The case of Farrington v. The Frankfort Bank, ( 24 Barb. 554 , and 31 id. 183,) has been urged as sustaining a contrary rule. But in that case the original notes were not given up at the time of receiving the notes -sued on, but only a short time before commencing the action. Allen, J. says, the transaction between the parties was complete when Osborn delivered to the plaintiffs the drafts. No other act was necessary to vest the title, and they were then the holders of both sets of securities. That case does not conflict with the views herein expressed.

I am also informed of manuscript decisions in the general term in this district holding a contrary doctrine. Although the question might-be considered settled by the court of appeals in Youngs v. Lee, and that there is no reason for any distinction whether the note given up was past due or not yet payable, still it may be that these cases are so explicit on this point that my brethren who have taken part in these decisions may feel bound by them.

My own opinion is that the present verdict should be sustained, and judgment rendered thereon.

New trial granted.

Ingraham, Leonard and Olerke, Justices,]

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