Meserole Securities Co. v. Cosman

The plaintiff is a corporation organized under the Business Corporations Law of the State of New York (Cons. Laws, ch. 4). Its certificate of incorporation purports to authorize it “ to loan money secured by personal property or real estate, to purchase, hold, own, sell, assign, deal in, pledge and otherwise dispose of shares of capital stock, bonds, mortgage debentures, notes and other securities, obligations, contracts and evidences of indebtedness of corporations of the State of New York or any

There is nothing in the record to show that these notes did not have a legal inception before they were delivered to the plaintiff. If the plaintiff were not a corporation, then unquestionably the defendant-appellants would be liable in this action as indorsers. They deny liability on the ground that the plaintiff is a corporation and is not authorized by the law of the State of New York to discount notes, and that under section 140 of the Banking Law (Cons. Laws, ch. 2) it is prohibited from “ making discounts ” and all notes made or given to a corporation, other than a bank, for discount are void.

Doubtless the policy of the State of New York embodied in its statutes restricts corporations not organized under the Banking Law and not subject to the supervision of the Banking Department from engaging in any form of banking. In section 2 of the Banting Law it has defined banks to mean “ any domestic moneyed corporation, other than a trust company, authorized to discount and negotiate promissory notes, drafts, bills of exchange and other evidences of debt; to receive deposits of money and commercial paper; to lend money on real or personal

It does not follow from the fact that banks possess these enumerated powers that every exercise of such powers is a form of banldng. Business corporations at times lend money on real and personal security without in any form conducting a banking business. So, too, the negotiation of bills of exchange, the purchase of foreign coins or bills of exchange, may be an incident of a commercial business. The Legislature has, of course, not attempted to forbid business corporations from exercising any of these powers occasionally and incidentally to a commercial business, but it has provided that no corporation shall by any implication or construction be deemed to' possess the power to carry on a business which constitutes a form of banking business (General Corporation Law, § 22, now § 18; Cons. Laws, ch. 23) and it has fortified the effect of tho restriction contained in that statute by express prohibition against certain banking operations. (Banking Law, § 140.)

The language of section 22 (now section 18 of the General Corporation Law) is significant. “ Prohibition of banking powers. No corporation, domestic or foreign, other than a corporation formed under or subject to the banking laws of this State or of the United States, and except as therein provided shall by any implication or construction be deemed to possess the power of carrying on the business of discounting bills, notes or other evidences of debt, of receiving deposits, of buying and selling bills of exchange, or of issuing bills, notes or other evidences of debt for circulation as money, or of engaging in any other form of banking.”

The general restriction against any other form of banking not only amplifies but characterizes the specific restrictions. It forms a guidepost to the legislative intent, made more conspicuous by the title of the section “ Prohibition of banking powers.” The powers conferred upon banks are, of course, banking powers when exercised in a banking operation; they may be ordinary business powers when exercised in connection with a business operation of other nature. Business corporations are not authorized to exercise banldng powers, but the legislative restrictions must be read in their context and construed in their natural sense, and may not by forced construction be given an application broader than their purpose.

It is argued that obviously a corporation “ other than a corporation formed under or subject to the banking laws of this State ” illegally engages in a “ form of banking ” when it habitually exerts a power confided

At times business corporations even “ discount ” commercial paper of their customers as a regular and customary part of a commercial business. Factors, as part of their business of selling on commission goods consigned to them, customarily agree to make advances of moneys to the consignors before the goods are sold and paid for in cash. At times such agreements require the advances to be made by “ discount ” of notes or drafts either made by the consignor or received in payment of goods. Certainly the commercial world would be somewhat astonished to learn that such ordinary commercial practices

Perhaps we may find in the variations of language in the descriptions of powers confided to banks under the Banking Law and the description of the powers withheld from other corporations under the General Corporation Law further evidence that the Legislature did not intend that in all cases the habitual exercise of a power confided to a bank shall constitute illegally engaging in a form of banking. Section 2 of the Banking Law authorizes banks to loan money on real and personal property. Certainly this constitutes a customary form of banking, yet there is no express restriction upon the power of a business corporation to engage in the business of loaning money, and no implied prohibition except where such business is carried on as a “ form of banking ” and not merely as a part or incident of a commercial business. So, too, the enumeration of powers which corporations may not exercise, as a business, does not include the power to buy and sell gold and silver bullion or foreign coins. Indeed, though a bank is authorized “ to discount and negotiate ” notes, yet there is no express provision excluding business corporations from the business of “ negotiating ” notes, except in so far as “ negotiation ” may be synonymous with or included in the term “ discount.” The Legislature by its disjunctive enumeration of banking powers which a corporation other than a bank may not exercise as a business, has unequivocally indicated that the statute applies even where a corporation assumes to exercise a single one of the enumerated powers. None the less, the juxtaposition of the enumerated banking powers and the term “ other form of banking ” indicates with scarcely less clearness that the Legislature did not intend that any definition of the enumerated powers should extend the application of the

In Tracy v. Talmage ( 18 Barb. 456 ) it was said that “ ‘ to discount ’ includes ‘ to buy;’ for discounting, in most cases, is but another term for ( buying at a discount.’ ” Undoubtedly definitions of the word “ discount ” by lexicographers and economists may be found wide enough to cover every purchase of a debt or chose in action, yet in banking or finance it seems to have a meaning somewhat more restricted. Banks are not ordinarily permitted to speculate in the purchase of negotiable instruments made or indorsed by parties of doubtful financial responsibility. Banks of discount loan or advance moneys to the makers or holders of negotiable instruments, receiving at that time, by deduction from the sum loaned or advanced, the interest or compensation to be paid for the advance of the bank’s money. (See Jevons Prim. Pol. Econ. 114.)

Ordinarily perhaps the advance or loan is made by discount of negotiable paper created for that purpose and having no legal inception until delivered for discount. Sometimes the loan or advance is made to the maker, sometimes to an indorser, where the maker has signed the note for the accommodation of the borrower. If a bank loans or advances moneys to a customer upon an existing note indorsed by the customer upon deducting interest to the date when the note becomes due, the transaction may in form be a purchase of the note; for most practical

It has been authoritatively decided by this court that the power of a bank to discount notes includes the power to purchase existing notes at a discount from note brokers. (Atlantic State Bank v. Savery, 82 N. Y. 291 .) There the question before the court concerned only the extent of the powers expressly or impliedly granted to banks organized under the Banking Law. There was no statutory prohibition against the purchase of negotiable instruments by banks, and the court decided only that in such case the grant of powers should not be.narrowly construed. Indeed, the court pointed out that “ If the statute contained words of prohibition, a different question would arise and the cases cited by the appellant (Bank of U. S. v. Davis, 2 Hill, 451 ; N. Y. State L. & Trust Co. v. Helmer, 77 N. Y. 64 ) would apply.”

Obviously a decision that the power of a bank to “ discount ” notes includes the power to purchase notes at a price determined by the deduction of interest in advance from the face value of the note cannot be an authoritative determination that a similar purchase at a discount by a business corporation constitutes an exercise of a banldng power or engaging in a form of banking. The distinction must always be borne in mind between the exercise in a commercial transaction of a power confided to a bank, and engaging in a form of banking.

This court has not, in the past, been oblivious to this distinction. In the case of New York State Loan & Trust Co. v. Helmer ( 77 N. Y. 64 , cited in Atlantic State Bank v. Savery, supra, with approval) the court held that a moneyed corporation chartered by special act of the Legislature to engage in some, but not all, forms of banking might not discount notes in the same manner as banks of discount might do. In some respects the question presented was similar to the question before us.

At this point it may be well to examine the prohibitory statute now in force; for the prohibitory statute and the restrictive statutes together form, as we have already pointed out, the statutory embodiment of the public policy of the State to exclude corporations not organized under the Banking Law from engaging in any form of banking. It provides in part: “ No corporation, domestic or foreign, other than a national bank or a federal reserve bank, unless expressly authorized by the laws of this State, shall employ any part of its property, or be in any way interested in any fund which shall be employed for the purpose of receiving deposits, making discounts, or issuing notes or other evidences of debt to be loaned or put into circulation as money. All notes and other securities for the payment of any money or the delivery of any property, made or given to any such association, institution or company, or made or given to secure the payment of any money loaned or discounted by any corporation or its officers, contrary to the provisions of this section shall be void.” (Banking Law, § 140.) At the time the earlier case was decided a statute was in force, similar in all respects, except that at that time there was no comma after the words “ making discounts ” in the first.sentence. (See Part 1, ch. 20, title 20, § 3; 1 Statutes at Large [Edm. ed., R. S.], p. 661.)

In that case the court pointed out that the records showed that “ the plaintiff kept a regular office for discount and deposit, carried on a regular banking business, discounted promissory notes and other commercial paper, bought and sold a large amount of exchange, received a large amount of deposits, and paid the same on the checks of depositors, and, in fact, did the ordinary business of a bank of discount and deposit.” It further appeared that “ the proceeds of the notes in question were credited upon the books of the plaintiff to the defendant, Bowen.” These facts, absent in the present case, dictated the decision of the court.

In deciding that under the facts of that case the banking corporation had “ made discount ” in manner prohibited by the statute, the court left no room for doubt as to the basis and scope of its decision.

“ Upon the facts alleged, the question to be determined is whether the plaintiff possesses authority, under its charter, to discount notes, the same as any other banking institution, credit the proceeds, and pay out the same upon the checks of one of the parties; and not whether the plaintiff can lawfully buy and receive promissory notes and advance moneys upon the same. There is a plain distinction between the two cases; and having that distinction in view, it is quite apparent that the plaintiff exceeded its powers in discounting the notes in question, and violated the provisions of its charter and the laws of this State passed to restrain illegal banking.”

On the other hand, it is the function of a business corporation to employ its capital in its own business. The plaintiff corporation was not engaged in the business of loaning or advancing moneys to its customers, deducting interest in advance. It was engaged in the business of purchasing notes at less than their face value, apparently as a speculation. It did not in this case deduct interest in advance. The notes were in fact payable with interest and the purchaser, under their terms, was to receive that interest at the date when the notes were payable. The plaintiff made a trading bargain in order to reap a

Technically the discount of the note in New York State Loan & Trust Co. v. Helmer (supra) may also have been a purchase, but it was a purchase made by a corporation engaged in a form of banking for the purpose of advancing money to a customer upon interest deducted in advance. The court, indeed, regarded it as if a loan, and in its opinion characterized the prohibited transaction as “ a loan of money obtained upon a promissory note by discount of the same to the maker or holder.”

The same considerations dictated a like decision in Pratt v. Short ( 79 N. Y. 437 ), much relied upon by the appellants. There again an institution endowed by charter from the Legislature with power to engage in some forms of banking, but not the power to discount notes, advanced money to a customer upon the purchase or discount of a note held by the customer and indorsed by him. Technically the transaction was not a loan though the court so regarded it.

An examination of the record on appeal reveals, even more clearly than the opinion, the facts upon which the court based its decision. The record is meagre, but it was admitted as a fact that the “ note was discounted by the said People’s Safe Deposit and Savings Institution at the banking office of said company in Syracuse and the money proceeds of said note less the discount was paid by said bank at its counter to the said defendant in the ordinary way that a bank of discount and deposit discounts short paper.” (Italics are ours.) Again it appears that the parties and the court by common consent considered that the discount was in fact a loan. The briefs of the

In no case cited by the parties; or which we have found, has any court of this or any other jurisdiction found that the terms “ discount notes ” and “ purchase or negotiate ” notes were coextensive in their application.

Section 140 of the Banking Law is derived from chapter 236 of the Laws of 1818, enacted pursuant to a message of Governor Clinton, pointing out the dangers of banking inflation. It has existed in its present form since 1828. (1 R. S., ch. 20, tit. 20, § 3, p. 712.) In some respects its language is confused and its punctuation seems casual and varies in different re-enactments of its provisions. Even so, it certainly suggests, if, indeed, it does not expressly provide, that the prohibited “ discounts ” are the usual discounts of banking institutions made for the purpose of loaning money to their customers. Since that time there has been no suggestion in any case that its prohibitions apply to a purchase of a note by a business corporation not

Many instances may be found in the Banking Law and other statutes where the Legislature has used the terms “ purchase ” or “ negotiate ” notes or evidences of debt in-a sense not coextensive with “discount.” Indeed, it is significant that in section 2 of the Banking Law, cited above, the Legislature has defined a bank as a moneyed corporation “■ authorized to discount and negotiate promissory notes,” yet it has not expressly restricted the power of a business corporation organized under the General Corporation Law to carry on the business of “ negotiating ” promissory notes, nor expressly prohibited under the Banking Law the purchase or negotiation of notes or other evidences of debt. By chapters 326 and 327 of the Laws of 1929 the Legislature has unmistakably evidenced the intention that at least in the future stock corporations may purchase, hold and dispose of notes or choses in action of persons or corporations and that such business is not confined to corporations organized under the Banking Law. Though such statutes cannot be given a retroactive effect, they may be considered as a legislative declaration that our interpretation of the earlier statutes is not contrary to the public policy of the State.

For these reasons it seems clear that under a reasonable

The order of the Appellate Division should be affirmed and judgment absolute ordered against appellant on the stipulation, with costs in all courts.

(dissenting). The plaintiff purchased two promissory notes, aggregating $8,800, which were made by Bischoff, Incorporated, and were payable to the defendant Jack T. Cosman. The notes bore the indorsement of Cosman, the defendants Tom Evans, Mark M. Dintenfass and National Evans Motion Picture Film Laboratories. The last named defendant transferred the notes to the plaintiff and received therefor the sum of $8,000. Default in payment of the notes at maturity was made, and this action was brought against the indorsers to recover the balance due and payable thereon. The defendants resisted payment on the ground that the plaintiff, having been organized as a business corporation and not as a bank, was not authorized to purchase or discount the notes, and that the notes in its hands, under section 140 of the Banking Law, were void and uncollectible.

On the trial it was stipulated that the plaintiff was incorporated pursuant to the provisions of the Business Corporations Law, now the Stock Corporation Law; that the purposes of its organization, as expressed in its

It is provided in section 18 (formerly section 22) of the General Corporation Law that no corporation, “ other than a corporation formed under or subject to the banking laws of this State or of the United States,” shall by any implication or construction be deemed to possess the power of carrying on the business of discounting bills, notes or other evidences of debt, of receiving deposits, of buying and selling bills of exchange, or of issuing bills, notes or other evidences of debt for circulation as money, or of engaging in any other form of banking.” It is said that, under this provision, there is denied to a business corporation the possession of the four enumerated powers in combination, but not the possession singly of any one of the powers. Under this interpretation, if the certificate of incorporation of a

Obviously a corporation, “ other than a corporation formed under or subject to the banking laws of this state,” illegally engages in a “ form of banking ” when it habitually exerts a power confided to a bank organized under the banking laws. Such a bank is defined, in section 2 of the Banking Law, as follows: “ The term, 1 bank,’ when used in this chapter, unless a different meaning appears from the context, means any domestic moneyed corporation, other than a trust company, authorized to discount and negotiate promissory notes, drafts, bills of exchange and other evidences of debt; to receive deposits of money and commercial paper; to lend money on real or personal security; and to buy and sell gold and silver bullion, foreign coins or bills of

In Atlantic State Bank v. Savery ( 82 N. Y. 291 ) the question was whether the plaintiff, organized as a bank under chapter 260 of the Laws of 1838, was empowered to buy the promissory notes in suit. Under section 18 of the act it was empowered “ to carry on the business of banking, by discounting bills, notes and other evidences of debt; by receiving deposits; by buying and selling gold and silver bullion, foreign coins and bills of exchange, in the manner specified in their articles of associations for the purposes authorized by this act; by loaning money on real and personal security; and by exercising such incidental powers as shall be necessary to carry on such business.” It was held that the plaintiff, in buying the notes in suit, lawfully exercised the statutory power of “ discounting bills, notes and other evidences of debt.” The court quoted with approval the statement that “ to buy or purchase a debt is always in commerce termed to discount it,” made in MacLeod on Banking (at p. 43); and the statement made in Tracy v. Talmage ( 18 Barb. 456 ), as follows: “ Now, ‘ to discount ’ includes ‘ to buy;’ for discounting, in most cases, is but another term for ‘ buying at a discount.’ ” It is noticeable that the statute under consideration did not expressly confer upon banks, as does our statute, the power “ to negotiate ” as well as “ to discount ” promissory notes. There is authority to the effect that “ to negotiate ” means not only “ to transfer or assign (as a bill, etc.) to another ” but “ to obtain or give value for (bills, cheques, etc.) in money.” (Oxford Dictionary.) In construing a statute similar to ours, the Supreme Court of Illinois, in the

It is provided in section 140 of the Banking Law that no corporation, other than a banking corporation, “ shall employ any part of its property, or be in any way interested in any fund which shall be employed for the purpose of receiving deposits, making discounts, or issuing notes or other evidences of debt to be loaned or put into circulation as money.” Again, the disjunctive “ or ” is used to connect the prohibitory clauses. The enumerated powers, thus forbidden to business corporations, are the precise powers conferred upon banks by sections 2 and 106 of the Banking Law. A bank is permitted to employ its funds in “ discounting ” commercial paper; other corporations are forbidden to use their funds in making “ discounts.” Obviously the discounting forbidden and the discounting sanctioned are identical. A bank in the exercise of the “ discounting ” power may purchase promissory notes. It would seem that a corporation to which making “ discounts ” is forbidden might never legally buy them. The provision quoted from section 140 is followed by this: “ All notes and other securities for the payment of any money or the delivery of any property, made or given to any such association, institution or company, or made or given to secure the payment of any money loaned or discounted by any corporation

In section 114 of the Banking Law a “ loan ” is distinguished from a “ discount.” The same distinction appeared in the act of 1870 (Ch. 163), from which the provisions of section 114 were derived. It was there provided that every bank might make a charge of seven per cent “ on every loan or discount made;” that if a greater sum were charged and paid, the person paying might recover from the bank twice the amount of the excess payment. The provisions of the act of 1870 were considered in Nash v. White’s Bank of Buffalo ( 68 N. Y. 396 ). It had been found that the plaintiff had presented commercial paper to the defendant bank for discount; that he had indorsed and transferred the paper to the defendant; that the defendant had credited the plaintiff on its books with the amounts for which the paper was made or drawn, less an amount charged for discount; that the amount charged in each case was greater than the sum of seven per cent per annum. Rapallo, J., writing for the court, said: “ There was no loan, but an absolute transfer of the paper to the bank.” It was held that, since there was no loan, the transaction was not usurious under the general statutes against usury; that nevertheless there had been a discount and the

In the case of Pratt v. Short ( 79 N. Y. 437 ) the plaintiffs, as assignees of a corporation not organized to do a banking business, sought a recovery from the defendants, who were the indorsers of a promissory note. The note was made payable to the defendants, and represented a debt owed by the maker to them. The note was indorsed by the defendants and transferred to the corporation, which paid the defendants the proceeds of the discount. The plaintiffs declared upon three counts, seeldng a recovery upon the note, a recovery for money loaned, and a_recovery for money had and received. The

While the court denied a recovery upon the note, it permitted the recovery of an amount equal to the sums advanced upon the discount. It is not at all clear that the permitted recovery was for money loaned. Thus, the court said that while “ the law will not enforce the prohibited contract, it will take notice of the circumstances, and if justice and equity require a restoration of money or property, received by either party thereunder, it will, and in many cases has given relief.” Again it said: “If the defendants avoid their indorsement it is the plainest equity that they shall restore the money which they received on the faith of it.” In support of its conclusions the court cited the Utica Insurance Company cases (Utica Insurance Co. v. Kip, 8 Cow. 20 ; Utica Insurance Co. v. Cadwell, 3 Wend. 296 ; and Utica Insurance Co. v. Bloodgood, 4 Wend. 652 ). In each of these cases the notes, with indorsements made for accommodation, were presented by the maker to the plaintiff, and the moneys paid by it were received by the maker.

It is now the rule in this State that where business paper is transferred and indorsed by the payee, or a subsequent indorser thereof, to a third person who makes payment therefor, no new relationship of debtor and creditor is created, and the transaction is not usurious, although the payment made involves a deduction of a greater sum than accrued interest. (Eastman v. Shaw, 65 N. Y. 522 ; Joy v. Diefendorf, 130 N. Y. 6 ; Nash v.

The respondent argues that the opinion in Pratt v. Short (supra) indicates that- the court deemed that a loan was involved in the transfer of the note sued upon, and, therefore, a true “ discount ” had been made. The proof showed that the maker, Alice Van Cleek, gave the note in suit to the payee, H. W. Short & Co., to apply on her account for lumber purchased. It was stipulated “ that the note in question was made by Mrs. Van Cleek payable to the order of Henry W. Short & Co., which company consisted of Henry W. Short and George B. Leonard, the defendants in this action, and upon the application of the payees and indorsers Henry W. Short & Co., said note was discounted by the said Peoples’ Savings Bank and Safe Deposit Company at the banldng office of said company in Syracuse, and the money proceeds of said note less the discount was paid by said bank at its counter to the said defendant in the ordinary way that a bank of discount and deposit discounts short paper.” (See

The order of the Appellate Division should be reversed and the judgment of the Trial Term affirmed, with costs in this court and in the Appellate Division.

Pound, O’Brien and Hubbs, JJ., concur with Lehman, J.; Kellogg, J., dissents in opinion in which Crane, J., concurs; Cardozo, Ch. J., not voting.

Order affirmed, etc.