State Bank v. Smith — 32 N.Y.S. 999

Majority

p. 999

STATE BANK OF LOCK HAVEN v. SMITH et al.

(Supreme Court, General Term, First Department.

March 15, 1895.)

Headnote

Principal and Surety—Liability or Surety—Loss or Collateral Security.

Where notes discounted by plaintiff bank were made by defendants for the accommodation of W. & B., the payees, who were also indebted to plaintiff’s president, the fact that the president, in effecting a settlement of the claims against W. & B., procured a prior lien for his individual claims on their property, does not render plaintiff chargeable with the amount of preferences obtained by the president as for property negligently lost, which might have been applied in satisfaction of the note on which defendants were liable as accommodation makers.

Appeal from judgment on report of referee.

Action by the State Bank of Lock Haven against James W. Smith and Wilbur F. Smith, impleaded, etc. From a judgment in favor

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eif plaintiff, and from an order granting an extra allowance, defendants appeal. Affirmed.

It appears from the pleadings and findings that the plaintiff is, and for many years has been, a banking corporation organized under the laws of Pennsylvania, and doing business at Lock Haven, in Pennsylvania; chat the defendants James- W. Smith and Wilbur F. Smith, during the same time, were co-partners, doing business under the name of J. W. & W. F. Smith, in Brooklyn, in this state; and that the nominal defendants Chandler P. Wainwright and Willis Bryant were copartners, doing business under the firm name of Wainwright & Bryant in Philadelphia. The 12 notes held by the plaintiff on October 24, 1889 (of which the notes in suit are merely renewals), were dated from June 21, 1889, to September 17, 1889, and were made by the defendants Smith to the order of the defendants Wainwright & Bryant, indorsed by the latter, and discounted by the plaintiff. It was found by the referee that, at or shortly prior to the times when defendants Smith made and delivered to Wainwright & Bryant these 12 notes, said Wainwright & Bryant made and delivered to defendants Smith their 12 notes of like date, tenor, and terms, and for like amounts, and payable to the order of J. W. & W. F. Smith; the notes made by Wainwright & Bryant being sent to the Smiths in letters, which in each case say, substantially: “Inclosed please find our note [describing it], for which please send us duplicate;” and the Smiths then returning their own notes as requested. It was also found that these notes were thus exchanged pursuant to an arrangement made in the latter part of 1884, at the request of Wainwright & Bryant, they promising the Smiths to send to them, upon the maturity of the notes, an amount of money equal to the face of the notes, unless said Smiths should have given notice that they had used any of the notes made by Wainwright & Bryant; each party to have the right to use any of the exchanged notes. It appears that, after this arrangement was made, defendants Smith and Wainwright & Bryant began exchanging their paper thereunder, and so continued to do up to about October 24, 1889. The notes so made by Wainwright & Bryant and sent to the Smiths were payable in Philadelphia, and the notes so made by defendants Smith and sent to Wainwright & Bryant were payable at the Smiths’ office in Brooklyn. Wainwright & Bryant were accustomed to and did send to defendants Smith money for the notes as agreed, and defendants Smith were accustomed to and did thereupon return Wainwright & Bryant’s paper to them, except in a few instances in which defendants Smith made-use of Wainwright & Bryant’s paper by procuring the same to be discounted. The Smiths invariably paid all the notes made by them according to their tenor, at their office, until after the failure of Wainwright & Bryant; and Wainwright & Bryant paid, according to their tenor, at their office, such notes of theirs as the Smiths had had discounted, and for the remaining notes sent the cash to the Smiths up to the time of their failure. At the time of Wainwright & Bryant’s failure (October 24, 1889), the plaintiff held the 12 notes, of which these in suit are the renewals; the defendants Smith held 11 of the counterpart notes made by Wainwright & Bryant; and the remaining note, one dated August 6, 1889, for $1,143.13, was held by the Eleventh Ward Bank, which had discounted it for the defendants Smith. The Smiths afterwards took up this note. At the request of the defendants Smith, the plaintiff has three times renewed the 12 notes held by it; the Smiths each time paying the interest or discount for such renewal, each renewal note being made and indorsed in the same form as the original note.

One William A. Simpson was the president of the plaintiff bank, its largest stockholder, and practically its manager. He was also, and had been for several years, the financial backer of Wainwright & Bryant. He had" loaned them $50,000, and was the accommodation indorser on their paper to the extent of from $85,000 to $135,000 more. He received from them' a royalty or definite payment, called “stumpage,” on each load of timber cut, ostensibly as compensation for advice given in the management of their business. When Simpson loaned them the first $50,000, in November, 1884, they gave him a judgment note therefor, dated November 14, 1884, due one day after date, and containing a warrant of attorney, which, under the laws of Pennsylvania, enabled Simpson to enter judgment against them at any time. Foi

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subsequent indorsements, Simpson got two other judgment notes,—one dated January 14, 1885, for $60,000, and another dated August 19, 1887, for $75,-000,—each payable one day after date. In addition to these obligations to Simpson, Wainwright. & Bryant, on the 24th day of October, 1889 (which was the day of their failure), had paper to the extent of $122,313, including that made by the defendants Smith, discounted in the plaintiff bank._ On October 24, 1889, Simpson, with one Corss, the attorney for the plaintiff bank, met Wainwright & Bryant in Philadelphia, and it was there determined that they were unable to continue in business, and that they should give -to the bank a judgment note as security for the paper that had been discounted by the bank for Wainwright & Bryant, and which bore their indorsement A list of the notes discounted in the bank was called off. Those indorsed by Simpson were omitted, because he already had a judgment note to secure them. A judgment note for $122,313 was then and there given to the bank, dated that day, payable one day after date. The judgment note was given as security for all the paper, including that made by defendants Smith, indorsed by Wainwright & Bryant, and then lying in the plaintiff bank, except the paper indorsed by Simpson. Simpson then had judgment notes several years old in his possession, and was president of the bank, and acted for it. There were no directions given as to the application of the avails of the judgment notes. Simpson said that he was going to enter judgment on the bank’s notes; nothing was said about his own. On the 26th of October. Mr. Simpson, through Corss, the attorney, caused judgments on the three notes already held by him and the note handed to him for the plaintiff to be entered, putting his own three judgments first, and issuing execution upon them first; so that they obtained a priority under the laws of the state of Pennsylvania as to the personal property of Wainwright & Bryant, but shared pro rata with the judgment in favor of the plaintiff as to the real estate. According to the law of Pennsylvania, judgments entered on the same day participate equally in the avails of funds realized through execution against real property. As to personal property, the execution first issued takes precedence. At the sheriff’s sale had in the month following, under these four executions and another for a small amount, Simpson bought in a large part of the personal property, and practically all the real estate; the personal property being sold for $74,-698.50, and the real estate for $26,490. The proceeds of this sale of the personal property, after deducting fees, etc., were paid to Simpson by crediting the amount to him on account of his purchase at the sale; and the proceeds of the real estate were disposed of by taking Simpson’s receipt as president of the bank for $12,000 thereof, applied upon the execution upon the plaintiff’s judgment, and by crediting the balance to Simpson on account of his purchase. An execution upon plaintiff’s judgment was also issued to Philadelphia, and certain property there was bought in by the plaintiff for $150, and was afterwards resold by it for $5,000. In addition, Simpson received certain cattle stock, which was afterwards sold for $5,000. To enable Simpson to close his purchase with the sheriff without paying cash, a formal assignment of the plaintiff’s judgment was made to him; but, by agreement between Simpson and the bank, it was provided that, after payment of his own claim, he would pay the full amount of the indebtedness of Wainwright & Bryant as drawers and indorsers of notes discounted by the bank, and not otherwise paid or secured to be paid.

Argued before VAN BRUNT, P. J., and O’BRIEN and PARKER, JJ.

Abel E. Blaclcmar, for appellants.

Frederick H. Man, for respondent.

The causes of action were upon 12 promissory notes made by the defendants Smith to the order of Wainwright & Bryant, and by them indorsed and delivered to plaintiff. There was no contest as to the making and delivery of the notes, or as to the title of the plaintiff to the same; but it was contended that

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the defendants Smith were accommodation makers, and that the notes were made for the accommodation of Wainwright & Bryant. It was further contended that Wainwright & Bryant placed certain securities with the plaintiff to secure. the' payment of these notes with others; and that the plaintiff had realized certain sums, of money upon said securities, and had negligently wasted and destroyed a part thereof; and that the defendants were entitled to have the amounts realized by the plaintiff on such securities applied to the payment of these notes pro rata with others; and also that the value of the securities wasted by the plaintiff should be credited on these notes. The referee found, against the contention of plaintiff, that all the notes except one were accommodation paper; that the plaintiff had received $22,000 applicable to the pay- ■ ment of these notes, with others; and directed that $3,389.48 be credited pro rata upon the principal of the notes. The plaintiff does not appeal, but the defendants do, claiming that they were entitled to a larger credit, and that all the notes were accommodation paper.

In holding that 11 of the 12 notes were accommodation notes, the referee reached a conclusion most favorable to the appellants, and with such conclusion we understand no fault is found, it being insisted, however, that the twelfth note also should have been included in the same category. In excluding it, we think, the referee was clearly right. Under the terms of the agreement, the defendants had a right to use the notes sent them by Wainwright & Bryant in exchange for notes of similar amount and tenor which they had loaned to that firm. If they had availed themselves of this privilege, and had used the notes, there can be no doubt, upon authority, that they would be regarded as business notes, because given in exchange for other notes, and used for the purpose of raising money. Where, however, but one was used, and the other 11 retained, we find no reason for relieving the defendants from liability as makers of business paper. It appearing, then, as to one of the Wainwright & Bryant notes,—i. e. the one dated August 6, 1889, for $1,154.13,—that the defendants, for their own benefit, had it discounted at the bank, the referee was right in holding that the counterpart note given to Wainwright & Bryant, which was discounted by the plaintiff, was included among the 12 notes sued upon, and, unlike the other 11, was not an accommodation note.

The other 11 notes being accommodation notes, the referee held that the ultimate duty of paying them rested on Wainwright & Bryant, and that any payments made by the latter or securities given by them inured to the benefit of the defendants Smith, whose obligation was that of sureties. To the extent to which they were entitled to the benefit of the security thus given, which consisted of the judgment note for $122,313, covering these and other notes of Wainwright & Bryant, the referee allowed the pro rata amount realized under the judgment upon the sale of the real property, and $10,000 in addition, realized from two other sources, making up the amount of $22,000, which he held was applicable to the payment of the notes. The defendants claim, however, that they were entitled to a greater credit, and that, in addition to the proceeds of

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the real estate, there should have been applied upon the notes the pro rata share of the proceeds of the personal estate of Wainwright & Bryant which the plaintiff should have realized upon the judgment given to dt to secure the notes. Whether this contention is right depends entirely upon the determination of the question as to whether, under the law, Simpson, who was president of the bank, and to whom Wainwright & Bryant were indebted in a large sum of money, for which he held their judgment notes, violated a duty, which as president of the bank he was chargeable with, towards the defendants, in giving himself a preference out of the avails of the personal property. It was in the power of Simpson to seize all of Wainwright & Bryant’s property at any time during a long period prior-to the giving to him of the judgment note for the bank. Had he reaped the advantage of his position by so seizing the property, the defendant, as against him, would have no legal right to complain. It may be that, considering his relation to the bank and the use that he had made of their funds, it might compel him, in some way or in some form of action, to make good the loss which under Ms management the bank sustained. Without, however, discussing the rights of the bank, it is clear that no tMrd party, situated as the defendants are, could successfully assail Simpson’s right to obtain, were he so disposed, a preference in respect to Wainwright & Bryant’s property over all other creditors. It must be remembered, too, that, in the disposition of their property among their creditors, Wainwright & Bryant selected Simpson as the person who was to make it, and constituted him their agent for that purpose; and they had a right to instruct him, had they seen fit, as to the manner in which the property should be applied; or they could leave it, as they did, to Ms discretion, in exercising which the defendant would have no more right to complain than if the disposition had been made by Wainwright & Bryant themselves. As correctly said, therefore, by the referee:

“In the absence of proof, the act of Simpson may be considered to be just what Wainwright & Bryant intended. Hence the bank cannot be held to stand as having received in payment of the Smith notes that which Simpson managed to apply to his notes through the instrumentality of Wainwright & Bryant.”

As urged by the respondent, the bank owed no duty to the Smiths-requiring it to take the judgment note at all, or to enter judgment thereon, or to endeavor to thrust aside Simpson’s security, which was prior in equity and in point of time, even' if it had the power to do so. The question here raised is not as to what rights the bank might claim against Simpson on the facts disclosed, but solely whether the Smiths, as so-called “accommodation makers” of the notes held by the bank, for which it had paid full value, can hold the bank liable for something which it neither did nor permitted. It is well established -that the holder of negotiable paper loses no right against the surety thereon by merely remaining passive. Bank v. Wood, 71 N. Y. 405 , 411; Smith v. Erwin, 77 N. Y. 466 . We do not think that the act of Simpson* and Gorss, although they were the president and the attorney, respectively, of the bank, in permitting

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Simpson to obtain a priority upon the personal property, made the bank liable for a breach of duty, and chargeable, as though lost, with the amount that would have been realized had the bank’s judgment attached equally with Simpson’s upon the personal property.

Another grievance assigned by the appellants consists in the refusal of the referee to find that the bank had realized $20,000 on the execution against the real property, and finding, instead, that it had realized only $12,000. Mr. Simpson, the president of the bank, testified that $20,000 was realized on the real property; but that this statement was made from memory, and that it was incorrect, is evident from the original documents, which include the receipt of Mr. Simpson and the sheriff’s return. Besides, it appears that the real estate was sold for $26,490; and, regard being had to the amount of the four judgments, the bank’s pro rata share of the proceeds would be about $12,000,—the amount found by the referee. There being a conflict between the oral testimony and these written documents, we think, upon consideration, that the referee was right in following the latter, as against the statement of the witness.

Although the referee has charged the plaintiff with $22,000 as having been realized upon the bank’s judgment, there is a serious question whether the entire value of the collateral security, including the judgment note, and the entire amount with which it is chargeable in favor of the defendants, was more than $12,150. The $22,000 found by the referee was made up of $12,000, the proceeds of the execution issued on the bank’s judgment to the sheriff of Jefferson county, and of $5,000, which he charged to the bank as being the amount realized on the resale by it of the property sold under the execution issued to the sheriff of Philadelphia, and which it bought in at such sale for $150, and of $5,000, the amount realized from the sale of certain cattle stock which Wainwright & Bryant had given to Simpson at the date of their failure. The amount of $150, realized on the sale of the Philadelphia real estate, would seemingly be the proper credit which the bank was entitled to allow, because any profits realized on the resale thereof could no more be reached as a security in defendants’ favor than would a loss, had it been made upon such resale, have been chargeable to it; and the referee, instead of charging the bank with $150, has charged it with $5,000, in defendants’ favor. The $5,000, proceeds of the cattle stock, as testified to by Bryant, was given by him to Simpson, as he understood, individually for his indebtedness. This amount, however, was appropriated by Simpson to the bank, under their agreement, pro tanto on the Wainwright & Bryant notes, and the referee allowed the payment. It will thus be seen that the referee reached upon these items a conclusion most favorable to the defendants.

The remaining question urged upon this appeal is in regard to the order granting to the plaintiff an allowance, in addition to costs, of $386.07. In view of the amount and the character of the questions involved, this cannot be regarded as an excessive allowance. It is insisted, however, by the appellants, that they should not be punished, by way of an allowance granted against them, for having in

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terposed equitable defenses which in part have been sustained. The answer to this seems to us apparent. It is true that the plaintiff asked a judgment for the full amount of the notes, upon the theory that they were business paper, and that the defendants took the opposite view, that they were accommodation notes; and, while the former demanded the full amount, the defendants insisted that the complaint should be dismissed. While the plaintiff did not obtain the entire relief demanded, we do not think it can be claimed that it has1 not succeeded in the action. Apart from this, if the defendants desire to limit their liability for costs, the Code provides a way by permitting a person to make an offer of judgment, which, if not accepted, would place the liability for costs upon the other party. This the defendants did not do, but litigated the question of plaintiff’s right to any recovery; and the plaintiff having recovered and been awarded costs, in view, as already said, of the difficulty of the questions involved, we think it was entitled to the allowance made.

In concluding, we think it proper to say that we might well have let this appeal rest upon the clear and satisfactory opinion of the referee; but as the appellants, with much force and earnestness, have pressed the questions again upon our consideration, we feel that a brief reference to all the questions presented upon the appeal was proper.

We think the conclusion reached by the referee was right, and that the judgment and order should be affirmed, with costs. All concur.

Cases cited

First National Bank v. Wood 71 N. Y. 405 N.Y. 1877-12-11 at 411 p. 1003
Smith v. Erwin 77 N. Y. 466 N.Y. 1879-06-03 p. 1003