Boston National Bank v. Armour — 6 N.Y.S. 714

Majority

p. 714

Boston Nat. Bank v. Armour et al.

(Supreme Court, General Term, First Department.

May 24, 1889.)

Headnote

Negotiable Instruments—Sale—Solvency of Maker.

Where the holder of a note, knowing that the maker and indorser are insolvent, hut without disclosing such information, sells the note to one who is ignorant of that fact, he is guilty of a fraud on the purchaser for which an action may be maintained.

Appeal from special term, Kew York county.

Action by the Boston national Bank against Paul J. Armour and Charles W. Armour. A demurrer to the complaint was overruled, the following opinion being delivered May 7, 1888:

“Ingraham, J. The action is brought to recover the amount paid by the plaintiff for two notes made by the Bushwick Chemical Works, a"domestic corporation, payable to the order of Martin Kalbfieisch’s Sons, and indorsed by them in blank. The complaint alleges the insolvency of the maker and indorser for a long time prior to the date of the notes, and that the indorsers had suspended payment, and their paper had been protested the day preceding the sale of the notes; that the notes were worthless; and that the facts were well known to the defendants, and were unknown to the plaintiffs, and were intentionally concealed from them by the defendants, with the view, and for the purpose, of deceiving and defrauding the plaintiffs or other purchaser of said notes. A scienter being alleged, the action is in tort, and the rule established by Littauer v. Goldman, 72 1ST. Y. 512, and Bank v. Bogart, 81 K. Y. 106, does not apply. In Brown v. Montgomery, 20 K. Y. 291, it appeared that a check had gone to protest on the day before the check sold to the defendants had been sold, and it was held that the trial judge was correct in instructing the jury that it was the duty of the vendor to communicate to the vendee what he had heard of the protest of the other checks of the drawer, and the rule is staled that, when á party negotiates commercial paper payable to bearer or indorsers in blank, he warrants that he has no knowledge of

p. 715

any facts which prove the paper to be worthless on account of the failure of the maker, or by its being already paid, or otherwise to have been void or defunct.

“The liability is here stated to be founded upon an implied warranty, but I think it could be placed upon the failure to fulfill the obligation of the vendor to disclose latent defects in the thing sold, known to him, but which are not known to the vendee, and that the failure to fulfill such an obligation is fraud upon the vendee, and avoids the sale; thus making the rule the same on the sale of negotiable paper as on the sale of other personal property. In Hoe v. Sanborn, 21 B. Y. 555, Selden, J., in delivering the opinion of the court says: ‘It is a universal doctrine, founded upon the plainest principles of natural justice, that whenever the article sold has some latent defect which is known to the seller, but not to the purchaser, the former is liable for the defect if he fails to disclose his knowledge on the subject at the time of sale.’ The value of the notes in question depended upon the solvency of the maker and indorsers. If they were at the time of the sale actually insolvent, and upon the brink of failure, and that fact was known to the defendant, it was a fraud upon the plaintiffs to sell the notes without disclosing the fact, and, by reason of that fraud, the sale is avoidable, and, the sale being set aside, the defendant is liable for the amount paid to them for the notes. The case of Dambmann v. SchulUng, 75 B. Y. 61, was an action to set aside a release under seal. The obligation of the vendor on the sale of the chattel was not involved.

“Under the authorities in this state, I think the complaint alleges a good cause of action against the defendants, and the demurrer must be overruled, and judgment ordered for plaintiff, with costs, with leave to defendants to answer within twenty days on payment of costs.”

Defendants appeal. Dor former report, see 3 B. Y. Supp. 22.

Argued before Van Brunt, P. J., and Daniels and Bartlett, JJ.

C. Bainbridge Smith, for appellants. Hamilton Odell, for respondent.

The reasons given by the learned judge who heard this case at special term are amply sufficient to sustain the conclusion that the complaint states facts sufficient to constitute a cause of action, and we deem it necessary to add very little to what he has said on the subject. The case of Bank v. Bogart, 81 N. Y. 101 , does not decide, as seems to be supposed by the counsel for the appellant, that upon the sale of a promissory note there is never any implied warranty as to the solvency of the maker. In that case Andrews, J., says: “The law on the sale of commercial paper implies a warranty on the part of the vendor of title, and that the instrument is genuine, * * * and also, as stated by Judge Story, [Story, Prom. Botes, § 118,] that the vendor ‘ has no knowledge of any facts which prove the instrument, if originally valid, to be worthless either by failure of the maker, or by its being already paid, or otherwise to have become void or defunct.’” But, wholly irrespective of any question of implied warranty, we think the action is maintainable on the ground of fraud. If the vendors of these notes knew that they had become worthless by reason of the insolvency of the makers and indorsers, and remained silent on the subject when they sold the paper to purchasers who were ignorant of the fact, they were guilty of a fraud, just as it would be a fraud knowingly to pay for purchased goods with a bill upon a broken bank, without divulging the true character of the instrument proffered in payment. The obligation in the case supposed would be perfectly valid in form, but the purchaser who had paid for goods with such a bill, knowing it to be worthless, would unquestionably be liable to an action sounding in tort, at the instance of the vendor, to recover damages arising out of the fraudulent concealment. The judgment appealed from should be affirmed, with costs. All concur.

Cases cited

Peoples' Bank v. Bogart 81 N. Y. 101 N.Y. 1880-06-01 p. 715