Phelps v. Boland — 4 N.Y. St. Rep. 233

Majority

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Isaac N. Phelps et al., Appl’ts, v. Robert B. Boland, Resp’t.^[1]

(Court of Appeals,

Filed November 23, 1886.)

Headnote

1. Principal and surety—Bills and notes—What action op the HOLDER OP A BILL OP EXCHANGE RELIEVES THE DRAWER

The defendant, a citizen of this country, drew a bill of exchange to his own order, at sixty days sight upon J. & Co., who were English merchants residing in Liverpool. Defendant sold it to the plaintiffs, who were American bankers residing in New York. The bill was accepted by J. & Co., payable in London. The bill was protested for non-payment at maturity, and J. & Co. having failed, were discharged in bankruptcy upon a compromise by the English courts, the plaintiffs, who were originally not parties to the proceedings, became so voluntarily afterwards, proved their claim and accepted the composition decreed whereby J. &

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Co. were wholly discharged, and defendant’s right of subrogation was rendered valueless, held, that plaintiffs’ having by their own voluntary act released J. & Co. from ail remaining liability, his surety, the defendant, was discharged.

2. Same—Bankruptcy—Effect of Foreign Discharge.

The foreign discharge in bankruptcy, if the plaintiff had not become a party, would have been, in and of itself, no defense to the American holder of the bill; if property of the bankrupt should be found in our jurisdiction, the plaintiff would have been at liberty to proceed against it by attachment, the only force of the discharge in our jurisdiction is from our consent, and that has been thus limited.

8. Same—When the discharge in one state bars rights of creditors IN ANOTHER.

As between the states of the union, a discharge in bankruptcy by the law of one, will not bar the right of a creditor who is a citizen of another, and not a party to the proceeding.

Appeal from an order of the supreme court, general term, first department, overruling the exceptions taken by plaintiff, and directing a judgment on the verdict ordered for defendant in the circuit court.

Thomas TI. Hubbard, -for app’lts; Frank D. Sturges, with Owen & Gray, for resp’dt.

The defendant, a citizen of this country, drew a bill of exchange to his own order at sixty days’ sight upon Johnston & Co., who were English merchants residing in Liverpool. The defendants sold it to the plaintiffs, who were American bankers residing in New York.

The bill was duly accepted by Johnston & Co., payable in London, who thereby, as to the plaintiffs, became the principal debtors, the. drawer’ being contingently liable upon their default and holding the position of a surety for the payment of their debt. The bill was protested for nonpayment at its maturity, Johnston & Co. having failed and being unable to meet their liabilities ; and the holders now sue the drawer to recover its amount.

The latter defends upon the ground that as surety he was entitled, upon payment of the bill, to be subrogated to the rights of the holder, and that the latter had so destroyed or materially impaired those rights as to have lost all remedy against the drawer.

The fact relied on as the cause and basis of this result is that the acceptors were discharged in bankruptcy upon a compromise by the English courts, and that the plaintiffs, who were originally not parties to the proceeding, became so afterward voluntarily, and proved their claim and accepted the composition decreed ; whereby the judgment became binding upon them in this country as well as in England, and so the acceptor was wholly discharged and right of subrogation as surety rendered valueless.

The answer made to this contention is that" the foreign

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discharge in bankruptcy was operative against the alders in this country, even though they had never become parties to the proceeding, and so the release of the acceptor flowed from no acts of theirs, and consequently they had not invaded or affected the drawer’s rights.

The authority pressed upon our attention, and which we are asked to follow, is that of May v. Breed ( 7 Cush., 1 5). The deserved reputation of the court and the great ability of its reasoning may well make us hesitate and reflect before adopting a contrary conclusion; but, deeming the question substantially settled, both in our own state and in the federal courts, adversely to the opinion cited, we feel it our duty to acquiesce in that result.

Two propositions are conceded on all sides : that the title of a foreign assignee, conferred by the foreign bankrupt law, may be asserted in our courts, but cannot operate or be effectual as against our own citizens pursuing their remedies as creditors against the bankrupt or his property within our jurisdiction, or when the recognition of such title is against our public policy, is conceded in May v. Breed, and has quite recently been decided by us. In re Waite, 99 N. Y., 433 .

And that, as between the states of the Union, a discharge by the law of one will not bar the right of a creditor who is the citizen of another, and not a party to the proceeding, is equally well settled by a substantial concurrence of authority.

The argument of the learned chief justice in the Massachusetts case is largely occupied with an effort to show that these two propositions do not decide the case of a discharge by the foreign court of a debt or obligation contracted under the law of its jurisdiction and to be there paid and discharged.

It is asserted that the cases between citizens of different states in our own country rest, not upon doctrines of international law, but upon provisions of the Federal Constitution and governmental relations peculiar to our national organization.

The most important and authoritative of these is Ogden v. Saunders (12 Wheaton, 217); and it is subjected to the double criticism that it did not in all respects reflect the opinion of the court, and that it decided no question of international law.

The first suggestion was fully and finally answered in Baldwin v. Hale (1 Wallace, 223), where the authority assailed was vindicated, and its doctrine expressly ratified and affirmed.

The second suggestion seems to us not sustained by a, careful reading of the case. The question before the court

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was stated to be “whether a discharge of a debtor under a state insolvent law would be valid against a creditor and citizen of another state who has never voluntarily subjected himself to the state laws otherwise than by the. origin of his contract,” and was argued in two forms: first, as a question of international law; and, second, under the federal constitution.

Upon the first branch of the argument the English rule was admitted to be that “The assignment of the bankrupt’s effects under a law of the country of the contract should carry the interest in his debts wherever his debtor may reside;” and then it was declared to be “perfectly clear that in the United States a different doctrine has been established; and since the power to discharge the bankrupt is asserted on the. same principle with the power to assign his debts, that the departure from it in the one instance carries with it a negation of the principle altogether.” At a later stage of the opinion attention is called to the circumstance that the discharge is always and necessarily an adjudication of a court, and depends wholly upon the operative force of that adjudication; and that neither comity nor justice requires that we shall hold one of our own citizens bound by a' judgment of a foreign court, to which he was-not a party, could not be compelled to be a party, and of which he might have had no notice.

I have less hesitancy in thus asserting the error of May v. Breed in construing the decision of the federal court as standing outside of international law, and so not authority in a case like this, because I observe that Mr. Rcdfield, in editing a new edition of Story on the Conflict of Laws, has deemed it .necessary to criticise his author’s assertion of the same error (section 341, a); and more especially because the supreme court itself in the later case of Baldwin v. Hale (supra) put its decision mainly upon a ground not peculiar to our federal relations, but upon the effect of a foreign judgment.

This last case, also referring to the Massachusetts doctrine, “that if the contract was to be performed in the state where the discharge was obtained, it was a good defense to an action on the contract, although the plaintiff was a citizen of another state and had not in any manner become a party to the proceedings,” expressly repudiated the conclusion, saying that, “irrespective of authority, it would be difficult if not impossible to sanction that doctrine.”

In our own state two cases have been decided in substantial accord with the ruling of the federal court: Gardner v. Oliver Lee & Co.’s Bank, 11 Barb., 558 ; In re Waite, supra. The latter case stated the general rule, without grafting

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upon it any exception founded upon the origin of the contract.

We are content to follow these authorities without entering into the wide and difficult discussion in which they culminated. It follows, therefore, in the present case that the foreign discharge would have been, in and of itself, no defense to the American holder of the bill.

If property of the bankrupt should be found in our jurisdiction, the plaintiffs were at liberty to proceed against it by attachment and collect their debt out of such property; and the foreign bankruptcy proceedings would neither prevent nor stand in the way, for 'the sufficient reason that their only force in our jurisdiction comes from our consent; and we have chosen thus to limit that consent.

This right remaining to the plaintiffs was a valuable right. It charged with the payment of the protested bill any present or future acquisitions of the acceptors which might come into our jurisdiction, and might result in the collection of the whole debt or a compromise settlement induced by the desire or interest of the debtors to have access to our markets and freedom to resume their business among us. _ To that right, thus valuable and material, it was the privilege of the surety to succeed by way of subrogation, whenever he should pay the debt; and the plaintiffs could not deprive him of it or impair and destroy it, except at the peril of releasing him from his liability.

Just that was what the plaintiffs did. Tempted by the compromise offered, they sought to obtain the defendant’s consent to its acceptance by him. That consent he withheld, but they, acting upon their own conceptions of what was most for their interest, voluntarily submitted themselves and their rights as creditors to the foreign jurisdiction, proved their debt and accepted the compromise decreed. The condition of the dividend was a release of the debtor. They could not take the compromise and avoid the condition; and so by their act they discharged the acceptors entirely and everywhere.

That such is the effect of their voluntary submission to the foreign jurisdiction is inevitable on principle and has been often decided. Gardner v. Oliver Lee & Co.’s Bank, supra; Clay v. Smith, 3 Pet. 411 . The unavoidable consequence follows. The creditor having, by his own voluntary act, released the debtor from all remaining liability, his surety is discharged. The courts below so held, and we think correctly.

But another suggestion has arisen among us, original with the court, and not at all urged in the brief of counsel, prepared with great" thoroughness and ability. That suggestion is that Roland consented to the acceptance of the

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dividend by plaintiffs, and so lost the right to complain;, and the evidence on which this is founded is said to exist in two letters which passed between the parties. It is not ■pretended that plaintiffs’ letter asks Boland’s consent to their acceptance óf the dividend, or that he, in terms, gave that consent, but such consent, not directly asked or given, is sought to be inferred from what was written. The letters are but the declarations of the parties bearing on the issue, and none the less so because they happen to be in writing. The proper inferences to be drawn from them were questions of fact more or less affected by the other evidence in the case. Whether, from the language used, Roland meant to give his consent and waive his rights, or plaintiffs understood him to consent, and acted upon that understanding, or without it, were certainly inquiries for the jury, and not for the court. But neither party asked to go to the jury upon any question of fact, and each, by asking judgment in his own favor, waived any possible question of fact, and conceded that only questions of law were involved. Were this otherwise, the result would not be changed. As I have said, plaintiffs did not ask Boland’s consent to their proving their own claim. On the contrary, they asked him to prove his, in order that they might not be compelled to prove theirs. The plain meaning was: We ask you to prove yours. If you decline, we shall prove ours, at all events. To this request, the only one made, Roland returns a refusal. That it is politely said in the phrase addressed to the counsel, “I would much prefer that your clients adopt some other course for securing to themselves dividends,” means only, in connection with their explicit avowal, “do it yourselves, if you choose to do it at all;” and then, as if fearing the very misconstruction now suggested, he adds : “I think, upon the whole, it may be better to leave the matter as it stands at present, rather than complicate it by assuming to be bailee of any funds they may claim as theirs. I do not aspire to the position.” Unquestionably his meaning is, “It is best that neither of us touch this dividend, and I, at least, refuse.” Language must be tortured to make this a consent, and a waiver of the surety’s rights.

The judgment should be affirmed, with costs.

All concur, except Earl, J., dissenting, and Ruger, C. J., not voting.

Cases cited

Clay v. Smith 3 Pet. 411 SCOTUS p. 237