Cheever v. Pittsburgh, Shenango & Lake Erie Railroad — 55 N.Y. St. Rep. 181

Majority

p. 181

Frank D. Cheever, Pl’ff, v. The Pittsburgh, Shenango & Lake Erie Railroad Co., Def't.

(Supreme Court, General Term, First Department,

Filed October 13, 1893.)

Headnote

1. Bills and notes—Bona nidio holder.

One to whom notes or securities of a corporation are offered by one of its officers in payment of, or as security for, the individual liability of such officer or that of his firm is bound to inquire into the circumstances-under which he became possessed of 'such notes or securities, and if he fails to make such inquiry, does so at his peril.

2. Same.

The defendant corporation issued notes to enable its president to purchase certain rolling stock for it, the same being payable to his private-secretary. They were not used for that purpose, but as collateral security for notes of a firm of which the president was a member, given to procure a loan from plaintiff’s transferor, and plaintiff received the same after maturity. In an action on the notes, Held, that plaintiff’s transferor was bound to inquire into the circumstances under which the firm became possessed of the notes, and not having done so was chargeable with notige of the facts which the inquiry would have elicited, and that a recovery could not be had.

Exceptions ordered heard at general term in the first instance.

Theall & Beam (Austen G. Fox, of counsel), for pl’ff; Frank Sullivan Smith, for deft.

The directors of the Pittsburgh, Shenango & Lake Erie Railroad Company, on the 17th day of February, 1888, passed the following resolution:

p. 182

“ Resolved, That the president be and hereby is authorized to make a contract for the purchase of five hundred flat cars for the use of this company, and is authorized, in carrying out this purchase, to give notes of this company to the sum of $10,000.”

On the same day the secretary of the company prepared two notes for signature, bearing a later date, and they were signed by the secretary and president. The notes were in the form following:

“ $5,000.' Greenville, Pa., Feb. 24, 1888.

“ Three months after date the Pittsburgh, Sbenango & Lake Brie Railroad Company promises to pay. to the order of John T. Bruen five thousand dollars, at the American Exchange Bank, ¡New York city. Value received.

“ The Pittsburgh, Sbenango & Lake Erie Railroad Company.

“ By M. S. Frost, President.

“Attest: E. S. Templeton, Secretary.”

The secretary was not in favor of the execution of the notes at that time, but the president, who had principal charge of the finances of defendant, explained that he might not be able to induce a car company to accept the notes in payment for cars, and then it would be necessary to have the notes discounted, and the proceeds used for that purpose. To the suggestion of the secretary that if the notes should be lost, and finally, before maturity, pass into the hands of a bona fide holder, the company might sustain serious loss, the president answered that such risk could be avoided by making them payable to the order of his private secretary, Bruen, who would not indorse them until the president shquld be ready to use them in the accomplishment of the purpose aimed at by the resolution. The president did not use the notes, directly or indirectly, for the purchase, or in payment, of flat cars ; but on the 19th day of March the firm of M. S. Frost & Son, of which defendant’s then president was the senior member, borrowed from Francis A. Brooks the sum of $30,000, giving their note therefor, and as collateral security thereto, among other things, the notes in question. These notes then bore the indorsements of private secretary Bruen and M. S. Frost & Son. Subsequently, but long after maturity, Brooks became the owner of the collateral, and thereafter they were duly transferred to this plaintiff.

The facts to which we have briefly alluded are uncontradicted. No material fact is, anywhere in the record, controverted. They command the conclusion of law that the president of the company fraudulently appropriated these notes to his private use. With this remark, we dismiss from further consideration the request of the plaintiff to have the question of fraud submitted to the jury.

The plaintiff urges that, the fraud being established, the notes are still valid obligations in the hands of a bona fide purchaser, and in the discussion he gives prominence to the fact that Brooks had no suspicion of the fraudulent conduct of Frost. But it is not enough, in a case like this, that the purchaser be ignorant of the wrong, in order to entitle him to claim the protection which

p. 183

the law affords to the good faith purchaser of commercial paper. There are cases in which it is not sufficient to close the eyes, and say, “I did not see cases where the circumstances are such as to put the prudent man on inquiry, and if reasonable inquiry will develop the wrong, he cannot afterwards claim, as against the party sought to be injured, protection because he did not know ■of the fraud. One of the instances which calls for inquiry by the purchaser of commercial paper is where an officer of a corporation is attempting to make use of its business paper for his private purposes. This rule is not unreasonable. The officer occupies a position of trust, which oftentimes affords opportunities, and occasionally presents great temptations, to use his trust for a temporary personal benefit. The knowledge that such is the fact, and the further one that corporations are not accustomed to have dealings with their officers of such a nature as to make it necessary to give them their notes in payment, is sufficient to suggest to every man of ordinary prudence that the possession of the business paper of a corporation by one of its officers, which he avowedly intends to use in payment of, or as security for, a personal debt, is so far suspicious as to prompt inquiry touching his right to so use it. Hence the rule that lie who takes the notes or securities of a corporation from one of its officers in payment of, or as security for, his individual liability, is bound to inquire into the circumstances under which the officer obtained possession of the notes or securities, and if he fails to make such inquiry he does so at his peril. Wilson v. Metropolitan El. Railway Co., 120 N. Y., 145 ; 30 St. Rep., 787 , and cases cited. Now, Brooks testifies that Frost told him, at the time he turned over this defendant’s notes as collateral security for the personal debt •of Frost & Son, that he was the president of the defendant; and certainly he knew that Frost was pressed for money, because he visited Brooks, in Boston, to obtain from him a loan of $30,000.

These facts should have prompted him to inquire how the president came to use the notes of this corporation, whose property had just come from the hands of a receiver, for his individual benefit, and, in law, he was bound to inquire. Whatever is sufficient to put a person of ordinary prudence on inquiry is constructive notice of everything to which that inquiry would reasonably have led. Shaw v. Spencer, 100 Mass., 388 . Had he tried to obtain information on the subject, he would naturally have first inquired whether the corporation had authorized the issuing of the notes ; and an examination of the resolution permitting their issue would have disclosed to him that they were issued for a specific purpose, to wit, the purchase of cars. This information would have assured him that the president was without authority to use -them, in the first instance, for his private purposes. Therefore, he would have found it necessary to take a further step, and ascertain whether the notes had accomplished the object for which they were issued, and thereafter passed regularly into the hands of the president, or his firm. All these facts Brooks would have discovered, had he made the inquiry which ordinary prudence die

p. 184

tated, and the law enjoined; and, with such information in his possession, there could be no recovery on the notes by him. Because he was bound to inquire, and did not, he is deemed to have had constructive notice of such facts, with necessarily the same legal result as if he had obtained full knowledge of the facts. As the plaintiff is a purchaser after maturity, he is in no better position than Brooks. Plaintiff’s exceptions overruled, and defendant’s-motion for judgment granted, with costs.

O’Brien and Follett, JJ., concur.