Wiltsie v. Northam — 16 N.Y. Super. Ct. 162

Majority

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James W. Wiltsie, Respondent, v. William L. Nobtham, Appellant.

Headnote

1. The pendency of an action for damages is no bar to the setting up of the same demand of damages as a counter-claim in a suit afterwards brought against the plaintiff in the first action by the defendant therein.

2. Where a sale of chattels has been fraudulently made, and the title to the chattels sold has failed, and the purchaser has commenced an action to compel the vendor to surrender a promissory note and mortgage given for the consideration of the sale, to be canceled, and to recover damages for the fraud, the pendency of such an action will not prevent the purchaser, if afterwards sued on the note by the vendor, setting up the fraud, and failure of title, as a defense to the action so commenced by the vendor.

3. A “ counter-claim,” as defined in the Code- of Procedure, or matter of “recoupement,” as understood before the Code, can only be used as a defense, where it exists, in favor of the defendant against the plaintiff in the action. Accordingly in an action on a note, by a transferee or assignee, a cause of action existing only against the payee, cannot be, set up as a counter-claim, although the plaintiff received the note from the payee after its maturity.

4. But where the facts averred and sought to be proved affect the validity of the note itself in the hands of the payee, and show either a want or failure of consideration, they are admissible in favor of the maker in an action by

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one who received the note after its maturity; and, in such case, the pendency of an action brought in equity by the maker against the payee to compel the surrender of the note, to be canceled, and for damages, will not preclude the maker from using these facts as a defense, when, after the bringing of such suit in equity, and after the maturity of the note, the payee transfers the note to a third person who sues the maker thereon.

(Before Woodruff and Pierrepont, J. J.)

Heard, March 10th;

decided, June 12th, 1858.

This action was tried on the 22d December, 1857, before Mr. Justice Duer and a jury, and resulted in a verdict for the plaintiff, upon which judgment was entered, and the defendant appealed.

The action was brought upon a promissory note, for sixteen hundred dollars given on the 16th November, 1855, at twelve months, by the defendant, to the firm of Lalouette & Ashfield, ( made payable to one of the firm, for their benefit, and by him indorsed and delivered to the firm) on and in consideration of the sale, to the defendant of certain fixtures and personal property in and connected with a coal yard, the lease whereof was at the same time assigned to the defendant. Although the sale and assignment was in one instrument, the fixtures and chattels mentioned in the schedule annexed, are expressly declared to be the consideration of the note, and the lease is assigned upon a separate and distinct consideration.

The agreement of sale and the schedule therein referred to, are as follows, to wit:

“Know all men by these presents, that we, P. H. Lalouette and H. Ashfield, doing business under the firm of Lalouette & Ashfield, in New York City, in consideration of a note for sixteen hundred dollars, (1,600) at twelve months from date, drawn by William L. Northam, do hereby grant, sell and deliver unto said Northam, all fixtures and appurtenances, in, upon and appertaining to the Coal Yard, known as 441 Grand street, and now occupied by said Lalouette & Ashfield, and described in the annexed schedule; and also, in consideration of one dollar, the receipt of which is hereby acknowledged, we do sell and transfer to the said Northam, the present lease of said yard, which has about 2 years to run, at its present rent, and do guarantee to him a renewal to him of said lease for five years, at a yearly rent of not exceeding two hundred dollars, advance, per annum, and at as much less as can be, and also the free privilege to

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remove all said fixtures at its expiration. If a renewal is not given, then Lalouette & Ashfield are to refund the one-half the loss on said fixtures, and further, in consideration of a note for $3,791.79 at six months from date, with 7 p. interest, p. annum, drawn by said Northam, we hereby sell and deliver unto said Northam, all the coal in said yard, being about 700 tons, and said Northam agrees to pay, in anticipation, on account of said notes, any funds he may have, a surplus not required in any manner in his business, and any such amounts are to be indorsed on his notes.

“ In witness whereof, we have hereunto set our hands, this 16th day of November, 1855.

“Lalouette & Ashfield.

“Witness,

“A. Ashfield.

“Schedule. 2 offices, brick; 1 office desk; 1 sofa; chairs;' washstand; scales and weights; 2 carts and harness; 1 horse; 1 safe; screens and shovels; 1 sleighbells; sheds; fence around yard; paving sections; iron rods; hydrants; shop, corner Division and Ridge streets.

“New York, November 16, 1855.

The defense set up in the answer, so far as it bears upon the right of the plaintiff to recover upon the note, is that the vendors represented that they had title to the fixtures and chattels. That they had no title to the most valuable portion thereof. That they knew when they sold the same, that they had no right to remove the same; that the defendant has been obliged to abandon the same, except one horse and cart of the value of $200, and that the consideration of the note has thereby failed.

The answer further states that the vendors guaranteed a renewal of the lease of the yard, and represented that their lease had about two years to run, when in truth they knew that their lease would expire in less than eighteen months, and .that they had no right of renewal, and that in fact they did not procure a renewal, so that the defendant was, on or about the 1st day of May, 1857, compelled to surrender the premises — averring damages sustained thereby.

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And further, that the defendant commenced an action in June, 1857, in the Supreme Court to recover his damages and to compel the vendors to surrender the note, and a mortgage given to secure the same, to be canceled.

The title of the plaintiff to the note is put in issue. And it is alleged that the transfer, if any, to the plaintiff was after the maturity of the note. And, also, that the suit is brought by the plaintiff in his own name, but in fact, for the benefit of Lalouette & Ashfield.

On the trial it was proved that the note was sold to the plaintiff after it became due, and after the suit (mentioned in the answer) brought to compel Lalouette & Ashfield to surrender the note, to be canceled, had been commenced. The defendant then offered to prove the failure of the consideration of the note, and the other matters set up in the answer.

The Court ruled that the defendant was precluded from availing himself of his said defense by reason of having commenced his said suit against the payees of the note, as in the answer averred.

The other rulings of the Court necessarily resulted from the exclusion of the evidence, and, by direction of the Court, the jury rendered a verdict for the plaintiff for the amount of the note and interest.

The case was ordered to be heard at the General Term, in the first instance, upon exceptions to the ruling of the Court.

The plaintiff entered judgment on the verdict, and the defendant appealed.

A. McOue, for the (defendant) appellant.

I. The Court erred in directing the jury to find a verdict for the plaintiff.

II. The Court erred in excluding proof of the several matters of defense set up by the defendant in his answer.

1. The testimony of the plaintiff’s ■ witness ■ shows beyond all doubt, that the note in suit was passed to the plaintiff after maturity, and after a suit had been commenced by the defendant against this same witness and his partner in business, who were the payees of the note, and from whom the plaintiff in this action derives his title.

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2. The rule is well settled that the purchaser of a note past due, even for value, takes it subject to all equities existing between the original parties, touching the subject matter of the note. (Johnson v. Bloodgood, 1 Johns. C., 51; id., 331; Jones v. Caswell, 3 id., 32; Story on Pro. Notes, § 190; Greenleaf’s Ev., vol. 2, § 199; vol. 1, § 25.)

3. The plaintiff took the note, not in the ordinary course of business, and with notice in fact that a difficulty existed between the defendant and the payees of the note, in relation to the note, and thus put on his guard; it was his duty to have inquired into the transaction as between the original párties.

HI. Northam’s right to commence the action in the Supreme Court, against Lalouette & Ashfield, cannot be questioned, and if the note in suit had been passed to the plaintiff before, instead of after the commencement of the suit in the Supreme Court, Wiltsie, the plaintiff, would have been a proper, party to that suit, and might have been enjoined equally with Lalouette & Ashfield from negotiating said note, and might have been compelled to deliver up the note tó be canceled, if the plaintiff succeeded in establishing his equities. (Story’s Equity, vol. 2, § 700; Reid v. Warner, 5 Paige, Chy., p. 650.)

IY. The suit in the Supreme Court is no bar to the defense sought to be established here. The plaintiff is not a party to that suit. Having taken the note after maturity, he took it subject to all the equities existing between the defendant and the payees, and to the extent that the defendant in this suit succeeded in establishing a defense to the note, to that extent the plaintiff would have his remedy over against the payees who indorsed and transferred the note to him. (Green v. Russell, 5 Hill, 183 .)

M J. Phelps, for the (plaintiff) respondent.

I. The evidence offered by the defendant, was properly excluded.

1. It is no defense to an action on a note, that it was given in part execution of a contract of purchase, which was induced by the fraudulent representations of the payee, if it appears that defendant, after knowledge of the fraud, has elected to go on,

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and avail himself of the contract, and has thus received the benefit of it.

2. All the facts as to which fraudulent representations are alleged to have been made, are the subject of special covenants in the contract, upon which an ample remedy exists: and the responsibility of the covenantor is not questioned. The claim of actionable fraud in these particulars, is therefore precluded by the contract itself. So far from relying, to his detriment, upon the representations, the defendant has provided himself with a good covenant of their truth, and has availed himself of it, to recover his damages.

3. There is no failure of consideration, upon the facts offered to be shown. So far as the particulars referred to entered into the consideration of the note, they are covered by the covenant of Lalouette & Ashfield. That constituted the consideration so far, and has not failed to afford an ample indemnity against any deficiency in the property purchased.

4. Were the defense offered, otherwise admissible, the fact that the defendant had elected to avail himself of it by an independent action, as he might legally do, would preclude him from setting him up here. He can have the benefit of it but once. It is not denied, that the action brought gives him ample remedy. If he has sustained any loss, which might otherwise entitle him to some deduction from the note, the remedy he has chosen is a compensation, and the consideration of the note stands unimpaired. (Halsey et al. v. Carter, 1 Duer, 667 .)

By the Court.

—The ruling had at the trial excluding the defendant’s proofs is sought to be sustained, in part, upon the idea that the defense as proposed to be proved on the trial was in the nature of a counter-claim, to establish damages in the defendant’s favor, which had the action been brought by the firm of Lalouette & Ashfield, the defendant might, but for the suit brought in the Supreme Court, have recouped and so defeated a recovery by them, and that the defendant having brought his action to recover those damages, had made his election to recover those damages by suit, which was then pending, and could not now avail himself of them as a defence or otherwise against the note.

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If the correctness of the ruling turned upon this view of the question between the parties, we should feel constrained to say that the pendency of such a former suit for the damages sustained by the failure of the title to the chattels was no bar to the use of the same matter as a counter-claim; the defendant having a cause of action for damages may sue therefor, and if pending that suit he is himself sued on a cause of action in favor of the adverse party, no rule of law requires him to discontinue his suit or be barred of his defense. It is true he cannot recover the same damages twice, and therefore he cannot use them to defeat a recovery against him, and also in his own suit have a recovery in.his own favor. When "the claim to damages has once been established by a recovery or by defeating the action brought against him, that must terminate the litigation; and it .may be that the Court would not permit a defendant after having set up such a counter-claim as a defense and pending the litigation, to bring a new suit himself to recover for the same cause • of action. But if the Court will, in the exercise of a discretion to prevent needless litigation, stay the proceedings in such a case, it can never be held, we think, that the pendency of an action for damages is a bar to the setting up of those damages as a counterclaim in a suit afterwards brought against him by his adversary; Fabricottiv. Launitz (3 Sand.; 743), sustains these views; and a subsequent case in this Court, Fuller v. Reed and Reed v. Fuller ( 15 How. Pr. Rep., 236 , and 6 Duer, 697 ), further affirms the same proposition.

But we apprehend that so far as the defense set up by the defendant in his answer is to be regarded as, a counter-claim, it was inadmissible upon another ground.

A counter-claim can only be used as a defense, when it exists in favor of the defendant and against the plaintiff, in the action in which-it is sought to be used. It must be a cause of action existing between the parties to the action itself (Code § 150), and this was always true of matter of recoupment. And accordingly a counter-claim cannot be set up in an action by an assignee, when it shows a cause of action against the assignor only. So it was held in Vasseur v. Livingston ( 4 Duer, 285 ), affirmed by the Court of Appeals (3 Kern., 248); and Gleason v. Moen ( 2 Duer, 639 ).

The case last cited is strikingly like the present. There

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the action was by an indorsee of a promissory note transferred after maturity, and the defendant claimed to recover his damages sustained by reason of a breach, by the payee, of the contract under which the note was given. And it was held that as the matters alleged created no right to recover damages from the plaintiff, the defense, viewed as a counter-claim, could not be sustained; although there the plaintiff received it with full knowledge of all the facts.

But the defense, as the same was offered to be proved on this trial, is not, we think, to be regarded as either a counter-claim, set-off or a recoupment. It was urged as a defense to the note itself. It is true that the answer sets up the defendant’s claim for damages as a counter-claim. For the reasons already given, no such claim could be allowed in this action, and evidence tending merely to establish a counter-claim would have been properly rejected. But the offer was to prove the matters alleged in his answer, as constituting a failure of the consideration of the note; matters amounting to such failure were alleged in the answer, and to that ground of defense, and to that alone, was the offer of evidence addressed. If the facts alleged in the answer, and offered to be proved, are established, they amount to a partial failure of the consideration of the note. This directly affected the validity of the note itself in the hands of the payees, and although a Iona fide indorsee for value, receiving the note without notice, before maturity, would not be affected by an impeachment of the consideration, the plaintiff receiving it after maturity, took it, subject to all defects impairing its legal validity in the hands of the payees themselves. This point is distinctly held in the case of Gleason v. Moen above referred to, and under a state of facts, substantially like those before us. See also, the cases there cited, and the1 same doctrine applied to an assignment of a chose in action not negotiable in Vasseur v. Living ston, supra.

The offer here was to show that the note was given for sundry chattels sold and delivered, and that the title to nearly all of those chattels was not in the vendors, and that the defendant lost the same by reason of such failure of title. To our minds this presents a case of alleged partial failure of consideration, which the defendant should have been permitted to prove if he was able.

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It is urged that the entry by the defendant into the possession of the premises, and his subsequent prosecution of his action for damages must be taken as an affirmance of the whole contract, and the defendant must now be held to pay his note and rely upon his covenants for his protection.

We do not perceive the force of this suggestion. The defendánt has no covenants respecting the title to the chattels except such as are implied in the act of sale. Nor is this a case in which the defendant is seeking to affirm the contract on the one hand, and on the other rescind it and recover back the consideration. The contract, under which the note was given consisted of several independent particulars, one of which was a sale of the chattels for which the note was given. Another, related to a distinct matter, the sale of coal. Another related to the transfer of a lease and contained a guarantee that the lease should be renewed.

The suit which it is claimed operates to deprive the defendant of his defense is brought upon the very ground that the title to the chattels has failed, and prays that for that reason the note should be canceled, and we are now told that the pendency of such a suit would prevent the defendant’s alleging a failure of consideration if the payees were here prosecuting the note itself,

The contract in some of its parts has been so far executed as to be incapable of rescission; and, in that respect, it follows that if any damages for a breach of its covenants have been sustained by the defendant, they may be the subject of inquiry in the Supreme Court even though they should decree a surrender of the note to be canceled. ■ But we think that the defendant, being now sued on the note may use as a defense, the failure of consideration to the same extent as if he had commenced no such action.

On this ground, we think the judgment should be reversed and a new trial ordered, with costs to abide the event.

Ordered accordingly.