Case ID: ny-st-rep_30/html/0787-01.html
Source: Caselaw Access Project
Author: {"author": "Parker, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Samuel K. Wilson, Resp’t, v. The Metropolitan R. Co., App’lt.
    
    
      (Court of Appeals, Second Division,
    
    
      Filed April 15, 1890.)
    
    1. Bills and notes—Bona fide holdek.
    The directors of defendant had passed a resolution to pay Kneeland, its president, a salary of $25,000 per annum from the time of his election, and at a subsequent meeting authorized the issuance and negotiation of the company’s notes to pay said salary. Plaintiff discounted certain of the notes, and credited the proceeds to Kneeland. Reid, that plaintiff was a Iona fide holder for value without notice, even though he had received it in payment oí a personal debt of Kneeland.
    
      2. Same.
    The purchaser of a note, under circumstances which devolve upon him the duty of inquiry, assumes no greater risk than the burden of proving that which would have protected him had he diligently inquired before making the investment.
    Appeal from a judgment of the general term of the court of common pleas of the city and county of New York, affirming a judgment entered on a verdict of jury by direction of the trial ■court.
    Plaintiff sued on a promissory note for $2,500 made by the defendant to its own order.
    At the close of the testimony, each party moved for a direction of a verdict in its favor; both thereby conceding that the facts in the case raised questions of law only to be determined by the court, and that there were no questions of fact to be passed upon by the jury. Upon such request the court directed the jury to render a verdict in favor of the plaintiff, and against the defend-. ant, subject to the opinion of the court. Thereafter, and during the same term, the court, after hearing counsel for the respective parties, sustained the verdict, and judgment was entered thereon for $3,117.21.
    Defendant made a motion for a new trial, which was denied. Defendant appealed from both the judgment and order, which were affirmed at general term.
    The defendant is a duly organized domestic corporation. On the 20th day of May, 1879, it leased its railway franchises, etc., to the Manhattan Eailway Company, a duly organized domestic corporation, which thereupon took possession of the defendant’s railway, and has ever since, with unimportant exceptions, operated the same. Sylvester IT. Kneeland was a stockholder, a director and the president of the defendant from the 8th of November, 1882, until August, 1884. What services he rendered, if any, as such president does not appear. The office of president, up to about the time of making the note in question, had never been a salaried one. No agreement was made by the defendant to pay Kneeland a salary or to give him any compensation for his services before the 5th of June, 1884.
    Shortly after three o’clock on the day last named, committees representing the defendant and the Manhattan Eailway Company ■entered into a memoradum agreement for the merger and consolidation of the two companies. This agreement provided that “the Manhattan company consolidated to assume all liabilities ” (of the -defendant) * * * “and to receive all assets” (of the defendant).
    Subsequently the two corporations were consolidated substantially on the basis stated in the memorandum.
    About 3:30 P. M. on the same day, at a meeting of the board of directors of the defendant, regularly appointed, the committee of that company presented the memorandum agreement so entered into, and it was unanimously adopted.
    At the same meeting the following resolution was unanimously .adopted:
    
      “ Resolved, That S. H. Kneeland, the president of the company, shall be paid a salary of $25,000 per annum from the time of his election as such.”
    Mr Kneeland presided at this meeting and put the resolution to vote. On the 18th of June, 1884, another duly appointed meeting of the directors of defendant was held at which the following resolution was unanimously adopted: “ .That the president be, and he is authorized to use the credit of the company, by issuing and negotiating its notes, or otherwise, for paying the salary of said president; said notes to be signed by the president, and countersigned by the treasurer, in the usual way and form, and not to exceed the limit of the amount heretofore authorized.” Mr. Kneeland presided at this meeting and put the question to "vote.
    In accordance with the provision of the last resolution, notes were issued, signed by S. H. Kneeland, as president of the defendant, and countersigned by the treasurer; they were made payable to the order of the defendant and endorsed by S. H. Kneeland as president and individually, and aggregating, as it is claimed, i$48,950. These notes matured at various dates from August 8th, to October 31, 1884.
    This suit is brought upon one of such notes, which was transierred directly to the plaintiff by Kneeland, under the following circumstances:
    On May 26, 1884, plaintiff cashed for Mr. Kneeland a check for $7,650, drawn by the Mercantile Trust Company on itself, by giving him the full value thereof. Plaintiff held the check uncollected until June 28, 1884, on which day Kneeland sent to him the note in suit and two other notes issued- as above stated, of like amount and tenor, and varying slightly in dates.
    The plaintiff then discounted the three notes, giving Kneeland as the proceeds of the discount, the check of the Mercantile Trust Company, instead of cash, and charging him with the $7,650 advanced to him on May 25th, together with interest to the date of the discount, and crediting him with the three notes discounted, less the interest thereon to their maturity.
    This left a balance against Kneeland of $283, which the latter paid to the plaintiff in cash. Two of the notes thus discounted were paid. The one in suit was not, and hence this action.
    
      JEdward S. Rapadlo, for app’lt; Francis O. Barlow, for resp’t
    
      
       Affirming 6 N. Y. State Rep., 234.
    
   Parker, J.

This court has decided at this term in the case of The Metropolitan Railway Company v. Kneeland et al., ante 782, that certain notes, including the one in controversy, are valid legal -obligations against the defendant, in favor of a purchaser for value before maturity, and without notice of the circumstances attending their issue.

It is insisted, however, that the plaintiff is not in a position to claim that he is a bona fide holder without notice, because the note was made by the corporation payable to itself, endorsed by Knee-land, as president and individually; it was sent to him by Knee-land through a messenger, and, therefore, it is said, he knew when he received it that the company’s note was being applied by its president to his personal benefit and advantage.

Undoubtedly the general rule is that one .who receives from an officer of a corporation the notes or securities of such corporation, in payment of, or as security for, a personal debt of such officer, does so at his peril.

Prima facie the act is unlawful, and unless actually authorized the purchaser will be deemed to have taken them with notice of the rights of the corporation. Garrard v. Pittsburgh & Connelsville R. R. Co., 29 Pa. St., 154; Pendleton v. Fay, 2 Paige, 202 Shaw v. Spencer, 100 Mass., 388.

The plaintiff contends that this transaction docs not come within the rule to which we have alluded. That the notes were not received by him with knowledge that the discount was intended to be for the personal benefit of Kneeland, but on the contrary they were regularly discounted in the usual course of business.

Plaintiff testified that several months prior to the purchase the president of the defendant spoke to him about discounting notes of the defendant.

On May 26, 1884, Kneeland sent him a check of the Mercantile Trust Co., for $7,650, drawn by it, on itself, to the order of Kneeland, and endorsed by him, with a request that he cash it and hold it for a few days. Plaintiff did not agree to hold it, but paid Kneeland the face of the check. The check was retained by the plaintiff until June 27th, when Kneeland sent to him the note in suit and two others.

Plaintiff discounted the notes and as a consideration therefor gave Kneeland the check of the Mercantile Trust Company. After deducting the discount and interest on the money advanced on the check the delivery of the Trust Co. check constituted an overpayment of $283, which amount Kneeland paid to the plaintiff the following day. And the plaintiff insists that neither in the communication from Kneeland, nor in his reply thereto, was it suggested that the notes were to be given or taken in payment of any indebtedness of Kneeland. That while he gave in payment a check which bore the endorsement of Kneeland, it. was perfectly good without such endorsement He could have obtained the money on it at any time. It makes no difference to either party whether Kneeland or the plaintiff should collect the check from the Trust Company. That if he had given his own check to Kneeland for the notes and collected the other from the Trust Company, the effect of the transaction would not have been different than that which took place.

While this evidence is undisputed, except in so far as the plaintiff's own statements may be said to be in conflict, still as this claim is based upon the testimony of a party to the action, the defendant would have been entitled to a submission to the jury of the question whether plaintiff understood that Kneeland was using the notes for his benefit instead of borrowing money thereon for the corporation.

As both parties requested the court to direct a verdict, the omission to submit the question to the jury is not now of moment..

If it were necessary in order to support the judgment this court would be required to adopt the evidence most favorable to the plaintiff. But assuming, as to the facts, the contention of the appellant, then we have the plaintiff paying full consideration for the notes, for the presumption is that the trust company’s check was good, under circumstances which imposed upon him the burden of inquiry as to whether them issuance was authorized. If he had made inquiry of the officers of the corporation and through them had ascertained the fact that the notes were issued and delivered to Kneeland pursuant to a resolution of the board of directors of defendant, he would clearly be entitled to the protection of a bona fide holder without notice. For that resolution recited- the existence of an indebtedness to the president for salary, and expressly authorized the issue of notes in the amount thereof, •“ to be signed by the president, and countersigned by the treasurer in the usual way and form.” It furnished information therefore that Kneeland was using the notes in the manner expressly authorized. It constituted an appearance of authority upon which a purchaser for value could safely rely. True, the resolution re■cited that the notes were to be issued to pay Kneeland, president, a salary, but it did not pretend to give or ñx a salary. It asserted an indebtedness for salary, and one dealing with a railroad corporation which has a right to pay its president a salary, and ordinarily does, is not bound to go behind such an assertion as was made by the defendant’s directors, for the purpose of ascertaining whether the salary is legally payable.

A different rule would be impracticable and would substantially incapacitate third persons from taking the paper of, or contracting with, corporations.

The principles enumerated in Farmers & Mechanics' Bank v. Butchers & Drovers Bank, 16 N. Y., 125 ; North River Bank v. Aymar, 3 Hill, 262; Exchange Bank v. Monteath, 26 N. Y., 505, are applicable to the rule we have stated.

We are of the opinion, therefore, that if plaintiff had been informed of the resolution, such information, inasmuch as it was true in fact, would afford to him the protection of a bona fide holder without notice. But the plaintiff did not make inquiry at the time. He assumed that the issue, and proposed disposition, of the notes had been duly authorized. He trusted to the fact of authority and not to the evidence of it. And can it be said that the resolution which would have protected him if he had been informed of it, cannot be invoked to aid him now ?

Does, the purchaser of a note, under circumstances which devolve upon him the duty of inquiry, assume a greater risk than the burden of proving that which would have protected him had he diligently inquired before making the investment? We think not.

If the plaintiff had relied upon a statement by one of the officers, that a resolution had been passed, authorizing the issue of the notes, he would have assumed, necessarily, the risk of the statement being true. If.true it would protect him, otherwise not He stands in no different position because he did not first inquire. In either event, he would assume only the risk of proving the authorization hy resolution.

This position has support in the. reasoning of Judge Andrews in Cowing v. Altman, 71 N. Y., 442, and Williams v. Mitchell, 17 Mass., 101.

The views expressed lead to an affirmance of the judgment.

The judgment should be affirmed.

Ill concur, except Haight, J., not sitting.