#### Anton Peterson, Appellant, *v.*Frank W. Fowler and John A. Phillips, Defendants, Impleaded with Henry Alton, Respondent.

First Department,

May 1, 1914.

Bills and notes—suit for cancellation of note—bona fide holder — burden of proof — fraudulent diversion of note — evidence — foreign statute.

In a suit for the cancellation of a promissory note made by the plaintiff to his own order it appeared that he indorsed the note in blank and delivered it to F. for the sole purpose of having it discounted and the proceeds turned over to him; that F. delivered it to P. for the same purpose; that P., instead of having the note discounted, delivered it to A. for the purpose of having it discounted and the proceeds remitted to him, either for his own interest or the joint interest of himself and A. A. did not discount the note, but held it, and the plaintiff has never received any consideration therefor.

Evidence examined, and held, insufficient to sustain findings that A. was a holder in due course and for value, or that he accepted the note in part payment for an interest in a railroad which he had agreed to transfer to P.;

That a judgment on a counterclaim against the plaintiff for the amount of the note and dismissing the complaint upon the merits should be reversed;

That A. fraudulently diverted the note and the burden of proof was upon him to show that he was a *bona fide*holder for value.

As the statute of Illinois, where the note was executed, delivered and payable, was not pleaded, it should not have been received in evidence.

Appeal by the plaintiff, Anton Peterson, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on the 15th day of *22July, 1913, upon the decision of the court after a trial at the New York Special Term.

*Otto C. Sommerich,*for the appellant.

*Francis S. Williams,*for the respondent.

McLaughlin, J.:

This action is brought to procure the cancellation of a promissory note made by the appellant and held by the respondent. The latter, in his answer, set up a general denial of the material allegations of the complaint, and also, as a counterclaim, asked judgment against the plaintiff for the amount of the note. After trial at Special Term the court granted judgment on the counterclaim and dismissed the complaint upon the merits. The plaintiff appeals.

There is little dispute of fact between the parties as to the origin and subsequent use of the note. It was for $2,167.50, made by the appellant, payable to his own order four months after date, at the First National Bank of Chicago. He indorsed it in blank and delivered it to the defendant Fowle'r for the purpose of having it discounted and the proceeds turned over to him. Fowler delivered it at Chicago to the defendant Phillips for a similar purpose. Phillips indorsed it in blank and mailed it to the respondent Alton, who was in New York. The evidence is uncontradicted, and the court found as a fact, that the plaintiff delivered the note to Fowler and the latter delivered it to Phillips solely for the purpose of having it discounted and the proceeds turned over to the plaintiff. Phillips promised, when he received the note, to have it discounted for plaintiff’s benefit and to pay the proceeds to him. Instead of doing so, Phillips delivered the note to Alton for the purpose of having it discounted and the proceeds remitted to him, either for his own interest or the joint interest of himself and Alton. Alton did not discount the note and remit the proceeds to Phillips, but held it and the plaintiff has never received any consideration whatever for it. The court found that Alton was a holder in due course and for value, and, therefore, the defense of want of consideration was not available as against him. I think this finding is against the evidence. When all of it is *23considered it shows, as it seems to me, that Alton never paid any value for the note, and when he received it he did so with notice that it was to he discounted and the proceeds remitted to Phillips. The note, when delivered to Phillips, was for the purpose of having’ it discounted and the proceeds remitted to the plaintiff. Phillips asked that Alton discount it and remit the proceeds to him. This was a fraudulent diversion and the burden of proof, therefore, rested upon Alton to show that he was a *bona fide*holder for value. *(Nickerson*v. *Ruger,*76 N. Y. 279; *American Ex. Nat. Bank*v. *New York Belting, etc., Co.,*148 id. 698; *Mitchell*v. *Baldwin,*88 App. Div. 265; Neg. Inst. Law [Consol. Laws, chap. 38; Laws of 1909, chap. 43], § 98.) Alton testified that a few months prior to the receipt of the note he entered into an oral agreement with Phillips to transfer to him an interest in a prospective railroad in Michigan; that Phillips promised, in consideration of such interest, to repay Alton all money which the latter had expended, or might thereafter expend, in connection with the construction of such road; that prior to the receipt of the note he had expended $1,495, and thereafter about $1,100 more, and the court found that he accepted the note in part payment for the interest hi the railroad which he had agreed to transfer to Phillips.

This finding, I think, is also against the evidence because it is clear from the correspondence between Phillips and Alton, and from the latter’s own testimony, that the note was not received in payment of anything, but solely for the purpose of having the same discounted and remitting the proceeds to Phillips, either for his own or their joint interest. In the letter which Phillips sent to Alton with the note he said: “ It is time to be up and doing, so use this at once and let me have proceeds; ” and in a telegram preceding the mailing of the letter, Phillips said: “Note sent special delivery Twentieth Century; get it and act promptly; our interests demand it.” A few days after Alton received the note, Phillips wrote him saying: “What I sent is good. * * Keep at it until something is done. If not 100 per cent get 75, and if not that then 60, or even 50 per cent.” The note was not delivered to Alton as collateral security for the payment of a pre*24existing debt and- this seems to be conceded in the respondent’s brief; if not, it well might be because there is no evidence to that effect. It was, as before said, delivered for the purpose of having it discounted and remitting the proceeds to Phillips. This was recognized by Alton not only at the time it was delivered to him, but sometime thereafter, because he contemplated, before the note matured, returning it to Phillips and so wrote him. But Alton’s testimony clearly establishes that the note was not taken in payment of or as collateral security for Phillips’ indebtedness. He testified, on cross-examination, as follows: CCQ. Now, how much did you say that Mr. Phillips owes you at the present time? A. At the present time I should say that Mr. Phillips owed me, at the present time, about $2500. Q. $2500 ? A. Twenty-four or twenty-five hundred dollars; I wouldn’t say exactly how much. Q. Made up of the $1400 which you have testified to before the note was received? A. Yes. Q. And $1000 paid after the note was received? A. Yes. * * * Q. I say you paid all those sums whether it was before or after; that is right, isn’t it ? A. Yes.” Alton knew that the note was not delivered to him as collateral security for the payment of Phillips’ indebtedness or as security for money which might thereafter be advanced to Phillips, and no advances were made on the strength of it.

I am unable to reach any other conclusion than that Alton gave no consideration for the note and is not, therefore, a holder in due course.

The court admitted, over plaintiff’s objection, proof of the statutes of Illinois to the effect that a negotiable instrument shall be deemed to have been taken for a valuable consideration if it is taken as collateral security for a pre-existing debt. The note, as indicated, was made and delivered in Illinois and was there payable and respondent contends that the maker’s liability should be determined in accordance with the law of that State. However that may be, the Illinois statute was not pleaded and it should not have been received in evidence. *(Southworth*v. *Morgan,*205 N. Y. 293.) But even if the statute be considered, the conclusion reached must be the same because the note was not taken as collateral security for the payment of a debt and respondent’s counsel does not so claim.

*25The judgment appealed from, therefore, is reversed and a new trial ordered, with costs to appellant to abide the event. .

Ingraham, P. J., Laughlin, Scott and Dowling, JJ., concurred.

Judgment reversed and new trial ordered, with costs to appellant to abide event. Order to be settled on notice.