#### CHEEVER v. PITTSBURGH, S. & L. E. R. CO.

(Supreme Court, Appellate Division, First Department.

April 7, 1898.)

Bills and Notes—Bona Fides of Indorsee—Directing Verdict.

In an action upon two notes of a corporation, drawn to the order of a third person, and signed with the name of the corporation, by F., its president, and indorsed by the payee and the firm of which F. was a member, there was evidence that, when plaintiff took the notes from F. for a loan, F. already owed him $75,000, which was poorly secured; that plaintiff knew that F. was engaged in business of a speculative character, and that plaintiff was raising the loan for private purposes; that he made no inquiry as to the payee, and did not rely on his name; that he made no inquiry as to the corporation, which had in fact been in serious financial difficulties; and that when the notes came due they were neither protested, nor presented for payment. *Held,*that on all the facts the question of plaintiff’s good faith should have been submitted to the jury, and that the direction of a verdict for plaintiff was error.

*1068Appeal from trial term.

Action by John D. Cheever against the Pittsburgh, Shenango & Lake Erie Railroad Company. From a judgment for plaintiff for the sum of $17,061.98, entered on a verdict directed by the court, defendant appeals. Reversed.

The action is upon two promissory notes for $5,000 each, of which the following are copies:

“$5,000.00. Greenville, Pa., Feb’y 24th, 1888.

“Three months after date the Pittsburgh, Shenango and Lake Erie Railroad Company promises to pay to the order of John T. Bruen five thousand dollars, at the American Exchange National Bank, New York City. Value received.

“The Pittsburgh, Shenango & Lake Erie Railroad Company,

“By M. S. Frost, President.

“Attest: E. S. Templeton, Secretary.

“[Indorsed] John T. Bruen.

“M. S. Frost & Son.”

“$5,000.00. • Greenville, Pa., Feb’y 24th, 1888.

“Four months after date the Pittsburgh, Shenango and Lake Erie Railroad Company promises to pay to the order of John T. Bruen five thousand dollars, at the American Exchange National Bank, New York City. Value received.

“The Pittsburgh, Shenango & Lake Erie Railroad Company,

. “By M. S. Frost, President.

“Attest: E. S. Templeton, Secretary.

“[Indorsed] Pay to the order of M. S. Frost & Son.

“John T. Bruen.

“M. S. Frost & Son.”

The notes in suit were executed under the following circumstances: On the 17th day of February, 1888, the board of directors of the railroad company held a meeting at Greenville, Pa., and adopted the following resolutions: “Resolved, that the president be, and is hereby, authorized to make a contract for the purchase of fifty flat cars for the use of this company, and is authorized, in carrying out this purchase, to give the notes of the company in the sum of $10,000.” After the meeting, and on the same day, M. S. Frost, the president of the company, requested the secretary to prepare the notes authorized by the resolution. The secretary then asked the president from- whom he would purchase the flat cars, as authorized by the resolution. The president replied that he did not know, and directed the secretary to make the notes in blank. To this the secretary objected, and the president said: “Make the notes payable to my private secretary, Mr. Bruen; and, when I find from whom I will get the cars, I can have him indorse them.” The president lived in New York, his office was in New York, and John T. Bruen was employed in that office. The secretary of the railroad company then prepared the notes in accordance with the president’s direction, and delivered them to him. Neither the notes nor any part of the proceeds thereof were used in the purchase of the cars. Subsequent to the making of the notes, and in March, 1888, the president induced Bruen to indorse them (without consideration) by leading him to believe that they were to take the place of a note of M. S. Frost & Son for $10,000, upon which Bruen was indorser, and which was held by the East Bridgewater Savings Bank, in Massachusetts. Frost then took the .notes to Boston, and there pledged them, for his own personal purposes, with Francis A. Brooks. There was no dispute at the trial as to Frost’s fraudulent diversion of the paper. The question was whether Brooks took the notes from Frost as a bona fide purchaser for value. The trial judge held, as matter of law, that he did, and directed a verdict for the plaintiff. He refused, upon the defendant’s request, to submit the question of Brooks’ good faith to the jury, and the defendant excepted to such refusal. This is the second trial of the case. Upon the first trial the court ruled that Brooks was put upon inquiry by what appeared upon the face of the notes,'and a verdict for the defendant was directed. This was affirmed' at the general term (72 Hun, 380, 25 N. Y. Supp. 449), but was reversed in the *1069court of appeals (150 N. Y. 59, 44 N. E. 701); the latter court holding that the appearances upon the face of the paper were not of themselves sufficient to warrant the direction, as matter of law. Other facts appear in the opinion.

Argued before VAN BRUNT, P. J., and BARRETT, RUMSEY, McLaughlin, and patterson, jj.

Frank Sullivan Smith, for appellant.

Austen G. Fox, for respondent.

BARRETT, J.

The facts, as they appear in the present record, differ materially from those which were presented upon the previous trial. We have examined the record of that trial, and we find that the defendant, after proving the diversion of the notes, rested upon the constructive notice implied from what appeared upon their face. It is true that Mr. Brooks’ deposition, taken in the year 1891, was read in evidence. But the circumstances attendant upon his receipt of the two notes in suit as collateral security for the loan which he made to Frost in March, 1888, were not fully or clearly developed. In that deposition, Mr. Brooks testified that he lent $30,000 to Mr. Frost upon the security of these notes, together with certificates or receipts representing unissued bonds of the Pittsburgh, Shenango & Lake Erie Railroad Company, of the par value of $21,000. These bonds were worth about 85 cents upon the dollar. He also testified that he had previously made loans to. Frost upon'the security of stock of the St. Paul Gaslight Company. He gave no particulars of these other loans, nor did he furnish any information as to their extent, character, or condition. He did not intimate that they were large, nor that they were due and unpaid, when Frost asked for this fresh loan of $30,000. In fact, there was nothing in his narration on that head suggestive of anything unusual in his financial relations with Frost. " For aught that appeared in that deposition, Frost approached Mr. Brooks upon the occasion in question as an ordinary borrower in good credit, who-had promptly met his previous obligations at maturity, and whose request for a further loan was unaccompanied by any circumstances calculated to arouse suspicion or to call for special inquiry. Upon the trial now under review, however, it was proved that, at the very time when Frost asked for this additional loan of $30,000, he owed Brooks $75,000; that Frost, as he himself says, was borrowing money from Brooks “all the time”; that he commenced this constant borrowing as far back as the year 1885; that the $75,000 was made up in part of two notes, amounting to $17,500, which had matured in the previous month, and had not been paid; and that the balance consisted of demand notes which were also unpaid. How this indebtedness of $75,000 was secured, does not appear by direct evidence. The inferences deducible from the course of business, between the parties, however, indicate that it certainly was-not well secured; for it appears that the principal debt was never paid, nor was the interest paid as it became due from time to time. This debt, with accrued interest, was “settled or canceled” some two years later by the turning over to Brooks, as owner, of the securi*1070ties which up to that time he had held as collateral thereto. It seems that Brooks, notwithstanding this unsatisfactory condition of things, unhesitatingly advanced to Frost the further sum of $30,000, without asking a single question or saying a single word as to these unpaid notes. Clearly he did not make the fresh advance to reduce the existing indebtedness. No part of it was applied to the payment of the $17,500 of matured and unpaid notes, much less to the payment of the demand notes. Frost says that when the $30,000 was borrowed no mention was made of these unpaid notes,—to his recollection,—and Brooks is entirely silent upon the subject. In fact, there is not a suggestion in the testimony that this indebtedness of $75,000 was then referred to in any manner. There is no proof in this record that the relations of the parties were such as to entitle Frost to special and extraordinary credit, regardless of his large unpaid indebtedness. On the contrary, it appears that Frost’s business, apart from his railroad presidency, was largely speculative, and that the- capital which he was using in this business was “chiefly borrowed.” Bruen testified that Frost’s business was the “putting in of gas plants,” the furnishing of railroad supplies, and “a variety of speculations.” It may reasonably be assumed that Brooks knew the nature of Frost’s business, and was well aware of its unstable and speculative character. Why, then, did not Brooks scrutinize the securities which such a debtor, under such circumstances, offered him? The debtor was seeking to extend his unpaid indebtedness, and to extend it largely. What was there in Frost’s situation and attitude when he thus approached Brooks to warrant the latter in taking anything in the way of security which was offered him, and in taking it without the slightest inquiry? He knew that Frost was president of the railroad company, and he also knew that that president proposed to raise money for his own purposes upon the credit of the railroad company’s notes and securities. The indorsement of Bruen upon these notes played literally no part in the transaction. Upon the present trial, Brooks himself says so. “I have no idea,” he now testifies, “that I placed any value upon the indorsement of John T. Bruen. *. * * I did not, so far as I can recollect, inquire who Bruen was. * * * I did not make any inquiries as to whether he was a man of property. * * * I did not know what interest, if any, the payee, John T. Bruen, had in them [the notes].” This is, under the circumstances, an extraordinary confession. Why, it may well be asked, did he make no such inquiry? Was security for a fresh loan of $30,000, beyond the unpaid $75,000, of so little moment to him that he did not care who the indorser was, or, for that matter, who the maker was? for there is not an intimation that Brooks made any inquiry, even with regard to the railroad, or as to its responsibility and solvency. Brooks was himself á railroad president. He had been such for nearly 10 years. And he either knew from his general information, as a railroad official, that this particular company had just emerged from a receivership, and that its predecessors had undergone great vicissitudes, or else he knew nothing at all about it, and did not care to know. Here *1071was a gentleman in Boston, a lawyer of 40 years’ experience, president of a railroad company, and apparently a capitalist, advancing money to a weak and speculative debtor without the slightest scrutiny of the collaterals offered. The parties were neither relatives, nor apparently close friends, nor near neighbors. There was plainly nothing philanthropic in the transaction. Nor were the securities, on their face, speakingly convincing. No innocent inference can well be drawn from the possibilities of local knowledge or environment. The debtor was from New York, the railroad was a Pennsylvania corporation, and the indorser, Bruen, was wholly unknown. He was in fact but a name. He might have as well been called John Doe. And Brooks did not even ask where notice of protest should be sent in case the notes should happen to be dishonored. All he knew, or seemingly cared to know, was that his crippled debtor was president of a railroad; that that president had the railroad’s notes and securities, of uncertain value, in his possession; and that he was anxious to pledge these notes and securities to raise money for use in his own speculative adventures. What happened subsequently tends to indicate Francis Brooks’ consciousness of what the transaction really meant. The notes were dated at Greenville, Pa., and they were payable to the American Exchange National Bank, in this city. When they matured they were not protested, nor were they even presented for payment. No notice of nonpayment was ever given to Bruen. And—what, upon any presumption of innocence, is still more astonishing—payment was not asked from the railroad company for some two years thereafter. The secretary of the company testified that he “first learned of the existence of the notes [after their execution] along in 1890 or 1891,—a short time before the bringing of this motion.” Now, what is the excuse that Brooks gives for thus releasing the indorser Bruen, and making no demand upon the railroad company, maker? He says that it was an “oversight.” “In the multiplicity of cares,” he adds, “I failed to remember the time of their maturity, and, when the subject was brought to my attention, I found that the time of maturity had passed.” But what of that? Why did he not at least ask the company for his money? The fact that the time of maturity had passed did not release the maker. Did his multiplicity of cares extend over the entire period of two years? He vouchsafes no answer, and suggests no explanation. Might not the jury, had they been permitted by the learned trial justice to consider the case,.have found, as a reasonable explanation of Mr. Brooks’ inaction, that he knew all along what the company’s answer would be. The jury might well have absolved this old and experienced lawyer and railroad president from his self-accusation of oversight in so important a matter. They might have said that the shadow which was thrown backward by his nonaction was that of consciousness, not of neglect.

It is difficult to see upon what principle, in view of all the present facts, the learned trial justice took the question of good faith from the jury. Certainly he was not admonished to do so by anything in the opinion of the court of appeals upon the first appeal. Judge *1072O’Brien expressly limits his conclusion to the error oí the first trial justice in directing a verdict for the defendant. “There was nothing,” he observed' “on the face of the paper, or in the facts shown, to warrant the court in holding, as matter of law, as it did, that the obligations were received by Brooks, and the advances made on them, mala fide.” 150 N. Y. 68, 44 N. E. 704. The reasoning of the learned judge throughout is aimed at the direction below. There is not an intimation that, even upon the facts as they then appeared, it would have been erroneous to submit the question of good faith to the jury. As we have seen, however, the facts are now, in many important particulars, much stronger in support of the charge of bad faith than they were in the former record. Facts which then seemed innocent, standing alone, are now colored and darkened by the additional facts to which we have referred. And these additional facts have also an independent bearing upon the question of good faith. It was conceded in the court of appeals'that, but for the intervention of Bruen’s name, a case of mala fides, as matter of law, would have been made out; citing and approving Wilson v. Railroad Co., 120 N. Y. 145, 24 N. E. 384, and many other cases. What was held was that the intervention of Bruen’s name, in the absence of any independent circumstance suggestive of bad faith, relieved Brooks from the conclusive imputation of mala fides as matter of law. It was not held, however, or intimated, that this intervention conclusively relieved him from the imputation of bad faith as matter of fact, nor that it operated to take from the jury the consideration of all the attendant circumstances on that head. ' There is indeed nothing in the opinion which requires us to hold that the appearances which, but for the intervention of Bruen’s name, would have concluded Brooks as matter of law, should be entirely eliminated from consideration when the question of good or bad faith is presented for decision as matter of fact. We think all the facts bearing upon that question were for the jury,—the character and appearance of the paper, upon its face; its possession by the railroad company's president; the compíete ignoring of the intervening indorser, Bruen; the lack of inquiry even as to the corporation itself, as to its bonds; the previous relations between Frost and Brooks; the speculative nature of the former’s business; his constant borrowing of money from Brooks for use in that business; his large existing indebtedness to Brooks, matured and unpaid; the failure, under the circumstances, to make the simplest and most natural inquiries; the neglect to present or protest the paper at maturity; and the failure for years thereafter, without plausible excuse, to ask for payment. We think these facts, and others to which we need not specially advert, were quite as sufficient to carry the case to the jury as were the facts in Bank v. Diefendorf, 123 N. Y. 191, 25 N. E. 402. The court of appeals in that case dwelt upon quite analogous facts, and treated them as essentially suggestive of bad faith. One of these facts was that the seller of the notes gave the cashier of the purchaser bank no information as to his residence or pecuniary circumstances, or to the place where he might receive notice of protest. Chief Judge Ruger spoke of the circumstances attendant upon the purchase of the notes as follows:

> *1073“The plaintiff’s cashier, however, studiously refrained from acquiring any information in regard thereto, even such as might he, under many circumstances, desirable for the bank to have. He made no inquiry as to the consideration of these large notes, the influences which had taken this farmer so far from home, or the circumstances attending their execution. He asked no questions as to the responsibility, employment, or associations of his vendor, but apparently bought the notes upon the security of a single name, evidenced by a signature unfamiliar to him, and indifferent to the manner in which they were obtained, or the responsibility of the person with whom he was contracting.”

And again:

> “The history of the negotiation is best described by negatives, and is more significant from what was omitted than' what was avowed. Stewart v. Lansing, 104 U. S. 510. Greater caution in avoiding the most natural information could not have been exhibited by the plaintiff if the cashier had known the notes were obtained by fraud or crime, or desired to remain in ignorance of these facts. His conduct indicated something more than negligence. He exhibited a studious desire to avoid any information which might throw light upon the origin of the notes, or the existence of equities in favor of their maker.”

The rule was laid down in this case, and there applied to the facts, that “gross carelessness, though not of itself sufficient, as a question of law, to defect title, constitutes evidence of bad faith. * * *” It was held in Seybel v. Bank, 54 N. Y. 288, that gross carelessness, though not conclusive, was evidence of bad faith, and impliedly, that a verdict of a jury upon such evidence would be upheld. “Guilty knowledge and willful ignorance,” said Justice Swayne in Murray v. Lardner, 2 Wall. 121, “alike involve the result of bad faith.” Mr. Daniel states the rule succinctly in another way, as follows (Daniel, Neg. Inst. § 795b):

> “The circumstances of the transaction may be of such a character as to intimate strongly a defect in the title, and, if they are such as to invite inquiry, they will suffice, provided the jury think that abstinence from inquiry arose from a belief or suspicion that inquiry would disclose a vice in the paper. * * * But, further than this, gross negligence, which is not in itself proof of mala lides, may be so great as to amount to proof of notice.”

And the learned writer quotes Baron Parke’s observation in May v. Chapman, 16 Mees & W. 355:

> “I agree that ‘notice and knowledge’ mean, not merely express notice, but knowledge, or the means of knowledge, to which the party willfully shuts his eyes.”

The authorities also support the appellant’s contention that the question, upon the present facts, was for the jury. In- Vosburgh v. Diefendorf, 119 N. Y. 357, 23 N. E. 801, Judge O’Brien, speaking for the court of appeals, reaffirmed the doctrine of the courts of this state, that, where the maker of negotiable paper shows that it has been obtained from him by fraud, a subsequent transferee must, before he is entitled to recover thereon, show that he is a bona ñde purchaser. “The plaintiff,” 'said that learned judge, “did not meet the requirements of this rule, for he remained silent upon the subject of notice of the circumstances under which the maker gave the note.” After going over the facts carefully, he added, “the most favorable view that could have been taken of the case for the plaintiff would still require the question of his good faith to be passed upon by the jury.” Even where the evidence is not conclusive, if it tends to *1074establish the lack of good faith it should be submitted to the jury, and the jury are authorized to draw such inference from the facts proved as any reasonable view thereof will permit. Hanover Nat. Bank v. American Dock & Trust Co., 148 N. Y. 612, 43 N. E. 72. This doctrine seems to be conclusive of the present appeal, without regard to the incidents of the trial as to the order of proof. The defendant here does not question the testimony of either Brooks or Frost. It does not ask us to discredit their testimony. It takes their testimony just as thé witnesses gave it. But from that testimony; from its affirmations, its.negatives, and its omissions; 'from the attendant circumstances which it partially discloses; and from the inferences which may fairly' be deduced therefrom,—the defendant contends that the question of Brooks’ good faith should at least have been submitted to the jury. We are satisfied .that it is right in this contention, and that the. learned trial justice’s direction cannot be sustained.

The judgment should therefore be reversed, and a new trial ordered, with costs to the appellant to abide event.

VAN BRUNT, P. J., and RÜMSEY and McLAUGHLIN, JJ., concur.

PATTERSON, J. (concurring).

The question here is whether there was something more in the evidence on behalf of the defendant than mere suspicions of the good faith of Francis Brooks in taking the notes from Frost. A careful examination of the record induces the conclusion that a jury might be justified in finding that Mr. Brooks’ relations to Frost were such that, as a lender of money, he was put upon inquiry as to the nature and character of the security offered as collateral to so large a loan. I am therefore inclined to concur in the conclusion that the special circumstances of this case were such that it should have gone to the jury.